The Wisdom of the Crowds and Cost Overruns in Construction Project Tenders [Abstract]

10.28945/4783 ◽  
2021 ◽  
Author(s):  
Yahel Giat ◽  
Amichai Mitelman
Keyword(s):  
Construction Projects ◽  
Construction Project ◽  
Future Research ◽  
Winner's Curse ◽  
Cost Overruns ◽  
Winner’S Curse ◽  
The Public ◽  
True Value ◽  
The Mean ◽  
Wisdom Of The Crowds

Aim/Purpose: This study’s objective is to demonstrate the wisdom of the crowds phenomenon in construction project tenders and relate it to cost overruns in these projects. Background: The wisdom of the crowd’s phenomenon is an age-old idea that argues that collective opinion is better than any single (even expert) opinion. The first data-based evidence for it is from the beginning of the twentieth century when statistician Francis Galton attended an exhibition in which attendants were asked to estimate the weight of a large ox. He found that while individual estimates varied considerably, the median estimate was within less than one percent from the true weight. The existence of the wisdom of the crowds has a particularly important implication in tenders. Consider a tender for a contract in which the winner is the bidder that agrees to take the contract for the lowest cost. If the collective bid, i.e., the mean bid, is the most accurate in assessing the true value of the contract, then the winning bid is overestimating the contract and is therefore expected to end up with a loss. Indeed, this winner’s curse, was first observed in tenders in the petroleum industry and has been since found in many other fields. Methodology: All the construction projects that were tendered and completed between January 2017 and July 2020 under the management of the department of engineering and construction, a government agency in Israel, were analyzed. After data cleansing, the data comprised 148 tenders with 1295 bids and total value of 229 million US dollars. For each project we determined the valid bids, average (valid) bid, the winning bid, the original project estimated cost, and the actual payments to the winning contractor (actual project cost). Contribution: Construction projects in the public sector are typically granted through a bidding process in which the lowest bidder is granted the contract. It is therefore of interest to examine whether the wisdom of the crowds and the winner’s curse phenomena are manifested in this type of tenders. The results could help understand the reasons for cost overruns in public construction projects. Findings: 1. Wisdom of the crowds: For each project we computed the ratio of the average bid and the project’s estimated cost. The mean ratio (for the 148 projects) was 1.01 suggesting that, on average, the bids are within 1 percent from the true project value. 2. Winner’s curse: On average the winning bid was 7.9% less than the estimated cost and 8.1% less than the average bid. 3. Cost overruns: On average, the payments to the contractor were 16.3% higher than the estimated cost, and 18.8% higher than the average bid. 4. In total these results demonstrate how contractors are able to overcome the winner’s curse. On average, payments to the contractor were 30.7% higher than their bid. Recommendations for Practitioners: Tender issuing public agencies should take into account that the winning bid is based on unrealistic optimism and when the winning contractor is tested by the real costs, they will be hard pressed to avoid these losses and therefore will drive the project into cost overruns. Recommendations for Researchers: It is important to model the strategic game between contractors and project managers that represent the tender-issuing agency. This may explain why the construction industry is beleaguered by cost overruns. Impact on Society: In the current state, the public is paying more than needed for construction projects since winning contractors are struggling to spin their losses into gains. Future Research: Develop game theory models that are based on our empirical findings and that can help to reduce cost overruns in construction projects.

scholarly journals An Integrated Decision Support Model Based on BWM and Fuzzy-VIKOR Techniques for Contractor Selection in Construction Projects

2021 ◽  
Vol 13 (12) ◽  
pp. 6933
Author(s):  
Aziz Naghizadeh Vardin ◽  
Ramin Ansari ◽  
Mohammad Khalilzadeh ◽  
Jurgita Antucheviciene ◽  
Romualdas Bausys
Keyword(s):  
Construction Projects ◽  
Construction Project ◽  
Water Channel ◽  
Multicriteria Decision Making ◽  
Decision Support Model ◽  
Cost Overruns ◽  
Contractor Selection ◽  
Model Based ◽  
Fuzzy Vikor ◽  
Bid Price

Sustainable development of any country to some extent depends on successful accomplishment of construction projects, particularly infrastructures. Contractors have a key role in the success of these projects. Hence, the selection of a competent contractor as a complicated and hard decision process has a vital importance in the destiny of any construction project. Contractor selection is in essence a multicriteria decision-making that ought to encompass so many aspects of the project and the client’s requirements on one hand and the capabilities and past records of the contractors on the other hand. Failure in selecting a competent contractor may cause time and cost overruns; quality shortcomings; increasing in claims, disputes and change orders; and even failure of the project. In spite of deficiencies of selecting a contractor by the rule of “the lowest bid price”, it still prevails in many countries including Iran. In this paper, a new contractor selection model based on the best-worst method (BWM) and well-known Fuzzy-VIKOR techniques is proposed as a solution to overcome the deficiencies of the traditional “lowest bid price” rule. An illustrative example of a water channel construction project verified the applicability of the proposed model in practice.

scholarly journals The Importance of Communication Management Improving the Performance of Construction Project Managers in Developing Countries

2021 ◽  
Vol 56 (3) ◽  
pp. 473-484
Author(s):  
Zulkifli Lubis
Keyword(s):  
Developing Countries ◽  
Public Relations ◽  
Construction Projects ◽  
Construction Project ◽  
Project Managers ◽  
Infrastructure Development ◽  
Communication Management ◽  
The Public ◽  
Study Results

The biggest threat that results in the project not being successful is failure to build a stakeholder project. Based on research on construction projects in developing countries, the lack of communication among workers due to cultural uniformity and the uniqueness of their respective regions can become work constraints that can affect implementation performance and productivity, namely, there is a 69.61% decrease in time performance. The main objective of this research is to analyze the role of communication management in improving the performance of construction project managers in developing countries, particularly the role of construction managers in implementing a construction project. This research uses a qualitative approach and a case study method. Sampling using purposive sampling. Forum Group Discussion to see how the opinions of construction project managers in Indonesia view the importance of communication management in the success of construction projects. The study results explain that the need for Public Relations Infrastructure management plays a role in ensuring various policies and communication to the public. This is a reflection of the effective function of public relations in the implementation of infrastructure development. In carrying out the construction, the construction project manager must pay attention to communication dynamics to support the success of infrastructure development projects. Contractors and other parties involved in infrastructure development must raise awareness of the essence of effective communication in fostering trust in the public concerned with infrastructure development.

Competition and the Winner's Curse in B2B Reverse Auctions

2011 ◽  
pp. 150-165
Author(s):  
Indranil K. Ghosh ◽  
John L. Fizel ◽  
Ido Millet ◽  
Diane H. Parente
Keyword(s):  
Theoretical Background ◽  
Procurement Auctions ◽  
Future Research ◽  
Winner's Curse ◽  
Negative Effects ◽  
Diverse Range ◽  
Winner’S Curse ◽  
Managerial Implications ◽  
The Given ◽  
The Relationship

The Winner’s Curse is a common phenomenon mostly in auctions, even though it has applications in a diverse range of fields. We define the idea of a Winner’s Curse and specify the types of auctions in which this could be prevalent. We look at the data provided by a major multinational corporation on online procurement auctions conducted by them. We specify the relationship that the prevalence of the Winner’s Curse would have on the success of such procurement auctions. Using this theoretical background, we analyze the given data and show that in some cases, the presence of the Winner’s Curse and the subsequent need for bidders to show caution in the presence of the Winner’s Curse could lead to lower auction success for the firm. We specify the particular cases where this is true. This leads to Managerial Implications for firms wishing to conduct procurement auctions online and we spell them out. We also provide some examples of how firms might try and lower the negative effects of the Winner’s Curse. Finally we provide some future research ideas that may be pursued and some additional readings for the curious reader.

scholarly journals SCIENTOMETRIC REVIEW OF CONSTRUCTION PROJECT SCHEDULE STUDIES: TRENDS, GAPS AND POTENTIAL RESEARCH AREAS

2020 ◽  
Vol 26 (4) ◽  
pp. 343-363
Author(s):  
Gebrehana Derbe ◽  
Yashuai Li ◽  
Di Wu ◽  
Qiuhong Zhao
Keyword(s):  
Performance Management ◽  
Construction Projects ◽  
Construction Project ◽  
Future Research ◽  
Scientometric Analysis ◽  
Project Schedule ◽  
Document Type ◽  
Research Areas ◽  
Future Potential ◽  
Abstract Content

Scheduling plays a fundamental role in construction projects’ success and thus has drawn attention from both academic researchers and industry practitioners. A large number of research articles tend to solve emerging challenges in construction project schedule (CPS). Therefore, there is a strong need of systematic review on existing studies. In this study, a total of 332 articles were retrieved from Scopus database using title, abstract and keywords with respect to CPS and filtered by document type, language type and abstract content. In particular, science mapping approach was adopted to analyse selected journal articles. These articles were examined using three sequential processes, including bibliometric search, scientometric analysis, and in-depth qualitative discussion. It could demonstrate the most influential journals, researchers, published articles, and active countries/regions in this area. In addition, major CPS knowledge areas were identified and summarized as CPS constructability, applications of variety of CPS methods, CPS optimization models and algorithms, identification and quantification of schedule risks and uncertainties, CPS performance management, and adopting new emerging CPS technologies and methods. Furthermore, knowledge gaps and future potential research directions were also discussed in detail. Finally, a comprehensive CPS framework was proposed as a sound reference in future research.

scholarly journals Assessment of delay and cost-overrun in federal road construction project in Abuja

2020 ◽  
Vol 11 (4) ◽  
pp. 1184
Author(s):  
Ashem Emmanuel Egila ◽  
Oluwaseun Abdulakeem Balogun ◽  
Saheed Olanrewaji Yusuf
Keyword(s):  
Construction Projects ◽  
Construction Project ◽  
Road Construction ◽  
Mean Value ◽  
Cost Overrun ◽  
Related Factors ◽  
Cost Overruns ◽  
Factors Influencing ◽  
Importance Index ◽  
The Government

Poor road infrastructure in Nigeria is a significant challenge, just like poverty, insecurity, and unemployment. The construction of road in the country is characterized by numerous challenges throughout the project life cycle. Some of these challenges are project delay and cost overrun, corruption and fraud, faulty contractual process among others. Objectives of this study are to identify factors influencing delays and cost overruns in road construction project, to rank these factors base on their impacts and importance, and to suggest conservative ways to address the future challenges that can result from delays and cost overruns of future road construction projects. The research instruments include in-depth literature review, fieldwork, questionnaire administration, and interview. Inferential statistics such as Relative importance index (RII) and Mean Value techniques were used to analyze collected data. The result of the study identified factors influencing delays and cost overruns in road construction projects as; man related, money-related, machine-related, material related, environmental-related, and method related factors. Analysis using RII and MV ranked man and money related as the highest factors for delay and cost overrun respectively. Hence, the research recommends that the Government should create an enabling environment, making suitable policy for the construction company to operate.

scholarly journals Assessment of Causes and Effects of Variation on Construction Project Performance in South West Nigeria

2020 ◽  
pp. 629-641
Author(s):  
Esan Martins Taiwo ◽  
Folaranmi Kazeem Adekunle ◽  
Hassan H ◽  
Buari T. A
Keyword(s):  
Construction Industry ◽  
Construction Projects ◽  
Construction Project ◽  
Project Performance ◽  
Cost Overruns ◽  
South West ◽  
Training Professionals ◽  
Negative Impacts ◽  
Proactive Measures

The construction industry in Nigeria faces many problems, including the delay due to variations in project execution. This delay has been studied as a major setback in the Nigerian construction industry. In Nigeria, the construction industry's performance in terms of time has been observed to be poor. The objective of this study is to examine the variation of the construction project in order to determine the effect on the delivery of the project. The maximum performance of the project would be reached if the work always goes efficiently on time with the budget. The result of the variation is delay, cost overruns, quality defects and other negative impacts. The causes of variation were identified by a questionnaire survey for two higher education institutions. The results of the study identified the five main factors, including change of plan or scope, defective labour, customers' financial problems, unavailability of skills and desired profitability of the entrepreneur. In general, the study shows agreement among clients, consultants and contractors regarding the classification of the 20 factors that cause the variation. The results also reveal that factors related to clients are the main causes of variation, followed by factors related to contractors. An understanding of the causes and effects of the variation would be helpful in training professionals to assess the variation. In addition, the study would also help professionals take proactive measures to reduce the gaps on construction projects.

scholarly journals The Amoebic Growth of Project Costs

2005 ◽  
Vol 36 (2) ◽  
pp. 15-27 ◽  
Author(s):  
Colin Eden ◽  
Fran Ackermann ◽  
Terry Williams
Keyword(s):  
Construction Projects ◽  
Project Managers ◽  
Total Expenditure ◽  
Claims Analysis ◽  
Private Industry ◽  
Cost Overruns ◽  
The Public ◽  
Project Costs ◽  
Industrial Projects ◽  
Public Construction

In the public arena, we often hear about projects that have suffered massive cost overruns. Often they are related to large public construction projects such as airports, bridges, or public buildings. Large overruns also exist in private industry. However, often these do not appear in the newspapers, so the public is not as aware of them. Of course, not all projects go badly wrong, but quite a few do, and frequently we find ourselves uncertain of the causes for such overruns. In this paper, industrial projects that overrun and overrun in a surprising manner are considered. In other words, the paper considers those many projects where the extent of the overrun is well beyond what might ever have been anticipated, even though what was going wrong within the projects was, for the most part, understood. The basis for the content of the paper (that is, the structure and lessons), are drawn from a postmortem analysis of many large projects as part of claims analysis, particularly “delay and disruption” claims for projects whose total expenditure appeared, at first look, inexplicable or surprising. The aim of the paper is to contribute to an understanding of how projects go badly wrong, when they do, and in particular to draw some lessons from this exploration that are likely to help all managers. The reasons for cost escalation are not just the responsibility of project managers.

scholarly journals Reliability evaluation index for the integrated supply chain utilising BIM and lean approaches

2020 ◽  
Vol 27 (5) ◽  
pp. 997-1038
Author(s):  
Jingxiao Zhang ◽  
Hui Li ◽  
Hamed Golizadeh ◽  
Chuandang Zhao ◽  
Sainan Lyu ◽  
...  
Keyword(s):  
Supply Chain ◽  
Construction Projects ◽  
Construction Project ◽  
Real Life ◽  
Reliability Evaluation ◽  
Evaluation Index ◽  
State Transitions ◽  
Future Research ◽  
Content Type ◽  
Novel Approach

PurposeThis research aims to develop an approach to assess the reliability of integrated construction supply chains via an integrated model of building information modelling (BIM) and the lean supply chain (LSC). It reflects the synergistic workflow between BIM and LSC as a novel approach to improve the reliability of construction projects.Design/methodology/approachThis research evaluates the reliability of the BIM-LSC approach through a combination of entropy theory, set pair analysis (SPA), and Markov chains (EESM). An exploratory survey was conducted to collect data from 316 industry professionals experienced in BIM and LSC. Subsequently, multiple cycles of calculations were performed with indirect data inputs. Finally, a reliability evaluation index is established for the BIM-LSC approach and potential applications are identified.FindingsThe results show that the EESM model of BIM-LSC developed in this study can handle not only supply chain reliability evaluation at a given state but also the prediction of reliability in supply chain state transitions due to changing project conditions. This is particularly relevant to the current environment of the construction project, which is characterised by an increasing level of complexity in terms of labour, technology, and resource interactions.Research limitations/implicationsFuture research could consider the accuracy and validity of the proposed model in real-life scenarios with by considering both quantitative and qualitative data across the entire lifecycle of projects.Practical implicationsThe research offers a model to evaluate the reliability of the BIM-LSC approach. The accuracy of BIM supply chain reliability analysis and prediction in an uncertain environment is improved.Originality/valueThe BIM-LSC reliability evaluation and prediction presented in this study provides a theoretical foundation to enhance understanding of the BIM-LSC in the construction project context.

scholarly journals ALGORITHM FOR PRELIMINARY ASSESSMENT OF THE RELIABILITY OF INVESTMENT PROJECTS IN THE CONSTRUCTION INDUSTRY UNDER UNCERTAINTY

2021 ◽  
pp. 141-148
Author(s):  
O.A. Tuhai ◽  
◽  
T.V. Vlasenko ◽  
Keyword(s):  
Decision Making ◽  
Construction Industry ◽  
Construction Projects ◽  
Construction Project ◽  
Level Of Involvement ◽  
Investment Projects ◽  
The Public ◽  
The Social ◽  
Selection Of ◽  
Theory Of Fuzzy Sets

Abstract. The construction industry is exposed to high risks, which cannot be ignored in case of large investments. The choice of a reliable investment and construction project is important for the success of the investor. A reliable choice of investment and construction project requires taking into account many uncertainties for decision-making. The investor has to be aware of the risks related to the implementation of investment and construction projects, as well as the level of involvement of all the uncertainties in the overall risk of investing in a particular project. These factors may be related to the economic environment, the public policy, mood of the social environment, the market, etc. Accordingly, factor-based decision-making is a vital process that should be considered when alternative investment and construction projects are being assessed. As the construction industry is characterized by long investment cycles, it is a dynamic, complex system with uncertain, incomplete data, as a consequence of a fundamental practical problem when applying investment-selection models construction projects are to determine the distribution of uncertainties to calculate the reliability of the projects. More recently, most approaches to pre-selection investment and construction projects have been presented using linguistic estimates instead of numerical values. This article presents a multi-criteria decision-making methodology for analysis and selection of the most reliable investment and construction project under the conditions of risk and uncertainty. This approach is based on the theory of fuzzy sets, which has the advantage of using linguistic estimates and precise for qualitative and quantitative assessments respectively.

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