A Conceptual Pre-Bid Risk Analysis Model for Ghanaian Construction Firms

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Construction companies in Ghana generally procure jobs through competitive bidding or through direct negotiations with client representatives, with competitive bidding being the more prevalent of the two. Due to constraints of time and other resources, construction companies cannot afford to bid for every project that comes their way. The decision to bid or not to bid for a project is one of the contractor’s greatest dilemmas. Each construction firm must seek to optimize or balance the workload in order to maximize profitability. However, bidding on the ‘wrong’ projects can have costly ramifications, whereas not bidding on the ‘right’ projects can lead to substantial opportunity cost. Due to the uncertainty of bidding outcomes, a certain level of risk is faced by the contractor with each bid, hence the need for some form of risk analysis at the bidding decision stage. Such analyses could help inform the contractor about his chances of winning the bid, successfully executing the successful bid’ and the project’s potential profitability. A determination of the ‘risk profile’ of a project could influence a contractor’s decision to bid or not to bid, and even what level of mark-ups to assign to the bid in terms of normal risk/return relations. Unfortunately, due to the complex and time-consuming nature of existing project risk analysis and management models/systems, most of our local contractors have little knowledge of, and use for, formal risk analysis. The main aim of this research was to develop a simple, quantitative risk model for profiling prospective construction projects in order to enable construction firms form fairly accurate risk perceptions for respective construction projects. This would aid them in their decision to bid or not to bid, and also with determining mark-up policies and prioritizations for respective proposed projects. The proposed model was based on developing a simple quantitative model from an existing qualitative project risk profile framework previously presented at the Herriott Watt University (see Appendix A). The goals of the modification process were to: 1. Establish the local (Ghanaian) relevance of each of the seventeen (17) risk factors proposed in the original model. 2. Prioritize and reduce the number of risk factors utilized, to a total less than ten (10) for incorporation into the proposed model, in a bid to make it simpler, user-friendly, and less time-consuming for potential users. 3. To develop and assign relative weightings to the each respective risk factor chosen by survey, which when in simple multiplied by their respective risk ratings can be summed up to give an overall risk profile score for each respective proposed project. The research comprised a questionnaire survey, backed with interviews of contractors, consultants, project managers, etc, in Accra and Kumasi, all of whom had had some appreciable experience influencing bid decisions. The research revealed that respondents considered each of the seventeen (17) factors to be of some relevance to the risk profile of a project, even though some were regarded as of relatively less relevance than others. A few additional factors, such as ‘political influence’, were also suggested by a significant number of respondents. Furthermore, the vast majority of respondents were convinced that some formal risk analysis was required in making bidding decisions. They also agreed that the proposed risk profile model would be a useful tool to aid bidding decisions by local construction organizations.
A thesis submitted to the School of Graduate Studies, Kwame Nkrumah University of Science and Technology in partial fulfilment of the requirement for the award of Master of Science degree Construction Management.