Paying the Price for Construction Risk

The amount that a contractor charges an owner is the expected cost of performing the work plus a price for accepting the risk plus a markup. The prices that different contractors should charge to accept risk depend upon their financial situations. The relative values of different sums of money to contractors and owners are modeled by utility curves, and the prices that contractors with different finances should charge are computed from these curves. The effects of these varying financial conditions upon the competitive bidding process are analyzed. The owner may be charged more by a contractor to carry risk than it is worth. A contractor in such financial difficulty that he is willing to gamble on a risky job to recover has a bidding advantage over a more financially stable contractor.