Understanding risky bidding: A prospect-contingent perspective

Abstract

A descriptive research school of thought provides the context for an examination of contractors' risky bid markup 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. © 2011 Taylor & Francis.