Journal of Cleaner Production 112 (2016) 863e871

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

Assessing the impacts of preferential procurement on low-carbon

building
Xiaoyu Liu 1, Qingbin Cui*
Department of Civil and Environmental Engineering, University of Maryland, College Park, MD 20742, USA

a r t i c l e i n f o a b s t r a c t

Article history: The significance of global warming is shaping building procurement, with much of the effort aimed at
Received 30 June 2014 reducing greenhouse gas emissions through a preferential bidding mechanism. However, only a limited
Received in revised form number of studies have quantitatively estimated the potential impact of bid preference on the emission
15 May 2015
reduction from building construction. The aim of this paper is to improve our understanding of how bid
Accepted 4 June 2015
discounts change owners' procurement costs and the magnitudes of emission mitigation. A two-stage
Available online 23 June 2015
optimization model is designed to help the owner determine the discount rate that would automati-
cally control the emission of the awarded contract within a desired level. The goal is for bidders to regard
Keywords:
Greenhouse gas emissions
emission reduction efforts as an investment, with returns coming in the form of an increased chance of
Building construction winning the bid. Our results imply that for the building retrofit project studied herein, a discount rate of
Bid preference 0.6 is suggested for every percentage of emission reduction. This discount level reduces greenhouse gas
Project procurement emissions by 28.2% while raising procurement costs by 3.7% relative to a non-preference mechanism. The
increased procurement costs can be partially compensated under existing cap-and-trade scheme. The
results show that the choice of discount significantly alters bidders' efforts on emission mitigation, and
emission control cost can be minimized with the proposed optimization algorithm.
© 2015 Elsevier Ltd. All rights reserved.

1. Introduction the most effective potential mechanisms available to governments

The construction of residential and commercial buildings emits
nearly 41 million metric tons (MT) of greenhouse gases (GHG) per
year, making it the largest construction-related emission contrib-
utor in the United States (Truitt, 2009). An increasingly interest has
been stirred to reduce GHG emissions using contract award criteria
in building procurement (Bratt et al., 2013; Rietbergen and Blok,
2013). The award criteria are often built upon basic environ-
mental requirements (European Commission, 2011; Local
Governments for Sustainability, 2007; United Nations
Development Programme, 2008; Varna €s et al., 2009). Those re-
quirements originally targeted on controlling harmful substances
and began to touch on GHG issues (Hamza and Greenwood, 2009;
Tarantini et al., 2011). Different from harmful substances, GHG
regulation requires more flexibility due to the variety of emission
sources and the high cost of technology upgrades (Sterner, 2002).
As a regulatory surplus, preferential bidding is widely seen as one of
* Corresponding author. Tel.: þ1 301 405 8104.
E-mail addresses: liuxy@umd.edu (X. Liu), cui@umd.edu (Q. Cui).
1
Tel.: þ1 301 364 7988.
to drive the GHG mitigation efforts of contractors (Correia et al.,
2013).
Preferential mechanisms are extensively used in public pro-
curement auctions (Colucci et al., 2012; Marion, 2007; Mougeot and
Naegelen, 2005). One commonly used mechanism, a bid discount,
improves the bids of favored companies by a predetermined rate
when determining the winner but uses the actual amount of the
winner's bid in the contract (Krasnokutskaya, 2007). The goal of
most preferential mechanisms is to facilitate the integration of
favored participants into the marketplace. Typical applications
include granting a certain bid discount to small companies that are
considered disadvantaged due to entry barriers.
Beginning in 2009, a few European regulation bodies initiated
instruments for sustainable procurement that took GHG emission
performance into consideration (Alvarez and Rubio, 2015; HM-
Goverment, 2009; HNS-SDU, 2010; MoD, 2010). The CO2 Perfor-
mance Ladder (CO2PL) is one of the most widely used procurement
tools in European countries, which rewards concrete improvement
in the GHG performance of companies in the form of a nominal
discount on the tender price (ProRail, 2009). The CO2PL uses the
capability maturity model. The model has been categorized into

http://dx.doi.org/10.1016/j.jclepro.2015.06.015
0959-6526/© 2015 Elsevier Ltd. All rights reserved.
864 X. Liu, Q. Cui / Journal of Cleaner Production 112 (2016) 863e871
five levels, numbered from 1 to 5. The discount on the tender price
ranges from 1% to 10%. The higher the level of certification, the
greater the discount awarded by the company. CO2PL has been
performed by 190 companies in the Netherlands and could achieve
a GHG emission reduction of 0.8e1.5% per year (Rietbergen and
Blok, 2013). However, this emission reduction potential is
strongly affected by economic activity, as the companies partici-
pating in the scheme have set varying levels of ambition. This paper
seeks to continue this conversation within the field of low-carbon
procurement. Such a growth in significance will require a new
understanding of carbon management in terms of procurement
mechanism designs.
The key insight of this paper is that an optimal choice of the
discount level can provide incentives to companies to reduce GHG
emissions while keeping procurement costs under control. An
owner potentially has strong flexibility in the design of the discount
level for favored parties. This paper shows that the choice of dis-
count significantly alters a company's incentives to participate in
emission savings as well as the bid it submits. While it continues to
be possible to use a preferential mechanism to regulate GHG
emissions from projects, both the cost-minimizing and emission-
minimizing level of the contract may change when discount ef-
fects are taken into account. The empirical determination of dis-
count levels for currently accepted procurement instruments may
yield unsatisfactory emission reductions, increased procurement
costs or both.
The main objective of this study is to improve our under-
standing of the effects of a bid discount on procurement costs and
the magnitudes of emission reductions. A model has been devel-
oped to simulate the bidders' behaviors in the presence of alter-
native bid discounts. The owner's decision of what discount to offer
is based on his knowledge about bidders' behaviors and reflects a
willingness to achieve an optimal cost-emission allocation. To
establish an emission benchmark against which reductions can be
quantified, a GHG emission estimation method is described that
enables the emission inventory to be directly linked to the quantity
takeoff of a building project. A cradle-to-gate assessment principle
is followed, which takes into account the entire supply chain, from
raw material extraction up to the point at which it is delivered to
the customer. The model uncovers the underlying effects of a bid
discount on the bidders' emission reduction efforts and can be
valuable for state and local agencies that want to optimize sus-
tainable procurement instruments and improve the carbon foot-
prints of engineering practices.
2. Existing studies on emission estimation and proposed
method
As Ochoa and Erdmenger (2003) and Erdmenger et al. (2001)
have emphasized, the power of low-carbon procurement has
been restrained by an immature method for carbon accounting. A
number of studies have investigated the estimation of GHG emis-
sions from building construction (Hong et al., 2014; Mattinen et al.,
2014; Tsai et al., 2011; Yan et al., 2010). For instance, the Athena
Impact Calculator is known to play an important role in analyzing
the life-cycle environmental impact of building assembly following
the CSI MasterFormat coding system (Athena, 2012). This calculator
supports detailed emission analysis for envelope configurations but
excludes some primary emission components, such as site con-
struction, thermal and moisture protection and electrical systems.
In addition to the Athena Impact Calculator, a wide range of other
tools can assist in building assembly, such as the Building Carbon
Calculator (CSBR, 2011) and the CO2 Emissions Estimator Tool
(WARP, 2006). These tools have been developed using databases
from different countries, follow different estimation boundaries
and basic assumptions and focus on different components of
building construction. Despite their complementary functions, the
wisdom of applying multiple tools in a single building project may
be questioned due to inconsistent methodologies. Also important
for effective estimation is the supporting information for emissions
from product alternatives. The Building for Environmental Eco-
nomic Sustainability (BEES), developed by the National Institute of
Standards and Technology (NIST), develops a database that con-
tains emission and cost information for approximately 230 building
products classified under a Uniformat coding system (NIST, 2007).
This product information serves as an important reference when
making trade-offs between cost and emission levels for products
with equivalent functions. Efforts are still needed to establish an
estimation method that is applicable to all of building assemblies
and compatible with existing emission databases as needed. This
would help owners to determine emission baseline for an adver-
tised project and measure emissions for all of the submitted bids
with alternative construction plans.
Quantity takeoff often assists the estimation of the GHG emis-
sions from materials and equipment and formulates an emission
inventory as part of the bid. Building information modeling (BIM)
contains a standardized set of formats that can be used to organize
construction information, e.g., CSI MasterFormat and Uniformat
(Volk et al., 2014). For a given project specification, BIM can produce
the quantity takeoff automatically based on the calculation criteria
set by the estimator. It has the ability to further take off the
quantities when estimating assemblies and items, with a break-
down of construction material, equipment and subcontractor costs.
This function provides the ability to decompose a single bid item
into multiple separate emission sources. For the case in which
multiple options are available for a given system, BIM allows a
specifier to qualify building products side by side and determine
which meets the criteria necessary to select it. This function en-
ables weighing the emission performance and cost benefit of each
product and determining the most effective option for the bid.
The emission sources of building construction encompass all of
the lifecycle stages, from raw material acquisition to product
installation, complying with the cradle-to-gate assessment princi-
ple (WRI, 2008). The GHG impact of constructing a building should
be calculated by adding up the following emission sources:
▪ The production of each construction material and ancillary
material;
▪ The transportation of materials from the factory gate to the
construction site;
▪ Carbon stock changes in biomass, dead organic matter and
mineral soils during site preparation e.g., clearing, grubbing and
earthwork;
▪ All forms of energy consumed by equipment on the construction
site, including relevant transport activities.
Each emission source is estimated using an independent
assessment method and database, which can be found in our pre-
vious study (Liu et al., 2014). The boundary excludes the activities of
operation and maintenance as well as GHG emissions associated
with the production of capital goods having lifetimes longer than 1
year and the transportation of employees to and from their normal
place of work.
An example of placing a beam is used to illustrate the process of
estimating emissions from assembled tasks based on BIM outputs.
The quantity of a beam job is reported in linear feet (L.F.) for a
typical quantity takeoff using the MasterFormat coding system. The
GHG estimation requires the emission factor in units of kgCO2e per
L.F. for material production, transportation and equipment usage.
The material emission factor for the beam (using steel) is estimated
 X. Liu, Q. Cui / Journal of Cleaner Production 112 (2016) 863e871
to be 45 lbCO2e/L.F. (Hammond et al., 2011). Similarly, the RSMeans
database provides the equipment list and standard productivity
(e.g., 142.8 L.F./h) for the equipment used to place the beam
(RSMeans, 2005). Using the productivity and equipment emissions
calculation method stated in Liu et al. (2014), the equipment
emission factor for the beam job is estimated to be 0.64 kgCO2e/L.F
(U.S.EPA, 2012). Therefore, the GHGs released from a single con-
struction task are obtained by multiplying the quantity of the beam
job (shown in quantity takeoff in units of L.F.) by the summation of
the material and equipment emission factors (kgCO2e/L.F.) plus the
impact of transportation. In addition to the use of material and
equipment, a few construction tasks also involve carbon stock
changes (e.g., excavation, clearing and grubbing), and emissions
from carbon stock changes are calculated using equations (1)e(5)
in Liu et al. (2014).
3. Decision-making model for low-carbon procurement
This section develops a two-stage model to explore bid discount
offered by owner, and corresponding bidding decisions of con-
tractors. A total of N potential contractors are assumed to express
their interests in a single building project offered for bidding. The
project advertisement adopts a mix of design and performance
specifications, in which only a proportion of building is specifically
designed. For the portions that are not designed, bidders have the
option of choosing from a list of building product alternatives that
have different costs and emission performances. Bidder i's de-
cisions reflect the costs of completing the contract (project cost),
denoted as ci, and the cradle-to-gate GHG emission impact of the
contract, denoted as ei. Given the emission benchmark e0 set by the
owner, bids with emissions lower than e0 are reduced by an amount
equal to d percent of the original bids. Bidder i wins the project if his
bid bi is less than all competing bids adjusted by the bid discount d
where applicable. The winner is then paid the full amount of his
bid.
Optimization module
Stage 1: Bidder’s Decision-Making Model
Bayesian-Nash equilibrium
Decision variable
Product choice 0-1 variable φ
Loop
iteration
Stage 2: Owner’s Decision-Making Model
Objective
Decision variable
Discount rate (r)
Output
- Optimal value of discount rate (r)
- Winner’s cost (c) and emission (e)
Fig. 1. Structure of the two-stage decision-making model.
865
A model is designed to help the owner determine the discount
rate that would automatically control the emission of the awarded
contract within a desired level. The goal is for bidders to regard
emission reduction efforts as an investment, with returns coming
in the form of an increased chance of winning the bid. The model is
presented in Fig. 1. The classification and acquisition of the model's
input parameters are subsequently described below.
(1) Technology module: This module collects the cost and GHG
emission information of 110 product alternatives from the
BEES database (NIST, 2007) and matches them with a pri-
mary building functional unit based on the CSI MasterFormat
(CSI&CSC, 2015).
(2) Optimization module: The decision is modeled as a two-
stage process. In the first stage, the owner sets up an initial
discount over emission reduction efforts and predicts the
contractors' bidding behaviors. The behavior rationale for an
individual bidder is that he notes the discount rule and
comes up with the optimal design solution to maximize
expected profit conditional on participating. In the second
stage, owner iteratively adjusts the discount level until the
optimal cost-emission allocation has been achieved. The
optimal cost-emission allocation in this model represents a
maximization of a social welfare function using a scoring rule
that equally weights procurement cost and contract emis-
sion, with the aim of achieving best money value.
(3) Input module: Two types of parameters are required to
support the model's operation. Emission parameters are
used to estimate the amount of GHG released from each
assembly, as well as the whole building, under the guidelines
in Section 2. The emission parameters include 1) raw mate-
rial emission factors obtained from the ICE database
(Hammond et al., 2011), 2) equipment emission factors ob-
tained from the EPA Engine Certification database (U.S.EPA,
2012), 3) transportation emission factors obtained from the
Technology module
110 building products from BEES
matching
Seven divisions for CSI
MasterFormat
Determine the list of
parameter for collection
Input module
Emission parameters
- Raw materials (ICE database)
- Equipment (EPA database)
- Transportation (TCR database)
- Product alternatives (BEES database)
Cost parameters
- Design specification (RSMeans)
- Performance specification
(RSMeans and BEES database)
866 X. Liu, Q. Cui / Journal of Cleaner Production 112 (2016) 863e871

Climate Registry database (TCR, 2008) and 4) design alter- positive affine transformation of ci. Because fcj gjsi are i.i.d. random
native emission data obtained from the BEES database (NIST, variables, bidder i has probability 1  Fðci Þn1 of winning the auc-
2007). Cost parameters apply to the measurement of mate-
tion when his cost is ci. His payoff equals bi ðci Þ  ci if he wins the
rial costs, labor costs, equipment costs, overhead and profits
auction and zero if he loses. Based on the study of Ausubel (2003),
and energy savings. Most of the cost parameters can be ob-
the unique symmetric BayesianeNash equilibrium of this first-
tained from RSMeans Building Construction Cost Data
price sealed-bid auction is
(RSMeans, 2005). A few parameters relevant to the cost of


design alternatives can be obtained from the BEES database ndi þ 1
(NIST, 2007). bi ðci Þ ¼ ci $ (1)
ndi
(4) Output: The output of the model generates an optimal value
of the discount rate r, which is the discount rate for a 1% in which bi represents the bid for bidder i before the discount and di
emission reduction. Procurement costs and contract emis- represents the bid discount for bidder i, which is dependent on the
sions can be calculated after the value of r is determined. emission reduction percentage over the predetermined emission
benchmark. These two variables can be calculated using the
following equations:
3.1. Boundary and product alternatives
ci ¼ ci;d þ ci;p (2)
To design a preferential bid that stimulates an awareness of GHG
X
emissions in building design, this paper begins by identifying ci;d ¼ pm qm (3)
building product alternatives that are applicable to principal m
building functional units as the crucial parts of the decision-making
XX X
process. Building construction activities have been divided into 50 ci;p ¼ fc;n pc;n qc;n ; fc;n ¼ 1 (4)
divisions according to the CSI MasterFormat coding system. Among c n n
those, 17 divisions are the guides for equipment usage and there-
fore are excluded from the estimation boundary. This paper ex- 
 
e0  ei
amines the potential emission reductions for seven principle di ¼ max r; 0 ; r>0 (5)
e0
divisions: (2) Site construction, (3) Concrete, (5) Metals, (6) Wood &
Plastics, (7) Thermal & Moisture Protection, (9) Finishes and (10) X XX
Specialties. These divisions account for more than 80% of the en- ei ¼ gm qm þ fc;n gc;n qc;n (6)
m c n
ergy consumed during building construction and offer significant
opportunities for the reduction of GHG emissions (Han et al., 2013). For bidder i, ci is the total project cost. It consists of the cost of
Significant opportunities for GHG emission mitigation could be portions that are specifically designed, denoted as ci,d, and the cost of
realized by the optimal choice of building products (Heravi and portions that are performance-specified, denoted as ci,p. pm is the
Qaemi, 2014). Environmental and economic performance data for price of product m, and qm is the quantity of product m. For
110 building products were collected from NIST (2007) and cate- performance-specified portions, bidders can only choose one
gorized into seven divisions. Selected products and their cost and product from a list of product alternatives that fall into category c.
emission parameters are listed in Appendix Table A1. Because of fc;n equals 1 if product n is selected for category c and 0 otherwise.
building complexity, it is impossible to incorporate all of the The mixed use of products for a single category is not allowed in this
P
building product alternatives in this analysis. Although new prod- model ( n fc;n ¼ 1). e0 is the emission benchmark, ei is the total GHG
ucts are continuously being developed, this study only considers emissions from contract i, and gm is the emission released from one
the products that are commercially available in the United States. unit of product m. The bid discount for bidder i is determined from
the percentage of emission savings multiplied by the discount rate r
3.2. Model design (the discount for a 1% emission reduction). e0 and r are determined
by the project owner and are the same among all bidders.
This section begins with an analysis of bidders' decisions and
then use the results to analyze an owner's response strategy. The
3.2.2. Characterization of the owner's behavior
model focuses on a symmetric equilibrium, where bidders follow
Before the project advertisement, the owner predicts each
the same bidding strategy, bð$Þ, mapping project cost, ci, onto a bid
bidder i's decision as a function of r by solving the equilibrium
bi, bð$Þ : ½c; c/½b; b. Given the emission benchmark e0 set by the
described in Eq. (1). Based on his prediction of the bidders' be-
owner, bids of contractors with emissions lower than e0 are
haviors, the owner needs to determine the value of b r that achieves
reduced by an amount equal to d percent of the original bid. A
an optimal cost-emission allocation. If r > b
r , bidders are encouraged
bidder i wins the project if his bid bi is less than all competing bids
to make large investments in low-emission products and obtain
adjusted by the bid discount d where applicable.
high discounts on their emission reduction efforts. In this case the
procurement costs for an owner would be high because the winner
3.2.1. Characterization of bidder's behavior
is paid the full amount of his bid (pre-discounted price). If r < b r,
A first-price sealed-bid auction is adopted, along with the re-
bidders do not have sufficient incentive to reduce the emissions;
striction of symmetric, monotonically increasing equilibrium in
instead, they would tend to choose low-cost but not necessarily
pure strategies. Any pure-strategy equilibrium can be characterized
low-emissions products. The owner's emission control for an
by the bid function fbi ð$Þgni¼1 , which gives bidder i's bid bi ðci Þ when awarded contract is weakened. Therefore, the owner faces a cost-
his cost is ci. Bidder i beats bidder j if and only if emission trade-off in procurement, and it is expected that

 !
 different discount levels determine different rankings of the same
bi ¼ bi=1 þ d < bj 1 þ d ¼ bj and hence if and only if
i j cost-emission combinations and thereby different winners.

 ! To solve the cost-emission trade-off, a social welfare function is

ci ¼ ci=1 þ d < cj 1 þ d ¼ cj under the assumption that bi is a built that allows the owner to transform cost and emission
i j
 X. Liu, Q. Cui / Journal of Cleaner Production 112 (2016) 863e871 867

performance into a score. The score is composed of two sub-scores, to increase r to further increase the social welfare function. The
one for procurement costs increases relative to a cost benchmark model then increases the value of r0 by 0.1 and uses
(c0) and one for emission savings relative to an emission bench- rnþ2 ¼ rnþ1 þ 0.1 as the parameter to solve the bidders' equilibrium
mark (e0). An optimal value of r can be found by maximizing the again. The model records the value of r as a local optimality when
score, which represents an optimal cost-emission allocation under PS(rn) begins to exceed PS(rnþ1) and then continues to find the next
this two-dimensional procurement context. The model is described local optimality. The iteration of the loop terminates when the
in Eq. (7): discount amount d begins to exceed its maximum value of 25%.

 Multiple local optimal points are compared, and the r that produces
c0  ck e0  ek the largest PS is determined as the global optimal point. Offering an
max PSðrÞ ¼ þ
r c0 e0 optimal value of b r suggests that the social welfare function can be
s:t: maximized when handling the trade-off between procurement
costs and GHG emission savings.
ck ¼ bk $ð1 þ dk Þ (7)
n o
bk ¼ min bi
i¼1;…;N 4. Case study
X XX
ek ¼ gm;k qm;k þ fc;n;k gc;n;k qc;n;k
c n
To explain the use of the decision-making model, this paper
m;k
investigated a building retrofit project conducted in Virginia. The
The process of finding the optimal value of b r is described in Fig. 2 work includes the construction of a metal frame enclosure within
as execute statements in the iterations of the loop. In this model, r is an existing building, stairs, storage space and installation of two
assigned an initial level of 0.1, which is used as a parameter for the penetration pipes to the existing underground accelerator tunnel as
bidder's decision-making. Observing r0 ¼ 0:1, all of the bidders well as site, mechanical and electrical work. The main body of the
optimize their design plans by solving the problem described in Eq. work involves Division 3, Concrete; Division 4, Masonry; Division 5,
(1). The owner awards the project to the bidder who has the lowest Metals; Division 6, Wood; Division 7, Thermal and Moisture; Divi-
effective bid (discounted bid bk ) and pays him the full amount of his sion 8, Openings; Division 9, Finishes; Division 23, Heating and
bid (pre-discounted bid bk). Whether r0 can be accepted as the Ventilation; Division 26, Electrical; and Division 32, Exterior Im-
optimal value is checked by comparing PS(rn) with PS(rnþ1). A sit- provements. In the bid advertisement, the owner specified the
uation of PS(rn) < PS(rnþ1) implies that the owner may still be able designs for Divisions 4, 5, 8, 23 and 26, called “design-based”

Fig. 2. Diagram of owner's decision-making process.

868 X. Liu, Q. Cui / Journal of Cleaner Production 112 (2016) 863e871

divisions. No detailed plan was proposed for the work belonging to
Divisions 3, 6, 7 and 9, called “performance-based” divisions.
Hence, for this case, bidders only have the flexibility to choose
design alternatives for the concrete pad, wood framing, ceiling
insulation, interior wall finishes and interior partitions. The cost
and emission performances of design alternatives are summarized
in Table 1. While only the case of retrofit project was tested, the
model can be used in a wide range of building construction projects
such as new construction and demolition.
The applicability of the proposed model to this project case
relies on two assumptions. First, the owner determines a baseline
design for the “performance-based” divisions. The products chosen
for the baseline design are marked with an asterisk in Table 1. Using
the estimation method described in Section 2, the emission
benchmark for the “performance-based” divisions is 8.57MT. The
baseline procurement costs are estimated to be $3494. Second,
three bidders are assumed to participate in the auction. Their costs
and emissions for the “design-based” divisions are the same, so
they only need to make decisions regarding the costs and emissions
for the “performance-based” divisions. Due to the limitation of
product availability, individual bidders cannot obtain access to all of
the design alternatives. The alternatives that are available for each
bidder are marked with an “X” in Table 1.
Faced with product alternatives in Table 1, each bidder lays out
all the possible designs options. The number of design options is 48
for bidder 1, 24 for bidder 2 and 48 for bidder 3. Adopting different
design options implies different bids, associated with different
emission levels. Bidders' choices of design options depend on the
discount level r offered by the owner. The initial level of r is 0.1.
Observing r ¼ 0.1, each bidder calculates bids according to Eq. (1)
and selects the lowest one to submit. The owner awards the proj-
ect to the bidder who has the lowest effective bid (discounted bid
bk ) and pays him the full amount of his bid. Based on the awarded
bid, the social welfare function PS(r ¼ 0.1) is calculated according to
Equation (7) and recorded for later comparison. This is the
the owner should offer to the bidders for every percentage of GHG
savings.
With the aid of this model, a significant reduction of GHG
emissions from the awarded project can be expected along with a
limited increase in procurement costs. As shown in Table 2, when
bidders are offered a discount rate r from 0.1 to 0.6 (the discount on
every percentage of emission savings), the emissions from the
awarded contract can be reduced by 28.2%, while the procurement
costs increase by 3.7%. When the bid discount rate increases beyond
0.6, the emission reductions can reach 28.7%, but the procurement
costs increase by 6.3%. That is, the owner who offers a discount rate
r from 0.1 to 0.6 pays $1 to encourage the contractor to voluntarily
reduce 20 kg of GHG; however, he has to pay an additional $2 if he
intends to encourage a voluntary reduction of another 20 kg of GHG
by increasing the discount level. Therefore, the optimal value of r in
this auction case is determined as 0.6, which implies a 16.8% dis-
count on the original bid.
The 0.6 discount rate is not the only number that maximizes the
social welfare function. Actually, in this case, as shown in Fig. 3, all
of the r values from 0.1 to 0.6 achieve the same target e a 28.2%
emission reduction with a 3.7% increase in procurement costs.
Within this range, bidder 3's design of “1.2 þ 2.3þ3.2 þ 4.1þ5.1”
(refer to the item index in Table 1) wins in the auction. If the value
of r continues to increase, item “2.3” needs to be replaced by item
“2.2” to further reduce the emissions as well as the effective bid;
however, item “2.2” is not in bidder 3's feasible bundle. In the sit-
uation in which r is larger than 0.6, the lowest effective bid is that of
bidder 1, who is able to lower emissions by 40 kg (0.4%). At the
same time, the procurement costs increase by $91 (2.6%). The
model selected 0.6 as the optimal value because this value repre-
sents the highest incentive that the owner can provide for bidders
to reduce the design's emissions without further increasing his
Table 2
GHG emissions and procurement costs for different bid discounts.

completion of the first loop. The model then increases the value of r Baseline 0.1 < r  0.6 r > 0.6
by 0.1 and obtain PS (r ¼ 0.2). The iteration of the loop terminates GHG emissions (MT) 8.57 6.15 6.11
when r ¼ 1.0 (d ¼ 25%). The model compares all the PSs and select Procurement costs ($) 3494 3624 3715
the large one, PS (r ¼ 0.6). r ¼ 0.6 is the optimal discount rate that MTCO2e reduction per dollar 0 0.02 0.01

Table 1
Building product alternatives for bidders.

Price, $/ft2 GHG emission, gCO2/ft2 Bidder 1 Bidder 2 Bidder 3

1. Framing
1.1 Generic wood framing-treateda 2.07 318 X X X
1.2 Generic wood framing-untreated 2.68 201 X X

2. Ceiling insulation
2.1 Generic Blown Mineral Wool R-38a 1.39 188 X X X
2.2 Generic Blown Celluloose R-38 2.19 179 X X
2.3 Generic Blown Fiberglass R-38 1.53 190 X X

3. Interior wall finishes

3.1 Generic consolidated 0.67 75 X X
3.2 Generic reprocessed latex paint 0.67 119 X X
3.3 Generic virgin latexa 0.76 230 X X

4. Interior partitions
4.1 P&M Altree panelsa 7.2 1992 X X X
4.2 Trespa Athlon panels 7.75 1175 X X X

5. Concrete pad
5.1 Generic 15% Fly Ash Cementa 1.73 3958 X X
5.2 Generic 20% Slag Cement 1.77 3889 X
5.3 Generic 35% Slag Cement 1.74 3595 X
5.4 Lafarge Portland Type I Cement 1.81 3185 X X
5.5 Lafarge NewCem Slag Cement (20%) 1.77 3910 X
5.6 Lafarge NewCem Slag Cement (35%) 1.74 3626 X
a
Represents the products chosen for the baseline design.
 X. Liu, Q. Cui / Journal of Cleaner Production 112 (2016) 863e871
4000
3800
The lowest effective bid ($)
3600
3400
3200
3000
2800
2600 Lowest effective bid
Procurement costs
2400
2200
0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
Discount rate r
Fig. 3. Changes of the lowest effective bids with discount rates.
procurement costs. By increasing the number of bidders and
product alternatives, the range of r that achieves the same target
would be narrowed. Individual bidders would continuously adjust
the emission level and effective bid by optimizing designs in
response to the changed r, and the line of procurement costs in
Fig. 3 would become a curve. The jump in the curve indicates a
change in which bidder wins the project. The value of r corre-
sponding to the jump represents a single optimal value as opposed
to an optimal bundle, as happened in this case.
5. Discussion
For project owner, the main concern of using preferential bid is
the increased procurement costs. Public owners are increasingly
faced with the pressure to reduce GHG in project procurement.
They are more likely to bear the increased costs and award the
project with lower emissions. In contrast, private owners may tend
to stay away from the preferential bid and keep their costs as low as
possible. There is a need to stimulate the private owners to adopt
the preferential bid, with the benefits of financial compensation.
The compensation can be provided by government in the form tax
credits or subsidies. It is more often offered under the cap-and-
trade scheme. The scheme relies on strict but feasible caps on the
amount of GHG that can be emitted per project. Project owners
who emit less GHGs than their cap can sell credits to those who
emit more, and get compensated.
The amount of compensation changes with carbon price in the
market. The price is determined by real-time auction, so it fluctu-
ates over time. The current price for a California Carbon Allowance
(CCA) is approximately $12 per MTCO2e. If the owner is qualified as
a CCA holder, he can obtain a return of $12 from the 1-MT emission
reduction of an awarded contract. For the building retrofit case, the
awarded contract delivers a reduction of 2.42 MTCO2e at a cost of
$130. This amount of emission savings would generate a return of
$29 from CCAs. An increase of procurement cost is inevitable,
which agrees with the study of Krasnokutskaya (2007). However, if
we extend our view over a longer time period, say, forty years, the
value of reducing GHG would be much more attractive. The benefit
of reducing GHG comes from the increasing trend of carbon values.
According to the study of DOT (2014), the value of 1 MT of carbon
will increase from $44 in 2014 to $86 in 2050. With this trend, the
increased procurement costs will be fully compensated by selling
carbon credits starting at 2050.
The above results should be explained with awareness of the
following limitations existed in the model. The model simplifies
bidders' decision behaviors by neglecting the process of deciding
whether to participate in the action. For some procurement pro-
cesses, the advertisement contains only limited information, e.g.,
869
building type, location and completion time. Interested contractors
must purchase a detailed project plan from the owner before the bid
opening date, and only those contractors who purchased a project
plan may submit a bid on the project (Krasnokutskaya, 2007). When
deciding whether to participate, potential bidders learn their costs
of entry, the distribution of projects and the number of competitors.
Only contractors with an entry cost below the expected profit from
participation decide to enter the auction. Contractors who choose to
enter pay bid preparation costs, become actual bidders and then
submit bids. For simplicity, the bidders modeled in this paper are
assumed to be those who decide to enter the auction, and their costs
for preparing the bids are not considered.
The model relies on an assumption that the owner is fully informed
1
of the potential choices of building products for all of the bidders
when deciding the optimal value of the discount rate. However, in-
formation asymmetries result in a lack of knowledge about the
availability of building product alternatives for each bidder and their
characteristics, such as cost- and emission-saving parameters (Fleiter
et al., 2011). Bidders themselves may not have knowledge about the
emission performance of each building product. Even with that
knowledge, bounded rationality can still lead to a reluctance to adopt a
new product with favorable emission savings based on “satisfactory”
rather than “optimal” behavior (Almeida, 1998).
The model also assumes that the project costs of each bidder are
independent. This assumption may fail in the situation in which
sets of subcontractors overlap across firms submitting bids for the
same auction. The use of a common subcontractor potentially in-
duces affiliation into bidders' costs and leads to a correlation in
their costs that is difficult to predict.
Whereas costs and emissions are relevant for product perfor-
mance, Mundaca et al. (2010) stated that they represent only a part of
a great variety of determinants that drive contractors' decisions
regarding building product choices. Many determinants are
described in terms of non-energy co-benefits, for instance, improved
functionality, reliability quality and design. Emission and cost criteria
seem insufficient for comprehensively simulating the choice
behavior of an individual bidder. In addition, product performance in
relation to costs and emissions is likely to change over time. There is
a need to continuously validate the model's capability in relation to
data updates and the incorporation of new building products.
6. Conclusion
This paper provides some insight into the effect of bid discounts
on GHG emission control for building construction. It proves that an
appropriate choice of bid discount level enables owners to reduce a
substantial amount of GHG emissions while increasing the budget
by a limited amount. This finding underlines the power of bid
discounts, combined with optimization algorithm, in weighing the
tradeoffs among environmental, social and economic goals. This is
of critical importance to the procurement mechanism design; this
paper shows, through a case study, that alternative discount levels
alter bidders' efforts on emission mitigation, and an optimal cost-
emission allocation can be achieved by finding an optimal value
that is within the range of typically used bid discounts.
In light of the various discounting effects across project types,
the model developed in this paper provides a generally applicable
tool that enables owners to tailor the bid discount to any building
project. Our results imply that, for the building retrofit project
studied herein, a discount rate of 0.6 can be offered to reach an
optimal cost-effectiveness of emission reductions. This discount
level provides a 28.2% reduction in GHG emissions but increases
procurement costs by 3.7% relative to no intervention. The effects
on procurement costs can be partially offset if preferential pro-
curement can be proven qualified for carbon trade; however,
870 X. Liu, Q. Cui / Journal of Cleaner Production 112 (2016) 863e871

increased procurement costs are inevitable due to the relatively low
carbon price in existing carbon markets.
While our findings are based on the building retrofit project, we
believe that this insight, as well as our model for predicting
behavioral patterns and making decisions, is pertinent to other
types of building projects in which preferential policies are used. A
number of interesting issues remain. The assumption of a fixed
number of participants could be relaxed. The relaxation requires
the model to take bidders' participation decisions into account. This
would change the competition pool because some bidders may
decide to quit when facing an unfavorable bid discount. In addition,
this model could be extended to include the long-term emission
impact e.g., operation and maintenance. This is important because
interior designs, such as thermal protection and equipment, also
directly and indirectly affect the emission levels during the oper-
ation and maintenance phases. This would require incorporating
human behavior into the emissions estimates. ENERGY STAR pro-
vides a fair assessment of the energy performance of building
operation accounting for human behavior, which can serve as a
valuable reference for designing emission benchmarks considering
long-term performance. Relaxing the assumption of a fixed number
of participants and incorporating the operation phase would pro-
vide a more accurate model.
Appendix

Table A1
Matrix of selected product alternatives for building construction.

Price, $/unit GHG emission, gCO2/unit

2 Site construction Basement wall

Generic 10% Limestone Cement 8.99 6332
Generic 100% Portland Cement 8.99 6547
Generic 15% Fly Ash Cement 8.57 5874
Generic 20% Slag Cement 8.77 5748
Lafarge BlockSet 5.24 6294
Lafarge NewCem Slag Cement (20%) 8.99 4328
Foundation slab on grade
Generic 10% Limestone Cement 1.81 4183
Generic 15% Fly Ash Cement 1.73 3958
Generic 20% Slag Cement 1.77 3889
Lafarge Portland Type I Cement 1.81 3185
Pavement
100%OPC 3.42 12,618
15%FlyAsh 3.3 11,395
AnonCement 3.42 9282
Asph/GSB88 3.6 3108

3 Concrete Beam and column

Generic 10% Limestone Cement 4KSI 30.17 14,141
Generic 100% Portland Cement 5KSI 30.68 15,264
Generic 15% Fly Ash Cement 4KSI 29.08 12,815
Lafarge NewCem Slag Cement 4KSI (20%) 30.17 9958

7 Thermal & moisture protection Wall insulation

Generic Blown Cellulose R-13 0.51 79
Generic Blown Mineral Wool R-13 0.76 95
Generic Fiberglass Batt R-13 0.78 163
Wall sheathing
Generic oriented strand board sheating 1.16 846
Generic plywood sheathing 1.35 421
Ceiling insulation
Generic Blown Celluloose R-38 2.19 179
Generic Blown Fiberglass R-38 1.53 190
Generic Blown Mineral Wool R-38 1.39 188
Generic Fiberglass Batt R-38 1.97 407

9 Finishes Interior wall finishes

Generic consolidated 0.67 75
Generic reprocessed latex paint 0.67 119
Generic virgin latex 0.76 230
Ceiling finishes
Trespa Athlon panels 7.75 1175
Trespa Virtuon panels 19.71 4920
Exterior wall finishes
Aluminum 3.05 1538
Brick 13.3 4513
CedarSidng 4.66 126
CTCedarBrd 3.28 575

10 Specialties Interior partitions

Generic gypsum board 14.08 4874
P&M Altree panels 0.72 1992
Trespa Athlon panels 7.75 1175
Trespa Virtuon panels 19.71 4920
Roof covering
 X. Liu, Q. Cui / Journal of Cleaner Production 112 (2016) 863e871 871

Table A1 (continued )

Price, $/unit GHG emission, gCO2/unit

Generic Asphalt Shingles/1 Layer Felt 119 158,920

Generic Asphalt Shingles/ECPNova-Seal II 114 173,707
Generic Clay Tile/ECP Nova-Seal II 593 199,562
Generic Fiber Cement 267 269,389

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