Owner’s Perspective on Evolution of Bid Prices under Various Price-Driven Bid Selection Methods

Abstract

In the construction industry, it is crucial for owners to select the appropriate contract delivery method to achieve best performance on their projects. The low-bid method has been the most common competitive bid selection approach used for public projects in the US construction industry and worldwide. Although awarding the project to the lowest bid promises transparency in the selection process by considering only one objective criterion (the bid price), it often leads to adversarial relationships, less cooperation among different parties involved in the project, and potential compromise of the project quality. Furthermore, it is often accompanied by a significant number of claims and disputes that often result in cost overruns and schedule delays. Thus, there is a need to explore alternative competitive price-driven bidding methods which can preserve the transparency of the low-bid method and at the same time remedy the inconvenience of unrealistic low bids. This paper uses agent-based modeling to simulate the bidding process dynamics and to observe the long-term evolution of tendered prices and market equilibrium under different competitive tendering approaches including the second low, average, below-average, truncated average, and truncated below-average bidding methods. Whereas most previous bidding literature focused on the contractor’s bidding decisions, this is the first study that addresses the owner’s concern of choosing the most suitable bidding method for its current project and market conditions. This is achieved by analyzing how the bid criterion defined by each of the aforementioned bidding methods impacts the interaction among competing contractors and their bid price adaptation in the long term. Simulation results show that the below-average bid method is most favored for less-competitive projects, whereas the second low bid and average-bid methods are preferred when the level of competition is high.