A bid‐unbalancing method for lowering a contractor's financial risk

Abstract

A method is presented for unbalancing bids and optimizing the allocation of overall project profits to individual activities by considering the financial parameters of a project (bid mark‐up and projected cash flow), in conjunction with lowering the exposure to possible financial disorder in the project. The method utilizes the general concept of entropy and a variant of it (hereby termed ‘monetary entropy’, H _M) as measures of a project's perceived level of disorder, in order to distribute the total bid mark‐up to the project activities. The entropy‐based bid‐unbalancing method seeks to minimize a possible financial disorder (the monetary entropy) resulting from limited monetary resources available to the project and from badly developed project cash flows. The intended primary users of the method are contractors during the initial bidding stage of a project.

Keywords:

• Bid‐unbalancing
• project profitability
• cash flow optimization
• entropy