Impact of Unit Time Value On Contractors' Optimal Bidding Strategies in Price

Construction Research Congress 2012 © ASCE 2012 41
Impact of Unit Time Value on Contractors’ Optimal Bidding Strategies in Price-

Time Bi-parameter Bidding
Saeed ABDOLLAHIPOUR, S.M.ASCE1 and “David” Hyung Seok JEONG, Ph.D.,

M.ASCE2
1
PhD Student, School of Civil and Environmental Engineering, Oklahoma State
University, Stillwater, OK 74078; E-mail: sabdoll@okstate.edu
2
Associate Professor, School of Civil and Environmental Engineering, Oklahoma
State University, Stillwater, OK 74078; E-mail: david.jeong@okstate.edu
Downloaded from ascelibrary.org by New York University on 07/31/15. Copyright ASCE. For personal use only; all rights reserved.
ABSTRACT
State Highway Agencies have started to utilize price-time bi-parameter bidding (A+B
bidding) in order to accelerate projects by incorporating construction time in the
bidding competition. Since this method is based on the principle of cost
reimbursement to the contractor for contract time reduction, the owner has to
calculate unit time value (UTV) before letting projects. Unlike most studies
performed in this area that have focused on optimizing the incentive/disincentive
(I/D) rates with respect to road user costs and added construction cost, this study
investigates how different UTVs can impact the competitiveness of contractors in
A+B bidding. By evaluating the optimal strategies of multiple contractors
participating in an A+B bidding competition, new criteria are developed to determine
the amount of UTV and I/D. Finally, the paper concludes with some discussions
regarding a set of criteria that need to be considered in both A+B with I/D and A+B
without I/D contracts. This study shows how the owner would be able to adjust the
UTV and I/D rates for A+B bidding projects by estimating the price-time curves of
contractors. It would also enable contractors to adopt a more competitive strategy by
estimating their competitors’ optimal bidding strategies.
INTRODUCTION
Interstate highways in the United States not only have passed their original
design life, but also have carried much more traffic than what they had been designed
for. According to 2009 ASCE infrastructure report card, roads have been graded D-
(ASCE 2009). Poor highway condition has alarmed transportation agencies to shift
their focus from expanding road network to rehabilitation of the existing
infrastructure. Unlike construction of new highways, rehabilitation projects affect the
traveling public adversely by making delays and safety problems. In response to
increasing road user costs caused by rehabilitation or reconstruction projects, State
Highway Agencies have started to utilize innovative methods by incorporating
construction time into the bidding process. Traditionally, the owners have used bid
price as the major criterion in evaluating the contractors’ proposals. In price-time bi-
parameter bidding (A+B bidding) methods, however, a total combination of price and
construction time is considered as the decisive factor in awarding the winning
contractor. The purpose of these bidding methods is to obtain accelerated construction
at the lowest possible cost in order to minimize the level of inconvenience to the
public.
The goal of this paper is to evaluate the impact of UTV on the
competitiveness of contractors in A+B bidding through an illustrative example. This
Construction Research Congress 2012

study not only provides state highway agencies with an additional factor to determine
UTV and I/D amounts more effectively in A+B contracts but also enables contractors
to adopt more competitive strategies. Furthermore, new criteria are suggested to
determine the amount of UTV and I/D.
BACKGROUND
In price-time bi-parameter bidding (A+B bidding), the contract duration is
determined by competition during the bid process. This procurement method
incorporates value of construction time with the bid price in evaluating contractors’
total combined bid (TCB). The successful bidder is the contractor who submits the
lowest TCB using the following formula:
(Eq. 1)
Where, A is contractor’s bid price, UTV is the unit time value, and t is
construction time. Unit time value (UTV) represents the cost of delays to the owner
and needs to be calculated by the owner for every project. According to Herbsman et
al. (1995), UTV is made up of both direct costs and indirect costs, and in the highway
construction industry, UTV is commonly referred to as the daily road-user cost. In the
memorandum issued by California Department of Transportation on June 12, 2000
(California Department of Transportation 2000), it is advised that although exceptions
may be allowed, the UTV typically ranges from 50 to 100 percent of the calculated
daily road user cost. Most state highway agencies calculate the UTV and apply this
value as their daily I/D fee. However, there are some states using different parameters
for establishing I/D fees such as calculating I/D fee as a percentage of total project
cost. Fick et al. (2010) suggest that market influences such as the number of qualified
bidders and the availability of other work to contractors should be included as the
significant factors in determining I/D rates. Despite the procedural variations in
calculating UTV and I/D rates, state highway agencies agree that the incentive
amount has to be more than contractor’s additional costs for accelerating construction
and be less than a dollar value of total time savings in order to effectively encourage
contractors to expedite construction.
There are two different A+B contracting methods: a) A+B without I/D and b)
A+B with I/D. In both methods, the low bidder is determined from the results of the
A+B procedure, and the estimated project duration submitted by the successful bidder
becomes the contractual project duration. In A+B without I/D contracts, the UTV is
only calculated to determine the low bid, and contractor does not receive any
incentive for early completion, nor pays any disincentive for late completion other
than normally specified liquidated damages. In A+B with I/D contracts, the winning
contractor not only competes with other contractors over project duration during the
bid process but also receives incentive for early completion, or is charged
disincentive for late completion.
Time-related I/D provisions are frequently used by state highway agencies to
minimize construction durations especially in urban areas where inconvenience to the
traveling public is a matter of importance. This method is an innovative way of
reducing construction duration by offering contractors an early completion incentive

bonus that can motivate them to apply their ingenuity to completing projects early
(Christiansen 1987, Jaraiedi et al. 1995). According to Federal Highway
Administration (FHWA), the major area of concern on the use of I/D provisions is the
determination of the appropriate dollar amount per day for early completion of
projects (FHWA 1989).
Arditi et al. (1997) suggest that the use of “A+B Bidding” in association with
I/D contracts and its likely impact on contract efficiency need to be further explored.
They expect that contract durations will be more realistic when the durations are set
by the winning bidder compared to when it is set by the owner in I/D contracts. They
also expect that “A+B Bidding” competition results in the elimination of inefficient
contractors. Herbsman et al. (1995) have also felt the need to study the interactions of
A+B bidding and I/D provisions. Even though several studies have investigated the
optimal UTVs (Fick et al. 2010, Shr & Chen 2004, and Arditi et al. 1997), studies on
the interactions between the UTV and competition between contractors are very
limited.
TCB ISO-MAP
In A+B bidding, contractors are allowed to adjust their TCB by trading-off
between contract time and bid price. As can be seen in Eq. 1, the contractor would be
able to increase the construction duration (t) and keep the TCB constant by
discounting the original bid price (A). Since TCB is the only factor that defines the
winner of A+B bidding contract, all the bidding strategies that result in the same TCB
have the same level of competitiveness. In fact, with a given UTV, Eq. 1 suggests that
there are infinite combinations of bid price (A) and contract time (t) that give the
same TCB. In a price-time right-angled coordinate diagram, these combinations form
a line, which has been called Iso_line by Shen et al. (1999) as shown in Fig. 1. The
slope of the Iso-line is determined by the UTV and since all the points on the line
have the same TCB, the line is called TCB Iso-line. Therefore, A+B bidding can be
reduced to a single parameter bidding by considering the total combined bid.
Figure 1. Contractor’s overall competitiveness: TCB Iso-Line (Shen et al. 1999)
BID COMPETITION
Assume that four contractors have participated in an A+B bidding with TCB
Iso-Map indicated in Fig. 2a. The bid proposals as well as their TCB Iso-line for each
contractor are drawn in this figure. There are four TCB values: TCB1, TCB2, TCB3,
and TCB4 for contractors 1, 2, 3, and 4 respectively. The contractor whose offer line

has the closest distance to the origin of coordinate diagram is the most competitive
and will, therefore, win the contract. Thus, the following relationship is obtained:
TCB3 < TCB2 < TCB1 < TCB4. Even though contractor 4 has proposed the lowest bid
price (A), its proposed long duration has made its TCB the largest among the bid
participants.
a) Contractor 3’s winning situation b) Contractor 1’s winning situation

(medium UTV) (large UTV)
c) Contractor 2’s winning situation d) Contractor 4’s winning situation

(small UTV) (very small UTV)
Figure 2. Iso-Maps for different UTVs in A+B bidding
The slope of the TCB Iso-lines is determined by the owner before contractors
propose bid price and construction time. The TCB Iso-Maps with different UTVs are
indicated in Fig. 2. While a medium UTV results in the winning of contractor 3,
large, small, and very small UTVs change the competition by providing situations
that contractors 1, 2, and 4 can win the contract respectively. These situations have
been illustrated in Fig. 2b, Fig 2c, and Fig 2d. In the next section, we discuss how
contractors can find their optimal strategy in an A+B bid.
TIME-COST FUNCTION
To a particular contractor, there is an optimum cost-time point for every
construction contract (Callahan et al. 1992). At this point, the contractor would have

the lowest construction cost. In general, the interrelationship between construction

cost and time can be expressed in a curve as shown in Fig. 3 (Shr and Chen 2003).
Upon development of the construction cost-time curve, the bid price-time relationship
can be developed by adding a certain profit margin to the construction cost. Since the
bid price-time curve is first decreasing and, after reaching its minimum, then
increasing, several studies have suggested a quadratic or second-order polynomial
function to approximate the relationship between bid price (A) and construction time
(t) (Shen et al. 1999, Shr and Chen 2004, Shr and Chen 2003, and Wu and Lo 2009).
(Eq. 2)
Shen et al. (1999) suggests estimating the constants of the quadratic equation
of time-price relationship by assuming three feasible bid plans based on the
contractor’s background and previous experience. One of these points is the shortest
time bid plan which is also called the crash point. This is a point where the contractor
is not able to compress the project duration further. The next point is the most likely
bid plan by which the contractor tends to offer. And the third point is the lowest
construction cost bid plan which is also called the normal point. By using these three
data points and incorporating them in Eq. 2, three different equations are developed
that can be used to solve for the three unknown constant values (a, b1, b2). The most
competitive strategy for a contractor would be the TCB Iso-line that is tangent to the
price-time curve of that contractor (see Fig. 3).
Figure 3. Construction cost and bid price versus time (Shr and Chen 2003)
ILLUSTRATIVE EXAMPLE
The hypothetical example used by Shen et al. (1999) and Wu and Lo (2009) is
expanded in this study to illustrate the interactions between UTVs and competition in
a price-time bi-parameter bidding. It is assumed that three contractors participate in
an A+B bidding competition. Each contractor estimates three bid plans for this
construction project. The three estimates are shortest time bid plan, most likely bid
plan, and lowest construction cost bid plan. Knowing that all the equations are in the
form Eq. 2 and by having three points on the curve, the three unknown constants for
each equation is calculated. The bid plans as well as price-time equations for the three
contractors are shown in Table 1.

Table 1. Bid plans and associated price-time equations for contractors
Construction
Bid Price ($)

Time (days)
Contractor
Bid Price-Time Equation
shortest time 170 5,100,000

A most likely 190 4,900,000 10,837,500 -55,000 t + 125 t2
lowest construction cost 210 4,800,000

B most likely 180 4,906,000 10,810,000 -58,000 t + 140 t2
C most likely 175 4,963,750 10,800,000 -59,600 t + 150 t2
The price-time curves of the three contractors are shown in Fig. 4. While
contractor A is able to propose the lowest bid price for this project, contractor B and
contractor C are more cost efficient for durations lower than 190 days.
The three scenarios illustrated in Fig. 4 are studied, and the results of
competition are discussed. The first scenario is the situation that UTV is small and
therefore the slopes of the TCB Iso-lines are shallow. In this scenario, contractor A
has the most competitive strategy which enables it to dominate other contractors by
providing the lowest TCB. In the second scenario, the UTV is assumed to be medium.
Contractor B would be able to provide the lowest TCB, and win the competition. The
third scenario illustrates the situation that UTV is large and contractor C would be the
most efficient competitor by providing the lowest TCB and having the most
dominating strategy.
This hypothetical example has been used to illustrate the findings based on the
assumption that the owner and contractors would be able to develop the price-time
curves. Shr and Chen (2004) have developed a technique to estimate the functional
relationship between construction cost and time using Florida Department of
Transportation’s data. As the continuation of this study, the research team will utilize
this technique to develop reasonably approximate price-time curves.
ADDITIONAL CRITERIA TO DETERMINE UTV AND I/D AMOUNT

As can be seen in Fig. 4, by increasing the UTV from zero, a point is reached
that equalizes the competitiveness of both contractor A and contractor B. In other
words, for this UTV the best bidding strategy of both contractors A and B passes
through a single TCB Iso-line. This means that they are associated with the same
TCB amount and have the same chance of winning the contract. There is also a
certain UTV that equalizes the best strategy of contractors B and C. These thresholds
are illustrated in Fig. 5 by TCB Iso-lines 1 and 2.

TCB Iso-Map
$5,200,000
$5,150,000
$5,100,000
$5,050,000
Bid Price (A)
$5,000,000
$4,950,000
C
$4,900,000
$4,850,000
B A
$4,800,000 Lowest TCB
Iso-lines
$4,750,000
150 160 170 180 190 200 210 220 230 240
Construction time (days) (t)
Contractor A Contractor B Contractor C
Figure 4. TCB Iso-Map for small, medium, and large UTVs
TCB Iso-Map
$5,200,000
$5,150,000
$5,100,000 C4
$5,050,000
Bid Price (p)
C3
$5,000,000
$4,950,000
C
$4,900,000
2
$4,850,000
C2 B A
$4,800,000
C1 1
$4,750,000
T T
150 160 170 180 190 200 2 210 1220 230 240
T4 T3 Construction time (t)
Contractor A Contractor B Contractor C
Figure 5. UTV thresholds in price-time bi-parameter bidding competition

For the TCB Iso-line 1, the optimal strategies for contractors A and B are
shown by (T1, C1), (T2, C2). The slope of curve SA at (T1, C1) is equal to the slope of
curve SB at (T2, C2). Moreover, a single TCB Iso-line passes through these two
strategies. The result is two independent equations with two unknown values T1, and
T2. By solving for unknown variables, the following values are obtained as: T1 =
215.17 days, C1 = $4,790,421, T2 = 202.83 days, C2 = $4,805,461. Therefore, the
UTV that equalizes the competitiveness of contractors A and B would be equal to
$1,219. By using the same method, the following parameters are obtained for line 2
as: T3 = 169.11 days, C3 = $5,005,367, T4 = 163.17 days, C4 = $5,068,735. Therefore,
if owner selects the UTV equal to $10,668, a situation is created where the lowest
TCBs that can be offered by both contractors B and C have the same value. In other
words, this UTV equalizes the most competitive strategies of contractors B and C.
For UTVs lower than this value, contractor B has a strictly dominating strategy and
for UTVs greater than this value, contractor C has a strictly dominating strategy to
win the bid.
Based on Table 1, the shortest time that contractor C would be able to
implement this project is 155 days. This indicates the maximum acceleration
capability of contractor C, who is also the most efficient contractor in compressing
construction duration. The TCB Iso-line that is tangent to the time-price curve at t =
155 days represents the bidding strategy that is associated with the shortest
construction time. As illustrated in Fig. 1, the absolute value of the slope of this
tangent line is equal to UTV. Therefore, by taking the derivative of time-price
equation of contractor C (see Table 1) with respect to t and then substituting t with
155 days, the UTV is obtained as $13,100. In other words, the UTV required to
motivate contractor C to implement the project in 155 days is $13,100. Because this is
the value associated with the shortest duration, increasing the UTV more than
$13,100 is not beneficial. Fig. 6 illustrates the results of UTV thresholds.
It is inferred that the contractors’ efficiency in construction acceleration is a
deriving factor in setting the maximum UTV. In addition, the UTV should be in the
range that motivates more contractors to participate in the bidding process to
maximize the competition between contractors. This occurs when the majority of the
participating contractors have a reasonable chance of winning the contract.
C Looser Winner
Efficient Cap
B Winner Looser
for UTV
A Looser Looser
$0.00 $1,219 UTV $10,668 $13,100 ∞
Figure 6. UTV thresholds for competitiveness of contractors

CONCLUSIONS
This study introduces a technique to assist state highway agencies in adjusting
the UTVs based on the competitiveness of contractors participating in A+B bidding
process. It also enables contractors to adopt a more competitive strategy by estimating
their competitors’ optimal bidding strategies. The following conclusions can be made:
1. This paper clearly shows that UTV derived from daily road user cost might
sometimes result in inefficient UTV and I/D rate for A+B contracts. The
interaction between the UTV and the price-time bi-parameter bidding adds
another aspect that owners need to consider prior to deciding the values for
I/D provisions.
2. Contractors are required to evaluate their competitiveness by investigating the
historical bidding data before participating in price-time bi-parameter bidding.
Based on specific UTVs, some contractors are always dominated by other
participants.
3. This paper continues the work of and brings improvements over Wu and Lo
(2009) and Shen et al. (1999) in certain aspects. First, UTV and its impact on
the winner of the bidding competition are studied in the presence of multiple
contractors. Second, unlike previous studies that look from contractors’
perspective, this study suggests optimal bidding strategies by keeping both
owner and contractors in mind. This provides insight to the owner to
determine the right amount of UTV and assist contractors to adjust their
strategies based on the other participants in the bid. Considering the increasing
need for collaboration between different parties, this research facilitates
moving toward Integrated Project Delivery (IPD) methods.
4. It is inferred that in A+B with I/D provisions, I/D rate that is used to calculate
the incentive and disincentive amounts should always be equal to the UTV
that is used to determine the winner of the bidding competition. This is due to
the fact that the winning contractor is the most efficient contractor to
implement the project based on the time value of money specified by the
owner during the bid process. If during the construction, the owner chooses a
different I/D rate than what is used during the bid process, the contractor that
performs the project would no longer be the optimal contractor. This would
also explain that why A+B with I/D contracts can result in more efficient
construction time reduction than A+B without I/D contracts.
5. This study confirms the suggestion made by Fick et al. (2010) that state
highway agencies should consider A+B with I/D contracts only when a
competitive bidding market exists. This study confirms their suggestion, if we
assume that a competitive market means presence of multiple contractors with
diverse characteristics and strengths. Only in this situation, the majority of
contractors find a chance to win the contract by slightly changing their
bidding strategies.
ACKNOWLEDGMENTS
The authors would like to thank Dr. Tieming Liu from School of Industrial
Engineering and Management at Oklahoma State University, and Mr. Gary Evans,

chief engineer from Oklahoma Dept. of Transportation, for sharing their knowledge
and experience with us during the course of this research.
REFERENCES
American Society of Civil Engineers (2009). “2009 Report Card for America’s
Infrastructure.”<http://www.infrastructurereportcard.org/sites/default/files/RC
2009_full_report.pdf> (Nov. 27, 2011).
Arditi, D., Khisty, C. J., and Yasamis, F. (1997). “Incentive/Disincentive Provisions
in Highway Contracts.” J. Constr. Engrg. and Mgmt., ASCE, 123(3), 302-
307.
Callahan, M. T., Rowings, J., and Quackenbush, D. G. (1992). Construction project
scheduling, McGraw-Hill, New York.
California Department of Transportation (2000). “Delegation of Authority for Use of
A+B Bidding and Incentive/Disincentive (I/D) Provisions.” <http://www.
dot.ca.gov/hq/oppd/design/m061200.pdf> (Nov. 27, 2011).
Christiansen, D. L. (1987). "An analysis of the use of incentive/disincentive
contracting provisions for early project completion." Transportation
management for major highway reconstruction, Special Report 212, Proc.,
Nat. Conf. on Corridor Traffic Mgmt. for Major Highway Reconstruction,
Transportation Research Board, Washington, DC, 69-76.
Federal Highway Administration (1989). "Technical Advisory: Incentive/
Disincentive (I/D) for Early Completion." <http://www.fhwa.dot.gov/
construction/contracts/t508010.cfm>. (Nov. 27, 2011).
Fick, G., Cackler, E. T., Trost, S., and Vanzler, L. (2010). "Time-Related Incentive
and Disincentive Provisions in Highway Construction Contracts." National
Cooperative Highway Research Program (NCHRP), Washington, D.C.
Herbsman, Z. J., Chen, W. T., and Epstein, W. C. (1995). “Time Is Money:
Innovative Contracting Methods in Highway Construction.” J. Constr. Engrg.
and Mgmt., ASCE, 121(3), 273-281.
Jaraiedi, M., Plummer, R. W., and Aber, M. S. (1995). "Incentive/Disincentive
Guidelines for Highway Construction Contracts." J. Constr. Engrg. and
Mgmt., ASCE, 121(1), 112-120.
Shen, L., Drew, D., and Zhang, Z. (1999). “Optimal Bid Model for Price-Time
Biparameter Construction Contracts.” J. Constr. Engrg. and Mgmt., ASCE,
125(3), 204-209.
Shr, J. F., and Chen, W. T. (2003). "A method to determine minimum contract bids
for incentive highway projects." Int’l J. Proj. Mgmt., 21(8), 601-615.
Shr, J.-F., and Chen, W. T. (2004). “Setting Maximum Incentive for
Incentive/Disincentive Contracts for Highway Projects.” J. Constr. Engrg.
and Mgmt., ASCE, 130(1), 84-93.
Wu, M.-L., and Lo, H.-P. (2009). “Optimal Strategy Modeling for Price-Time
Biparameter Construction Bidding.” J. Constr. Engrg. and Mgmt., 135(4),
298-306.

Impact of Unit Time Value On Contractors' Optimal Bidding Strategies in Price

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Construction Research Congress 2012 © ASCE 2012 41

Impact of Unit Time Value on Contractors’ Optimal Bidding Strategies in Price-

Saeed ABDOLLAHIPOUR, S.M.ASCE1 and “David” Hyung Seok JEONG, Ph.D.,

Construction Research Congress 2012

Construction Research Congress 2012

Figure 1. Contractor’s overall competitiveness: TCB Iso-Line (Shen et al. 1999)

Construction Research Congress 2012

a) Contractor 3’s winning situation b) Contractor 1’s winning situation

c) Contractor 2’s winning situation d) Contractor 4’s winning situation

Figure 2. Iso-Maps for different UTVs in A+B bidding

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the lowest construction cost. In general, the interrelationship between construction

Construction Research Congress 2012

Table 1. Bid plans and associated price-time equations for contractors

Bid Price ($)

shortest time 170 5,100,000

lowest construction cost 210 4,800,000

ADDITIONAL CRITERIA TO DETERMINE UTV AND I/D AMOUNT

Construction Research Congress 2012

Contractor A Contractor B Contractor C

Figure 4. TCB Iso-Map for small, medium, and large UTVs

Contractor A Contractor B Contractor C

Figure 5. UTV thresholds in price-time bi-parameter bidding competition

Construction Research Congress 2012

$0.00 $1,219 UTV $10,668 $13,100 ∞

Figure 6. UTV thresholds for competitiveness of contractors

Construction Research Congress 2012

Construction Research Congress 2012

Construction Research Congress 2012

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