Question

You operate your own small building company and have decided to bid on a government contract to build a pedestrian walkway in a national park during the coming winter. The walkway is to be of standard government design and should involve no unexpected costs. Your present capacity utilization rate is moderate and allows sufficient scope to understand this contract, if you win it. You calculate your incremental costs to be $268,000 and your fully allocated costs to be $440,000. Your usual practice is to add between 60% and 80% to your incremental costs, depending on capacity utilization rate and other factors. You expect three other firms to also bid on this contract, and you have assembled the following competitor intelligence about those companies.

Issue	Rival A	Rival B	Rival C
Capacity Utilization	At full capacity	Moderate	Very low
Goodwill Considerations	Very concerned	Moderately concerned	Not concerned
Production Facilities	Small and inefficient plant	Medium sized and efficient plant	Large and very efficient plant
Previous Bidding Pattern	Incremental cost plus 35-50%	Full cost plus 8-12%	Full cost plus 10-15%
Cost Structure	Incremental costs exceed yours by about 10%	Similar cost structure to yours	Incremental costs 20% lower but full costs are similar to yours
Aesthetic Factors	Does not like winter jobs or dirty jobs	Does not like messy or inconvenient jobs	Likes projects where it can show its creativity
Political Factors	Decision maker is a relative of the buyer	Decision maker is seeking a new job	Decision maker is looking for a promotion

Show all of your calculations and processes. Describe your answers in three- to five-complete sentences.

A.) What price would you bid if you must win the project?

Answer 1

Solution(s):

Bidding depends on the price that you're announcing. Since its not stated here exactly which kind of the bid process is - either sealed first price or sealed second price, I assume that it is the most commonly used bid where the participants announce their prices and the bidder with the highest price wins.

Now, to decide as to what the price needs to be offered, one has to be sure what others are going to offer. Since rival A is already at full capacity, possessing an inefficient plant and incremental costs that are higher than our plant, it should be of little worry than that rival A will not win.

Perhaps the most worrysome would be rival B, since its capacity is moderate and efficeint and the cost structures are very similar. Since the maximum 12% of $440,000 suggests that rival B is willing to go to the extent of $52,800 more, if our company can go at least till $55,000, the bid could be ours. However, even more worrysome is the last rival C who can make up to a staggering $66,000 more to win the bid. If we could go to a maximum of 80% of incremental costs, the total amount of $654,400 should be more than enough to win the bid. However, this amount is too big and should be lowered down. I believe an amount of $510,000 shuld be more than enough to overtake all the three rivals as also to maximize the expected value of contribution from this contract.