Competitive Bidding and Opportunity Costs

Abstract

Methods of analyzing competitive bidding have treated construction projects as isolated elements to be optimized without regard to availability of work or other opportunity costs. This paper shows how resource restraints and opportunities can be easily included in these competitive bid analyses, so that a contractor's decisions concerning the overall firm or its individual projects reflect a broad view of the firm's market position. It is shown how markup decisions and predictions of corresponding expected values can take into consideration other possible projects and uses for the firm's limited resources, and also it can take into consideration estimated project costs that differ from the historical base. Consideration of opportunity costs and resource restrictions integrates data and decisions for greater understanding of a firm's competitive position and better business decisions in general. An example demonstrates the methods.