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Article: Rational under-pricing in bidding strategy: A real options model
Title | Rational under-pricing in bidding strategy: A real options model |
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Authors | |
Keywords | Bidding strategy Pricing Real options Tendering |
Issue Date | 2006 |
Publisher | Routledge. The Journal's web site is located at http://www.tandf.co.uk/journals/titles/01446193.asp |
Citation | Construction Management And Economics, 2006, v. 24 n. 5, p. 475-484 How to Cite? |
Abstract | Under-pricing in construction tenders is a common phenomenon and is commonly explained by the need of cash flows and penetration strategy. However, these explanations involve profit cutting and therefore are not plausible in explaining a long-term persistent phenomenon of under-pricing. A real options model is proposed and using the binomial lattice method a real-life construction project tender was analysed to examine how management flexibility and uncertainty provide real options value. When uncertainties of cost items in a tender exist and choices are available to defer and switch modes of construction, then a valuable option is available to the bidders. It amounts to about 4% of the lump sum tendered in our case. The under-priced portion is the options value which the bidder is willing to pay for the flexibility and the uncertainty. These findings enable contractors to be more competitive and to estimate construction costs more accurately in devising their bid strategies. © 2006 Taylor & Francis. |
Persistent Identifier | http://hdl.handle.net/10722/168739 |
ISSN | 2023 Impact Factor: 3.0 2023 SCImago Journal Rankings: 0.874 |
ISI Accession Number ID | |
References |
DC Field | Value | Language |
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dc.contributor.author | Yiu, CY | en_HK |
dc.contributor.author | Tam, CS | en_HK |
dc.date.accessioned | 2012-10-08T03:31:57Z | - |
dc.date.available | 2012-10-08T03:31:57Z | - |
dc.date.issued | 2006 | en_HK |
dc.identifier.citation | Construction Management And Economics, 2006, v. 24 n. 5, p. 475-484 | en_HK |
dc.identifier.issn | 0144-6193 | en_HK |
dc.identifier.uri | http://hdl.handle.net/10722/168739 | - |
dc.description.abstract | Under-pricing in construction tenders is a common phenomenon and is commonly explained by the need of cash flows and penetration strategy. However, these explanations involve profit cutting and therefore are not plausible in explaining a long-term persistent phenomenon of under-pricing. A real options model is proposed and using the binomial lattice method a real-life construction project tender was analysed to examine how management flexibility and uncertainty provide real options value. When uncertainties of cost items in a tender exist and choices are available to defer and switch modes of construction, then a valuable option is available to the bidders. It amounts to about 4% of the lump sum tendered in our case. The under-priced portion is the options value which the bidder is willing to pay for the flexibility and the uncertainty. These findings enable contractors to be more competitive and to estimate construction costs more accurately in devising their bid strategies. © 2006 Taylor & Francis. | en_HK |
dc.language | eng | en_US |
dc.publisher | Routledge. The Journal's web site is located at http://www.tandf.co.uk/journals/titles/01446193.asp | en_HK |
dc.relation.ispartof | Construction Management and Economics | en_HK |
dc.subject | Bidding strategy | en_HK |
dc.subject | Pricing | en_HK |
dc.subject | Real options | en_HK |
dc.subject | Tendering | en_HK |
dc.title | Rational under-pricing in bidding strategy: A real options model | en_HK |
dc.type | Article | en_HK |
dc.identifier.email | Yiu, CY: ecyyiu@hkucc.hku.hk | en_HK |
dc.identifier.authority | Yiu, CY=rp01035 | en_HK |
dc.description.nature | link_to_subscribed_fulltext | en_US |
dc.identifier.doi | 10.1080/01446190600601560 | en_HK |
dc.identifier.scopus | eid_2-s2.0-33745099013 | en_HK |
dc.relation.references | http://www.scopus.com/mlt/select.url?eid=2-s2.0-33745099013&selection=ref&src=s&origin=recordpage | en_HK |
dc.identifier.volume | 24 | en_HK |
dc.identifier.issue | 5 | en_HK |
dc.identifier.spage | 475 | en_HK |
dc.identifier.epage | 484 | en_HK |
dc.identifier.isi | WOS:000213197300005 | - |
dc.publisher.place | United Kingdom | en_HK |
dc.identifier.scopusauthorid | Yiu, CY=9248825800 | en_HK |
dc.identifier.scopusauthorid | Tam, CS=7201444744 | en_HK |
dc.identifier.citeulike | 689286 | - |
dc.identifier.issnl | 0144-6193 | - |