Computer-Aided Civil and Infrastructure Engineering 22 (2007) 449–460
Fuzzy Logic Model for Determining Minimum
Bid Markup
Li-Chung Chao∗
Department of Construction Engineering, National Kaohsiung First University of Science
and Technology, Kaohsiung 824, Taiwan, Republic of China
Abstract: Many construction markets exhibit severe
price competition where contractors have to cut their bids
to compete, giving priority to winning enough contracts
to sustain normal operation, and it is common to see a
winning bid close to the expected project cost. While cut-
ting bids not only gives up profits but also undoubtedly
increases the risk of making a loss, the behavior of con-
tractors in intense competition is difficult to explain by ex-
isting models. A fuzzy-logic-based model is proposed for
determining the minimum bid markup with assessments
of chance of winning and loss risk. The model incorpo-
rates the position of a decision maker in the fuzzy rules
according to his/her attitude toward risk and degree of
need for the job. Two illustrative examples, one hypothet-
ical and one real, are provided, in which differences in
priorities are simulated by four sets of fuzzy rules for a
comparison of the effects. The results show that the model
is sensitive enough to differentiate a decision maker’s posi-
tion on bidding and suggest bid-cutting limits consistently,
thereby remedying some shortcomings of existing models.
1 INTRODUCTION
Many construction markets exhibit severe price com-
petition for contracts because there are too many
contractors competing for limited job opportunities.
Contractors who want to survive in such markets have to
place priority in bidding on contract winning above profit
and cut bid prices to compete, to obtain enough jobs to
sustain normal operation. It is frequent to see the win-
ning bid for a project close to or even lower than a reason-
ably estimated project cost (direct job cost plus site and
∗ To whom correspondence should be addressed. E-mail: chaolc@ccms.
nkfust.edu.tw.

C 2007 Computer-Aided Civil and Infrastructure Engineering. Published by Blackwell Publishing, 350 Main Street, Malden, MA 02148, USA,
and 9600 Garsington Road, Oxford OX4 2DQ, UK.
company overheads), that is the markup for profit and
contingency applied in the bid is near zero or even neg-
ative. However, cutting price not only reduces profit but
also undoubtedly leads to an increase in the risk of mak-
ing a loss in completing a contract. Moreover, it poses
a threat to the quality of the project. To avoid financial
and quality disasters, a decision to cut price should not
be made arbitrarily, but as a rational choice made with
careful calculation, yet existing bidding models fail to ex-
plain the behavior of contractors in intense competition
and to provide guidance to the decision.
Conventional models, such as those proposed by
Gates (1967) and Carr (1982), are based on the prob-
ability of winning for a markup applied. The optimum
markup is determined as the one that has the maximum
expected profit, where the expected profit for a markup
is defined as the product of the probability of winning
multiplied by the markup. In theory, the application of
such models may achieve the maximum profit over many
times of bidding. However, the problem is that the rec-
ommended markup often is too high to be competitive
enough in intensely contested markets; a zero markup
will never be recommended, because such a markup’s
expected profit is always less than a positive markup’s.
Hence, in light of limited job opportunities they cannot
meet the urgent need for a higher chance of winning a
contract. Furthermore, such expected-profit-based mod-
els, although simple and straightforward, do not take into
account differences in attitude toward loss risk and de-
gree of need for work, and the result may not be relevant
to many situations.
To address the risk concern of bidders, the theory
of utility under uncertainty can be applied to bid op-
timization. The utility theory model proposed by Lifson
and Shaifer (1982) produces a recommended markup
that maximizes expected utility based on a nonlinear
450
utility function for translating monetary bid outcomes
into utility measurements. Considering the uncertainty
of project cost, Ahmad and Minkarah (1987) presented a
more intricate utility theory model based on a compos-
ite utility function comprising segments for loss, com-
pany overhead, and profit. Although such approaches
assume that it is possible to establish the utility function
for representing the value scale of a bidder in a bidding
situation, in practice it is difficult to elicit information
required for developing the form and parameters of the
utility function, and this difficulty may affect the correct-
ness of the result.
Multicriteria models, such as the multiattribute utility
model by Dozzi et al. (1996) and the case-based reason-
ing model by Chua et al. (2001), consider the complex
and subjective nature of bid decision and include quali-
tative factors as inputs to reflect the many facets of the
markup problem. Network models, which often use mul-
tiple inputs too, such as the neural network (NN) model
by Moselhi et al. (1993) and the fuzzy neural network
(FNN) model by Chao and Liu (2000) and Liu and Ling
(2005), require training and testing before use and thus
are more computing-intensive. They offer various meth-
ods for producing an optimum markup for a project, yet
they do not cater to the specific need of competing in in-
tensely contested markets and provide a basis for cutting
bids to raise the chance of winning.
To redress the above stated shortcomings of existing
models, this article presents a model for determination
of the minimum bid markup, which is intended as an aid
in bid price decision in intensely contested markets. The
model is a novel application of fuzzy logic to evaluating
bid markup levels to suggest the bid-cutting limit for a
project according to the decision maker’s position on bid-
ding in terms of his/her attitude to loss risk and degree of
need for the job. The objective of the fuzzy-logic-based
model, as a quantitative method, is to streamline the
evaluation and produce a consistent suggestion, while
keeping to simplicity and tractability. In the following,
why fuzzy logic is chosen for the model is explained be-
fore a description of the model is presented. The pro-
posed model is then illustrated using two case projects
and the effects of different attitudes to loss risk and de-
grees of need for work on the results are compared in
assessing the appropriateness of the model.
2 WHY FUZZY LOGIC
Fuzzy logic has found applications in many areas of con-
trol and decision. It is based on the concept of fuzzy sets
or membership functions for describing the values of lin-
guistic variables. Fuzzy rules in the form of IF precon-
ditions THEN consequences are employed to emulate
the linguistic way humans judge in dealing with differ-
Chao
ent circumstances. An inference is achieved by mathe-
matical operations on the rules to determine the output
for given inputs. Steps of the inference process generally
include fuzzifying crisp inputs, calculating rules’ firing
strengths, weighing consequences, aggregating weighed
consequences, and defuzzifying the result into crisp out-
puts. As introductions to fuzzy set theory can be found
in many publications, the following gives the rationale of
a fuzzy-logic-based bid decision system.
Fuzzy logic is tolerant of and accommodates impre-
cise data, making it close to human reasoning in the real
world where imprecision is pervasive. The membership
functions for a linguistic variable usually overlap with un-
sharp boundaries between neighboring semantic terms,
which means that there may be quite a few rules in a
rule base that have preconditions matching input facts
to a certain degree and collectively impact the final out-
put. Fuzzy logic systems are easy to modify. The logic
(the rules) is decoupled from the value scale (the mem-
bership functions), which facilitates modular system de-
sign, and as a result, changes to the former and the latter
can be made independently. The guiding principle is, as
Zadeh (1995) put it, exploit the tolerance for impreci-
sion, uncertainty, and partial truth to achieve tractability,
robustness, and low solution cost.
Because of these features, fuzzy logic appears poten-
tially useful for modeling a difficult and risky decision
such as bid cutting under intense competition, which of-
ten is made with imprecise and uncertain data, and in
which the decision maker’s value system and judgments
play a large part. Fuzzy logic may be used as a system-
atic computing framework to shore up the consistency
that is particularly important for bid cutting because of
the risk involved but often is lacking in the traditional
way of bid decision, which Moselhi et al. (1993) describes
as a mix of intuition, gut feeling, and experience. Fuzzy
logic has been applied to many complex problems in
construction, such as evaluation of alternative technol-
ogy (Chao and Skibniewski, 1998), project risk assess-
ment (Tah and Carr, 2000), and schedule updating and
forecasting (Oliveros and Fayek, 2005). Therefore, fuzzy
logic may be used for evaluation of bids on a set of crite-
ria to determine the bid-cutting limit in given conditions.
The criteria used in the proposed fuzzy model need to
be established first, and the decision maker’s position on
bidding needs to be incorporated in the fuzzy inference
system.
3 DESCRIPTION OF MODEL
Much previous research has studied factors that were
thought to influence bid markup decisions. For example,
Ahmad and Minkarah (1988) used a questionnaire sur-
vey of general contractors to rank 31 compiled factors
 Fuzzy logic model for determining minimum bid markup
in order of importance, the result of which were used by
Dozzi et al. (1996) to identify 21 bidding criteria in devel-
oping a utility theory model. Chua and Li (2000) listed
51 factors and evaluated their effects in a bid-reasoning
model based on a survey and using the Analytic Hier-
archy Process technique. Out of seven categories with a
total of 52 attributes, Liu and Ling (2005) chose the five
most important attributes as input variables for a fuzzy
neural network model. An examination of the factors
used in these studies will find that they are quite simi-
lar and may be categorized similarly, for example, into
internal and external factors, or environment, company,
and project factors etc.
While the above studies link an extensive set of factors
with the optimum bid markup decision under general
conditions, the proposed model focuses on key consid-
erations in connection with the minimum bid markup
for a given situation. As chance of winning and chance
of making a loss if winning (or loss risk) are of the utmost
concern in this connection, they are used as the only two
criteria in the proposed model for evaluating bid lev-
els. Chance of winning is important, as a bid cannot be
realistic in intensely contested markets without consid-
ering its competitiveness, and the probability that it will
win against the competition is the best measurement of
its competitiveness. On the other hand, in cutting the
bid for a job to raise the chance of winning, there is an
accompanying increase in loss risk in doing the job. The
presented next and the steps involved are shown in
maximum loss risk a firm can take limits the extent of bid
Figure 1.
cutting. Hence, the two criteria serve as opposing forces
to determine the minimum bid markup. The chance of
winning and loss risk for a given bid are influenced by
economic and project conditions, for example, the pre-
vailing bid level in the target market and the nature of
work involved. Factors identified by Chua and Li (2000)
with respect to competition and cost uncertainty can be
regarded as underlying these probabilities. The methods
for estimating them will be discussed later.
To account for the effects of the decision maker’s at-
titude toward risk, that is risk-averse or risk-taking (op-
portunistic), and degree of need for the job, that is, ur-
gent or moderate, which are affected by conditions of
the company and outlook for the market, the proposed
fuzzy logic model incorporates the position of the deci-
sion maker in the fuzzy rules and the membership func-
tions that comprise the fuzzy inference system. The fuzzy
inference system is used as the mechanism for evaluating
various bid levels with assessments of the chance of win-
ning and loss risk. Aspects of the proposed model that
are original in terms of computational modeling for bid
markup determination are as follows:
r Both the NN model with hidden layers and the FNN
model with a prearranged structure acquire a markup-
451
estimating ability through training with example pat-
terns that represent a contractor’s experience or judg-
ment built up over time. For a given project scenario, a
unique markup deemed optimum is produced by such
models regardless of the bidder’s priorities, which
are however likely to change in different circum-
stances. In contrast, the proposed fuzzy logic model
produces a minimum bid markup as the bid-cutting
limit that is governed by the bidder’s position and
suggests a different markup for differing priorities as
reflected by the set of fuzzy rules being used in the
model.
r The inputs to the proposed model are objectively as-
sessed probabilities of winning and probabilities of
making a loss. The output of the proposed model, the
minimum bid markup for a bidder for a project, is
determined by evaluating varying bid markup levels
using the fuzzy inference system in order to find out
the one achieving the highest fuzzy score as the result.
r Of particular interest is the development of fuzzy rules
in the model, where only a partial set of possible com-
binations of fuzzy loss risk and fuzzy chance of win-
ning are used in ranking the preconditions, thereby
reducing the complexities in computation and mak-
ing the result more tractable.
The details of the proposed fuzzy logic model are
Estimate chances of winning Estimate chances of making
for various bid levels a loss for various bid levels
Set up fuzzy rules and membership
functions representing contractor’s
value system in bidding
Evaluate various bid levels
by fuzzy set operations on
fuzzy model
Determine minimum bid
markup as one with highest
score from evaluation
Fig. 1. Steps of the proposed fuzzy logic approach.
452
3.1 Estimate chances of winning for various bid levels
To obtain an estimate of the probability of winning (Pw )
for a bid b (or a markup m, applied on top of firm’s
estimated cost c with bid/cost ratio r = b/c = 1 + m)
for a given project, statistics of past bids in the partic-
ular market on the type of job involved will have to be
used, as these bids, especially recently submitted ones,
are indicative of the expected level of competition due
to the underlying economics and market conditions. In
general, there are two estimating methods adopted by
bidding models in the literature. One of them is based
on the probability distribution of the low bid markup
(Chua et al., 2001). Assuming the ratio of lowest oppos-
ing bid to firm’s estimated cost is a normally distributed
random variable with the mean and standard deviation
estimated from past bids and cost estimates, Pw can be
calculated for a given b/c using (1):
 ∞
Pw = N(µ, σ 2 ) dy (1)
b/c
where N refers to the normal distribution; µ and σ 2 are
the mean and the variance of ratio of lowest opposing
bid to firm’s estimated cost, respectively.
Alternatively, if an estimate of probability distribu-
tions for competitors’ bids can be made, probability the-
orems can be applied to calculate Pw for a given b/c
for competition against a certain number of competitors.
For example, Carr (1982), based on assumptions on vari-
ances in cost estimates and markups and magnitudes of
markups, developed a formula for estimating Pw against
average competitors using the mean and standard de-
viation of ratio of competitor’ bid to firm’s estimated
cost and the expected number of competitors as param-
eters. With similar input requirements, the Monte-Carlo
method of simulation, which is mathematically less de-
manding, can also be used to produce an approximate
probability distribution for ratio of lowest opposing bid
to firm’s estimated project cost for estimating Pw .
3.2 Estimate chances of making a loss
for various bid levels
Accurate cost estimation lays the solid foundations of a
sound bid price decision. The objectivity and accuracy of
cost estimation may be improved by using data-oriented
methods such as neural networks (Adeli and Wu, 1998;
Emsley et al., 2002). However, because of the change-
able construction environment and the uniqueness of
each project, productivity and resource prices can ex-
hibit great variability and even the best estimate is often
not uncertain: cost is subject to variation. Not only may
the actual cost of completing a project turn out higher
than the estimated cost, but also there is a chance that it
Chao
exceeds the bid, resulting in a loss for the contractor. As-
sessing the risk of loss involved in a bid is clearly impor-
tant for operating in low margin markets and the assess-
ment, as part of the process of estimating and bidding,
must consider project cost variability that is influenced
by the nature of work.
To estimate the probability of making a loss in exe-
cuting a project (Pl ), given winning the contract with a
bid b, conventional deterministic estimation has to ex-
tend to probabilistic estimation for establishing explicitly
a probability distribution for project cost. As a generic
representation of a project’s probable economic perfor-
mance embodying all uncertain factors, the distribution
serves as the basis for assessing the loss risk and the vi-
ability of undertaking the project at various bid levels.
Assuming that actual project cost is independent of bid
level due to specifications requirements, the distribution
does not change with a varying bid. Then, assessments of
Pl can be made for any b or b/c, as defined conceptually
in (2).
 ∞  ∞
Pl = fo(X) dX = f (x) dx (2)
b b/c
where f o (X) = probability density function of project
cost; f (x) = probability density function of standardized
project cost against firm’s estimated project cost (c).
To obtain the probability distribution for a project’s
total cost, it is necessary to use probability theorems and
probabilistic cost estimating techniques, such as those in-
troduced in Diekmann (1983), Ranasinghe and Russell
(1993), Back et al. (2000), Wang (2002), and so on. His-
torical production and cost data in similar job condi-
tions are the basic information required for estimating
likely outcomes of project elements (quantities and unit
costs for all items) under all possible scenarios, favor-
able and unfavorable. Where data is insufficient, assump-
tions based on knowledge and judgment will come into
play. The estimates of all elements are made in the form
of ranges or probability distributions and, with any as-
sumed correlations between them, the distribution for
the total cost is obtained by aggregating those for the el-
ements. As aggregation by direct mathematical methods
may be difficult, Monte-Carlo simulations can be used
to yield an estimated probability distribution for project
cost. Where the central limit theorem applies, the dis-
tribution is approximately normal and the mean of the
distribution can be used as the firm’s estimated project
cost c in bid determination. Then, Pl can be assessed
using the normal form of (2) as:
 ∞
Pl = N(1, σ 2 /µ2 ) dx (3)
b/c
where µ = c = mean project cost; σ 2 = variance of project
cost.
 Fuzzy logic model for determining minimum bid markup
As some types of work inherently involve more uncer-
tainties than others, for example, earth moving, during
the analysis it is advisable to focus on elements that con-
tribute the most in project cost variability. Furthermore,
when executing an unfamiliar operation, an organization
typically spends more time and cost to master it and the
spread of the probable economic outcomes of the oper-
ation is likely to be greater. Therefore, more attention
should be paid to estimating the related elements.
As any project is a unique combination of require-
ments and conditions, in spite of the use of above-
mentioned sound methods along with data from simi-
lar past projects, the accuracy of an obtained probability
distribution for project cost is often disputed. To counter
this problem, sensitivity analysis can be conducted to ex-
amine the impact of a change in the distribution on the
assessed Pl and results of the model, as shown later in an
example.
3.3 Develop fuzzy rules and membership functions
Whether a lower bid with a higher chance of winning
and a higher loss risk or a higher bid with a lower loss
risk and a lower chance of winning is better in terms of
bid-cutting limit is to be defined in a collection of fuzzy
rules. Playing a role similar to that of the utility func-
tion in utility theory, the set of fuzzy rules along with the
associated membership functions define the value scale
of a contractor in a bidding situation. In developing the
fuzzy rules, a decision maker exercises his or her sub-
jective preference to determine the standing of various
combinations of preconditions without considering any
particular bid levels.
The preconditions of a rule involve two fuzzy vari-
ables, the chance of winning and the chance of making
a loss. The consequence part involves only one fuzzy
variable, the rank assigned by the decision maker to a
bid that meets the preconditions. Instances of these vari-
ables, which are linguistic rather than numerical values,
make up individual rules. The two preconditions in a rule
are connected by either the “and” operator or the “or”
operator. For example, a rule might read: IF a bid has a
medium chance of winning AND a low chance of mak-
ing a loss, THEN the rank of the bid is high. There may
be only one precondition specified in a rule regardless
of the other, for example IF a bid has a very low chance
of winning (regardless of its chance of making a loss),
THEN the rank of the bid is low.
Many combinations of preconditions are unlikely be-
cause of the context of the proposed model that is con-
struction markets where price competition is intense. For
example, a rule that reads: IF a bid has a high chance of
winning AND a low chance of making a loss, THEN the
rank of the bid is highest, although grammatically cor-
453
rect, is impossible in the competitive bid situation, and
inclusion of the rule is meaningless. The same can be
said on another rule at the other extreme that reads: IF
a bid has a low chance of winning AND a high chance of
making a loss, THEN the rank of the bid is lowest. Also,
value systems of individual decision makers do not mat-
ter in such cases. Therefore, an exhaustive listing of all
combinations of preconditions with the “and” connec-
tion is not necessary for developing the rules. Instead,
one should pay attention to problematic regions where
the preferences for some particular preconditions play a
critical role, that is the ranking of high chance of winning
versus that of low loss risk must be made clear.
The decision maker’s attitude toward risk and degree
of need for the job will be the basis for the ranking of
the preconditions of the rules that reflect his/her priori-
ties. The risk attitude is implied by the ranks assigned to
different levels of chances of making a loss, whereas the
need-for-work degree is implied by the ranks assigned to
various levels of chance of winning. Another aspect of
formulating the fuzzy rules relates to predictability of the
evaluation result. It is important to make the fuzzy rules
as simple as possible, as long as they represent the ob-
jectives and concerns of the decision maker, so that the
effect of changes in the rules and the associated mathe-
matical operations is traceable.
For each fuzzy variable involved in the rules, a group
of membership functions will be formulated to define
the possible instances. For example, if high, medium, and
low are the linguistic values for fuzzy variable “chance
of making a loss,” then three membership functions
are created, each covering a certain range of probabil-
ity and overlapping to some extent. The consequence
variable, “rank”, will have its possible linguistic values,
say {highest, high, moderate, low, lowest}, defined on a
scale of 0 to 1 as the support quantity or score. A given
quantity’s membership in a linguistic term is very much
individual and context dependent, for example, the de-
gree to which 0.8 is a “high” chance. Therefore, the par-
ticular shapes and ranges of the membership functions
should be set according to what the related linguistic
terms mean to the decision maker. The Gaussian and
triangular shapes are considered appropriate for descrip-
tion of membership functions related to chance and rank,
respectively.
3.4 Evaluate various bid levels for determining
bid-cutting limit
After the required inputs have been prepared, that is,
pairs of the estimated probabilities of winning and mak-
ing a loss for various bid levels, they are fed into the de-
veloped fuzzy inference system to produce a score as out-
put for each corresponding bid/cost ratio. This evaluation
454
is a mapping of input to output by fuzzy inference involv-
ing selected mathematical operations of the formulated
membership functions on the if-then rules. An overview
of the inference process has been given in a previous
section. All possible pairs of the probabilities are sub-
jected to the same process consistently to determine the
bid/cost ratio with the highest score as the suggested bid-
cutting limit for the decision maker, which represents a
best fit or balance between the two criteria of chance of
winning and loss risk.
As with other quantitative approaches to decision
analysis and risk evaluation, sensitivity analysis can be
performed to see the impact of changes in inputs and
assumptions on the final result, for example, what if a de-
cision maker has second thoughts about the ranks given
for certain preconditions in the rules? What about dif-
ferent estimates of the involved probabilities and differ-
ent membership functions being used? Such tests may
be conducted with varied values of parameters involved
until a satisfactory result is reached. The use of an off-
the-shelf software package such as MATLAB’s Fuzzy
Logic Toolbox and its graphical user interfaces, together
with a spreadsheet such as EXCEL, facilitates formu-
lation, inspection, and revision in model development
as well as evaluation. More details are explained in the
examples below.
4 ILLUSTRATIVE EXAMPLES
Two case projects, one hypothetical and one real, are
used in the following to illustrate the proposed fuzzy
logic model.
4.1 Case projects and preparation of inputs
As the first example, assume a hypothetical project that a
contractor is bidding for. The firm uses probabilistic cost
estimating techniques to produce a probability distribu-
tion for project cost with a mean of $100,000,000 and
a standard deviation of $4,500,000, standardized against
the mean cost as N(1, 0.0452 ). Assume further that from
recent bids it is established that the ratio of lowest op-
posing bid to firm’s estimated cost is normally distributed
with the mean and standard deviation assessed at 1.015
and 0.03, respectively. Then, the probabilities of winning
and those of making a loss for various bid/cost ratios (r)
can be assessed using (1) and (3), respectively. To facili-
tate calculation and storage of the results for subsequent
fuzzy evaluation, a spreadsheet was used with the EX-
CEL functions shown next.
Pw = 1 − NORMDIST (r , 1.015, 0.03, TRUE) (4)
Pl = 1 − NORMDIST (r , 1, 0.045, TRUE) (5)
Chao
1
0.9
0.8
0.7 chance of
probability
0.6 winning
0.5 chance of
0.4 making a loss
0.3
0.2
0.1
0
0.9 0.92 0.94 0.96 0.98 1 1.02 1.04 1.06 1.08 1.1
bid/cost ratio
Fig. 2. Probabilities of winning and probabilities of making a
loss for various bid levels for the first case project.
The assessments obtained for r between 0.9 and 1.1 are
shown in Figure 2, for example, for r = 1.01, Pw = 0.566
and Pl = 0.460.
The second example quotes real data in Chao and
Liou (2006). A contractor was bidding for a road con-
struction project of a major city in Taiwan in early 2004.
The project comprised 99 items of work with fixed quan-
tities involving earthwork, paving, structures, drainage
etc. The contractor used the conventional deterministic
method for estimating for the project and obtained a to-
tal of NT$35,220,000 (1NT$≈0.03US$), so minimum and
maximum values of the unit costs were added by Chao
and Liou (2006) to form triangular distributions for unit
costs, in order to produce a probability distribution for
project cost. The results are a mean of NT$35,684,000
and a standard deviation of NT$1,366,000. However, to
be in line with the contractor’s past bid data, the deter-
ministically estimated project cost instead of the mean
project cost was used to represent the firm’s estimated
cost c in bid/cost ratios. Therefore, the probability distri-
bution is standardized against the deterministic estimate
as N(1.0132, 0.03882 ) and the EXCEL function used for
assessing Pl is slightly changed as:
Pl = 1 − NORMDIST(r, 1.0132, 0.0388, TRUE) (6)
Furthermore, the contractor submitted 21 bids between
2000 and 2003 for projects with the same client. The mean
and standard deviation of the ratio of lowest opposing
bid to firm’s estimated cost are 0.994 and 0.116, respec-
tively. The assumption of normal distribution for the
ratio was validated using a Kolmogorov–Smirnov test.
The ratio passes the test at 95% significance level, as the
largest deviation from normal probability is 0.101 < K-
S(0.05,21) = 0.287. Then, the same method as in the first
example was used to assess Pw for various r.
4.2 Fuzzy inference system
Four sets of fuzzy rules (shown in Tables 1–4) are for-
mulated for both examples to address four different
 Fuzzy logic model for determining minimum bid markup 455

Table 1 Table 4
Example fuzzy rules for risk-taking decision maker with Example fuzzy rules for risk-taking decision maker with
urgent need for work moderate need for work

Chance of Chance of Chance of Chance of

No. winning making a loss Rank No. winning making a loss Rank

1 Very high – A 1 Very low – E

2 High – B 2 – Very high E
3 Medium – C 3 Not very low Not very high Not E
4 Low – D
5 Very low – E
6 – Very high E five linguistic grades used are A, B, C, D, and E, ranging
from most favorable to most unfavorable, whose trian-
Table 2 gular membership functions are shown in Figure 4. The
Example fuzzy rules for risk-averse decision maker with basis for setting up the rules for each scenario is discussed
moderate need for work below.
Table 1 provides a set of rules that refer to the scenario
Chance of Chance of
of a decision maker who is risk-taking (less sensitive to
No. winning making a loss Rank
loss risk) and has urgent need for work. Winning is more
1 – Very low A important here and the rules show that the ranks as-
2 – Low B signed range from E for very low chance of winning to A
3 – Medium C for very high chance of winning. However, the loss risk
4 – High D increases with increasing chance of winning, and there
5 – Very high E must be a limit to the level of loss risk the firm can ac-
6 Very low – E cept. Therefore, the last rule, in which very high chance
of making a loss is ranked E, is added, to the effect of
a stop end preventing the system from cutting the bid
combinations of risk attitude and need-for-work de-
infinitely. The set of rules will result in a suggested cut-
gree as possible scenarios. Differences in the results
ting limit that may be called a bid that wins at maximum
will be compared. Either of the two precondition vari-
acceptable risk.
ables, chance of winning and chance of making a loss,
Table 2 gives a set of rules for the opposite of the previ-
can take five possible linguistic values, that is, very low,
ous scenario, that is, a contractor who is risk-averse (very
low, medium, high, and very high, whose Gaussian mem-
sensitive to loss risk) and has moderate need for work.
bership functions are shown in Figure 3, where the five
Loss risk is more important here and the rules show
equally spaced curves have the same spread with σ set
that the ranks assigned range from E for very high loss-
at 0.1062 such that the adjacent curves intersect at mem-
making chance to A for very low loss-making chance.
bership of 0.5. For the consequence variable, rank, the
However, the chance of winning decreases with decreas-
ing loss risk, and there must be a minimum chance of
Table 3 winning the firm requires. Therefore, the last rule, in
Example fuzzy rules for risk-averse decision maker with which very low chance of winning is ranked E, is added,
urgent need for work to the effect of a stop end preventing the system from
raising the bid infinitely. The set of rules will suggest
Chance of Chance of a substantially higher cutting limit, constrained only by
No. winning making a loss Rank what constitutes very low chance of winning.
1 Very high – A The rules in Table 3 relate to a common dilemma in
2 High – B which a risk-averse contractor is in urgent need for work,
3 Medium – C for whom the chance of winning and the loss risk both are
4 Low – D important in bid-cutting decision. As a joining together
5 Very low – E of the previous two sets of rules, the first five rules pro-
6 – Very low A vide that the ranks from A to E be according to the levels
7 – Low B of chance of winning from very high to very low, while
8 – Medium C the other five rules provide that the ranks from A to E
9 – High D be in reverse order of the levels of chance of making a
10 – Very high E
loss from very low to very high. Both criteria are at work
456 Chao

Fig. 3. Membership functions for fuzzy variables “chance of winning” and “chance of making a loss.”

and applied to the same full extent, one decreasing the
bid-cutting limit while the other is increasing it. The set
of rules tends to result in a compromise that is a middle
value between the two previously suggested.
The set of rules in Table 4 represents a risk-taking con-
tractor with moderate need for work. In this scenario,
neither the chance of winning nor the chance of making
a loss is a main determinant, so the ranking is not based
on the desirability of either one. However, as another
joining of Tables 1 and 2, the two previously mentioned
stop ends both are applied to exclude extremely low as
well as extremely high bids from being suggested as the

Fig. 4. Membership functions for fuzzy variable “rank.”

 Fuzzy logic model for determining minimum bid markup
cutting limit. The last rule, which reads if chance of win-
ning is not very low and the chance of making a loss is
not very high, then the rank is not E, is added to create
room for suggesting something in between. Note that at-
taching the adverb not to a linguistic term will produce a
membership function that is complementary to that for
the linguistic term.
The selected mathematical operations in the fuzzy in-
ference process are: minimization for the “and” con-
nection in calculating the firing strength, minimization
for weighing consequences in implication, maximization
for aggregation of weighed consequences, and centroid
for defuzzification to produce the output.
4.3 Evaluation and determination of bid-cutting limit
The bid-cutting limit for each scenario defined above is
determined as the bid/cost ratio with the highest score
by evaluation of various ratios using the developed fuzzy
inference system. MATLAB’s Fuzzy Logic Toolbox was
used for building the fuzzy inference systems for each
scenario that differ only in the rules. Then, for each case
project, pairs of Pw and Pl were input to a built system
to obtain corresponding scores.
4.3.1 Results for the first case project. Figure 5 shows
the score distributions obtained for the first case project
in each scenario, over the range of r between 0.9 and
1.1. These distributions generally peak in the middle, ex-
cept the one for the last (fourth) scenario, which has
the shape of a plateau because its rules do not specify
what is ranked more favorably. Table 5 gives the sug-
gested bid/cost ratios as the bid-cutting limits for the
four scenarios, along with the corresponding chances of
0.9
0.8
0.7
0.6
0.5
score
0.4
0.3
0.2
0.1
0
0.9 0.92 0.94 0.96 0.98
bid/cost ratio
Fig. 5. Scores of various bid levels for the first case project in each scenario.
457
winning, chances of making a loss, fuzzy scores obtained,
and expected profits. The optimum bid/cost ratio recom-
mended by the risk-neutral conventional bidding model
is also presented for a comparison.
In the first scenario, when the contractor is risk-taking
and in urgent need of work, a bid-cutting limit of r =
0.974 is suggested, which is the lowest of all four scenarios
and has the highest Pw and Pl . In the second scenario,
for a risk-averse contractor in moderate need of work,
the suggested limit is raised to the highest level of all
scenarios at r = 1.030 with a marked decrease in Pw and
Pl . When the contractor is risk-averse but in urgent need
of work (the third scenario), the ten rules representing
the full influences of the two opposing criteria result in
a cutting limit of r = 1.002 as a compromise. In the last
scenario, for a risk-taking contractor in moderate need
of work, the middle value of r = 1.006 within the plateau
range from 0.988 to 1.024 was selected as the suggested
limit. The conventional model recommends an optimum
bid at r = 1.028 regardless of risk attitude and need for
work.
4.3.2 Sensitivity analysis concerning cost spread. The ef-
fects of differing rules on the results have been addressed
above, so the following discusses that of a change in
the probability distribution for project cost. As every
project is unique, an obtained distribution is often not
certain, particularly regarding its spread. Assume the
standard deviation for the first case project increases to
$10,000,000 from $4,500,000, or to 0.1 from 0.045 as stan-
dardized against mean cost, leading to reassessment of
the Pl for various bid/cost ratios. Then, the bid-cutting
limits suggested for each scenario were revised with the
results shown in Table 6. Compared with those in Table 5,
risk-taking w/urgent
need for work
risk-averse w/moderate
need for work
risk-averse w/urgent
need for work
risk-taking w/moderate
need for work
1 1.02 1.04 1.06 1.08 1.1
458 Chao

Table 5
Evaluation results for the first case project with cost variability at σ = 0.045

Suggested Chance of Chance of Obtained

Risk attitude and bid/cost winning, making loss, fuzzy Expected
need for work ratio, r Pw Pl score profit (%)

Risk-taking with urgent 0.974 0.914 0.718 0.791 −2.377

need for work
Risk-averse with 1.030 0.309 0.252 0.720 0.926
moderate need for
work
Risk-averse with urgent 1.002 0.668 0.482 0.608 0.134
need for work
Risk-taking with 1.006 0.618 0.447 0.562 0.371
moderate need for
work
Risk-neutral 1.028 0.332 0.267 – 0.931
(conventional model)

the lowest limit (in the first scenario) now decreases to
r = 0.954, while the highest limit increases to r = 1.034
(in the second scenario). For the third and fourth scenar-
ios, the suggested limits both decrease marginally, to r =
1.000 and r = 0.998, respectively. The above can be ex-
plained by the longer tails of the distribution, which lead
to a lower bid meeting the precondition of very high loss
risk and a higher bid meeting the precondition of very
low loss risk. There is no change in the optimum bid of
the conventional model, as cost variability is not a factor
of it.
4.3.3 Results for the second case project. For the second
case project, the results of evaluation using the same
fuzzy inference system are shown in Table 7. Although
the results are comparable to those for the first case
project in Tables 5 and 6, there are appreciable differ-
ences due to different inputs used for the two projects.
The suggested bid-cutting limit for a risk-taking contrac-
tor in urgent need for work now decreases to r = 0.887
because of the effect of a tougher competition on fuzzy
evaluation, as indicated by the mean of ratio of low-
est opposing bid to firm’s estimated cost at 0.994. For a
risk-averse contractor in the second and third scenarios
where chance of making a loss has a large influence in the
fuzzy rules, the suggested limits now increase to r = 1.070
and r = 1.031, respectively, mainly because the c used in r
is the deterministic cost estimate that is smaller than the
mean project cost, leading to a higher Pl for any given
r, which can be reduced only by a higher r. In the last

Table 6
Evaluation results for the first case project with a larger cost variability (σ = 0.1)

Suggested Chance of Chance of Obtained

Risk attitude and bid/cost winning, making loss, fuzzy Expected
need for work ratio, r Pw Pl score profit (%)

Risk-taking with urgent 0.954 0.979 0.677 0.863 −4.503

need for work
Risk-averse with 1.034 0.263 0.367 0.616 0.895
moderate need for
work
Risk-averse with urgent 1.000 0.691 0.500 0.607 0.000
need for work
Risk-taking with 0.998 0.715 0.508 0.562 −0.143
moderate need for
work
Risk-neutral 1.028 0.332 0.390 – 0.931
(conventional model)
 Fuzzy logic model for determining minimum bid markup 459

Table 7
Evaluation results for the second case project

Suggested Chance of Chance of Obtained

Risk attitude and bid/cost winning, making fuzzy Expected
need for work ratio, r Pw loss, Pl score profit (%)

Risk-taking with urgent 0.887 0.823 0.999 0.524 −9.300

need for work
Risk-averse with 1.070 0.256 0.072 0.782 1.792
moderate need for
work
Risk-averse with urgent 1.031 0.375 0.323 0.527 1.163
need for work
Risk-taking with 1.016 0.425 0.508 0.562 0.680
moderate need for
work
Risk-neutral 1.085 0.216 0.471 – 1.836
(conventional model)

scenario, the suggested limit increases only marginally 5 CONCLUSIONS

to r = 1.016 as the resultant plateau does not vary much
with the changes in Pw and Pl . The conventional model Construction markets are often a buyer’s market where
recommends a higher optimum r at 1.085 as a result of contractors have to cut prices to compete for limited
the larger standard deviation of ratio of lowest opposing jobs. However, bid-cutting decision is dangerous and the
bid to firm’s estimated cost than the first case project. associated financial risk must be evaluated. Although a
A comparison of the above results with the bids actu- firm’s financial conditions, operating prospect, market
ally received for this project, ranked in increasing order, outlook, and many other factors may influence a final bid
is given in Table 8. Competition for the project was quite decision, what determine the minimum bid level are the
intense as only bidding at the minimum markup sug- maximum risk the contractor can take and the degree of
gested for the first scenario could underbid the actual his/her need for the job, which are subjective and fuzzy.
winning bid. However, such a deep cut in the bid would The proposed fuzzy logic model evaluates bid levels
involve high loss risk based on the contractor’s cost esti- using the chance of winning and the chance of making
mate. It is not advisable unless it is a conscious decision a loss as the criteria and determines the minimum bid
made out of business necessity. markup as the one achieving the highest fuzzy score. As
shown by the illustrative examples, in which different
Table 8 attitudes toward risk and degrees of need for work are
Comparison with actual bids for the second case project simulated by four sets of fuzzy rules, the model is sensi-
tive enough to differentiate a decision maker’s position
1,000 Bid/cost on bidding and suggest bid-cutting limits consistently.
Bid NT$ ratio r The effects of differences in the inputs on the results can
also be accounted for.
Risk-taking with urgent need 31,240 0.887
for work
The strength of the fuzzy logic model is the linguis-
Actual bid 1 31,700 0.900 tic way of describing preference in the rules, which are
Actual bid 2 33,600 0.954 more comprehensible and easier to develop for a given
Risk-taking with moderate 35,784 1.016 scenario compared to nonlinear utility functions in a util-
need for work ity theory model. Furthermore, fuzzy rules, membership
Risk-averse with urgent need 36,312 1.031 functions, and fuzzy operators can be altered indepen-
for work dently, facilitating modification and maintenance of the
Risk-averse with moderate 37,685 1.070 system. Therefore, likely changes of a decision maker’s
need for work priorities, which are common in the dynamic construc-
Risk-neutral (conventional 38,214 1.085 tion environment, can be easily accommodated, for ex-
model)
ample, the contractor can use a different set of fuzzy
Actual bid 3 38,590 1.096
rules to deal with different business circumstances. The
460
computing aspects of the model generally reflect fuzzy
logic’s flexibility, manageability, and robustness and thus
remedy some shortcomings of existing bidding models.
However, the appropriateness of the rules, membership
functions, and input data used will determine the useful-
ness of the model.
It is emphasized that the bid markup from the model
should be considered the lower limit of a bid and any
further bid cutting is not advisable. The suggested bid-
cutting limit is, however, by no means the optimum bid;
the final decision will most likely be higher because of
considerations of required rate of return and other long-
term factors. A negative bid markup, such as the one
suggested in the illustrative examples for the first sce-
nario, can only be applied as a short-term measure. The
behavior of a contractor desperate for work who sub-
mits an extremely low bid for a project with high cost
variability may be explained by the attempt to use the
complement of loss risk, the chance of not making a loss,
but it is not sustainable in the longer term.
ACKNOWLEDGMENT
Financial support from National Science Council of Tai-
wan for the work described in this article is gratefully
acknowledged.
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