Risk Pricing in Construction Tenders - How, Who, What

Marcus Tower
David Baccarini

Abstract


Construction projects are most commonlyprocured in Australia by means of a traditionaldesign–tender–build model, whereby design islargely completed then contractors submittenders in a competitive environment.Construction contractors must consider riskswithin their tenders. This paper reports theresearch findings into pricing for risk incompetitive tenders by constructioncontractors. The research is based onstructured interviews with 10 contractingpersonnel; supplemented by 23 responses ofconstruction personnel from an online survey.Two common methods to price for risk are atrade-by-trade basis or an overall percentageor lump sum addition to the base estimate.Experience and intuition plays a significant rolein pricing for risk in tenders and the numberand type of people involved varies with projectsize, with greater involvement as project sizeincreases. The most significant risks priced intenders were: availability of resources; designor documentation errors; incomplete design;buildability issues; and inclement weather. Themost significant project factors considered bycontractors when pricing for risk in tenders are:value of liquidated damages; type ofcontract/procurement; completeness ofdocumentation; project complexity; and currentworkload. These risks and project factors areprimarily those over which the contractor haslimited or no control.

Full Text:

PDF

References


Ahmad, I. & Minkarah, I. 1988, 'Questionnaire survey on bidding in construction', Journal of Management in Engineering, vol. 4, no. 3, pp. 229-43

Akintoye, A. 2000, 'Analysis of factors influencing project cost estimating practice', Construction Management & Economics, vol. 18, no. 1, pp. 77-89.

Akintoye, A. & Fitzgerald, E. 2000, 'A survey of current cost estimating practices in the UK', Construction Management & Economics, vol. 18, no. 2, pp. 161-172.

Baccarini, D. & Archer, R. 2001, 'The risk ranking of projects: a methodology', International Journal of Project Management, vol. 19, no. 3, pp. 139-145.

Bent, J. A. & Humphreys, K. K. (eds.) 1996, Effective project management through applied cost and schedule control, M. Dekker, New York.

Clark, F. D., Lorenzoni, A. B. & Jimenez, M. 1997, Applied cost engineering, 3rd ed., Marcel Dekker, New York.

Dulaimi, M. F. & Shan, H. G. 2002, 'The factors influencing bid mark-up decisions of large- and medium-size contractors in Singapore', Construction Management & Economics, vol. 20, no. 7, pp. 601-610.

Flanagan, R. & Norman, G. 1993, Risk management and construction, Blackwell Scientific, Oxford, England.

Hegazy, T. & Moselhi, O. 1995, 'Elements of cost estimation: A survey in Canada and the United States', Cost Engineering, vol. 37, no. 5, p. 27

Karlsen, J. T. & Lereim, J. 2005, 'Management of Project Contingency and Allowance', Cost Engineering, vol. 47, no. 9, pp. 24-29.

Kumar, R. 2005, Research methodology: a step-by-step guide for beginners, 2nd ed., Pearson Longman, Frenchs Forest, N.S.W.

Liu, M. & Ling, Y. Y. 2003, 'Using fuzzy neural network approach to estimate contractors' markup', Building and Environment, vol. 38, no. 11, pp. 1303-1308.

Mak, S., Wong, J. & Picken, D. 1998, 'The effect on contingency allowances of using risk analysis in capital cost estimating- a Hong Kong case study', Construction Management and Economics, vol. 16, no. 5, pp. 615-169.

McDermott, P. & Rowlinson, S. M. (eds.) 1999, Procurement systems: a guide to best practice in construction, E & FN Spon, London.

Moselhi, O. 1997, 'Risk assessment and contingency estimating', AACE International Transactions, vol. b, no. a1, p. 90.

Paek, J. H. 1994, 'Contractor risks in conceptual estimating', Cost Engineering, vol. 36, no. 12, pp. 19-22.

RCBCI 2002, Discussion paper one -Royal commission into the building and construction industry, Retrieved: 03/04/06, from http://www.royalcombci.gov.au/docs/DP% 201%20Overview.pdf

Sarantakos, S. 2005, Social research, 3rd ed., Palgrave Macmillan, Houndmills, Basingstoke, Hampshire; New York.

Shash, A. A. & Abdul-Hadi, N. H. 1992, 'Factors affecting a contractor's mark-up size decision in Saudi Arabia.' Construction Management & Economics, vol. 10, no. 5, p. 415.

Skitmore, M. & Wilcock, J. 1994, 'Estimating processes of smaller builders', Construction Management & Economics, vol. 12, no. 2, pp. 139-154.

Smith, G. R. & Bohn, C. M. 1999, 'Small to Medium Contractor Contingency and Assumption of Risk', Journal of Construction Engineering and Management, vol. 125, no. 2, pp. 101-108.

Smith, N. J. (ed.) 1995, Project cost estimating, T. Telford, London.

Tah, J. H. M., Thorpe, A. & McCaffer, R. 1994, 'A survey of indirect cost estimating in practice.' Construction Management & Economics, vol. 12, no. 1, p. 31.

Tilley, P., Gallo, G., Lucas, G., McLennan, A. & Parminter, T. 2002, Project Documentation Quality and its Impact on Efficiency in the Building & Construction Industry, Queensland Division of the Institution of Engineers, Australia, Brisbane .




DOI: http://dx.doi.org/10.5130/AJCEB.v8i1.2997


Share this article:

ISSN: 2204-9029

Creative Commons License This work is licensed under a Creative Commons Attribution 4.0 International License.