Risk Assessment of Competitive Procurement

Abstract

A method is proposed to evaluate the risk of cost growth in competitively procured construction projects. It uses computer records of past bid data and an inferential statistical technique to simultaneously assign projects into two risk categories. One category is based on the observed disagreement between the winning bid and the other submitted bids. The other is based upon the observed bias in the bidding pattern of the winning bidder. Results verify differences in cost growth for both risk categories. Projects awarded to the most extreme bids are seven times more likely to experience excessive cost growth than a project awarded to a more reasonable bid. Similarly, projects awarded to extreme bidders have average cost growths 3.5–4 times higher than if awarded to more reasonable bidders. This risk-assessment method would prove useful in the bid-evaluation procedures of public agencies. It appears from these results that agencies that make bargains based upon competitive procurement, often do not receive the bargain that had been anticipated.