Professional Documents
Culture Documents
Estimation
Objectives
Bidders
-Cash Flow
Cost Markup
Profit
Risk contingency
Direct Cost Indirect Cost
Labor
Equipment Project General
Material Overhead Overhead
…
The Final Touches
Approximate range
of contribution to Relative Variations
70-90% total cost among estimators
5-20%
3-10%
0-10%
3 3
Below 2 2
cost
1 1
B/C
From the table (provides left side area), Probability = 0.8413, then the
probability of winning “Company B” at 20% markup = 1 - 0.8413 =
0.1587 (the shaded area)
b) Expected profit = Probability of winning x Profit
= Probability of winning x Cost x markup
= 0.1587 x $1,000,000 x 0.2 = $31,740
Winning All Competitors
Simultaneously
How to combine: Pwin(A), Pwin(B), Pwin(C), … @ a certain
markup level, to get Pwin(All), at that markup
Two models are available:
Friedman (1956): The basic assumption is that different
competitors’ probability distributions are mutually independent.
Accordingly, he suggested a multiplicative model to combine the
probabilities; i.e., Pwin(All)= Pwin(A) x Pwin(B) x Pwin(C) x …
Gates (1967): criticized the independence of Friedman and offered
his model as follows: 1
Pwin(All)=
1 - Pwin(A) + 1 - Pwin(B) + 1 - Pwin(C) + …+[1]
Pwin(A) Pwin(B) Pwin(C)
Optimum Markup Estimation
Expected
Profit
1% 3% 5% 7% 9% markup
Optimum markup
Optimum Markup Estimation
Initialization: m = 0%, increment j = 1%
LOOP
m=m+j
LOOP
Calculate P win (competitor i) @ markup m
14000 4.2%
12000
3.2%
10000
8000 EP-F
6000 EP-G
4000
2000
0
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
Friedman’s and Gates’ models give different results, and
debate over the years has not been able to resolve this
conflict.
There are many studies that concluded that:
Freidman’s model is more correct when variation in bids is only
due to markup,
Gates’ model is more correct when variation in bids is only due
to variation in cost estimate
Gates model gives higher markups, i.e., Freidman model can
present a pessimistic approach while Gates model presents an
optimistic approach
Important Bidding Relationships
When s of B/C ratio of a competitor is small, it indicates
this competitor uses a consistent markup policy (easy to
win)
in case of high project risk, it is wise to use higher
markup as an allowance for unforeseen conditions. The
use of Gates model in this case is more advisable.
When the level of competition is high (large number of
bidders) and the economic conditions are not favorable,
winning bids becomes difficult and bidders reduce their
bids.
Important Bidding Relationships