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.     

Construction project risks: further considerations for constructors' pricing in Hong Kong

Construction project risks affect contractors' tender price. A host of factors influencing tender prices were identified and the importance of these factors evaluated by making use of the data collected in a postal questionnaire survey conducted to the ‘Buildings’ contractors in Hong Kong. Out of 60 factors identified, the availability of required cash, uncertainty in costs estimates, urgent need for work, past experience in similar projects and contract size are considered most important. The need for work and the amount of experience are similar to those factors affecting bidding decisions of top UK contractors. The findings suggest that in the upward adjustment of tender prices, the large‐size contractors are more concerned with the uncertainty in costs estimates while the medium‐ and small‐size contractors care more about no past experience. In the downward adjustment of prices, the large size of the contract is the main factor affecting the pricing of the large‐ and medium‐size contractors while the urgent need for work is the main drive for the small‐size ones. There are significant differences between the contractors' perceptions of the importance of the risk factors. This is consistent with differing attitudes towards bid mark‐up decisions of the large‐ and medium‐size contractors in Singapore.     

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.     

The use of global strategies by British construction firms

A two‐stage qualitative case study, and Yip's conceptual framework, are used to examine the extent to which British construction firms have adopted ‘global’ strategies. In the first stage industry experts provided evidence on the forces driving global strategy. In the second stage executives from eight internationally active firms described how they have responded to those forces. Results indicate that the forces driving globalisation, at least for traditional contracting activities, are not strong. Evidence shows that most firms operating internationally organise ‘multi‐locally’ and make little use of globally integrated strategies. However, firms that have moved into ‘higher value‐added’ construction activities have a greater propensity to integrate some aspects of their strategy on a global basis.     

Valuing a price cap contract for material procurement as a real option

This paper uses real option methodology to compare the cost of a long‐term contract with a price cap to that of spot purchases in construction material procurement. In construction, material procurements are usually short‐term, project‐based and subject to high price volatility. These characteristics and the competitive nature of the industry lower the profit margin of contractors. We have observed that contractors purchase a stable amount of commodity materials such as concrete, structural steel and lumber year after year. For contractors, the price cap reduces the price volatility of materials without their being obliged to purchase a certain quantity; for suppliers, the price‐cap contracts give them steady demand and a bigger market share. We evaluate this price‐cap contract as a real option and find the contractor's optimal ordering policy. When materials are not frequently traded, we model price processes by using related market information and then evaluate the idiosyncratic uncertainties in a risk‐neutral setting. Our methodology does not require market completeness and incorporates some of the results of the latest research in finance such as correlation pricing, option pricing and zero level pricing, as well as Monte Carlo simulation.     

Factors impeding the offsite production of housing construction in China: an investigation of current practice

The promotion of offsite production is a possible future strategic direction for the construction industry as it provides economic, environmental and social benefits. However, in China, the uptake of offsite production, particularly in the housing sector, is relatively low and few studies have identified and examined the reasons behind this trend. This research gap is addressed and factors that inhibit the wider use of offsite production in China’s housing construction industry are investigated. A questionnaire survey was carried out, examining the views of 110 construction professionals in China including developers, designers, contractors, manufacturers and suppliers. Factor analysis of 21 separate variables was undertaken which extracted six principal factors, namely: ‘constructability implementation’, ‘social climate and attitudes’, ‘architectural performance’, ‘costing’, ‘supply chain’ and ‘preparatory stage’. The findings identify both barriers and challenges to increasing the uptake of offsite production in China. This provides a rare insight about the housing construction industry in China with possible implications for other developing countries that are seeking to identify and overcome barriers to the wider uptake of offsite production.     

A neural network bid/no bid model: the case for contractors in Syria

Despite the crucial importance of the ‘bid/no bid’ decision in the construction industry, it has been given little attention by researchers. This paper describes the development and testing of a novel bid/no bid model using the artificial neural network (ANN) technique. A back‐propagation network consisting of an input buffer with 18 input nodes, two hidden layers and one output node was developed. This model is based on the findings of a formal questionnaire through which key factors that affect the ‘bid/no bid’ decision were identified and ranked according to their importance to contractors operating in Syria. Data on 157 real‐life bidding situations in Syria were used in training. The model was tested on another 20 new projects. The model wrongly predicted the actual bid/no bid decision only in two projects (10%) of the test sample. This demonstrates a high accuracy of the proposed model and the viability of neural network as a powerful tool for modelling the bid/no bid decision‐making process. The model offers a simple and easy‐to‐use tool to help contractors consider the most influential bidding variables and to improve the consistency of the bid/no bid decision‐making process. Although the model is based on data from the Syrian construction industry, the methodology would suggest a much broader geographical applicability of the ANN technique on bid/no bid decisions.     

To bid or not to bid: a parametric solution

One of the most important decisions that has to be made by construction companies/contractors is whether or not to bid for a new project when an invitation has been received. It would be of great help if a structured model could be developed that deals systematically with different bidding situations. A simple parametric solution for the ‘;bid/no bid’ decision is reported in this paper. This solution is based on the findings of six semi-structured interviews and a formal questionnaire through which 38 factors that affect the bid/no bid decision were identified and ranked according to their importance to contractors operating in Syria. Only the most influential factors were considered in the development process. The model was optimized using data about 162 real bidding situations. Then the optimized model was tested using another 20 real projects. It proved 85% accurate in simulating the actual decisions. Although, the proposed model is based on data from the Syrian construction industry it could be modified very easily to suit other countries.     

Changing collaborative practices through cultural interventions

After a parliamentary enquiry into construction industry malpractice, changes occurred in collaborative practices between clients and contractors in megaprojects within the Dutch construction sector. The enquiry meant that both clients and contractors were forced to acknowledge illegal practices of collusion and fraud. For those engaged in public–private relationships, a process followed of attempting to change collaborative practices. Three interventions in collaborative practices are recounted: (1) organizing personal networks between clients and contractors; (2) a competitive dialogue procedure; and (3) the right of withdrawal. These three interventions helped to change ‘first order’ practice, such as increasing mutual trust between client and contractor, supporting a mutual understanding of role positioning and dilemmas, and creating an understanding of the nature of the conflict but failed to change ‘second order’ practices. Two contributions to the understanding of project management are provided. New empirical data are presented on the challenges that public and private partners face in their attempt to implement new collaborative practices. It is shown how power is entangled in the emerging of new collaborative practices. The findings are based on a longitudinal ethnographic study of public–private collaboration in the Dutch construction industry in the period 2006–11.     

Safety risk perception in construction companies in the Pacific Northwest of the USA

Unsafe worker actions contribute greatly to the frequency and severity of construction injuries. Recently, contractors have expressed concern with the high rate of injuries that occur when workers violate company safety policies. To enhance knowledge associated with this topic the following four objectives were targeted: (1) quantifying the current level of safety risk as perceived by construction workers; (2) quantifying the risk tolerance of workers and managers; (3) comparing the risk perceptions and tolerance of workers with managers; and (4) identifying factors that may affect one’s risk tolerance. Fifty‐one risk perceptions were gathered through interviews with managers and workers of nine different construction firms in the Pacific Northwest region of the United States. The results indicate that the level of current perceived risk is approximately five times higher than the tolerable risk value, workers are most dissatisfied with the frequency of high severity injuries, and there is a statistically significant difference in the risk tolerance between workers and managers. The findings presented can be used by project managers to increase awareness of risk tolerances, current areas where workers feel improvement is most needed, and for goal setting.     

ISO 9000 and beyond: from a Hong Kong construction perspective

Client driven ‘pushes’ for ISO 9000 certification in Hong Kong are observed to have overtaken any spontaneous ‘pull factors’ (motivators) towards quality improvements ‘for their own sake’. For example, the need for ISO 9000 certification as a prerequisite for even being considered for public sector construction works appears to have distracted some organizations from a more comprehensive organization-specific development of their quality management systems. Both positive (beneficial) and negative (detrimental) outcomes from ISO 9000 certification, as observed from relevant previous studies, are summarized herein. These provide a useful background against which to present perceptions derived from the current study in Hong Kong construction. The target groups were predominantly from consultants in the initial survey and all from contractors in the second and more comprehensive survey. The more significant positive and negative outcomes from ISO 9000 certification as derived from the two current surveys are identified. Recommendations are made for realigned approaches to ISO 9000 certification and for seamless integration with other quality management approaches such as TQM, as well as with other management subsystems, such as for productivity improvement and dispute minimization.     

Ownership advantages/disadvantages of Singapore transnational construction corporations

Expanding beyond Singapore's boundaries has been a source of increased business for Singapore transnational construction corporations (STCCs). This paper analyses the significance of ownership advantage and disadvantage factors of STCCs in pursuing their international construction business, relative to other ASEAN contractors and contractors from developed countries. Moreover, this study examines if these ownership factors do vary significantly according to firm specific contextual variables in the STCCs such as size, international age, multinationality and extent of specialization/diversification. Based on responses from 22 STCCs, this study has found that the most important ownership advantage factors of STCCs were identified as coming from: (1) information, knowledge, technology and R&D capability; (2) the firm's name and reputation; and (3) management and organizational capability. Relative to established international contractors STCCs have a significant size disadvantage with reference to certain project types.     

当前施工招标过程中存在的计价问题与对策

本文结合当前工程施工招标投标市场实际,分析7当前工程施工招标过程的招标文件及其控制价中存在的计价问题及原因,并提出加强监管与提升服务的具体措施.     

The impact of individual and job characteristics on 'burnout' among civil engineers in Australia and the implications for employee turnover

A survey was undertaken to explore the experience of ‘burnout’ among engineers working in the Australian construction industry. The most widely recognized model of burnout, comprising emotional exhaustion, cynicism and a diminished sense of personal accomplishment was found to be valid. However, Australian engineers experience a strong sense of the social worth of their professional activity, independently of believing in their own individual competence as engineers. There was also a widespread belief that the rewards enjoyed by engineers as a result of their professional endeavours are not commensurate with their level of skill and responsibility. The results of the study also show that burnout cannot be attributed to a single cause but occurs as a result of a complex interaction of individual characteristics and issues in the work environment. As such, there is no single ‘cure’ for burnout and multiple intervention strategies are probably needed. However, the relative importance of job characteristics compared to personality characteristics in predicting burnout suggests that job re-design may be an effective preventive strategy. Cynicism and emotional exhaustion were strong predictors of engineers' intention to leave their jobs. This suggests that measures to prevent burnout could also help to reduce turnover and its associated costs.     

Pre-tender and post-tender negotiations in Australia

One of the main features of the Australian building industry is the high level of subcontracting of building works. This paper reports on a survey of 43 subcontractors regarding various aspects of the relationship between subcontractors and general contractors. In particular it reports on the practice of ‘bid shopping’ in which the general contractor in various ways attempts to reduce the subcontractor's price below that of the tender. Generally the subcontractors were strongly against bid shopping attempts to tie with general contractors and negotiations in general. However, the strength of the responses was determined by the size of the firms. The larger firms were more open to negotiations and deals than the smaller firms. The overall benefits to the general contractors who ‘shop’ are doubtful, most subcontractors adjust their mark up by up to 20% to allow for such negotiations.     

A needs based methodology for classifying construction clients and selecting contractors-a rejoinder

Our original article (Chinyio et al., 1998a) ‘A needs based methodology for classifying construction clients and selecting contractors’, Construction Management and Economics, 16 (1), 91-98 discussed the empirical classification of construction clients and illustrated a new methodology for selecting contractors. The techniques we adopted have not been applied in a construction scenario before and thus their implementation may face teething difficulties as differences between construction and the disciplines from which the techniques were adopted are ironed out. Due to brevity we did not highlight some of the potential problems their implementation would encounter, as we could not explain everything on the subject matters in one article. Skitmore and Mills (1999) in a comment, Construction Management and Economics, 17 (1), 5-7, highlighted some anticipated difficulties and posed some insightful questions concerning the applicability of our concepts. From an optimistic perspective we have addressed most of the sundry issues raised by Skitmore and Mills wherein ‘Decision Analysis’ was reviewed as a basis for responding to the comments.     

Making a risk-based bid decision for overseas construction projects

The globalization of international construction markets provides tremendous opportunities for contractors to expand into new foreign markets. However, entry decisions for international construction markets are very risky and more difficult than those for domestic markets, due to the wide variety of uncertainties and complexities associated with the international construction domain. This paper focuses on developing and testing a ‘risk-based go/no-go decision-making model’ for contractors who wish to expand into international construc5 tion markets. The go/no-go decision model applies the cross-impact analysis (CIA) method to assess the various uncertainties associated with international construction. This research draws significant findings regarding the benefits of this go/no-go decision model from experimental studies involving 56 participants.     

Contractor financial credit limits; their derivation and implications for materials suppliers

Current methodologies for ‘calculating’ contractors' credit limits (for supply of construction materials) are discussed and critically appraised. It is highlighted that credit limit imposition should be a function of a supplier's financial characteristics as well as potential debtors' probability of defaulting upon repayment. A conceptually new approach is presented to identify whether an additional contractor's trade results in a worthwhile gain in utility for the supplier. It is identified, inter alia, that (i) allowing very few contractors credit facilities that account for a large proportion of suppliers' potential profits, (ii) having inaccurate creditworthiness evaluation procedures, and (iii) operating on low targeted profit margins are the characteristics that inflict maximum financial risk upon materials suppliers.     

Studying ‘cost as information’ to account for construction improvements

Contractors throughout the construction supply chain develop and use cost information. By treating ‘cost as information’, insights are generated into how cost information is created and flows from work carried out to a client cost. A case study of a main contractor’s supply chain involved semi-structured interviews, workshops and document reviews. We considered whether contractors’ current costing practices used for the purpose of pricing and cost control could support decision-making about improvements through the supply chain. The results show that firms recognize that current costing practices do not provide a good representation of work carried out. Cost information that is useful in a narrative that seeks to improve site operations is either not created or hidden in layers of assumptions and lost as it does not cross the boundaries between organizations. This implies that the implementation of current practices of costing in building information modelling will not increase the effectiveness of modelling construction costs for the purpose of improvements. However, cost information that is useful in decision-making about improvements could be created. This could be achieved but requires a systemic change, where new representations of cost are tied to work processes used within more stable procurement relationships.     

Analysis of pre‐qualification criteria in contractor selection and their impacts on project success

While construction industry practices are reasonably well developed, construction projects still witness widespread failures of many contractors due to varied reasons such as financial problems, poor management, over‐commitment and or conflicts and disputes associated with construction activities. Pre‐qualification of contractors is a common practice across projects, yet the investigation on the ability of the selected contractors in successful delivery of projects is not widespread. In an attempt to understand these pre‐emptive qualification criteria and their links in contractors’ performance in projects, a total of 43 influencing technical attributes were identified through a systematic research approach. The relative significance and impacts of the attributes have been determined based on a structured questionnaire survey in selected construction projects. By performing the factor analysis, a total of seven factors significant to contractors’ performance were extracted, namely (1) soundness of business and workforce; (2) planning and control; (3) quality management; (4) past performance; (5) risk management; (6) organizational capability; and (7) commitment and dedication. Multiple linear regression models reveal that technical expertise, past success, time in business, work methods and working capital significantly impact on contractors’ performance across time, cost and quality success. With a clear understanding of a contractor’s performance, these findings could potentially contribute to development of a company’s procedures or enhance existing knowledge in relation to the pre‐qualification practices in contractor selection in projects.