Professional Documents
Culture Documents
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Assistant professor, Construction Dep., Faculty of Engineering, Ain Shams University, Cairo, Egypt.
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Ph.D. student, Faculty of Engineering, Ain Shams University. Cairo, Egypt.
Abstract
A Construction contracting is the ability to bid-successfully. Winning tender and making profit is a sustainable target for any
contactor to survive in construction sector. While there are different methods for bid pricing in estimating direct and indirect
costs, there are fewer tools for estimating proper mark-ups percentage. Therefore, the decision of proper bid mark-up's
percentage is vital in winning the tender. Meanwhile, the contractor can cover contingency and keeping its bid at a competitive
level with the possibility of achieving maximum profit. Bid markup decision in construction projects is a complex adaptive
process. Therefore, it requires significant experience and market knowledge. The problem is getting worth in case of the
economic reform in developing countries such as Egypt. This economic reform initiative lately undertaken by the Egyptian
government coupled with the ambitious development programs of infrastructure and the development of several new cities
which means additional variables that increase the complexity. These variables include high inflation, currency exchange
changes, economic instability, removal of subsidies and compressed construction deadlines. The objective of this paper is to
develop a decision support system (DSS) to generate the optimum bid markup. Many factors which may impact the decision
process either quantitative or qualitative are identified and evaluated using Delphi technique for reality seeking. Then Analyze
the retrieved factors with step wise regression statistical technique to generate highly impact factors. The DSS consists of three
modules, first the Financial forecast module then using the Analytic Network Process (ANP)-Relative Module and the Rating
Module. Finally, generate the optimum bid markup among Alternatives. The main finding in this paper is the minimum
alternative, summation of the cost of finance and inflation finance percent, the Priorities of significant factors, which include
need to work, project complexity, markup inflation, the risk involving owing contract, economic and competition- market
environment. The result of this study improves and assess contractor’s ability to enhance their documentation system and
estimating process to deal with various bidding evaluation conditions.
Keywords: bid Markup, Decision support system, inflation, Delphi, Competitive tender, ANP.
1. INTRODUCTION
Construction industry is considered as a main indicator for economic growth in developing countries such as
the Middle East countries specially Egypt over the last decade. Rapid development in the construction industry
is significance in its strengthening and progressing of building urbanization.
Construction companies play a prominent role in economic activity by their contribution to the implementation of
major construction projects, such as the development of new cities across the country including a new Capital, a
massive infrastructure program, power plants, infrastructure, roads & bridges and significant housing program to cope
population increase.
In recent years, Egypt faced many economic and political challenges, which had direct impact on the construction:
• Global crises (the global financial crisis in 2008 and the European crisis in 2011).
• Local crises following the events of the political changes in 2011
• Egyptian currency floatation in November 2016
• Implementation of Value Added Tax (VAT) 2016
• Reduction of government subsidies (utilities, fuel, etc.)
• Change money value over time
All the above factors have had impact on construction costs and consequently construction companies. Hence, the
significant economic reform program that is being undertaken by the Egyptian Government. Which in turn increase the
need of developing a new bidding strategy to adapt the economic changes. Thus, decide bid mark-up during the bidding
stage has become increasingly important. This complicated combined process integrates cost estimation and decision-
making process that involve bidders' objective on achieves the balance between the winning a tender and the maximum
profit as much as possible. it is necessary to consider the following issues when developing a competitive bidding
strategy model that is suitable for use in practice:
• A wide range of factors influencing bid markup.
• Quickness to cover the short bidding preparation period under enormous pressure.
• Lowest responsible bidder awards the contract.
The objective of this paper is to develop a generic approach of multi-factors evaluation process to assist contractors in
contract awarding, by deciding an optimum bid mark-up percent for their projects. Which varies from one construction
bid to another according to its objectives. This decision involves multiplicity of various internal and external factors
that encountered in each financial management decision. Factors considered in markup decision can be classified into
two groups: quantitative and qualitative.
Qualitative Factors enables us to use logic and apply mathematical formulas to compare the data as well as charts to
assist in visualizing the findings.
Quantitative Factors major advantage is that it can be easily analyzed using mathematical formulas.
2. LITERATURE REVIEW
The literature review carried out for this paper illustrated that many researcher’s efforts proposed a various method and
technique in deciding the markup size, which is heuristic in nature based on their experiences, judgments and
perceptions.
1. Identifying various factors influencing bid mark-up decision survey.
An earlier research of Shash and Abdul-Hadi (1992) developed this research and presented 37 factors underlying
the markup size decision, with their relative importance to contractors operating in Saudi. Drew and Skitmore
(1997) further identified several factors affecting competitiveness in bidding focused only on contract type and size.
Therefore, Dulaima and Shan (2002) investigated the factors influencing bid markup decisions of large- and
medium-size contractors in Singaporean contractors, respectively. Yng Ling and Lie (2005) identified the factors
affecting the markup decisions of a profitable contractor in Singapore. Enshassi et al. (2010) analyzed contractors’
bidding decisions in the Palestinian construction industry and concluded that “project durations”, “political
environment” and “terms of payments” are the primary factors controlling the mark-up size decisions of contractors.
In a recent study, El-Mashaleh (2013) reported the importance weights and standard deviations of 53 Jordanian
bidding factors.
From precede literature we note that bid mark-up size decision factors vary from construction project to other according
to the different contractor's objectives depending on environmental, social, cultural, economic, political conditions,
uncertainty, competition and can be differ from countries to other according to geographical regions.
2.2. Artificial intelligence-based models: Several bidding models used artificial neural networks to support markup
decisions via a sequence of deep-reasoning steps (Li & Love, 1999; Moselhi, Hegazy, & Fazio, 1993).
2.3. Multi-criteria utility models making with discrete alternatives has started to solve competitive bidding decision
problems (Shi and Zeleny, 2000). Furthermore, as bid-related decisions are highly unstructured, and no clear
rules exist for bidding decisions, Chua, Li, and Chan (2001) devised a case-based-reasoning bidding model. Liu
and Ling (2003) described a fuzzy neural network based on approach that estimate the markup percentage.
Additionally, Christodoulou (2004) presented a methodology for arriving at optimum bid markups in static
competitive bidding environments using neuro-fuzzy systems and multidimensional risk analysis algorithms.
According to Anderson et al (2011), Hosny and Elhakeem (2012) estimate an optimum markup using the
integrated optimum markup approach.
3. METHODOLOGY
Bid price comprises of the direct cost, indirect cost and a mark-up percent of
direct and indirect cost equation (2). The estimated direct cost is the sum of
material, manpower and machine costs of the project plans and
specifications. The indirect cost is the sum of all costs which are traceable to
the project and which are not traceable to a single activity is job overhead.
Finally, bid mark-up percentage of the estimated bid price to account for
profit and contingencies as shown in figure1
Figure1: Bid price division example
C= Direct cost+ Indirect cost [1]
B optimum=C*(1+Markup optimum % [2]
Markup optimum % = (B optimum /C) -1 [3]
Markup optimum % = Net profit% + Contingency % [4]
Where B is the bidding cost, C is the project cost.
Deciding the optimum mark-up that provide high chance to win the contract in competitive tender, interested bidders
should prepare the bidding documents (technical and financial). Moreover, tender evaluation based on the “lowest
responsible bidder” is awarded the contract and that bidders strive for an optimum bid value, one that would result in a
bid that is low enough for a bidder to win over competition and whilst high enough to cover contract costs, Service,
contingency and yield a profit. Especially those who are planning to enter Egyptian's construction firm. Methodology
associated process guides contractors considering the more important relevant factors and choosing of an alternative of
optimum markup size. This study concerns in real estate residential building projects.
percent decision. This round used a quantitative interview’s participants requested to identify every factor degree of
influencing on markup decision using Likert’s four scale consisting four categories (where one is the lowest influence
of factor significant on markup and four is the highest influence. was adopted where respondents were asked to indicate
the importance of each factor.
2 Factors reduction using stepwise regression
Stepwise regression is an essential technique does multiple regression several times, each time removing the weakest
correlated variable. Which requires two significance levels: one for adding variables and one for removing variables.
The cutoff probability for adding variables should be less than the cutoff probability for removing variables so that the
procedure does not get into an infinite loop. At the end, the variables that explain the distribution best. The only
requirement is data normally distributed (or rather, that the residuals), and there is no correlation between the
independent variables (known as Collinearity).
Ex: the effect of size of project on markup.
Table 2 present the value of adjusted R squared is 0.998, so it is very good value and we can say that the independent
variables managed to explain almost variation in the dependent variable.
This module is to illustrate the effectiveness a set of top twenty key factors and their relative importance weights is an
initial step toward developing a new technique-based on expert system.
2.3 The final influencing factors
Finally, the highly impacting Twenty factor generate from the statistical analysis which presented in table3. Which we
can utilize in the Developed Decision support system.
2.3 Duration
2.4 Location
2. Project 2.5 Complexity
Characteristics 2.6 Site Condition
2.7 Tech. Doc level
2.8 Owner type
2.9 Contract Type
2.10 Contingency
3.1 Need to Work
3.2 Current Work Load
3.3 Uncertainty in Cost Estimation
3. Company Condition
3.4 Availability of Resources
3.5 Financial Stability
3.6 Company Classification
3. Developed Decision
Analysis is break down a problem into its constituent components to study their behavior has been the major tool of
scientific inquiry to test hypotheses then solve problems and generate decision. DSS is a system for decision making
and problem-solving Intelligence with computer-based information system designed for interactive use, that supports
business or organizational decision-making activities to control the sequence of interaction and the operations
performed, which can be intended for repeated used as needed for decision support tasks. DSS features are flexible and
can be altered according to needs providing a helping hand in the work process.
3.1.2 Cash in
The flow of income money from the project’s owner to the contractor is in the form of progress payments. Estimates of
work completed are made by the contractors periodically (usually monthly) and are verified by the owner's
representative. Owners usually retain 10% of all validated progress payment submitted by contractors.
Input date: Advanced payment amount, retention, payback period, first payment date.
Output data: cash-in stepped diagram as shown in Figure2.
The Analytic Network Process (ANP) developed the first mathematical theory that makes it possible for decision
maker to deal systematically with this kind of dependence and feedback that improves the priorities derived from
judgments and makes prediction much more accurate. Analytic Network Process’s power lies in using ratio scales to
capture all kinds of interactions and make accurate predictions to deal with engineering economics problems to make
better decisions with expert judgment associated.
Input: Actual measurement subjective opinion (price, weight, satisfaction, experience, etc.)
Output: Ratio scales (from Eigen vectors), consistency index (from Eigen value).
(1) Matrix
- Super matrix technique synthesizes ratio scales. Each ratio scale is appropriately introduced as a column in a
matrix to represent. the super matrix is composed of several sub-matrices which each column is a principal eigenvector
that represents the impact of all elements in a cluster on each element in another (or the same) cluster, the vector of
priorities is the principal eigenvector of the matrix. This vector gives the relative priority of the criteria measured on a
ratio scale.one often needs to prioritize the influence (importance) of the elements themselves on each other.
- Weighted Super Matrix if the column sum of any column in
the composed super matrix is greater than 1(there are more than
one eigenvector), that column will be normalize.
average and poor. We then pairwise compare them to establish priorities and normalize those priorities by dividing by
the largest value among them, so that excellent would have a value of 1.000 and the others would be proportionately
less. Idealizing the priorities by dividing by the largest assures that intensities belonging to large families do not receive
small priorities simply because there are many of them. Example or residential project type Factor table 5.
OBJECTIVE
GOAL Criteria Sub Criteria Priorities
Environment
1.1 1.1.1 Availability of future Project 0.0205
1. Market
Economic 1.1.2 Fluctuation-Project start date 0.0521
1.2 1.2.1 Number of competitors 0.0199
Competition 1.2.2 Level of Competitors 0.0191
2.1 Project Type 0.1031
2. Project Characteristics
The Priorities column is obtained by normalizing the Total Score column by dividing by the sum of the values in it. The
selected intensities for each alternative.
From table 9 the Optimum markup ratio= Ʃ priorities X Average alternative range
=2.5*0.1345+6.6*0.211+9.6*0.1847+12.6*0.1435+15.6*0.161+18.6*0.1656=10.9%
Bidding strategies vary from contractor to another in competitive tender, have different degrees of sensitivity towards
the factors affecting their markup ratio decisions in their tender such as Uncertainties, competitors and ambiguities.
Setting up the right markup ratio contributes to completing the Project successfully. This research has identified them
and, based on the stepwise regression, determined the most influenced factors causing markup percent variation. Then
decision support system to retrieve the best alternative, represents the expected return, cover contingency and high
probability to award contract. The ratio is the limit between the contractor's desire to raise the profit to achieve the
highest return and his desire to reduce its value. Our model enables the estimators to consider many factors (some of
them of purely qualitative character) that affect both the chance of winning a contract and capacities to deliver and
satisfy the client.
6 CONCLUSION
This research shows the development of a decision support system (DSS) to optimize the markup for construction
projects in Egypt during the volatile economic reform period that the country is going through. The DDS provides a
means to obtain optimum markup for pricing a competitive tender for contractors in Egyptian construction firm. By
identifying, the crucial factors that influence optimization process via the decision support system (DSS) in the short
tender preparation period, to assist contractor decision in achieving the objective of awarding contract and gaining
reasonable profit with economic growth. Engineering economics strategy by choosing among alternative assess
contractors make more deliberate, thoughtful decision-making of markup in competitive construction tender by
identifying decision related factors, gathering, information, and assessing alternative resolutions. This approach
increases the chances of choosing the most satisfying alternative possible. Estimating bid mark-up with respect to the
future value of money and prices fluctuation predicted during execution phase. With the evaluation, many influencing
qualitative and quantitative factors whenever contractor take either decision. Finally, we have a decision support system
that reflect new vision and method to adapt the economic changes whose varies from project condition to another.
References
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AUTHOR
Sherin Yosr received the B.Sc. in Civil Engineering from Faculty of Engineering-Cairo University in
2001 and M.Sc. degree in construction Engineering management, Faculty of Engineering-Ain Shams
University in 2010, Phd student, Faculty of Engineering- Ain Shams University respectively.
Prof. Dr. Ibrahim M. Mahdi is associated professor of project management at Future University of
Egypt. Mahdi has over 30 years of professional experience in all phases of project management
including Planning; Cost a, Risk management and Project Control. He has been responsible for many
assignments of highly technical projects in Egypt and Kuwait. His experience includes Preparing
tender’s packages; receiving and analyzing tenders, making consultant and contractor
recommendations, issuing, executing and administering contracts; and finally, supervising the
construction to insure quality and schedule requirements are met. Specialties: Assoc. Prof. Project Management and
Project management Consultant.