Bid Mark-Up Selection Using Neural

Engineering, Construction and Architectural Management
Bid mark-up selection using artificial neural networks and an entropy metric
Symeon Christodoulou
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ECAM
17,4
Bid mark-up selection using

artificial neural networks and an
entropy metric
424
Received October 2008
Revised October 2009
Accepted February 2010
Symeon Christodoulou
Department of Civil and Environmental Engineering, University of Cyprus,
Nicosia, Cyprus
Abstract
Purpose The purpose of the paper is to perform bid mark-up optimisation through the use of
artificial neural networks (ANN) and a metric of the selected bid mark-ups derived entropy. The scope
is to provide an alternative, entropy-based method for bid mark-up optimisation that improves on the
analytical models of Friedman and Gates.
Design/methodology/approach The proposed method enables the incorporation of bid
parameters through the use of ANNs pattern recognition capabilities and the integration of these
parameters with a mark-up selection process that relies on the entropy produced by possible mark-up
values. The entropy metric used is the product of the probability of winning over the bidders
competitors multiplied by the natural logarithm of the inverse of this probability.
Findings The case study results show that the proposed entropy-based bidding model compares
favourably with the prevailing competitive bidding models of Friedman and Gates, resulting in higher
optimisation with regards to the number of jobs won, the monetary value of contracts awarded and the
value of money left on the table. Furthermore, the method allows for the incorporation of several
objective and subjective bid parameters, in contrast to Friedmans and Gatess models, which are
based solely on the bid mark-up history of a bidders competitors.
Research limitations/implications While the proposed method is a useful tool for the selection
of optimal bid mark-up values, it requires historical data on the bidding behaviour of key competitors,
much like the classic bidding models of Friedman and Gates.
Originality/value The method is suitable for quantifying objective and subjective competitive
bidding parameters and for optimising bid mark-up values.
Keywords Tendering, Neural nets, Thermodynamic properties
Paper type Research paper
Engineering, Construction and

Architectural Management
Vol. 17 No. 4, 2010
pp. 424-439
q Emerald Group Publishing Limited
0969-9988
DOI 10.1108/09699981011056600
Introduction
Competitive bidding is the prevailing method for tendering and contract awarding in the
construction industry. The process, during which an underwriter submits a sealed bid to
the issuer and the issuer awards the contract to the underwriter with the best reasonable
price, comprises one of the most important functions that contractors perform on a regular
basis. At the core of competitive bidding is each bidders need to determine a proper bid
mark-up value for the project in consideration, for a given set of project parameters and
risk factors. Bid mark-up (r) is typically defined as the ratio of a bid over the estimated
project cost for the subject project, and its value must be low enough to ensure a good
chance of winning the contract and high enough to realise a reasonable profit from it.
Over the years, several models for bid mark-up estimation have been developed,
some analytical, some numerical. Initial formulations of competitive bidding, such as
the models of Friedman (1956) and Gates (1967), utilised a rather limited set of
parameters (the cost estimate and the competitors past bidding behaviour) to arrive at
optimum bid mark-up calculations through the maximisation of the expected value
obtained by one of several possible bid values. The approach is based on a trade-off
analysis between the probability of winning at a given bid mark-up and the
corresponding profit/loss at such bid mark-up. The analysis is based on the premise
that, in competitive bidding environments, the lowest responsible bidder is awarded
the contract and that bidders strive for an optimum bid value, one that would result in
a bid that is low enough for a bidder to win ahead of the competition, yet high enough
to generate profit.
Within the framework of the aforementioned trade-off analysis, the optimum bid
mark-up (r *) to be utilised by a specific bidder is obtained by maximising the expected
value of a bid (b). The expected value, E(r), can be expressed by:
Er b 2 c:P win r cr 2 1:P win r;
with r b/c being the bid mark-up, b the bid, c the cost estimate, and Pwin(r) the
probability of winning at the specific mark-up. It should be noted that the general
model expressed by equation (1) relies heavily on the bidders cost estimate and does
not take into consideration the estimating inaccuracy inherent in the bidding process.
Friedman (1956) addressed the inaccuracy by using the distribution of a bidders
historical mark-up to adjust the expected value, and a subsequent model by Skitmore
and Pemberton (1994) improved on this adjustment by assuming a log-normal
distribution and relating the bias involved to the number and the type of bidders
involved in each bidding process.
This paper presents an alternative approach to the classical competitive bidding
models of Friedman and Gates, utilising entropy as a decision metric for selecting a
suitable bid mark-up. Even though entropy is a term mostly associated with natural
phenomena, in its more general context entropy is considered to be a good measure of a
systems stability; it is directly related to an events probability of occurrence, and it is
widely used in optimisation. The proposed method utilises the pattern recognition
capabilities found in artificial neural networks (ANN) to enable the incorporation of
several parameters in competitive bidding and then integrates such parameters with a
mark-up selection process that relies on the entropy produced by possible mark-up
values.
Competitive bidding models
Contract-awarding methodologies, and competitive bidding in particular, have been at
the centre of attention for numerous researchers starting from the pioneering work of
Friedman (1956) and Gates (1967). The models developed since then range from
analytical to numerical and address a number of questions/problems, such as the
decision by a contractor to bid (or not) and the optimum bid mark-up to use, or the
contract award criteria to be used by the owner. The former question relates to bidding
models (contractor) while the second question relates to awarding models (owner). In
most cases, the bid price is the deciding (if not the sole) factor in awarding the contract.
In terms of the bid-decision aspect, the traditional bidding models of Friedman and
Gates are based only on the bidding history of the firm and its competitors (with
additional refinements to the models proposed by Schaffer and Michaeu, 1971;
Bid mark-up
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425
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Benjamin, 1972; Griffis, 1992). Additional bid mark-up decision parameters are
reported by Ahmad and Minkarah (1988) and later introduced in the analysis by
Hegazy (1993) and Christodoulou (2000, 2004). Such parameters include a bidders
desire to win a bid, the bidders volume of work at the time of submitting the bid, the
overall competition, the projects complexity, the market conditions, etc. (Ahmad and
Minkarah, 1988). A series of recent advances in computational analysis, such as matrix
calculations, expert systems, ANN and fuzzy logic, have allowed the introduction of
even more quantitative and qualitative factors in the development of bidding models.
The goal has been the capture of the underlying patterns in human reasoning and their
incorporation in increasingly more complex bidding models. Hegazy (1993), for
example developed an ANN decision-support model that incorporated many of the
parameters identified by Ahmad and Minkarah (1988) and Christodoulou (2004) linked
ANN with fuzzy logic and a bidders historical bidding records to develop the
probability of winning a particular project stemming from Friedmans or Gatess
models. Other bidding models include:
.
a preference-uncertainty trade-off analysis (Ahmad and Minkarah, 1987), by
which the attitudes of a bidder towards risk and subjective value judgement are
captured;
.
rule-based expert systems and ANN (Li and Love, 1999, Li, 1996);
.
utility theory (Dozzi and AbuRizk, 1996);
.
multi-attribute utility theory and analytical hierarchy process (Marzouk and
Moselhi, 2003);
.
multiple-objective goal programming (Tan et al., 2008); and
.
regression analysis (Oo et al., 2007).
In general, though, existing models impose several limitations depending on what and
how one desires to model, and on the level of model complexity one desires to employ.
For example, the mathematical models proposed for competitive bidding (Friedman,
Gates, Benjamin, et al.) were limited to the inclusion of only two parameters (cost
estimate and bid mark-up), and thus there are inherent limitations due to
over-simplification of the bidding problem, whereas more complex analytical models
are cumbersome and non-usable. Numerical models (such as expert systems and
artificial neural networks, or ANN) manage to capture several more of the factors
influencing bid decisions (objective and subjective factors), yet unless complemented
with competitive bidding history on competitors they fail to enumerate the resulting
probability of success and therefore the optimum bid mark-up (Christodoulou, 2004).
If one considers the dynamics of only the decision to bid on a project, the problem
can be simplified significantly and ANN can be employed (Ahmad, 1990; Wanous et al.,
2003; Lowe and Parvar, 2004), but even in this case ANN can only capture the patterns
in past behaviour and not necessarily the expert opinions of bidders on the specifics
of a project at hand. In other words, even though one can benefit from past experience
one cannot rely on future decisions based solely on history, and a closer look should be
given to the specifics of a new project subject to all the evaluation weights one assigns
to this project at that specific point in time.
Another problem with the prevailing bidding models is the lack of consensus
surrounding the probability estimates used in optimising the bid mark-up. Returning
to the classical bidding models of Friedman (1956) and Gates (1967), one cannot help
noticing that each model relies on essentially the same information but arrives at
different probabilities of submitting the winning bid (Crowley, 2000). Both models
assume that the primary objective of a construction firm involved in competitive
bidding is the maximisation of the margin of bid over cost, coupled with the
simultaneous consideration of only one source of uncertainty that arises from a
competitive situation, and that the problem of determining the optimal bid is defined as
one of determining the bid mark-up that yields the maximum probability of winning
over the competition. At this optimum bid mark-up, the product of the probability of
being the lowest bidder times the mark-up level corresponding to that probability
yields the maximum expected value of the bid (Friedman, 1956; Gates, 1967).
Friedmans model assumes that the bidding behaviour of each bidder can be
described by a probability distribution, that bidders bid independently of each other (i.e.
each bidders behaviour is stochastically independent of each and all other bidders), and
that the cost of the project is a random variable. The probability of winning over each
competitor is computed by using historical bidding data on past projects to determine
the competitors bidding patterns. The probability of winning over all competitors is the
product of the probabilities of winning over each and every competitor:
P win P win A :P win B :P win C . . .P win N
n
Y

P i r ;
i1
where Pi(r) is the probability of winning over competitor i if a bid is marked up by a

factor r, and n is the number of competitors submitting a bid. If the number of
competitors submitting bids is not known, then the concept of average bidder can be
used, as defined by Friedman.
Gatess (1967) model is very similar to that of Friedman in its underlying
assumptions, but fundamentally different in the method used to assess the probability of
winning against all competitors. In Gatess model, every competitor has an equal chance
of winning if all the bidders are ideal or similar competitors, and the joint probability of
winning over all competitors can be obtained by using equations (3) and (4):
P win 1=1 1 2 P win A =P win A 1 1 2 P win B =P win B . . . 1 1
2 P win N =P win N ;
3
"
P win
n
X
1 2 P i r
1
P i r
i1
#21
:
It should be noted that even though the two models as expressed by equations (2) and
(4) result in different winning probabilities and hence different optimum bid mark-ups,
the methodology used and the models underlying information is the same.
Furthermore, one of the fundamental assumptions in both models is that the
competirors cost estimates (c) are identical to the bidders estimate and that they are
known in advance. In effect, by not taking into account the bidders estimating
inaccuracy, Friedmans and Gatess models oversimplify the underlying bidding
problem. Later use by Friedman of the distribution of past actual costs over estimated
Bid mark-up
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ECAM
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costs for adjusting the expected value of each bid has only marginally improved the
model. A later model by Skitmore and Pemberton (1994) assuming a log-normal
distribution did this in a more coherent manner by relating the bias involved in the
model to the number and type of bidders involved.
With regards to the debate over the validity and appropriateness of the models
presented by Friedman and Gates, Crowley (2000) states that both models are
simultaneously correct and incorrect. Friedmans model is theoretically correct, yet the
bid problem is incorrectly specified. Gates model is practically correct, yet the formula is
incorrectly specified. Furthermore, while using the same underlying assumptions, each
comes to a different assessment and the numeric difference between Friedmans and
Gates is due to the incomplete sample space considered in Gates model (Crowley, 2000).
The debate about the validity of the Friedman and Gates formulae has recently been
resolved in the work by Skitmore et al. (2007), in which Gatess model is shown to be a
special case of a general model that contains both the Gates and Skitmore and Pemberton
models. In the work by Skitmore et al. (2007):
Gates model is shown to be correct if, and only if, the distributions involved are from the
proportional hazards family. Furthermore, for this to hold with the application of a markup,
the PDF must be specifically Weibull.
Thus, Gates model is shown to be based on a Weibull probability distribution

function, where the Skitmore and Pemberton model is based on a log-normal
probability distribution function. By comparison, Friedmans model uses the empirical
distribution of pairwise bidders, resulting in poor parameter estimates for the small
data samples typically found in construction bidding.
An equally important issue with the aforementioned analytical models is their
oversimplification of the bidding problem to one of consisting of only two parameters
(cost estimate and bid mark-up). This simplification reduces the models accuracy and
usefulness, for they fail to capture all the other objective and subjective factors that
govern bid decisions.
A number of computational models tried to address the aforementioned limitation
(expert systems, artificial neural networks), the most notable of which was a neural
network application developed by Hegazy (1993). The ANN used was modelled around
the back propagation algorithm, having an input layer of 30 neurons, a hidden layer,
and an output layer of seven neurons. The factors corresponding to these neurons
ranged from project-specific factors (such as job complexity, duration, cost, inadequacy
of design, level of competition, etc.) to global considerations (such as status of economy,
the firms need for work, etc.) and they were both quantitative and qualitative (Hegazy,
1993). The ANN application was the culmination of Hegazys survey as well as a
survey questionnaire (Ahmad and Minkarah, 1988) among the top 400 contractors in
the USA and Canada, identifying and ranking the underlying factors of the bidding
problem by degree of importance to the bid mark-up decision. Among the outputs of
the ANN model were the percent mark-up and the bid outcome (win/lose). Hegazy
suggested that both these values could be calculated by use of the ANN model by first
applying a trained ANN model to specific project attributes in order to predict a new
bid, and then applying Monte Carlo simulations on the inputs so as to obtain the
probability of winning at the suggested bid mark-up. The win/lose output neuron
and the resulting frequency histograms help in the estimation of such probability.
The method proposed by Hegazy, in effect, suggests that both the bid mark-up and
the probability of winning at a given mark-up are direct outcomes of the qualitative
factors affecting the bid mark-up decision. Even though this may be true in the case of
the bid mark-up, the probability of winning is primarily dependent on the level of
competition, as defined by Friedmans and Gatess stochastic models. Thus, even
though back-propagation based ANNs are suitable for capturing the knowledge of a
contractor, for simulating the contractors bidding behaviour and for applying this
knowledge base to new projects recommending appropriate bid mark-ups, such models
are not appropriate for calculations of the probability of winning.
Furthermore, the value suggested by the ANN model for the bid mark-up cannot be
considered as the optimum value. This value is only the result of the pattern recognition
performed by the ANN of the knowledge base it was trained on with, and it can therefore
only be considered as the best prediction of an appropriate bid mark-up for a project of
given attributes. Historical bid data of competitors is absent from such ANN.
Alternative ANN techniques for optimum bid mark-up and probability of winning
calculations should therefore be sought.
Bid mark-up
selection
429
Entropy-based bid mark-up optimisation

Entropy (Hx) is generally considered to be a metric of a systems order and stability,
and mathematically it can be evaluated as the product of the probability distribution
( px) of a variable x, multiplied by the natural logarithm of the inverse of that
probability distribution (equation (5)) (Shannon, 1948, Wikipedia, 2009). In information
theory, entropy is a measure of the uncertainty associated with a random variable and
in this context it is usually referred to as the Shannon entropy (Shannon, 1948).
H x px ln1=px 2px ln px ;
As Figure 1 depicts, the entropy metric is initially increasing in value with increasing
probability values (in the range [0.00, 0.37]) and then decreasing in values (in the range
Figure 1.
Graphical representation
of the general entropy
equation
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430
[0.37, 1.00]). As a result of the parabolic shape of the graph produced by equation (5)
(Figure 1) for a given entropy value there could be two possible values of px.
Even though entropy is a term mostly found in natural sciences it has, in recent
years, been applied to a wider range of sciences. It has yet to be systematically applied
to construction management though. Apart from reported work by Choi and Russell
(2005) on long-term entropy and profitability change of public construction firms in the
USA, there has been little additional reported research activity on the applicability of
the entropy concept to construction management.
Why entropy maximisation?
Since the entropy equation is centred on the probability of occurrence ( px) and the
outcome of an event of interest, it could be a possible alternative to the classical bid
mark-up optimisation paradigms. The goal of the entropy-based bidding paradigm is
to maximise the probability of winning that produces the maximum total entropy.
As previously noted, the Shannon entropy is a measure of the uncertainty
associated with a random variable. Equivalently, it is a measure of the average
information content one is missing when one does not know the value of the random
variable. Consider, for example, the case of tossing a coin with known but not
necessarily equal probabilities of coming up with either heads or tails. The total
entropy (HT) of the each toss is at maximum if the possible outcomes are of equal
probability: if phead ptail 0:5 then H T 0:693. This is the situation of
maximum uncertainty, since it is most difficult to predict the outcome of the next toss.
However, if we know that the coin is not fair and that the possible outcomes have
unequal probabilities of occurrence then there is less uncertainty in the toss (with every
toss, one side is more likely to come up than the other). For example, if
p0 head 0:6 1 2 p0 tail, then H 0T 0:306 0:367 0:673. The reduced
uncertainty in the coin toss results in a lower total entropy.
By extension, should one consider the uncertainty involved in competitive bidding
and assuming no a priori knowledge of each competitors past bidding behaviour, then
in theory all bidders have equal probability of winning the bid. This is the case of
maximum entropy. As the bidders past bidding behaviour is assembled and
introduced in the analysis by use of each bidders PDF, the probability of beating each
competitor may be estimated more accurately and the total entropy can be reduced.
However, there is still high uncertainty in the estimated PDFs due to the partial
information available to the bidder about each of its competitors decision variables
and preferences. With this in mind, a bidder should in essence select a mark-up for
which the probability of winning against all its competitors takes into consideration
the case of maximum uncertainty (i.e. maximum entropy) in the estimation of the PDFs
and in the competitors underlying bidding behaviour and decision variables.
Proposed method
The entropy-based bid mark-up optimization is as follows:
(1) A firm identifies the factors that are thought to govern the firms bid mark-up
decision strategy and develops an ANN model to capture the firms knowledge
over time.
(2) The developed ANN, once trained with company-specific data, is used by the
firm in developing an initial appraisal of a bid mark-up for a new project
opportunity.
(3) In parallel, the firm records the bid behaviour of its competitors over time. The
information collected is each competitors bid and the firms own cost estimate
for each project bid on by the firm.
(4) Each competitors bid history is utilised in developing a bid histogram and a
probability distribution histogram for the competitor.
(5) For a new bid, the firm uses the suggested by the ANN bid mark-up and each
competitors PDF of past bids to calculate the probability of winning each
competitor (i ) separately. The entropy, Hi(r), produced by the various bid
mark-up values (r) is also calculated for each competitor (by use of equation (5)).
For a desired bid mark-up the total entropy, HT(r), caused by all competitors
bidding on the project is the summation of the entropies caused by the
individual competitors (equation (6)):
H T r
n
X
{ 2 P i r: lnP i r}:
i1
(6) The total entropy is maximised and the corresponding bid mark-up value is
identified. This is the entropy-based optimum bid mark-up for the new project.
Demonstration of the method
For the purpose of demonstrating the proposed entropy-based method for bid mark-up
optimisation, consider the case of a firm bidding against three key competitors against
whom the firm bid 30 times in the past. The data used in the analysis is a combination of
two case studies documented in literature (Christodoulou, 2004; Li and Love, 1999).
Table I shows the bid data for the 30 projects in study (from Christodoulou, 2004) and
Table II shows the relative strength metrics for the ANN inputs (from Li and Love, 1999).
The ANN used in the data-pattern analysis is a three-layered network (one input
layer, one output layer, one hidden layer) with ten input neurons representing bid
mark-up attributes and four hidden neurons (Figure 2). The ANN utilised uses the back
propagation algorithm in combination with a supervised error-correction learning rule
for training and for pattern recognition, with the learning rule, momentum and target
error parameters being 0.60, 0.80 and 0.05, respectively. The learning rate affects the
speed at which the ANN arrives at a solution (a high value may lead to
non-convergence, whereas a low value may lead to slow convergence). The momentum
parameter is used to prevent the ANN from converging to a local minimum (a high
value may lead to instability or overshooting a solution, whereas a low value may lead
to local minima and wrong solutions). The ANN topology utilised is an implementation
of the ANN architecture proposed by Li and Love (1999) and the training parameters
they arrived at (Table II). It should be noted that even though the ANN neurons were
initialised with the relative strength values quoted by Li and Love (1999) so as to
replicate the knowledge quoted in their work, firm-specific ANN topologies can be
developed once bidding data pertaining to a company is accumulated over time. This
will further improve the ANNs training and prediction accuracy.
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Bid number
432
Table I.
Tabulation of bid
mark-ups
Cost estimate
Bidder 1
r1
Bid mark-up
Bidder 2
r2
Bidder 3
r3
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1.153
1.026
1.050
1.084
1.119
1.071
1.029
1.109
1.186
1.125
1.137
1.080
1.139
1.134
1.051
1.045
1.189
1.067
1.083
1.011
1.089
1.094
1.114
1.071
1.095
1.077
1.112
1.030
1.151
1.099
1.031
1.170
1.114
1.053
1.024
1.014
1.190
1.164
1.055
1.095
1.130
1.133
1.066
1.110
1.025
1.186
1.194
1.137
1.125
1.081
1.048
1.010
1.102
1.072
1.086
1.026
1.004
1.030
1.145
1.155
1.100
1.158
1.121
1.045
1.145
1.100
1.095
1.002
1.017
1.044
1.043
1.104
1.022
1.133
1.187
1.120
1.018
1.006
1.180
1.051
1.117
1.189
1.097
1.081
1.106
1.097
1.013
1.119
1.048
1.128
Bid data
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
30
Input attribute
Table II.
Relative strengths of
ANN input attributes
1
2
3
4
5
6
7
8
9
10
Project size
Location
Market conditions
Number of competitors
Project type
Working cash requirement
Overhead rate
Current workload
Labour availability
Project complexity
Relative strength
0.09
0.06
0.10
0.13
0.08
0.04
0.02
0.27
0.01
0.19
Bid mark-up
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433
Figure 2.
ANN architecture utilized
in bid mark-up estimation
As Li and Love (1999) note, the effect of the ith input node on the output node (Ei) is
calculated by the use of equation (7):
E i I i :RS i =
n
X
I k :RS k ;
k1
where RSi is the relative strength between the ith input and the output, RSk is the
relative strength between the kth input and the output, n is the total number of hidden
nodes, Ii is the value of the ith input node, and Ik is the value of the kth input node. Also
of importance is the fact that the magnitude of the relative strengths (Table II) indicate
only how much of the input values are passed on to the next nodes when calculating
the output neuron, and not the influence of the input neurons on the output neuron.
When the trained ANN is presented by a new bid scenario (such as the ones
showcased in Li and Love, 1999) then it outputs a suggested bid mark-up value based
on the appraisal of the ten input parameters from Table II (values in the range of 5.5-7.8
per cent are quoted). The suggested values, however, do not take into consideration the
competitors bidding history against the subject firm, and thus cannot be thought of as
metrics of the probability of winning the project. To accomplish that estimation, the
firm needs to also consider the bidding history of competitors (as suggested by
Friedman and Gates).
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The bid histogram data produced by Table I, cumulative relative frequency data
and the resulting probability of winning against each competitor at the various bid
mark-up values are tabulated in Table III.
As a demonstration of the use of Friedmans and Gatess models in evaluating the
expected value of the bids and the optimal bid mark-up value (r *), consider the
possibility that the firm chooses a bid mark-up of r 1:05. At this mark-up and by use
of Table II, the probability of winning over bidder 1 is P 1 1 2 0:200 0:800,
over bidder 2 P 2 0:700, and over bidder 3 P 3 0:667. This means that the
probability of winning over all three bidders by use of Friedmans model (equation (2))
is P F 0:800 0:700 0:667 0:373. Similarly, by use of Gates model (equation (4)) the
probability of winning all three bidders is P G 0:460. By use of equation (1), the
expected value of such a bid would be E F 1:05 2 1 0:373 0:019 (Friedmans
model) and E G 1:05 2 1 0:460 0:023 (Gatess model). The graph of expected
value against bid mark-up would indicate the optimal bid mark-up at which the
expected value is maximised.
Bid mark-up
Table III.
Bid histogram values for
key competitors
1.00
1.01
1.02
1.03
1.04
1.05
1.06
1.07
1.08
1.09
1.10
1.11
1.12
1.13
1.14
1.15
1.16
1.17
1.18
1.19
1.20
1.21
1.22
1.23
1.24
1.25
1.26
1.27
1.28
1.29
1.30
Bid frequency
Bidder 1
Bidder 2
0
0
1
3
0
2
1
1
4
3
3
1
3
1
3
0
2
0
0
2
0
0
0
0
0
0
0
0
0
0
0
0
2
1
4
1
1
2
1
1
2
1
2
1
2
2
1
1
2
0
2
1
0
0
0
0
0
0
0
0
0
0
Bidder 3
0
2
3
1
0
4
1
0
0
1
5
2
3
2
1
1
1
0
1
2
0
0
0
0
0
0
0
0
0
0
0
Cumulative relative frequency

Bidder 1
Bidder 2
Bidder 3
0.000
0.000
0.033
0.133
0.133
0.200
0.233
0.267
0.400
0.500
0.600
0.633
0.733
0.767
0.867
0.867
0.933
0.933
0.933
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
0.000
0.067
0.100
0.233
0.267
0.300
0.367
0.400
0.433
0.500
0.533
0.600
0.633
0.700
0.767
0.800
0.833
0.900
0.900
0.967
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
0.000
0.067
0.167
0.200
0.200
0.333
0.367
0.367
0.367
0.400
0.567
0.633
0.733
0.800
0.833
0.867
0.900
0.900
0.933
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
As Christodoulou (2004) notes, by employing Friedmans and Gatess models for the
calculation of the joint probability of winning over all three competitors (equations (2)
and (4), respectively) the results were calculated to be 1.055 (Friedmans model) and
1.085 (Gates model). As expected, the bid mark-up obtained from Gates model is higher,
since the model is more aggressive in nature compared to Friedmans model (the
stochastic independence assertion results in lower bid mark-ups and more jobs won).
In the entropy-based paradigm, the probability of winning over each competitor is
used in the calculation of the entropy produced by using equation (6) but not for the
joint probability of winning over all competitors. The values for each bidder and the
total entropy produced for each possible bid mark-up value, as derived from the
case-study data, are tabulated in Table IV and depicted graphically in Figure 3. As
shown in Table IV the total entropy is maximized at a mark-up of r *E 1:08 which is
very close to the values obtained by Friedmans model (r *E 1:055) and Gatess model
(r *G 1:070).
Bid mark-up
1.00
1.01
1.02
1.03
1.04
1.05
1.06
1.07
1.08 *
1.09
1.10
1.11
1.12
1.13
1.14
1.15
1.16
1.17
1.18
1.19
1.20
1.21
1.22
1.23
1.24
1.25
1.26
1.27
1.28
1.29
1.30
Probability of winning
Bidder 1 Bidder 2
0.000
0.000
0.033
0.133
0.133
0.200
0.233
0.267
0.400
0.500
0.600
0.633
0.733
0.767
0.867
0.867
0.933
0.933
0.933
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
0.000
0.067
0.100
0.233
0.267
0.300
0.367
0.400
0.433
0.500
0.533
0.600
0.633
0.700
0.767
0.800
0.833
0.900
0.900
0.967
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
Bidder 3
Bidder 1
Bidder 2
0.000
0.067
0.167
0.200
0.200
0.333
0.367
0.367
0.367
0.400
0.567
0.633
0.733
0.800
0.833
0.867
0.900
0.900
0.933
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
0.0000
0.0000
0.1134
0.2687
0.2687
0.3219
0.3396
0.3525
0.3665
0.3466
0.3065
0.2893
0.2274
0.2037
0.1240
0.1240
0.0644
0.0644
0.0644
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.1805
0.2303
0.3396
0.3525
0.3612
0.3679
0.3665
0.3624
0.3466
0.3353
0.3065
0.2893
0.2497
0.2037
0.1785
0.1519
0.0948
0.0948
0.0328
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
Entropy
Bidder 3
0.0000
0.1805
0.2986
0.3219
0.3219
0.3662
0.3679
0.3679
0.3679
0.3665
0.3219
0.2893
0.2274
0.1785
0.1519
0.1240
0.0948
0.0948
0.0644
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
Bid mark-up
selection
435
Total entropy
0.0000
0.3611
0.6423
0.9301
0.9430
1.0493
1.0753
1.0869
1.0968 *
1.0597
0.9636
0.8851
0.7442
0.6319
0.4797
0.4266
0.3112
0.2540
0.2236
0.0328
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
Table IV.
Entropy-based bid
mark-up optimisation
ECAM
17,4
436
Figure 3.
Individual bidder
entropies and total
entropy for various bid
mark-ups
A closer comparison of the three models (Table V) reveals that the entropy-based bid
mark-up value is closer to Friedmans model in terms of projects won (six versus seven)
and compares favourably with both Friedmans and Gatess models in terms of the
average money left on the table (12,500 versus 34,429 and 13,000, respectively). This
indicates a higher optimisation in terms of the money left on the table metric.
Conclusions
The proposed entropy-based method for bid mark-up selection provides an alternative
approach to the classical bidding models of Friedman and Gates. The method, which
uses entropy as a decision metric, relies on the bidding history of competitors to
estimate the probability of winning against each one of them, and to calculate the
entropy deduced by these probabilities. The individual entropies are then synthesised
to produce the total bid entropy, which in turn is used for finding the bid mark-up that
maximizes the total entropy. Possible bid mark-up values under various bid scenarios
and risk factors can be derived from historical bid data and by use of ANN.
The entropy-based method produces bid mark-up values that compare favourably with
values deduced by Friedmans model and Gatess model, and sidesteps the controversy
over the models underlying stochastic dependence (or independence) assertion.
As with other similar work on competitive bidding, however, the difficulty in
testing the accuracy and validity of the model outputs should be noted. Even though
the entropy-based model results in values that compare with the results from
Friedmans and Gatess models, the issue remains that it is not known how accurate
and valid those models are. As Skitmore (2004) notes:
. . . it has been doubted that sufficient data can be mustered for each bidder for any effective
predictions to be made. In analysing some real and typical sets of construction contract
auction bid data it has been possible to compare the major models here against pure chance,
showing that at best only a marginal improvement on chance seems possible.
Lowest
competitor
Data
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.085
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
1.080
Bid models markup

Friedmans
Gates
Entropy
model
model
model
1,000,000
1.031
1.055
1,000,000
1.026
1.055
1,000,000
1.050
1.055
1,000,000
1.045
1.055
1,000,000
1.024
1.055
1,000,000
1.014
1.055
1,000,000
1.029
1.055
1,000,000
1.002
1.055
1,000,000
1.017
1.055
1,000,000
1.044
1.055
1,000,000
1.043
1.055
1,000,000
1.080
1.055
1,000,000
1.022
1.055
1,000,000
1.110
1.055
1,000,000
1.025
1.055
1,000,000
1.045
1.055
1,000,000
1.018
1.055
1,000,000
1.006
1.055
1,000,000
1.083
1.055
1,000,000
1.011
1.055
1,000,000
1.048
1.055
1,000,000
1.010
1.055
1,000,000
1.097
1.055
1,000,000
1.071
1.055
1,000,000
1.086
1.055
1,000,000
1.026
1.055
1,000,000
1.004
1.055
1,000,000
1.030
1.055
1,000,000
1.048
1.055
1,000,000
1.099
1.055
Number of bids won
Amount of contracts awarded ($)
Money left on the table (total, $)
Money left on the table (average, $)
Cost
estimate
WIN
WIN
WIN
WIN
4
4,340,000
7
7,385,000
Bid outcome
Gates
model
WIN
WIN
WIN
WIN
WIN
WIN
WIN
Friedmans
model
6
6,480,000
WIN
WIN
WIN
WIN
WIN
WIN
Entropy
model
241,000
34,429
25,000
55,000
28,000
42,000
16,000
31,000
44,000
30,000
3,000
17,000
6,000
19,000
75,000
12,500
52,000
13,000
25,000
12,000
1,000
14,000
Money left on the table

Friedmans
Gates
Entropy
model
model
model
Bid mark-up
selection
437
Table V.
Analysis of bid results
ECAM
17,4
438
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About the author
Symeon Christodoulou holds a PhD in Civil Engineering from Columbia University (New York
City, 1998). Upon completion of his PhD, and after several years of industry experience in the
field of construction management, he joined Polytechnic University (Brooklyn, New York) as an
Assistant Professor and Head of the Construction Management Program of the university
(1998-2003). In 2004 he joined the University of Cyprus as an Assistant Professor and Democritus
University of Thrace (Greece) as an Industry Professor. Symeon Christodoulou is the author of
several scientific publications, the recipient of significant research funding (including a
prestigious award from the National Science Foundation, NSF), and the recipient of an
international research award (London, 1999). He is an Associate Member of the American Society
of Civil Engineers (ASCE), a reviewer for several technical journals and a member of the Domain
Committee on Transport and Urban Development of the EUs COST program. Symeon
Christodoulou can be contacted at: schristo@ucy.ac.cy
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439
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between public and private projects: A China study. International Journal of Project Management 32,
461-472. [CrossRef]
2. O.A. Adedokun, O.T. Ibironke, S.O. Babatunde. 2013. Assessment of competitive tendering methods
of procuring educational building projects in Nigeria. Journal of Facilities Management 11:1, 81-94.
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