Is Bid Shopping Increasing?
Kegler Brown Construction Newsletter February 1, 2010
Difficult economic times may test one’s business ethics. And so it appears with the practice of “bid shopping.” By all reports, bid shopping is increasingly prevalent in the current economic downturn as contractors scramble to try to wring minimal profit out of bids with little or no mark-up, and subcontractors desperate for work agree to almost anything.
In the construction industry, perhaps nothing is more widely condemned while being commonly practiced than bid shopping. So what exactly is bid shopping?
“Bid shopping” occurs when a contractor discloses a bid price of one subcontractor (or suppliers) to its competitors in an attempt to obtain a lower bid than the estimate on which the general contractor based its bid to the owner. A close cousin of bid shopping is the equally deplored “bid peddling.” ASA defines bid peddling as what happens “when a subcontractor, whose sub-bid was not selected for the contractor’s bid, offers to reduce its price in order to induce the contractor to substitute it after award of the contract.” The only real difference between bid shopping and bid peddling is the party who initiates the disclosure of the original low bid price. A general contractor will ‘shop’ a low bid and a subcontractor will ‘peddle’ its bid. But, regardless of the seemingly unanimous consensus against bid shopping and bid peddling, the practices remain common.
Supporters of bid shopping simply think of it as vigorous price competition or a necessary evil. But any benefits of a lower price that occur when a general contractor accepts a lower price after bidding closes are benefits that accrue solely to the general contractor. The price of that benefit to the general contractor is the laundry list of widely-recognized problems that accompany bid shopping and peddling, including the inevitable shortcuts and shoddy work it encourages.
As an Ohio Court noted:
‘[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 threatens. There is little satisfaction in such a contract. The temptation of the [ultimate subcontractor] to do inferior work and to cheat is strong.”
Sheet Metal Employers’ Ass’n v. Giordano, 188 N.E.2d 329, 330 (Ohio Com. Pl. 1963). Contractors should also realize that by “shopping” a subcontractor’s bid, the contractor is releasing the sub from a mistaken bid or inequitable subcontract language.
As owners control the bidding process from the start and fail to gain any benefits from bid shopping, owners should realize they have a common interest with subcontractors in minimizing the practice. Owners could insist that bidding general contractors provide a list of names of major subcontractors (those providing over a set dollar amount or percentage of the work on each job), and only permit substitution of subcontractors with good cause.
With price competition among subcontractors already fierce, hopefully all members of the construction team realize that inappropriate bid shopping and bid peddling creates great risks and problems, and does nothing positive for the industry.