Economic principles of bidding for construction projects

Most contracts in the construction industry are awarded through a tender or bidding process. While bidding contractors aim to cover their costs, they also try to gain a competitive advantage with their final price which includes a markup. Pricing needs are often balanced with certain other realities that may constrain perfect rationality in deciding the final price. The microeconomic theory of the behaviour of individual competitive markets suggests that a bidding price may be dependent on the market or competitive environment in which it takes place. However, it would also depend on a firm's particular circumstances. A contractor's bidding process comprises three stages namely the commercial review, estimating and adjudication stages. Key economic considerations at play at each stage of the bidding process are highlighted. The relationship between cost, price and value ultimately influences the final bidding price that is negotiated and agreed between the client and contractor.