Improving Contractors' Bids Using Preference Reversal Phenomenon

Abstract

Owners of projects have the opportunity to improve the bids obtained from bidders by using a well‐known psychological phenomenon called “preference reversal.” This is a systematic tendency of people, to pay more than they should for less attractive choices in specific situations—a phenomenon that has been extensively documented by psychologists. In the present research this effect was demonstrated experimentally for the field of construction in several series of structured interviews with professionals in construction management and real estate development regarding realistic bidding situations. The strength of the effect was found to depend on two factors recently shown to have a strong influence on contractors' behavior: the risk of the project and the contractor's need‐for‐work. The pervasiveness of the preference reversal phenomenon in the construction industry has implications for owners of projects to help reduce their costs: owners should structure the design process as a construction management project and then shift to a lump sum contract for the construction phase.