A sequential competitive bidding strategy considering inaccurate cost estimates

• We develop a new model for establishing an optimal sequential bidding strategy.
• We take a scenario-based approach to consider the effect of inaccurate cost estimates.
• We introduce a value-at-risk constraint to mitigate the risk of suffering a large loss.
• Our model increases the average profit and reduces the profit volatility risk.

This paper develops a stochastic dynamic programming model for establishing an optimal sequential bidding strategy in a competitive bidding situation. In competitive bidding, a contractor usually sets the bid price of each contract by putting a markup on the estimated cost, and consequently, the bid price is affected by a cost estimation error. We take a scenario-based approach to determine the optimal markup in consideration of the effect of inaccurate cost estimates. We also introduce a value-at-risk constraint to mitigate the risk of suffering a large loss. Numerical results show that our model increases the average profit and reduces the profit volatility risk.