I was reading through my weekly list of construction law blogs when I noticed this post about “bid bombing.” The post draws attention to a recent article in Engineering News Record.
So-called bid bombs are bids that come in substantially lower than other competing bids. In these situations the other competing bids might be hovering more closely around a particular price range for the project. For example, out of four bidders on a public tender, three come in around $20M while the low tender steals the project for $14 or $15M. I’ve seen this happen, and for the second bidder this can be annoying and frustrating (although bidders are typically annoyed at losing a job anyway).
What the project price ’should’ be
The ENR article makes two central assertions:
That that there is a “correct” price for a given tender call.
That unusually low bids are caused by “bad business managers” or “poor bidders.”
The article throws around the word “correct” a lot (engineers love the word): “correct materials specified”, “correct labor (sic) productivity”, determining contract requirements “correctly”, etc. Now, given that all players are working with the same set of variable costs, in a highly competitive market project costs and thus bids will gravitate to a fairly narrow range if everyone is working with similar resources, the same suppliers, and similar knowledge. Specifically, the article finds that on large projects the likelihood of a competitive advantage resulting in a price advantage of more than a few percent is practically non-existent, leaving the only real variable in the final price to be the profit margin. That is, whichever bidder decides to take the tightest margin above the proper cost should get the project.
The “poor bidders” who throw the bid bombs are those who i) make significant mistakes in their estimates, or ii) purposely take a project below cost. The article identifies the latter as bad management.
Altogether, the author calls bid bombing a problem because “qualified bidders” lose business and the low bids “ruin markets”.
What should the project price be?
While I agree that wild-card low bids very often are the result of uninformed or inexperienced estimators, or of intentional under-bidding, I take issue with both of the article’s main points.
First, while bids often will hover around a certain price range, I think that it is possible for a bidder to occasionally gain some competitive advantage, or series of advantages, which allows them to score the job. I’d actually argue that some of the more successful “qualified bidders” became successful not by consistently squeezing their margins but by working to gain advantages and thus making their work more profitable. Further, it is possible that profit margins in some local markets might have become temporarily inflated, so an unexpected low bid might actually be closer to the so-called “correct” price.
Second, while making a serious mistake in a bid is never good, I don’t think I’d be so quick to condemn intentional underbidding. Which is not to say I think it is typically an effective strategy – if anything, I’ve seen it fail as a strategy when used in an attempt to starve smaller competition out of a market. But that doesn’t mean that underbidding is not a legitimate strategy. The bidder takes the risks with the possible rewards, if any.
In the long run, the strongest contracting companies will survive, while others stagnate or fail. If a bid bomber takes a project and fails to complete, then there are remedies for that situation that the owners can pursue – often those remedies involve calling in other builders anyway. If a bid bomber takes a job and completes it within spec, then the owners (which are often the taxpayers) are happy.
All said, I’m not convinced that it’s so easy for the bombers to ruin the construction market.
As a final note, bid bombing situations in Canada could potentially attract the operation of privilege clauses. In fact, the proper good faith exercise of privilege clauses in situations where a low bidder has obviously made a mistake – so that the owner awards to the second bidder, presumably at a substantially higher price – might actually save headaches, time and money in certain circumstances.
Bid Bombing
I was reading through my weekly list of construction law blogs when I noticed this post about “bid bombing.” The post draws attention to a recent article in Engineering News Record.
So-called bid bombs are bids that come in substantially lower than other competing bids. In these situations the other competing bids might be hovering more closely around a particular price range for the project. For example, out of four bidders on a public tender, three come in around $20M while the low tender steals the project for $14 or $15M. I’ve seen this happen, and for the second bidder this can be annoying and frustrating (although bidders are typically annoyed at losing a job anyway).
What the project price ’should’ be
The ENR article makes two central assertions:
The article throws around the word “correct” a lot (engineers love the word): “correct materials specified”, “correct labor (sic) productivity”, determining contract requirements “correctly”, etc. Now, given that all players are working with the same set of variable costs, in a highly competitive market project costs and thus bids will gravitate to a fairly narrow range if everyone is working with similar resources, the same suppliers, and similar knowledge. Specifically, the article finds that on large projects the likelihood of a competitive advantage resulting in a price advantage of more than a few percent is practically non-existent, leaving the only real variable in the final price to be the profit margin. That is, whichever bidder decides to take the tightest margin above the proper cost should get the project.
The “poor bidders” who throw the bid bombs are those who i) make significant mistakes in their estimates, or ii) purposely take a project below cost. The article identifies the latter as bad management.
Altogether, the author calls bid bombing a problem because “qualified bidders” lose business and the low bids “ruin markets”.
What should the project price be?
While I agree that wild-card low bids very often are the result of uninformed or inexperienced estimators, or of intentional under-bidding, I take issue with both of the article’s main points.
First, while bids often will hover around a certain price range, I think that it is possible for a bidder to occasionally gain some competitive advantage, or series of advantages, which allows them to score the job. I’d actually argue that some of the more successful “qualified bidders” became successful not by consistently squeezing their margins but by working to gain advantages and thus making their work more profitable. Further, it is possible that profit margins in some local markets might have become temporarily inflated, so an unexpected low bid might actually be closer to the so-called “correct” price.
Second, while making a serious mistake in a bid is never good, I don’t think I’d be so quick to condemn intentional underbidding. Which is not to say I think it is typically an effective strategy – if anything, I’ve seen it fail as a strategy when used in an attempt to starve smaller competition out of a market. But that doesn’t mean that underbidding is not a legitimate strategy. The bidder takes the risks with the possible rewards, if any.
In the long run, the strongest contracting companies will survive, while others stagnate or fail. If a bid bomber takes a project and fails to complete, then there are remedies for that situation that the owners can pursue – often those remedies involve calling in other builders anyway. If a bid bomber takes a job and completes it within spec, then the owners (which are often the taxpayers) are happy.
All said, I’m not convinced that it’s so easy for the bombers to ruin the construction market.
As a final note, bid bombing situations in Canada could potentially attract the operation of privilege clauses. In fact, the proper good faith exercise of privilege clauses in situations where a low bidder has obviously made a mistake – so that the owner awards to the second bidder, presumably at a substantially higher price – might actually save headaches, time and money in certain circumstances.