Company Have Bid With a Zero Mark-Up

¶ … company have bid with a zero mark-up on some past tenders? Why didn't it win all of those contracts?

Based on the percentage of contracts awarded to Bright Paints at a zero mark-up rate, which falls at 95.9%, it is clear that this strategy is effective at courting particularly valuable contracts. In instances where the contract itself has the capacity to bring the company both a high level of profitability and the potential of a positive long-term relationship with a resource-affluent partner such as the State Department of Transportation, the sacrifice of profits from mark-ups is a sensible one. The underlying premise is that the risk of losing the contract is more compelling than the lost opportunity to earn revenue on markups.

Indeed, even bypassing these markups is not itself a guarantee that a contract will be awarded. With 4.1% of zero mark-up bids not being selected, we can see that Bright Paints must also concern itself with rival bids. In these instances, Bright Paints was likely undercut at the base price or on incremental costs. Other factors such as a preexisting relationship between Bright Paints and a selected contractor may well have been relevant to the final decision as well.

b. What is the bid price that maximizes the expected contribution of the contract?

In calculating the bid price that maximizes the expected contribution of the contract, we consider the rate of mark-up on the base of $76,200 at which Bright Paints has shown a history of likely contract selection. At a 10% markup rate, Bright Paints has historically been awarded with 84.8% of contracts sought. The drop-off in likely contracts becomes fairly significant thereafter, calculating at 65.4% for 15% mark-ups. This justifies a markup rate not exceeding 10% and therefore amounting to a total contract bid of $83,820.

c. Why, or why not, is the fixed-price mode of bidding likely to be the best one to use for this contract?

The fixed price mode is not ideal in this case because of the size of the contract. Based on the duration that it might take to fill this order, the likelihood of cost fluctuation for supplies, energy consumption and other production demands is high. A fixed price mode could represent some danger to anticipated profit margins by failing to account for these fluctuations.

2. In calculating the incremental cost of a particular project, how would you treat the possible future costs of a lawsuit that may occur as a result of this project, where the cost of the lawsuit might range from $10,000 to $500,000 with an associated probability distribution?