An empirical study of software project bidding

The study described in this paper reports from a real-life bidding process in which 35 companies were bidding for the same contract. The bidding process consisted of two separate phases: a prestudy phase and a bidding phase. In the prestudy phase, 17 of the 35 bidding companies provided rough price indications based on a brief, incomplete description of user requirements. In the bidding phase, all 35 companies provided bids based on a more complete requirement specification that described a software system with substantially more functionality than the system indicated in the prestudy phase. The main result of the study is that the 17 companies involved in the prestudy phase presented bids that were, on average, about 70 percent higher than the bids of the other companies, although all companies based their bids on the same requirement specification. We propose an explanation for this difference that is consistent with the "prospect theory" and the "precautionary bidding effect." A possible implication of our findings is that software clients should not request early price indications based on limited and uncertain information when the final bids can be based on more complete and reliable information.