This is a two-part blog on bid shopping in public contracts. Part I of this blog series explores bid shopping in general, including what it means to bid shop, bid peddle, and the consequences of bid shopping, and Washington’s anti-bid shopping laws. Part II discusses actions arising out of the Subcontractor Listing Statute in more detail.
- 1. Bid Shopping Defined
In construction, bid shopping is the practice of divulging a contractor’s or subcontractor’s bid to another perspective contractor(s) or subcontractor(s) before the contract is awarded in order to secure a lower bid. Once an owner issues an Invitation for Bids, general contractors calculate their bids based, in part, on bids received from potential subcontractors. Once the general contractor has incorporated a particular subcontractor’s bid (usually the lowest) into its own bid, it may attempt to inform other subcontractors of the amount of the incorporated subcontract bids and try to get them to underbid it.[i]
Another way bids are “shopped” is for the subcontractor to induce the general contractor to divulge information about other bidding subcontractors so that the subcontractor may undercut its competitors’ bids. This practice is known as “bid peddling,” which is “bid shopping” in reverse. Bid peddling occurs when a subcontractor that is not selected for a construction project seeks to induce the general contractor to substitute its company for the “incorporated” subcontractor bid by offering to reduce its price.
If the general contractor is successful in “shopping” the incorporated sub-bid, the general contractor can realize a windfall profit. If on the other hand, the general contractor is unsuccessful, it is no worse off because it still has the original low bidder locked in. To avoid having a general contractors shop their bids, subcontractors often submit their bids at the last possible moment – sometimes literally minutes before the deadline for submitting bids.
Bid shopping may lead to cost-cutting in the construction process (primarily in terms of materials and labor), but it may also lower the quality of the work performed. While the windfall from the cost-cutting is enjoyed by the general contractor, the public owner experiences the consequences of poor workmanship. Accordingly, states that have adopted some type of anti-bid shopping legislation recognize that bid shopping can result in poor quality, unfair competition, and insolvencies. As a result, for public contracts, those states require general contractors to list subcontractors that they will use in their bids and prevent the general contractor from substituting subcontractors if its bid is accepted, except on very narrow grounds.
- 2. Defense to Promissory Estoppel
The legal doctrine of “promissory estoppel” prevents a subcontractor from withdrawing its bid for a limited time; thereby, allowing the general contractor to execute a contract with the owner. In the construction context, the requirements for promissory estoppel are as follows: (1) a bid, (2) that the subcontractor should reasonably expect to cause the general contractor to change its position, (3) that does cause the general contractor to change its position, (4) upon which the general contractor justifiably relied, in such a manner that, (5) justice can only be avoided by enforcement of the bid.[ii]
Bid shopping, however, can act as a defense to promissory estoppel claims because the general contractor stands to gain substantial savings in shopping the prices of various subcontractors. Accordingly, the general contractor does not “rely” on the subcontractor’s bid, which is an essential element of promissory estoppel. This defense of promissory estoppel was successful argued in the California case of Saliba-Kringlen Corp. v. Allen Eng’g Co.,[iii] but no reported Washington, Oregon, or Alaska cases have addressed bid shopping as a defense to promissory estoppel.
- 3. Subcontractor Listing Requirement (Public Works Contracts)
In order to combat bid shopping, Washington adopted the Subcontractor Listing Statute, RCW 39.30.060. Under the Subcontractor Listing Statute, all general contractors bidding on public works of $1 million or more must submit the names of the plumbing, electrical, and HVAC (heating, ventilating, and air conditioning) subcontractors with whom the prime contractor will contract. The general contractor must submit the subcontractors’ names either at the time the bid is submitted or, if allowed by the bidding documents, within one (1) hour of the published bid submittal time. If the general contractor fails to list the plumbing, electrical, or HVAC subcontractors, or itself (if self-performed), its bid is non-responsive and must be rejected.
- 4. Does Listing a Subcontractor Convey Acceptance of its Bid?
There is a question whether the mere listing of the subcontractors’ price in the general contractor’s bid indicates an acceptance by the general contractor of the subcontractor’s bid price and, thus, whether the mere “listing” creates a contract. The Washington Supreme Court found that the mere use of the subcontractor’s bid was insufficient to create a contract if a general contractor uses a subcontractor’s or supplier’s bid without communicating any commitment to the subcontractor.[iv] However, where the general contractor uses a subcontractor’s bid and expresses an intent to use the subcontractor, the Court held that a contract may be formed.[v]
For example, in Indus. Elec. Seattle, Inc. v. Bosko, the general contractor received the subcontractor’s quotation for electrical work and said, “Okay, I will go ahead and bid this job,” and “Okay, I will see; I will let you know how we make out.” The Court found that these communications, together with the custom of awarding a subcontract to the party whose quotation was incorporated into the prime contractor’s bid, were enough to express acceptance of the subcontractor’s bid. Thus, based on the Indus. Elec. case, the mere listing of a subcontractor may very well create a subcontract.
[i] Bids may also be “shopped” by changing non-priced items. For example, the general contractor may refuse to execute a subcontract with the low incorporated subcontractor unless the subcontractor agrees to onerous subcontract clauses.
[ii] Ferrer v. Taft Structurals, Inc., 21 Wn. App 832, 834, 587 P. 2d 177 (1978).
[iii] 15 Cal. App. 3d 95, 92 Cal. Rptr. 799 (Ct. App. 1971).
[iv] Indus. Elec. Seattle, Inc. v. Bosko, 67 Wn.2d 783, 796-97, 410 P.2d 10 (1966).
[v] Id. at 787 and 796.