On the value of cost estimating accuracy under conditions of competitive bidding

A more accurate cost estimate costs more to produce. Therefore, an estimating department might find itself, through budget restrictions, pressed to get by with less accurate cost estimates that cost less to produce. With a financial benefit from a more accurate estimate, a profit-supporting choice c...

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Bibliographic Details
Published inCost engineering (Morgantown, W. Va.) Vol. 36; no. 1; p. 25
Main Author Larsen, Harry T
Format Journal Article
LanguageEnglish
Published Morgantown American Association of Cost Engineers 01.01.1994
Subjects
Accuracy
Bids
Competition
Computer simulation
Control theory
Corporate profits
Cost control
Cost engineering
Cost estimates
Estimating techniques
Expected values
Market shares
Profit margins
Project management
Standard deviation
Statistical analysis
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Summary:A more accurate cost estimate costs more to produce. Therefore, an estimating department might find itself, through budget restrictions, pressed to get by with less accurate cost estimates that cost less to produce. With a financial benefit from a more accurate estimate, a profit-supporting choice could be made. For one specific set of circumstances, namely competitive bidding of fixed-price contracts, a financial benefit resulting from increased estimate accuracy can be derived. This situation is illustrated by forming a game between 2 companies competitively bidding fixed-price contracts. To calculate a reliable relationship between estimating accuracy and profit under conditions of competitive bidding, a computer simulation is formulated and run. The results of the simulation indicate that using an estimating methodology whose recurring costs are from 1.5% to 4% of project cost, with associated estimating accuracies ranging from 5% to 10%, will maximize profit.
ISSN:0274-9696