Elaboration of willingness to pay and compensation demanded for costly bid preparation

Encouraging contractors to dedicate considerable effort in the bidding process is the cornerstone of a successful bid management system. However, the bid preparation cost is usually high, and preparing a high-quality tender submission is time-intensive. To motivate contractors to devote additional effort to bid preparation, owners should consider compensating the second-best bidder. However, the practice of this bid compensation notion is still rare and lacks empirical demonstrations. Hence, the study aims to expand the existing tender management system by developing a contingency standpoint on how to effectively utilize bid compensation. The proposed model focuses on the effects of bid compensation and develops appropriate compensation strategies for the owner and bidder alike. Game theory was adopted for modelling the dynamics and deriving high-effort strategies from bid compensation. The results demonstrate the effectiveness of Nash equilibrium solutions under bid compensation, quantitative formula, and qualitative implications for the formation of bid compensation strategies. Based on the analysis, the offering of bid compensation can effectively encourage the bidders to make extra efforts in the early stage. Conditions for the effective use of bid compensation and strategic implications for practitioners are identified and suggested accordingly.