Uncertainty in construction contracting: A new approach for contractors

The thesis deals with the economic uncertainty contractors are facing in competitive contracting. Most contractors base their pricing on a deterministic cost estimate, to which a markup is added to arrive at the bid price. The deterministic cost estimation approach ignores the influence of uncertainty in both costs and revenues, although this uncertainty has a major influence on contractors profitability. In his dr. ing thesis Morten Stjern has developed a model for estimation and management of uncertain costs and revenues. The model is called "The Joint Cost Revenue Uncertainty Model". The basic idea is to develop the estimate by adding together a number of stochastic cost revenue vectors, in which each vector includes the uncertain costs and revenues for an item from the bill of quantities, or for a work package in the projects work breakdown structure. An analyses of more than 800 bids in the Norwegian competitive bidding market has shown that contractors apply different strategies in their bidding. One reason for this is that they have different preferences for risk, and apply different means to address uncertainty in cost and revenues. The uncertainty in costs and revenues have an impact on two facets of contractors pricing decisions. First how to arrive at the total bid price for a project, and second how to allocate the mark up between the bid items to maximise the expected profit. A heuristic procedure is devised to support the contractor in making such decisions. The use of the model is demonstrated in a case study of a real project at the contractor Selmer ASA, Oslo, Norway. Custom computer soft ware has been developed to link the model to Selmer ASAs project management system.