Tuesday, October 8, 2013

How an Unbalanced Bid Can Cost an Agency More Money

Eastern Washington's Douglas County was forced in 2012 to rebid a roadwork project after receiving a large number of unbalanced bids that exploited an error in the project specifications. 

Unit price bids:  Projects are vulnerable to unbalanced bids when they use unit price bids, where the overall bid amount must be itemized and include the unit price for each item (e.g. a bid item for 100 widgets that a bidder prices at $1/each means that $100 of their total bid amount is the cost of widgets). This makes determining prices for quantity changes more straightforward (if 50 extra widgets are needed, the contract amount is just increased by 50 x $1 = $50). 

Unbalanced bids:  Sometimes, however, bidders will try to game the system by unbalancing their bid: manipulating a unit price in order to profit from future quantity changes, usually compensating by changing other prices elsewhere in the bid to avoid affecting their overall bid amount. For example:
  • Inflating bid prices:  If a bidder anticipates that the quantity of an item will be increased, they may artificially inflate that item's unit price (if the bidder guesses that 50 extra widgets will be added, they might list widgets at $100/each in hopes of a $5,000 windfall, and then lower the cost of another item to maintain the same overall bid amount).
  • Lowering bid prices:  The opposite technique is also used: artificially lowering the unit price for items the bidder thinks will have their quantity reduced, minimizing the impact those reductions will have on the overall amount the bidder gets paid. 
Risks of unbalanced bids:  Both types of unbalanced bids can of course backfire for the bidder if they guess wrong. They are also detrimental to the public agency, since a low bid that is unbalanced may not end up being the lowest after changes to the project have been made. An unbalanced bid that carries this risk for the public agency is termed materially unbalanced. 

The Douglas County situation:  The county solicited unit price bids for a roadwork project that included a bid item for asphalt, which was estimated to be $75/ton. The county later realized that the specification listed more asphalt than the project needed, among other things. Upon reviewing the bids, they saw that several contractors had also spotted the error and - anticipating a reduction in the amount of asphalt - attempted to take advantage of it by unbalancing their bids. The low bidder, for instance, listed a unit price for asphalt of just $0.01/ton. 
  • County's analysis of bid environment:  County engineer Doug Bramlette attributed the unbalanced bids to contractors in unusually dire need of work, noting that bidders would normally have pointed out the error so the county could correct it. "The bidding climate is so competitive that we’re seeing some unusual things occur here," he said. The project will be rebid, delaying it by four to six weeks. 
Lessons learned:  
  • Accurate specifications:  The county's situation illustrates the importance of accurate specifications: as can be seen, bidders will not always help correct the owner's mistakes and may even seek to use the errors to their own advantage. 
  • Language permitting bid rejection for unbalanced bids:  While most standard specifications include language allowing the public agency to reject all bids and re-advertise a project (as Douglas County had to do), it's important to also include provisions making it clear that unbalanced bids will be rejected as non-responsive, a potentially less time-consuming and costly option than completely rebidding a project. 
Additional resources:
  1. Article on the Douglas County situation from the Wenatchee World
  2. 2-part blog post on unbalanced bids from Seattle construction attorney John P. Ahlers: Part 1 and Part 2
  3. My previous blog entry on unbalanced bids 
Note:  This blog posting is a repeat of one from August 15, 2012. 
Mike Purdy's Public Contracting Blog 
© 2012-2013 by Michael E. Purdy Associates, LLC 

1 comment:

Daryl @ electrical contractors Sarasota FL said...

This example certainly reveals the need to provide accurate specifications for bidders but it also shows the importance of the bid review process as well to be able to catch unbalanced bids.