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a simplified unbalanced bidding model - Construction...

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A simplified unbalanced bidding model DAVID WILLIAM CATTELL 1 * , PAUL ANTHONY BOWEN 2 and AMMAR P. KAKA 3 1 Independent Software Developer, PO Box 21368, Christchurch, New Zealand 2 Department of Construction Economics and Management, University of Cape Town, South Africa 3 School of Built Environment, Heriot-Watt University, Edinburgh, UK Received 21 April 2008; accepted 21 October 2008 Much research effort to date has focused on the development and use of bidding models in optimizing contractors’ bid prices in competitive tendering environments. Unbalanced bidding models, in particular, have the objective of maximizing a project’s prospective profits by using techniques of applying differentiated mark- ups to all of a project’s items of work. It is shown here that these unbalanced bidding models have been unnecessarily complicated by incorporating consideration of a project’s item costs. Bidding models can be significantly simplified by having the objective of maximizing a project’s top-line revenue rather than maximizing bottom-line profit. A new model, incorporating all three standard effects of item price loading: namely, front-end loading, individual-rate loading, and back-end loading, is proposed that gives effect to determining the optimum pricing for a project’s component items. Keywords: Bidding, competitive advantage, cost modelling, revenue, mark-up. Introduction Bidding models are mathematical techniques designed for use by building contractors, among others, to assist them with optimizing their bid prices in competitive tenders (Cattell, 1985). This area of research has been led by that of Friedman (1956) and Gates (1959) and more than 1000 papers have been published since then with much of the debate focused on the underlying mathematics. The debate has gone on for 40 years and it is only recently that Skitmore et al. (2007) have provided a proof that the mathematics advocated by Gates is to be preferred over that which was instead proposed by Friedman. However, Skitmore (2004) warns that both methods are problematic. Bidding models are focused on the determination of a project’s overall bid price. Contractors are also, however, required to submit prices for each component item such that the summation of these component prices equates to the overall project price. These item prices are then used as the basis by which these contracts are administered. Gates (1959) was the first to identify the role of item price loading as a strategy. This approach entails allocating different mark-ups to individual items within a project so as to realize advantages that are not likely to be accomplished by way of allocating a universally constant mark-up to all of a project’s items. Further research (as reviewed by Cattell et al. , 2007) led to the development of a variety of mathematical techniques by which to optimize this and these have become known as unbalanced bidding models .
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