Can Anything Be Done About Bid Shopping?
Don Gregory, Esq. / April 2015
“Bid shopping” occurs when a general contractor discloses the bid price of one subcontractor (or suppliers) to its competitors in an attempt to obtain a lower bid than the one on which the general contractor based its bid to the owner. Put another way, bid shopping occurs when a general contractor uses the lowest bid received to pressure other subcontractors to submit even lower bids.
The Associated General Contractors of America calls the practice of bid shopping “abhorrent” and proclaims that it is “resolutely opposed” to it. The American Subcontractors Association calls these practices not only “abhorrent” but also “unethical” and anticompetitive. Other contractor trade associations share such strident opposition (the AGC, ASA and ASC have issued Joint Guidelines decrying the practice), and the courts that have opined on bid shopping tend to agree with the prevailing sentiment.
Perhaps nothing is more widely condemned in the construction industry than bid shopping. But regardless of the stated consensus against bid shopping, the practice remains common.
Incentives Make It Tough
Bid shopping almost necessarily forces subcontractors into post-award negotiations. A subcontractor that is approached by a general contractor with a competitor’s lower bid naturally assumes that it won’t get the job unless it reduces its price. The subcontractor now knows that it stands to lose the subcontract and the recovery of its initial costs, so there is strong incentive for it to reduce its bid and cut corners, to avoid losing the subcontract.
As the Court of Common Pleas of Cuyahoga County, Ohio, noted in Sheet Metal Employers’ Ass’n v. Giordano, “[m]any hours are invested … in preparing a bid to the … contractor. The latter may then proceed to play one bidder against another, getting each in turn to shave its bid as much as it will. Estimated profit is drastically reduced and financial loss threatened.
There is little satisfaction in such a contract. The temptation of the [ultimate subcontractor] to do inferior work and to cheat is strong.”
Prices Are Affected
Another negative consequence of bid shopping is that the practice interferes with how the free market fairly sets prices. This may occur where a subcontractor artificially inflates its bid to compensate for expected bid shopping. Once again, the owner is harmed because its costs will have been artificially inflated. Any deflation of a subcontractor’s price inures solely to the benefit of the bid-shopping general contractor, not to the owner or taxpayer footing the bill for the project.
Another way bid shopping interferes with the free setting of competitive prices is to discourage otherwise interested subcontractors from spending the time and resources to prepare and submit competitive bids when bid shopping is expected. This reduces overall competition, with the potential effect of increasing construction prices. This benefits only the general contractor, to the detriment of both the subcontractor and the owner.
One court that took on the “bid shopping” issue is the Ohio 10th District Court of Appeals, which in 2009 found that a general contractor that “bid shops” releases subcontractors from a mistaken bid or inequitable subcontract language. In Complete General Construction Co. v. Kard Welding, Inc., the court found that the general contractor was obligated to timely accept the subcontractor’s offer because delaying, in hope of obtaining a better price, would similarly release the low bid subcontractor from its bid.
The legal reasoning given by the Ohio 10th District Court of Appeals in the Complete General case provides authority for courts in other states. Under traditional concepts of offer and acceptance, if a general contractor discloses a low subcontractor bid, requests a price reduction, insists on concessions that contradict terms in a conditioned bid or bid shops, it rejects the subcontractor’s bid and loses any right to compel the subcontractor to its bid.
What Can You Do?
Subcontractors who want to minimize the risk of “bid shopping” can condition their bids and state the bid is valid for “the earlier to occur of (a) 30 days from the date of the bid; or (b) one business day after opening of the general contractor’s bid and notification of the award of the general contract.” Another provision could clarify that the bid “is submitted and must be kept confidential except for disclosures required by law. Failure to keep that confidentiality, through disclosure of the attached bid or its material terms, will operate as general contractor’s rejection of the bid.”
Owners, like subcontractors, do not gain from bid shopping. Owners control the bidding process and therefore could insist that bidding general contractors provide with their bids a list of names of major subcontractors (those providing over a certain dollar amount or percentage of the work on each job), with language that precludes substitution of such subcontractors without good cause or prior approval from the owner.
Although bid shopping is unlikely to disappear, recent court rulings, and self-help by owners and subcontractors in their bid and contract language, can go a long way to discourage the practice.
Don Gregory, Esq. is director and chairman of the construction law practice at Kegler Brown Hill & Ritter in Columbus, Ohio, and AWCI’s general counsel. The 2015 edition of “U.S. News – Best Lawyers” names him one of the Best Lawyers® for construction law, a listing he has held for 10 years.