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Decision Tree — Tender Strategy: Bid High, Bid Low or Walk Away

A contractor's bid decision with a downstream procurement choice: bidding high wins less often but rolls back to $447k against $264k for bidding low, and in both branches a fixed-price steelwork subcontract beats self-performing once overrun risk is priced in. Illustrative values.

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Hospital wing tender — bid high, bid low or walk away?Hospital wing tender — bid high, bid low or walk away?Expected contractor profit, US$ thousands, after a US$120k bid-preparation cost3 decisions · 6 chance nodes · 13 outcomes · maximise expected valueOPTIMAL FIRST CHOICEBid high (US$14.2M)·EV $447kBid low (US$12.9M)cost $120k · net $264kDo not bidSelf-performOn budget0.6Minor overrun0.3Severe overrun0.1Win0.65Lose0.35Fixed-price subcontractcost $150k · net $590kSelf-performOn budget0.8Minor overrun0.2On budget0.6Minor overrun0.3Severe overrun0.1Final accountEV $1,640k$2,150knet $2,030k$1,300knet $1,180k−$400knet −$520kAwardEV $384kSteelwork packageEV $590kFinal accountEV $740k$850knet $580k$300knet $30kFinal accountEV $340k$850knet $730k$0net −$120k−$1,700knet −$1,820k$0net −$120k$0Bid high (US$14.2M)cost $120k · net $447kWin0.3Lose0.7Fixed-price subcontractcost $150k · net $1,890kOn budget0.8Minor overrun0.2Tender strategyEV $447kAwardEV $567kSteelwork packageEV $1,890kFinal accountEV $2,040k$2,150knet $1,880k · P 0.24$1,600knet $1,330k · P 0.06$0net −$120k · P 0.7DecisionChanceOutcomeOptimal strategyRejected alternativeRisk profile·cumulative probability by first choice0%25%50%75%100%−$250k$0$250k$500k$750k$1,000k$1,250k$1,500k$1,750k$2,000kfinal outcome, net of costsFIRST CHOICEEVBid high (US$14.2M)$447kσ $874k · P(loss) 0.7Bid low (US$12.9M)$264kσ $333k · P(loss) 0.35Do not bid$0σ $0 · worst $0What the rollback showsBest first choice: “Bid high (US$14.2M)”, EV $447k — $184k ahead of the next best, “Bid low (US$12.9M)” ($264k).If the path reaches “Steelwork package”: “Fixed-price subcontract” ($1,890k) over “Self-perform” ($1,640k).Following it, the outcome ranges from −$120k to $1,880k across 3 possible results, standard deviation $874k; a 70% chance of a loss.Note: Win rates from the last 24 comparable tenders; overrun bands from the firm's cost-report history.Note: Illustrative values for a fictional contractor.

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title "Hospital wing tender — bid high, bid low or walk away?"
subtitle "Expected contractor profit, US$ thousands, after a US$120k bid-preparation cost"
currency $
unit k
risk-profile compare
terminals natural
note "Win rates from the last 24 comparable tenders; overrun bands from the firm's cost-report history."
note "Illustrative values for a fictional contractor."

decision "Tender strategy"
  "Bid high (US$14.2M)" cost 120 -> chance "Award"
    "Win" p 0.30
      decision "Steelwork package"
        "Fixed-price subcontract" cost 150 -> chance "Final account"
          "On budget" p 0.80 -> 2,150
          "Minor overrun" p rest -> 1,600
        "Self-perform" -> chance "Final account"
          "On budget" p 0.60 -> 2,150
          "Minor overrun" p 0.30 -> 1,300
          "Severe overrun" p rest -> -400
    "Lose" p rest -> 0
  "Bid low (US$12.9M)" cost 120 -> chance "Award"
    "Win" p 0.65
      decision "Steelwork package"
        "Fixed-price subcontract" cost 150 -> chance "Final account"
          "On budget" p 0.80 -> 850
          "Minor overrun" p rest -> 300
        "Self-perform" -> chance "Final account"
          "On budget" p 0.60 -> 850
          "Minor overrun" p 0.30 -> 0
          "Severe overrun" p rest -> -1,700
    "Lose" p rest -> 0
  "Do not bid" -> 0