Contractor’s decision for bid profit reduction within opportunistic bidding behavior of claims recovery Khaled A. Mohamed * , Shafik S. Khoury, Sherif M. Hafez Structural Engineering Department, Faculty of Engineering, Alexandria University, Alexandria, Egypt Received 13 September 2009; received in revised form 4 December 2009; accepted 17 December 2009 Abstract Contractors may decide to reduce the bid profit on basis of opportunistic bidding behavior (OBB) under potential claims recovery for performing changes in work or likely employer’s mismanagement. An analytical evaluation in a decision tree framework is used to represent the expected events and the state of information for OBB decision and their possible outcomes. Quantitative evaluations are introduced to set the likely chance of a claim occurrence, to manage the claim success and to expect a negotiation offer ratio for the profit in claim negotiation. The product output of these parameters sets the conditional contractor’s decision for the price reduction that may be assigned in the original bid. The presented methodology pro- vides an applicable decision technique for use by contractors to benefit from the potential uneven events caused by employer’s acts during project phases to reduce the bid profit on price based competition case which is a significant item in a typical competitive bidding. Ó 2009 Elsevier Ltd and IPMA. All rights reserved. Keywords: Opportunistic bidding behavior; Profit reduction; Claims recovery; Bid price competition 1. Introduction Under the competitive bidding methods in construction, competition may enforce bidders to lower their margin of profits to enhance the probability of winning and get the bid contract award. Nagi et al. (2002) reported that competition has compelled contractors to set a lower profit to add to the estimated cost of the project to produce a more advanta- geous bid. Meanwhile, some contractors mark up the estimated cost by a certain percentage to increase the profit which might reduce the bidding competitiveness simulta- neously (Xu and Tiong, 2001). Pursuing the optimal balance among the expected profit and costs is critical for the bidding decision making (Perng et al., 2006). Numerous studies have examined bidding strategies from the contractor’s perspective of the cost uncertainty (Chapman et al., 2000), factors influencing the decision to bid (Wanous et al., 2000), and the probability of winning the bid (Cagno et al., 2001). Meanwhile, other researchers introduced various strategies to model bid markup in com- petitive bidding using mathematical methods, including fuzzy set theory (Fayek, 1998), artificial neural network (Li et al., 1999), analytical hierarchy process (Chua and Li, 2000), case-based reasoning (Chua et al., 2001), and fuzzy neural network (Liu and Ling, 2005). However, in terms of price, the contractor may offer a lower bid price than other competitors in a sacrifice of the profit margin (Tan et al., 2008) and may recover the profit reduction with the knowledge that on subsequent change orders or claims he can receive monies that were initially scarified for the award (Crowley and Hancher, 1995). Levin (1998) reported that in competitive bidding, it is not unu- sual for contractors to bid low on a project and hope to recover the loss through claims. Zack (1993) stated this bid- ding practice “bid your claims” which can be extended recently to opportunistic bidding behavior strategy within potential claims recovery developed in this paper. 0263-7863/$36.00 Ó 2009 Elsevier Ltd and IPMA. All rights reserved. doi:10.1016/j.ijproman.2009.12.003 * Corresponding author. Address: 19, Ibn Zohir Street, Ibrahimia, 21321 Alexandria, Egypt. Tel.: +20 3 5905107, mobile: +20 12 3035395. E-mail address: k.abdelaziz100@yahoo.com (K.A. Mohamed). www.elsevier.com/locate/ijproman Available online at www.sciencedirect.com International Journal of Project Management 29 (2011) 93–107