Average‐Bid Method—Competitive Bidding Strategy

Abstract

The major drawback of the low‐bid method, often used for competitive bidding in the U.S. construction industry, is the possibility of awarding a construction contract to a contractor that submits, either accidentally or deliberately, an unrealistically low bid price. Often, such an occurrence works to the owner's and contractor's detriment by promoting disputes, increased costs, and schedule delays. To address this problem, other countries have adopted the average‐bid method and award the contract to the contractor whose price is closest to the average of all bids submitted. This paper presents a competitive bidding model for the average‐bid method and explores its merits relative to the low‐bid method. The bidding process is analyzed both mathematically and through Monte Carlo simulation. The final results of the average‐bid model, as well as Friedman's low‐bid model, are presented in four nomographs that can be used to analyze a competitive situation without the need for any mathematical or numerical manipulation. A comparison of the two methods reveals that the average‐bid method and its variations have the potential to improve contracting practices both for the owner and the contractor and deserve the industry's increased attention.