Wednesday, July 21, 2010

Should a Bid Guaranty Be Required When Selecting a GC/CM?

Bid guaranties are typically required on all public works projects.  The purpose of a bid guaranty is two-fold.  First, they serve as a disincentive for bidders to submit frivolous bids.  Second, they compensate a public owner for additional costs in the event the low bidder refuses to enter into a contract.

How GC/CMs Are Selected:  Under a GC/GM (General Contractor/Construction Manager) model of contracting for public works, at least as practiced in the State of Washington, the GC/CM is selected based partially on their qualifications and approach, and partially on certain prices (overhead, profit, general conditions) that are competitively bid.  Most agencies in the State of Washington will also include and evaluate an interview with shortlisted firms as part of the selection process.  The actual cost of construction is negotiated between the selected contractor and the public agency once the construction documents are at least 90% complete.  See chapter 39.10 RCW for more information.

Frivolous GC/CM Proposals Unlikely:  It is highly unlikely that a contractor will submit a frivolous proposal as part of a GC/CM selection process.  Proposals cost contractors thousands of dollars to prepare.  In the event a frivolous proposal was submitted, it would not be rated high enough to be considered further.  This is unlike what occurs with regular competitive bidding where all a contractor has to develop is a price, which may or may not be carefully thought through.

Purpose of GC/CM Bid Guaranty Unclear:  In addition, because the cost of construction under GC/CM is negotiated and not bid, the purpose of a bid guaranty is not clear.  
  • How would a public agency actually be able to collect on a bid bond under a GC/CM project?  
  • A bid bond guarantees that the bidder will, if awarded the project, enter into a contract with the owner.  But because the construction cost is negotiated in a GC/CM project, there is no guaranty that the parties will actually be able to successfully negotiate a price and execute a contracct.  
  • How would a bid bond even be written for a GC/CM project?  Bid bonds are typically for 5% of the amount bid, but because there is no bid amount (other than for overhead, profit, and general conditions), this is problematic.
Limited Bid Guaranty?  Perhaps you could argue that a bid guaranty is appropriate for holding the contractor to their overhead, profit, and general conditions costs.  GC/CM selection documents should require that the contractor hold these prices through the negotiation process.  If a contractor, for whatever reason, doesn't want to successfully conclude negotiations of the Maximum Allowable Construction Cost (MACC), there are many avenues they can pursue, even if there was a bid guaranty.  

GC/CM is Not Low Bid:  GC/CM contracting is a very different model from low bid.  The whole intent of the GC/CM selection process is for public agencies to find a contractor they can work in partnership with.  The purpose of a bid guaranty, as required for most public works projects, doesn't make sense for GC/CM contracting.  If you have a different perspective on this issue, I'd love to hear from you.

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