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Risk-minimizing approach to bid-cutting limit determination

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  • Li-Chung Chao
  • Chang-Nan Liou

Abstract

Intense price competition is quite common in the construction industry. In many markets, contractors have to cut their bids to compete, giving priority to winning enough contracts to sustain normal operation, and it is common to see a winning bid close to the expected project cost. While cutting bids not only gives up profits but also undoubtedly increases the risk of making a loss, the behaviour of contractors in intense competition is difficult to explain by existing academic bidding models. An approach to determining the lower limit of the bid for a project is proposed based on minimization of the overall loss risk defined by a probabilistic model. The approach can be used to prevent arbitrary over-cuts in final bid decision where price competition is intense. Factors influencing the suggested bid-cutting limit for a project are analysed. An illustrative example using real case data is provided.

Suggested Citation

  • Li-Chung Chao & Chang-Nan Liou, 2007. "Risk-minimizing approach to bid-cutting limit determination," Construction Management and Economics, Taylor & Francis Journals, vol. 25(8), pages 835-843.
  • Handle: RePEc:taf:conmgt:v:25:y:2007:i:8:p:835-843 DOI: 10.1080/01446190701393018
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    References listed on IDEAS

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    Cited by:

    1. João Adelino Ribeiro & Paulo Jorge Pereira & Elísio Brandão, 2013. "Volume Uncertainty in Construction Projects: a Real Options Approach," CEF.UP Working Papers 1309, Universidade do Porto, Faculdade de Economia do Porto.

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