The practice of unbalanced bidding continues to be a problem on federal and state-funded projects. This bidding strategy results in the client (ultimately, the taxpaying citizens like you and me) overpaying the contractor for the completed work. An unbalanced bid can also severely disrupt the payment process for other project contractors/vendors, and ultimately result in payment disputes.
The funding for public construction projects can come from various sources, such as block grants, state or local bond measures, tax revenues, and even emergency disaster funds.
If the project utilizes multiple payment sources, the potential damage from an unbalanced bid increases dramatically for the project owner.
The Unbalanced Bid
An unbalanced bid occurs when a contractor moves his costs for one part of the work into his pricing for a different part of the work.
On a three-phase project, adding expenses for phase III of the project into the bid or schedule of values for phase I of the project is a textbook example of an unbalanced bid.
This type of bid results in either:
- A mathematically unbalanced bid, or
- A materially unbalanced bid
According to a memo from the US Department of Transportation:
“A mathematically unbalanced bid is one containing lump sum or unit bid items which do not reflect reasonable actual costs plus a reasonable proportionate share of the bidder’s anticipated profit, overhead costs, and other indirect costs, which he/she anticipates for the performance of the items in question.”
While a mathematically unbalanced bid isn’t necessarily prohibited, it is the first warning sign of a materially unbalanced bid.
A materially unbalanced bid exists “if there is a reasonable doubt that award to the bidder submitting the mathematically unbalanced bid will result in the lowest ultimate cost to the Government. Consequently, a materially unbalanced bid may not be accepted.”
The dangers of unbalanced bidding
If discovered at the time of the project bidding, an unbalanced bid can be deemed non-responsive. The unbalanced bidder could be banned or restricted from bidding on future projects.
If it goes undiscovered at bid time, the entire project payment process will be affected, leading to potential payment disputes.
The unbalanced bid could have the owner overpaying one contractor, and not having the funds to pay another.
Unbalanced bidding is a perilous business strategy to employ. If the contractor moves his work costs from phase III to phase I, and then the stage I work is cut-back or eliminated, he could suffer a substantial financial loss on the project.
The contractor may put himself out of business based on the size of his company and financial stability.
Why contractors use unbalanced bids
Years ago, contractors started front-loading the schedule of values or their bids. This was an attempt to minimize the amount of retainage that the owners, lenders, and GCs could withhold from their construction payments.
I have heard horror stories of retention amounts in the 25-33% range held from construction payments, back in the day.
The good news is that many states now have retention limits in place for construction projects. So, the original purpose of front loading a bid is now virtually non-existent.
Despite that fact, contractors continue to practice unbalanced bidding for several reasons.
To receive larger payments early in the project
In this scenario, the unbalanced bid gets used to correct/supplant a contractor’s cash flow problem.
But we all know that robbing Peter to pay Paul is a slippery slope at best. Whatever is causing the cash flow issue needs to be corrected.
Contractors have a lot of tools to get paid on time and improve their cash flow. They don’t need to resort to deceptive bidding practices.
Sending preliminary notices and otherwise protecting your mechanics lien rights will go a long way to ensuring payment.
Other strategies, like improving job-site production or adjusting company overhead are much better ways to resolve most cash flow issues for the contractor.
To conceal exact pricing from competitors
Many contractors will go to great lengths to keep their labor and material costs secret. Perhaps this comes from a need to protect their work territory or stay a leg-up on the competition.
What they don’t realize is that most contractor bids can be reverse-engineered, exposing their actual costs to anyone who wants to spend the time and figure it out.
Take advantage of inaccurate quantity estimates from the owner for a windfall
Erroneous calculations occur when the contractor understands the project better than the owner.
When the project RFP states that it will take 1000 widgets for the project, but the contractor sees that only 100 are genuinely needed, some will try to take advantage of the owner’s error.
Unbalanced? Expect project delays & payment disputes
Many public works projects get funded in phases or use multiple funding sources to cover the construction project costs. And this is where an unbalanced or front-loaded bid can cause the most significant problems for everyone else connected to the project.
Overpayments made to one contractor can result in underpayments or non-payments to other contractors or suppliers.
While a public works project isn’t at risk for a mechanics lien claim, unpaid contractors and suppliers still have the right to make a bond claim, or file a stop notice in some cases.
Payment disputes can cause jobsite production to slow or shut down until the issue gets resolved. This can push the completion schedule back, pushing up labor or material costs, and forcing parties to delay other projects as well.
Balance your bids to avoid consequences
Unbalanced bidding practices don’t provide any real advantage for the contractor anymore. This practice can have severe ethical and financial consequences for the contractor who follows this practice.
If you’re concerned about your cash flow on a public works project, use the other tools in your arsenal to get paid. Don’t resort to fudging your numbers in the hopes that you’ll skate by.