The effect of risks and uncertainties on subcontract bid prices

The thesis sets out the results of a study of the effect of risks and uncertainties in subcontracting on subcontract bid prices in which the extent of the variability of subcontract bids and the reasons for such variability were investigated. The most critical risks and uncertainties in subcontracting were identified and the effect of such risks on the preparation of bid prices assessed. A practical risk management model for analysis of the effect of risk on subcontract bid prices has also been developed. A large variability in subcontract bid prices was found to exist. The reason for this variability seems likely to arise from the various bidding patterns of different trade groups of subcontractors resulting from risks and uncertainties to which subcontractors are exposed and for which they make risk allowances. A regression model was established to predict the degree of the variability. The presence of inequitable subcontract conditions, safety issues and industrial relations problems, and the reputation and competence of the general contractor were found to be the most critical risks affecting subcontract bid prices. Subcontractors make allowances for such risks, which increase their bid prices by up to 11.4%. The presence of risks and their substantial effect on bid prices highlights the need for an effective and systematic approach to risk management in subcontracting. A practical model of risk management for use by subcontractors has been developed. It allows risk analysis in the form of Monte Carlo simulation to be undertaken using a spreadsheet. The reliability of the cost estimate for the given magnitude of a risk allowance can be assessed.