Hostage to a Low Bid

Construction firms often make unrealistically low bids to get jobs… but they can count on finding plenty of reasons later to jack the price up enough to allow for a profit. When the building is underway, it becomes prohibitively expensive to fire the contractor and start anew. The owner has become a hostage.” – Wall Street Journal, December 5th, 2007 

The perils of low bid awards, particularly in government contracting, but also in commercial contracting, are easy to find.  In some places low bid awards are required.  Let’s face it!  A low bid solution can be attractive to the contracting officer or owner on a construction or materials purchase.  Think of a first date. In the beginning it is difficult to tell if it is a crisis or not, but the potential for risk that low bid presents should be clearly understood by the purchaser before making that decision to award and become hostage to a catastrophic error in judgement.

The low bid contract is counted on for an upsurge in change orders.  If the underbid is a result of misunderstanding the scope of work, or underestimating the actual project, or an attempt to sucker the customer, then change orders are very commonly requested to close the gap between the low bid and the actual expense of a profitable project.  The project is prone to slow down by the change order process.  That same process also leads to the slippery slope of claims.

The correlation between low bid and low-quality work is clear.  The contractor/bidder may be inexperienced, unobservant, or may just intend to cut costs at the expense of the project to win the bid.  This can create an inferior project for the customer due to costs cutting with substandard or an inexperienced labor pool, inferior materials and project delays.   More often than not, it is a combination of all of the above.  Ultimately it is an inferior final project, if the project is actually completed.  This leaves a project open to disputes between customer and contractor.  Worst of all, this impacts the useful life and full functioning of the project.

With low bid come costly delays as a result of change order processing, poor quality work with unskilled installers, and inferior and/or non-specified materials.  This type of installation can end in arbitration, litigation or just plain liquidated damages.

The purpose of the low bid model is a feeble and frequently failed attempt to equalize all bids and push estimating to the lowest possible pricing.  It makes the fallacious assumption that all bids are equal and as designed.  It removes responsibility from the decisionmaker by excluding many critical factors and opening to the impact of long-term cost over the life of a project. These critical factors are often characterized as intangibles, but they are not!  They include quality of materials, trained and experienced individuals from the designer all the way to the installers, and accuracycompleteness, and timeliness of the bid including test results and as-builts.  This very briefly describes the best value procurement model that is the highest criteria of award and almost invariably excludes the lowest bids which are frequently incomplete, miscalculated, and poorly installed with incorrect and inferior materials. 

Points to remember:

  • The low-bid contractor can do more harm than good by:
    • Change orders,
    • Low quality work,
    • Delays,
    • Partial completion,
    • Improper material installation.
  • The best value of a project well designed is easily overwhelmed by:
    • Poor workmanship, 
    • Inferior materials,
    • Incomplete installation,
    • Delays in beginning or completing the project.
  • Low bid potentially damages the useful life of the project, not to mention the contractor’s and the contracting officer’s reputations.

Merit and price?  Where do you stand?  Certainly not in between.  Merit and price are two very different things.  The discriminating customer easily distinguishes the difference between them.  It requires a commitment to and an understanding of best value procurement.  Failing the customer’s willing participation, it falls to the contractor to convey the difference between merit and price or low bid and best value.  

If you find you are or have been hostage to a low bid, don’t worry.  Aspen can help clean up the mess.

When it has to be done right, it has to be Aspen.

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