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Understanding risky bidding: a prospect-contingent perspective

Author

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  • Budi Hartono
  • Chee Meng Yap

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.

Suggested Citation

  • Budi Hartono & Chee Meng Yap, 2011. "Understanding risky bidding: a prospect-contingent perspective," Construction Management and Economics, Taylor & Francis Journals, vol. 29(6), pages 579-593.
  • Handle: RePEc:taf:conmgt:v:29:y:2011:i:6:p:579-593
    DOI: 10.1080/01446193.2011.569733
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