The Motives for and Consequences of Underpricing for Construction Contractors—Evidence from Australia

Authors

  • Li Liu University of Sydney Australia
  • Paul L. Bannerman NICTA, University of New South Wales Australia
  • Xiang Ding Nanjing University - CHINA China
  • Emma-Jane Elliott ISIS Group Australia Australia
  • Georgina Ewart ISIS Group Australia Australia
  • Xiaoying Kong University of Technology, Sydney Australia

Keywords:

Underpricing, strategic misrepresentation, deception, tendering, project bidding, pricing strategy, construction

Abstract

Over the period of 2011-2013, there was a spate of bankruptcies of medium-to-large Australian construction contractors (many of whom were well-established), coinciding with a prolonged decline of the property market. Anecdotal evidence suggests that underpricing played a major role in the collapse of these companies and the financial misfortune of many major Australian construction contractors. On the other hand, anecdotal evidence also suggests that underpricing can be an effective tactic to penetrate markets or weaken competitors when used as part of a strategic mix—a double-edged sword. Because of the political sensitivity of the topic of underpricing, there has been a dearth of research in this area. This study investigates the extent and consequences of the practice of underpricing (in the Australian context), where it is defined as the submission of a tender price at a significantly lower level than the best estimate for the costs, profit margins, and risks of the construction project. Drawing from the literature on construction tender-price formulation, we develop a framework that separates the motives for underpricing into need-for-work and marketing-based competitive pricing; and predict the consequences of the practice of underpricing in terms of adverse financial consequence or profitability in circumstances driven by the two different motives. The framework is validated through data analysis based on a survey of the members of the Australian Institute of Quantity Surveyors and randomly selected large contractors. Underpricing was found to be prevalent in construction projects. Contributing to the literature, the results show that when underpricing is primarily driven by a contractor’s need for work to maintain cash flow; underpricing contractors are likely to engage in deceptive practices, such as submission of unwarranted variations or reducing the standard of work. Further, the findings indicate that, although such deceptive conduct could lead to short-term relief of adverse financial outcomes, it does not contribute to the competitiveness of the company in the longer term. By contrast, underpricing driven by deliberate marketing strategies, such as market penetration or to weaken competitors, was found to be linked with long-term financial profitability of the contractor.

Author Biographies

  • Li Liu, University of Sydney Australia

    Dr Li Liu; Senior Lecturer, Coordinator, Bachelor of Project Engineering and Management degree School of Civil Engineering | Faculty of Engineering and IT THE UNIVERSITY OF SYDNEY

  • Paul L. Bannerman, NICTA, University of New South Wales Australia

    Paul Bannerman, PhD, is a Research Scientist at Data 61, CSIRO (formerly NICTA), Sydney, where he researches value creation through the use of software systems. His research interests include project management, risk management, governance and IT-enable organisational performance. His work is published in information systems and software engineering conference proceedings and journals. Dr Bannerman has over 40 years experience in information technology in Australia, USA and the UK as a manager and consultant in industry, and a researcher and instructor in academia. He is a conjoint Researcher at UNSW Australia’s School of Computer Science and Engineering, and an Adjunct Faculty member at UNSW’s Business School. He has a BA in economics and finance and an MBA from Macquarie University, Sydney; an MSc in Computing from the University of Technology, Sydney; and a PhD in management from the Australian Graduate School of Management (University of Sydney and University of NSW).

  • Xiang Ding, Nanjing University - CHINA China

    Xiang Ding, PhD candidate. He is working for his Doctor's degree of Management Science and Engineering in Nanjing University (NJU). He also holds an ME and BE at Harbin Institute of Technology. His research interests include organizational behavior in project settings, performance and project governance of mega infrastructure projects, project complexity, with particular focus on exploring the outcomes of different styles of leadership in temporary organizations. His research has been published and in press in the Mathematical Problems in Engineering, Chinese Journal of Management Science.

  • Emma-Jane Elliott, ISIS Group Australia Australia

    Emma-Jane Elliott has a Bachelor of Engineering (Civil) (Honours) and a Bachelor of Commerce (Econometrics)(Finance) from the University of Sydney. She has worked in Project Management and Funds Management. Currently, she is working in Finance and is based in Sydney, Australia.

  • Georgina Ewart, ISIS Group Australia Australia

    Georgina Ewart graduated with Honours from a Bachelor of Engineering and Bachelor of Commerce at The University of Sydney. Her majors were Project Management and Economics respectively. Both her studies and work experience reflect a combination of commerce and engineering project management, which influenced her contributions to the paper Underpricing for construction projects—a double-edged sword. Georgina is currently working as a Consultant at Capgemini, with 180,000 people in over 40 countries, Capgemini is one of the world's foremost providers of consulting, technology and outsourcing services. In June 2015 she passed the Chartered Financial Analyst Exam Level 1, demonstrating a strong understanding of finance, accounting and economics amongst other topics. She has had experience in construction project management at Shape Australia. Her understanding of pricing strategy and project management both contributed to the paper Underpricing for construction projects—a double-edged sword, which she presented at the Project Management Institute (PMI®) Conference in 2014.

  • Xiaoying Kong, University of Technology, Sydney Australia

    Xiaoying Kong is currently a Senior Lecturer in the Faculty of Engineering and Information Technology, University of Technology, Sydney. She received her BE and ME in Control Engineering from Beijing University of Aeronautics and Astronautics. She received her PhD in Mechatronic Engineering from the University of Sydney. She has many years’ industrial experience in aeronautical engineering and commercial web development. Her research interests include control theory, sensor technologies, data fusion, and robotics, software engineering, and web technologies.

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Published

2022-05-20

Issue

Vol. 3 No. 3 (2016): The Journal of Modern Project Management

Section

Articles-JMPM

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Copyright (c) 2022 Li Liu, Paul L. Bannerman, Xiang Ding, Emma-Jane Elliott, Georgina Ewart, Xiaoying Kong

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

How to Cite

The Motives for and Consequences of Underpricing for Construction Contractors—Evidence from Australia. (2022). The Journal of Modern Project Management, 3(3), 160. https://journalmodernpm.com/manuscript/index.php/jmpm/article/view/216

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