The Competitive Bidding
Process: Beyond
Probability Models
Paul D. Boughton
In this article, the author reviews various approaches to
competitive bidding. He then goes on to describe the results
of a study of factors important to general construction con-
tractors in developing a bidding strategy. These factors are
synthesized into a general view of strategic bidding that em-
phasizes a wide range of information flows and describes the
final bid outcome as a function of company objectives, costs,
risk and desirability of the job.
INTRODUCTION
This article explores the topic of competitive bidding
from a managerial perspective and presents the results of
a study of General Construction Contractors.
Competitive bidding and the negotiation of prices are
common practices in business, government, and insti-
tutional markets. The development of a successful bid-
Address correspondence to: Professor Paul D. Boughton, School of Busi-
ness, St. Louis University, 3674 Lindell Boulevard, St. Louis, MO 63108.
Industrial Marketing Management 16, 87-94 (1987)
0 1987 Ekvier Science Publishing Co., Inc., 1987
52 Vanderbilt Ave., New York, NY 10017
ding strategy represents a real problem for the industrial
marketing manager and the pricing analyst. The subject
has received extensive treatment in the Operations Re-
search and Management Science literature, but this lit-
erature has focused primarily on quantitative theory.
While pricing is a significant element in the marketing
mix, the marketing literature has added very little to this
discussion.
This article seeks to expand the discussion of com-
petitive bidding strategies beyond the quantitative model
to include a number of company, competitive, and en-
vironmental issues that influence bid outcomes.
APPROACHES TO BIDDING STRATEGY
(Table 1)
Three major approaches to bidding strategy can be
identified: (1) the adaptive approach; (2) the quantitative
approach; and (3) the strategic approach. Each of these
approaches have important managerial implications.
07
0019-8501/87/$3.50
TABLE 1
Approaches to Bidding Strategy
Adaptive Approach
Firm reacts to the market.
Primary strategy is to bid low and bid often (low margin, high turn).
Markup over cost will vary according to recent success or failure and
current workload.
Quantitative Approach
Markup percentage is based on the number of competitors, size of bid,
and competitors’ past performance.
Firm uses probability model to estimate expected profit at a given bid
price.
Primary goal is profit maximization.
Strategic Approach
Bid price is based on an estimate of the “value” of the job.
Bidding is selective-targeted at opportunities most likely to meet
company objectives.
Primary goal is long-term value creation for the organization.
The Adaptive Approach
A firm following the adaptive approach behaves in a
way similar to a learning theory model. In its attempts
to win business, the firm adapts or reacts to the market-
place and to its own record of successes and failures.
Profit margins on bids tendered will move up or down
in direct relationship with recent bid experiences, and
will reflect the firms current capacity and workload sit-
uation [7]. The process of arriving at a bid price relies
heavily on configuring the lowest possible cost for the
job, combined with an intuitive judgement on mark-up
percentage. Each new bid opportunity is viewed as a
stand-alone opportunity and the primary pricing goal is
to win as many jobs as possible within capacity con-
straints. By bidding often enough, and by adjusting the
mark-up fee based on the most recent bid, a supplier
can be expected to gamer a share of business. How-
ever, the cost of bidding is high and improved profita-
bility relies on turning out projects at an increasing
rate.
The Quantitative Approach
The uncertainty associated with decisions about “when
to bid” “how much to bid,” led to the development of
Paul D. Boughton is a professor at the School of Business, St.
LOUIS University, St. Louis, Missouri.
88
mathematical or probabilistic bidding models. The basic
objective of these models is to find a bid price that will
result in the highest expected payoff value given the prob-
ability of winning at that price. The optimum bid may
be illustrated by the following formula:
E(X) = P(X)Z(X)
where X = the dollar amount of the bid, Z(X) = expected
profit if the bid is accepted, P(X) = probability of the bid
at this price being accepted, and E(X) = expected profit
of a bid at this price [4]. P(X) is determined by studying
the results of previous bidding patterns of potential com-
petitors. This requires that the bidder have accumulated
past bid histories on competitor’s, and assumes that
competitors will act in the future as they have in the past.
The approach further assumes that the overriding objec-
tive of the firm is to maximize total expected profit.
Scholarly discussion of competitive bidding strategy
has almost exclusively been focused on the use of math-
ematical models. Such models have been presented as
the sine qua non of successful bidding. While quantitative
models have been useful in certain situations where mar-
ket conditions are relatively static, there is little empirical
evidence to suggest that they have enjoyed widespread
use or have practical application to most bidding situa-
tions. Benjamin, in an extensive comparison between
competing mathematical models provides data that chal-
lenges their validity. He states that it is “ . . . unlikely
that any given contractor could acquire sufficient data to
develop probability distributions of known competitors
bid-cost ratios, needed in order to use the models” [I].
The models have been further criticized as being singular
in focus (looking only at competition), historical in per-
spective (based on the past), and failing in consideration
of the riskiness of the job and the environment in which
the job must be accomplished [2].
The Strategic Approach
This approach is similar to “adaptive,” except that firms
view bidding strategy as a continuous process in which bid
opportunities are evaluated and selected based on the value
of the job and the fit with both the long- and short-run objec-
tives of the firm [2]. The strategic bidder sees each bid op-
portunity in terms of its fit with the total business plan. For
example, a construction company, seeking to establish itself
in the office building segment of a new geographical market,
identified bidding opportunities on a 1, 3, and 5year basis.
A total business plan was developed to enable entry into the
market and to build market share over the 5-year period. The
strategy was long range and multibid in scope. It included an
assessment of key influencers, competitors, alternative bid-
ding options, and nonprice factors that would be important
to success. Opportunities that did not fit with key criteria
were excluded from the choice set of projects to be investi-
gated for proposal development.
Overall, the strategic approach takes into consideration
a broad range of factors including the environment, com-
petition, and other marketplace and company issues.
A SURVEY OF CONTRACTORS
The purpose of this study was to determine what factors
are regarded as important, by general construction con-
tractors, in developing a bidding strategy. The construc-
tion industry was chosen because it relies heavily on the
bidding process to obtain business.
A questionnaire was mailed to a random sample of 400
general contractors nationwide. A total of 126 useable
questionnaires were returned for a 3 1.2% response rate.
As a point of focus, contractors were asked to provide
information on the most recent competitive bid submitted.
This information included the number of competitors, the
use of past bid histories, and the firm’s business objective.
A list of 13 items, representing variables that are often
taken into consideration by firms preparing a bid, was
presented to the respondents and they were asked to rate
them on a 7-point scale as to their importance in bidding
strategy.
RESULTS
The 126 contractors who responded to the survey rep-
resented a broad array of local, regional, and national
firms. They ranged in size from a low of $3 million in
There are three distinct phases in bidding
decision process.
annual sales to $400 million, with an average size of
$120 million.
Regarding the most recent bid proposal submitted, the
number of competitors per bid ranged from one to 21, with
a median number of five. As shown in Table 2, most firms
reported knowing the identity of some or all of the competi-
tors against which they would be bidding. However, fewer
than one-half reported keeping a history file of previous bids
made by these competing firms, and fewer than 10% re-
ported using a statistical bidding model, payoff table, or
probability model in preparing the bid.
The primary objective of the firm, for the most recently
submitted bid, is shown in Table 3. As expected, the leading
objective was to “maximize expected profit,” but this was
closely followed by “gaining or maintaining market share,”
and “target ROI” was a strong third.
The list of 13 items, shown in Table 4, are ranked from
most important to least important, according to the weighted
mean response for each item. The rank ordering suggests
that the most important considerations have to do with the
suppliers ability to assess the risk and cost of the job and the
ability to exercise control over the project. The use of com-
petitor bid histories, an essential element of quantitative
modeling, is seen as relatively less important.
DISCUSSION
Based on prior research, survey comments, and analy-
sis of survey responses, a structure of the bidding process
emerges. There are three distinct phases to the bid de-
cision process: (1) prebid analysis; (2) proposal devel-
opment; and (3) final bid decision.
Prebid Analysis
Given a wide assortment of bid opportunities, the firm
must make a choice about which ones to pursue and which
89
TABLE 2 TABLE 4
Survey Results Rank Order of Items Important in Bidding Strategy

Percent of Mean”
Respondents
1. Clearness and detail of specifications 5.31
Knowledge of Competitors 2. Past experience with similar work 5.19
Knew all competitors 53 3. Confidence in subcontractor bids 4.97
Knew some competitors 45 4. Location of project 4.90
Didn’t know any competitors - 2 5. Number of competitors 4.87
100 6. Duration of project 4.57
7. Workload 4.56
Existence of History File on Previous Competitor’s Bids 8. Market condition (busy or slow) 4.54
Kept history file 46 9. Size of bid 4.51
Didn’t keep history file 54 10. Opportunity for follow-on work 4.32
100 1 I. Relationship with architect owner 4.02
12. Competitors bid history 3.56
Use of Statistical Bidding Model, Probability Model, or Payoff Table 13. Confidence re: external events 3.41
Used a model 9
Didn’t use a model 91 “Weighted mean on a 7-point scale, where 1 is most unimportant and 7 is
100 most important.

Base = 126.

Proposal Development

TABLE 3
Projects that pass the prebid phase proceed to the pro-
Company Objective’
posal development phase in which a number of variables
Percent of are assessed to determine the costs, risks, and desirability
Respondents
of the job. These variables have been grouped into four
Maximize expected profit 40 major areas, which, taken together, determine the value
Minimize expected loss 5
of the bid opportunity. These four areas are labeled com-
Gain or maintain market share 30
Keep assets and labor employed 4 pany specific, customer specific, environment specific,
Position firm for follow-on contract I and competition specific.
Achieve target return on investment - 20
100%
Company Specific
“Base = 126.

This factor includes those things that represent ele-

to reject. The bidding process can be expensive, involv-
ing direct costs for information search, evaluation of
specifications, subcontractor solicitation, and proposal
preparation. Therefore, only those opportunities that
satisfy key criteria should be targeted for proposal
development. Paranka lists criteria such as com-
pany objectives, competition, plant capacity, and follow-
on-potential, as key criteria for determining if a bid op-
portunity is worth considering further [8]. These are var-
iables that have a direct bearing, not only on whether or
not to bid, but also on how much the job is worth, and
therefore will be discussed further under proposal de-
velopment. An example of a contractor’s prebid analysis
checklist is shown in Figure 1. This checklist includes
an initial assessment of the project that is both quantitative
and qualitative, and serves as a screening device for se-
lecting projects for the next phase.
ments over which management can exercise some control
or have some influence over outcomes. The first variable,
“clearness and detail of specifications,” has to do with
task specificity. The more precise the requirements of the
buyer, the better the supplier can estimate the critical
elements of cost, time, and resource needs. A loose, ill-
defined set of specifications increases the risk of mis-
understanding, and increases the possibility of exceptions
and change orders being invoked at points throughout the
project. In short, an ill-defined specification introduces
an element of uncertainty that makes the bidding process
increasingly problematic. A high level of uncertainty puts
upward pressure on the amount of profit margin needed
to provide adequate risk coverage. Uncertainty may be
lessened through clarification and revisions to the Request
for Quote (RFQ) prior to final bidding.
The second variable is “confidence in subcontractors. ”

90
FIGURE 1
Construction Project Analysis and Preplanning
(In Checklist Form)

Phase No. I Preliminary Review (To Bid Or Not To Bid, )

A. Own Company Analysis

Need for work: ( ) Desperate ( ) Desirable ( ) Doubtful

Bond capacity $ Current workload $ Available capacity $
Availability of Resources
Labor by trade - ea. - ea. _ ea.
Supervision by trades _ ea. ~ -ea. - ea.
Management & Administrative expertise - ea. _ ea.
Materials

Capital (Cash) $ Source

B. Market Ptace Analysis

Current bidding patterns & climate

Own recent bidding position
Wage rate stability
Labor contract periods up
Probable competition

C. Project Review

General Requirements Technical Requirements

(Check when complete)
Read Instructions, info, & notice to bidders Size of project $
Read general conditions Scope of own work $
Read supplementary general conditions Degree of difficulty
Read special conditions Special equipment
_ Read all addendums Special materials
Record owner Special expertise or manpower
Record architect
Record engineer

D. Bidding Data

Bid Submittal Requirements Bidding Information

Bid form no. of cyc - Site location
Attachments Site problems
Submission requirements Construction time frame
Prequalification requirements Potential delays: Start
Bid due date day time _ Foundation ~ Weather
Bid due at Strikes other ~
Access to plans & specs

At the end of this analysis and preplanning phase, you should be able to intelligently answer: do I want to bid?, can I bid?, what are bidding and
construction requirements?

The final bid package will usually include bids made by
firms serving as subcontractors. These bids represent a cost
to the prime contractor that are not directly controllable once
accepted. An assessment of the quality and integrity of the
subcontractors must be included with an emphasis on their
ability to adhere to the schedule and to stay within their esti-
mates. The effect of subcontractors on profit margin is not
only a function of confidence, but also depends upon the pro-
portion of the total job represented by subs. The more work
a contractor subcontracts to others the lower will be his risk,
and thus the lower the percentage mark-up on the value of
the whole contract [5].

91
 The third variable, “past experience with similar
work,” includes an assessment of how well the project
fits with existing levels of skill and company capabilities.
The experience level of the firm will have a dramatic
impact on project cost and vulnerability to risk. An in-
experienced bidder must include an additional amount for
risk coverage as part of their cost estimate. Ringwald
refers to this as a form of self-insurance [9].
The fourth variable is “opportunity for follow-on
work.” In determining a target mark-up on the present
job, the firm must factor in the effect of potential follow-
on work or repeat orders. This includes the effect of
shared costs and capital equipment amortization over the
total potential life of the project. Further, an assessment
of follow-on orders provides the opportunity to examine
how the project fits within the longer term objectives of
the firm.
The final variable is “relationship with architect/
owner.” This variable reflects the positioning of the sup-
plier with the buyer. It recognizes the interactive nature
of the bidding process, in which the reputation of the
supplier is a factor, as well as the supplier’s knowledge
of how the buyer operates. It is not uncommon for a low
bidder to increase revenue through change orders as the
project evolves. Thus, a supplier may “low ball” the
bid, with an expectation of improving the profit margin
through post bid contractual revisions. It is therefore im-
portant for any prospective bidder to consider the role,
if any, that client-supplier relationships will play, not
only in the selection process but throughout the life of
the contract.
Customer Specific
Three subfactors are included here: job size; job lo-
cation; and job duration. These items are very important
determinants of cost, but are essentially beyond the direct
control of the bidder. While the duration of the job may
be influenced somewhat by the amount of resources
brought to bear by the contractor, the size of the task and
location are embedded in the requirements of the job.
Understand your competitor’s
marketplace.
92
Broemser referred to the ratio of the size of the task to
its duration as “project intensity.” A high ratio implies
a tight working schedule with increased costs of man-
agement and overtime while a low one implies that man-
agement is underutilized. Broemser further notes that a
large job in relation to a contractors capacity, referred to
as “coverage,” implies an increase in risk and a need
for above-average markups to cover such risks [3].
Environment Specific
Environmental issues include, “market condition
(busy-slow), ” “workload,” and “confidence in external
events (interest rates, inflation, etc.).” These issues con-
cern management’s view of how volatile or stable the
market is, as well as macroeconomic/political concerns.
They are uncontrollable variables that will affect man-
agement’s proclivity to bid jobs selectively, as well as
their willingness to forgo profit/losses, in order to keep
labor and equipment employed. If the number of job
opportunities are plentiful and the firm is operating at or
near capacity, then the firm may be selective on when to
bid and how much profit to seek. Just the opposite is true
when the market is weak and/or resources are idle.
Competition Specific
As previously discussed, knowledge of the numbers
of competitors and their bid histories are critical to the
application of quantitative bidding models. While these
models have been criticized for their inadequacies, it is
not to say that bidding histories are of no consequence
in arriving at a bidding position. If the quality and quan-
tity of historic data permit their utilization, such models
can provide relevant input to the bid decision. But, the
outcome must be evaluated in light of judgements con-
cerning the competitors current economic and psycho-
logical predisposition. A qualitative profile of
competitors should be developed that would include an
evaluation of each competitor’s workload, financial sit-
uation, attitude toward risk, and overall management phi-
position in the
losophy. This qualitative assessment places emphasis on
the current and likely future behavior of the competition
rather than on the past. It does, however, recognize that
future bid opportunities are influenced by past events,
resulting in changing profit expectations, propensity for
accepting risk, and resource availability. Two firms may
react quite differently to the same situation. Each decision
maker will have their own level of indifference to risk
and opportunity, reflecting partly their corporate person-
ality, and existing state of business. This level of indif-
ference may change with every change in the state of
business and thus with every contract won or lost [5].
The objective of a good competitive analysis is to un-
derstand your competitor’s positioning in the market-
place, his/her strengths and weaknesses, personnel,
capacity limitations, and ambitions.
Cost/Risk/Desirability
All of the variables discussed so far provide the es-
sential raw material for evaluating three of the four major
components of the final bid selections: cost, risk, and
desirability.
COST. As with any pricing effort, cost provides the foun-
dation upon which the final bid is determined. This in-
cludes the direct costs of fulfilling the contract (labor and
material), directly assignable overhead charges, and an
allocation to general and administrative expense. In ad-
dition, however, allowances should be developed to rep-
resent the cost of losing the contract. The preparation
cost of the proposal, as well as the effect of opportunity
loss to the firm, should be included here.
To be complete, an assessment of cost must include
the coverage of uncertainty due to such things as bad
weather, supplier delays, or other unexpected events.
It is often assumed that competitors face essentially
the same costs on a given project, but this is usually not
the case. In the construction industry, for example, such
factors as the application of materials and technology,
production efficiency, and proximity to construction site,
affect unit costs. The allocation of overhead costs are
greatly affected by workload, availability of equipment,
and volume. This implies that resource management is a
critical part of the bidding process and that competitive
advantage can be obtained through cost management
strategies.
RISK. Risk is defined as the probability of a cost-im-
pacting or time-impacting event or circumstance [9]. No
consideration of bidding strategy would be complete
without an assessment of risk and its impact upon the bid
price. The return needed to cover ordinary risk must be
built into the planning decision and subsequently the final
bid price. The riskier the task, the greater the return it
should generate.
DESIRABILITY.While risk is well defined and the rela-
tionship to return well established, desirability is much
less so. Desirability refers to how badly management
wants the job, given the nature of the job, the position
of the company, and the resources available. A complete
definition of this construct and its relationship to bid
pricing needs further investigation. It may be assumed
that a job that is highly desirable will lead to lower mark-
ups in order to increase the probability of winning. How-
ever, a task that is highly desirable may also be high in
risk, leading to countervailing pressure on the markup
decision. The nature of the interaction of risk, desira-
bility, and markup pricing is beyond the scope of this
study.
Final Bid Price Selection
Competitive bid pricing for most firms is essentially a
process of estimating the cost of doing the job, and adding
a markup to provide for profit. The lower the bid, the
greater the likelihood of winning the job, but at a sacrifice
to profit. Conversely, a high bid relative to competition,
will include a greater profit target, but at the same time,
will lessen the chance of winning the job. It is the task
of the pricing analyst and bid decision makers to arrive
at an optimum combination of price and profits to achieve
the long-run objectives of the firm.
For a company to assume a strategic bidding posture,
it is essential that the objectives of the firm be defined.
There are many possible objectives and different strate-
gies will result from different objectives. Quantitative
theorists make the assumption that all bidders are seeking
to maximize total expected profit. As indicted from Table
3, this is not likely to be the case. Instead, the set of
bidders will include a mix of objectives, ranging from
profit maximization on one hand to survival of the firm
on the other. Each of these objectives will have a different
weighting effect on the bid price decision. A firm seeking
to penetrate a market segment will be more willing to
forgo immediate profits in order to gain market entry and
enhance longer run opportunities. A firm in a survival
mode may be willing to bid at cost in order to just keep
labor and equipment employed. Another firm, operating
at full capacity, will pick and choose only those select
93
opportunities that will be most advantageous in the longer
run.
The final bid price decision will represent the best
judgement of the decision maker taking all of the relevant
factors into consideration. The end focus is not on what
price will beat the competition, but on the value of the
job to the bidder. The emphasis is on “bidding the job
. . . not the competition.”
CONCLUSIONS AND IMPLICATIONS
While the survey of construction companies focused
on a single industry, the results have much wider impli-
cations. It is clear that the attention and space given to
the quantitative model in most industrial marketing texts
should be questioned. Instead, a broader view of bidding
strategy is needed.
Strategic bidding starts with the assumption that com-
peting firms do not place constant valuations on the worth
of varying bid opportunities in a dynamic market. The
following managerial implications are suggested.
First, the need for a capability to monitor, gather,
analyze, store, and evaluate a wide range of market in-
formation is evident. This need goes far beyond the col-
lection of past competitive bid histories. Information
about the company, the customer, the competition, and
the environment must be obtained and processed to pro-
duce knowledge that can be used directly in decision
making. A formalized Management Information System
(MIS) will become an increasingly important tool to the
bidding strategist. The establishment of an MIS implies
the existence of a systematic data gathering function (i.e.,
marketing research), a database (storage and processing),
and a decision-process model to interpret and integrate
the information.
Second, the emphasis on bidding value rather than
“lowest price” moves the strategy away from the tra-
ditional cost plus markup approach to a demand/value
orientation. Such an orientation requires assessing the
value contribution to the firm of alternative bid oppor-
tunities. At least three steps are required:
1. Setting performance standards for achieving de-
fined company objectives.
2. Selecting target bid opportunities that best fit the
above criteria.
3. Estimating how much the job is worth to the firm
(value of the job).
94
The estimate of job value will establish a competitive
floor level price for each bid opportunity. Below this
price, the return generated by the job will be insufficient
to meet the performance standards required by the specific
company objective.
Third, for many bidding opportunities, the buyer is not
constrained to accept the lowest price bid. Thus, the final
bid contract is subject to negotiation and may be influ-
enced by the incorporation of nonprice features. The
buyer is also interested in “value,” as represented by
delivery, reliability, technical ability, and knowledge,
and general reputation of the firm. The strategic bidder
must therefore know the customer and their choice cri-
teria. Choice criteria are the set of factors or mental rules
a buyer utilizes to evaluate competitive offerings [6]. This
means developing a marketing strategy aimed at satis-
fying the total needs of the buyer, rather than just price.
Finally, while a broad range of factors have been in-
corporated into the model, it is important to realize that
not all bid outcomes will result from a process of sys-
tematic decision making. There are some decisions that
will be based on situational factors that are unique and
lie outside the framework of the model. Such bid situa-
tions must be evaluated in light of their own special
conditions.
REFERENCES
1. Benjamin, Neal H., Competitive Bidding: The Probability of Winning,
Journal of Consrruction
Div., ASCE (September 1972), pp. 313-328.
2. Boughton, Paul D., Pricing in a Closed Bid Environment, Proceedings
of the Academy of Marketing Science (May 1984).
3. Broemser, G. M., Competitive Bidding in the Construction Industry,
Ph.D dissertation, Stanford Universtiy, 1968.
4. Haas, Robert W., Industrial Marketing Management, Kent Publishing,
Boston, 1982, pp. 332-333.
5. Hillebrandt, Patricia M., Economic Theory and the Construction Industry.
Macmillan, London; 1974). pp. 163-173.
6. P. J. Kelly, and Coaker, J. W., The Importance of Price as a Choice
Criterion for Industrial Purchasing Decisions, Industrial Marketing Man-
agemenr 5, 281-293 (1976).
7. Niss, James F., The Effect of Bidding Procedures on Profits and Sales
in the Contract Construction Industry, Journal of Purchasing (August
1968).
8. Paranka, Stephen, Competitive Bidding Strategy: A Procedure for Pre-
Bid Analysis, Business Horizons (June 1971).
9. Ringwald, Richard C., Bid Markup Calculation by Crew-Day Method,
Journal of Consfrucrion Div.. ASCE (December 1982). pp. 521-529.
10. Stark, Robert M., Competitive Bidding: A Comprehensive Bibliography,
Operations Research 19, 484-490 (March-April 1971).