(Part I)
This is the first of two blog posts exploring the intricacies and risks of unbalanced bids and schedules of value. Today’s discussion will revolve around unbalancing of bids by contractors.
Contractors’ reasons for unbalanced bidding are many. In certain instances a bidder may unbalance its price to conceal its pricing strategy from its competitors; it may be in hope of receiving larger sums at the beginning of the contract (“front end loading”); and in other instances it is the belief that the governments/owners’ quantity estimates are inaccurate and that the contractor will be able to reap a “windfall.”
1. Definition: The unbalancing of a bid is the shifting of part of the cost of the work for one element of the work to another element of the work. The degree to which the unbalancing is accomplished determines whether the bid is simply mathematically imbalanced or materially unbalanced.
- Mathematically unbalanced: “A bid is mathematically unbalanced if the bid is structured on the basis of nominal prices for some work and has inflated prices for other work; that is, each element of the bid must carry its proportionate share of the total cost of the work plus profits.” Matter of: Howell Construction, Comp. Gen. B-225766 (1987).
- Materially unbalanced: “A bid is materially unbalanced if there is a reasonable doubt that the award to the bidder submitting the mathematically unbalanced bid will result in the lowest ultimate cost to the Government.” Matter of: Crown Laundry and Dry Cleaners, Comp. Gen. B-208795.2 (1983).
2. Consequences of unbalanced bidding: Unbalanced bids may be rejected as non-responsive. The Federal Acquisition Regulations state,
“The Government may reject a bid as non-responsive if the prices are materially unbalanced between line items or subline items. A bid is materially unbalanced when it is based on prices significantly less than the cost of some work and prices which are significantly over stated in relation of the cost of other work, and if there is reasonable doubt that the bid will result in the lowest overall cost to the Government even though it may be the low evaluated bid, or if it is so imbalanced as to be tantamount to allowing an advanced payment.” FAR 52.214-10(e).
Similarly, State procurement regulations discourage unbalanced bids. See Alaska DOT/PF Standard Specifications for Highway Construction § 102-1.06 1. e. (2004) and WSDOT Standard Specifications (2010) § 1-02.13 2. b (“a proposal may be considered irregular and may be rejected if any of the unit prices are excessively unbalanced…to the potential detriment of the Contracting Agency”).
In public works contracts, an unbalanced bid is generally considered objectionable because it: (1) constitutes an advanced payment (advanced payments to contractors are constitutionally prohibited in most states); (2) may not ultimately prove to be the best offer (demonstrated below); and (3) is detrimental to the concepts of competitive bidding (it turns the bidding process into a tactical game with severe consequences to both contractors and owners).
3. Windfalls and disasters associated with unbalanced bids. Assume the following hypothetical example on a public works highway project:
|
Item Description |
Engineer’s Estimate |
Bidder A Estimate |
Bidder B Estimate |
|
Unclassified excavation 30,000 CY |
$9.50/ $285,000 |
$10.00/ $300,000 |
$0.01/ $300 |
|
Embankment Borrow 10,000 CY |
$5.00/ $50,000 |
$4.50/ $45,000 |
$15.00/ $250,000 |
|
Bid Price |
$335,000 |
$345,000 |
$250,300 |
On this hypothetical project, which consists of only two bid items, Bidder B is clearly the apparent lwo bidder.
A. Windfall. Bidder B has managed to “trick” the system by being evaluated as the low bid at bid opening, but through the unbalancing strategy has made it likely that he will be paid more than it appears. If there is an under run in Unclassified Excavation and an over run in Borrow. Bidder B will be paid a lot more than reflected by its bid because of its “educated guess” that there will be a windfall occasioned by an over run or under run. If the unclassified excavation item is eliminated entirely, due to a differing site condition change for example, then the low bidder on the project is really not Bidder B but Bidder A to the detriment of the public owner.
B. Disaster. If the Embankment Borrow is eliminated entirely however, then Bidder B is in trouble. Its bid price for Embankment Borrow contained a disproportionate amount of the project’s cost and likely all of Bidder B’s overhead and profit. Bidder B is stuck with the payment of $300 for the entire project.
Courts confronted with this issue have ruled differently in appeal of Manis Drilling, IBCA #2658, 93-3 BCA at 115187 (1993) the court stated “We recognize the practice of submitting unbalanced bids in the construction industry is not uncommon. While a contractor may legitimately unbalance its bid as a bidding technique, it does so at is own peril and must accept the consequence that the deletion of separately priced items may affect its profit or loss structure.” This court would hold Bidder B’s feet to the fire.
On the other hand, in MJ Paquet Inc. v. New Jersey Dept. of Transportation, 794 Atlantic 2nd 141 (N.J. 2002) a contractor fared better. Paquet submitted what was admittedly (but “inadvertently”) an unbalanced bid and then protested when the DOT proposed to delete the profitably work from the contract for unrelated reasons. The contractor sought an equitable adjustment to make up for what it would lose, and the DOT rejected the claim, based on a specification section that the department would not consider “any claim for additional compensation arising from the bid on an item…inaccurately reflecting the cost of such work or containing a disproportionate share of the bidder’s anticipated profit, overhead or other costs.” Id. at 151. The court held that because the contractor was not claiming additional compensation – or at least the phrasing was ambiguous – its claim was not barred. The court went on to provide a discussion of front-end loading and unbalanced bidding, cautioning that its decision was “limited to the unique facts of this appeal.” Had the specification been worded a little more artfully, the contractor very well could have found itself deeply out of pocket.
4. Lessons learned: Contractors who choose to submit unbalanced bids take several risks:
- Violating the Invitation for Bid (Specification Requirements)-the contractor’s bid could be found non-responsive.
- If after award, lower priced items are increased in quantity and higher priced items are decreased in quantity, the contractor may suffer substantial financial detriment.
Tomorrow, the blog post will explore the unbalancing of Schedule of Value items by owner specification mandates, as well as the risks and downside of such practice.