Strategy for Mark-up Definition in Competitive Tenders for Construction Work

Abstract

A competitive tender with the lowest price as the only (or the main) criterion of contractor selection is one of the most common approaches to procurement in construction. On the one hand, it is expected to offer the greatest benefits of competition to the client; on the other hand, it forces numerous competitors to engage time and resources for bid preparation with a low chance to win the job. To stay in the market, the contractor needs to foresee the behaviour of the competitors (which implies knowing who they are and what prices are they likely to offer), and apply some strategy to increase his/her probability to win without compromising the profits. A number of mathematical models of competitive bidding process can be found in the literature, from the earliest basing on probability theory, to more recent that apply artificial neural networks or fuzzy set theory. The paper presents a probability-based method of estimating the optimal bid price (which means a price of maximum expected value of the contractor’s profit) in lowest bid tenders that stems from Friedman’s model (1956). The authors discuss the assumptions that make the model applicable to real-life situations of specialized construction contractors. A worked example based on case-study data is presented to illustrate the idea. To be used in practice, the proposed model has to be fed with up-to-date results of tenders (number of competitors, and their bid prices). The proposed strategy thus rests upon careful monitoring of the market and internal condition of the bidder.