Utility Function Determination for Bidding Models

Abstract

Two basic decision criteria which may be used in bidding models are maximization of expected monetary value and maximization of expected utility value. The utility function is used in the latter type of models so that the contractor's personal goals and risk preferences may be reflected in the suggested markup levels. The utility function is determined by presenting the contractor with a number of hypothetical bidding opportunities within the framework of the von Neuman-Morgenstern utility axiom system. The utility function results obtained in the illustrative example indicate that the contractor tended to be risk averse when considering all markup levels on large size projects and favorable markup levels on small size projects. He tended to gamble when confronted with small or large markup levels on small size projects.