Modelling of tri-parameter bidding integrating cost, time and risk: a stochastic approach

Abstract

Purpose

This paper aims to propose a new tri-parameter bidding model integrating cost, time and risk. The key value of the model is that it remains within the framework of the competitive bidding system while controlling the risk resulting from float loss.

Design/methodology/approach

The model utilizes stochastic scheduling to quantify the float loss impact at the project level. Prospective bidders are evaluated based on their total combined bid (TCB) including cost, time and risk. The risk parameter is calculated as the relative risk between the bidder’s schedule and the client’s baseline schedule.

Findings

The results confirmed that choosing the contractor based on the lowest price and time reduces the available float and increases the schedule risks. The probability of completing the project on time dropped from 46 per cent for the baseline schedule to 19 per cent for the bidder with the most compressed schedule. The selected bidder, using the proposed model, has the lowest TCB of cost, time and risk. Results show that adding the risk parameter in the evaluation changed the ranking of the bidders.

Research limitations/implications

The model does not discuss all project risks that the contractor retains. It focuses on schedule risks that result from shortening project duration. The model focuses on solving the problem with price plus time bidding method by addressing the schedule risk issue. Other criteria, such as sustainability, are not considered.

Practical implications

The proposed model encourages contractors to pay more attention to the time parameter and the schedule risks resulting from aggressive reduction in project duration.

Originality/value

Problems arose, in the current complex construction industry, as owners rely solely on price as the award criterion. Recently, the bi-parameter bidding system, A + B, introduced the time parameter to the awarding criteria. However, reducing the project duration by compressing the schedule consumes the float of non-critical activities, which reduces the schedule flexibility of a project. The proposed model allows clients to evaluate potential bidders objectively. Rather than evaluating the bidders based on price, in the conventional low bid system, or based on price and time, as in the A + B system, the bidders are evaluated based on three parameters: price, time and risk.

Citation

Rabie, M. and El-Sayegh, S. (2017), "Modelling of tri-parameter bidding integrating cost, time and risk: a stochastic approach", Journal of Financial Management of Property and Construction, Vol. 22 No. 2, pp. 117-134. https://doi.org/10.1108/JFMPC-06-2016-0024