Optimism Bias in Bidding: Contractors’ Horizontally Biased Estimating Behavior

Abstract

In the construction management literature, it is not an ultimately settled matter that optimism bias is one of the undisputed factors or reasons affecting cost underestimation and cost overrun. This study tried to answer whether bidders—usually legal entities, not natural persons—would exhibit optimism bias-like behavior when bidding for construction projects and whether financial ramifications would follow. Two hundred eighty-six projects delivered to the Ohio Department of Transportation between 2011 and 2020 were analyzed to test the proposed hypothesis. It was observed that bidders were more optimistically biased when bidding for long-duration projects than short-duration projects. The observation strengthens the causal nature between optimism bias and cost underestimation and encourages stakeholders to develop internal or external monitoring systems that call out optimism bias at the organizational level. Project-based organizations, such as engineering and construction firms, generally have the function of estimating. Prior research has shown that individual estimators are subject to various cognitive biases, including optimism bias; in other words, estimators may feel overly confident about the chance of favorable outcomes. However, such estimators hardly work individually; instead, estimators work as teams, especially for large and complex projects, to estimate the cost of projects as accurately as possible. The observation reported in this paper strengthens the argument that such teams are subject to optimism bias-like group behavior, and such behavior is time dependent. Therefore, project-based organizations are advised to investigate their historic cost data to see whether their records show horizontally biased estimating behavior. In addition, project-based firms are advised to establish internal steps to remind their estimation teams of their tendency to overestimate the chance of favorable outcomes, especially when estimating long project horizons.