Unit Price Contracts: A Practical Framework For Determining Competitive Bid Prices

Abstract

A general analytical framework within which to solve the competitive bidding problem is developed by considering a unit price contract. By viewing the problem in the standard capital budgeting framework and exploiting the linearity of the firms objective function and constraints, the problem can be formulated as a standard linear programming (LP) application whose solution is the optimal bid. We also investigate a so-called unbalanced bidding strategy as an effective way for bidding firms to hedge the risk, or uncertainty, inherent in may unit price contracts.