February  12, 1999



Bulletin # 23: Bidding—Life in the Shark Tank (Part 2)

In Contract Bulletin #22, a fictional subcontractor, (we’ll call it, “ZZZ Sheet Metal”), had rushed to submit a bid on a large design/build project. The general contractor had a reputation for “bid shopping” and such activity was rampant among general contractors and owners in that market. In an attempt to minimize the impact of such bid shopping, ZZZ had adopted an internal policy of bidding all projects at the lowest feasible price. ZZZ would, in each instance, communicate to the general contractor that it was not prepared to further negotiate the submitted bid.

The project on which ZZZ was bidding was being constructed on a “fast-track” basis and a number of aspects of the design were not well defined. The fact that ZZZ was to design part of the HVAC system further complicated the bid process. ZZZ did the best it could under the time constraints to submit a meaningful bid. Almost immediately, the general contractor called to seek a ten percent reduction in the bid price. ZZZ refused. The discussions with the general contractor ground to a halt and ZZZ assumed that it had not gotten the job, but took no action to formally withdraw its bid. Several days later, the subcontractor discovered an error in the bid that would have made the project highly unprofitable. There was a general sense of relief at ZZZ that its bid had not been accepted.

Approximately a week after the “bid shopping” conversations with the general contractor had ended, ZZZ was contacted and told that its initial (defective) bid had been accepted in the form submitted. The general contractor demanded that the subcontractor sign its standard subcontract form committing to do the work under the bid. Since it could not profitably perform the project under its initial bid due to the errors in preparing the bid, ZZZ management refused to proceed with the project and returned the subcontract forms, unsigned.

The next shoe dropped quickly. ZZZ was sued for a large sum in damages and consulted its attorney. After reviewing the file, the attorney informed ZZZ that under the legal doctrine of “promissory estoppel,” the general contractor might prevail in a claim that it had relied on ZZZ’s initial bid in bidding the overall project and that the subcontractor had not effectively withdrawn the bid. To avoid the cost and risk of litigation, ZZZ finally signed the subcontract and proceeded to complete the unprofitable job.

The phenomenon of “bid shopping” is a fact of life for many subcontractors. Whether it takes the form of a contractor using one subcontractor’s bid to negotiate lower bids from other subcontractors or attempting to pressure the low bidder to further reduce the bid, such practices severely damage the integrity of the construction bidding process. There is no absolute protection against a general contractor or owner that will manipulate project bidding, but a subcontractor can take certain steps to minimize the worst aspects of bid shopping (including outcomes like that experienced by ZZZ).

The first and most obvious step in minimizing bidding-related risk is to make certain that any bid submitted has been carefully prepared based upon all available information. To the extent that any aspect of the scope of work is unclear, the bid should emphasize that fact and the need for clarification before any final price can be established or any subcontract document can be executed.

As a second step, a subcontractor can submit a scope sheet to the general contractor before bids are due so that the general contractor will know what is intended to be covered by the subcontractor’s bid and what is not. The scope sheet need not cover pricing, but should, as clearly as possible, define what the subcontractor deems the scope of the work (including exclusions). If the general contractor responds to the scope sheet by indicating that the bid has excluded work that should have been included, the subcontractor will have the opportunity to adjust its price in conjunction with its clarification of the scope.

Third, the subcontractor can use the scope sheet process to disclose any conditions of the bid. For example, the subcontractor might state on a cover memo to its scope sheet that its bid will be contingent upon entry into a specific form of contract (i.e. AIA A-401), or a mutually acceptable form and that the terms of the subcontract will be no less favorable than the terms of the general contract with the owner.

Finally, once initial bids have been submitted, the subcontractor should immediately notify the general contractor if it discovers an error in its bid. This is true even if the subcontractor believes that the bid may not have been accepted. If the subcontractor does not wish to proceed under a previously submitted bid (whether due to a misunderstanding of the scope, a disagreement with the general contractor over price or otherwise), it should immediately notify the general contractor in writing of the withdrawal of the bid.

Timely delivery of the notice before the general contractor has accepted the bid can go a long way toward preventing the sort of promissory estoppel claim to which ZZZ found itself subject and which resulted in its having to proceed on an unprofitable job. The subcontractor should also familiarize itself with any bid listing statutes that might apply in the jurisdiction in which the construction is being performed, as well as the availability of bid depositories that might provide some protection to the subcontractor.

 

Issues Archive  |  Search Issues Archive  |  Publications Store  |  SMACNA Home



Sheet Metal and Air Conditioning Contractors' National Association
4201 Lafayette Center Drive Chantilly, Virginia 20151-1219
Tel (703) 803-2980 Fax (703) 803-3732 info@smacna.org

SMACNA LOGOCopyright © 2019 SMACNA. All rights reserved.
Created by Matrix Group International