You operate your own small building company and have decided to bid on a governm

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.

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?

b.What price would you bid if you want to maximize the expected value of the contribution from this contract?

c.Defend your answers with discussion, making any assumptions you feel are reasonable and/or are supported by the information provided.

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 cost 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

Explanation / Answer

A) The firm must bid a price less than other firms to win the project.

It cannot bid any amount less than its allocated cost which is $440,000.

Therefore, minimum bid price to win: $440,000 + my incremental cost.

The usual practice is to add between 60% and 80% to incremental costs.

B) To maximise the expected value of the contribution from this contract, price to bid would be:

440000+60%(268000) to 440000+ 80%(268000)

$600,800 to $654,400

C) To win the project minimum bid has to be $440,000, else the company will have to face a loss.

Even in a no profit situation, the firm would make future profits by getting more projects like this.

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