Impact of considering need for work and risk on performance of construction contractors: An agent-based approach

• An agent-based model of the competitive construction bidding process is presented.
• We study the impact of risk aversion and need for work in a competitive environment.
• Moderately risk-averse contractors exhibit better financial performance than others.
• Considering need for work in the markup decision leads to growing capital over time.
• Discounting the markup up to 3% is the optimal policy to account for need for work.

Competitive bidding is the main mechanism of allocating projects in the construction market. In the traditional single criterion bidding method, the markup decision has a significant impact on a contractor's business success. Contractors usually take into consideration several factors in the process of determining their markup. This study has reviewed the literature and identified a range of contractors' behaviors when making their markup decision within a competitive bidding environment. An additive markup function consisting of three components, namely competition, risk, and need for work, was developed in order to replicate markup behaviors of contractors. Then, agent-based modeling has been employed for simulating the bidding process within a market formed of a set of heterogeneous contractors with different risk attitudes and defined markup behaviors. This model was used to study the impact of considering need for work and risk allowance in markup determination on financial performance of contractors in various market scenarios. Results suggest that the optimal policy is moderation in both dimensions of risk attitude and need for work.