CE 308

Construction Technology and Management

Lecture 2

Dr. Santu Kar

Department of Civil Engineering
Bidding Process
❑ The process starts with the owner inviting parties to ‘bid’ for a project
and forms a contract being signed between the owner and a party
identified to carry out the job

❑ Open Bidding
❖ Applied for small value project

❑ Selective Bidding
❖ Applied for very specialized projects
❖ Prequalification of contractors gets added to the bidding process

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 2
Prequalification
❑ The purpose is to select a set of ‘right’ contractors

❑ The gains in long terms that result from prequalification process are worth the time
and effort spent on it

❑ Typical document required for prequalification

❖Letter of transmittal
❖Power of attorney
❖Financial information
❖Details of similar works
❖Details of plant and equipment
❖Details of technical and administrative personnel

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 3
Steps involved in Bidding Process

Notice Inviting Tender – directly by

Obtain Prequalification Submit prequalification
owner or by consultant appointed
application in case of application with
by owner through news papers,
selective bidding required documents
trade journals or online.

Evaluation to Obtain tender

Study tender Prepare tender
select qualified documents - after
documents summary
bidders getting prequalified

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 4
Steps involved in Bidding Process (cont…)
List out queries for pre-bid
Organize and obtain site
meeting, clarification required Attend pre-bid meeting
investigation
and submit to clients

Compute bid price and Attend techno-

Submit tenders in
prepare offer for commercial
technical/price bid
submission of bids discussion

Submit revised
price based on
Obtain work order Agreement
techno-commercial
discussion

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 5
Notice Inviting Tender
❑ NIT is published with the following details:
• Name of the authority inviting the bids
• Brief details of the project
• Estimated cost and time of completion of the project
• Conditions for eligibility of contracting agencies to submit a bid
• The cost of the tender document
• Earnest money to be deposited with the completed tender
• Date of pre-bid meeting
• Date and time by which the bids are to be submitted and the place of submission
• The date and time of opening of the bids
Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 6
Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 7
Steps involved in Bidding Process

Notice Inviting Tender – directly by

Obtain Prequalification Submit prequalification
owner or by consultant appointed
application in case of application with
by owner through news papers,
selective bidding required documents
trade journals or online.

Evaluation to Obtain tender

Study tender Prepare tender
select qualified documents - after
documents summary
bidders getting prequalified

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 8
Tender Summary
❑ A typical tender summary would contain
• General information

• Information on mobilization advance, P&M advance and material advance

• Commercial terms/deposits

• Terms of payment

• Information on taxes and duties

• Escalation clause, liquidated damages and incentive clauses

• Arbitration and dispute resolution

• Facilities at site

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 9
Steps involved in Bidding Process (cont…)
List out quarries for pre-bid
Organize and obtain site
meeting, clarification required Attend pre-bid meeting
investigation
and submit to clients

Compute bid price and Attend techno-

Submit tenders in
prepare offer for commercial
technical/price bid
submission of bids discussion

Submit revised
price based on
Obtain work order Agreement
techno-commercial
discussion

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 10
Site investigation
❑ Site investigation helps to collect

1) Meteorological information
• Rainfall – season and maximum intensity per hour

• Temperature and humidity in different seasons

• Snow and fog in different seasons

2) Information related to access to project site

• Condition of approach road to site, presence or absence of bridges on the route and
their load carrying capacity

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 11
Site investigation (cont…)
3) Information on public utilities and services
• Collect information on distance of the nearest police station, post office,
bank, water and electricity supply office
• Information on material testing laboratories

4) Information on material availability and their rates

• Collect information on quarries, borrow pits and sources for other
construction materials
• Information on existence of crushers, their capacity

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 12
Site investigation (cont…)
5) Information on site topography
• The condition of site

• The presence of obstruction

• Geotechnical details

6) Information on site facilities

• Space for site facilities like casting yard, fabrication yard

• Facilities available for waste and excess earth disposal

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 13
Site investigation (cont…)
7) Information on labor
• Availability of labors and wages
• Enquire about works being done by other contractor and their operating rates with
client

8) Information on plant and machinery

• The type of plant and equipment locally available and their hire charges

9) Information on subcontractor

10) Information on taxes, duties

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 14
Steps involved in Bidding Process (cont…)
List out quarries for pre-bid
Organize and obtain site
meeting, clarification required Attend pre-bid meeting
investigation
and submit to clients

Compute bid price and Attend techno-

Submit tenders in
prepare offer for commercial
technical/price bid
submission of bids discussion

Submit revised
price based on
Obtain work order Agreement
techno-commercial
discussion

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 15
Prepare offer for submission of bids
• Note down important clauses/points

• Arrange EMD

• Arrange MOU

• Mail enquiries to suppliers/sub contractors

• Prepare construction program

• Identify construction methods

• Identify required plant and equipment

• Identify material requirement

• Identify labour requirement

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 16
Prepare offer for submission of bids (cont…)
• Analyze rates

• Take out quantities

• Calculate project overheads

• Finalize mark up

• Compute the bid price

• Prepare cash flow chart

• Prepare offer letter

• Incorporate technical specifications

• Enclose other papers as per tender requirement

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 17
Computing Bid Price
• Bid price = Total cost + Mark up amount

• Total cost = Direct cost + Indirect cost

• Direct cost = Labor cost + Material cost + Plant & equipment cost +
Subcontractors’ cost

• Indirect cost = Overheads + Common plant & equipment + Common

workmen cost

• Mark up amount = Profit + Contingency + Allowance

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 18
Computing Bid Price (cont…)
❑ Let us assume that direct cost of a project is DC, indirect cost is IC and bid price is B.

Thus, total cost TC is given by TC = DC + IC and Bid price, B = TC + Mark up

❑ Mark up can be expressed

1) in terms of some percent of total cost

𝑚𝑎𝑟𝑘 𝑢𝑝 (%)
B = 𝑇𝐶 + × 𝑇𝐶
100

2) in terms of some percent of bid price

𝑚𝑎𝑟𝑘 𝑢𝑝 (%)
B = 𝑇𝐶 + ×𝐵
100
𝑇𝐶
B= 𝑚𝑎𝑟𝑘 𝑢𝑝 %
(1 − )
100

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 19
Computing Bid Price (cont…)
• 1st case:

Assuming that mark-up is 10 per cent of the total cost TC

10
B = 𝑇𝐶 +
100
× 𝑇𝐶 so, B = 1.10 × 𝑇𝐶

• 2nd case:

Assuming that mark-up is 10 per cent of the bid price B

10 𝑇𝐶
B = 𝑇𝐶 + 100 × 𝐵 so, B = 0.9 = 1.11 × 𝑇𝐶

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 20
Computing Bid Price (cont…)
• The multiplication factor CO, for the direct cost of individual items would be
given as:
𝐵
CO = 𝐿+𝑀+𝑃

• Where L, M and P are the labor, material and plant and equipment costs for all
the activities of the project. The expressions for computation of L, M and P are
given below:

(n is the total activity/items in the project)

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 21
Bidding Models
❑ From the contractor’s perspective, the bidding process is a game where he wants to win a bid at
a price that gives him the maximum profit.

❑ Probability of winning a bid decreases as the contractor tries to increase his profit margin.

❑ Statistical bidding strategy models

- These assists decision-makers in selecting an optimum mark-up level for a bid.

- Objective here is to maximize the bidder’s expected profit, i.e., the expected monetary value.
➢ Friedman’s model

➢ Gate’s model

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 22
Friedman’s Model
❑ Case I: All the competitors on a particular job are known

Probability of winning against a number of known competitors

= Probability of beating competitor A
x Probability of beating competitor B
x Probability of beating competitor C
x Probability of beating competitor D ………., etc.

❑ Case II: The exact number of competitors is known, but their identity is not known

Probability of winning against a number of unknown competitors for a given mark-up

= (probability of beating one typical competitor)n

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 23
Gate’s Model
❑ The probability of winning against ‘n’ known competitors for a given mark-up

❑ The probability of winning against ‘n’ unknown competitors

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 24
Optimum Mark-up Level
❑ To start with, a mark-up percentage varying usually between 1 per cent and 20
per cent of total cost TC is assumed. This is increased in small increments of one
per cent to start with and is reduced as and when the mark-up approaches the
optimum level.

❑ The mark-up amount corresponding to a given mark-up per cent, M, is

computed using the expression:

𝑚𝑎𝑟𝑘 𝑢𝑝(%)
𝑀𝑎𝑟𝑘 𝑢𝑝 𝑎𝑚𝑜𝑢𝑛𝑡 = × 𝑇𝐶
100

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 25
Optimum Mark-up Level
❑ Probability to beat different competitors, say x1, x2, x3,…….xn, is computed from the
past history of competitors

❑ Using Friedman’s model, the probability of winning at mark-up level M is calculated.

❑ Expected mark-up amount is determined using the expression:

𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑚𝑎𝑟𝑘 𝑢𝑝 𝑎𝑚𝑜𝑢𝑛𝑡
= 𝑀𝑎𝑟𝑘 𝑢𝑝 𝑎𝑚𝑜𝑢𝑛𝑡 𝑓𝑜𝑟 𝑎 𝑔𝑖𝑣𝑒𝑛 𝑚𝑎𝑟𝑘 𝑢𝑝 𝑝𝑒𝑟 𝑐𝑒𝑛𝑡 𝑀
× 𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑤𝑖𝑛𝑛𝑖𝑛𝑔 𝑎𝑡 𝑡ℎ𝑒 𝑚𝑎𝑟𝑘 𝑢𝑝 𝑝𝑒𝑟 𝑐𝑒𝑛𝑡 𝑀

❑ The mark-up per cent is increased to (M + 1)% now, and the expected value of mark-up
amount is calculated again as described in the above steps.

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 26
Optimum Mark-up Level
❑ Based on the above values of mark-up per cent and the expected mark-up
amount, a curve is plotted for mark-up per cent versus expected mark-up
amount.

❑ The optimum mark-up per cent is read from the above plot. Let this be M1.

❑ Above steps are repeated for Gates’ model, and the optimum mark-up is read
from the plot. Let this be M2.

❑ The average mark-up (M1 +M2)/2 can be taken as the optimum mark-up.

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 27
Illustration – Optimum Mark-up Level
5

0
0.98 1 1.02 1.04 1.06 1.08 1.12 1.16 1.2
B/C ratio

The histogram shown is the compilation of past behavior of 15 bids of a typical

contractor against you as a contractor. In the histogram, the B/TC ratio indicates
the competitor’s bid price/your estimated total cost.
Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 28
Optimum Mark-up Level
❑ Based on the given behavior, what is the mark-up value that this competitor uses on
average? What is the probability of winning against this competitor if you use a mark-up
of 12 percent?

❑ In a new project with an estimated cost of Rs. 50,000,000, what is your optimum mark-
up strategy against four typical competitors using:
▪ Friedman’s model?
▪ Gates’ model?

What is the expected mark-up amount at optimal mark-up?

❑ What would be your suggested mark-up level?

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 29
Optimum Mark-up Level
• In order to find the probability of winning against this competitor:

Mean of bid-to-total cost ratio (B/TC) = 1.07467

Std. Deviation = 0.0630

(1.12−1.07467)
Thus, Z at 12% mark-up level = = 0.7195
0.0630

• For Z=0.7195, the probability value is 0.7642

• Hence, the probability of winning against the competitor at 12% mark-up = 1 –

0.7642 = 0.2358 (23.58%)

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 30
Optimum Mark-up Level using Friedman’s model
Mark- x z Prob. from Prob. of winning Final prob. of Expected
up % std. normal the bid with only winning the bid mark-up
dist. table one typical with 4 typical amount (Rs.)
competitor competitors

X = 1 + (mark- Z = (x-µ)/σ y P(typ) = 1-y Pfinal=p(typ) x E = Rs.

up % / 100) p(typ) x p(typ) x 50,000,000 x
p(typ) (x-1) x Pfinal
1% 1.01 -1.03 0.1515 0.8485 0.5183 259166
2% 1.02 -0.87 0.1922 0.8078 0.4258 425810
3% 1.03 -0.71 0.2389 0.7611 0.3356 503336
4% 1.04 -0.55 0.2912 0.7088 0.2524 504806
5% 1.05 -0.39 0.3483 0.6517 0.1804 450953

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 31
Optimum Mark-up Level using Friedman’s model
• Expected mark-up amount has
600000
been increasing initially up to 4%
500000
and then started decreasing.
400000

• Hence, according to Friedman’s

300000

model, the optimal mark-up that 200000

should be applied is 4%. 100000

0
0% 1% 2% 3% 4% 5%

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 32
 Optimum Mark-up Level using Gate’s model
Mark- x z Prob. from Prob. of winning Final prob. of Expected
up % std. normal the bid with only winning the bid mark-up
dist. table one typical with 4 typical amount (Rs.)
competitor competitors
X = 1 + (mark- Z = (x-µ)/σ y P(typ) = 1-y Pfinal=1/[{n(1- E = Rs.
up % / 100) p(typ))/ (p(typ))} 50,000,000 x
+ 1] (x-1) x Pfinal
1% 1.01 -1.03 0.1515 0.8485 0.5834 291681
2% 1.02 -0.87 0.1922 0.8078 0.5124 512368
3% 1.03 -0.71 0.2389 0.7611 0.4434 665026
4% 1.04 -0.55 0.2912 0.7088 0.3783 756618
5% 1.05 -0.39 0.3483 0.6517 0.3187 796738
6% 1.06 -0.23 0.4090 0.5910 0.2654 796138
7% 1.07 -0.07 0.4721 0.5279 0.2185 764661

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 33
Optimum Mark-up Level using Gate’s model
• Expected mark-up amount has
900000
been increasing initially up to 5%
800000

and then started decreasing. 700000

600000

• Hence, according to Gate’s model, 500000

400000
the optimal mark-up that should 300000

be applied is 5%. 200000

100000

0
0% 1% 2% 3% 4% 5% 6% 7%

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 34
Optimum Mark-up Level
• The optimal mark-up obtained using Friedman’s model = 4 %, and the optimal
mark-up using Gate’s model = 5 %.

• Thus, a moderate mark-up should be used:

(4 + 5)
= 4.5%
2

Dr. Santu Kar, Assistant Professor, Department of Civil Engineering, IIT Guwahati 35
36
Thank You