Probabilistic Approach to Determining Overhead-cum-markup Rate in Bid Price

Abstract

The bid price for a construction project comprises the contractor's estimated direct cost and overhead cost plus its applied markup. Contractors often use an all-in rate to lump overhead and markup together on top of direct cost for arriving at a bid price. Such a method is naturally prone to inaccuracy and involves a greater risk in competitive bidding, if the applied rate is selected subjectively. The present research aims to develop an improved approach to determining the combined rate of overhead and markup in the bid price for a project. Four factors, i.e., direct cost, duration, type of work, and location, were used as inputs to build a regression model from cost and bid data of collected projects for predicting the overhead and markup rate in the winning bid for a project, which, together with the model error, is used to estimate the probability of winning for a bid level. Then, based on minimization of overall loss risk proposed by a previous research, the bid preventing over-cuts in price competition is determined by using the model, the probabilistic estimates of project cost, and the probability of recovering costs if losing the bid. The approach is illustrated using two cases and the suggested bids for the cases are compared with those from other models.