Bid shopping is considered an unethical practice used by contractors to gain advantage over their clients in the bidding process. Bid shopping can be harmful to the construction industry because it creates an unhealthy business environment, eliminates the benefits of the bid system, promotes lower standards of quality performance, delays project completion and reduces job site safety.
Attempts have been made to stop bid shopping through contract law but these attempts have not been successful. Educating contractors of the effects of bid shopping is a means of helping to reduce the amount of bid shopping that occurs.
Graduates of construction programs will be responsible to discover and use processes that allow contractors to build cheaper, faster and more efficient projects. To accomplish this, students must be taught methods that accomplish this goal and informed about methods that do not accomplish this goal. One method that prevents the goal of building cheaper, faster and more efficient projects is bid shopping. Bid shopping is an unethical practice that hinders progress in construction and hurts the construction industry.
To better explain how bid shopping has a detrimental effect on the construction industry, this paper examines how bid shopping occurs in the bidding process, the difference between pre- and post-award bid shopping and the effects of each, and what has been done to try and eliminate the practice.
The Bidding Process
When a project is competitively bid, the owner hires an architect to create a set of plans and allow general contractors (contractor) to submit bids to build the project. In most states, statutory law requires that the prime contract for a governmental/public project is awarded to the lowest responsible bidder, whose bid meets those requirements set by the awarding authority. In the case of public projects, the awarding authority, or owner, is the public/governmental agency, and the projects are paid for through tax monies.
These laws further state that except under exceptional circumstance, once the prime contract has been awarded to the contractor, the awarding authority is prohibited from either re-soliciting bids for the project or renegotiating the bid price with the determined lowest bidder (Dufficy, 1989). The purpose of these laws is to protect the awarded contractor and allow for the public projects to be performed at the lowest possible price or tax dollar. Private owners may also bid their projects using the competitive bid system or they may elect to negotiate the contract. Unlike the governmental/public agency owners, the private owners are not bound by law to award the project to the lowest responsible bidder.
Most building projects cover a large and broad scope of work, making it impractical for the contractor to perform most of the work itself. To complete the project on time and be the lowest responsible bidder on the bid, the contractor needs to solicit subcontract bids from subcontractors. Subcontractors submit their bids to the contractor to be incorporated into the contractor’s bid. Once the prime contract has been awarded, the subcontractors become bound to the contractor in the same way the contractor becomes bound to the owner. This applies to public/governmental bids as well as private owner bids. That is, subcontractors are legally obligated to perform the work for the price specified on the bid. However, current law does not prohibit the contractor from re-soliciting or renegotiating the bid price after the prime contract has been awarded.
There are many different kinds of subcontractors in the construction industry, and competition among these groups is often strong. This competition allows the contractor to have the work performed at the lowest possible price. In theory, this sort of competition is healthy for the industry because it keeps the cost of construction down. This enables the contractor to receive a fair price for the subcontracted work, and the saved money is then passed on to the owner of the project. In reality, however, competition can lead the contractor to take advantage of subcontractors through the use of excessive bargaining pressure in the form of bid shopping.
Bid shopping is an unethical practice in which a contractor discloses the bid price of one subcontractor to another in an attempt to obtain a lower bid price. Included in bid shopping is “bid peddling,” in which subcontractors themselves offer to undercut the known bid of another subcontractor. Bid shopping can occur both before and after the project owner awards the prime contract to the contractor.
Pre-Award Bid Shopping
Many people consider pre-award bid shopping, or bid shopping that occurs prior to the awarding of the prime contract, as an acceptable expression of free competition. “It (pre-award bid shopping) ultimately benefits the (owner) by arriving at the lowest possible bid for, and consequently the cost of, the project” (Dufficy, 1989).
Effects of Pre-Award Bid Shopping
Although this sort of competition may seem beneficial in terms of lower costs and market dynamics, the resulting savings do not come without a price. Subcontractors devote time and money to the preparation of their bids. To try and prevent contractors from shopping their bids, subcontractors submit their bids to the contractor just prior to the time that the contractor is required to submit their bid to the owner. The reasoning is that the contractor won’t have time to shop their bids to other subcontractors. This practice is often referred to as “just in time bid submittal.” While this practice, used by subcontractors as a defense against bid shopping, does keep the contractor from bid shopping, it can also act as a double-edged sword. The problem is, if the subcontractors turn in their bids just prior to the deadline of the contractors bid turn, the contractor is unable to check for any discrepancies or errors. These discrepancies and errors, of course, lead to increased costs, disputes over the scope of work, and the general inefficient prosecution of work (Foster, 1997).
Post-Award Bid Shopping
Despite all of the problems associated with pre-submission negotiations, it is post-award bid shopping that is considered the most harmful to the construction industry. In post-award bid shopping, the contractor seeks to obtain a lower price from a second subcontractor, after having already been awarded the prime contract through the original subcontractor’s bid. Post-award bid shopping serves only to benefit the contractor, as monies from these savings are used to increase the profit margin rather than being passed on to the public authority or owner.
The steps to bid shopping are simple. First, the contractor solicits bids from various subcontractors for the scopes of work on the project. It should be mentioned that soliciting these bids and/or listing them in its own prime contract bid does not bind the contractor to these subcontractors in any way.
Second, the contractor returns to the subcontractors and attempts to further chisel down their bid prices by using the incorporated subcontractor’s bid as a negotiating tool. This happens after the awarding of the prime contract, but before the contractor enters into a subcontract agreement. To do this, the general gives the subcontractors permission to use any means possible to achieve the lower price, including suggesting design modifications under the guise of “value engineering” (Mechanical Contractors Assn., 2001).
Lastly, the contractor repeats the above steps, using the lowest received bid each time as the benchmark until the lowest possible price is obtained. Each subcontractor is forced to either reduce his or her costs and/or profit margin, or forfeit being awarded the contract. Those that can afford to do so will drop out, while those who need the work are forced to remain. This process continues until “all but one subcontractor drops out of the bidding or there appears to be no further reduction attainable” (Mechanical Contractors Assn., 2001).