FACTORS AFFECTING THE CONTRACTORS MARK-UP SIZE DECISION IN MALAYSIA

TEY KIM HAI

A project report submitted in partial fulfillment of the requirements for the award of the degree of Master of Science (Construction Management)

Faculty of Civil Engineering Universiti Teknologi Malaysia

JUNE 2009

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To my beloved parent, siblings, and friends Thanks for your never ending love and support

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ACKNOWLEDGEMENTS

First of all, I would like to express my sincere appreciation to my project supervisor, Assoc. Prof. Dr. Aminah Md Yusof for her generous advice, patience, guidance and encouragement throughout the duration of my dissertation.

Secondly, I would like to express my gratitude to all participated contractors, who generously spent their precious time to participate in the questionnaire survey of this project. Their honest information, opinions and comments are very useful indeed.

Furthermore, I would also like to express my sincere thanks to my senior and friends, who has given me a lot of guidance and advice on this project.

Finally, I am most thankful to my parents and family for their continuous support and encouragement given to me unconditionally in completing this dissertation. Without the contribution of all those mentioned above, this work would not have been possible.

ABSTRACT

Construction industry is a competitive industry and the only possible way for a contractor to survive is by winning the tenders and making profit. Therefore, a right mark-up size is essential for contractor which to maximum possible profit, at the same time keeping its bid at a competitive level. Hence possessing a sound knowledge of the factors affecting the contractors mark-up size decision is imperative in identifying the right mark-up size in bidding. Thus, this project is to investigate the factors affecting the mark-up size decision. It seeks to determine the factors affecting the mark-up size decision and analyzes the perceived importance of various factors in different contractor sizes evaluation. The project extent investigates on the current practices in contractors mark-up size decision. Questionnaire conducted and distributed to the respondents who are the medium and large-size of contractors in Johor Bahru, Malaysia. This finding of project shows that there are top ten important factors affecting mark-up size decision such as overall economy, competition, need for work, size of project, project cash flow, and so on. Besides, the ranking of most influence category of factor were followed by project characteristics, company characteristics, economic situation, project documentation and bidding situation. Finding also indicates that the different of perceived important of factors between medium and large-size contractors evaluation. Seven factors which are degree of difficulty, uncertainly in cost estimate, need for work, availability of qualified staff, time allowed submitting bids, bidding document price and risk involved in investment has been highlighted. The finding shows that the most preference mark-up size is 10 % to 15%. Experience, previous record and market survey are commonly practiced by contractors in determining their mark-up size. Unfortunately, the bidding models were not utilized by contractors since they are not sufficient information to effectively use it and the complexity of these models.

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ABSTRAK

Industri pembinaan adalah industri yang sangat kompetetif dan satu cara untuk berjuang terus bertapak dalam industri tersebut adalah mendapatkan tender dan memaksimakan keuntungan. Saiz mark-up yang sesuai adalah penting untuk menjaminkan keuntungan yang maksimum dan kompetetif. Shash and Abul-Hani (1992) menekankan bahawa pengetahuan mengenai faktor mempengaruhi keputusan saiz mark-up kontraktor adalah sangat mustahak untuk menentukan saiz markup yang sesuai. Kajian ini akan mengenalpasti faktor-faktor yang mempengaruhi keputusan saiz mark-up dan menganalisa kepentingan faktor-faktor dalam penilaian mengikut perspektif kontraktor yang berlainan. Penyelidikan ini juga menganalisa amalan semasa bagi kontraktor dalam menentukan keputusan saiz mark-up. Soalan penyelidikan ini diagihkan kepada responden iaitu kontraktor yang bersaiz sederhana dan besar di Johor Bahru, Malaysia. Keputusan penyelidikan ini menunjukkan 10 faktor utama yang mempengaruhi harga tender seperti ekonomi, kompetetif, keperluan kerja, saiz projek, aliran tunai projek, dan sebagainya. Kategori yang paling berpengaruh diikuti cirri-ciri projek, ciri-ciri syarikat, situasi ekonomi, pendokumenan projek dan situasi bidaan. Keputusan penyelidikan juga menunjukkan kepelbagaian ketara dalam penilaian kontraktor yang berlainan saiz. Terdapat tujuh faktor menunjukkan perbezaan yang ketara seperti tahap kesukaran, ketidakpastian dalam anggaran kos, keperluan kerja, kakitangan yang bertauliah, jangkamasa penyerahan tender, harga dokumen tender dan risiko dalam perlaburan. Selain daripada itu, saiz mark-up yang biasa ditentukan oleh kontraktor adalah 10 % hingga 15%. Pengalaman, rekod terdahulu, dan penyelidikan pasaran banyak diamalkan oleh kontraktor dalam menentukan saiz mark-up. Malangnya, model bidaan tidak digunapakai sepenuhnya oleh kontraktor disebabkan mereka tidak mempunyai maklumat yang mencukupi untuk melaksanakannya secara berkesan dan kerumitan model-model tersebut.

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TABLE OF CONTENTS

CHAPTER

TITLE

PAGE

DECLARATION DEDICATION ACKNOWLEDGEMENTS ABSTRACT ABSTRAK TABLE OF CONTENTS LIST OF TABLES LIST OF FIGURES LIST OF APPENDICES

ii iii iv v vi vii xii xiv xv

INTRODUCTION 1.1 1.2 1.3 1.4 1.5 1.6 Introduction Statement of Problems Research Aim and Objectives Research Scope and Limitations Research Significance Research Methodology 1 4 6 6 7 8

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MARK-UP IN BIDDING SYSTEM 2.1 2.2 Introduction Bidding System 2.2.1 Negotiation Bidding 2.2.2 Competitive Bidding 2.3 The Challenges of Competitive Bidding System 2.3.1 The Price-Cutter 2.3.2 The Bidding Fool 2.4 Mark-up 2.4.1 Allowance for Overhead 2.4.2 Allowance for Contingencies 2.4.3 Allowance for Profit 2.5 2.6 2.7 The Difficulty in Determining a Mark-up Size Right Mark-up Size Factors Affecting the Mark-up Size Decision 2.7.1 Project Characteristics 2.7.2 Project Documentation 2.7.3 Company Characteristics 2.7.4 Bidding Situation 2.7.5 Economic Situation 2.8 Summary 11 12 13 14 17 18 18 19 20 22 23 24 25 26 30 32 33 35 37 39

BIDDING STRATEGIC IN THEORY 3.1 3.2 Introduction Bidding Model 3.2.1 Friedmans Model 3.2.1.1 Bidding Strategy Objective 3.2.1.2 Probability of Winning 3.2.2 Gates Model 3.2.2.1 Bidding Strategy Objective 3.2.2.2 Lone-Bidder 3.2.2.3 Two-Bidder Strategy 3.2.2.4 Many-Bidders Strategy 40 41 41 42 42 44 44 45 45 45

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3.2.2.5 All-Bidders-Known Strategy 3.2.3 OPBID 3.2.4 LOMARK 3.2.5 Carrs Bidding Model 3.2.5.1 Impact of Number of Bidders 3.2.5.2 Competitive Bidding and Opportunity Cost 3.2.6 Optimum Bid Approximation Model 3.2.7 Bids Considering Multiple Criteria 3.2.8 Winning over Key Competitors 3.2.9 DBID 3.2.10 Sequential Competitive Bidding 3.2.11 Self-explanatory Artificial Neural Network 3.2.12 Average-Bid Method Bidding Model 3.3 3.4 Utilization of Bidding Models Summary

46 46 48 48 48

49 49 50 50 51 51 52 53 54 55

RESEARCH METHODOLOGY 4.1 4.2 4.3 Introduction Stage 1: Preliminary Study Stage 2: Data Collection 4.3.1 Primary Data 4.3.1.1 Survey Questionnaires 4.3.2 Secondary Data 4.4 Stage 3: Data Analysis 4.4.1 One-Sample t-Test 4.4.2 Chi-Square Test 4.4.3 Reliability Analysis 4.4.4 Mann Whitney U Test 4.4.5 Importance Index 4.5 4.6 Stage 4: Writing-up Summary 57 57 58 58 59 59 60 60 61 62 62 63 64 64

DATA ANALYSIS 5.1 5.2 Introduction Company Profile of Contractor 5.2.1 Size and Grade of Contractors Company 5.2.2 Years and Project Taken by Contractors 5.2.3 Type of Project Usually Undertaken By Contractors 5.3 70 65 67 67 69

Factors Affecting the Contractors Mark-up Size Decision 71 5.3.1 Project Characteristics 5.3.1.1 One-sample T-Test 5.3.1.2 Chi-Square Test 5.3.2 Project Documentation 5.3.2.1 One-sample T-Test 5.3.2.2 Chi-Square Test 5.3.3 Company Characteristics 5.3.3.1 One-sample T-Test 5.3.3.2 Chi-Square Test 5.3.4 Bidding Situation 5.3.4.1 One-sample T-Test 5.3.4.2 Chi-Square Test 5.3.5 Economic Situation 5.3.5.1 One-sample T-Test 5.3.5.2 Chi-Square Test 5.3 6 Reliability Analysis 5.3.7 Ranking of Significant Factors That Affecting Mark-up Size Decision 81 71 72 72 73 73 74 75 75 76 76 77 78 78 79 79 80

5.4

The Importance of the Various Factors in Medium and Large Size Contractors Evaluation 5.4.1 Comparison of Factors between Medium and Large Size Contractors 87 85

5.5

The Current Practice in Contractors Mark-up Size Decision 5.5.1 Mark-up Size Taken By Contractors 90 90

5.5.1.1 Allocation of Components in Mark-up Size 91

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5.5.2 Utilization of Bidding Models in Mark-up Size Decision. 5.5.3 Practices in Determining Mark-up Size Decision 5.5.3.1 One Sample T Test 5.5.3.2 Chi-Square Test 5.5.3.3 Reliability Analysis 5.5.3.4 Ranking of Practices in Determining Mark-up Decision 5.5.4 Reason of Non Utilization of Bidding Models 5.5.4.1 One Sample T Test 5.5.4.2 Chi-Square Test 5.5.4.3 Reliability Analysis 5.5.4.4 Ranking of Reason for Non Utilization of Bidding Models 5.6 Summary 102 103 98 100 100 101 101 95 96 96 97 98

CONCLUSION AND RECOMMENDATIONS 6.1 6.2 Introduction Summary of Finding 6.2.1 Objective No. 1 6.2.2 Objective No. 2 6.2.3 Objective No. 3 6.3 6.4 6.5 6.6 Conclusion Research Limitation Recommendations For Further Studies Summary 105 105 106 106 107 108 108 109 109

REFERENCES APPENDICES

110 114

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LIST OF TABLES

TABLES

TITLE

PAGE

Table 2.1 Table 5.1 Table 5.2

Factors Affecting the Mark-up Size Decision Size of Contractors Company One Sample T-Test Result for Factors of Project Characteristic

28 68

72

Table 5.3

Chi-Square Test Result for Factors of Project Characteristic 73

Table 5.4

One Sample T-Test Result for Factors of Project Documentation 74

Table 5.5

Chi-Square Test Result for Factors of Project Documentation 74

Table 5.6

One Sample T-Test Result for Factors of Company Characteristic 75

Table 5.7

Chi-Square Test Result for Factors of Company Characteristic 76

Table 5.8

One Sample T-Test Result for Factors of Bidding Situation 77

Table 5.9

Chi-Square Test Result for Factors of Bidding Situation 78

Table 5.10

One Sample T-Test Result for Factors of Economic Situation 79

Table 5.11

Chi-Square Test Result for Factors of Economic Situation 80

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Table 5.12 Table 5.13

Reliability Test Result for Remained Factors Ranking of Significant Factors That Affecting Mark-up Size Decision

80

82

Table 5.14

Ranking on the Importance of Various Factors in Medium and Large Contractor Sizes Evaluation 86

Table 5.15

Comparison Factors between Medium and Large Size Contractors 87

Table 5.16

One Sample T-Test Result for Practices in Determining Mark-up Size Decision 97

Table 5.17

Chi-Square Test Result for Practices in Determining Mark-up Size Decision 97

Table 5.18

Reliability Test Result for Practices in Determining Mark-up Size Decision 98

Table 5.19

Ranking of Practices in Determining Mark-up Size Decision 99

Table 5.20

One Sample T-Test Result for Non Utilization of Bidding Models 100

Table 5.21

Chi-Square Test Result for Non Utilization of Bidding Models 101

Table 5.22

Reliability Test Result for Non Utilization of Bidding Models 102

Table 5.23

Ranking of Reasons of Non Utilization of Bidding Models 102

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LIST OF FIGURES

FIGURES

TITLE

PAGE

Figure 1.1 Figure 3.1

Flow Chart of Research Methodology Friedmans Method of Determining the Probability of Winning

10

43 47

Figure 3.2 Figure 3.3

Summary Flow Chart for OPBID Queuing Model Representation of Flow of Limited Resources

52 53 67 68 69 70

Figure 3.4 Figure 5.1 Figure 5.2 Figure 5.3 Figure 5.4 Figure 5.5 Figure 5.7 Figure 5.8 Figure 5.9 Figure 5.10 Figure 5.11 Figure 5.12

Hierarchical Structure of the Artificial Neural Network Sequence of Reliability Test Size and Grade of Contractors Years and Projects Taken by Contractor Type of Project Usually Undertaken by Contractors

Ranking of Significant Factors According To the Category 81 Overhead Cost with Different Mark-up Size Contingencies Cost with Different Mark-up Size Profit with Different Mark-up Size Others Cost with Different Mark-up Size Utilization of Bidding Models in Mark-up Size Decision Practices in Determining Mark-up Size Decision by Contractors 99 103 91 92 93 94 95

Figure 5.13

Reasons of Non Utilization of Bidding Models

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LIST OF APPENDICES

LIST

TITLE

PAGE

A B

Survey Questionnaire Confirmation Letter from Faculty

114 123

CHAPTER 1

INTRODUCTION

1.1

Introduction

Construction industry covers a wide range from sub-urban homes to multi-storey skyscrapers; from sidewalks to dam, tunnel, bridges, highway and rapid transit system that contributes substantially to the economic growth of country. Therefore, construction industry is an important economic sector of country and mostly contributes to 3%-6% of overall Gross Domestic Product. (Fahlin Abdullah, 2004).

In other words, construction industry is stimulated by the economy of the country. During economic development, it will generate additional demand for construction activities and construction markets as incomes rise. Construction activity increases as companies expand their existing facilities or build new premises, more dwellings are purchased and developers and institutions invest in property. Adversely, the development of construction industry will recess during the economic crisis and

recession. (Ofori, 1990). Therefore, construction industry will experience different structural changes from time to time because the economy develops over time.

In Malaysia, the current economic is more challenging since the global economic slowdowns which have been associated with the current crisis in the worlds financial system. The current crisis start from United States as the problems in the credit industry culminated in the bankruptcy filing of Lehman Brothers. (Levy, 2008). This phenomenon has left the construction industry facing its toughest challenges and directly influences the changes in the aspects of construction demands, systems of construction markets, and conditions of competition. Therefore, it is clear that construction industry in Malaysia today is entering a period of deflation.

Moreover, the rapid expansion of construction works after the economy recovered from the mid eighties recession led to an increased number of construction firms in the industry. Especially the implementation of Vision 2020 in 1991 was enhancing the growth of the construction industry in Malaysia. (Fahlin Abdullah, 2004). As at January 2008, a total of 63,465 local contractors were registered with CIDB under various grades. (CIDB, 2008). During this recession period, the construction market will became more competitive as the increase of construction firms at same time decrease of construction demand.

As a result, contractors today are facing more challenges in this fiercely competitive construction industry. Thus, the only possible way for a contractor to survive in todays highly competitive construction market are winning tenders and making profit. (Egemen and Mohamed, 2007). But is it possible for a contractor winning a tender simultaneously making a good profit? It is another new challenges for contractors since the widely uses of particular bidding method in construction industry, its competitive bidding.

In construction industry, there are two ways through which a contractor may be awarded a construction project, negotiation with an owner or competitive bidding. Nowadays, the construction industry becomes more competitive and low profit margin has great influenced by the widely uses of competitive bidding. Under the competitive bidding, the clients professional advisers will invite the contractors to submit tenders for the clients proposed development through the advertisement in the local, national and technical press. As a result, stack of the interested contractors will participant in the tender and increase the competitive in getting a job of the contractor. (Clough and Sears, 1994).

Besides, competitive bidding also influences the contractors profit margin due to the fierce competitive among the contractors in getting a job. According to Shash & Abul-Hani (1992) and Mohammed & Hong (2002), competitive bidding for construction projects usually awarded to the lowest responsible bidder. During this recession period, the lowest bidding prices are driven down by the competitive pressures. (Park, 1979). As a result, the contractors are forced to reduce their profit margin in bidding and tried to bid the project as low as possible to getting a job.

In this highly competitive construction business only the strong would survive. In such situation, contractors are forced to develop a strategy which can improve their competitiveness. (Shash and Abul-Hani, 1992). Park (1979) stated that even a bad plan is better than no plan at all. Thus, contractors are encouraged to setting a right mark-up as the common bidding strategies. This is because a right mark-up plays important role in competitive bidding in term to maximize the possible profit, at the same time keeping its bid at a competitive level. (Clough and Sears, 1994). As a result, a right mark-up size is able enhances the probability of the contractors to winning a tender, yet maximizes possible profit for the job.

However, how to determine the right mark-up size is not an easy task. The complexity of the issue is magnified by many influencing factors and the uncertain potential outcome of decision. This complexity is the source of the difficulty faced by many contractors in determining the right mark-up sizes which will assure them of winning sufficient projects with reasonable profits. (Shash and Abul-Hani, 1992).

1.2

Statement of Problems

In bidding process, the contractors are facing the two crucial decisions. The first is the decision of whether to bid or not to bid for a project, when an invitation has been received. If yes, the second decision is associated with the determination of the mark-up size. The mark-up size may vary from 5 to more than 20 percent of the job cost and represents an allowance for profit plus other items such as general overhead and contingency. However, to determine the mark-up size is not an easy task because it is affecting the probability of getting a job and its chances of making a reasonable profit. (Clough and Sears, 1994).

In determining a mark-up size, the contractor is facing two seemingly incompatible and contradictory objectives. He must bid high enough to make a profit yet low enough to get a job at the same time. It is difficult for a contractor to balance between both at the same time because a bid low enough to assure getting a job will invariably is too low to guarantee a profit. On the other hand, a bid high enough to assure an adequate profit margin usually has only a remote chance of winning the job. (Park, 1979)

According to Egemen and Mohamed (2007), right mark-up is the optimum balance between a bid price that is as practically low as possible to win the tender and as practically high as possible to maximize profit. But is it possible for contractor to balance between both at the same time? These unpleasant alternatives place the contractor in an extremely awkward position.

Since the mid-1950 years, many researchers have tried to eradicate the difficulty by developing mathematical models as bidding strategy to determine the right mark-up size. The two best-known and most widely accepted of these bidding strategies are known as the Friedman Model and the Gates Model. (Clough and Sears, 1994). However, the utilization of these mathematical models is not widely spread among contractors to aid them in determining the proper mark-up size while the majority uses subjective judgment. (Ahmed and Minkharah, 1988).

As discussed in earlier, the determination of the right mark-up is an essential task of all contractors. However, is it possible to determine the right mark-up that will help the contractor winning the bidding and at the same time maximize his profit? Neither mathematical models nor pure subjective judgment proved to be the answer to this difficult question.

Contractors need to use a more rational way to determine their mark-ups. This way of thinking is essential for all contractors because the awarding system depends basically on the lowest bidder criterion. Thus possessing a sound knowledge of the factors affecting the contractors mark-up size decision is imperative in identifying the right mark-up size in bidding. (Shash and Abul-Hani, 1992). Hence study should be carried out to investigate what are the factors affecting the contractors mark-up size decision.

1.3

Research Aim and Objectives

This study aims at statistically investigate factors affecting the contractors markup size decision in Malaysia. To achieve the aims, the following objectives are formulated:

Objective 1:

To determine the factors affecting the mark-up size decision by contractors.

Objective 2:

To analyze the perceived importance of the various factors considered in the mark-up size decision in different contractor sizes evaluation.

Objective 3:

To investigate the current practices in contractors mark-up size decision.

1.4

Research Scopes and Limitations

As earlier research, Ahmad and Minkarah (1988) studied the method by which contractors in the USA to determine the mark-up size. They found that contractors consider and evaluate many factors subjectively when they decide on mark-up sizes. In this research, they are identifying 31 factors affecting the bid mark-up decisions made by the top general contractors in the USA. Shash and Abdul-Hadi (1992) further developed this research and presented 37 factors affecting the bid mark-up size decision, with their relative importance to contractors operating in Saudi Arabia. Shash (1993) revised the questionnaire by Ahmad and Minkarah (1998) and identifying 55 potential factors affecting in tendering decisions by top UK contractors.

Shash and Abdul-Hadi (1993) conducted a further research regarding the effect of contractor size on mark-up size decision in Saudi Arabia. In this study, the 37 factors same as previous research (Shash and Abdul-Hadi, 1992) but contractor size had divided into large, medium and small. Thus, this research is initiated to investigate vary significant of the various factors in the different size of contractors evaluation. Dulaimi and Hong (2002) further developed this issue which investigated impact on contractor size on the contractors attitude to mark-up decision. They suggested that 40 factors influencing the contractor bid mark-up decision of large and medium-size in Singapore.

The author found out that Shash and Abdul-Hadi (1993) and Dulaimi and Hong (2002) had done the same research related to effect of contractor size on mark-up size decision. Hence, a similar study will simultaneous conducted by author in Malaysia. Study wills extent the existing research by investigating into the factors affecting the contractors mark-up size decision in Malaysia. The scope of this research by is limited to the medium and large-size contractors in Johor Bahru, Malaysia. Also, emphasis is given to the competitive bidding method and traditional procurement method in construction contracting.

1.5

Research Significance

i.

Guide contractors to focus their attention on the most important factors that affecting the mark-up size decision.

ii.

Help contractors to enhance their chances of assigning the right mark-up size to the right job.

iii.

Sets the foundation for the development of an expert system that will help a contractor decide on how much mark-up to add his cost estimate.

1.6

Research Methodology

a) Preliminary Study

This stage includes observations on the current issues and problems on construction industry. This was done by analysis of documents from various sources such as text books, journals, electronic media, internet, reports, conference papers and previous research. Discussion with the lecturers, senior and classmate also carried out in a purpose to gain a better understanding of the issues and problems to be studied. As a result, the researcher was able to determine the topic, main issues and problems, aims, objectives and scope of research.

b) Data Collection

This stage includes utilizing the questionnaires to collect the primary data. The questionnaire will be design which aim to investigate the different factors affecting the mark-up size decision and sent to medium and large-size contractors in local construction industry. Besides, the secondary data was gathered from books, journals, reports, articles, thesis, conference papers and internet.

c) Data Analysis

All of the data collected will be analyzed using computer software such as Statistical Package of the Social Sciences (SPSS). Analysis methods will be determined according to the suitability of each variable. Among the methods to be used are such as One-sample t-test, Chi-square test, Mann-whithey test, and so forth. As a result, the research objectives were presented in the form of graphs, charts and tables.

d) Writing-up

This stage includes the process of documentation together with summaries, conclusion, and some future research recommendations relevant to this topic.

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First Stage

Preliminary Study

Literature Review

Books Journals Internal Sources

Lecturers Seniors Classmates

Discussion

Determine Research Topic Determine Research Aim and Objectives Determine the Research Scopes and Limitations

Second Stage

Data Collection

Questionnaire Primary Data

Different Size of Contractors

Books Journal Thesis Seminar Papers Newspapers Internet

Secondary Data

Third Stage Reliability Test

Data Analysis

Data Interpretation Data Compilation

Significance Index Analysis

Final Stage

Writing-Up

Summaries, Conclusion and Recommendations Documentation Figure 1.1: Flow Chart of Research Methodology

CHAPTER 2

MARK-UP IN BIDDING SYSTEM

2.1

Introduction

There are two methods for contractor obtaining the job; negotiation with an owner or competitive bidding. Competitive bidding method is more challenging for contractor because it promotes the competitive and lowest possible profit. Furthermore, there is no remedy for the rejected bidder to recover its lost profits in competitive bidding law. (Cementeh, Inc. vs Fairlawn, 2006). Thus the only possible way for a contractor to survive in highly competitive constructions market is to win the tenders and making profit. (Egemen and Mohamed, 2007).

However, it is not easy for contractor to win a tender simultaneously making a fair profit. If the contractor bids low enough and get the job yet he cannot make a fair profit. On the other hand, if he bids high enough to make a fair profit but he may not be able to get a job. These unpleasant alternatives place the contractor in an extremely awkward position.
[Cementech, Inc. vs. Fairlawn, 109 Ohio St.3d 475, 2006-Ohio-2991.]

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Therefore, a right mark-up sizes which assure the win of project with reasonable profits are concerned by contractor. (Shash and Abdul-Hadi , 1993). Besides, it is important for the contractor to identify all factors affecting his mark-up size decision because they will improve the chances of applying and determining the right mark-up to the right project. (Abdul-Hadi, 1990).

This chapter will look into detail the mark-up in bidding system. There are several topics that will be discussed in this chapter, including the bidding system, the challenges of competitive bidding, right mark-up size and factors affecting the markup size decision. This discussion will begin with bidding system in following section.

2.2

Bidding System

Bidding is the usual mode of contractor in accomplishing construction work and enters into a contract with the owner. The contract will describes in detail the nature of the construction to be accomplished and the services that are to be performed. Therefore, the contractor is obligated to perform the work in full accordance with the contract documents, and the owner is required to pay the contractor as agreed. Bidding forms the preliminary stage in the formation of the contract. Different approaches to bidding have been practiced in construction. Despite the regulations imposed by authorities, there are two ways in which the bidding is practiced.

In bidding system, there are two ways which a contractor may be awarded a construction project; negotiation with an owner or competitive bidding (Clough and Sears, 1994) and this will be followed by a discussion of different types of bidding.

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2.2.1 Negotiation Bidding

Negotiation bidding is a contract to be negotiated with a single contractor nominated by the client instead of the competitive tendering. This may be done using bills of quantities or schedules of rates which instead of the contractor pricing the tender document on his own and submitting his tender to be accepted or rejected. In negotiation bidding, the rates and prices are discussed and agreed until eventually a total price is arrived at which is acceptable to both sides.

According to Clough and Sears (1994), it is common practice for a private owner to use the negotiated bidding to hand-pick a contractor on the basis of reputation and overall qualifications to do the job. For negotiation bidding, it is divided into the singlestage negotiation and two-stage negotiation.

i.

Single-stage Negotiation

In single-stage negotiation process, the negotiation usually will be conducted between the contractors senior estimator and the PQS (either a partner, associate or senior assistant). To facilitate the procedure, one party will usually price the tender document first of all, to provide a basis for the negotiation. On the other hand, the other party will then go through the rates and prices. When agreement on the whole is reached, a contract will be entered into between the client and the contractor. (Ramus, 1981).

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ii.

Two-stage Negotiation

The two-stage negotiation process has involves both competitive stage and negotiation stage. In the first (competitive) stage, tenderers are informed of the second stage intention and are asked to submit tender. During this stage, discussions with each of the tenderers may be conducted in order to elucidate their proposals and to enable the contractors to make suggestions with regard to design and/or construction methods. Having selected a contractor at the end of the competition stage, negotiation will follow on the basis of a detailed tender document, as in single stage negotiation. Again, when agreement is reached on the whole, the parties will enter into a contract for the construction work. (Ramus, 1981)

Two-stage negotiation is the method normally used to select a contractor to carry out a management contract, in which the general contractor does little or none of the construction work himself but organizes sub-contractors to do the work instead (Ramus, 1981)

2.2.2 Competitive Bidding

In the construction industry, competitive bidding is traditional and is widely used. This bidding method is normally awarded to the lowest responsible bidder and it is designed to promote competition in an attempt to ensure the lowest price for the project. In other words, competitive bidding is used to encourage efficiency and innovation by the participating contractors, thereby providing the owner with a constructed project of specified quality at the lowest possible price. (Clough and Sears, 1994).

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A contractor knows that lowering a bid price increases the probability of being awarded the project. Therefore, they are trying to reduce their profit margin thereby to increase their competitiveness. As a result, this phenomenon will cause the fiercely competitive among contractors and lowest possible profit margin of contractors.

It has two different types of competitive bidding are used such as open tendering and selective tendering. (Ramus, 1981)

i.

Open Tendering

Open tendering is initiated by the clients architect or quantity surveyor advertising in local newspapers and/or the technical press. They are inviting contractors to apply for tender documents and to tender in competition for carrying out the work. Usually a deposit is required in order to discourage frivolous applications, the deposit being returnable on the submission of a bona fide tender. (Ramus, 1981). Nonetheless, the deposit is no longer practiced in government project in Malaysia.

In open tendering, an opportunity is provided to more participating contractors and it secure maximum benefit from competition. For advantages, the open tendering gives the opportunity of a capable firm to submit a tender which might not be included on a selected list. However, there is a danger that the lowest tender may be submitted by a firm inexperienced in preparing tenders (particularly if bills of quantities are used) and whose tender is only lowest as a consequence of having made the most or the largest errors.

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In addition, there is no guarantee that the lowest tenderer in open tendering is sufficiently capable or financially stable. Although obtaining references will provide some safeguard, there may be little time in which to do so. As a result, the total cost of tendering is increased as all the tenderers will have to recoup their costs eventually through those tenders which are successful. The result can only be an increase in the general level of construction costs. (Ramus, 1981)

ii.

Selective Tendering

Under selective tendering, a short list is drawn up of contractors who are considered to be suitable to carry out the proposed project. In the latter case the contractors may be invited, through suitably-worded advertisements in the press, to apply to be considered for inclusion in the tender list. The selective tendering gives the client the opportunity to exclude any firms thought to be unsuitable and to limit the number of tenderers. At the same time, it gives any firm the opportunity to apply for the purpose to be considered for the project.

Ramus (1981) recommended that the number of tenderers should be limited between five and eight, depending on the size of the contract. The tenderers on the list are reputable, well-established and suitable for the proposed work. The selective tendering ensures that only capable and approved firms submit tenders. Also, it tends to reduce the aggregate cost of tendering. In selective tendering, the absence of competition usually results in a higher price for the project. Therefore, the cost level of the tenders received will be higher, due to being less competition and also to the higher caliber of the tenderers. (Ramus, 1981)

17

As discussed in earlier, the competitive bidding is designed to promote competition in an attempt ensure the lowest price for the project. For this reason, it is more challenge for contractors dealing if compared to the negotiation bidding. In this research, we are focus to the situation and environment of competitive bidding. To gave more understand about it, we will further discuss the challenges of the competitive bidding system in next sections.

2.3

The Challenges of Competitive Bidding System

Major construction work is obtained through competitive bidding. This practice has been generally criticized by many contractors as the basic challenges of the construction industry. The competitive bidding is characterized as highly competitive and lowest profit margin. If the contractor bids low enough and get the job yet he cannot make a fair profit. On the other hand, if he bids high enough to make a fair profit but he may not be able to get a job. These unpleasant alternatives place the contractor in an extremely awkward position. Under these conditions there is little wonder that profit margins are low in construction contracting if the contractors are sacrificing their profit margin to win the bidding.

The most challenge in competitive bidding is the degree and type of competition brought about by the contractors themselves which affecting profits margin in the competition. There are two kinds of contractors who probably do more harm to the industry than any other. These are (1) the price-cutter and (2) the bidding fool. (Park, 1979). Each is illustrated further in the following sub-section.

18

2.3.1 The Price-Cutter

According to Park (1979), the impact of the low-mark-up cause the millions of dollars in profits sacrificed each year. The price-cutter can be defined as a job taken at a price closely approaching the direct job cost and not benefits. The contractor who gets the job makes nothing at his minimal price, and those who bid the job without getting the additional costs are synonym to preparing the unsuccessful bids. The effect on the construction industry as a whole is worse than if the jobs were never offered in so low bid prices, for it results only in additional costs with no compensating profits. (Park, 1979). This phenomenon affects the competitiveness among the bidders and it is impossible mission of contractor to tendering the project with compensating profits.

2.3.2 The Bidding Fool

The bidding fool is contractors who feel obligated to bid every job. Such situation will contributed to the profit squeeze by increasing the intensity of competition on each job they bid, thereby lowering the price at which the job is finally let. It is not only possible, but often happens, that as total construction volume increases and the number of contractor decreases, competition becomes even more intense than before. (Park, 1979).

Only the average numbers of bids per job need increase to bring about this situation, the result of each contractor increasing the number of bids he submits. The intensity of competition encountered on a job depends solely on the number of bids on that one job, not on the total number of contractors in business. (Park, 1979). As a result,

19

this phenomenon affects the competitiveness among the bidders due to solely on the number of bids.

As mentioned in this section, its very challenging of the competitive bidding system in construction industry. To be competent in this fiercely competitive, the contractor must dealing with the mark-up that determined the success or failure of bidding. (Adrian, 1982). Thus, next section discusses mark-up in detail.

2.4

Mark-up

During the estimating process, a contractors estimating staff is responsibility to establish the direct costs which represent the largest cost component of the project. The direct costs were including the job-site labor costs, equipment costs and temporary or put-in-place materials costs. (Adrian, 1982). Then the mark-up will be added to the estimated direct cost of construction at the close of the estimating process. (Clough and Sears, 1994).

The definition of mark-up is an amount added to the cost price to determine the selling price. Also, the amount added by a seller to the cost of a commodity to cover expenses and profit in fixing the selling price. In construction industry, the mark-up added in term to bidding a project contract. The mark-up size is representing the different between his winning or losing the project contract in the competitive bidding procedure. (Adrian, 1982).

20

According to Clough and Sears (1994), the mark-up is customarily determined as a percentage of the cost and it may vary from 5 to more than 20 percent of the job cost. The mark-up usually contains three elements; an allowance for company overheads, an allowance for contingencies and an allowance for profit. (McCaffer and Baldwin, 1984).

Mark-up = Overheads + Contingencies + Profit

2.4.1 Allowances for Overhead

Most overhead costs relate generally to the firms overall operations rather than to specific jobs or work functions. A portion of overhead costs will be relatively stable and other overheads may vary according to the firms capacity to do business, the amount of work bid, or the sales volume achieved. And still other overheads can be related to the combination of two or more different factors.

Overhead costs are largely independent of the amount of work actually done or the total sales volume actually achieved. The amount of overhead cost incurred is determined by the decisions of management; these costs are then accumulated with time, according to the obligations that management has established. (Park, 1979).

Overhead costs may be defined generally as all costs incurred by the contractor that cannot be attributed directly to specific functions; these usually include all costs other than direct labor, materials, and equipment. According to Park (1979), overhead costs fall into two categories:

21

1. Job overheads or indirect expenses.

2. General overheads.

i.

Job Overheads or Indirect Expenses

Job overheads are the indirect expenses that are caused directly by individual jobs, but are not directly chargeable against any specific phase of the work. These job overheads typically include items such as welfare fund payments, apprentice training, social security, workmens compensation, unemployment taxes, miscellaneous payroll related expenses, surety bonds, direct supervision, building permits, tool and equipment expenses, temporary buildings and enclosures, sanitary facilities, utilities, sales taxes, and many others.

Job overheads can be handled in different ways. Many contractors add job overheads to their estimates as some percentage of the estimated direct job costs. For contractors who perform essentially the same type of work all the time, and who maintain a stable work load, this method is generally satisfactory.

However, most contractors are confronted by varying workloads and different types of jobs, and a percentage add-on simply adds another element of uncertainty to the job. As long as costs can be identified and attributed directly to certain jobs, these job overheads should be estimated with the same care and accuracy as the other direct job costs and included as such in the bid. (Park, 1979).

22

ii.

General Overheads

General overhead expenses are those which cannot be charged directly to a single job. These include the costs of maintaining an office or shop, such as rent, telephone and other utilities, property taxes, interest, insurance, salaries of office personnel (such as secretaries, bookkeepers, and estimators), association dues, sales and promotion expenses, office supplies, depreciation and management salaries.

Most of these general overhead costs must be paid regardless of the amount of work done or contracts received, although their magnitude may vary somewhat with the amount of business done or with the number and size of the contracts. Such expenses are continuous and can be controlled only through managements decisions to curtail them.

General overhead costs can be either fixed or variable in nature. In general, the fixed elements of overhead involve the resources for obtaining, or trying to obtain, jobs. The variable or semi-variable elements are related to the actual amount of work that the firm either gets or tries to get. (Park, 1979).

2.4.2 Allowances for Contingencies

In construction industry, contractors are required to assess cost and price of a product before production and this process involves high risks due to the uncertainties of the national construction market, the national and international economies, the weather, ground conditions, and so on. (Kwakye, 1994). When the assessemnt places the risk of

23

the uncertainties entirely on the contractor, consideration must be given to the inclusion of a contigency allowance in the mark-up amount to be included in the bid. (Clough and Sears, 1994).

Contingency is an amount added to an estimate to allow for additional costs for the uncertainities thing. Contingecy cost cover the costs that may result from incomplete design, unforeseen and unpredictable conditions, or uncertainties within the defined project scope. The disccusion of allowances for profit will be discussed in next sections.

2.4.3 Allowances for Profit

The profit in a job bid represents the minimum acceptable return on the contractors investment. Profit more linked with the risk and uncertainty. Typically, the more risk there is in a business venture or industry, the higher the potential profit. In construction industry, the contractor is asked to take a significant risk so that his profit margin should be relatively high. However, this potential is tempered by the relatively fierce competition that exists between contractors. As an industry approaches perfect competition, the potential profit margin of the industry diminishes. (Adrian, 1982).

As mentioned in earlier, the mark-up are consists of the overhead cost, contingencies cost and profit. But it is difficult to balance each other element of mark-up in order to determine a right or appropriate mark-up size. Therefore, the difficulty in determining a mark-up size is going to be discussed in next section.

24

2.5

The Difficulty in Determining a Mark-up Size

According to Park (1979), overhead costs and contingencies cost as the cost for some contractors feel can be reduced and simply reducing their prices on jobs. This thought is a dangerous illusion because as these costs reduced, they are reducing the price bid for a job cuts profit, not overhead and contingencies costs. (Park, 1979).

That mean, overhead and contingencies cost are inevitable to changes thus only profit margin will first considered changes in mark-up size. In other words, change of mark-up size is the major factor affecting the profit margin of contractor. As we know that the objective of contractors is to maximize the profit margin as the return of their investment. (Clough and Sears, 1994). This scenario places the contractors in the dilemma situation which change the mark-up size in order to change profit margin which contrary their objective.

A contractor can increase his mark-up size but by doing this the contractor is minimizing his chances of being the lowest bidder. On the extreme, the contractor can minimize his mark-up size so that his chances to win are maximized; however, this situation may and will cause loss which is not the objective of the contractor. (AbdulHadi, 1990). That means if the contractor includes too large profit, the bid may not qualify to win the project. On the other hand, if he/she includes too low profit in his bid to ensure winning the contract, this may be unprofitable which actual costs may exceed the contractors estimated costs to the extent that they exceed his profit. Such a situation would result in the contractor losing money on the project. (Adrian, 1982).

Under these conditions, it seems that contractors are faced with two extremely unpleasant alternatives: (1) an excellent chance of making no profit with a low bid, or (2)

25

no chance at all of making a high profit with a high bid. These unpleasant alternatives place the contractor in an extremely awkward position. (Park, 1979). Therefore, the contractor should make a trade-off between the mark-up size and the probability of winning the contract. (Abdul-Hadi, 1990). This will be followed by a discussion of the right mark-up size in next section.

2.6

Right Mark-up Size

According to Egemen and Mohamed (2007), a contractor who intends to survive in this competitive construction business is competent to making a right mark-up size in their bidding. Without right mark-ups, selecting right projects will be meaningless. (Egemen and Mohamed, 2007). That mean the mark-up size which profitability are important in bidding whatever projects are selected. Therefore, right mark-up size was very important in bidding in term of profitability at the same time high competitiveness. (Clough and Sears, 1994). There are many explanation and definition of the right mark-up size as discuss below:

Egemen and Mohamed (2007) explain that right mark-up size is the optimum balance between a bid price that is as practically low as possible to win the tender and as practically high as possible to maximize profit. Park (1979) determines the right mark-up size is the result in the highest possible profit obtainable under the existing competitive situation.

According to Clough and Sears (1994), right mark-up size is potential to maximum possible profit, at the same time keeping its bid at a competitive level. Shash

26

and Abdul-Hadi (1993) said that right mark-up sizes which will assure them of winning sufficient projects with reasonable profits.

As briefly discussed in above, all of the right mark-up size has similar explanation and definition. It can be summary that right mark-up size is the highest profitability in bidding at the same time under the highest competitive level. However, determining the right mark-up size is not an easy task.

According to Abdul-Hadi (1990), if a contractor can determine and identify all the factors that affect his mark-up, then the chances of applying the right amount of mark-up to the right project will be much improved. Therefore, there should be considered concern by contractor in determining the right mark-up size. Next, the factors affecting the mark-up size is going to discusses.

2.7

Factors Affecting the Mark-up Size Decision

Ahmad and Minkarah (1988), Shash and Abdul-Hadi (1992) and Shash (1993) suggested that at thorough investigation of the underlying factors affecting the bid markup decision is essential before attempting to develop a realistic bidding strategy. Therefore, many factors must be considered by contractors in deciding a mark-up figure, and each can have an influence on the value chosen. The size of the project and its complexity, its location, provisions of the contract documents, the contractors evaluation of the risks and difficulties inherent in the work, the identity of the owner and/or the architect-engineer, and other intangibles can have a bearing on how a contractor marks up a particular job. (Clough and Sears, 1994).

27

As earlier research, Ahmad and Minkarah (1988) identified 31 factors affecting the bid mark-up decisions made by the top general contractors in the USA. Shash and Abdul-Hadi (1992) further developed this research and identifying 37 potential factors affecting a contractors decision on proper mark-up size. These factors are classified into five categories such as project characteristics, project documents, company characteristics, bidding situation and economic situation.

Shash (1993) revised the questionnaire by Ahmad and Minkarah (1988) and identifying 55 potential factors affecting in tendering decisions by top UK contractors. In this research, the result of 10 most important factors affecting the mark-up decision is followed by: degree of difficulty, risk involved owing to the nature of the work, current work load, need for work, contract conditions, anticipated value of liquidated damages, owner/promoter client identity, past profit in similar projects, completeness of the documents and project size.

Recently, Dulaimi and Hong (2002) suggested that 40 factors influencing the contractor bid mark-up in Singapore. These factors have been grouped under five broad categories describing project characteristic, project documentation, company

characteristics, bidding situation and economic environment. Table 2.1 is shows the listing of all of the factors affecting mark-up size decision which determined by several researchers. Table 2.1: Factors Affecting the Mark-up Size Decision
Factors Affecting Mark-up Size Decision Project Characteristics Size of contract/project Project type Duration Project cash flow Shash & Abdul-Hadi (1992) Shash (1993) Dulaimi & Hong (2002)

28

Type of equipments required Location of project Identity of owner Degree of difficulty Degree of hazard/safety Job related contingency Risk involved nature work Job start time Type and number supervisory person required Project Documents Type of contract Completeness of documents Contract condition Use of nominated subcontractor Anticipated value of liquidated damages Contractor involved design phase Design quality Qualification requirements Insurance premium Owner special requirement Designer (A/E) Company Characteristics Availability of required cash Uncertainty in cost estimate Confidence in work force Strength in industry Availability of qualified staff Need for work Experience in such projects Establishing long relationship with client Past profit in similar jobs

29

General overheads Current workload Reliability of subcontractors Portion subcontracted to others Public exposure Bidding Situation Required bond capacity Competition Number of competitors Identity of competitors Tendering method Tendering duration Time allowed for submitting bids Time of bidding (season) Reliability of company cost estimate Availability of other project Risk in fluctuation in material prices Risk in fluctuation in labour prices Bidding document price Prequalification requirements Economic Situation Risk involved in investment Availability of equipment Overall economy (availability of work) Quality of available labor Availability of labour Rate of return Government division requirements Tax liabilities Policy in economic use of building resources Policy in production cost savings

30

2.7.1 Project Characteristics

According to Shash and Abdul-Hadi (1992), project characteristics includes all qualities that describe the project such as size, owners identity, duration, project cash flow, type of equipment required, location, and job start time. However, it is slightly different from Dulaimi and Hong (2002) who suggested that project characteristics has included the degree of difficulty and degree of safety.

The size of a project is found to be the most heavily contemplated factor among the project characteristics. It seems that the larger the size of project is, the more attractive it is to contractors. The attractiveness of a large size project may arise from its big contract price and long construction duration. The large project size will contribute positively and substantially to annual business volume and al1ows sizeable monthly cash inflows to a contractor. (Shash and Abdul-Hadi, 1992).

Besides, the project cash flow also considered heavily the mark up size decision. Project cash flow reflects the contractors need for cash. Monthly cash inflow will help a contractor to pay the monthly wages of the contracted imported work force and other permanent employees. Also, the monthly inflow will increase cash availability to a contractor giving him an economic leverage to compete for other projects. (Shash and Abdul-Hadi, 1992). Therefore, contractors can reduce the mark-up size because they not to rely on borrowed funds to make up the shortfall of cash flow.

The duration of a project also should be considered in the determination of a mark-up size. Given two projects of equal value but different expected duration, the project with the longer duration should have a higher total profit due to the time value of money and opportunity costs. (Adrian, 1982). Also, the long construction duration will

31

allow a contractor to keep his resource in revenue generating state for, at least, a period extending over the project duration, hoping that a more prosperous economy will emanate before the completion of the project. (Shash and Abdul-Hadi, 1992).

In addition, equipment required by a project and equipment availability also plays a heavy role in determining the mark-up size for the project. A contractor who is deciding on a mark-up size evaluates equipment required by the project against equipment available in his own. In a situation where a contractors own equipment make up a major portion of the required equipment, he may trade off high mark-up size with setting his available equipment in a revenue generating condition. On the other hand, this factor might have heavier weightage on the mark-up size decision in a situation where the majority of the contractors equipment are inactive in the storage yard. (Shash and Abdul-Hadi, 1992). Therefore, contractors need to raise the required loan to purchase or rent the equipment required by the project. (Kwakye, 1994).

The project location also plays a heavy role in mark-up size determination. The heavy importance is given to the project location may originate from its potential effect on a contractors competitive strength. A contractor bidding for a project that is located outside his business area is assumed to be in a weak competitive position. He/she has to compete against local contractors who have already established good business relationship with local suppliers. Also, he may have to reflect the cost of transporting and accommodating his imported work force in his bid price. Thus, project location has heavier influence on a contractors mark-up size decision. (Shash and Abdul-Hadi, 1992).

Moreover, the identity of client and professional advisers of project also need considered in the determination of a mark-up size. If the contractor has had previous dealings with the client and clients professional advisers, then he or she may be in a

32

better position to predict the level of risks that may confront him or her. If experience has shown that the client does not pay promptly and clients professional advisers are noted for the late issue of project information or disruptive variations, the contractor may decide to increase the project overhead costs in his mark-up size in order to mitigate this risk. (Kwakye, 1994).

The degree of difficulty or complexity job also should be considered in the determination of a mark-up size. (Dulaimi and Hong, 2002). If the complexity of the project requires more technical and managerial input, contractors may consider either employing or hiring consultants to undertake some of the technical and managerial functions. In such situation, contractors will determine the high mark-up size in his bid price. (Kwakye, 1994). Besides, the degree of safety and hazard risk also need to be considered in determination of mark-up size. According to Smith (1986), the greater the degree of risk and uncertainty involved in the job, the greater the profit margin that will be expected by the management. Thus, contractors have heavier weightage on the markup size decision in the highest risk of safety and hazards.

2.7.2 Project Documentation

According to Shash and Abdul-Hadi (1992), the project documentations category constitutes all factors and characteristics of the bidding documents such as type of contract, design quality, owner special requirements and designer (A/E). Besides, Dulaimi and Hong (2002) suggested that the project documentation includes the type of procurement method, completeness of document, owners special requirement, use of nominated subcontractor, anticipated value of liquidated damages, risk in fluctuation in materials price and percentage of insurance premium.

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In project documentation, type of contract plays an important role to determine the mark-up size. According Shash and Abdul-Hadi (1992), the lump sum and the unit prices contracts are usually used in competitive bidding. This type of contract is rigid and inflexible for changes. As we know that changes are very expensive for the owner and they usually bring extra cash to the contractor. Also, both types of contracts transfer the construction risk from an owner to the contractor. (Shash and Abdul-Hadi., 1992). Therefore, contractors are deciding to increase the contingencies costs in their mark-up size in order to mitigate these risks and uncertainties.

2.7.3 Company Characteristics

Company characteristics include factors relevant to the company such as need for work, current work load, availability of required cash, confident in work force, reliability of subcontractors, portion subcontracted to other, and so on. (Shash and Abdul-Hadi, 1992). However, Dulaimi and Hong (2002) suggested that company characteristic should include the experience in similar project and established long relationship with clients.

The current work load and the need for work are taken into account interdependently in determining the proper mark-up size for any project. These factors should be considered by contractor with the surrounding economic situation through the availability of work condition. It looks as though in a depressed economy where the availability of work is very scarce, the need for work may be considered the dominating factor on mark-up size decision. However, in a recessive economy where a contractors current load is low, he puts less weight on the need for work in the mark-up size decision. The weightage of the need for work may he reduced to minimal when the

34

contractors current work load is high and work is available. (Shash and Abdul-Hadi., 1992).

In addition, availability of required cash of company also should be considered in the mark up size decision. If the required cash is available to a contractor, he will have the control in setting the interest rate for using the money. But, if the required cash is not readily available, the contractor will approach a bank for a loan. In this case the interest rate is dictated by the bank. In addition, obtaining a bank loan may freeze a contractors short and/or long term assets that are held against the loan as collateral. (Shash and Abdul-Hadi, 1992).

The availability of qualified staff also need considered during mark-up size decision. This factor is not considered by large and medium contractors in the determination of the mark-up size, but for small contractors it is a major input to their mark-up decisions. Large contractors may attract qualified staff to join their organizations for the better pay, benefits and recognition they offer. It seems that small contractors cannot compete with large ones in attracting qualified staff to join their firms. Consequently, they may hire less qualified staff and recognize this in the determination of their mark-up. (Shash and Abdul-Hadi, 1993).

The experience of a contractor in similar projects also needs to be considered in the determination of the mark-up size. The contractors past experience may provide an ability to foresee the project requirement more clearly which will help the contractor in putting proper estimate, plans and schedule. (Shash and Abdul-Hadi, 1992). In such case, the contractor can determine an optimum mark-up size with easily. However, if a contractor inexperienced in new project, he or she will evaluate the project as risky and therefore increase the mark-up size as a contingency cost. (Adrian, 1982).

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Moreover, confidence in work force also considered when deciding mark-up sizes for projects. For large and medium contractors do not consider this factor when deciding on their mark-up because they have established successful programmes for selecting, orienting, training and motivating their expatriate work force. These programmes may have created a sense of commitment and loyalty in the attitudes of the work force towards the organization. On the other hand, small contractors may not have such programmes. The absence of such programmes may have caused them to develop a work force that could be characterized as dissatisfied and incompetent in their jobs. The small contractors may find it is easier to make up for their level of confidence in their work force in the mark-up size rather than seeking remedial actions. Such situation indicates that small contractors accentuate the influence of this factor on their mark-up. (Shash and Abdul-Hadi, 1993).

Another consideration to determine the mark-up size is the past profit in similar job. By considering past profit rates, the contractor may be able to formulate his desired future profit rate. (Adrian, 1982). That means that the contractor can determine the best and optimum mark-up size which maximize the possible profit and at competitive level. Besides, establishing long relation with clients is also considered by contractors when they want to determine the mark-up size. This factor may be taken into account to satisfy a contractors long term business plan. (Shash and Abdul-Hadi, 1992).

2.7.4 Bidding Situation

According to Shash and Abdul-Hadi (1992), bidding situation includes all factors operating in the awarding of contract situation. This category includes factors such as competition, required bond capacity, time of bidding, bidding document price,

36

prequalification requirements and time allowed for submitting bids. Besides, availability of other project, identity of competitors and number of competitors also need identify in this factor. (Dulaimi and Hong, 2002).

Competitive nature of the construction industry especially in the competitive bidding situation should be considered by contractors when deciding the mark-up size. According to Adrian (1982), the lowest bidder prices decreases as the number of competitors on a project increases. In such competitive situation, contractors need to minimize his or her mark-up size so that the chances being lowest bidder are maximized. Latter, he or she just can winning over the competitors and success biding the project. (Abdul-Hadi, 1990).

The required bond capacity is need to be considered in the mark-up size decision. The bond is usually in the form of cash or a bank guarantee. In any case the contractor should commit an amount equal to the bond capacity until the expiration of the warranty period. The commitment of cash reduces the contractors economic leverage. Therefore, this factor may have heavier influence on a contractors mark-up size decision when availability of cash in a contractors account is limited. (Shash and Abdul-Hadi, 1992).

Besides, the bidding document price also needs to be considered in mark-up size determination. Project drawings and specifications are usually sold to the interested contractors for non-refundable consideration. Only the contractor who wins the contract is able to recover the document price given that they incorporate it as a cost item in the bid. As we know that the amount paid for bidding documents for projects undertaken by large and medium contractors is high enough to influence the mark-up size decision. For small contractors, this factor has no influence on the determination of mark-up size. (Shash and Abdul-Hadi, 1993).

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The pre-qualification requirement also needs to be considered when deciding on their mark-up. The pre-qualification requirements may provide these contractors valuable information in evaluating the level of competitiveness. If the pre-qualification requirements limit the contractors who can bid for the project to a certain class or grade, contractors may have the ability to reasonably estimate the number of bidders and their identity. This information may help them in setting the optimum mark-up that maximizes expected profit and the chances of winning the project. (Shash and AbdulHadi, 1993).

In addition, the time allowed for the preparation of bids has a great importance in the determination of the large contractors mark-up. It appears that large numbers of these contractors believe that the period allowed for submitting bids is not enough to prepare an accurate estimate. Therefore, they are aware of the likelihood of producing an inaccurate estimate so that they consider this factor when determining their mark-up. (Shash and Abdul-Hadi, 1993).

2.7.5 Economic situation

Shash and Abdul-Hadi (1992) and Dulaimi and Hong (2002) stated that the economic situations category involves all economic indicators that may operate on the project. Indicators such as overall economy, labor and equipment availability, government regulation, risk of investment and anticipate rate of return on project are the elements of this category.

38

The overall economy is important in determining the mark-up size decision. A study of the economic indicators will enable the contractor to forecast whether the economy is heading toward a boom or recession. If the indications are that recession is imminent, which may slow down construction activities, and then the contractor would price keenly to win the contract. In such case, determination to win means lower percentage mark-up and hence reduced profit margin. (Kwakye, 1994).

In addition, anticipate rate of return on project also affecting the mark-up size decision. If a project has a high anticipate rate of return, the contractors may minimize their mark-up size to winning the project. In such case, they are considering the long term profit margin incurred on the project in future.

The risks involved in investment also need to consider in mark-up size decision. After the contractual and construction risks assessed, the contractors are expects to be rewarded for accepting such risks with a reasonable return and mark-up size. Generally, the greater the degree of risk and uncertainty involved in the project, the greater the profit margin that will be expected by the management. As a conclusion, where an element of risk is attached to an investment, it follows that a higher rate of return would be required to make it worthwhile.

According to Shash and Abdul-Hadi (1992), the availability of the labor force is low contributed to mark-up size decision. A contractor may obtain the required work force from his own imported labor and or from other contractors imported labor. It is because contractor who does not win a contract functions as a labor supplier, supplying surplus labor, for other busy contractors.

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2.8

Summary

This chapter had discussed the challenges of competitive bidding, right markup size and factors affecting mark-up size decision. In competitive bidding, to

determine a right mark-up size is not an easy task because it is two unpleasant alternatives place the contractor in an extremely awkward position. If the contractor bids low enough and get the job yet he cannot make a fair profit. On the other hand, if he bids high enough to make a fair profit but he may not be able to get a job. Therefore, all factors affecting the mark-up size decision should be considered concern by contractor in order to improve the chances of applying the right mark-up to the bidding.

CHAPTER 3

BIDDING STRATEGIC IN THEORY

3.1

Introduction

As briefly discussed in the previous topic, mark-up is important in determining the success or failure of competitive bidding. (Adrian, 1982). However, to determine the right mark-up is not an easy task. Furthermore, competitive bidding is characterized as highly competitive in construction industry. As Park (1979) said that the more competitive an industry, the greater the need for making sound strategic decisions. The need is greater in construction contracting especially competitive bidding, where competitive pressures are probably more intense that in any other industry.

According to the Park (1979), even a bad plan is better than no plan at all. Thus, contractors are encouraged to use the bidding strategies to improve their bidding effectiveness, thereby to assist them in selecting the right mark-up figure that will maximize its profits over the long term determine. Therefore, this chapter will look into

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detail in bidding model as the bidding strategies in theory. This discussion will begin with bidding model and thereafter utilization of bidding model in following section.

3.2

Bidding Model

Since the mid-1950 years, many researchers tried to eradicate the bidding difficulties in construction industry by developing mathematical or statistical models. The two best-known and most widely accepted of these bidding strategies are known as the Friedman Model and the Gates Model. The Friedman Model is the simplest of the two and assumes that all bidders are acting independently of one another. This means that the probability of underbidding a group of competitors equals the product of the probabilities of underbidding each competitor separately. The Gates Model assumes that bids from competing contractors are not totally independent of one another and procedures are applied to take this into account. (Clough and Sears, 1994). Also, other approaches of bidding models will be briefly discussed in the following section.

3.2.1 Friedmans Model

Friedman's competitive bidding strategy is the pioneering work in the study of competitive bidding. In this bidding model, the lower limit of bids is generally set by the estimated direct cost of a given project. The relationship between the bid price and the estimated cost depends on several factors, such as the contractors need for work, the minimum acceptable markup, and the maximum he thinks he can get. In addition, every

42

contractor should realize that his chances of being low bidder have a direct relationship to his bid. (Park, 1979). Therefore, the bidding strategy of Friedmans Model should be well understood as discussed in following section.

3.2.1.1 Bidding Strategy Objective

There are several objectives in the Friedmans model such as to maximize the total expected profit, minimize the total expected losses, or to obtain the project even at a loss. One of the objectives that chose as the basis of his bidding strategy is to maximize the total expected profits. This objective is the common one for any company and because it is "one of the easiest to handle in a bidding situation of this type". (Friedman, 1956)

3.2.1.2 Probability of Winning

To determine the probability of winning can be quite difficult. In Friedman model, one way to determine the probability of winning is to examine the bidding patterns of the competition in relation to the contractor's own bidding pattern. Any competitor's bidding pattern can be understood by examining the ratio of the competition's bid to the contractor's cost for past projects. (Friedman, 1956)

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A probability distribution of that ratio can be constructed and determine the probability of winning with a bid of x. The probability of winning is equal to the area under the distribution curve greater than the ratio of x for the current project to C for the current project. For more than one competitor, the probability of winning with a bid x is the product of the probability of defeating each of the competitors as shown in Figure 3.1. (Friedman, 1956)

Figure 3.1: Friedman's Method of Determining the Probability of Winning

In Friedmans concept, if all the competitors are not known then the probability of winning should be determined as average bidder. The probability distribution of the ratio of the average competitor's bid to the contractor's costs is determined by fitting a curve to the set of ratios of the opposition's bid to the contractor's costs for past projects.

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3.2.2 Gates Model

Gates model is dependent on the pioneering work of Friedman. The basic assumptions of both models are the same, but they are differing on two points. The first point of disagreement is the assumption of independence. Gates model does not assume that bid-to-cost ratios are independent. It does, however, assume that outcomes of different competitors are dependent. This assumption is more realistic, but when applied to the bidding model it ignores a very important aspect of bidding in real practice. (Sparks, 1999).

In this model, Gates assumes that if there are seven competitors the chance that any one of them will be the winner is 1/7. The study of bidding behavior in reality assures us that this assumption is not valid because the lowest bidder is not randomly selected, as implicitly assumed by Gates. Therefore, the bidding strategy of Gates Model should be well understood as discussed in following section.

3.2.2.1 Bidding Strategy Objective

This model is same with Friedman' model which based on the main objective of maximizing the profits for a job. There are six different strategies for use by contractors in different situations. All the strategies are calculates the expected value of the project for different bid amounts in determining the probability of winning. (Gates, 1967).

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3.2.2.2 Lone-Bidder

In the situation that the contractor finds that he/she is the only bidder, the contractor just only estimates the probability of winning. The probability of winning will be based on the contractor's estimate of the highest bid that the owner will accept. The bid with the greatest expected value should be submitted, thereby maximizing the profits for bidding situation. (Gates, 1967).

3.2.2.3 Two-Bidder Strategy

If the contractor is one of two bidders for a project, the contractor should carefully estimate the probability of winning with certain bid amounts. After discovering that there are only two bidders, a contractor might raise his bid because there is less competition. Using the game-theory approach, the contractor can determine what bid amount to submit to maximize the profit for the job. (Gates, 1967).

3.2.2.4 Many-Bidders Strategy

An average bidder will be representing all the other competitors in this situation. Using historical data, the contractor studies his bid in relation to the low bidder by subtracting the ratio of the low bid to the contractor's bid from one. This percentage implied how much the contractor would have needed to reduce his bid in order to be the

46

low bidder. Then, a cumulative probability distribution can create to determine the probability that certain ratios of his bids to the low bids will occur in the future. From that distribution, the contractor can develop a relationship between the probability of winning and the amount of the bid. (Gates, 1967).

3.2.2.5 All-Bidders-Known Strategy

This strategy would be used when the contractor is familiar with and has historical bidding information for all the other bidders for a project. It is very similar to the many-bidders strategy. The difference is that the historical bidding data is sorted by which competitor was the low bidder. Then, a separate analysis, like the one done for the many-bidders strategy, is done for each opponent. (Gates, 1967).

3.2.3 OPBID

The OPBID program is basically a computerized version of Friedman's bidding model. The OPBID program uses the same goal as Friedman which to maximize the total expected profits. OPBID improves on Friedman's model by taking in to account that competitors bid differently for different class of work and by giving more recent data more weight in the calculations. By weighting more recent information, OPBID is recognizing that bidding strategies and the market environment can change over time.

47

OPBID processes the information and advice the contractor the optimum markup for that particular project. Figure 3.2 shows the process that OPBID uses to determine the optimum markup. (Morin and Clough, 1968)

Figure 3.2: Summary Flow Chart for OPBID

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3.2.4 LOMARK

The LOMARK bidding model is designed to be used by small to medium sized contractors to analyze their local market. This model focuses on the local market because bidders in a local market typically have similar constraints for a project. Also, competitors in one particular area usually know each other personally. Therefore, LOMARKs model would allow a contractor to better predict his opponents' behavior. (Wade and Harris, 1976).

3.2.5 Carr's Bidding Model

Carrs bidding model is based on the idea that a contractor can compare his bidding strategy to his competitors' bidding strategies by looking at the ratio of opponents' bids to his estimated cost. The goal of the model is to maximize the expected profit, which is equal to the bid amount multiplied by the probability of winning. The contractor can see how his probability of winning which varies as he uses different bid to cost ratios. (Carr, 1983).

3.2.5.1 Impact of the Number of Bidders

Carr (1983) incorporated the number of bidders into his general bidding model which recognizing that an increase in the number of competitors can greatly decrease a contractor's chance of winning a bid.

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3.2.5.2 Competitive Bidding and Opportunity Costs

According to Carr (1987), in order to increase profitability over a set of projects, the contractor must understand that certain resources limit him, so winning one project reduces his ability to win other projects. If a contractor accepts one project, that mean he may give up the chance to make a profit on a different project. These lost profits are called opportunity costs. So, a contractor needs to be able to calculate the expected profit of a series of jobs when he is limited by a certain resource. The expected value for a set of projects is simply the total amount of the bids submitted for the projects multiplied by the probability of winning.

3.2.6 Optimum Bid Approximation Model

The optimum bid approximation model was developed in order to simplify the use of competitive bidding models. This model requires minimal computational effort because it has reduced Carr's model into a single equation. All the contractor needs to do to use this model is determine the ratios between the lowest competitor's bid and his estimated costs for past projects. When contractor knows estimated costs, the optimum bid is simply the estimated costs multiplied by the optimum bid to cost ratio. Then, it is a simple matter to determine the optimum bid to cost ratio. (Sugrue, 1980).

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3.2.7 Bids Considering Multiple Criteria

There are many important factors to be considered in real bidding decisions. In an attempt to address these many factors, the analytical hierarchy process (AHP) was developed to optimize multiple criteria when there is a limited set of options. This involves the contractor choosing certain criteria to be optimized and assigning each of the potential options a score for each criterion. The option with the best score is the optimum solution. If one criterion is to maximize profit, then other bidding models can be used to calculate the expected profit for the different options, then weights are assigned based on the expected profit. (Seydel and Olson, 1990).

3.2.8 Winning over Key Competitors

The key competitor model will recognizes the importance of the competition's limitations, in regards to taking on more work, by incorporating the amount of work currently being done by the key competitor into the model. (Griffis, 1992). In this model, contractor must accumulate an extensive database of bidding information in order to develop a three dimensional probability distribution function for winning over the key competitor. This three-dimensional probability is then incorporated in Gates' bidding model to determine the optimum bid amount.

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3.2.9 DBID

DBID is software which uses the neural networks to mesh many of the factors in bidding (Moselhi, 1993). To use it, the contractor need puts data regarding his company, data regarding the bids currently under consideration, and information about bidding on past projects. DBID produces the optimum markup, not just for one project, but for the entire set of bids under consideration. This new artificial intelligence bidding technologies models the actual bidding decision by incorporating both the subjective and objective bidding factors and by allowing the contractor to obtain information for all the bids under consideration.

3.2.10 Sequential Competitive Bidding

The main idea behind sequential competitive bidding is the recognition of the fact that contractors have limited resources, such as expensive labor, equipment, or managerial time. According to Chen, et.al. (1994), the competitive bidding market is modeled as a queuing system in order to incorporate this fact into a bidding model, as shown in Figure 3.3.

The sequential bidding model is limited; it can only model the situation of one constraining resource. The goal of the model is to maximize the expected value over a series of projects. (Chen, et. al., 1994).

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Figure 3.3: Queuing Model Representation of Flow of Limited Resources

3.2.11 Self-explanatory Artificial Neural Networks

Artificial neural networks are used to aid in competitive bidding models. However, the neural network's inability to explain why it made a certain decision has limited its use. Users do not want to trust a system that just spits out an optimum markup unless they can understand the reasoning behind the choice. Researchers used an optimum markup estimation neural network to try and add a self-explanatory feature.

The system is composed of three layers--the input layer, the hidden layer, and the output layer, as shown in Figure 3.4. The extracted rules from each layer can then be used to develop a rough explanation of why a certain markup was chosen. (Li, et.al., 1999).

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Figure 3.4: Hierarchical Structure of the Artificial Neural Network

3.2.12 Average-Bid Method Bidding Model

The average-bid method of awarding competitively bid contractors has been growing in popularity. Ioannou (1993) developed a bidding model that could be used by contractors submitting bids for a project that was going to be awarded with an averagebid method.

Different average-bid methods use different procedures for calculating the average, or use different criteria for determining the winning bid. For example, some use

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an arithmetic average or a weighted average, while others use the average of the remaining bids after all bids that differ more than a certain percentage from the average of all other bids are eliminated. Similarly, the winner might be the contractor whose price is closest to the average, or the contractor whose bid is closest to, but less than the average.

The average-bid method is significantly more difficult to model than the low-bid method. For the low-bid method, the main variable of interest which from a contractor's perspective, is simply the minimum of the bid prices submitted by the other competitors. The contractor's own bid price is not part of the minimum function but rather serves as a value to which the minimum of the opponents' bids is compared. On the other hand, the average-bid price are depends on the contractor's own bid price. Furthermore, in order to determine the winner, the absolute value of the difference of every bid to the average we need to determine and select the minimum. A change in any of the bid amounts and the number of bidders, it may profound effect on any particular bidder's chance of winning. (Ioannou , 1993)

3.3

Utilization of Bidding Models

From the above discussion, the construction industry has several bidding models to use to determine the right markup for the project. However, the utilization of these models is not widely spread among contractors while the majority uses subjective judgment as discussed in next section. (Ahmad and Minkharah, 1988).

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In year 1988, Ahmad and Minkarah conducted a survey of contractors, who had been named in ENR's 1986 Top 400 contractors. The survey attempted to determine the bidding habits of contractors. Approximately 80% of their study group did not use statistical methods of determining their bid prices. However, majority uses subjective judgment such as experience, hunches and intuition in determining the mark-up size.

The result of the survey is surprising when considering about thirty years had passed since the first competitive bidding model was introduced. The contractors were not using the available models because they were not familiar with the models and also models did not address the issues most important to them.

In addition, the bidding models were not being used because the required a large amount of information. Some contractors may not have sufficient information to effectively utilize known-competitor-bidding models. Also, many contractors are not familiar with the models and these models did not address the issues most important to them. (Sparks, 1999).

3.4

Summary

There are several bidding models that will be discussed in this chapter, including Friedmans model, Gates model, OPBID, LOMARK DBID, Carr's bidding model, Optimum bid approximation model, Bids considering multiple criteria, Winning over key competitors, Sequential competitive bidding, Average-bid method bidding model and Self-explanatory artificial neural networks. However, the utilization of these models is not widely spread among contractors to aid them in determining the proper mark-up

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size while the majority uses subjective judgment. This scenario because many contractors are not familiar with the models and models did not address the issues most important to them, also the inability to accumulate the large amount of data required.

CHAPTER 4

RESEARCH METHODOLOGY

4.1

Introduction

In order to achieve the research aim and objectives that have been outlined earlier, it is important to clearly define the path in which the research can be accomplished. Therefore, the major stages within the whole research that will be undertaken are discussed in detail in this chapter. The major stages in this research are involves preliminary study, data collection, data analysis, and writing-up.

4.2

Stage 1: Preliminary Study

The preliminary study forms the foundation to initiate the research work. This stage includes observations on the current issues and problems on construction industry.

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This stage have been done by analysis of documents from various sources such as text books, journals, electronic media, internet, reports, conference papers and previous research. Discussion with the lecturers, senior and classmate also carried out in a purpose to gain a better understanding of the issues and problems to be studied. As a result, the researcher was able to determine the topic, main issues and problems, aims, objectives and scope of research.

4.3

Stage 2: Data Collection

In this stage, the relevant data and information are gathered in order to achieve the research aim and objectives. In general, the data that are gathered for this research involved primary data and secondary data. The primary data for this research was collected through the survey questionnaires which targeting the medium and large-size contractors in local construction industry. Besides, the secondary data was gathered from books, journals, reports, articles, thesis, conference papers and internet.

4.3.1 Primary Data

Primary data was collected using survey questionnaire which consists of a set of questions with answers to choose from. Survey questionnaire is a suitable method in collecting data sources and information accordingly and comprehensively. (Mohd Najib, 2003). However, the questionnaire was only designed after a thorough study on the research topic through a second stage literature review.

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4.3.1.1 Survey Questionnaires

The preliminary structure of this questionnaire is consists of three parts; Part A for company profile, Part B for factors that affecting the mark-up size decision and Part C for the current practices in mark-up size decision. The design for this questionnaire is using by the 5-point likert scale which are; 1) Strongly Disagree 2) Disagree 3) Average 4) Agree and 5) Strongly Agree will be applied for the questionnaire for part B. But for the questionnaire in the part C, the design of 5-point likert scale which are; 1) Not At All 2) Rarely 3) Sometimes 4) Frequent 5) Most Frequent to determine the utilization of bidding models and practices in mark-up size decision.

The questionnaires were delivered by two methods which were postage and hand delivery to targeted medium and large-size contractors in Johor Bahru, Malaysia. As a result, the finding from survey questionnaire are able to determine the factors affecting the mark-up size decision, importance of the various factors in different contractor sizes evaluation, and the current practices in mark-up size decision by local contractors.

4.3.2

Secondary Data

The collection of secondary data was done through a second stage literature review. These data and information are used to strengthen certain facts, ideas, figures and statements of primary interest within the scope of this work. Apart from that, secondary resources may also be used to compare, discuss and relate certain findings from the survey conducted through the questionnaires. The sources of these secondary

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data are gathered from books, journals, reports, articles, thesis, conference papers and internet.

4.4

Stage 3: Data Analysis

Data gathered from the questionnaire survey will be analyzed by applying computer software Statistical Package of the Social Sciences (SPSS). Analysis methods will be determined according to the suitability of each variable. Among the methods, three tests are used which were (1) One Sample t-Test, (2) Realistic of Data (Chi-Square Test) and (3) Reliability Analysis (Reliability Test) to prove the reliability of the data or finding analyzed. On the other hand, another test knows as Mann-Whitney Test also used to test the significant difference between variables from two different groups. All of these tests will be briefly discussed in following section.

4.4.1 One Sample t-Test

One sample t-test is a statistical procedure that used to test whether the mean of a single variable is differs from a specified constant as the lowest significance mean. In this test, null hypothesis assumes that there are no significance differences between the variable mean and the specified mean. On the other hand, the alternative hypothesis assumes that there is a significant difference between the variable mean and the specified mean.

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By using this significance value, a statistical decision will be made. If the p value is less than 0.05, then the null hypothesis can be rejected and conclude that these two mean are statistically different. Thus, it is statistically proved that the variables are significant in this analysis and these data will be used for further test.

Otherwise, if p value is greater than 0.05, then the null hypothesis can be accepted and conclude that these two mean are statistically equal. Therefore, it is statistically proved that the variables are less significant and these data will be omitted for further test. (Marija, 2007)

4.4.2 Realistic of Data (Chi-Square Test)

Chi-square test is a statistical procedure that tabulates a variable into categories and computes a chi-square statistic base system. At that time, the observed and expected frequencies of a variable were compared to test whether the result of respond questionnaires is presenting the result of the surveyed population, or just happen in case and not showing the result of particular population.

In this project, Chi-square test will be used to check the reliability of the data with the remaining data which passed the first test. If the p value is 0.05 then the data are accepted for the next test. On the other hand, if the p value is > 0.05 then the data will be omitted from the next test. (Marija, 2007)

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4.4.3 Reliability Analysis (Reliability Test)

Reliability analysis is a statistical procedure that applied to measure the internal consistency of the variable within a scale. The higher of the internal consistency in scale indicated that the greater reliability of the data. Cronbachs alpha is the most common used to measure scale reliability. Only the value of alpha greater or equal to 0.7 will be accepted as reliable. This number is basically been as a rule of thumb by some professionals (Wikipedia, 2007). On the other hand, if the value of alpha substantially lower than 0.7, then it is indicate an unreliable scale.

In this project, the remaining data which passed the second test will be tested with reliability analysis. If the p value is greater or equal to 0.7 then the data were proved to be reliable and non-bias or error free. (Marija, 2007)

4.4.4 Mann Whitney U test

In statistics, Mann Whitney U test is a non-parametric alternative to the two independent-sample t-test. The purpose of the test is to test whether the means of two unpaired sets of measurements are different from each other. In this project, this test is used in achieving the second objective. This test will enable the research to establish whether the medium and large-size contractors evaluation of the various factors varied significantly.

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The hypotheses are as below:

Null hypothesis, Ho:

The means of factors evaluated by medium-size contractors is equal to the means of factors evaluated by large-size contractors.

Alternatives hypothesis, Ha: The means of factors evaluated by medium-size contractors is not equal to the means of factors evaluated by large-size contractors.

In this project, the 2-tailed p > |Z| will determine whether the differences between the two categories of contractor which vary significantly at 95% significance level. If p value is less than the reference probability of 0.05, the result is statistically significant, and the null hypothesis is rejected while accepted the alternatives hypothesis. This indicated that the factor evaluated by medium and large-size contractors is significant different. (Marija, 2007)

4.4.5 Importance Index

The importance index also will be identified in order to ranks the important or significant among these variables. According to Shash and Abdul-Hadi (1993), the important index of each factor was measured using the following formula:

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Importance Index = (a) x 100/5

where: a = constant expressing the weight given to each response. The weight ranges from 1 to 5 where according to the Likert Scale. X = n/N n = the frequency of the response. N = total number of responses.

4.5 Stage 4: Writing-up

This stage includes the process of documentation together with summaries, conclusion, and some future research recommendations relevant to this topic.

4.6 Summary

This chapter has outlined the research methodology processes which are to be performed in order to derive findings and conclusion towards the study. It starts by explaining the preliminary study, data collection, data analysis and writing-up.

CHAPTER 5

DATA ANALYSIS

5.1

Introduction

As mentioned in Chapter 1, there are three objectives of the study. This include to determine the factors affecting the mark-up size decision by contractors, to analyze the perceived importance of the various factors considered in the mark-up size decision in different contractor sizes evaluation and to investigate the current practices in contractors mark-up size decision. In achieving the objectives, the theoretical review has been undertaken. In addition, an empirical survey also has been performed. Primary data is collected via an instrument of questionnaire which designed to fulfilling the objectives in the study.

In this chapter, the data and finding from the questionnaire survey will be interpreted and discussed thoroughly. Thus, this chapter is divided into four main sections; Section 5.1 presents the company profile of contractor and Section 5.2 discusses the factors affecting the mark-up size decision by contractors. The following

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Section 5.3 interprets the perceived importance of the various factors in different contractor sizes evaluation and Section 5.4 discussed the current practice of contractors mark-up size decision.

The statistical analyzes by the aid of SPSS software will be used in this chapter. Between, three tests are used which (1) One Sample t-Test, (2) Realistic of Data (ChiSquare Test) and (3) Reliability Analysis (Reliability Test). The purpose of the test is to prove the reliability of the data or finding analyzed.

To prove the reliability of the data, One Sample t-Test is used first to analyze the data. If the result show that the p value is 0.05 then the data were accepted for the next test and the p value is > 0.05 then the data will be omitted for the next test. Next, Chi-Square Test will be used to check the realistic of the data with the remaining data which passed the first test. If the p value is 0.05 then the data were used for the next test. Otherwise, if the p value is > 0.05 then the data will be omitted from the next test.

The remaining data which passed the second test will be tested by Reliability Analysis (Reliability Test). If the result found out that p value is 0.7 then the data were proved to be reliable and non-bias or error free. The flow or sequence of this reliability test is shown in Figure 5.1.

On the other hand, Mann-Whitney U Test also will be used to achieving the second objective of study. This test will compare the mean score of various factors evaluated by different size of contractors. If the result show that the p value 0.05, it is statistically proved that significant different between medium and large-size contractors evaluation in these factors.

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p value > 0.05 One Sample t-Test p value 0.05 p value > 0.05 Chi Square Test p value 0.05 Reliability Test p value 0.7 Proved Reliable Data omitted for next test Data omitted for next test

Figure 5.1: Sequence of Reliability Test

5.2

Company Profile of Contractor

This section discusses the background of the respondents. It begins with the categories of size and grade of contractors company.

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5.2.1 Size and Grade of Contractors Company

Table 5.1: Size of contractors company Size Large-size Medium-size Total Frequency 15 15 30 Percentage (%) 50 % 50 % 100 %

In this project, the total of questionnaire survey returned are 30 set. There has been equal distribution between large and medium size contractor as presented in Table 5.1.

Figure 5.2: Size and grade of contractors

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As mentioned in Chapter 1, the large-size contractors are in Grade 4, Grade 5, and Grade 6 according to CIDBs registration. Besides, the medium-size contractors are in the Grade 2 and Grade 3. From the Figure 5.2, the large-size contractors have 5 respondents are Grade 4, 5 respondents are Grade 5 and 5 respondents are Grade 6. Besides, medium-size contractors have 2 respondents are Grade 2 and 13 respondents are Grade 3.

5.2.2 Years And Project Taken By Contractors

Figure 5.3: Years and projects taken by contractors

Based on the Figure 5.3, 2 respondents have experience between 1-5 years in construction field. Between them, 1 respondent had undertaken 1-10 projects and other 1 had undertaken among 11-20 projects. Besides, 10 respondents have experience in

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construction industry between 6-10 years. Within the 10 respondents, 1 respondent had undertaken among 1-10 project, 4 respondents had undertaken between 11-20 projects and 5 respondents had undertaken amount 21 to 30 projects.

On the other hand, 10 respondents possess 11-15 years experience in construction job. Between them, 6 respondents had undertaken among 21-30 projects and 4 respondents had undertaken more than 30 projects. Lastly, 8 respondents have experience more than 8 years in construction industry and all of them had undertaken more than 30 projects.

5.2.3 Type of Project Usually Undertaken By Contractors

Figure 5.4: Type of project usually undertaken by contractors

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From the Figure 5.4, contractors who involved in this survey are usually undertaking the private projects than government projects. Between them, 76% respondents usually involved in the private project and only 23% undertake the government project. The next section is going to identify the factors affecting the markup size decision by contractors.

5.3

Factors Affecting the Contractors Mark-Up Size Decision

There are five main categories of factors affecting the contractors mark-up size namely project characteristics, project documentation, company characteristics, bidding situation and economic situation. Different category of the factor has different influential in mark-up size decision. Thus, each category is analyzed differently in this study. On the same time, all factors in each category are tested as mentioned in previous section to ensure the factors are significant and reliable. After that, remained factors only will be ranked according to the score of mean and important index in order to determine the perceived important factors among them. The following section will discuss the analysis of the first category.

5.3.1 Project Characteristics

The category of project characteristics includes all qualities that describe the project such as size, duration, location, project cash flow, identity of owner, degree of difficulty and safety in a project.

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5.3.1.1 One-Sample T Test

According to Table 5.2, the result of one-sample T test to the principles testing on category of project characteristics found out that all of the factors are accepted as its p value is not more than or equal to 0.05 (0.05). Hence, all of the factors which are significant will be used for further analysis of Chi-square test statistics.

Table 5.2: One sample t-test result for factors of project characteristic
Test Value = 2 95% Confidence Interval of the t df Sig. (2-tailed) Mean Difference Lower Size of project Duration of project Location of project Project cash flow Identity of owner Degree of difficulty Degree of safety 19.408 12.540 7.918 21.524 7.503 20.451 17.133 29 29 29 29 29 29 29 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2.267 1.433 .967 2.233 1.100 2.133 1.900 2.03 1.20 0.72 2.02 .80 1.92 1.67 Difference Upper 2.51 1.67 1.22 2.45 1.40 2.35 2.13

5.3.1.2 Chi-Square Test

According to Table 5.3, the result of chi-square test shows that all of the factors except one have passed this test whereby the p value 0.05. Therefore, the factor identity of owner which p value equal to 0.741 will be eliminated for further analysis.

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Table 5.3: Chi square test result for factors of project characteristics
Size of project Chi-Square df Asymp. Sig. 8.600a 2 0.014 Duration of Location of Project cash project 9.800a 2 0.007 project 7.400a 2 0.025 flow 14.600a 2 0.001 Identity of owner .600 a 2 0.741 Degree of difficulty 15.800a 2 0.000 Degree of safety 12.600a 2 0.002

a. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 10.0.

5.3.2 Project Documentation

Project documentations category constituted by the characteristics of the bidding documents such as type of contract, completeness of document, owner special requirement, use of nominated subcontractor, and anticipated value of liquidated damages.

5.3.2.1 One-Sample T Test

Based on the Table 5.4, the result of one-sample T test found out that all of the factors are accepted as its p value is not more than or equal to 0.05 (0.05). Therefore, all of the factors are accepted for next Chi-square test.

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Table 5.4: One sample t-test result for factors of project documentation
Test Value = 2 95% Confidence Interval of the t Df Sig. (2-tailed) Mean Difference Lower Type of contract Completeness of document Owner's special requirement Use of nominated subcontractor Anticipated value of liquidated damages 9.522 5.809 10.269 12.173 17.026 29 29 29 29 29 0.000 0.000 0.000 0.000 0.000 .967 .733 1.333 1.367 1.767 0.76 0.48 1.07 1.14 1.55 Upper 1.17 0.99 1.60 1.60 1.98 Difference

5.3.2.2 Chi-Square Test

In below Chi-square test statistics, one of the five factors is rejected namely completeness of document due to its p value more than 0.05. The remaining factors have passed this test which significant for further analysis.

Table 5.5: Chi square test result for factors of project documentation
Type of contract Completeness of document 5.600a 2 0.061 Owner's special requirement 17.467b 3 0.001 Use of nominated subcontractor 9.800a 2 0.007 Anticipated value of liquidated damages 14.600a 2 0.001

Chi-Square df Asymp. Sig.

18.200a 2 0.000

a. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 10.0. b. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 7.5.

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5.3.3 Company Characteristics

Company characteristics includes all factors relevant to the company such as availability of required cash, uncertainly in cost estimate, need for work, current workload, experience in similar project, portion subcontracted to other and so on.

5.3.3.1 One-Sample T Test

Refer to the Table 5.6, the result of one-sample T test found out that all of the factors are accepted as its p value is not more than or equal to 0.05 (0.05). Hence, all of the factors are significant and will be used for next test. Table 5.6: One sample t-test result for factors of company characteristic
Test Value = 2 95% Confidence Interval t df Sig. (2-tailed) Mean Difference Lower Availability of required cash Uncertainty in cost estimate Need for work Past profit in similar job Current workload Experience in similar project General overhead Portion subcontracted to others Availability of qualified staff Establishing long relationship with owner 23.930 7.180 21.138 16.699 15.503 17.895 10.140 12.042 8.115 8.462 29 29 29 29 29 29 29 29 29 29 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2.100 .800 2.300 1.667 1.833 1.867 1.300 1.333 .900 1.100 1.92 0.57 2.08 1.46 1.59 1.65 1.04 1.11 0.67 0.83 Upper 2.28 1.03 2.52 1.87 2.08 2.08 1.56 1.56 1.13 1.37 of the Difference

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5.3.3.2 Chi-Square Test

According to the Table 5.7, one of the ten factors which is establishing long relationship with owner will be omitted due to its p value is more than 0.05. The remaining factors had passed in this test and significant for next reliability analysis test.

Table 5.7: Chi square test result for factors of company characteristics
Chi-Square Availability of required cash Uncertainty in cost estimate Need for work Past profit in similar job Current workload Experience in similar project General overhead Portion subcontracted to others Availability of qualified staff Establishing long relationship with owner 25.800a 11.400a 11.400
a

df 2 2 2 2 2 2 3 2 2 2

Asymp. Sig. 0.000 0.003 0.003 0.001 0.014 0.000 0.000 0.006 0.002 0.122

14.600a 8.600a 15.800

a

18.800b 10.400a 12.600

a

4.200a

a. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 10.0. b. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 7.5.

5.3.4 Bidding Situation

The category of bidding situation includes all the factors operating in the awarding of contract situation such as competition, required bond capacity, bidding

77

document price, prequalification requirements, time allowed for submitting bids and availability of other project.

5.3.4.1 One-Sample T Test

Based on the Table 5.8, the result of one-sample T test indicated that all of the factors are accepted as its p value is not more than or equal to 0.05 (0.05). Therefore, all of the factors are significant and will be used for Chi-square Test.

Table 5.8: One sample t-test result for factors of bidding situation
Test Value = 2 95% Confidence Interval of the t Df Sig. (2-tailed) Mean Difference Lower Required bond capacity Competition Time allowed submitting bids Bidding document price Prequalification requirements Availability of other projects 16.155 19.338 10.846 9.957 5.525 8.464 29 29 29 29 29 29 0.000 0.000 0.000 0.000 0.000 0.000 1.200 2.333 1.267 1.400 0.667 1.033 1.05 2.09 1.03 1.11 0.42 0.78 Upper 1.35 2.58 1.51 1.69 0.91 1.28 Difference

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5.3.4.2 Chi-Square Test

From the Table 5.9, all of the six factors are passed the test whereby the p value 0.05. It is proved that the six factors in this category have significant in this analysis and will be used for next test.

Table 5.9: Chi square test result for factors of bidding situation
Required bond capacity Chi-Square df Asymp. Sig. 10.800a 1 0.001 Competition 7.400b 2 0.025 Time allowed submitting bids 8.600 b 2 0.014 Bidding document price 14.000c 3 0.003 Prequalification requirements 7.400b 2 0.025 Availability of other projects 7.400b 2 0.025

a. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 15.0. b. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 10.0. c. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 7.5.

5.3.5 Economic Situation

The category of economic situation have involves all economic indicators that may operate on the project such as overall economy, risk involved in investment, availability of labor and equipment, government division requirement and tax liability.

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5.3.5.1 One-Sample T Test

Refer to the Table 5.10, the result of one-sample T test found out that one of the five factor namely Tax liability will be eliminated due to its p value is more than 0.05 The remaining factors had passed the test whereby the p value 0.05 and will be used for further test.

Table 5.10: One sample t-test result for factors of economic situation
Test Value = 2 95% Confidence Interval of t Df Sig. (2-tailed) Mean Difference Lower Overall economy (availability of work) Risk involved in investment Availability of labor or equipment Government division requirement Tax liability 23.647 16.276 9.327 4.287 1.439 29 29 29 29 29 0.000 0.000 0.000 0.000 0.161 2.467 1.733 1.000 .533 .200 2.25 1.52 0.78 0.28 0-.08 Upper 2.68 1.95 1.22 0.79 0.48 the Difference

5.3.5.2 Chi-Square Test

According to the Table 5.11, the result of Chi-square test shows that all of the remaining factors are accepted as its p value is not more than or equal to 0.05 (0.05). Hence, the remaining factors are significant and will be used for reliability analysis test.

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Table 5.11: Chi square result for factors of economic situation

Overall economy (availability of work) Chi-Square df Asymp. Sig. 12.200a 2 0.002 Risk involved in investment 12.800a 2 0.002 Availability of labor or equipment 15.000a 2 0.001 Government division requirement 13.400a 2 0.001

a. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 10.0.

5.3.6 Reliability Analysis

Reliability statistics by Cronbachs Alpha will be conducted to test the remained factors which passed through two previous tests. In Cronbachs Alpha, the result of reliability must equal or more than 0.70 ( 0.70) as proved reliable. According to the Table 5.12, the value of Cronbachs Alpha shows 0.805 and indicated that 29 remained factors are reliable as its p value 0.70. Hence, the researcher can conclude that the 29 remained factors having strong degree in affecting the mark-up size decision.

Table 5.12: Reliability test result for remained factors

Cronbach's Alpha 0.805 Cronbach's Alpha Based on Standardized Items 0.805 N of Items 29

The next section is going to determine the ranking of perceived important factors that affecting the mark-up size decision.

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5.3.7 Ranking of Significant Factors That Affecting Mark-up Size Decision Factors Affecting Mark-up Size Decision
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

Mean

Project Characteristics Size of project Duration of project Location of project Project cash flow Degree of difficulty Degree of safety 4 Project Documentation Type of contract Owner's special requirement Use of nominated subcontractor Anticipated value of liquidated damages 2 Company Characteristics Availability of required cash Uncertainty in cost estimate Need for work Past profit in similar job Current workload Experience in similar project General overhead Portion subcontracted to others Availability of qualified staff Bidding Situation 5 Required bond capacity Competition Time allowed submitting bids Bidding document price Prequalification requirements Availability of other projects Economic Situation 3 Overall economy (availability of work) Risk involved in investment Availability of labor or equipment Government division requirement
1

3.82 3.43
59%

4.27
69%

76% 85%

2.97

2.97

3.36 3.33
59%

3.90

4.13

4.23

85% 78% 85%

67%

3.37

67%

3.57 2.80
56%

3.77

67% 75% 71% 82%

4.10

3.67

4.30
73% 77% 77%

86%

3.83

3.30 2.90

3.87
66% 67%

3.33
58%

3.20

3.32

66% 64%

3.27 2.67
53%

4.33

87%

3.40

65% 68%

3.03

3.43

61% 69%

2.53

3.00
51%

3.73
60%

4.47
75%

89%

Figure 5.5: Ranking of significant factors according to the category.

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As mentioned in earlier, there are five main categories of factors affecting the contractors mark-up size. Every category has varied influential in mark-up size decision. Therefore, the ranking of the category of factors is considered important and will be analyzed first in this section.

According to the Figure 5.5, the influential categories of factors affecting markup size decision are followed by project characteristics, company characteristics, economic situation, project documentation and bidding situation. The important index among them is followed by 76%, 71%, 69%, 67% and 66%. Next, the ranking of significant factors is going to discuss according to the below table.

Table 5.13: Ranking of significant factors that affecting mark-up size decision
No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Factors Affecting Mark-up Size Decision Overall economy (availability of work) Competition Need for work Size of project Project cash flow Degree of difficulty Availability of required cash Degree of safety Experience in similar project Current workload Anticipated value of liquidated damages Risk involved in investment Past profit in similar job Duration of project Bidding document price Use of nominated subcontractor Portion subcontracted to others Owner's special requirement General overhead Time allowed submitting bids Required bond capacity N 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 Mean 4.47 4.33 4.30 4.27 4.23 4.13 4.10 3.90 3.87 3.83 3.77 3.73 3.67 3.43 3.40 3.37 3.33 3.33 3.30 3.27 3.20 Important Index 89% 87% 86% 85% 85% 83% 82% 78% 77% 77% 75% 75% 73% 69% 68% 67% 67% 67% 66% 65% 64% Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

83 3.03 3.00 2.97 2.97 2.90 2.80 2.67 2.53 61% 60% 59% 59% 58% 56% 53% 51%

22 23 24 25 26 27 28 29

Availability of other projects Availability of labor or equipment Type of contract Location of project Availability of qualified staff Uncertainty in cost estimate Prequalification requirements Government division requirement

30 30 30 30 30 30 30 30

22 23 24 25 26 27 28 29

Based on the Table 5.13, the top ten important factors that affecting the mark-up size decision are overall economy, competition, need for work, size of project, project cash flow, degree of difficulty, availability of required cash, degree of safety, experience in similar project, and current workload.

Overall economy is the most influential factors that affecting the mark-up size decision in this project. That means the contractors will first consider the overall economy in determining their mark-up size especially when recession is imminent. This is because it may slow down construction activities, then the contractor need to price keenly to win a project.

Besides, competitive nature in bidding also has great influence in determination of mark-up size decision. As naturally, the bidder prices will be reduced when the number of competitors in tender increases. In such competitive situation, contractor will consider to minimize the mark-up size in nature maximize the chances to winning the tender.

In addition, need for work also taken into account by contractors in determining the mark-up size decision. Contractors are willing to sacrifice their profit margin to winning the tender if they needed for the works. Thus, this factor is ranked as third important in affecting the mark-up size decision.

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Moreover, size of a project also found heavily influence in mark-up size decision. The larger of the size of project is more attract the contractors because its big contract price and long construction duration. This will contribute positively and substantially to annual business volume of a contractor.

On the other hand, project cash flow also considered heavily in the mark up size decision. This can be explained that project cash inflow can increase cash availability to a contractor and giving him an economic leverage to compete for other projects. Therefore, this factor is considered by contractor during determining the mark-up size decision.

Also, degree of difficulty and safety are ranked in the top ten important factors. These factors have influential because related to the degree of risk and uncertainty involved in the job. Therefore, contractor will consider the high mark-up size in his bid price in the case of higher degree in difficulty and safety.

Next, the importance of the various factors in medium and large contractor sizes evaluation will be discussed in following section.

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5.4

The Importance of the Various Factors in Medium and Large Contractor Sizes Evaluation

According to the Table 5.14, the top ten factors have been identified by the largesize contractors as the most important in their mark-up size decisions were degree of difficulty, overall economy, project cash flow, competition, size of project, degree of safety, risk involved in investment, need of work, availability of required cash and current workload.

Besides, the top ten factors have been determined by the medium-size contractors as the most influential in their mark-up size decisions were overall economy, need for work, competition, size of project, availability of required cash, project cash flow, experience in similar project, degree of difficulty, anticipated value of liquidated damages and past profit in similar job.

On the other hand, the response from large-size and medium-size contractors showed that the category project characteristics is the most important in affecting their mark-up size decision. The second most important category affecting large-size contractors mark-up size decision is economic situation while the medium-size contractors is category company characteristics.

The following important categories identified by large-size contractors are company characteristics, bidding situation and project documentation. For medium-size contractors, the following important categories are economic situation, project documentation and bidding situation.

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Table 5.14: Ranking on the importance of various factors in medium and large contractors evaluation.
Variable Medium Factors Affecting Mark-up Size Decision Project Characteristics Size of project Duration of project Location of project Project cash flow Degree of difficulty Degree of safety Project Documentation Type of contract Owner's special requirement Use of nominated subcontractor Anticipated value of liquidated damages Company Characteristics Availability of required cash Uncertainty in cost estimate Need for work Past profit in similar job Current workload Experience in similar project General overhead Portion subcontracted to others Availability of qualified staff Bidding Situation Required bond capacity Competition Time allowed submitting bids Bidding document price Prequalification requirements Availability of other projects Economic Situation Overall economy (availability of work) Risk involved in investment Availability of labor or equipment Government division requirement Mean 3.70 4.27 3.47 2.73 4.13 3.87 3.73 3.32 2.80 3.27 3.40 3.80 3.66 4.20 3.07 4.60 3.80 3.73 4.00 3.07 3.33 3.13 3.20 3.20 4.33 2.87 2.93 2.87 3.00 3.33 4.60 3.47 2.87 2.40 Important Index 74% 85% 69% 55% 83% 77% 75% 66% 56% 65% 68% 76% 73% 84% 61% 92% 76% 75% 80% 61% 67% 63% 64% 64% 87% 57% 59% 57% 60% 67% 92% 69% 57% 48% Rank 1 4 14 28 6 8 12 4 27 17 15 9 2 5 20 2 10 11 7 21 16 19 5 18 3 25 23 26 22 3 1 13 24 29 Mean 3.94 4.27 3.40 3.20 4.33 4.40 4.07 3.40 3.13 3.40 3.33 3.73 3.47 4.00 2.53 4.00 3.53 3.93 3.73 3.53 3.33 2.67 3.43 3.20 4.33 3.67 3.87 2.47 3.07 3.53 4.33 4.00 3.13 2.67 Large Important Index 79% 85% 68% 64% 87% 88% 81% 68% 63% 68% 67% 75% 69% 80% 51% 80% 71% 79% 75% 71% 67% 53% 69% 64% 87% 73% 77% 49% 61% 71% 87% 80% 63% 53% Rank 1 5 18 22 3 1 6 5 23 17 20 13 3 9 28 8 16 10 12 15 19 26 4 21 4 14 11 29 25 2 2 7 24 27

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

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5.4.1 Comparison of Factors Between Medium and Large-Size Contractors

This section will compare the factors evaluated by the medium-size and largesize contractors as the most important in their mark-up size decisions. As discussed earlier, Mann-Whitney U Test will be used in this analysis to determine the varied significant of factors between the two different size of contractors.

Table 5.15: Comparison factors between medium-size and large-size contractors

No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Factors Affecting Mark-up Size Decision Size of project Duration of project Location of project Project cash flow Degree of difficulty Degree of safety Type of contract Owner's special requirement Use of nominated subcontractor Anticipated value of liquidated damages Availability of required cash Uncertainty in cost estimate Need for work Past profit in similar job Current workload Experience in similar project General overhead Portion subcontracted to others Availability of qualified staff Required bond capacity Competition Time allowed submitting bids Bidding document price Prequalification requirements Availability of other projects Overall economy (availability of work) Risk involved in investment Availability of labor or equipment Government division requirement Mean Rank Z Large-Size 15.37 15.03 18.27 16.67 18.90 17.57 17.63 16.27 15.40 15.03 14.10 12.20 11.60 13.73 16.80 13.77 17.93 15.17 12.67 15.50 15.67 20.50 20.53 13.30 15.93 13.80 18.97 17.17 16.50 Medium-size 15.63 15.97 12.73 14.33 12.10 13.43 13.37 14.73 15.60 15.97 16.90 18.80 19.40 17.27 14.20 17.23 13.07 15.83 18.33 15.50 15.33 10.50 10.47 17.70 15.07 17.20 12.03 13.83 14.50 -0.093 -0.326 -1.927 -0.856 -2.545 -1.503 -1.645 -0.525 -0.070 -0.342 -1.180 -2.360 -2.766 -1.282 -0.910 -1.298 -1.681 -0.234 -2.061 0.000 -0.115 -3.480 -3.399 -1.514 -0.302 -1.202 -2.495 -1.244 -0.730 Asymp. Sig. (2-tailed) 0.926 0.745 0.054 0.392 0.011 0.133 0.100 0.600 0.944 0.732 0.238 0.018 0.006 0.200 0.363 0.194 0.093 0.815 0.039 1.000 0.909 0.001 0.001 0.130 0.763 0.229 0.013 0.214 0.466

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From the Table 5.15, there are 7 factors found to have significant difference between medium-size and large-size contractors which are factors (5) Degree of difficulty, (12) Uncertainly in cost estimate, (13) Need for work, (19) Availability of qualified staff, (22) Time allowed submitting bids, (23) Bidding document price and (27) Risk involved in investment.

First, degree of difficulty has significant different and it can be deduced that this factors is more considered by large-size contractor due to the size of project them taken. As we know that the size of project normally taken by large-size contractor is larger. As naturally, it is higher degree of difficult and complexity job. Therefore, largesize contractors are more focus into the degree of difficulty during mark-up size decision in his bid price.

Moreover, uncertainly in cost estimate and availability of qualified staff have significant different between large-size and medium-size contractors evaluation. These factors are not considered by large-size contractors in the determination of the mark-up size, but for medium-size contractors it is a major input to their mark-up decisions. Normally, large-size contractors more attract qualified staff to join their organizations due to better pay, benefits and recognition they offer. It seems that medium contractors cannot compete with large ones in attracting qualified staff to join their firms. Consequently, they may hire less qualified staff and recognize these factors in the determination of their mark-up.

Besides, need for work is more considered by medium-size contractor rather than large-size contractor. Generally, medium-size contractor involved in short construction duration where it is not enough contribute and substantially to annual business volume. Thus, they are needed and desired to getting a new project. As a result, medium-size contractor will take into account of this factor in their mark-up decision.

89

In addition, time allowed submitting bids is great considered by large contractor. It appears that large contractors believe that the period allowed for submitting bids is not enough to prepare an accurate estimate. Therefore, they are aware of the likelihood of producing an inaccurate estimate so that they consider this factor when determining their mark-up.

Bidding document price also shows the significant different between two different size contractors. Generally, only the contractor who wins the contract is able to recover the document price given. Thus, they are incorporating it as a cost item in the bid. But, this factor is more considered by large-size contractor where the amount paid for bidding documents for projects is high enough to influence the mark-up size decision.

In addition, risk involved in investment indicated that significant different between large-size and medium-size contractors. As discussed in earlier, large-size contractor are generally involved in larger size of project. As naturally, larger size of project has greater degree of risk and uncertainty. Therefore, this factor is taken account by large-size contractor where the element of risk is attached to an investment.

Next, the current practice in contractors mark-up size decision is going to discuss in following section.

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5.5

The Current Practice in Contractors Mark-Up Size Decision.

5.5.1 Mark-up Size Taken By Contractors Mark-up Size Taken By Contractors

20 18 16
Number of Contractors

63.3%

14 12 10 8 6 4 2 0 5-10% of overall cost 10-15% of overall cost Range of Mark-up Size 15-20% of overall cost

30.0% 6.7 %

Figure 5.6: Mark-up size taken by contractors

From the Figure 5.6, the higher preference mark-up size taken by contractors is among 10 % and 15% in overall project cost which consists 63.3%. The following is mark-up size from 15% to 20 % of overall project cost which the percentage is 30.0%. Finally, mark-up size between 5% to 10% of overall project cost is most rarely taken by contractor which its percentages only reach 6.7%. It can be concluded that the range of the mark-up size may vary from 5% until 20% and the most preference mark-up size is 10 % to 15%.

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5.5.1.1 Allocation of Components in Mark-Up Size

As discussed in Chapter 2, the mark-up size will be added to the estimated direct cost of construction at the close of the estimating process. Generally, the mark-up size contains three major components; overhead cost, contingencies cost, profit. The allocation of percentages of each component in mark-up size is considered important due to their influence in winning a tender. Therefore, allocation of each component in mark-up size will be discussed in this section.

i.

Overhead Cost

5-10%

10-15%

10-15% 15-20% Markup Size

15-20%

Figure 5.7: Overhead cost with different mark-up size

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From the Figure 5.7, 10 contractors are determining their overhead cost as 3% of overall project cost. Within them, 8 are from the range of 10%-15% mark-up size and 2 are in the range of 5%-10% mark-up size. Besides, the 4% overhead cost in their markup size is most frequently identified by the contractors which reaches 14 respondents. Between, 11 are in the range of 10%-15% mark-up size and only 3 from the range of 15%-20% mark-up size. Lastly, only 6 contractors determine their overhead cost as 5% of overall project cost and all of them are from the range of 15%-20% mark-up size.

ii.

Contingencies Cost

5-10% 10-15%

5-10% 10-15% 15-20%

10-15% 15-20%

15-20%

Markup Size

Figure 5.8: Contingencies cost with different mark-up size

From the above figure, contingencies cost is determined from 2 % until 5 % of overall project cost. Between them, the 4 % contingencies cost is mostly determined by the contractors which reaches 11 respondents. Second is the 3 % contingencies cost which have consist 10 respondents. Also, the following is 2 % contingencies cost which

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identified by 7 respondents. Last is the 5 % contingencies cost which involved 2 respondents.

In 2 % contingencies cost, 6 are from the range of 10-15% mark-up size and only 1 is from the 5%-10% mark-up size. For 3 % contingencies cost, 1 is from the range of 5-10% mark-up size , 8 from the 10-15% mark-up size and 1 from the 15-20% mark-up size. Besides, it is 5 respondents from the range of 10-15% mark-up size and 6 respondents from 15-20% mark-up size in 4% contingencies cost. Moreover, only 2 respondents who from 15-20% mark-up size in 5% contingencies cost.

iii.

Profit

5-10%

10-15%

10-15% 15-20%

10-15% 15-20%

15-20%

15-20%

15-20%

Markup Size

Figure 5.9: Profit with different mark-up size

94

According to the Figure 5.9, the ranges of profit determined by contractors are from 4 % until 10 %. Among them, 5% profit is most frequently used by the contractor in writing up their mark-up size which reaches 12 respondents. Next is the 6 % profit which had determined by 7 respondents and 7 % profit had 3 respondents. The following are 4 %, 7 %, 8 %, 9 % and 10 % profit which consistent has 2 respondents.

On the other hand, 4 % profit only determined by the respondents who from the range of 5-10% mark-up size. Moreover, 5 % profit only determined by the respondents who from the range of 10-15% mark-up size. For 6 % profit, 5 are from the range of 1015% mark-up size and only 2 from 15-20 % mark-up size. Also, 2 are form the range of 10-15% mark-up size and only 1 from 15-20 % mark-up size in 7% profit. Last, the 8 %, 9 % and 10 % profit are same from the range of 15-20% mark-up size.

iv.

Others Cost

5-10%

10-15%

5-10% 10-15% 15-20%

Markup Size

10-15%

15-20%

Figure 5.10: Others cost with different mark-up size

95

The others cost are discussed in this section is the possible cost incurred related to non-confidence in work force, unavailability of qualified staff, uncertainty in cost estimate, government policy and so on. Actually, some contractors have considered the others cost in their mark-up size. But some contractors have omitted the others cost as a component cost in their mark-up size.

From the Figure 5.10, 5 contractors have omitted the others cost who 1 is from the range of 5-10% mark-up size and 5 are from the 10-15% mark-up size. On the other hand, the range of others cost determined by contractors only 1 % and 2 % of overall project cost. Among them, 2% for others cost is most frequently determined by the contractors which it reaches 13 respondents. Between, 6 are from the range of 10-15% mark-up size and 7 are from the 15-20% mark-up size. Besides, 12 contractors have considered the others cost as 1 % in their mark-up size which 1 is from the range of 5-10% mark-up size, 9 are from 10-15% mark-up size and 2 are from 15-20% mark-up size.

5.5.2 Utilization of Bidding Models in Mark-Up Size Decision Utilization Of Bidding Models
30
Number of Contractors

25 20 15 10 5 0 Yes

100%

No

Figure 5.11: Utilization of bidding models in mark-up size decision

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From the Figure 5.11, no contractors in this survey had utilized any bidding models in assist their mark-up size decision which it is reaches 100% disagreed. The reason of not utilization of the bidding models will be discussed in section 5.5.4. But the following section will be discussed the contractors practices to determine their mark-up size decision even not use any bidding models in assist them.

5.5.3 Practices in Determining Mark-up size Decision

The usual practices by contractors in determining the mark-up size decision included the experience, hunches, market survey and previous record. As mentioned earlier this chapter, the same test were (1) One Sample t-Test, (2) Realistic of Data (ChiSquare Test) and (3) Reliability Analysis (Reliability Test) will be conducted before ranking the perceived important of these practices.

5.5.3.1 One-Sample T Test

From the Table 5.16, the result of one-sample T test found out that all of the practices are accepted as its p value is not more than or equal to 0.05 (0.05). Hence, all of the practices are significant and will be used for further test.

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Table 5.16: One sample t-test result for practices in determining mark-up size decision
Test Value = 2 95% Confidence Interval of the t df Sig. (2-tailed) Mean Difference Lower Experience Hunches Market Survey Previous Record 22.066 2.796 19.343 13.857 29 29 29 29 0.000 0.009 0.000 0.000 2.533 0.367 2.300 2.333 2.30 0.10 2.06 1.99 Difference Upper 2.77 0.63 2.54 2.68

5.5.3.2 Chi-Square Test

From the Table 5.17, all of the four results have passed the test whereby the p value 0.05. This is indicated that all of the practices have significant in this analysis.

Table 5.17: Chi-Square test result for practices in determining mark-up size decision
Experience Chi-Square df Asymp. Sig. 12.800a 2 0.002 Hunches 6.200a 2 0.045 Market Survey 7.800a 2 0.020 Previous Record 21.467 b 3 0.000

a. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 10.0. b. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 7.5.

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5.5.3.3 Reliability Analysis

As mentioned in earlier, the result of reliability in Cronbachs Alpha, must equal or more than 0.70 ( 0.70) to proved the reliable. According to Table 5.18, the value of Cronbachs Alpha shows 0.709 which means that all practices are reliable in this test as it is 0.70.

Table 5.18: Reliability Test result for practices in determining mark-up size decision
Cronbach's Alpha Cronbach's Alpha Based on Standardized Items 0.715 N of Items 4

0.709

5.5.3.4 Ranking of Practices in Determining Mark-up Size Decision

According to Table 5.19 and Figure 5.12, experience (mean=4.53) is most important in determination of mark-up size decision. Besides, the previous record (mean=4.33) can be considered frequent used by contractors in help them determine the mark-up size. It is followed by market survey (mean=4.30) which also frequently used by contractor to assist their mark-up size decision. Lastly, the hunches is a practice which more disagreed by contractors in determining a mark-up size decision. Therefore, the value of mean for this practice only reaches 2.37.

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Table 5.19: Ranking of practices in determining mark-up size decision Variable Determination of Mark-up Size Decision Experience Hunches Market Survey Previous Record N 30 30 30 30 Mean 4.53 2.37 4.30 4.33 Rank 1 4 3 2

1 2 3 4

Practices In Determining Mark-up Size Decision

Experience

4.53

Hunches

2.37

Market Survey

4.30

Previous Record

4.33

0.00

1.00

2.00

3.00

4.00

5.00

Mean

Figure 5.12: Practices in determining mark-up size decision by contractors

100

5.5.4 Reason of Non Utilization of Bidding Models

From the analysis in previous, the result shows that no respondents has utilize the bidding models in assist them in mark-up size decision. Therefore, the fact of this scenario will be briefly discussed in this section.

5.5.4.1 One-Sample T Test

According to the Table 5.20, the result of one-sample T test found out that all of the reason are accepted as its p value is not more than or equal to 0.05 (0.05). Hence, all of them are significant will be used for further test.

Table 5.20: One sample t-test result for non utilization of bidding models
Test Value = 2 95% Confidence Interval of the t df Sig. (2-tailed) Mean Difference Lower Not knowledge about bidding models Not familiar with bidding models Complexity of bidding models Not sufficient information of effectively utilize 18.137 13.145 16.029 19.826 29 29 29 29 0.000 0.000 0.000 0.000 2.200 2.267 2.367 2.467 1.95 1.91 2.06 2.21 Upper 2.45 2.62 2.67 2.72 Difference

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5.5.4.2 Chi-Square Test

From the Table 5.21, all of the results passed this test whereby the p value 0.05. This indicated that all of the four reasons have significant and will be tested in reliability analysis.

Table 5.21: Chi-Square test result for non utilization of bidding models.
Not knowledge about bidding models Chi-Square df Asymp. Sig. 7.200a 2 0.027 Not familiar with bidding models 18.533 b 3 0.000 Complexity of bidding models 7.400a 2 0.025 Not sufficient information of effectively utilize 9.800a 2 0.007

a. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 10.0. b. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 7.5.

5.5.4.3 Reliability Statistics

As mentioned in earlier, the result of reliability in Cronbachs Alpha, must equal or more than 0.70 ( 0.70) to proved the reliable. According to Table 5.22, the value of Cronbachs Alpha shows 0.835 which indicated that all of reasons are reliable in this analysis as it is 0.70.

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Table 5.22: Reliability Test result for non utilization of bidding models
Cronbach's Alpha Cronbach's Alpha Based on Standardized Items 0.829 N of Items 4

0.835

5.5.4.4 Ranking Of Reason for Non Utilization of Bidding Models

According to the Table 5.23 and Figure 5.13, not sufficient information of effectively utilize (mean=4.47) is most influential reason of non utilization of bidding models. Next, complexity of bidding models is the second influential reason which mean value equal 4.37. The following influential reason is not familiar with bidding models (mean=4.27) and the last reason is not knowledge about bidding models (mean=4.20).

Table 5.23: Ranking for reason of non utilization of bidding models

Variable

Non Utilization of Bidding Models Not knowledge about bidding models Not familiar with bidding models Complexity of bidding models Not sufficient information of effectively utilize

N 30 30 30 30

Mean 4.20 4.27 4.37 4.47

Rank 4 3 2 1

1 2 3 4

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Reasons For Non Utilization Of Bidding Models

Not knowledge about bidding models Not familiar with bidding models Complexity of bidding models Not sufficient information of effectively utilize 4.00 4.10 4.20

4.20

4.27

4.37

4.47

4.30

4.40

4.50

Mean

Figure 5.13: Reason of non utilization of bidding models

5.5.5 Summary

This chapter has analyzed the factor affecting the mark-up size decision through the overall and different contractor size. For overall analysis, the most important categories of factors are followed by project characteristics, company characteristics, economic situation, project documentation and bidding situation. Besides, the top 10 important factors are overall economy, competition, need for work, size of project, project cash flow, degree of difficulty, availability of required cash, degree of safety, experience in similar project, and current workload.

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In different contractor size analysis, 7 factors found that significant differences between medium-size and large-size contractors which are degree of difficulty, uncertainly in cost estimate, need for work, availability of qualified staff, time allowed submitting bids, bidding document price and risk involved in investment.

On the other hand, the range of the mark-up size may vary from 5% until 20% but the mark-up size in range 10 % to 15% is most evaluated by contractors. Besides, experience, previous record and market survey were more practiced by contractors in determining their mark-up size. Unfortunately, the bidding models were not utilized by contractors since they are not sufficient information to effectively use it and the complexity of these models.

CHAPTER 6

CONCLUSIONS AND RECOMMENDATIONS

6.1

Introduction

This chapter will conclude the overall study that regard to the factors affecting the mark-up size decision. It will present the achievement of objectives of this study based on the results and analysis from the previous chapter. In addition, some research limitations will also be discussed, as well as some recommendations for further research regard to the mark-up size decision will be highlighted.

6.2

Summary of Finding

Basically all the objectives of this study have been successfully achieved. This study can be summarized as follows:

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6.2.1 Objective No. 1 - To determine the factors affecting the mark-up size decision by

contractors.

According to the analysis, the top ten influence factors that affect the mark-up size decision are overall economy, competition, need for work, size of project, project cash flow, degree of difficulty, availability of required cash, degree of safety, experience in similar project, and current workload. On the other hand, the most influence categories of factors affecting mark-up size decision are followed by project characteristics, company characteristics, economic situation, project documentation and bidding situation.

6.2.2 Objective No. 2 - To analyze the perceived importance of the various factors

considered in the mark-up size decision in different contractor sizes evaluation.

From the analysis, , the most influence categories of factors evaluated by largesize contractors are project characteristics, economic situation, company characteristics, bidding situation and project documentation. On the other hand, categories of project characteristics, company characteristics, economic situation, project documentation and bidding situation are evaluated by medium-size contractor as the influential categories of factors.

In addiction, the top ten factors evaluated by the large-size contractors as the most influential in their mark-up size decisions are degree of difficulty, overall economy, project cash flow, competition, size of project, degree of safety, risk involved in investment, need of work, availability of required cash and current workload. On the

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other hand, overall economy, need for work, competition, size of project, availability of required cash, project cash flow, experience in similar project, degree of difficulty, anticipated value of liquidated damages and past profit in similar job are evaluated by the medium-size contractors as the top ten influence factors. This shows that the different of perceived important of various factors is exist between medium and largesize contractors evaluation.

Furthermore, there are seven factors indicated that have significant differences between medium-size and large-size contractors which are degree of difficulty, uncertainly in cost estimate, need for work, availability of qualified staff, time allowed submitting bids, bidding document price and risk involved in investment.

6.2.3 Objective No. 3 - To investigate the current practices in contractors mark-up

size decision.

In current practices, the range of the mark-up size may vary from 5% until 20% but the most preference mark-up size is 10 % to 15%. Besides, experience, previous record and market survey were more practiced by contractors in determining their markup size. Unfortunately, the bidding models are not utilized by contractors since they are not sufficient information to effectively use it and the complexity of these models.

By appreciating objectives that have been achieved, the aims of study therefore has been successfully achieved and materialized.

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6.3

Conclusion

Based on findings, researches can conclude that the factors affecting the contractors mark-up size have different importance one of another. Besides, there were distinct and significant difference in the importance assigned to the factors between the different sizes of contractor. Moreover, the most preference mark-up size determined by contractors is between 10 % and 15% of overall project cost. Sadly, the bidding models are not utilized while experience, previous record and market survey are more practiced by contractors in assist to determine their mark-up size decision.

6.4

Research Limitation

There are several limitations had to be taken into consideration while conducting this study. One of the biggest challenges faced is in term of time limitation in conducting the study. This study employed questionnaire structure in order to gather required data from the respondent within a short semester. However, only 30 set of questionnaire successfully collected by author in this limited time.

Since no other financial aids as well as time limitation, author has difficulties in travelling to other parts of Malaysia to collect the required data. Therefore, the scope of this study is limited to Johor Bahru, Malaysia to carry out the research.

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6.5

Recommendations for Further Studies

Since the author had covered only limited scope in this study, it is proposed that study can be conducted in whole the Malaysia. Also, more extensive study can be conducted regard to the mark-up size decision in non-traditional procurement method such as Design and Build, Turnkey, and so on. In addition, bidding models are recommended for advanced study in order to persuade and encourage the Malaysian contractors effectively utilized it.

6.6

Summary

This study had successful provided an overview on the factors that affecting the contractors mark-up size decision in local construction industry. It is hoped that this study can truly motivate future studies in carrying out the recommendations for further studies as briefly described above.

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APPENDICES A

SURVEY QUESTIONNAIRE

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FACULTY OF CIVIL ENGINEERING UNIVERSITI TEKNOLOGI MALAYSIA MASTER OF SCIENCE (CONSTRUCTION MANAGEMENT)

SURVEY QUESTIONNAIRE Title: Factors Affecting The Contractors Mark-up Size Decision In Malaysia

Objectives of Study: 1. To determine the factors affecting the mark-up size decision by contractors. 2. To analyzes the perceived importance of the various factors those are considered in the mark-up size decision in different contractor sizes evaluation. 3. To investigate the current practices in contractors mark-up size decision.

Prepared by: Name: Tey Kim Hai I/C No: 850706-01-5441 H/phone No: 012-7308826 Supervisor: Associate Professor DR. Aminah Md Yusof
All the provided information from your respond will be treated as strictest confidence and will be used in this research only.

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Part A: Company Profile (Please

and answer in given spaces)

i.

Company Name:

ii. Company Address:

iii. Grade of Company Registration (CIDB): Large-Size G6 G5 G4 Medium-Size G3 G2

iv. Years in Construction Field: 1 to 5 years 11 to 15 years 6 to 10 years More than 15 years

v. Amount of Project Taken: 1 to 10 projects 21 to 30 projects 11 to 20 projects More than 30 projects

vi. Type of Project Usually Taken: Public Private

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vii. Company Stamping:

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Part B: Factors Affecting the Contractors Mark-up Size Decision (Please to answer) What do you think the potential factors that affecting the mark-up size decision in construction tender? Please rate the following factors based on the level of frequency occurred. Strongly Disagree 1 Disagree 2 Average 3 Agree 4 Strongly Agree 5

1. Project Characteristics a. Size of project b. Duration of project c. Location of project d. Project cash flow e. Identity of owner f. Degree of difficulty g. Degree of safety 2. Project Documentation a. Type of contract b. Completeness of document c. Owner's special requirement d. Use of nominated subcontractor e. Anticipated value of liquidated damages 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5 1 1 1 1 1 1 1 2 2 2 2 2 2 2 3 3 3 3 3 3 3 4 4 4 4 4 4 4 5 5 5 5 5 5 5

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3. Company Characteristics a. Availability of required cash b. Uncertainty in cost estimate c. Need for work d. Past profit in similar job e. Current work load f. Experience in similar project g. General overhead h. Portion subcontracted to others i. Availability of qualified staff j. Establishing long relationship with owner 4. Bidding Situation a. Required bond capacity b. Competition c. Time allowed submitting bids d. Bidding document price e. Prequalification requirements f. Availability of other projects 5. Economic Situation a. Overall economy (availability of work) b. Risk involved in investment c. Availability of labor or equipment d. Government division requirement e. Tax liability 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 4 4 4 4 4 4 5 5 5 5 5 5 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5

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Part C: Current Practices in Contractors Mark-up Size Decision (Please given spaces)

and answer in

i. What mark-up size normally taken by company to tender a project? Under 5 % of Overall Cost 10 to 15 % of Overall Cost 20 to 25 % of Overall Cost 30 to 35 % of Overall Cost 5 to 10 % of Overall Cost 15 to 20% of Overall Cost 25 than 30% of Overall Cost More than 35% of Overall Cost

ii. The percentages allocated for the following components in mark-up size. Components in Mark-Up Size 1 Overhead Cost ( % of overall cost) 2 Contingencies Cost 3 Profit ( % of overall cost) Percentages %

(% of overall cost)

4 Others (Please specify): ______________________

iii. Does your company utilize any bidding models in determining mark-up size decision? Yes

No

[If no, please answer a question (vi)]

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iv.

Which bidding models were utilized in determination of the mark-up size decision? (Please to rate the utilization of following bidding models based on the level of frequency occurred). Not At All 1 Rarely 2 Sometimes 3 Frequent 4 Most Frequent 5

Utilization of Bidding Models In Mark-up Size Decision 1. 2. 3. 4. 5. 6. 7. 8. 9. Friedman model Gates model OPBID LOMARK DBID Carr's Bidding Model Optimum Bid Approximation Model Bids Considering Multiple Criteria Winning over Key Competitors 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5

10. Sequential Competitive Bidding 11. Average-Bid Method Bidding Model 12. Self-explanatory Artificial Neural Networks

v.

Why you think the bidding models are important in determination of mark-up size decision?

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vi.

How your company determines the mark-up size decision? (Please to rate the following practices in determination of mark-up size decision based on the level of frequency occurred). Not At All 1 Rarely 2 Sometimes 3 Frequent 4 Most Frequent 5

Determination of Mark-up Size 1. 2. 3. 4. 5. Experience Hunches Market Survey Previous Record Others (Please specify) : ____________________ 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5

vii.

What do you think the reason of lack or not utilization of bidding model in assist contractors mark-up size decision? (Please to rate the following factors of lack or not utilization of bidding models based on the level of frequency occurred). Strongly Disagree 1 Disagree 2 Average 3 Agree 4 Strongly Agree 5

Factors of Lack or Not Utilization of Bidding Models 1. Not knowledge about bidding models 2. Not familiar with bidding models 3. Complexity of bidding models 4. Not sufficient information to effectively utilize 5. Others (Please specify) : ____________________ 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5

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viii.

In your opinion, do you feel that most contractors should be encouraged to utilize the bidding models in determination of mark-up size decision?

Thank you for participating in this questionnaire Your cooperation is highly appreciated

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APPENDICES B

CONFIRMATION LETTER FROM FACULTY

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