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Hot Topic: Bid Shopping

In an industry that is made up of high voltage, alternating currents and live wires, often times the most perilous part of the job for electrical contractors is before it even begins: the bidding process.

Bid shopping generally occurs after the award of a contract, when the prime contractor contacts several subcontractors of the same discipline in an effort to reduce the previously quoted price.

A reverse auction is another form of bid shopping because it requires disclosure of a competitive bid price in order to motivate a lower prime contractor’s bid.  In reverse auction bidding, bids are posted on the internet and each subsequent bid must be an amount lower than the previous bid. 

Bid peddling is bid shopping in reverse. It occurs when a sub-contractor approaches a prime contractor, who already has been awarded a project, with the intent of “buying” the subcontract by undercutting the low bid that was offered before the deadline on bid day.  This action implies that the subcontractor’s original price was either padded or incorrect.

Bid Shopping in Brief

The negative impact of bid shopping reaches beyond just the subcontracting industry.  The construction owner, the contract awarding authority and inevitably, on public construction, taxpayers suffer the effects too.  Bid shopping encourages those contractors who offered cut-rate prices to obtain the “shopped” job to cut corners, thus secretly cheating the construction owner out of receiving the full value for which he paid.  By the same token, taxpayers do not get value for which they paid.

Bid shopping defeats the purpose of the competitive bidding process.  The competitive bid system works best when several bids are submitted for the same scope of work, where each bidder has developed and produced his best estimate from the specifications provided, and the low bidder is awarded the job.  When subcontractors anticipate that bid shopping will occur, fewer subcontractors may bid on the job. Those who do bid may inflate their bid to cushion against their price being shopped by the prime. Both situations contribute to higher construction costs and lower overall value to those paying for the construction. 

Project delays are an associated negative effect of bid shopping. If a job has been shopped, the subcontractor who eventually is awarded the shopped job comes to the project without having had time to fully evaluate the plans, and has to spend critical time getting up to speed. If this is a smaller subcontractor he may not have the resources needed to complete the job on schedule.

Hurried work can result in low quality craftsmanship, which may be overlooked in the rush to complete the job or need additional time for reworking at the end of the project.

Bid shopping can reduce the quality of the finished project.  If a project is shopped, the subcontractor may be forced to cut corners by using improper or low quality materials to try to recoup his anticipated profits.  To keep costs down, the subcontractor also may hire unqualified or poorly trained labor in place of better-trained and more efficient skilled professionals.

Bid shopping increases risks – both financial risks and to the safety of the project. Subcontractors working in a highly competitive business with notoriously slim profit margins generally leave little margin for error in bidding.  If the prime contractor “shops” the bid after the contract has been awarded, not only does the low-bidding subcontractor lose the contract, he also has lost the time and costs it took to prepare the bid. If the bid is “negotiated” down by the prime, the sub will have to complete the job at a far greater risk of taking a loss.  A business cannot long survive in this sort of irrational and unfair marketplace.

Of even greater consequences is the risk to project safety. In order not to lose money on a project, a subcontractor may cut corners on safety equipment, trained professionals or sufficiently sized crews.  In an already dangerous industry, this can result in injuries or even deaths on the project. 

Bid shopping hurts subcontractors, construction customers, public awarding authorities and taxpayers alike; the only winner is the prime contractor who is able to obtain for himself a windfall increases in his profit margin.

Ongoing Legislation

The industry has been struggling with this problem since 1931 when Congress took a first look at “bid listing” to reduce bid shopping and bid peddling. Several proposals made in the 1930’s required contractors to list their subcontractors on bid day for federal projects. Approval from the federal contracting officer would be required before substituting a subcontractor would be allowed, and a substitution would only be allowed for good cause such as the inability to perform. Legislation made it as far as the President’s desk, but was never signed into law.

In 1963 the General Services Administration (GSA) used its regulatory authority to institute a policy that required all winning prime contractors on federal bids to list their subcontractors within 48 hours for federal projects in excess of $150,000. Other agencies soon followed the GSA and began to require bid listing. However, the process required some knowledge and involvement of an agency’s contracting officers. This proved to be too great a problem, so during the late 1970’s most agencies quietly dropped their bid listing requirements

The GSA was the last federal agency to require bid listing, and did so until 1983 when the requirement was eliminated because of a case in which the agency incurred multi-million dollar liability when a contracting officer refused to allow substitution for a listed subcontractor, even though that subcontractor was financially unable to perform the work.  The federal government has yet to come up with an alternative solution.

Four years ago, in the 106th Congressional session, Representative Paul Kanjorski (D-11-PA) introduced H.R. 4012, the Construction Quality Act of 2000 to end bid shopping.  This bill failed to pass out of the House subcommittee. Again in the 107th Congress Rep. Kanjorski introduced H.R 1859 that included grounds for suspension or expulsion if a contractor were found to bid shop. 

The Associated General Contractors of America (AGC) oppose any legislation which would impose penalties for not following due process when bidding on federal jobs. 

The AGC states that bid shopping legislation is not needed because it currently has policies against both bid shopping and bid peddling and does not consider it common commercial practice within the construction industry.

While federal government is still trying to work out how to resolve the bid shopping problem, a few states have addressed this issue successfully.  At least 8 states have current anti-bid-shopping legislation in place:  Arkansas, California, Connecticut, Delaware, Florida, Massachusetts, New Mexico and North Carolina.

Massachusetts is a strong example of state law protecting subcontractors during the bid process.  It uses a system called a “filed sub-bid”, where the public awarding authority accepts bids directly from subs.  This process is used for most public building construction projects.  Under this system, the bid process has two-phases.  First, the categories for subcontractors are listed, specifications are provided, and bids are accepted. The awarding authority compiles a list of all sub-bids received and sends the list to all interested prime contractors. The prime contractors then need to submit their bids, including any of the filed sub-bids they may select from among the subcontractors who bid on the project. Subcontractors may condition their filed sub-bids by including different prices for different named possible prime contractors, and may even withhold their bid from certain potential prime contractors. Prime contractors may select from among any of the subcontractors who have filed sub bids, with the only conditions being that the subcontractors they select must perform the work and that the work will be performed at the price included in the subcontractor’s filed bid.

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