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Cattell, D W, Bowen, P A and Kaka, A P (2011) Proposed Framework for Applying Cumulative Prospect Theory to an Unbalanced Bidding Model. Journal of Construction Engineering and Management, 137(12), 1052–9.
- Type: Journal Article
- Keywords: Bids; Construction management; Pricing; Risk management; Bidding; Markup; Portfolio selection; Utility theory; Cumulative prospect theory; Risk analysis;
- ISBN/ISSN: 0733-9364
- URL: https://doi.org/10.1061/(ASCE)CO.1943-7862.0000367
- Abstract:
Recent research on unbalanced bidding models has identified both the benefits and the risks generated from different prices applied to the component items of a construction project. It has also been proposed that modern portfolio theory (MPT) be used as the technique by which to trade-off the conflicting objectives of maximizing the expected profit and, at the same time, minimizing the risk. The MPT methodology has previously been found to provide contractors with a technique by which they can identify and sift out all of the efficient item-price combinations, such that they need not suffer the consequences of deciding upon any substandard inefficient pricing combination. The use of MPT still leaves contractors with a wide range of choices. This paper introduces and applies microeconomic techniques [namely cumulative prospect theory (CPT)] to narrow these choices down to only one optimal choice. CPT serves to equate different return-risk alternatives to find the one set of item prices that will provide the optimal outcome in light of the contractor’s risk profile. The paper concludes by applying and evaluating this technique, on a small hypothetical project. Results show that a contractor with such a profile is able to identify prices that will generate an expected mean profit of 150%, more than they could accomplish by way of balanced pricing.
Cheung, S O and Chow, P T (2011) Withdrawal in Construction Project Dispute Negotiation. Journal of Construction Engineering and Management, 137(12), 1071–9.
Edwards, D J and Holt, G D (2011) Mini-Excavator Safety: Toward Innovative Stability Testing, Procurement, and Manufacture. Journal of Construction Engineering and Management, 137(12), 1125–33.
Eybpoosh, M, Dikmen, I and Talat Birgonul, M (2011) Identification of Risk Paths in International Construction Projects Using Structural Equation Modeling. Journal of Construction Engineering and Management, 137(12), 1164–75.
Fonte, G C A (2011) Energy Management Reduces Great Pyramid Build Effort by More Than 98%. Journal of Construction Engineering and Management, 137(12), 1195–204.
Golparvar-Fard, M, Peña-Mora, F and Savarese, S (2011) . Journal of Construction Engineering and Management, 137(12), 1099–116.
Gouett, M C, Haas, C T, Goodrum, P M and Caldas, C H (2011) Activity Analysis for Direct-Work Rate Improvement in Construction. Journal of Construction Engineering and Management, 137(12), 1117–24.
Hartmann, T (2011) Goal and Process Alignment during the Implementation of Decision Support Systems by Project Teams. Journal of Construction Engineering and Management, 137(12), 1134–41.
Heon Jun, D and El-Rayes, K (2011) Multiobjective Optimization of Resource Leveling and Allocation during Construction Scheduling. Journal of Construction Engineering and Management, 137(12), 1080–8.
Kale, S and Karaman, E A (2011) Evaluating the Knowledge Management Practices of Construction Firms by Using Importance–Comparative Performance Analysis Maps. Journal of Construction Engineering and Management, 137(12), 1142–52.
Kirgiz, M S (2011) Chemical Properties of Blended Cement Pastes. Journal of Construction Engineering and Management, 137(12), 1036–42.
Li, J and Zou, P X W (2011) Fuzzy AHP-Based Risk Assessment Methodology for PPP Projects. Journal of Construction Engineering and Management, 137(12), 1205–9.
Li, N and Becerik-Gerber, B (2011) Life-Cycle Approach for Implementing RFID Technology in Construction: Learning from Academic and Industry Use Cases. Journal of Construction Engineering and Management, 137(12), 1089–98.
Li, Y Y, Chen, P, Chew, D A S, Teo, C C and Ding, R G (2011) Critical Project Management Factors of AEC Firms for Delivering Green Building Projects in Singapore. Journal of Construction Engineering and Management, 137(12), 1153–63.
Love, P E D, Edwards, D J, Irani, Z and Goh, Y M (2011) Dynamics of Rework in Complex Offshore Hydrocarbon Projects. Journal of Construction Engineering and Management, 137(12), 1060–70.
Nahmens, I and Bindroo, V (2011) Is Customization Fruitful in Industrialized Homebuilding Industry?. Journal of Construction Engineering and Management, 137(12), 1027–35.
Swarup, L, Korkmaz, S and Riley, D (2011) Project Delivery Metrics for Sustainable, High-Performance Buildings. Journal of Construction Engineering and Management, 137(12), 1043–51.
Xia, B, Chan, A P C and Yeung, J F Y (2011) Developing a Fuzzy Multicriteria Decision-Making Model for Selecting Design-Build Operational Variations. Journal of Construction Engineering and Management, 137(12), 1176–84.
Zhou, H and Zhang, H (2011) Risk Assessment Methodology for a Deep Foundation Pit Construction Project in Shanghai, China. Journal of Construction Engineering and Management, 137(12), 1185–94.