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Understanding risky bidding: a prospect-contingent perspective

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  • Budi Hartono
  • Chee Meng Yap
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    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.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/01446193.2011.569733
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Construction Management and Economics.

    Volume (Year): 29 (2011)
    Issue (Month): 6 ()
    Pages: 579-593

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    Handle: RePEc:taf:conmgt:v:29:y:2011:i:6:p:579-593

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    Web page: http://www.tandfonline.com/RCME20

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    Web: http://www.tandfonline.com/pricing/journal/RCME20

    Related research

    Keywords: Bidding; mark-up; contingency; cluster analysis; prospect theory;

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