Empirical Analysis of Cost Estimation Accuracy in Procurement Auctions

Abstract

This paper explores the impact of better cost estimation accuracy for a firm that bids on projects. Specifically, we investigate the effect of cost estimation accuracy on firms’ ability to submit lower bids amounts and their likelihood of winning in a bidding environment. We analyze highway construction bidding data between year 2001 and 2009 from a state department of transportation. Our results suggest that firms with more accurate cost estimation are more likely to lower their bids amounts and thus are more likely to win more bids than firms that have less cost estimation accuracy. The findings help us better understand the process and effect of cost estimation accuracy in the bidding environment and provide practical implications.