The risks of unbalanced bidding - Construction Management...

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Construction Management and Economics ( April 2010) 28 , 333–344 Construction Management and Economics ISSN 0144-6193 print/ISSN 1466-433X online © 2010 Taylor & Francis http://www.informaworld.com DOI: 10.1080/01446191003663264 The risks of unbalanced bidding 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 Taylor and Francis Ltd Received 2 December 2008; accepted 29 January 2010 10.1080/014 61910 36 3264 Unbalanced bidding models have largely ignored the risk aspect of item pricing. Many researchers have acknowledged that there are considerable risks associated with unbalancing a bid but little has been done to describe these risks, let alone model them. A new framework is proposed by which all of these risks can be assessed. It identifies that these risks comprise the risk of rejection, the risk of reaction, and the risk of being wrong. It is further proposed that the value-at-risk (‘VaR’) method of measuring risk is a convenient way by which to combine all of these risks into one composite assessment. This quantified assessment serves to describe the extent of risk generated by each level of each item’s price. Previous related research has proposed an unbalanced bidding model that has likewise provided a measurement of the expected reward generated by each level of each item’s price. By doing a summation of these, keeping in mind that the prices applied to all of a project’s component items must add up to the overall bid price, the contractor is able to assess both the risks as well as the rewards of all possible item price combinations. Keywords: Bidding, cost modelling, risk analysis, risk management, mark-up. Introduction In the construction industry, with unit price contracts, contractors compete on the basis of their bids for whole, composite projects. These projects comprise many hundreds or thousands of component items, often described in detail in bills of quantities. In the UK method of contracting (popular across the Commonwealth countries), it is typical when contrac- tors compete by way of tendering, that clients (typically represented by their quantity surveyor), will provision- ally select one contractor from all of the bids submitted to them. This is often the lowest bidder, although not necessarily so. The client will then request sight of this contractor’s priced bills of quantities. At this stage, the contractor has to decide on prices for each unit of each of the project’s constituent items and it is for this purpose that contractors could employ an unbalanced bidding model to assist them in optimizing this task.
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This note was uploaded on 05/06/2011 for the course BANKING 254 taught by Professor Kumar during the Spring '11 term at Birla Institute of Technology & Science, Pilani - Hyderabad.

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The risks of unbalanced bidding - Construction Management...

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