We have written a number of blogs addressing unbalanced bids: Unbalanced Bids & Schedule of Values Part I and Part II. An unbalanced bid is one offering unreasonably low prices on certain bid items and compensating for those unreasonably low prices by unreasonably high prices on other bid items. An unbalanced bid may give a contractor a substantial advantage in the bidding process not enjoyed by other bidders. However, an owner considering an award to a contractor that has submitted an unbalanced bid may not be awarding the contract to the lowest responsive bidder.
- 1. Owners Recognize Unbalanced Bids are Grounds for Rejection of such a Bid
The Washington State Department of Transportation, in Section 1-02.13 2.b, provides that a bid may be declared irregular and rejected if unbalanced:
2. A Proposal may be considered irregular and may be rejected if:
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b. Any of the unit prices are excessively unbalanced (either above or below the amount of a reasonable Bid) to the potential detriment of the Contracting Agency;
The unbalancing is done to obtain a competitive advantage in construction contracts by receiving funds earlier to finance later portions of the work. WSDOC rejects unbalanced bids, in part, because it knows that they do not result in the lowest cost to the Owner.
- 2. Washington Law Requires Rejection of Non-Conforming Bids
Washington courts have consistently stated that there is a strong public policy favoring competitive bidding as embodied in competitive bidding statutes.[i] To enforce the public policy inherent in competitive bidding statutes, a public agency is required to reject any bid that is non-responsive (i.e., a bid that varies materially from the Invitation for Bids or provides the bidder an advantage not enjoyed by other bidders). The objective of all bidders is to submit bids that contain no material irregularities.
- 3. Unbalancing of Bids Constitutes a Material Irregularity – Material Irregularities are Non-Waivable and Bids Should be Rejected as Non-Responsive
Public agencies must reject bids which contain material variance or irregularities.[ii] The test of whether a variance is material is “whether it gives the bidder a substantial advantage or major benefit not enjoyed by other bidders.”[iii] In federal procurements, overstating unit prices for items where quantity estimates are uncertain has been held to create a risk that the government will not accomplish the work for the lowest cost.[iv] In a case involving overstated unit prices, the Comptroller General ruled that the Army properly rejected the unbalanced bid.
- 4. Awarding the Contract to an Unbalanced Bidder Will Not Result in the Lowest Prices to the Awarding Agency
To “buy” a project through unbalanced bids, a bidder gambles by nominally pricing certain bid items; there will be no overruns in those bid items, rather an underrun will occur. In order to make up for the low prices on these items, the bidder then enhances other bid items to make up for the nominally or inadequately-priced items. The bidder gambles that there will be overruns in the enhanced bid items, resulting in windfalls to the bidder at the taxpayer’s expense. When artificially enhanced bid items overrun, the bidder will make an increased profit. Further, the money that a bidder may be able to shift into early bid items means that the bidder will finance the project from the Owner’s resources, instead of financing the project on its own. The effect of the unbalanced bid on the Owner is two-fold:
Front-End Loading. If a bidder enhances a bid item which occurs early in the project, the bidder is able to obtain cash from the Owner early. Front-end loading bids are tantamount to allowing the contractor an advance payment or loan, which is strictly prohibited on public works projects under the Washington State Constitution, Article 8, Section 7. An advance payment violates the constitutional prohibition of a public works entity loaning money or credit to a private entity.[v]
Unbalanced Bids Result in the Public Agency Not Receiving the Lowest Bid. Another adverse impact of an unbalanced bid is that a public agency is actually not receiving the lowest cost bid. If the public agency ultimately requires a greater quantity of the overpriced items and a lesser quantity of the underpriced items, the actual cost of the contract will be more than what the apparent low bidder price is. In the end, taxpayers will end up paying more for the unbalanced bid than they would have paid if the contract was awarded to another bidder who did not unbalance its bid.
Comment: A Recent General Accounting Office (GAO) Decision Illustrates the Risks of Unbalanced Pricing.[vi] Although there may be perfectly rational reasons for front-end load pricing, such as instances where there are significant start-up costs that will not be incurred in later phases of the project, and there may be reasons why costs will decrease later in the project through economies of scale or other methods of cost savings, federal agencies have the discretion to eliminate an offeror from competition for an unbalanced submission because they are required to analyze the risk to the government posed by unbalanced pricing.
[i] Manson Construction Engineering v. State of Washington, 24 Wn. App 185, 190, 600 P.3d 643 (1979).
[ii] Gostovich v. West Richland, 75 Wn.2d 583, 587, 452 P.2d 737 (1969).
[iii] Id. at 787.
[iv] Burney & Burney and Burney Construction, Inc., Comp. Gen. B-292458.2 (March 19, 2004).
[v] Attorney General Opinion, 53-55 No. 347.
[vi] Gulf Master General Trading, LLC, Comp. Gen. B-407941.2 (July 15, 2013).