Bid amount decision making for large integrated infrastructure projects by EPC contractors in the Netherlands

Abstract

In the Netherlands, from time to time, remarkable bids can be observed among the results of tenders for large infrastructure projects with design and construction integrated in a single contract. This observation sparked interest in the decision-making processes that Dutch contractors apply. Contractors determine their bid amount with the mark-up approach; the construction costs are marked-up, to account for; risk, general overhead and profit. Decision makers balance the profit with the probability of winning the tender, by adjusting the mark-up. This is challenging, because they are faced with little information, limited time and large uncertainties. The mark-up decision is made based on a mixture of experience, individual beliefs and gut feelings. This makes the decision-making susceptible to biases and emotional responses to external pressures. Hence, the research question is; how can the bidding price determination process for large infrastructure projects by Dutch EPC contractors be improved? The general viewpoint in literature is that the decision-making would greatly improve if it would be more rational. Over the years, several methods have been proposed to assist decision makers in their mark-up decision, however, they are not used by Dutch contractors. A literature study of the proposed mark-up models and decision-making literature was used to compile a theoretic framework. Semi-structured interviews are conducted with six of the largest Dutch infrastructure contractors to obtain a notion of contractors’ bid determination processes. The obtained notion is compared with the theoretic framework, which resulted in the finding that multi-criteria mark-up models are most congruent with current practice. In addition, a barrier to rationalizing a contractor’s bid determination is identified. There is a misalignment between the phase in which the contractor conceptualizes the tender and the final phase in which the bid amount is determined. The misalignment is present at different levels; 1) between a structured tender process and a unstructured mark-up decision process, 2) between a focus on data during the tender which disappears when other, more intangible items are considered in the bid amount decision as well and 3) between bounded rational decision-making during the tendering phase and a more entrepreneurial type of decision making at the mark-up decision. Implementing a multi-criteria mark-up model is recommended to reduce the misalignment and subsequently improve the decision-making. This model is most congruent to contractor’s current processes. In addition, it promotes a more complete, well-considered decision-making, which reduces the sensitivity to biases.