Optimal Risk Attitude for Construction Contractors in Competitive Bidding Environments

Competitive bidding is the major mechanism for allocation of construction projects and consequently price determination of the construction services. Risk attitude has been recognized as a competitive characteristic of construction contractors primarily due to the risky nature of construction projects as well as competitive bidding. This paper aims to investigate the importance of risk attitude on business success of contractors and mainly to determine the optimal relative range of risk-averseness that helps a contractor outperform its competitors in a long run. An agent-based model (ABM) of the construction bidding environment is utilized to run a variety of experiments where the simulated market is comprised of heterogeneous, risk-sensitive contractors competing over projects with different characteristics. Results suggest that risk attitude has considerable impact on bidding performance of contractors and moderate risk averseness is the optimal policy. Depending on level of cost estimating accuracy and project execution skills of contractors, slightly and extremely risk averse contractors can close the gap between their performance and that of moderately risk averse ones.