Revista ingeniería de construcción
versión ISSN 0718-5073
Rev. ing. constr. vol.26 no.1 Santiago 2011
Revista Ingeniería de Construcción Vol. 26 N°1, Abril de 2011 www.ing.puc.cl/ric PAG. 41-60
Factors affecting bid/no bid decision in the Gaza Strip -contractors' perspectives
Adnan Enshassi*1, Sherif Mohamed**, Ala'a El Karriri***
* The Islamic University of Gaza IUG. PALESTINE
** Griffith University. AUSTRALIA
*** UNRWA. GAZA
To bid or not to bid for a certain project is considered to be a crucial decision for contractors' survival. The objective of this paper is to identify and rank the factors that affect the bid/no bid decision according to their relative importance from the perspective of the local contractors operating in the Gaza Strip, Palestine. A total of seventy-eight factors were identified through a comprehensive literature review to evaluate the most important factors that affect the contractors' decisions to bid or not in the Gaza strip. A survey was conducted on a sample of seventy three contractors classified under the building category, and sixty five of them responded with response rate 89%. The results illustrate that, the financial capability of the contractors, the reputation of the clients, the financial capability of the clients, the financial values of the project, the availability of construction raw materials in the local markets, and the stability of the construction industry were the most critical factors affecting the contractors bid-no bid decisions. This study suggests that contractors and clients should improve their financial systems and capabilities in order to stay in business.
Keywords: Contractors, bid decision, construction, finance
The construction industry is usually considered to be the back-bone of any economy as it absorbs a relatively high percentage of the national workforce. In the United Kingdom, the construction industry (the second largest industry in the European Union) contributes around 8.2% of Gross Value Added (GVA), and employs about 7.0 % of the local workforce providing some 2.2 million jobs (AGCAS, 2008). Similarly, in the United States of America, the construction industry is considered to be the largest in the world accounting for 25% of the total global construction industry (UK Trade & Investment Website, 2007). In emerging economies, such as India, the industry is worth around USD 25 billion annually and accounts for more than 6% of GDP, employing 18 million people (UK Trade & Investment Website, 2007). In Palestine (the geographical focus of this paper), the construction industry is considered as one of the main sectors that contribute strongly to the local economy. In year 2007, alone, this industry employed 11.6 % of the local workforce.
From the above, it is clear that a healthy economy is a function of the demand for construction work as reflected by the number and value of procured construction projects. Given that most projects get awarded to contractors via tenders (competitive bidding), contractors' survival is, therefore, strongly dependent on being able to successfully deal with different bidding situations. These situations (e.g. economic, social and/or political) could dictate the number of construction firms registered and the degree of competition for construction works (Akintoye and Skitmore 1990).
The contractor's decision whether to bid or not for a certain project is usually associated with uncertainty and may be influenced by a plethora of factors. While some of these factors are directly related to the contractor, other factors are related to the client, contract and project characteristics as well as the business environment. The objective of this paper is to identify and rank the factors affecting the bid/no bid decision according to their relative importance from the perspective of the local contractors operating in the Gaza Strip, Palestine. The next section provides a summary of the literature review undertaken to identify the relevant factors, while the rest of the paper presents the research methodology and study findings.
Relevant previous studies
Over the years, the bid/no bid decision has attracted the attention of many researchers.
A relatively large number of studies have focused on identifying the factors effecting this decision, whereas few studies have investigated and developed relevant bidding strategy models. Skitmore et al. (1993) argued that, the decision to bid needs a comprehensive and intensive process of data collection and investigation of the internal and external factors. The internal factors relates to the organizational capabilities and resources, while the external factors relates to both market and project conditions. From a cost perspective, Krasnokutskaya and Seim (2007) stated that, the contractors' decision to participate in the tender depends on two different costs: cost of entry and cost of completing the project. Focusing on the Middle East, Abdul-Hadi (1999) categorized factors affecting bidding and markup decisions in Saudi Arabia into five categories: project characteristics, project documents, contractor characteristics, the bidding situation and the economic situation. In the Gaza Strip, Palestine, Nirab (2007) identified a total of ninety four factors affecting bidding decision and classified them into three categories, firm- project- and market-related factors.
Critically reviewing many previous research studies undertaken in different countries (e.g. Odusote and Fellows 1992, Skitmore et al., 1993, Drew and Skitmore (1990, 1993), Eastham and Skitmore 1993, Sohail et al., 1999, Abdul-Hadi 1999, Stewart 2000, Drew et al., 2001, Wanous et al., 2003, Noumba and Dinghem 2005, Alexandersson and Hultén 2006, Krasnokutskaya and Seim 2007), has led this paper to categorize the identified several factors into four main groups, namely: 1) contractor's related factors, 2) client characteristics 3) contract and project characteristics and 4) business environmental factors such as political situation, governmental regulations, etc. The four groups of factors are briefly discussed below.
Contractor's related factors
At any point in time, within a contracting company there are contracts which are being undertaken and contracts which are being sought, usually in a competitive environment (Odusote and Fellows 1992). The contractor's bidding decision is influenced by several factors related to the contractors themselves. These include the contractor's experience, technical and financial capabilities, current and projected workload, etc.
From a behaviour perspective, Drew and Skitmore (1993) classified the factors that i nfluence bidding behavior into three groups.
The first group is related to the behavior of contractors, the second group is related to the individual contractor behavior, while the third group is related to the contractor behavior toward the characteristics of the contract. Flanagan and Norman (1982) [cited in Drew et al. (2001)] stated that bidding behavior, in general terms, is likely to be affected by the following five major factors: the size and value of the project, and construction and managerial complexity required to complete it, the regional market conditions, the current and projected workload of the tenderer, the type of client, and the type of project. Skitmore (2002) explained that, there are a variety of reasons why tenderers may prefer not to bid for a particular contract. These include; number of bids in hand, the strength of the competition, projected profit levels, cost of bidding and time-period allowed for bid preparation. Drew and Skitmore (1992) observed that project profitability, number and value of bids in hand, the availability of contractor's staff and their technical capabilities are critical factors influencing the decision to participate in a new tender or not.
Stewart (2000) emphasized that, much of the work on strategic management is based on the assumption that companies seek to earn profit or maximize returns to shareholders. Dijik (1999) stated that, the bidders could be faced with the problem that preparing a bid involves costs, this means that, the estimation of the margin of profit may affect the bidding decision. Krasnokutskaya and Seim (2007) argued that, the probability to submit a bid increases significantly with the firms' capabilities. Large firms have strong trend to participate in the large size of the project. Sohail et al (1999) analyzed the factors effecting on the bidders participation, their survey revealed that 88% of the contractors' respondents believe that the technical competency, legal status of the contractors, experience with similar projects, competencies of the contractors' staff and managerial capabilities are important factors to consider prior to participating in the tenders.
The clients' policies and characteristics such as selection system, awarding criteria, advertisement characteristics, tendering system, reputation of clients among others, are critical factors that do also affect the contractor's bid/no bid decision.
Drew and Skitmore (1997) emphasized that the character of construction markets is set by several factors including the nature of the client and the type of competition experienced by the construction firm. Drew et al. (2001) concluded also that, three important factors influencing contractor-bidding behavior, these factors are the type of client, type of construction work and the size of construction work. Krasnokutskaya and Seim (2007) went even further by illustrating the influence of the tenders' advertisement procedures on the contractor's behaviour. The client policy of inviting potential bidders, client reputation and experience, bid selection process transparency, credibility many other factors were studied by several researchers (Drew and Skitmore 1992, Hatush and Skitmore 1998, Jennings and Holt 1998, Mills and Skitmore (1999a, 1999b) Egemen and Mohamed 2005, Banaitiene and Banaitis 2006, El Sawalhi et al., 2007, Straub and Mossel 2007).
Contract and Project Characteristics
Eastham and Skitmore (1993) emphasized that, the project and contract characteristics are critical factors that affect the bidders' decision of participation. Drew and Skitmore (1992, 1997) concluded that, the contract conditions, site conditions, construction methods and Programme, market conditions and identity of other participated bidders are critical factors influencing the decision to participate or not. Krasnokutskaya and Seim (2007) identified a number of factors that have an impact on the bidding behaviors such as: working days, number of bidders participating in the tender, distance to project, current load and qualified small business. Noumba and Dinghem (2005) revealed that, the efforts, resources and time spent to review and fill the bids will influence the bidders' strategy to contribute in future with similar projects or not. Krasnokutskaya and Seim (2007) showed that, the contract requirements have an influence on the bidding behaviors, and found that, the low bidders' categories prefer the small size projects and long duration. This suggests that small companies are primarily interested in smaller-scale projects that require limited resources and longer projects that provide steady business. Stone and Reiners (1954) cited in (Warsame 2006b) draw a connection between contract size and the size of contractors.
They state that only the largest firm normally undertakes the largest contracts, while both small and large firms undertake the small contracts.
External Business Environment
The contractors' bidding decision is also being affected by the external business environmental conditions such as number of competitors in the market, strength of the competitors, stability of the local construction industry, governmental regulations, weather conditions, etc. Newcombe et al. (1990) showed that, the business environment within which the construction contractors operate consists of general factors (e.g. politics and law, economics, sociology and technology) as well as competitive factors (e.g. finance, plant, labour, management, suppliers, subcontractors, consultants and clients). Hong and Shum (1999) stated that, an increase in the number of bidders has two counteracting effects on equilibrium bidding behaviors. First, the increased competition generally leads to more aggressive bidding, as each bidder attempts to maintain their chances of wining against more rivals: this action called competitive effect. Second, the winner curse becomes more severe as the number of bidders increases and rational bidders will bid less aggressively in response: this action called winners curse effect. If the winners curse effect is large enough, the possibility arises that prices could actually rise as the number of competitors increases. Hong and Shum (1999) found that, the costs of procurement auctions increased by 30% as the number of bidders increases from 3 to 6 bidders. Athey et al. (2004), observed that the competition with unknown bidders (sealed envelopes) attracts more bidders than the open auctions with generating higher revenue.
In sum, a total of seventy eight factors affecting the bidders' decisions and behaviors to bid or not to bid were identified and categorized by this paper into the above four groups.
3. Research methodology
In this research, the questionnaire approach was used to collect the factual, perceptive and attitudes of the respondents regarding the factors affecting bidders decisions to bid or not.
Fellows and Liu, (1997) and Naoum (1998) argued that, the questionnaire is widely used approach for descriptive and analytical surveys to find out the facts, opinions and views of the respondents. The populations that were targeted in this research were all local contractors who are classified by the Palestinian Contractors Union "PCU" under the following five building categories in Gaza Strip.. The financial ceiling (maximum project value they can bid for) for each category is as follows:
1st Category: [6.0-15.0 USD million]
2nd Category: [3.0-6.0 USD million]
3rd Category: [1.0-3.0 USD million]
4th Category: [0.5-1.0 USD million]
5th Category: [less than 0.5 USD million]
To determine the appropriate sample size from the theoretical population, the following Kish's (1965) equation was used:
n' is the sample size from infinite population, which can be calculated from this formula [n' = S2/V2]. The definitions of all variable can be defined as the following:
n: sample size from finite population.
N: Total population (170 contractors)
V: Standard error of sample population equal 0.05 for the confidence level 95 %, t =1.96.
S2: Standard error variance of population elements,
S2= P (1-P); maximum at P= 0.5
The sample size can be calculated from the previous equations as follows:
Although the calculated sample size for the contractors was (63 questionnaires), the distributed questionnaires were 73 instead of 63. This process was applied to overcome the low response rate that may disturb the consistency and the benefits of the study.
The response rate was 89.5%. The sample was selected randomly from the available lists of each category. The selection process was done with a non replacement selection process.
The respondents were asked to give their perceptions of group of statements using a five-point Likert scale (1, for strongly disagree to 5 for strongly agree), reflecting their assessment regarding the factors affecting the bidding process. The relative importance index was computed using the following equation (Naoum 1998, Assaf et al., 1999, 2001, Abdul-Hadi 1999, Wanous et al 2003):
Where W is the weighting given to each factor by the respondent, ranging from 1 to 5,(n1 = number of respondents for strongly disagree, n2 = number of respondents for disagree, n3 = number of respondents for neutral, n4 = number of respondents for agree , n5 = number of respondents for strongly agree ). A is the highest weight (i.e. 5 in this study) and N is the total number of participants in the sample. The relative importance index ranges from 0 to 1.0.
4. Results and discussions
4.1 Factors related to the contractor (Group one)
Table 1 shows a total of 18 factors that are directly related to the contractors and affect their decision to bid or not. As indicated in Table 1, the contractor's financial capability was ranked in the first position by the respondents, with a relative importance index of (0.889). This result is in line with Krasnokutskaya and Seim (2007) and Abdul-Hadi (1999), Drew and Skitmore (1992), Jennings and Holt (1998) and Banaitis (2006) where their results reflect the importance of the contractor's financial capabilities to sustain their contracting business. 'The contractors' category according to the PCU' was ranked in the second position with a relative importance index of (0.837). This provides guidance to the PCU's committee, the Palestinian classifications committees, clients and consultants to look more closely at how the PCU's contractors categorization is perceived by contractors as crucial factor affecting their ability to bid for projects.
Therefore, having transparent and objective evaluation criteria to periodically review the contractors' categories would be of benefit to the construction industry.
'Experience and competence of the contractor's staff' was ranked in the third position with a relative importance index of (0.834). 'Experience in similar projects' was ranked in the fourth position with a relative importance index of (0.822). Experiences in similar projects will strengthen the managerial, technical and financial capabilities of the contracting organization to competitively bid with high level of success and satisfaction. These results were in agreement with those by Drew and Skitmore (1992) who emphasized that past projects strongly support the contractors' decision to bid for the similar projects.
Table 1. Relative importance indices (RII) and ranks (R) for contractors-related factors related
Looking at the bottom end of Table 1, 'the relationship between the contractor and subcontractors' was ranked in the seventeenth position with a relative importance index of (0.692) while the 'contractor's ability to form sustainable or temporary joint venture" was ranked in the last position with a relative important index of (0.668). The weak influence of these two factors on the contractor's bid/no-bid decision can be explained by the relatively large number of subcontractors, and the small size of projects in the Gaza strip that may not necessitate forming joint ventures. Besides, the clients' policies and regulations may not easily accommodate forming such joint ventures. This finding is not in agreement with those of Felso et al. (2005) and Stehbens et al. (1999) who demonstrated in their respective studies the benefits of applying joint venture on construction projects.
4.2 Factors related to the clients (Group 2)
Table 2 shows a total of 26 factors that are related to the clients and affect the contractor's decision to bid or not. From Table 2, it is observed that, 'The reputation of the client' was ranked in the first position with a relative importance index of (0.931). This result illustrates clearly the influence of client's reputation on the potential contractor-client business relationship. This finding is in agreement with those of Dijik (1999) and Skitmore and Picken (2000).
'The financial capability of the clients' was ranked in the second position with relative importance index of (0.917). Clients with strong financial capabilities will be able to meet their scheduled financial commitments (i.e. progress payments) on time. This findings are in line with those by Wanous et al (2003) and Abdul-Hadi (1999) reflecting the importance of the clients financial capabilities as a motivational factor to improve the bidding environment overall.
'Clients payment policy' was ranked in the third position with a relative importance index of (0.886). This is not surprising as contractors rely heavily on receiving timely payments in order to ensure their business continuity.
Table 2. Relative importance indices (RII) and ranks (R) for factors related to the clients
'Client's policy for compensation and mainly under force Majeure conditions' was ranked in the fourth position with a relative importance index of (0.843). Such a high ranking is due to instability of the political and economical situations experienced in the Gaza strip.
This instability has continually forced several clients to suspend or prematurely terminate contracts thus resulting in severe financial losses for both contractors and clients alike. The responses indicate that clients with fair compensation and reimbursing policy will be more successful than others in attracting higher number of competitive bids. These results are in line with Klein (1999), and Noumba and Dinghem (2005) who explained that, the clients' policies to reimburse the bidders will contribute strongly towards enhancing the bidders' behaviors, 'The clients' policy to adopt advanced payment(s) for the contractors' was ranked in the fifth position with a relative importance index of (0.837).
"The annual common type of tenders advertised by the clients" (construction building works, repair, or maintenance) was ranked in the 20th position with a relative importance index of (0.628). This reflects contractors' readiness and flexibility to bid for different type of projects if the client has good reputation, strong financial capability, and clear payment policy.. 'Adopting e-tendering policy by clients' was equally ranked with the previous factor reflecting its weak influence on the contractors bidding decision. Finally, the 'client's base or address' was ranked in the last position (21st) with a relative importance index of (0.560).
4.3 Factors related to contract and project characteristics (Group 3)
Table 3 shows the 19 factors that are related to the contract and project characteristics and affecting contractor's decision to bid or not. The results revealed that, 'The financial value of the project' was ranked in the first position as a critical factor affecting the contractors bidding decision, and with relative importance index of (0.863). This indicates that, participation in the tenders is affected strongly with the financial value of the project. The results revealed that (what is the evidence of this result?), the contract value that is within the financial capabilities of the contractors will be more attractive than other contracts. Moreover, the large bidders could participate competitively in the large size projects as they expect the higher margin of profits in these projects.
The obtained results are compatible with Krasnokutskaya and Seim (2007) who showed that, small companies are primarily interested in smaller-scale projects that require limited resources and longer projects that provide steady business. Stone and Reiners (1954) [cited in Warsame (2006b)] drew a connection between contract size and the size of contractors since the largest firm normally undertakes the largest contracts, while both small and large firms undertake the small contracts. Moreover, the results are also in line with Drew and Skitmore (1997) as they concluded that, the bidders are more competitive on larger contracts than smaller contracts. That's fine but where is the evidence in item 1, Table 3.
Table 3 shows also that, 'The due date of the payment' - as stipulated in the contract documents - was ranked in the second position with a relative importance index of (0.835).This reflects contractors preference towards contracts having shorter waiting periods following the submissions of their payment claims to enable them to cover their expenditures and meet financial obligations. The procedures and policies in issuing the interim or final payments may differ from one contractual system to another. For instance, the UNRWA's building contract (2008) in article 12, item (d/BC/10) shows that, the payments shall be made to the contractor or his representative within twenty (20) days after receipt by the director of works of correct amount. FIDIC (1999), however, shows in article 14.6 that, the payment will be within twenty eight (28) days after receiving a statement and supporting documents. Such difference reflect the reasons for giving this fact high importance.
'The clarity of the contract clauses' was ranked in the third position with a relative importance index of (0.828). Ranking this factor highly reflect that, the contractors are becoming more aware of the importance of the contract document and its different clause, and not focusing only bill of quantities part. This finding is in line with results obtained from Drew and Skitmore (1992 and 1997) who explained that, the contract conditions and project complexity are critical factors influencing the contractors' arrangements in the bidding stage.
Table 3. Relative importance indices (RII) and ranks (R) for factors related to the contract and project characteristics
The contractors ranked 'Tender fees', 'English language of the contract', 'Size of tender documents'and the 'Arabic language of the contract' in the bottom four positions (16th, 17th, 18th and 19th) with a low relative importance indices of (0.581), (0.575), (0.563) and (0.547) respectively. The weak influence of the tender fees (as requested by clients) could be traced back to its low values. Contract language (whether English or Arabic) appears to have little influence as the majority of contractors review and quote their prices with the help of their qualified engineers. Finally, the tender document size does not seem to play a role in the bid decision as the majority of clients tend to adopt a standard form of contract.
Besides, the majority of the projects in the Gaza Strip are of the medium or small size which may not need a large size contract documents.
4.4 External Business environmental factors (Group 4)
Table 4 shows a total of 15 external environmental factors that affect the contractor's decision to bid or not. The results illustrated that, the stability of the construction industry' was ranked in the first position with a relative importance index of (0.914). The results can be justified on the grounds that the stability of the industry reflects stability of the political economic as well as financial situations for the clients. Moreover, the stability of the industry will in turn, translate into having a steady stream of future projects, stability of costs, and availability of raw materials. The recent NGO's Report (2008) shows the importance of the construction industry in accommodating and absorbing tens of thousands of local laborers. This could reflect why the contractors feel the importance and sensitivity of this factor.
"The availability of the required raw materials for the tender in local markets" was ranked in the second position with a relative importance index of (0.911). This is compatible with Skitmore et al (1993) and in line with the results of Eastham and Skitmore (1993) that showed the importance of the material availability for the bidding decision. Interestingly, this factor ranked was ranked at the 9th position in than Wanous et al's (2003) study. This difference in ranking could be explained by having different operational business conditions between the two geographical locations (i.e. Gaza strip and Syria).
"The stable political situation" was ranked in the third position with a relative importance index of (0.898). The instability of political situation will definitely lead to high risks in the design, procurement and implementation stages; while on the other hand, a more stable political situation will stabilize the industry and the economy as a whole. Newcombe et al. (1990) emphasized the influence of the political environment and governmental law within which contractors operate.
Table 4. Relative importance indices (RII) and ranks (R) for factors related to the external environment
'[The stability of the currency exchange rate' was ranked in the fourth position as an important factor affecting the contractors decisions to bid or not with a relative importance index of (0.895). Currently, severe fluctuations in the currency exchange rates force many contractors to reduce their participations in tenders. In addition, huge inflation coupled with local currency devaluation lead to continually rising tender values. It is becoming clear that clients and consultants must adopt the same currency for their payments and tender practices to overcome the influence of this factor . The new Israeli shekel could be a preferred option to be generalized in all clients' payments and tenders.
'Weak barriers to market entry and the local climate conditions) were ranked in the last two positions with relatively low important indices of (0.692), (0.677) respectively.
These results were not completely matched with Wheelen and Hunger (1998) who showed that, the threat of new entrants' competitors is one of the most important factors affecting the contractors' competitiveness and bidding strategies. Moreover, the results are also not compatible with Drew and Skitmore (1992) results who indicated that weather conditions are one out of three main factors affecting the competitiveness level and the behaviors of the bidders tendency. The deviation between the two sets of findings is not surprising as the Gaza Strip enjoys the mildness of Mediterranean weather.
5. Summary of the four groups
Table 5 lists calculated a relative important index for each group factors. At the top, the external environmental factors group appears to be the most critical with a RII of (0.810). This could be traced to the sensitivity of the local construction industry to the political instability. This further illustrates the high level of risk that the contractors face and must consider during the bidding process. The contractors' related factors group was placed in the second position with a RII of (0.781). The clients' related factors group followed in the third position with a RII of (0.753) while the contract and project characteristic factors group were in the last position with the least RII value of (0.706).
Table 5. Relative important indices of the four groups that affecting bidding decision
6. Conclusions and recommendations
The objective of this paper is to identify and rank the factors that affect the bid/no bid decision according to their relative importance from the perspective of the local contractors operating in the Gaza Strip, Palestine. The identified factors were categorized into four groups. With respect to the factors related to contractors group, the financial capabilities of the contractors appear to be the most important factor affecting their bid/no bid decision. This was followed by contractor's category according to the PCU, experience and competence of contractors' staff, and experience in similar projects were ranked in the top positions.
With respect to factors related to clients group, it was found that, the reputation of the clients, their financial capabilities, payment policies, advanced payments policy, and compensations policy especially in the force majeure situations are the most important factors affecting the contractors decision to whether participate in tenders or not. With respect to factors related to contract and project characteristics group, the financial values of the project, the due date of the payments, the clarity of the contract clauses, the clarity of the drawings and specially the detailed drawings were ranked as a key factors affecting contractors decisions to bid or not.
With respect to the external environmental factors group, it was found that, the stability of the industry, the availability of the required raw materials for the tender at the local markets, the stability of political and economic situations, and the stability of the currency exchange rate, are the most critical factors affecting contractors strategies, arrangements and decision to participate in tenders or not. The overall results revealed that this group of factors has the highest influence among other groups on the contractors bidding decision.
Based on the study findings, local contractors are recommended to continue to upgrade their staff competency level to enable them in improving their financial capabilities and thus increasing their chances to stay longer in the construction business. The Palestinian Contractors Union (PCU) is recommended to draw comprehensive, transparent and objective criteria in reviewing contractors' classification. These criteria should include: financial capabilities, the technical capabilities, past experiences and competencies and qualifications of their staff.
The clients are recommended to adopt the advanced payments policy for the contractors aiming to facilitate the contractor's participation in the construction tenders. The study recommends that both clients and consultants should endeavour to minimize the waiting period associated with regular progress payments to enable contractors meet their financial obligations and facilitate timely materials and service procurement. This in turn would strength the bidders' chances to bid and compete with relatively low levels of risk that may unnecessarily raise the tender value and/or reduce the level of quality.
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firstname.lastname@example.org Fecha de recepción:
12/ 10/ 2010 Fecha de aceptación: 15/ 02/ 2011
Fecha de recepción: 12/ 10/ 2010 Fecha de aceptación: 15/ 02/ 2011