The risks of unbalanced bidding

Abstract

Unbalanced bidding models have largely ignored the risk aspect of item pricing. Many researchers have acknowledged that there are considerable risks associated with unbalancing a bid but little has been done to describe these risks, let alone model them. A new framework is proposed by which all of these risks can be assessed. It identifies that these risks comprise the risk of rejection, the risk of reaction, and the risk of being wrong. It is further proposed that the value‐at‐risk (‘VaR’) method of measuring risk is a convenient way by which to combine all of these risks into one composite assessment. This quantified assessment serves to describe the extent of risk generated by each level of each item’s price. Previous related research has proposed an unbalanced bidding model that has likewise provided a measurement of the expected reward generated by each level of each item’s price. By doing a summation of these, keeping in mind that the prices applied to all of a project’s component items must add up to the overall bid price, the contractor is able to assess both the risks as well as the rewards of all possible item price combinations.

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