Determining the Optimal Fee-Technical Proposal Combination in Two Envelope Fee Bidding

Derek Drew, Connie Kwong, Patrick Zou, L.Y Shen


Abstract

Two envelope fee bidding is a mechanism used by construction clients to allocate commissionsto willing consultants such as architects, engineers and surveyors. In two envelopefee bidding the client scores the competing consultants’ fees and technical proposals.The fee and technical proposal scores are weighted and aggregated and the consultantobtaining the highest aggregated score normally wins the commission. The consultant’sobjective in bidding, therefore, is to obtain the highest aggregated score possible since thismaximizes the chance of winning the commission. Given that fee and technical proposalscores are to some extent correlated, consultants can submit any one from a number ofdifferent fee—technical proposal combinations, ranging from a low fee—low scored technicalproposal combination to a high fee—high scored technical proposal combination.Only one possible combination will result in the highest aggregated score. Drew et al(2002b) offered consultants a model to determine this optimum fee-technical proposalcombination for any given commission. This paper tests the proposed model using datacollected from a leading Hong Kong consultant. The analysis, based on 51 bidding attempts,indicates that had the consultant adopted the proposed optimization model, theoverall average improvement on the consultant’s original total scores was 7.07%. The optimumstrategy was to aim for an absolute low fee—low scored technical proposal on 20occasions, absolute high scored technical proposal—high fee on 21 occasions and somewherebetween these two extremes on the remaining 10 occasions. The extent to whichfees scores and technical scores vary relative to each other has an important influence onthe optimum fee—technical proposal combination. However, the client’s change from a70/30 to a 50/50 predetermined weighting appears to have little effect on the consultant’soptimum bidding strategy.

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References

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