Page 289 - Industrial Process Plant Construction Estimating and Man Hour Analysis

TABLE 12.11.1 Expected profit
Bid, $ (1) (2) (3)
Profit if bid wins Probability of winning Expected profit (1) × (2)
(bid—$500,000)
350,000 $50,000 1.00 -$50,000
375,000 $25,000 0.95 $23,750
400,000 $0 0.90 $0
425,000 $25,000 0.80 $20,000
450,000 $50,000 0.60 $30,000
475,000 $75,000 0.35 $26,250
500,000 $100,000 0.20 $20,000
525,000 $125,000 0.10 $12,500
550,000 $150,000 0.05 $7,500
575,000 $175,000 0.00 $0
To maximize expected profit, the contractor should bid $450,000.
Probabilities
Bid, $ Probability of winning
$350,000 1.00
$375,000 0.95
$400,000 0.90
$425,000 0.80
$450,000 0.60
$475,000 0.35
$500,000 0.20
$525,000 0.10
$550,000 0.05
$575,000 0.00

1.50
Probability of Winning 1.00

0.50
0.00
$0 $200,000 $400,000 $600,000 $800,000
Amount of bid
FIG. 12.11.1 Graph of optimal bidding strategy.