FAIR AND REASONABLE MARKUP (FARM) PRICING MODEL: A PRESENT VALUE APPROACH TO PRICING OF CONSTRUCTION CONTRACTS

While the construction industry accounts for slightly less than 10 percent of the Gross National Product (GNP), it is responsible for more than 17 percent of all business failures. Conventional pricing methods employed in construction appear to be the major causes of these economic problems.; The Fair and Reasonable Markup (FaRM) Pricing Model follows the "maximizing equityholders' wealth" objective of the firm more closely than do the conventional pricing practices. The model adopts the following definition for the Markup which is considered as "Fair and Reasonable": The FaRM would be viewed as the markup which satisfies the Required-Rate-of-Return (RRR) of the contractor for the particular (or at least the general risk-class of) project at hand.; The FaRM Pricing Model is based on reasonable, adequate, and easily accessible information, and will result in a Minimum Acceptable Price (MAP). The firm cannot accept the project at a price below this MAP, without damaging its financial position; i.e., diminishing the equityholders' wealth.; Several methods of incorporating uncertainty into capital investment decisions are investigated. Various types of "sales taxes" are studied and a proper treatment is suggested in each case. It is shown that sales tax is generally far from negligible. The federal, state and/or local income taxes are combined into a single composite-income-tax rate. The "Before-Tax-RRR" and the "Tax-Adjusted-FaRM" methods of considering the effects of income taxes on the FaRM Pricing Model are discussed.