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Engineering, Construction and Architectural Management

The effect of construction demand on contract auctions: an experiment


Alexander Soo Bee Lan Oo

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Alexander Soo Bee Lan Oo , (2014),"The effect of construction demand on contract auctions: an
experiment", Engineering, Construction and Architectural Management, Vol. 21 Iss 3 pp. 276 - 290
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ECAM
21,3

The effect of construction


demand on contract auctions:
an experiment

276

Alexander Soo
School of Civil Engineering, The University of Sydney, Sydney, Australia, and

Bee Lan Oo
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Built Environment, The University of New South Wales, Sydney, Australia


Abstract
Purpose The purpose of this paper is to present an experiment to test the effect of construction
demand on the mark-up price level in construction contract auctions.
Design/methodology/approach An experimental approach was adopted for this study. In a
controlled laboratory environment, a first-price sealed bid auction was simulated with varying number
of projects available over ten rounds to simulate changing construction demand. Two experimental
treatments were run in parallel, one exhibiting a booming demand over time, and the other group
with a recession scenario. The experiment involved student (inexperienced) bidders with a construction
project management background.
Findings The results show that inexperienced bidders do behave differently when subjected to
varying levels of construction demand. Variations in the bid price level are affected by varying levels
of construction demand and the general mark-up level for the bidders experiencing a booming scenario
was higher on average compared to bidders subjected to the recession scenario.
Research limitations/implications An identified limitation of this study is the use of student
subjects in the experiment, thus the experiment results are limited in generalisation to inexperienced
bidders. Further studies may be able to replicate the experiment with experienced industry practitioners
to observe the results.
Practical implications The results allow for industry practitioners to gain a stronger
understanding of the effects of varying levels of construction demand and the need to consider
construction demand in construction contracting. For construction clients, the level of construction
demand may be used as an indicator to assist in the timing to call tenders to achieve a desirable price.
For contractors, increased awareness of how demand affects competition and the price level will allow
additional optimisations to be achieved in the bid price.
Originality/value Construction demand has been widely known to be one of the key factors
affecting contractors bidding decisions. However, there has been little empirical investigation of the
changes in bidders behaviour due to varying levels of construction demand. This paper attempts to
add to the empirical research knowledgebase through an experimental setting.
Keywords Experiment, Construction bidding, Construction demand, Contract auctions
Paper type Research paper

Engineering, Construction and


Architectural Management
Vol. 21 No. 3, 2014
pp. 276-290
r Emerald Group Publishing Limited
0969-9988
DOI 10.1108/ECAM-01-2013-0010

1. Introduction
Demand is part of the large domain of market conditions that affect many decisions
revolving around construction contract auctions (Runeson and Skitmore, 1999).
These decisions force contractors to make judgements in an attempt to balance out the
market opportunities and risks (Thorpe and McCaffer, 1991), and thus, affecting their
bidding behaviour in order to achieve their firms objectives (Skitmore, 1989). Skitmore
(1989) classified construction firms objectives under three main categories: monetary,
non-monetary and market related, where construction demand by nature affects all
three categories.

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Based on a literature survey, there is a commonly accepted definition of construction


demand. Industry reports provided by independent companies (e.g. Davis Langdon,
2010a; Australian Industry Group, 2011) define construction demand as the number
of or the number requirement of buildings to be constructed. From this definition,
it is inferred that stronger (higher) demand is analogous to a larger amount of projects
available in the market for bidding and a weaker demand, reflecting less projects available
in the market. A study by Ngai et al. (2002) also provided a similar definition for
construction demand, suggesting that lower demand would lead to lower capacity
utilisation in the industry (i.e. that contractors would have less jobs on hand).
In terms of the significance of construction demand, Runeson and Skitmore (1999)
noted that a characteristic of markets for building and construction services was
rapid high-impact changes in effective demand. These changes were estimated to be
10 per cent or more per year for the industry and up to 50 per cent or more for
individual markets an example of the extreme conditions contractors sometimes
endure. The commonly found factors affecting bidders bidding decisions with respect
to construction demand are the need for work and current workload (Shash, 1993).
The need for work is directly related to the number of projects, with due consideration
for the competition (Fayek et al., 1999) and current workload (or capacity utilisation)
can be seen as a product of construction demand, reflecting the number of competitors
in any particular market (Ngai et al., 2002). In addition, functional relationships have
been developed for these factors, being that demand increases with an increasing
number of projects available on the market and vice versa, where there is decreasing
demand, the number of projects also decreases (De Neufville et al., 1977). With respect to
workload and need for work, there is an inverse relationship between these two factors.
When the current workload increases, the need for work decreases (Ngai et al., 2002).
Despite the importance of construction demand in affecting bidders behaviour, there
have been few attempts to quantify the effects of construction demand on bidders
behaviour. The reason for this may be partly due to the evidence suggesting that bidding
decisions are based more on subjective rather and objective information (Fellows and
Langford, 1980; Ahmad and Minkarah, 1988). In addition, the literature has a stronger
focus on the extreme ends of booming (strong) market conditions compared to recession
(weak) market conditions with little discussion on the intermediary.
Focusing on inexperienced bidders, this paper aims to investigate the extent to which
bidders behaviour is affected by varying levels of construction demand. Using
an experimental approach, two groups of inexperienced bidders were subjected to two
different demand scenarios, one with a booming situation (defined as having an
increasing demand up to a peak, then decreasing subsequently), and the other group
with a recession situation (defined as have a decreasing demand to a trough and then
increasing subsequently). This study provides a valuable insight into bidders behaviour
in response to changing market demand. Through the results of this study, industry
practitioners may gain a deeper understanding of the changes in bidding behaviour due
to varying levels of construction demand and also appreciate that construction demand
is a significant factor to be considered in construction contracting.
2. Literature review
This section provides a review on market conditions and construction demand.
The review initially ventures through theoretical studies involving market conditions
and construction demand, moving onwards to previous empirical studies and finally
a brief overview of the industry representation of demand.

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2.1 Market conditions, supply and demand


The bidding process is one that is continuous and dynamic, requiring the contractor to
evaluate the solutions to problems and opportunities for each bid on a project (Lowe and
Skitmore, 2006). Much of this evaluation has to do with the nature of the construction
industry being competitive and thus leading itself towards market-oriented pricing
(Skitmore, 1987). Being market oriented, construction bid pricing is affected by market
conditions and ultimately accept the market price has been suggested by many
researchers (e.g. Fine, 1974; Avery, 1982; Shealy, 1986). Runeson and Skitmore (1999) also
noted that market conditions had a significant effect on bidders, specifically on price
changes, and that any future theories on construction bidding would require serious
consideration of market conditions. Skitmore (1987) conducted interview surveys of
contractors in the USA and found that prices in the construction industry were market
driven and determined by market forces alone. From a microeconomics viewpoint,
the market forces that define the market price are predominantly supply and demand
(Taylor and Frost, 2009). Due to the competitive nature of the construction industry, it is
not surprising that any individual firm alone cannot affect the market price and hence
construction firms are price takers (Hillebrandt, 2000).
Construction supply is defined by Skitmore et al. (2006) as the availability of
contractors and is related to the degree of competition (i.e. higher competition results in
a lower bid price). As Ngai et al. (2002) suggest, the construction industry responds to
changes in demand through changes in the price in the product, and in the long run,
changes in the capacity (supply) of the industry. Their example explained that a
reduction in demand would lead to lower prices because of the lower utilised capacity
in the industry. In the long run, the industry would have an excess supply due to
insufficient profit and prices would return to their equilibrium level. This view is
similar to that of Runeson and Benett (1983) in that the degree of competition should be
measured in terms of capacity utilisation. One way of considering supply is in terms of
the number of bidders, that is usually an indicator for the need of work (Skitmore,
1987). By simple microeconomic analysis, it is also clear that supply (in terms of the
number of bidders) is also related to the demand function.
Construction demand can be considered as a need for construction work to be
completed. For example, in general building sector, the availability of building projects
available for bidding might be an indicator of the demand (i.e. private or public sector
clients requiring a specific number of buildings to be constructed). The functional
relationship discovered by Stone (1983) was that construction prices rose amidst
increases in demand and fell when demand declined. This is in agreement with the law
of demand (and the demand curve on a typical supply and demand diagram) in that
increases in demand lead to a higher price, with supply remaining unchanged.
The relationship may be explained in terms of competition where we consider demand
to be a function of the number of projects available (i.e. higher demand leading to
higher number of projects, similar to the study by De Neufville et al. (1977)). If there are
more projects available for bidding then bidders are conjectured to have more options
to choose from and hence degree of competition is decreased (in a general scenario).
Hence, in line with Stones (1983) finding, an increase in demand (more projects
available) would lead to higher bid prices (due to less competition).
2.2 Factors affecting construction demand
In terms of the factors affecting the level of construction demand, it follows that
different geographical areas would have different levels of demand (Beeston, 1983).

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Runeson and Skitmore (1999) explained changes in demand being related to productivity
and cost. One example they utilised was that, in order to expand the firms capacity,
new factors of production would need to be employed, because of the lower skill level
and lower productivity of the new factors, the costs would increase (i.e. productivity growth
or contraction has an effect on demand and prices). Skitmore (1987) also noted that
construction demand was affected by seasonal changes, where certain seasons would
exhibit higher price levels and vice versa. Akintoye and Skitmore (1994) suggest that the
general factors affecting construction demand could be classified under the PESTL
(political, economic, social, technological and legal) framework. Focusing on the UK
construction industry, they grouped the general factors of demand into economic
conditions, construction price, real interest rate, unemployment level and profitability. Their
results show that private sector construction demand was responsive to changes in the real
interest rate and profitability, but not the changes in construction price levels, whilst the
demand was negatively correlated with unemployment. Hillebrandt (2000), on the other
hand, identified ten general leading indicators of construction demand as follows:
(1)

population;

(2)

interest rate;

(3)

economic crises;

(4)

demand for goods;

(5)

surplus manufacturing capacity;

(6)

the ability to meet demand through renovation;

(7)

government policy;

(8)

expectation of demand;

(9)
(10)

expectation of profit; and


new innovations in technology.

Killingsworth (1990) performed a multiple regression analysis on a similar set leading


indicators of construction demand (based on Hillebrandt, 1985) and found that
economic shock (crisis), interest rate and demand for goods as being the most
significant leading indicators of the US construction demand. Similarly, Goh (1996)
identified indicators of demand for residential construction, which appear to be similar
to that proposed by Hillebrandt (1985) but on a smaller (local and personal) scale.
The main differences involve considerations for inflation rate, household income and
savings, mortgage credit and the supply and price of residential property.
2.3 Significance of construction demand
The significance of construction demand can be appreciated when evaluating the
factors considered by the top construction firms in their bidding decisions. A study by
Shash (1993) considered results from a written questionnaire to 300 top UK contractors.
With a response rate of 28 per cent (85/300 contractors), he found that the top five
factors affecting the decision to bid (d2b) decision were need for work, number of
competitors tendering, experience in such projects, current workload and client
identity. In terms of the mark-up decision, he found that the top five factors were
degree of difficulty, risk, current workload, need for work and contract conditions.
From his findings market conditions are predominant in the factors considered by

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280

management such as need for work, number of competitors and current workload.
Ahmad and Minkarah (1988) also performed a survey questionnaire on the top 400
contractors in the US with a response rate of 90 contractors. They found that the top
five factors affecting the d2b decision were type of job, need for work, client, historic
profit and degree of hazard. For the mark-up decision, the top five factors were degree
of hazard, degree of difficulty, type of job, uncertainty in estimate and historic profit.
Similar to the study by Shash (1993), need for work appears to be an important factor
considered. In another study on Canadian construction contractors, Fayek et al. (1999)
found that the d2b decision was also influenced by the need for work, and that the
mark-up size was affected by the need for work and the number of competitors for the
project. Dulaimi and Shan (2002) also performed a survey on medium and large sized
contractors in Singapore and found that, regardless of firm size, both groups of
contractors considered the economic situation greatly. In terms of the factors affecting
mark-up size, there is again a common consideration for the need for work and current
workload. As the former studies were performed in different countries and different
time periods, Ling (2005) performed a meta-analysis of the data sets (of five international
surveys) to isolate the global factors that affected the margin (mark-up) size. She found
that, irrespective of the geographical location of the project, the current workload
and need for work are key factors affecting margin size. Hence, with market conditions
and demand being found as important factors affecting contractors bidding decisions, it
can be conjectured that these factors are significant and hence deeper understanding of
their effects can lead to insight into bidders behaviour how bidders consider and adapt
their strategy to differing market conditions of varying levels of demand.
2.4 The effect of construction demand
Empirical studies performed to date have shown quite conclusively the effect of
construction demand in construction contract auctions. De Neufville et al. (1977)
analysed 691 highway projects and found that the mark-up ration was different
between good years and bad years (with good years have more projects available for
bid and bad years have less projects available). In good years, it was found that bidders
applied higher mark-ups to projects and in bad years bidders applied lower mark-ups
in their bidding attempts. In line with mark-up changes due to changes in demand,
Andrews and Brunner (1975) also found that contractors changed their bidding
strategy in response to varying levels of construction demand. In a study by Oo (2007),
senior managers of Hong Kong and Singapore construction firms were invited to
participate in a bidding experiment that observed their bidding behaviour in
booming and recession market conditions. She found that the probability of a bid
decision was lower in a booming scenario, whilst higher probability was recorded in
times of a recession. This finding is in line with the study by Bevacqua and Elias (1992)
whom found that there were more bid attempts in weak years as opposed to strong
years representing the need for work.
In terms of the effect of general market conditions (also incorporating some aspect
of demand), Runeson (1988) found that prices changed systematically by a range in
excess of 20 per cent over the economic cycle, and that such changes were attributed to
market conditions such as demand and capacity utilisation. Runeson (1990) attempted
to incorporate the effects of changes in market conditions into a bidding model and was
successful in developing a method to assess the probability of a winning bid and the
probability density function of the profit. A study by Flanagan and Norman (1985)
identified a bid price rule for sequential bids. Their model demonstrated that bid prices

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for any particular bidder would be influenced by market conditions, particularly


by the current and projected workload where a higher workload would represent
higher opportunity costs and hence higher bid prices. They also found that the number
of competing firms had an impact on bid price level, where bid price decreases with
an increase in number of competing bidders (due to competition). Using 221
construction projects from a large Australian construction firm, Chan et al. (1996)
found a significant relationship between market conditions and the firms profit levels,
and that two-thirds of the variations in profit and loss could be explained by market
characteristics and conditions.
2.5 Industry representation of demand
As Ngai et al. (2002) noted, in Hong Kong there was no formal compilation of market
condition index or a building cost index and thus they had used the tender price index
(TPI) as an indirect measure of market conditions. In Australia, however, periodic
construction costs guides are released (such as Construction Cost Guide, Rawlinsons, 2011)
that provide the general price level for construction work (either residential, commercial or
special purpose). In terms of a measurement for the level of construction demand, research
publications of leading indicators and the tender level index (such as Davis Langdon,
2010a, b) give a general (indirect) idea of current demand for works. This type of
measurement for construction demand details the movements of the general tender price
level in terms of quarter-to-quarter changes. Release of technical reports by Australian
Industry Group (2011) also provide a viewpoint of construction demand through a
percentage forecast of increase or decrease in annual turnover. This is also representative
of the growth or contraction in demand for various segments of the construction industry
(e.g. building, infrastructure, industrial, etc.). Thus, from the industry perspective, market
conditions is portrayed through indices and forecasts, where they would be particularly
useful since contractors are generally aware of the current market price and could use the
forecasts to gain an idea of the future price inflation/deflation.
3. Research method
An experimental approach was adopted for this research for an explicit observation of
the effect of construction demand on contract auctions. An experiment allows for
control and discrete manipulation of variable(s) by the researcher, that of which is not
possible using surveys and/or past data. As Zikmund (2003) suggests, the purpose of
experimental research design is to provide the researcher with control over all factors
that might have an impending effect on the outcome, and that a single (or multiple)
variable may be manipulated in order to test the tenability of a hypothesis.
The experiment participants involved final year undergraduate students with
a construction project management background. They were enrolled in a project
procurement and tendering course and were randomly split into two main groups, one
group to experience a booming scenario and the other with a recession scenario
(see Figure 1). In the booming scenario, the number of projects released each bidding
round increased to a peak and decreased in subsequent rounds. With the recession
scenario, the number of projects decreased with the passage of time to a trough, after
which the number of projects started to increase again. All participants were not aware of
which scenario they were assigned to. These two main groups consisted of five subgroups
(with four students in each subgroup) each to simulate a bidding competition with five
competing bidders. The experiment was conducted in a controlled environment with an
experiment conductor and strictly no communication was allowed between the groups.

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282

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Figure 1.
Experimental treatment
scenarios

Number of Projects

ECAM
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10
9
8
7
6
5
4
3
2
1
0
0

10

Round Number
Booming

Recession

Each subgroup was provided with a start-up capital of $400,000 and were required
to bid for general building projects ranging from approximately $5 to $12 million
(where monetary figures represent the unbiased construction cost estimate). The general
building projects consisted of schools and public buildings. These hypothetical projects
were created using the information from past real contracts obtained from the NSW
e-tendering web site (https://tenders.nsw.gov.au). Overheads were required to be paid for
in each bidding round. Each subgroup also has a capacity limit of five projects on hand at
any time point, the cost to exceed this capacity limit attracts a cost penalty representing
outsourcing costs.
The experiment was conducted for ten rounds (one round per week) with each
bidding round simulating a time period of six months. Within a timeframe of one hour,
the participants were required to decide which projects to bid for and the bid price,
if deciding to bid at all. The bid price submitted was expected to cover the construction
cost in addition to a mark-up adjustment for profit, overheads, risk and competitive
factors. The general instruction to the participants was that their ultimate aim was to
survive and prosper in which the lowest bidder wins the job, but how this was
achieved was left to them. Feedback information was provided at the beginning of
every bidding round that consists: details of the winning bid and identity of winning
bidder (from round 2 onwards); profit/loss statements and capacity utilisation
information (from round 2 onwards); and a statement of the market outlook of
construction demand. The market outlook statement detailed the expected trend of the
number of projects in the subsequent round(s) (i.e. whether the number of projects
available were expected to increase, decrease or remain constant) and the period of the
outlook was dependent on the demand scenario and trend (refer to Figure 1).
Experiment participants were notified that the subgroup with the highest account
balance by the end of the ten bidding rounds would win a cash prize. The cash prizes
were awarded to the respective subgroups with the highest account balance in the
booming and recession scenarios. This incentive scheme was implemented in order to
promote serious participation in the experiment and to prevent dropouts.
4. Results and discussion
The results and discussion are presented in three parts. The first part presents an
exploratory analysis of bids obtained from the bidders in both the booming and
recession scenarios. The second part details statistical analysis of cross-comparison,

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at several time points, between the booming and recession groups. This is then
followed by an assessment of the seriousness of bidders bidding attempts.
4.1 Exploratory analysis
Table I shows the sample size for both the booming and recession groups. For the
booming group (i.e. bidders A1-A5), a total of 290 bids were obtained with ten no-bid
decisions. For the recession group (i.e. bidders B1-B5), a total of 271 bids were
submitted with 29 no-bid decisions. A Kolmogorov-Smirnov test on the two data
samples is not normally distributed ( p-valueo0.05), and thus non-parametric
statistical tests were used for subsequent analyses. At first glance of the frequency of
no-bid decisions, one might be tempted to suggest that the results are not in
agreement with the studies by Oo (2007) and Bevacqua and Elias (1992), where higher
no-bid decisions are expected with an increase in number of projects. Here, the
disparity is due to different research design, whilst the two previous studies focused on
two extreme market conditions booming/strong and recession/weak years, the levels
of demand in this experiment were varied over ten rounds. Taking the recession group
as an example, the true recession period is from rounds 1-5 as this represents a
decrease in the number of projects available. Rounds 6-10, on the other hand, represent
a recovery period, where the number of projects increases again. Looking at the
no-bid decisions for the recession group, the majority (23 out of 29) of the no-bid
decisions were recorded in the recovery period, suggesting the results are in general
agreement with the two studies aforementioned. Other possible factors affecting this
observation are the bidders current workload (or jobs on hand) and accumulated
profit/loss as the experiment proceeded.
For the exploratory analysis, scatter plots were created to show the spread of data
for both the booming (Figure 2) and recession (Figure 3) groups. The y-axis scale is the
mark-up ratio and is defined as the contractors bid divided by the unbiased cost
estimate. A mark-up ratio of one indicates that the bidder had placed a bid at the cost
estimate level. A mark-up ratio 41 indicates that the bidder had placed a mark-up on
top of the cost estimate and vice versa, a mark-up ratio o1 indicates that the bidder
had decided to bid below the cost estimate. The trend line attached to the data points
is a LOWESS curve and stands for locally weighted scatter plot smoothing.
The LOWESS fit line is based on local polynomial least squares fit to a set of data
points. The fit is then robustified which is defined as resmoothing of the curve for
several iterations to provide a more accurate trend representation of the data set
(Hardle, 1990). The robustified LOWESS curve is more resistant to effects of noise
and/or marginal outliers in any particular data set.
For the booming group, it can be seen that there are a few kinks in the LOWESS
curve from rounds 3-5. This may be seen as rapid adjustments to bidding strategy
after the initial two rounds, possibly due to the time taken to learn about the bidding
environment. It should be noted that feedback information regarding profit and loss
was provided at the beginning of round 3 (due to a minimum time frame of two rounds
Bid

No-bid

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Total

Scenario

Booming
Recession

290
271

96.7
90.3

10
29

3.3
9.7

300
300

100.0
100.0

Table I.
Sample size for booming
and recession groups

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284

Figure 2.
Booming group
scatter plot

1.4000
1.3800
1.3600
1.3400
1.3200
1.3000
1.2800
1.2600
1.2400
1.2200
1.2000
1.1800
1.1600
1.1400
1.1200
1.1000
1.0800
1.0600
1.0400
1.0200
1.0000
0.9800
0.9600
0.9400
0.9200
0.9000
0.8800
0.8600
0.8400
0.8200
0.8000

Bidder
ID
A1
A2
A3
A4
A5

4
5
6
Round Number

10

to complete a hypothetical project), thus this may have been a wake-up call for those
bidders with aggressive bidding strategies in initial bidding rounds. The mark-up ratio
trend from round 5 onwards is stabilised and represents consistent bidding behaviour
(constant level of mark-up). A possible conjecture for this behaviour stems from
bidders need for work, having gained sufficient amount of work on hand, even though
the number of projects is decreasing (round 6 and onwards) there is little need to alter
the bidding strategy until more capacity is available.
For the recession group, it can be seen that there is a continually decreasing
mark-up ratio trend from the LOWESS curve. The gradient of the curve is steepest
from rounds 1-4, reflecting the rate of decrease in number of projects (see Figure 1).
This result is in line with theoretical expectations, with a decreasing number of
projects available, and a constant number of competitors, the competition becomes
more intense, thus forcing lower mark-ups in order to win job(s). Round 5 (the trough)
appears to be the turnover point where the decreasing slope turns to a lower gradient.
One possible explanation for the trend observed from round 6 and onwards can again
be related to bidders need for work. During the recovery period (round 6 onwards)
some bidders were still in need for work and continued to apply lower mark-ups in
order to win job(s).

Markup ratio

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1.4000
1.3800
1.3600
1.3400
1.3200
1.3000
1.2800
1.2600
1.2400
1.2200
1.2000
1.1800
1.1600
1.1400
1.1200
1.1000
1.0800
1.0600
1.0400
1.0200
1.0000
0.9800
0.9600
0.9400
0.9200
0.9000
0.8800
0.8600
0.8400
0.8200
0.8000

Bidder
ID
B1
B2
B3
B4

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285

B5

4
5
6
Round Number

10

A key observation from both LOWESS curves is that for the booming group, the mark-up
ratio trend is consistently above 1.0, however, for the recession group, the mark-up ratio
drops below 1.0. This suggests higher overall mark-ups were being applied for the
booming group, and lower mark-ups (or mark-downs) were recorded for the recession
group. These results are in line with the findings from De Neufville et al. (1977) where they
found that in good years bidders applied higher mark-ups and in bad years, bidders
applied lower mark-ups.
4.2 Cross comparison between groups
At the broadest level, a Mann-Whitney U-test was performed in order to test the
difference in distributions of the mark-up ratio for the booming and recession groups
(i.e. the effect of two different experimental treatments). The test results reveals that
the mean mark-up ratio for the booming group is higher than the mean mark-up
ratios being applied for the recession scenario (mean rank: 305.18 (booming); 255.12
(recession), U 32,282, Z 3.657, p 0.000). This means that the two different
experimental treatments resulted in statistically different mark-up ratio distributions,
providing evidence that the bidders do consider the level of construction demand in
their bidding decisions. Although a higher overall mark-up ratio (i.e. higher mean rank)

Figure 3.
Recession group
scatter plot

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286

was recorded for the booming group as expected, a possible explanation for the difference
in mean mark-up ratio can be traced back to the difference in the scenarios. In the
booming scenario, the number of projects were increasing for the first five rounds, thus as
the number of projects increase, the level of competition decreases and the bidders
were able to apply higher mark-ups and still win job(s). As the bidders gained enough
harvest from the first five rounds, they did not need to significantly alter their bidding
strategy to become more competitive in the remaining rounds of the bidding experiment
(see Figure 2). However, for the recession scenario, the number of projects were decreasing
for the first five rounds, thus the level of competition was increasing with each passing
round, whereby contractors would have bid aggressively (lower mark-up) in order to win
job(s) and offset the operational costs of the firm (at the very least). As some bidders were
likely still in need of work, the low mark-up trend continued, albeit slowing down as the
construction demand was recovering (see Figure 3).
At the second level, Table II shows the results of an in-depth analysis on specific
bidding rounds and subseries of bids using Mann-Whitney U-tests. First, a test was
performed on the first bids of the two groups. The results show that there is no
significant difference in the mean mark-up between the booming and recession groups
( p 0.641). This is expected as all the bidders were assumed to start off at an
inexperienced state. As Fu et al. (2004) suggests, inexperienced contractors would not
be very competitive in their initial bidding attempts, however, their interpretation of
the bidding environment would be improved over time through learning. Hence,
an alternative interpretation of the insignificant difference is that the difference in
the experimental treatments (booming and recession scenarios) has no impact on the
bidding participants in the first bidding round. Next, from the exploratory analysis,
it has been identified that there are a few key time points of interest for cross
comparison. These include: first, round 3 that represents the point where the bidders
had gained experience in the bidding experiment; second, round 5 peak and trough of
the booming and recession scenarios that appears to be the turning point a change
in the LOWESS curve slopes (mark-up stabilisation for the booming group and a
change in aggressiveness in mark-up for the recession group); and third, round 9 the
stagnant demand expectation for both groups. Comparing the mark-up ratios for the
third bidding round from both groups yielded a significant p-value of 0.007. This
suggests that, at round 3, the bidders in the respective groups had begun to behave
differently in terms of mark-up decision and were affected by the varying levels of
construction demand. To further examine the effect of experimental treatments from
round 3 onwards, two subseries of bids (i.e. rounds 4-5 and 5-6) were considered by
using round 5 as the turning point. The test results show that there are significant
differences between the two groups. In rounds 4-5, just before the turning point, there
was a significant difference in the mean mark-up ratio between the booming and
recession groups ( p 0.041). After the turning point (rounds 5-6) there was also a
Bidding round(s)

Table II.
Bidding round(s)
cross-comparison

1
3
4-5
5-6
9-10

67
70
115
102
87

489.0
381.0
953.5
441.0
329

0.467
2.720
2.048
4.057
4.709

0.641
0.007
0.041
0.000
0.000

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significant difference between the two treatment groups mark-up ratios ( p 0.000).
Rounds 9-10 represented a stagnant demand whereby the number of projects released
did not change. The results show that there was a significant difference between the
booming and recession groups ( p 0.000). Although the number of projects did not
change, the level of construction demand was clearly different at that point in time (eight
projects released for the recession group and three projects released for the booming
group), thus this explains the difference in the mark-up ratio. Again, this provides strong
evidence that the different experimental treatments were having an impact on the bidders
behaviour (through changes in mark-up decisions). It can be conjectured that from round
3 onwards, bidders needed to have considered the changing construction demand in
order to survive and prosper in the bidding environment. Those who did not adapt well to
the changing market conditions would have been compelled to alter their bidding
strategy in an attempt to improve their performance.
4.3 Seriousness of bidding
With the bidding forms (where bidders write down their bids), a blank field was
required to be filled in representing the percentage chance of winning each submitted
bid. In construction contract auctions setting where the lowest bidder wins, thus an
understanding of the bidding experiment would yield a logical result whereby higher
bids lead to lower chances of winning and vice versa, lower bids lead to higher chances
of winning. Hence, the Spearmans correlation test was used to test the participants
seriousness in bidding and as a sanity check for the results. The test was performed on
the entire population sample (both booming and recession groups included) with
the percentage chance of winning and mark-up ratio being the factors analysed.
The results show a strong negative correlation between the percentage chance of
winning and the mark-up ratio (rs 0.432, p 0.000). The negative correlation is as
expected, providing evidence that the bidders understood the mechanics of the
bidding experiment. This also suggests that they were serious in their bidding
attempts and were behaving logically.
5. Conclusion
This study examined the effect of construction demand on contract auctions utilising
an experimental research method. Two groups of inexperienced bidders were subjected
to two different demand scenarios, a booming demand and a recessionary demand.
The results show that the variations in the bid price level are affected by varying levels
of construction demand, in terms of the number of projects available for bidding.
From the exploratory analysis, it was found that there were more bid decisions when
the number of projects was decreasing, and that there were less bid decisions
when the number of projects was increasing. It was also found that the general
mark-up level for the bidders experiencing a booming scenario was higher on average
compared to bidders subjected to the recession scenario. Cross-comparisons between
the two groups revealed that the experimental treatments have an impact on the
bidders mark-up decisions. An in-depth analysis of subseries of bids over bidding
rounds shows that the inexperienced bidders in the experiment had taken two rounds
to learn about the bidding environment before their behaviour adapted to the varying
levels of construction demand.
The findings provide empirical support for construction demand effects on
bidders and how varying levels of demand may impact bidders behaviour.
In addition, this study has reinforced the notion that bidders do adapt to their changing

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external environment, and that the bid price level for contracts are affected by the
current market conditions. An identified limitation of this study is the use of
student subjects in the experiment, thus the experiment results are limited in
generalisation to inexperienced bidders. However, it was found that in this study,
the bidders were rational and serious in their bidding attempts. For further studies,
this experiment may be replicated with different considerations for the booming and
recession scenarios. For example, a continually decrease in number of projects
over time a prolonged recession. Also, it is likely to yield more insights on
inexperienced bidders learning process in recurrent bidding by running the
experiment for a longer duration. In addition, the experiment can be replicated using
experienced contractors in order to compare the results of inexperienced bidders to
experienced. For construction clients, this study has demonstrated a need to consider
the levels of construction demand in the industry in order to best design their
procurement strategies, especially when deciding on the timing to call tenders and
on an acceptable price for contracts. For construction contractors, enhanced
understanding of the interaction between construction demand and price, may
assist in formulation of a more effective bid, which has additional optimisation for the
current market conditions.
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Corresponding author
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