Risk assessment on contractors' pricing strategies

TIn a competitive tender, pricing strategies are often used by contractors to facilitate their cash flows. Usually, the decisions are based on contractors' experience, intuition, and personal bias. The existing mark-up or cash-flow forecasting models simulate the pricing strategies in a simplified manner which may depart from real situation and therefore could lead to inaccurate cash-flow forecasting. There is a lack of practical models that could quantify risks associated with pricing strategies. For construction projects, the quantity values of break-down cost items are random variables. A new approach to the risk assessment of contractors' pricing strategies is presented. By using the quantities as random variables, the approach developed in this paper enables the contractor to find the global optimal pricing through the stochastic programming model. The risks caused by contractors' pricing strategies are then assessed in a quantitative manner. A real case analysis using the approach is demonstrated.     

Barchester Low Rise: a case study of a management contract for remedial work to a large housing scheme

A case study of substantial remedial work to 580 dwellings was undertaken. Certain provisions and consequences had to be taken into account. These included: uncertainty of the extent of the defects, it was essential to remedy with tenants in occupation; a pilot contract approach taking 37 dwellings of different types and situations in order to identgy the extent of the defects; test buildability of design solution; monitoring of costs; refining design accordingly; monitoring costs to establish productivity on a full production run; the need for a management contract to ensure that the objectives of the pilot project were carried out; selection of a management contractor in competition; preparation of tender documents; evaluation of contractors’ submissions; appointment of a management contractor; monitoring the pilot contract; measuring performance arising from revisions to design and familiarity with the work; innovative use of temporary shelters over dwellings; feasibility studies on optimum annual spend on the main contract; negotiation of main contract on a management basis; main contract documentation; post-contract cost control against target and in relation to resources used; review meetings; risk analysis.     

Factors affecting the bid/no bid decision in the Saudi Arabian construction contractors

The bid/no bid decision requires an understanding of a company's assessment in relation to factors affecting the decision. Different companies might have different assessment values. The aim is to investigate how bid/no bid decisions are influenced by different characteristics of contractors. Various factors are identified and then analysed in order to investigate their influence and relative significance. A questionnaire survey was used to identify and rank the factors affecting the bidding decision and then analyse them in terms of differences between the returned responses with respect to the differing respondent characteristics. The findings have established the ranking order of the factors affecting the bid/no bid decision and identified their weights of importance. In addition, the influence of these characteristics upon the different weights of importance given by the survey respondents is found to be statistically significant. The most influential characteristics that affected their assessment of the weight of importance are contractor size, classification status of the contractor and the main client type. Different contractors' characteristics should be reflected in the way that the bid/no bid decisions are modelled. Also, the data collected should be categorized with regards to contractors' characteristics before starting the data analysis and modelling processes.     

A survey of current cost estimating practices in the UK

The results are documented of an investigation into current cost estimating practices of contractors for construction projects. A questionnaire survey of contractors was undertaken, in which the respondents are classified into four groups based on their turnover namely: very small, small, medium and large firms. The survey indicates that contractors, irrespective of size, continue to undertake cost estimating predominantly for construction planning purposes, including the preparation of tenders and cost control of projects during the execution stage and, to a lesser extent, for construction project evaluation. Recent developments in cost estimating methods and tools that consider risks and variability in cost estimates, such as the use of range estimating and parametric estimating techniques, have not been adopted by contractors. The practice of cost estimating does not differ from conventional techniques based on the use of labour and material constants to obtain prices for bills of quantities items on an item by item basis. The study shows that the major causes of inaccuracy in cost estimating continue to be the lack of practical knowledge of the construction process by those responsible for the estimating function, insufficient time to prepare cost estimates, poor tender documentation and the wide variability of subcontractors' prices.     

Subcontractor-general contractor relationship in Australian building industry

This paper is based on a major survey of tendering practices in the Australian building industry. The material was obtained from interviews comprising a stratified sample of 43 subcontractors representing five trades and four different size groups. The results show that the most important factors affecting subcontractors' bids to general contractors are a good past relationship with general contractors, a reputation for prompt payment, discussions of how the job will be done, planning and supervision of the work and a reputation for finishing projects on time. The majority of subcontractors seek and receive feedback from general contractors regarding the prices that other subcontractors are quoting on or before tender day. However, only the larger subcontractors respond to this feedback by lowering their bids.     

The accuracy of pre‐tender building cost estimates in Australia

A pre‐tender building cost estimate is an important piece of information when making decisions at the project planning and design stage. The important project characteristics influencing the accuracy of pre‐tender building cost estimates are examined and practical improvement for increasing the accuracy of estimates are considered. A quantitative approach is used to address the research problem. Analysis of data from 56 projects and from a postal questionnaire survey of 102 quantity surveying firms suggests that the accuracy of pre‐tender building cost estimates varies according to project size and principal structural material. When eight identified project characteristics are controlled in a multiple regression analysis, the accuracy of estimates is influenced by project size. The estimates of smaller projects are more biased than the estimates of larger projects. It was discovered that pre‐tender building costs are more often overestimated than are underestimated. Overestimated forecasts are incorrect by a larger amount than underestimated forecasts. Data analysis also revealed that the accuracy of pre‐tender building cost estimates has not improved over time. The majority of the respondents are somewhat dissatisfied with the accuracy of estimates in the industry. Probability estimation and simulation of past estimates, reducing quantity surveying and cost engineering skill turnover, incorporating market sentiments into estimates, early involvement of the quantity surveyor at the brief stage, and proper documentation of experience gained in the estimation of projects should help firms increase the accuracy of estimates for new projects.     

The factors influencing bid mark-up decisions of large- and medium-size contractors in Singapore

The construction industry in Singapore is dominated by a competitive business environment that is being driven by a lowest cost mentality. The pressure on contractors' profit margins has further increased after a prolonged recession in this sector, which has seen construction demand and output shrinking significantly. This paper examines the factors that contractors perceive to be important when they are considering the size of their bid mark-up. The research hypothesis is that contractor size would have a significant bearing on the factors that would influence the bid mark-up decision. Forty factors were identified and a survey was conducted. The results showed that contractor size has a significant impact on their attitude towards bid mark-up decision-making. The analysis also showed that when deciding the size of a bid mark-up large contractors tend to be more concerned with the nature of the construction work while medium-size contractors are more concerned about the state of their own companies finance.     

The guaranteed maximum price contract as call option

Due to increasing constraints on project duration and costs, together with the increasing implication of contractors in the design process, guaranteed maximum price (GMP) contracts are likely to become common in the future. This paper explores a new approach for evaluating the remuneration of the contractor. The GMP contract is considered as a hybrid arrangement consisting of a cost reimbursement contract and a call option on a fixed price contract. The option pricing theory is used as a conceptual framework to assess the GMP contract and the contractors' remuneration.     

Rational under‐pricing in bidding strategy: a real options model

Under‐pricing in construction tenders is a common phenomenon and is commonly explained by the need of cash flows and penetration strategy. However, these explanations involve profit cutting and therefore are not plausible in explaining a long‐term persistent phenomenon of under‐pricing. A real options model is proposed and using the binomial lattice method a real‐life construction project tender was analysed to examine how management flexibility and uncertainty provide real options value. When uncertainties of cost items in a tender exist and choices are available to defer and switch modes of construction, then a valuable option is available to the bidders. It amounts to about 4% of the lump sum tendered in our case. The under‐priced portion is the options value which the bidder is willing to pay for the flexibility and the uncertainty. These findings enable contractors to be more competitive and to estimate construction costs more accurately in devising their bid strategies.     

Contractor financial prequalification using simulation method based on cash flow model

Although construction contractor prequalification highly prioritizes the financial capacity of the construction contractors, a special assessment of contractors' financial capacities has seldom been performed in the construction industry. Cash flows largely reflect a contractor's capacity to meet its financial obligations, this study assesses the credit qualities of construction contractors by using a cash flow based credit model (CFB credit model). The model uses historical continuously free cash flow to firm of construction contractors to simulate possible future cash flow paths. The credit quality scores of construction contractors are then assessed using the CFB credit model. The results demonstrate the effectiveness of assessment of the credit quality of construction contractors, and recommend the clients to adopt it in prequalification of the contractors' financial abilities.     

The effect of experience on contractors' competitiveness in recurrent bidding

This paper considers the relationship between bidding competitiveness, organizational learning and experience and it measures the effect of contractors' bidding experience on competitiveness in recurrent bidding, a notion that conceptualizes a continuous decision-making process in which experiential learning plays a key role. The data analysis demonstrates that contractors who bid more frequently over a six-year period are more competitive than contractors who bid occasionally. It is found that greater bidding competitiveness is positively correlated with the frequency of bidding attempts. An analysis of contractors' bidding performance on a pairwise basis supports this finding. Not only does the pairwise analysis show that the bidding competitiveness of experienced contractors who bid frequently is greater, but also that experienced contractors' bidding attempts fall within a relatively small competitiveness range when compared with that of contractors who only bid occasionally. A key finding of this paper is the existence of some experienced contractors, who may be perceived as being ‘experienced market players’, having the attribute of a more competitive and consistent bidding performance. This research should be useful to procurers looking to prequalify contractors on the basis of experience and to contractors in analysing their bidding performance and/or their competitors' bidding performance.     

The effect of contractor size on mark-up size decision in Saudi Arabia

This study is a part of a larger study addressing the bidding decisions of construction contractors in Saudi Arabia. It examines the mark-up size decisions of small, medium, and large contractors in Saudi Arabia. These groups are found to consider and evaluate many factors subjectively when they set mark-up sizes for projects. However, the importance of these factors varies as the contractor's size changes. Bidding document price, strength in the industry, time allowed for submitting bids and other factors are the greatest contributors to the discrimination between contractor sizes.     

Impact of considering need for work and risk on performance of construction contractors: An agent-based approach

Competitive bidding is the main mechanism of allocating projects in the construction market. In the traditional single criterion bidding method, the markup decision has a significant impact on a contractor's business success. Contractors usually take into consideration several factors in the process of determining their markup. This study has reviewed the literature and identified a range of contractors' behaviors when making their markup decision within a competitive bidding environment. An additive markup function consisting of three components, namely competition, risk, and need for work, was developed in order to replicate markup behaviors of contractors. Then, agent-based modeling has been employed for simulating the bidding process within a market formed of a set of heterogeneous contractors with different risk attitudes and defined markup behaviors. This model was used to study the impact of considering need for work and risk allowance in markup determination on financial performance of contractors in various market scenarios. Results suggest that the optimal policy is moderation in both dimensions of risk attitude and need for work.     

Resolution of disputes arising from set-off clauses between main contractors and subcontractors

Set-off relates to the situation where a main contractor raises a counterclaim against a subcontractor's claim or where an employer raises a counterclaim against the main contractor. The alternative terms cross claim, counterclaim, contra charge, compensation and retention are explained in the context of Scots law. Set-off in the construction industry in Scotland is then discussed within the contractual frameworks upon which main contractors are entitled to exercise such rights and how these conditions of contract have been formed over recent years. A study reported shows the extent of the use of amended and unamended forms of subcontract and main contractors' own forms of subcontract which imposed more onerous set-off conditions than the standard forms, the reasons given by main contractors for exercising their rights of set-off, the level of satisfaction amongst subcontractors with the sums set-off against them, the means by which main contractors and subcontractors settled disputed set-offs, and subcontractors' reasons for accepting unsatisfactory instances of set-off. The research was undertaken using a questionnaire to a stratified sample of subcontractors throughout central Scotland in 1995. Forty-seven subcontractors responded to the questionnaire and 427 instances of set-off were recorded. The study indicated that, despite the considerable protection given to subcontractors in the standard forms of subcontract and in common law, they were prepared to settle set-offs with which they were dissatisfied without initiating contractual proceedings which would have improved their situation. It would appear from this study that subcontractors are reluctant to use their contractual entitlements either because of fears over the costs of disputing set-offs or because they fear that they will be denied opportunities to tender for work in the future. Until there is a culture shift in the industry, reliance on contractual conditions alone may be inadequate to meet the needs of subcontractors.     

Performance of US contractors in foreign markets

The international construction market shrank considerably in the period 1980–88. US contractors' performance in this period was less than satisfactory. This paper first discusses briefly the principal causes for this decline in international construction (the reduction in oil prices, an increase in Third World countries' external debts, local companies becoming more competitive, and governments' barriers to foreign contractors). It then uses published statistical data to identify the common features of US construction companies that undertake work overseas. Finally, it attempts to explain the factors such as financing, taxing, the Foreign Corrupt Practices Act, and foreign competition that may have affected US competitiveness abroad.     

Referees for Volume 25 (2007)

Bidding strategies vary from contractor to contractor, each of which will have different degrees of sensitivity towards the factors affecting their bidding decisions. A competitor analysis using a linear mixed model is proposed for use by contractors as part of a more informed approach in identifying key competitors, and as a basis for formulating bidding strategies. The competitiveness between bids is examined according to: (i) project size, (ii) work sector; (iii) work nature; and (iv) number of bidders. The model was tested empirically by application to a bidding dataset obtained from a large Hong Kong contractor. Allowing for different degrees of sensitivity towards the four bidding variables across competing contractors (i.e. with the model parameters that varied across competing contractors), the results indicate that competitiveness in bidding of this contractor is generally greater than the majority of its competitors.     

工程造价管理在建筑施工企业发展中的重要性

针对工程造价管理在建筑施工企业发展中的重要作用,分析了社会主义市场经济条件下国家对施工企业承包价格的宏观调控及监管,并就如何做好项目的投标工作进行了探讨,提出了加强工程结算的措施,从而降低工程造价。     

Farsighted project contract management: incomplete in its entirety

The purpose of project organization is to create a cooperative environment. Contracts are the method by which the owner creates a project organization to employ resources to achieve their development objectives. Contracts should aim to produce a cooperative organization, aligning the contractors' objectives with the owners. A three‐dimensional vector (reward, risk, safeguard), adapted from the Transaction Cost Economics literature, is used to analyse the efficacy of contract types to do this. Contracts are also unavoidably incomplete. They need to respond to unforeseen circumstance. A four‐dimensional vector (incentive intensity, adaptiveness, reliance on monitoring and control, reliance on the courts), also from the Transaction Costs Economics literature, is used to analyse the governance efficacy of contract types. The results are used to develop a contract selection strategy, depending on whether the uncertainty is controlled by the client or the contractor, the project is simple or complex, and the uncertainty is in the project's product, method of delivery or both.     

Planning for claims: an ethnography of industry culture

Claims by contractors for additional payments have been identified by commentators as a major source of difficulty in the industry. Ethnographic research with industry members reveals some key features of planning practices that underlie such events. Claims are sometimes planned at tender stage and sometimes during the course of a project. One practice at tender stage is a pricing technique that minimizes the tender price while maximizing the out‐turn cost of a contract by exploiting mistakes in the bill of quantities. Another is the programming of work to maximize its vulnerability to delay. More reactive techniques may be employed during the course of the project, often to make up for an unanticipated increase in costs. These and other similar practices may be reported as features of an integrated culture, defined in such a way as to encompass activity and reject Cartesian dualism. The unique adequacy requirements of methods are suitable criteria for the evaluation of such reports. The claims culture arises from economic conditions in the industry, which include low entry barriers and competitive tendering. However, removal of these conditions alone cannot guarantee that the practices will cease.     

Impact of crude oil market behaviour on unit bid prices: the evidence from the highway construction sector

It is well known that the cost of highway construction is affected by the cost of crude oil. While this relationship is highly visible for construction items such as asphalt cement (a by‐product in the process of refining oil), the effects of the crude oil prices on the cost of other construction items, such as concrete cement or construction operations are less direct, but equally important. For unit‐based contracts without price adjustment clauses, this relationship is of a particular significance. In fact, an increase in price of fuel could result in substantial losses, as contractors are not protected. Hence, to hedge against this risk, contractors are likely to incorporate a premium in bid prices to manage project risks. The objective of this paper is to investigate the evidence of this behaviour. New evidence shows that the expected change in oil prices (the difference between future and spot price) and the implied volatility in the oil market affect the price of bid items for contracts without price adjustment clauses. Such results allow for more effective implementation of risk management on project‐ and programme‐level basis.