Wednesday, October 6, 2010

Can You Negotiate A Low Bid Amount?

Let's say you've just received four bids to build a new building for your agency, and all four bid amounts are over your estimate.

Are Negotiations Permitted?  Can you negotiate with the low bidder, using value engineering and scope reductions to bring the cost of the project in under budget, and either award at a reduced amount or execute a change order immediately after award for the reduction?

West Virginia Bid Dispute:  That's the question facing Wood County, West Virginia commissioners, who authorized the project architect-engineer to reduce costs by almost $1 million on an almost $6 million low bid submitted by Phoenix Associates, Inc.  The commissioners' action has caused a flurry of activity between the attorneys for the first and second low bidders who are arguing whether the "West Virginia Fairness in Competitive Bidding Act" permits or doesn't permit negotiation of price with the low bidder. 

West Virginia's law doesn't appear to address the subject of bid negotiations, but does by its silence suggest it is not permitted.  It requires that the "construction contract shall be awarded to the lowest qualified responsible bidder."

The county's attorney, Wood County Prosecutor Jason Wharton, has advised the commissioners to "reject all the bids, come up with a new set of specifications and rebid."  The commission will decide at their October 7, 2010 meeting whether to award a contract or rebid it.  Click here for an article on the dispute in the

Transparency in Public Bidding:  One of the purposes of public bidding is to ensure that all bidders have the opportunity to compete for public projects on the same basis - all bidding on the same scope of work.  While bid negotiation may make financial sense for a public agency, it doesn't promote a transparent and fair bidding environment, nor does it necessarily ensure a competitive price.

Additive and Deductive Bids:  One tool that public agencies have available on public works projects is to request additive bids for a scope of work that is desirable to award if the bids come in low enough to meet the budget.  Using additives enables the work to be competitively bid and not negotiated.  The opposite of additive bids would be deductive bids, in which the public agency deducts an amount bid by the contractors from the base bid amount.  Both additives and deductive bids serve as bid protection tools for the public agency to reduce the likelihood of having to reject all bids and readvertise the project. 

Audit Findings for Bid Negotiations: In 2009, the Washington State Auditor's Office issued an audit finding that the City of University Place, Washington improperly negotiated with the low bidder, awarded the contract at the amount bid, and immediately after award executed a change order reducing the scope of work and dollar amount of the contract to bring it in under budget. 

Authority to Negotiate:  Know what your state and local laws permit and don't permit.  In the State of Washington, state agencies have authority under RCW 39.04.015 for limited negotiations with the low bidder, if the low bid does not exceed the available funds by:
(a) Five percent on projects valued under one million dollars; (b) the greater of fifty thousand dollars or two and one-half percent for projects valued between one million dollars and five million dollars; or (c) the greater of one hundred twenty-five thousand dollars or one percent for projects valued over five million dollars.
If these negotiations will bring the bid price within the available funds, state agencies may negotiate the bid price.  The tool is not available to other types of public agencies in Washington state.

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