The Construction Industry - Bidding Strategies

CHAPTER ONE

INTRODUCTION

1.1        Background of Study

The construction industry is fraught with intensive competitiveness coupled with risks and varying margins of markup. Continual survival of contractors in the construction industry is therefore dependent on their ability to tender, win bids and make profits. The degree of competition in the construction industry coupled with associated performance risks requires contractor’s adoption of a bidding strategy that enhances their profitability and survival.

According to Newcombe (1976), the construction environment within which contractors bid comprises of a series of sectors, each requiring a different set of resources, skills and management expertise and includes general contracting, civil engineering, speculative house building, property development, manufacture and supply of building products, plants and equipment hire. Langford and Male (1997; 2001) further identified that the environment is made up of four main areas namely building, civil engineering, repairs and maintenance and materials manufacturing. In addition to the areas identified, Telecommunication, Auctioning, Oil and gas are also sectors that are involved in the construction environment.

Banki, Esmaeeli & Ravanshadnia (2008) argued that Construction transactions and contracting are executed through bidding process which leaves the contractor with no other option of survival than to continuously aspire to win bids. Runeson (2000) agreed that a bid offer must be equal to or above the minimum price at which a contractor is prepared to undertake when he considers an acceptable probability of profit without unacceptable risk of loss. Furthermore, contractors are known for bidding for jobs in familiar terrains where their level of success on bids is assured.

Drew and Skitmore (1992) resolved that the construction environment revolves around competitive bidding which is a driving force for contractors to provide lower bid prices to suit the client’s construction and financial needs. Furthermore, the pivotal stand on which any contractor successfully bids and eventually gets engaged as the preferred bidder is hinged on experience, intuitions, which contract to bid and bid levels necessary to secure them Drew and Skitmore, (1997).

Fayek (1998) posit that deciding on the appropriate margin or mark-up to add to the estimated cost of a project is one of the decisions to be taken by any contractor. Skitmore, Martin and Pemberton, John (1994) observed that many contracts for goods and services are contracted on the basis of sealed bidding whether competitive or negotiated where interested contractors may enter by a stipulated date and time, a bid for the amount they wish to be paid should they become a party to the contract. Consequently, contractors bidding for any project adopt various strategies with the sole aim of increasing their chances of winning the bid.

McCaffer and Harris, (2001) submitted that since the mid-1950s Contractors Bidding strategy has generated a lot of interest from various researchers. Drew, Lo, and Skitmore, (2001) defined a contractor’s bidding strategy as one which is concerned with the setting of mark-up level to a value that is likely to provide the best pay-off. Boughton, (1987) stated that so much is attached to successfully bidding for construction work than accurately determining and pricing the resources requirements for a job. He posit that the “bidding process can be very expensive, involving direct costs for information search, evaluation of specifications, subcontractors solicitation and proposal preparation”. He speculated that for a contractor to successfully bid on jobs, he must be able to formulate some economical approach to obtaining contracts at the right volume to make him break even profitably.

Various researchers have developed models suited for bid/no bid and mark-up size decision but it was difficult to develop models that best suit the complexity and uncertainty of the full construction contract bidding situation, which is why many contractors did not show interest in such models Drew and Skitmore (1997). The two most important decisions in the bidding stage is so demanding that even experienced contractors belief that the industry should have a better technique for arriving at bid/no bid of mark-up size decisions. Interestingly, over the last five decades, there has been a relatively modest addition and renewed interest in the bidding strategy of contractors Banki, et al, (2008). The bottom line of the bid strategy is that the contractor must be careful to choose a price high enough to provide sufficient contribution to mark-up, yet low enough to ensure that a sufficient volume of work is actually obtained in an environment where a greater consideration of the behavior of contracting competitors are uncertain Douglas (1989).

Osama Moselhi, Tarek Hegazy and Fazio (1991) in their opinion suggested that bidding strategy models through which contractor bid can be grouped into three main categories,

1. Models based on probability theory put forward by [Friedman (1956) and Gates (1967)] to maximize the expected profit;
2. Models based on decision-support systems put forward by [Ahmad and Minkarah (1987)] to account for the multi attributed nature of bidding decisions;
3. Newly emerging models based on artificial intelligence techniques [Tavakoli arid Utomo (1989)] to consider the heuristic and unstructured nature of such a decision problem.

However, since Friedman’s (1956) model, the literature has been flooding with many bidding models, most of which remained in academic circles and did not find their way into the practical world. Tang, Wing-hung, (2004) in his research work noted the following concerning the bidding models,

1. the over simplicity of the models’ assumptions made them unable to represent the real-world problem;
2. Most bidders are unwilling to struggle with sophisticated mathematical models. They prefer to rely on their experience in dealing with bidding situations;
3. Most of these bidding models neglected to take into account that bidders might have other objectives rather than maximizing the expected profit.

These factors imply a need for other bidding approaches to view the bidding problem practically. Business and bidding are closely related. A continuous blossoming contracting business is hinged on sound practical bidding strategy which takes into account both external and internal factors since in contracting business; there is no bad luck but poor strategy employed when a bid is lost.

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