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Risk and price in the bidding process of contractors

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Laryea, S. and Hughes, W. (2011) Risk and price in the bidding process of contractors. Journal of Construction Management and Engineering, 137 (4). pp. 248-258. ISSN 1943-7862

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To link to this article DOI: 10.1061/(ASCE)CO.1943-7862.0000293

Abstract/Summary

Formal and analytical risk models prescribe how risk should be incorporated in construction bids. However, the actual process of how contractors and their clients negotiate and agree on price is complex, and not clearly articulated in the literature. Using participant observation, the entire tender process was shadowed in two leading UK construction firms. This was compared to propositions in analytical models and significant differences were found. 670 hours of work observed in both firms revealed three stages of the bidding process. Bidding activities were categorized and their extent estimated as deskwork (32%), calculations (19%), meetings (14%), documents (13%), off-days (11%), conversations (7%), correspondence (3%) and travel (1%). Risk allowances of 1-2% were priced in some bids and three tiers of risk apportionment in bids were identified. However, priced risks may sometimes be excluded from the final bidding price to enhance competitiveness. Thus, although risk apportionment affects a contractor’s pricing strategy, other complex, microeconomic factors also affect price. Instead of pricing in contingencies, risk was priced mostly through contractual rather than price mechanisms, to reflect commercial imperatives. The findings explain why some assumptions underpinning analytical models may not be sustainable in practice and why what actually happens in practice is important for those who seek to model the pricing of construction bids.

Item Type:Article
Refereed:Yes
Divisions:Faculty of Science > School of Construction Management and Engineering > Business Innovation in Construction
ID Code:8158
Uncontrolled Keywords:bidding, contractor, participant observation, risk apportionment, UK
Publisher:American Society of Civil Engineers
Publisher Statement:Original paper published at: http://dx.doi.org/10.1061/(ASCE)CO.1943-7862.0000293

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