Factors that affect bidding decisions/behaviour of construction companies and a description of 2 contemporary bidding modelsmore

behaviour_of_construction_companies_and_a_description_of_2_contemporary_biddin g_models.pdf 191 KB

1. Introduction Bidding for contracts can be one form of acquisition of new projects for contractors.Before getting a potential contract, contractors have to make 2 key decisions.1.

Whether to bid or not to bid.2.

Which mark up should be included in the calculations.This paper aims to provide a better understanding of these decisions by examining thefactors that affect bid decisions and consequently tries to give an insight of biddingmodels available to the construction industry today and how the contractors decidethe level of mark ups used in their bid proposals.A perfect competitive environment provides the basis for this study. That means anequal number of bidders and buyers is present. Therefore equal chances of winningfor each of the competitors. In addition it is assumed that the basic costs are of thesame value for each competitor. Basic costs refer to the sum of direct costs and project overheads. 2. Factors that affect the bidding decisions / behaviour of construction companies To prepare and submit a competitive bid proposal is often referred to as the biddersdilemma (Burke, 1999) in todays highly competitive construction market. That is because of submitting a tender figure which is low enough to win the competition andget the contract awarded, whilst it has to be high enough to cover contract costs,service, a proper share of the contractors overhead and to yield a profit. As one canimagine tendering is a one of a kind process that is affected by various differentfactors.Firstly the decision to bid or not to bid has to be made. Several studies and surveysabout that have been conducted in the past decades (Wang, 2011). Ahmad andMinkarahs (1988) survey in the US construction industry found 31 factors affectingthe bidding decision, similar to Shash (1993) who extended their survey and came upwith 55 factors relevant for the UK construction industry. Wanous, Boussabaine

andLewis (1999) identified 35 factors and ranked them according to their importance tocontractors in Syria. Other studies with akin results have been carried out in Canadaand Australia (Fayek, Ghoshal & AbouRizk, 1999; Fayek, Young & Duffield, 1998).Finally in 2009 Bageis and Fortune conducted a study applicable for the SaudiArabian market, identifying 100 factors from their intensive literature reviewincluding the prementioned studies (Bageis & Fortune, 2009). The identified factorsof these various studies are partly reflected in the following paragraphs.It seems that, although the studies have been undertaken in different countries, thereare a great number of similarities and the main factors to be considered by contractorsto decide whether to bid or not to bid can be brought down to a few criterias.Recurring factors are the type and size of the project, economic situation andcompetition as well as the bidding companys actual and upcoming workload and theclients reputation. This perception is underpinned by a study of Flanagan and Normanin 1982 (as cited in Wang, 2011) who stated that five major criterias influence acompanys decision to bid or not to bid and therefore ultimately influences their bidding behaviour. Flanagan and Normans criterias are:

1.

Project size and value, managerial complexity2.

Regional market conditions3.

Current and projected workload of the tenderer 4.

Type of client, and5.

Type of project.These five criterias in turn can be subdivided into a broad range of subfactors asexplained in the following paragraphs. 2.1. Project size and value -

What is the value of the project-

Projected cash flow required during execution-

Desired rate of investment required by company-

Is the project size beyond the capability of the firm-

Need of equipment, labour and plants-

Risk of project-

Conditions of ContractProject size and value determines whether a potential project fits within a companysmagnitude, i.e. can they build it. If the scope of work is too small resources may beunderutilised and mobilization costs could break the mould. A project with a bigger extent of work on the other hand might lead the company out of their operating areaand hence brings more uncertainties into the calculations. 2.2. Regional market conditions -

Economical situation overall-

Situation of the construction industry-

How many projects are currently available n the market-

How many competitors are expected to bid-

How competitive are they and what is the experience of estimators-

What is the status of the competitors-

Amount of work currently available in the industry-

Availability of skilled workers-

Availability of equipment needed and not owned by the contractor -

Rate of expected price escalation in labour/materials price-

Codes and standards applicable in the region-

Reliability of subcontractorsRegional market conditions combine several factors. As there is the overall situationof the economy and more particularly the current situation of the constructionindustry itself. Furthermore the amount of competitors and their condition have to betaken into account in order to try to foresee their bidding strategy. If there are more projects available in the market or if there are just a few available to bid for will havea significant impact on the bidding decision of contractors. With lots of projectsavailable contractors can choose for what they bid for whereas the less projects areexistent, the more likely contractors are forced to bid for works which may be partlyout of their competence and therefore more risky in terms of successfulimplementation. In addition, the less projects present in the market, the higher thecompetition amongst contractors and therefore their mark ups have to become lower in order to raise their chance of winning the contract.

2.3. Current and projected workload of the bidding company -

Need for work -

Other projects currently out for tender -

Forecast for upcoming projects-

Availability of in-house staff (Project Manager, Site Manager,etc.)-

Labour force availability-

Availability of equipment owned by the contractor The fundamental question is if the need for work is present. If so, then it is of highimportance to evaluate the current and projected workload in order to be able tocalculate if a possible execution of the bidding project is feasible at all. For example if the current workload of a company is 75 percent and the project to be bid for wouldneed 35 percent of resources to be allocated for it might not bid for this one.However, considering the start date and duration of the potential project, if the projected workload soon is declining then there is a relative high certainty that thecompan y will bid for this project. 2.4. Type of client -

Public or private-

Financial capability of the client-

Reputation of the client-

Relationship with the client-

Expectations of the clientForm of ContractThe type of client plays a major role in a companys decision to bid for a job or not.Contractors are more likely to bid for projects were there is an existing and positiverelationship with the client. If there are no empirical values available it is of highimportance to investigate a clients financial capability and his/her reputation amongst peers in the industry. The aim of this investigations is to secure that in case of gettingthe contract awarded, the client is reliable and payments will be made in time. 2.5. Type of project -

Site location and accessibility-

Is the project within the company boundaries-

Delivery method of the project-

Past experience with similar projects-

Is the project complexity beyond the capability of the company-

Risk involved considering the nature of the work -

Degree of hazard of works-

Method of constructionThe type of project clearly aims at the contractors experience in this particular field. The better the match, the higher the possibility of bidding for it and eventually to be awarded the contract. A well experienced contractor may be able to propose a lower bid than his competitors since, due to his experience, he might work more efficientlythan them. According to Drew and Skitmore (1997), the type of construction work isless influencing their competitiveness than the size of construction. Nevertheless, bidding contractors are compelled to carefully examine the scope of work for a ny

potential project and evaluate their ability to execute them in a best possible andefficient way.As we can see, after the decision to bid for a particular project is made, there are a lotof factors to be considered and interdependencies to be borne in mind. In general itcan be said that the key for submitting competitive and ultimately successful bid proposals lies within (a) self assessment of a company; (b) evaluation of thesurroundings/ market; and (c) examination of the project regarding owner, type andsize. This finds confirmation in a quote from Sun Tzu, who said If you know your enemy and know yourself, you need not fear the result of a hundred battles. (SunTzu, as cited in Hawkins & Rajagopal, 2005).There needs to be a clear understanding of the environment (e.g. market conditions,competition, clients and oneself). A sound self-evaluation has to be seen as thefoundation to guarantee the realistic planning and successful implementation of projects. The more one know about oneself, his competitors and the surroundings, themore creative

and innovative solutions can be explored and hence potential clients being attracted by that. Consequently, by implementing these techniques and carefulo bservation and recording of rivals, one can achieve competitive advantage throughadopting approaches they are unable to challenge (Hawkins & Rajagopal, 2005). 3. Description of 2 contemporary bidding models After examining the various different factors that affect the bidding decisions / behaviour of a firm, it seems clear that this involves a great deal of effort. Torationalise this process several different bidding models have been developed over time. Up to today the research has gone on and more than 1000 papers have been published since Friedman (1956) and Gates (1959) have started the debate with their firs t approaches to develop bidding models. Most of the focus of the researches has been on the underlying mathematical concepts of these models (Cattell, Bowen &Kaka, 2008).Curiously enough, evidence from the industry shows that bidding models are morelikely to be found in an academic context rather than implemented in the industry.This may be attributable to the highly complex mathematical formulas and thevariables in the calculations as well as commercial influence. In practice humanconsciousness seems to be of higher value than computer-based theory (Fayek et al.,1998). Nevertheless, what is used from the researches are the principles behind theconcepts which help decision makers to clarify their thinking process and improvetheir subjective judgements based on instincts and experience (March, 2009).From the wide range of bidding models available, the first attempt of Friedman (ascited in Harris, McCaffer & Edum-Fotwe, 2006) and a more recent approach knownas unbalanced bidding model were choosen and their concepts behind the formulasis explained as follows.

3.1 Friedmans probabilistic model (balanced bidding model) Friedman in 1956 was the first one who tried to predict the probability of winning acontract. He used the assumption that there is an existing coherence between the bidding sum and the probability of being awarded the contract. If a contractor for example submits a bid which just covers the cost and no mark-up, he/she may have achance of winning of 100 percent, while on the same time a bid is existing with achance of winning of 0 percent. Bids in between these two extremes are connected toa probability of X amount of

winning the contract.The method to extrapolate this coherence is depending on gathering and processinghistorical data. Therefore a contractor firstly collect data of bids submitted bycompetitors on past contracts. Secondly, each of these bids is divided through thecontractors estimated costs for this bidding process. Finally a histogram is made outof the derived results, showing the historical performance of the competitor againstthe contractor. This of course can be generated for other known competitors,assuming that relevant data has been collected before.For dealing with unknown competitors were no historical data is available, Friedmansuggested accruing all known competitors bids into one formula, representing the behaviour of a typical bidder. In his model, the probability of winning againstunknown competitors then would be the probability of beating one typical bidder(Harris et. al, 2006).Friedmans model is very useful in a perfect competitive environment since thevariability in bids results only from different mark ups added while the cost estimatesamongst competing contractors are the same (Rickwood, 1972 as cited in Harris et. al,2006). However, it will fail if there is no sufficient, and more important, reliable dataavailable (i.e. realistic historical bids) to try to predict competitors behaviour. 3.2 Unbalanced bidding models Due to the fact that Friedmans balanced model was highly probabilistic and neglectsmost of the factors that affect bid decisions to be taken into account, it was sooncriticised. In 1959 Marvin Gates made an attempt to provide a different approach todetermine a contractors bidding strategy (Gates, 1959 as cited in Cattell, Bowen &Kaka, 2007). This is known as the unbalanced bidding model. Up to today there has been extensive research about unbalanced bidding models and consequently their mathem atical techniques got optimized and more developed over time. Nowadays being a common practice in the construction industry, using an activityname d as item price loading. Contractors have to decide their individual prices of allthe various different items included in a bid proposal for a contract. Item price loadingrefers to the mathematical approach to determine and allocate different mark ups todifferent items within a project without effecting the overall bid sum of a bid proposalfor a project.Clients normally provide the design and specifications for a project that they wish to be built and leave the method of how to construct up to the contractor. It is notsurprising that different contractors choose different methods and techniques resultingin different costs. In addition the difference amongst contractors in terms of available