The Effect of Construction Demand on Inexperienced Bidders’ Bidding Behaviour

Abstract

Construction demand is a core component of the construction markets and affects contractors’ bid pricing behaviour. Through learning and adaptation, they continuously respond to changes in the level of construction demand as reflected by variations in their bids. Using an experimental research design, this research aims to investigate the effect of varying levels of construction demand on inexperienced bidders’ mark-up level and learning behaviour. Fifty-five inexperienced student bidders participated in the experiment. They were randomly assigned to two different demand scenarios: (i) a booming demand curve with a continually increasing number of projects available for bidding, and (ii) a recession demand curve with a continually decreasing number of projects available for bidding. The results show that the bidders’ mark-up level increases with the level of construction demand. They do learn and adapt rationally; whereas bidders with a higher current workload are, in general, more likely to submit higher bid prices, and vice versa. It is found that variations in their bids over time are statistically significant. The mark-up level for the booming group is significantly lower than the recession group, with the booming group having a higher bidding consistency. Linear mixed model analyses show that there is significant heterogeneity between individual bidders, indicating that each bidder behaved differently in response to varying levels of construction demand. Allowing for the heterogeneities, the significant factors affecting the bidders’ mark-up level are the number of projects available for bidding and current workload, whereas their learning behaviour is significantly affected by the time factor and bidding success rate. The implication of the findings for construction clients is that they should consider the construction demand level in their procurement strategies, in particular for scheduling the timing of their tenders. For contractors, a better understanding of how varying levels of construction demand affects their competitors will assist in the formulation of their bidding strategies.