Understanding risky bidding: a prospect-contingent perspective

Budi Hartono and Chee Meng Yap

Construction Management and Economics, 2011, vol. 29, issue 6, 579-593

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.

Keywords: Bidding; mark-up; contingency; cluster analysis; prospect theory (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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DOI: 10.1080/01446193.2011.569733

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