Risk and Price in the Bidding Process of Contractors

Abstract

Formal and analytical risk models prescribe how risk should be incorporated into construction bids. However, the actual process of how contractors and their clients negotiate and agree to price is complex and not clearly articulated in the literature. With participant observation, the entire tender process was shadowed in two leading U.K. construction firms. This was compared with propositions in analytical models, and significant differences were found. A total of 670 h of work observed in both firms revealed three stages of the bidding process. Bidding activities were categorized and their extent estimated as deskwork (32%), calculations (19%), meetings (14%), documents (13%), off-days (11%), conversations (7%), correspondence (3%), and travel (1%). Risk allowances of 1–2% were priced in some bids, and three tiers of risk apportionment in bids were identified. However, priced risks may be excluded from the final bid to enhance competitiveness. Although risk apportionment affects a contractor’s pricing s...