Thursday, October 30, 2008

What is Bid Shopping?

What is "bid shopping"?

It's a common practice in the construction industry in which a general contractor attempts to convince a subcontractor to lower their bid price to a figure below what the contractor says is the current low bid they have received from another subcontractor. If the subcontractor really wants the project, they may lower their bid price, even to the point of making it financially detrimental for their business.

The Washington State Legislature has gone on record opposing the practice of bid shopping. In 2002, by amending RCW 39.30.060, the Legislature stated the legislation was "intended to discourage bid shopping and bid peddling on Washington state public building and works projects."

RCW 39.30.060 (2) includes a prohibition on the practice: "Substitution of a listed subcontractor in furtherance of bid shopping or bid peddling before or after the award of the prime contract is prohibited."

The purpose of RCW 39.30.060, also known as the Subcontractors List statute, is to reduce the number of bid shopping occurrences on public works projects. It requires contractors to list the names of the subcontractors (or the prime contractor) who will be peforming work in the following three trades: Electrical, Plumbing, HVAC. The law applies to public works projects with an estimated cost of $1 million or more. Failure by the contractor bidding the public works project to provide the Subcontractors List in a timely manner as specified in the bidding documents (either with the bid or up to one hour after bid submittal deadline) renders the bid non-responsive. The Legislature has gone on record to state that failure to submit the Subcontractors List is a material irregularity in the bid that may not be waived by a public agency, and the bid of a contractor not submitting the Subcontractors List must be declared non-responsive.

There is a common misperception among some subcontractors that a contractor is required by law to award a subcontract to them if they were the low bidder. I've had conversations with subcontractors not required to be listed on the Subcontractors List who thought the contractor had to award to them. One subcontractor was the second low bidder to the contractor. When the subcontractor with the low bid went out of business, the contractor approached the second low bidder and asked them to lower their price by a substantial sum (bid shopping). They asked for a meeting to discuss the scope. No meeting ever occurred and it is likely that the contractor awarded a subcontract to the third low bidder who may have lowered their price. The subcontractor wondered if they had any recourse against the contractor. Because the subcontractor was not named on the Subcontractors List and because it was not a protected trade, the subcontractor didn't have any recourse against the contractor.

It is only with the use of the alternative public works contracting method of General Contractor/Construction Manager (GC/CM) where the contractor is required to award to the low subcontract bid. On traditional "design-bid-build" projects, the contractor may award to any subcontractor at any price. However, if they have listed the subcontractor on the Subcontractors List as a firm they intend to use (whether they were the low bidder or not) and then attempt to substitutee that named subcontractor later for a reason not listed in RCW 39.30.060, then the substituted subcontractor "is entitled to recover monetary damages from the prime contract bidder...but not from the public entity." The burden of proof rests with the substituted subcontractor to demonstrate that bid shopping occurred.

Acceptable reasons for substitution of a subcontractor named on the Subcontractors List include the following:
  • Refusal of the listed subcontractor to sign a contract with the prime contractor
  • Bankruptcy or insolvency of the listed subcontractor
  • Inability of the listed subcontractor to perform the requirements of the proposed contract or the project
  • Inability of the listed subcontractor to obtain the necessary license, bonding, insurance, or other statutory requirements to perform the work detailed in the contract
  • The listed subcontractor is barred from participating in the project as a result of a court order or summary judgment.

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