Construction Bid Pricing Factors

This assignment examines the various factors that affect a contractor's bid price for a construction project. It highlights the importance of analyzing each aspect, from project scope and material costs to labor availability and market conditions, to make informed bidding decisions. The analysis draws on academic research and industry best practices to provide insights into successful bidding strategies in the construction sector.

CONSTRUCTION ECONOMICS

TABLE OF CONTENTS
Introduction..........................................................................................................................................1
UK Construction market structure...............................................................................................1
Costs in Construction industry.....................................................................................................1
Transaction costs in Construction sector.....................................................................................2
Impact of Transaction costs on Tendering process......................................................................2
Factors affecting contractor’s bid prices......................................................................................3
Conclusion............................................................................................................................................5
References............................................................................................................................................6

INTRODUCTION
The term construction economics can be defined as the process of economizing
construction processes i.e. from the initiation to completion. The main purpose of economics in
construction is that assist in ensuring practical and sustainable financial decisions are made
during the course of entire project (Myers, 2013). Herein, researcher focuses on illustrating the
concept of economics in construction industry as well as illustrates that costs that is considered
under this sector. Further, trending process and market price for construction of work is
determined and lastly, factors that effects the contractors bid prices has been highlighted.
UK Construction market structure
Looking at the current contracting market structure of UK it can be said that there are
large number of firms which are operating in it and making tons of efforts to satisfy the
expectations of the customers (Valence, 2010). There are different types of functional categories
within the firms in constructions such as builder, consultant, supplier and hybrid. Further,
considering the market condition of construction industry in UK it has been evaluated that there
is high competition due to large number of small contractors. Along with this, there is low
barriers to entry which indicates that firms can enter easily and sustain for longer period. Highly
labor intensive sector requires low level of invest in terms of resources and technology and
construction sector does not exploit economies of scale (Drake, 2013). But at the present there
are several small level firms who are unable to generate better sales that leads to low productivity
across the sector.
Costs in construction industry
Varied types of costs are associated with the construction companies and in context to
traditional theories of the firm the major profit maximization strategy of firms is to manage and
control costs (Chern and Lowe, 2013). Thus, contractor pay great attention to the need of
controlling the costs. However, there are several key costs concepts that contractors have to
focus on such as labor subcontracting assist in minimizing the variable costs, either to hire or buy
plant and equipment, management of working capital and making decisions regarding
bidding/estimating costs (Morton and Ross, 2008). In construction industry, contractors assess
the costs before the work is completed or done. In other terms, it is the reverse process from most
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of the organizations e.g. in manufacturing industry, producers determines price after the products
are produced and costs incurred.
Transaction costs in Construction sector
In general, transaction cost can be defined as the expenditure incurred by the firm or
individual while making economic exchange (Adamson and Pollington, 2006). There are several
aspects that transaction costs covers such as communication charges, legal fees, informational
cost of finding the price, quality and durability as well as it can consist of transportation costs.
The rationale behind considering the transaction costs within the construction sector is that it
provides detailed illustration about each and every step while bidding the contract. However,
search costs that helps in illustrating who is offering what at what price so that best possible
options can be selected (Lewis, 2012). Further, product and service specification costs because
equipment’s and resources used in construction sector are expensive in nature. In addition to it,
considering transaction costs includes contract selection, design, negotiation and these are
essential aspects because product does not exist when demand is generated.
Furthermore, in the study of Kaplinskiand Tupenaite(2011), there are four sources
uncertainties has been identified in the construction industry i.e. task uncertainties that illustrates
that problems arise due to small batch of production in which units are typical. Secondly, natural
uncertainties which consist of geotechnical conditions can affect the course of construction work
by causing disruption and delay. Thirdly, organizational uncertainty arises when construction
project represent temporary coalitions between functionally distinct parties. Lastly, contracting
uncertainties which arises due to minor changes in success rate of tender which leads to large
alteration in turnover for the firms (Fugar and Agyakwah-Baah, 2010). There are two more
source of transaction costs i.e. asset specificity and opportunism these are evident in construction
industry.
Impact of transaction costs on tendering process
Contractor selection are generally based upon the pre-selection activities of competition
and negotiation. Under this process, client puts work to tender and interested contractors are
invited to submit bids (Okmenand Oztas, 2010). However, bidding is perused either open or
selective tendering. Open tendering assist in providing opportunities to parties to submit their bid
for the work. While in selective tendering process, contractors are subject to pre-qualification. In
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this, firms are short listed on the basis of pre-qualification and only limited number of bids are
invited. In this regard, transaction costs makes huge impact on the tendering process because
activities involved in the course of tendering license expenditure. However, each organization
participating the tendering process have to incur permit costs (Kikwasi, 2013). It leads to higher
competition which enforces the costs of abortive tendering become more important and the
organizations that fails to acquire or win the contract/project will either have to bear the costs of
tendering or need to find a way to recouping. The more number of organizations involved in
bidding process, more the abortive costs gets higher. There are several transaction costs
associated with tendering process such as: the costs of drafting contracts, setting up the
mechanisms for obtaining tenders, preparing other contract documentation as well as for
ensuring the subsequent execution of contracts by consultants and contractors (Luuand Sher,
2012). Generally, the costs of tendering are subsumed in an organization’s overheads.
Factors affecting contractor’s bid prices
In recent past, there are several studies that has been made by on bidding process shows
that varied factors that affects the bid or no bid decision making process. However, it is the
responsibility of party to analyze and evaluate each and every aspect about construction bid so
that factors affecting the bid price can be evaluated and accordingly makes decision regarding
bidding for the contract (Finkel, 2015). Different authors have categorized these in various
prospects but herein, factors have been grouped under different categories which are as follows:
Bid price highly depends upon the need of work. However, if contractor is already
overloaded with the work then it may affect its bidding price. While on the other hand, company
has less workload and large number of vacancy resources which enhances the need of work
(Samuels, 2013).In this regard, financial condition of contractor is very important because
despite of being overload with work, if he/she have adequate funds to bid for the new project
may lead the decision in contractor’s favor.
Strength of construction firm is another major factor that can affect the bid price of the
project. It is because of the fact that, strength of firm refers ability of contractor to achieve the
tender conditions, experience of similar project, familiarity with site conditions, availability of
resources etc. If all these factors are in favor of contractor may help in acquiring the tender
(Akintoye, 2012).
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The project conditions and its ability to attain profitability is another major factor that
affect the contractor’s bid price. However, it is because despite the project is smaller in size or
nature if it is able to generate higher profits than contractor decisions towards bid price may
affect positively. Along with this, size, type, location and duration are highly related to the
capabilities of contractors (Thomas Ng, Fan and Wong, 2011). Furthermore, capabilities of a
contractor can be categorized under volume of cash available, number of available qualified
staff, equipment’s, plant, management skills and construction technique expertise etc. are the
major contributors towards the decision making of bidding for a project or not.
Risk associated with the project may negatively affect the bid price of contractor.
However, there are several risks involved in a project such as job related risks, macro
environment risks etc. Thus, it is the duty of contractor to analyze and identify the risks and
uncertainties associated with the project so that his/her team member can make smart and
effective decisions regarding bidding (Hughes, Hillebrandt and Greenwood, 2006).
Competition is another major issue to contractors bid price. However, for a project if
large number of companies are bidding it becomes more difficult for a contractor to bid the
project. In construction industry, competition can be analyzed on two different prospects:
considering the current market conditions and current project (Brook, 2012). In context to
competition in currentproject it mainly concentrates on the number of bidders participated to bid
for the project.
Regional market is another major factor that affects the bid price of the contractor.
However, regional market conditions consist of various factors i.e. economic conditions of
overall market or financial condition of construction industry (Lewis, 2012). Furthermore, the
amount of competitors need to be taken into account because it may fluctuate the bid price of
project. In addition to it, if contractor have wide range of contract option available to bid or have
lack of project to bid may impact on the bidding decisions of the contractors.
Type of client may change the mind set of contractor for bidding the project. However,
for contractor different prospects of client need to be evaluated before making decisions
regarding bidding such as client is public or private, financial capability of client, reputation of
the client, relationship with the client and expectations of the client (Drake, 2013). Thus, these
factors may easily affect the bidding decision of contractor regarding a particular project.
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Type of project factor clearly indicates the experience of contractor in the particulars
field. However, having relatively good working experience or familiarity with the concern field
encourages or motivates the contractor to bid for the project (Myers, 2013). It is important for the
contractor or construction firm to have clear understanding of the environment which consists of
market conditions, competition, client etc. further, having self-evaluation assist in identifying the
strengths and capabilities to initiate and complete the project.
These are some of major factors that can affect the contractor’s bid price for a
construction project. It is important for the individual or organization to evaluate and analyze
each and every aspect so that they can make sound and effective decisions regarding the bidding
process and sustain their position within industry or market (Fugar and Agyakwah-Baah, 2010).
CONCLUSION
In summing up the above study, it has been evaluated that, there are several costs
associated with construction firm and in particular transaction cost is taken into account for
making estimation of the project. Considering the current market structure of construction
industry in UK it can be said that companies can easily enter into the market and demand and
workload will assist them to sustain for long periods (Valence, 2010). Lastly, researcher
evaluated that there are varied factors that affects the bid price of contractor for a project and it is
the duty of individual or construction firm to analyze each and every aspect so that they can
make smart and effective decisions regarding bidding for a project or not (Adamson and
Pollington, 2006).
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Brook, M., 2012. Estimating and Tendering for Construction Work. Routledge.
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Drake, B., 2013. Construction Economics in the Single European Market. Routledge.
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Ghana. Australasian Journal of Construction Economics and Building. 10(1/2). p.128.
Hughes, W., Hillebrandt, M. P. and Greenwood, D., 2006. Procurement in the Construction
Industry: The Impact and Cost of Alternative Market and Supply Processes. Routeldge.
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Thomas Ng, S., Fan, R. Y. and Wong, J. M., 2011. An econometric model for forecasting private
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