Understanding risky bidding: a prospect‐contingent perspective

Abstract

A descriptive research school of thought provides the context for an examination of contractors’ risky bid mark-up decisions in a competitive bidding setting. Grounded in prospect theory and the one‐reason decision model, a contingency‐based theoretical model was developed to explain and to predict bid mark‐up decisions in light of four identified determinants, namely: perceived ‘rate of returns’, ‘revenues’, ‘project backlogs’ and ‘project strategic importance’. Three scenarios according to this model were verified by means of a self‐administered survey in the Singapore construction industry. By using cluster analysis, five groups of bidders with distinctive bid profiles were identified and the associated bid mark‐ups were calculated. The emerging groups provide an empirical illustration on how the theoretical model is utilized. For instance, one group of bidders (n = 16) demonstrates a scenario of the model in which participating bidders had considered the reported project bid as having high strategic importance to their organizations and hence made aggressive, low bid mark‐ups. The theoretically grounded framework could be used by contractors to improve their own bidding strategy in anticipating the likely behaviour of the competitors.