January  15, 1999



Bulletin #22: Bidding—Life in the Shark Tank

Acme Sheet Metal does most of its work in a region known for cut-throat bidding practices. As a specialty subcontractor, Acme has little control over the bidding process. Acme and its competitors have frequently complained to each other about general contractor practices in bidding projects, but the need to compete for work has prevented any action by the subcontractors to change what they perceive are unfair practices.

Acme has come to expect that several general contractors in its area will shop its bid on any major project, almost as a matter of routine. Acme had worked very hard to improve its estimating practices over the prior years and had developed a reputation for accurate bidding. Based in part upon the quality of Acme’s bids, the offending general contractors would take the Acme sub-bid to its competitors (including some outside of the market) and attempt to negotiate lower bids off of Acme’s scope of work. Initially, Acme had responded by building an inflation factor into all of its bids for these general contractors so that it would be in a position to negotiate when the general contractor came back seeking a reduction in the bid. However, Acme found itself frequently losing the projects based upon its initial, inflated bids. As an alternative strategy, Acme began to bid these projects at the absolute lowest possible price with the understanding that it would not further negotiate its bid.

When one of these general contractors came to Acme seeking a bid on an HVAC system for a large office building being constructed on a fast-track basis, Acme set to work on reviewing the available plans and specifications. However, the general contractor claimed that it needed the bid very quickly. Further, there were a number of aspects of the project scope that were not well defined and the general contractor was looking for the subcontractor to undertake design of parts of the system, as well as installation. Pressed for time, Acme responded with the lowest possible bid that it could justify and submitted it to the general contractor.

When the general contractor called back and sought a ten percent reduction in the bid, Acme agreed to tweak a few items, but refused the request for a wholesale discounting of its work. The general contractor’s response was non-committal and Acme assumed that the general contractor was shopping the bid. A week passed and Acme assumed that it had not gotten the job. This turned out to be something of a relief for the subcontractor, since an error was discovered in the bid that would have made the project unprofitable. The bid materials were filed away at the Acme office and it went on with business as usual.

Management personnel at Acme were shocked a week later to receive a letter from the general contractor stating that Acme’s bid had been accepted and that the subcontractor should immediately order materials and plan to start work within 30 days. A subcontract form signed by the general contractor was delivered along with the letter. Acme management immediately called the general contractor and informed the contractor that the bid was no longer valid and that the subcontractor would not sign the subcontract form. The general contractor responded that it had not been notified in a timely manner that the bid was withdrawn, that the general contractor had relied upon Acme’s bid in contracting for the overall project, and that Acme was stuck with the bid it had submitted. The general contractor stated that it would sue Acme if it did not perform under the bid.

Already angry and frustrated with the general contractor’s overall treatment concerning the project, Acme management wrote WILL NOT SIGN across the front of the subcontract form and mailed it back to the general contractor. With no signed subcontract in place, Acme considered the matter resolved.

A week later, Acme was served with a lawsuit from the general contractor asserting a claim for damages based upon the difference between Acme’s bid and the amount the general contractor would have to pay another subcontractor to perform the same work. While the precise amount of the claim was not yet known, Acme was aware that such a claim could total at least several hundred thousand dollars and perhaps more. Another subcontractor bidding the work would presumably not make the same error that Acme had made in its bid and the anticipated price would be much higher. Concerned about legal liability, Acme management retrieved the file and arranged a meeting with its attorney.

After a review of the file, Acme’s attorney informed the subcontractor that it faced a very real legal risk as to the general contractor and the project. When Acme management protested over the absence of a signed subcontract, the attorney referred to the doctrine of promissory estoppel. Under this legal doctrine, if the contractor could demonstrate that it reasonably relied upon Acme’s bid in entering into the general contract, the general contractor might recover damages resulting from Acme’s subsequent withdrawal of its bid.

It was established that Acme would probably not be considered to have effectively withdrawn its bid when it simply assumed that the bidding process was dead. It was also clear that Acme’s bid constituted an offer to do the work at a specified price. The attorney informed Acme that the case would likely turn on whether or not the general contractor was reasonable in relying upon Acme’s bid. While the general contractor’s bid shopping and attempts to renegotiate Acme’s bid would be raised as a defense to the general contractor’s claim, the attorney could not assure Acme that the defense would be successful. The attorney informed Acme that the state in which Acme had bid the work clearly recognized the concept of promissory estoppel in a bidding context and the attorney called the case a toss up.

Fearful of an adverse decision and the cost of defending the case, Acme contacted the general contractor and agreed to step in and perform the work under the original bid. It then signed the subcontract form and completed the unprofitable job. Acme’s decision that it would never work with the general contractor again was small consolation given the losses it incurred on the job.

The next Contract Bulletin will review some of the steps that Acme might have taken to avoid legal liability in the bidding process and also provide some general advice for subcontractors in dealing with bid shopping and other bid-related issues.

 

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