Pricing Strategy for Best Value Tender

Abstract

Unlike the traditional price-focused lowest bid (LB), the best value (BV) tendering process selects the contractor that offers a product or service that is most beneficial to the procurement entity in various aspects. Existing pricing models, including cost-based probabilistic models and market-based neoclassical microeconomic theory, were developed for LB. Very few operational models exist for BV tenders due to the difficulty of measuring the price differences with respect to the variance of product or service quality. This paper proposes a price elasticity of quality (PEQ) model that provides useful tools to measure the PEQ of a product or service offered by contractors in a tendering process. Based on the proposed model, a bidding zone is suggested for the contractor in light of competitiveness and profitability. Two working examples are used to show the applicability of the proposed method.