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Competitive bidding for outcome based contracts – price to win?

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conference contribution
posted on 20.03.2015, 15:04 by Linda B. Newnes, Stuart Wicks, Yee Goh, Melanie E. Kreye
The suppliers of long-life assets such as submarines and airplanes no longer simply sell these assets but provide advanced engineering services. In other words companies that traditionally designed and manufactured long-life products now compete through the provision of a service, such as asset availability. These companies face a high level of uncertainty due to the novelty of the process and the long-term nature of services. However, regardless of these uncertainties the service provider needs to estimate the cost and expected profits for such provision. The pricing decision of these service contracts is influenced by multiple factors and considerations and as a minimum the supplying contractor needs to yield suitable profit to sustain their business. From current research it is known that the estimated company profit is often optimistic. This places pressure on both the customer and the service provider. From our research we found examples of reductions in profits for those providing services. For example a company, which moved to performance-based road maintenance contracts, only yielded less than 50% of their expected profit. So, how can providers of long-life, high-value assets estimate the costs for delivering an expected outcome and account for the uncertainties? One of the challenges is measuring such uncertainties and taking account of them in the pricing decision. In this paper we present our research to date on the provision of a framework and a five-step process for modelling the influencing uncertainties and the impact of these uncertainties on the price bid. We will present the background need for such analysis and then provide an overview of our approach and findings to date. Finally, using an exemplar service we will demonstrate how using our approach highlights the probability of winning the contract, the probability of making a profit and the expected profit value for particular price bids.

Funding

The authors gratefully acknowledge the support provided by our industrial partners, the Department of Mechanical Engineering at the University of Bath, the Innovative electronics Manufacturing Research Centre and the Engineering and Physical Sciences Research Council for funding the research.

History

School

  • Mechanical, Electrical and Manufacturing Engineering

Published in

Spring Servitisation Conference

Citation

NEWNES, L.B. ... et al, 2014. Competitive bidding for outcome based contracts – price to win? IN: Baines, T., Clegg, B. and Harrison, D. (eds). Growth Through Servitization: Drivers, Enablers, Processes and Impact. Proceedings of the Spring Servitisation Conference (SSC2014), 12th-14th May 2014, Aston University, Birmingham, pp. 96-103.

Publisher

© Aston Business School

Version

VoR (Version of Record)

Publisher statement

This work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/

Publication date

2014

Notes

This is a conference paper and is available here with the kind permission of the publisher.

ISBN

9781854494726

Language

en

Location

Birmingham, UK

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