Professional Documents
Culture Documents
To cite this article: Mohammed Fadhil Dulaimi & Hon Guo Shan (2002) The factors influencing bid
mark-up decisions of large- and medium-size contractors in Singapore, Construction Management
and Economics, 20:7, 601-610, DOI: 10.1080/01446190210159890
Download by: [University of Sri Jayewardenepura] Date: 27 May 2017, At: 23:55
Construction Management and Economics (2002) 20, 601610
The construction industry in Singapore is dominated by a competitive business environment that is being
driven by a lowest cost mentality. The pressure on contractors pro t margins has further increased after a
prolonged recession in this sector, which has seen construction demand and output shrinking signi cantly.
This paper examines the factors that contractors perceive to be important when they are considering the size
of their bid mark-up. The research hypothesis is that contractor size would have a signi cant bearing on the
factors that would in uence the bid mark-up decision. Forty factors were identi ed and a survey was
conducted. The results showed that contractor size has a signi cant impact on their attitude towards bid
mark-up decision-making. The analysis also showed that when deciding the size of a bid mark-up large
contractors tend to be more concerned with the nature of the construction work while medium-size contrac-
tors are more concerned about the state of their own companies nance.
program Statistical Package for the Social Sciences the data, the research has decided to use the non-
(SPSS). These techniques made it possible to analyse parametric MannWhitney two independent sample
and examine certain aspects of the bidding environ- tests. These tests would enable the research to
ment, the importance index of the different factors establish whether the medium and large contractors
that may have an impact on contractors bid mark-up evaluation of the various factors varied signi cantly.
decisions, and the likely variation between responses The research null hypothesis states that the means
from large and medium contractors. The research used of the two categories of contractors are the same, and
the importance index to assess the importance contrac- the alternative hypothesis states that they are not the
tors attach to the different factors. same. The mean rank value reveals any differences
between the two categories of contractors in evaluating
Importance index = SaX 3 100/5
the importance of the various factors in uencing the
Here a is a constant expressing the weight given to bid mark-up decision. A higher mean rank value in
each response, the weight ranging from 1 (least impor- one factor represents a higher importance level stressed
tant) to 5 (most important). X = n/N, with n the by that particular category of contractors for that
frequency of the response and N the total number of particular factor. The 2-tailed p> |Z| value will deter-
responses. This index helps in ranking the factors in mine whether the differences between the two cate-
accordance with their importance to the contractors, gories vary signi cantly at 95% signi cance level. If p
and also determines any similarities or differences is less than the reference probability of 0.05, the result
between the medium and the large contractors (Shash is statistically signi cant, and the null hypothesis is
and Abdul-Hadi, 1993). rejected, i.e. the two categories of contractors have
The SPSS package was used in the analysis of vari- varied signi cantly in their evaluation of a particular
ation between the two groups of contractors in their factor. If p is greater than 0.05, the null hypothesis is
attitude towards the factors in uencing their bid mark- not rejected, concluding that there is no signi cant
up decision. Due to the sample size and the nature of difference between the two groups of contractors.
604 Dulaimi and Hong
The results also show that contractors tend to always asked to indicate, on a scale from 1 (low importance)
or most of the time demand performance bonds from to 5 (high importance) the level of importance they
their subcontractors: 6.3% and 21.9%, respectively. attach to the different factors and issues. The impor-
The majority, 65.6%, indicated that they would some- tance indices (introduced above) and the rank order
times demand a performance bond from subcontrac- of the factors in uencing the contractors bid mark-up
tors. These results may be a re ection of contractors decisions presented in Table 3 were compounded from
unwillingness to increase the nancial burden of sub- the average mean value of each factor generated from
contractors, especially those involved in certain low risk, the SPSS program.
repetitive and less complex tasks, to achieve better prices
and hence increase their own competitiveness.
Attitude of the medium-size contractors
The top 10 factors identi ed by medium-size contrac-
Methods and tools used for determining bid tors as the most in uential in their bid mark-up deci-
mark-up sion were: (1) the overall economy; (2) the need for
work; (3) establishing relationship with clients; (4) past
The entire sample surveyed indicated that the contrac- pro t in similar job; (5) anticipated rate of return; (6)
tors did not make use of any statistical/mathematical risk in investment; (7) type of owner; (8) experience
technique or program in determining their percentage in similar project; (9) project cash ow; and (10)
mark-up. This indicates that general building contrac- current workload.
tors would determine their percentage mark-up solely The results in Table 3 show that medium-size con-
based on their experience, intuition and judgement. tractors have assigned the highest level of importance
Contractors seem to be more comfortable with the way to economic situation. Factors such as the overall
they make their bid mark-up decision without relying economy, risk involved in investment and anticipated
on scienti c methods. This picture is similar to that of rate of return on a project were given a higher impor-
the earlier ndings. Ahmad and Minkarah (1988) tance level because they re ected the availability of
stated that bid decisions were heuristic in nature, and works in the market and the feasibility and pro tability
thus they were made on the basis of experience, judge- of projects, which would be key to the survival of such
ment and perception. They also noted that very few contractors.
contractors were reported to use mathematical or Company related issues was the second highest
statistical models in the determination of their mark- ranking category. Factors such as the need for work,
up sizes. Shash (1993) reiterated these observations current workload, past pro t and experience in similar
and indicated that, despite the availability of mathe- projects were given a higher level of importance. It may
matical models, their utilization was not widespread be argued that due to the relatively limited capacity,
among the contractors. low working capital and low turnover of the medium
The respondent contractors indicated that they were contractors the acceptable level of uncertainty in their
relatively comfortable with the way they make the pro t margins tends to be lower. Medium-size contrac-
mark-up decision: 56.3% were somewhat comfort- tors also placed a higher emphasis on establishing long
able, only 6.3% were uncomfortable, and the relationship with their clients, because having a good
remaining 37.5% were comfortable. The majority of relationship with clients would help them generate
the respondents who indicated that they were comfort- future contracts crucial to their long term business
able with their decisions were the large contractors. operations.
The study therefore concluded that the majority of the The top 10 factors identi ed by medium-size
general building contractors were rather comfortable contractors are all listed under the above two cate-
with the way they made their bid mark-up decisions, gories with the exception of the factors ranked 7 and
even without the use of statistical/mathematical tech- 9 (Table 3). Medium-size contractors placed a high
niques or programs. emphasis on the type of owner (ranked 7) when making
a bid mark-up decision. It seems that medium-size
contractors feel that for the owner to be private or
Factors in uencing contractors bid public has a signi cant in uence on their desired mark-
mark-up decisions up. The relatively limited nancial capacity of the
medium-size contractors may have in uenced them to
The attitude of contractors towards the factors in u- place a higher emphasis on the project cash ow
encing the bid mark-up decisions has been assessed by (ranked 9) because this factor will determine the short
evaluating the level of importance contractors placed term liquidity of such contractors and their economic
on the factors identi ed in Table 1. Respondents were leverage to function pro tably.
606 Dulaimi and Hong
Table 3 Importance indices and rank order of the factors for medium size and large size contractors
Attitude of the large-size contractors (5) size of contract; (6) anticipated rate of return; (7)
number of competitors tendering for a particular job;
The top 10 factors identi ed by the large-size contrac- (8) completeness of document; (9) degree of safety of
tors as the most in uential in their bid mark-up deci- the work on the project; and (10) risk in uctuation
sions were: (1) the degree of dif culty of the project; in materials prices (Table 3).
(2) the state of the overall economy; (3) identity/ The response from large-size contractors showed
competitiveness of competitors; (4) risk in investment; that the category project characteristics is the most
Factors in uencing contractor bid mark-up in Singapore 607
important (importance index of 63.3%) in in uencing Table 4 Test statistics of factors under the category
their bid mark-up decision. This may re ect the fact project characteristics
that larger contractors are likely to be involved in larger Project characteristic Mean rank p (2-tailed)
and more complex projects compared with the
medium-size contractors. It is not surprising that these Large Medium
contractors have given factors such as the degree of contractor contractor
dif culty and safety of construction work a higher Size of contract 17.89 14.46 0.274
importance level (Table 3). Large contractors also Duration of project 16.16 17.00 0.782
placed emphasis on contract size, because increased Project cash ow 12.89 21.77 0.005
value in a project would contribute positively to their Location of project 16.58 16.38 0.951
annual business volume, sustain their overheads and Owner (private/public) 11.45 23.88 0.000
give them the potential to earn a better pro t. Degree of dif culty 20.39 10.81 0.001
Degree of safety 19.37 12.31 0.027
The second most important category in uencing
large contractors bid mark-up decisions is economic
situation (importance index of 62.1%). Under this groups of contractors in evaluating the importance of
category, factors such as the overall economy, risk these factors in uencing their bid mark-up decisions.
involved in investment and anticipated rate of return The mean rank values in Table 4 show that medium-
on project were given higher emphasis by large contrac- size contractors are signi cantly more concerned than
tors (Table 3). These factors are likely to in uence the large size contractors about project cash ow and the
availability of works as well as the perceived feasibility type of owner being public or private, while large
and pro tability of the project. contractors viewed the degree of dif culty of the
The third most important category is project docu- construction work more important than medium-size
mentation (importance index 59.6). Risk in uctua- contractors when considering their bid mark-up deci-
tion in materials prices and the completeness of the sion. The different capacities and availability of
document, within this category, were identi ed to be working capital for the contractors may explain the
the most important factors that large contractors would differences between their attitudes toward these
consider in deciding on their bid mark-up (Table 3). factors. The medium-size contractors, who are
The larger contractors also emphasized both the expected to have relatively limited working capital
number and the identities of their competitors during compared with the large size contractors, are more
their bid mark-up decisions. The above intelligence sensitive to the project cash ow; hence they have to
can be argued to provide these contractors with a level place a higher emphasis on that factor. On the other
of con dence about how much they can mark-up their hand, the large contractors are usually involved in
bid and still have a good chance of winning a tender. bigger and more complex projects; hence they viewed
the degree of dif culty and safety to be more critical
in deciding their mark-up.
Differences between the medium-size and The rest of the factors, like size of the contract,
large-size contractors attitudes duration of project and location of project have
p>0.05. Hence, the null hypothesis was not rejected,
The previous section highlighted the level of impor- concluding that at the 95% con dence level, the two
tance the two groups of contractors have attached to groups of contractors did not vary signi cantly in eval-
the different factors in considering their bid mark-up uating the importance of these factors in in uencing
decision. A hypothesis was set up to test whether both the contractors bid mark-up decision.
groups of contractors varied signi cantly in their atti-
tudes toward these factors. The factors that
Company characteristics
contributed signi cantly to the differences between the
two groups of contractors in evaluating their bid mark- Table 5 indicates that the factors need for work, past
up decision are discussed under four categories. pro t in similar job, current workload, experience
in similar projects and establishing long relationship
with clients have p<0.05. Hence their null hypotheses
Project characteristics
are rejected, concluding that there are signi cant
Under this category, Table 4 shows that project cash differences between the two groups of contractors. By
ow, type of owner, degree of dif culty and degree comparing the mean rank value for these factors,
of safety have p less than the signi cance level of 5%. medium-size contractors demonstrated that when
Hence their null hypothesis was rejected, concluding deciding on their bid mark-up size they are signi cantly
that there are signi cant differences between the two more concerned with these factors than are the large
608 Dulaimi and Hong
contractors. The differences between the two groups sions. Medium-size contractors tend to have, relatively,
of contractors may be explained, again, by the limited smaller resources available, and this may have
operating capacities, limited working capital and the increased their sensitivity to competition and the risks
relatively low turnover of the medium-size contractors. posed by the tendering environment. The higher cost
Their limited operating capacities and low working of tendering associated with competitive tendering,
capital led the medium-size contractors to place a which dominates contracting in Singapore, would put
higher importance level on current workload and the greater pressures on medium-size contractors mark-
need for work, while making the bid mark-up decision. ups, which would then attract more attention when
The medium-size contractors also placed higher tendering for a job.
emphasis on their experience and the level of pro t The rest of the factors, pre-quali cation require-
they achieved on similar projects. This may re ect the ment, bidding document price, availability of other
greater sensitivity of such contractors to the likelihood projects, requirement of bond capacity, number of
of a desired mark-up affecting their long term survival competitors and identity of competitors tendering
in the industry. The medium-size contractors have also have p>0.05. Hence, the null hypotheses were not
given higher emphasis to establishing long relationship rejected, concluding that at the 95% con dence level
with clients. They seem to be more keen to ensure that there are no signi cant differences between the two
they are able to secure further work from such clients groups of contractors in evaluating the importance of
in a market dominated by competitive tendering. these factors in in uencing the bid mark-up decision.
The rest of the factors, availability of cash, uncer-
tainty in cost estimate, general overhead, portion
Economic situation
subcontracted to others, need for public exposure
and availability of quali ed staff have p>0.05. Hence, Table 7 indicates that overall economy and antici-
the null hypothesis was not rejected, concluding that pated rate of return on project have p<0.05. Hence,
at the 95% con dence level there was no signi cant the null hypotheses were rejected, concluding that
difference between the two groups of contractors in there are signi cant differences between the two groups
evaluating the importance of these factors in in u- of contractors. The mean rank values show that
encing the bid mark-up decision. medium-size contractors placed higher emphasis on
these two factors when deciding their bid mark-up
decision compared with large contractors. This may be
Bidding situation
related again to the fact that medium-size contractors
Under the category bidding situation, Table 6 shows have relatively limited resources and liquidity com-
that factors like tendering method and tendering pared with those of large-size contractors. This would
duration have p<0.05. Hence, the null hypothesis is make medium-size contractors more vulnerable during
rejected, concluding that there is a signi cant differ- unfavourable times and more sensitive to variation in
ence between the two groups of contractors. Based on the expected rate of return on a job in comparison with
the mean rank values, medium-size contractors placed large-size contractors.
signi cantly more emphasis on the tendering method The rest of the factors, risk involved in investment,
and duration while making their bid mark-up deci- availability of labour or equipment, governmental
Factors in uencing contractor bid mark-up in Singapore 609
Table 6 Test statistics of factors under the category The research has shown that bidding models and
bidding situation statistical techniques are not used by general building
Bidding situation Mean rank p (2-tailed) contractors in Singapore to determine their bid mark-
up. This is consistent with practices reported by other
Large Medium researchers, which show that experience, judgement,
contractor contractor and subjective assessment based on gut feelings are
Tendering method 13.45 20.96 0.016 more favoured by contractors in bid mark-up size
Tendering duration 14.08 20.04 0.046 decision-making. However, the contractors identi ed
Pre-quali cation 16.87 15.96 0.774 several factors as important and in uential. It might
requirement be inferred that such factors are seen to in uence the
Bidding document price 14.66 19.19 0.153 mind set of the decision makers rather than be involved
Availability of other 15.08 18.58 0.263 in the decision making process methodologically.
projects
Contractors attitudes towards the importance of
Number of competitors 16.16 17.00 0.782
these factors varied with contractor size. Some factors
tendering
Identity/competitiveness 16.58 16.38 0.952 are strongly emphasized by both categories of contrac-
of competitors tors, medium and large, but for other factors there are
Requirement of bond 15.53 17.92 0.460 signi cant differences: e.g. both the medium and the
capacity large contractors gave signi cant emphasis to the eco-
nomic situation during their bid mark-up decision-
making.
Table 7 Test statistics of factors under the category The results show that there were signi cant differ-
economic situation ences in the attitudes of the two groups of contractors
when evaluating the importance of factors in uencing
Economic situation Mean rank p (2-tailed) bid mark-up decisions. The results have shown that
Large Medium large contractors tend to be more concerned with the
contractor contractor nature of the construction work of the tendered project
when they make the decision on the mark-up size. By
Overall economy 13.18 21.35 0.009
(availability of work) contrast, the medium size contractors are more
Risk involved in 14.76 19.04 0.164 concerned about their own companys nance, and
investment how bidding for a particular project would enable the
Anticipated rate of 13.92 20.27 0.045 company to maintain a viable business. It may be
return on project argued that this is a function of size, because medium
Availability of labour/ 14.32 19.69 0.081 size contractors are likely to have relatively limited
equipment resources and capabilities, making them more sensitive
Governmental division 15.61 17.81 0.496 to marginal changes in the expected pro ts from a
requirement particular project. In addition, medium size contrac-
Tax liability 15.13 18.50 0.292
tors are more likely to be involved in construction
projects as subcontractors. In the view of the lowest
price mentality that seems to dominate Singapores
division requirements and tax liability, have p>0.05. construction industry and the extensive use of subcon-
Hence, the null hypothesis was not rejected, con- tractors, the medium-size contractors will be under
cluding that at the 95% con dence level there was no maintained pressure to reduce their prices.
signi cant difference between the two groups of con-
tractors in evaluating the importance level of these
factors in in uencing the bid mark-up decision. References
Construction Engineering and Management ASCE, 122(2), Morin, T. and Clough, R. (1969) OPBID: Competitive
11924. bidding strategy model. Journal of the Construction Division
Drew, D. S. and Skitmore, R. M. (1997) The effect of ASCE, 95(1), 85105.
contract type and size on competitiveness in bidding. Moselhi, O., Hegazy, T. and Fazio, P. (1991) Neural net-
Construction Management and Economics, 15, 46989. works as tools in construction. Journal of Construction
Dulaimi, M. F., Ling, Y. Y. and Ofori, G. (2001) Building Engineering and Management ASCE, 117(4), 60625.
a World Class Construction Industry: Enablers and Motivators, Moselhi, O., Hegazy, T. and Fazio, P. (1993) DBID: analogy
National University of Singapore. based DSS for bidding in construction. Journal of Con-
Fayek, A. (1998) Competitive bidding strategy model and struction Engineering and Management ASCE, 119(3),
software system for bid preparation. Journal of Construction 46670.
Engineering and Management ASCE, 124(1), 110. Park, W. R. (1979) Construction Bidding For Pro t, Wiley,
Friedman, L. (1956) A competitive bidding strategy. Opera- New York.
tions Research, 4, 104112. Runeson, G. and Skitmore, R. M. (1999) Tendering theory
Gates, M. (1967) Bidding strategies and probability. Journal revisited. Construction Management and Economics, 17,
of the Construction Division ASCE, 97(1), 75107. 28596.
Lai, S. K. (1982) Tendering. Undergraduate dissertation, Shash, A. A. (1993) Factors considered in tendering deci-
National University of Singapore. sions by top UK contractors. Construction Management and
Li, H. (1996) Neural network models for intelligent support Economics, 11, 1118.
of mark-up estimation. International Journal of Engineering Shash, A. A. and Abdul-Hadi, N. H. (1992), Factors
Construction and Architectural Management, 3(1), 6982. affecting a contractors mark-up size decision in Saudi
Li, H. and Love, P. (1999) Combining rule-based expert sys- Arabia. Construction Management and Economics, 10,
tems and arti cial neural networks for mark-up estimation. 41529.
Construction Management and Economics, 17, 16976. Shash, A. A. and Abdul-Hadi, N. H. (1993) The effect of
Lifson, M. W. and Shaifer, E. F. (1982) Decision and Risk contractor size on mark-up size decision in Saudi Arabia.
Analysis for Construction Management, Wiley, New York. Construction Management and Economics, 11, 4219.
Mak, Y. S. (1977) General study on contractors pro t and Tan, W. (1995) Research Methods in Real Estate and Con-
pricing. Undergraduate dissertation, National University of struction, National University of Singapore.
Singapore. Xu, T. and Tiong, R. (2001) Risk assessment on contrac-
Mannerings, R. (1970) A study of factors affecting success tors pricing strategies. Construction Management and
in tendering for building works. Doctoral thesis, UMIST, Economics, 19, 7784.
Manchester.