Market-based pricing in construction

There is only one pricing approach predominantly used in construction: cost-based pricing. This pricing logic may lead to the underpricing or overpricing of a bid offer. On the other hand, there is another pricing strategy that is widely implemented in the manufacturing industry: market-based pricing. Market-based pricing starts with the customer and the benefits a company creates relative to key competitors. Chapter II discusses pricing in marketing both in general and in the construction industry. The discussion focuses on pricing and marketing concepts, principles, and market behavior, and finally strategies in pricing. The importance of the marketing intelligence function in pricing is discussed in Chapter III that includes marketing intelligence systems, marketing research, marketing information systems, and finally decision support systems both in general and in the context of the construction industry. The methodology of the research, including the development of market-based pricing models, the development of a survey instrument and of a simulation model, and finally the statistical tools used in the research, are discussed in Chapter IV. The questionnaire was mailed to the presidents/CEOs of Engineering News Record (ENR) 400 top U.S. construction companies. The research findings and their discussion are presented in Chapter V. In conclusion, the belief that the current pricing strategy in construction is predominantly cost-based is confirmed by the survey findings; indeed, in setting the markup, most contractors rely on their intuition after subjectively assessing the competition. The three internal pricing variables that have the largest statistically significant contingency coefficients with pricing strategy are “marketing intelligence capabilities”, “annual contract value”, and “the type of client in most projects”. It is discovered that contractors use mostly traditional marketing intelligence strategies. It is recommended that contractors develop computerized intelligence activities such as using resources on the Internet and developing management information systems and decision support systems. “Owner's characteristics”, “competitors' characteristics”, and “market demand” are statistically significant external variables in making pricing strategy decisions. A change in the current bidding procedure is proposed so that all parties in construction can maximize the benefits of market-based pricing strategies.