Considerations in the General Contractor’s Decision to Bid or Not to Bid
Bidding Practices in the Construction Industry
Arthur O'Leary, FAIA, MRIAI
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Facing the Bidders
Architects and engineers who set up and administer bidding procedures or who advise clients on how to do it should be aware of the practical problems facing general contractor bidders. When actual bidding conditions do not take into account realistic concerns and attitudes of bidders, the available pool of prospective bidders will dry up.
Some do not realize how costly it is for a general contractor to prepare a responsible competitive bid for a construction contract. To submit a properly thought-out proposal will involve the time and efforts of a considerable portion of the typical contractor’s staff. Bidding activities must be interwoven among the normal high priority operations of keeping the previously contracted work serviced and operating in the field.
Contractors will not normally elect to risk and possibly waste their funds and time on a bidding competition unless the conditions appear advantageous. They will not ordinarily participate in all available bidding opportunities but will selectively decide which to enter on the basis of numerous practical and subjective considerations.
Probability of Getting the Job
This is probably the most significant overall factor, all other considerations being secondary. If any of the known conditions indicate that there is little likelihood of actually being awarded a contract even after committing considerable time, funds, and effort, the firm will extend polite excuses and let the competition squander their resources.
In evaluating a bidding opportunity and assessing its chances of obtaining a favorable contract, each contracting firm applies its own criteria. Generally, the factors of most interest to general contractors are those that have to do with fair bidding conditions, the owner’s ability to obtain necessary construction funds, and the owner’s apparent willingness to proceed with the work.
Availability of the Firm
A seriously managed contracting firm will not normally be interested in bidding for more work if they are already excessively committed to bidding other projects. They could spread their facilities too thin with the result that insufficient consideration would be given to each project being bid. Consequential errors in judgment and mathematics could easily creep in. Mistakes on the high side would merely lose the project and waste all the efforts already expended, while those on the low side could win an unwanted job at an excessively low price guaranteed to produce a loss.
Construction firms would be reluctant to take on new bidding assignments if the bid due date is coincidental with or too close to other bids they are already preparing.
During periods when the firm’s capacity is fully committed in field work under construction, attention must be given to finding new work to begin as old work is gradually being completed. At these times, bidding will be limited to those projects that can be started promptly as their workload starts tapering off. Work would not be bid if new construction must be commenced before the firm’s field capacity is available.
Size of the Project
The physical size and dollar volume of the work will have to fit in with the firm’s organizational structure, physical capacity, and financial limitations. Very large firms cannot make a profit on small jobs, as their usually ponderous and highly developed infrastructure will be inefficient, whereas smaller personal service contractors may find them profitable. Conversely, large contractors are very efficient on extensive projects that are beyond the capacity of smaller competitors. Contractors who are allowed to bid work out of their size class are generally wasting their time or risking the possibility of obtaining work that will prove to be unprofitable.
Contractors of all sizes must fit their projected workload into their bonding capacity. Each firm will know the largest size of single project their bonding company will allow as well as the total value of all bonded projects they may undertake at one time. Bonding capacity is based on the firm’s construction experience, character, personnel and equipment, office procedures, financial history, and financial resources. There is no point in taking on new bidding assignments if the firm’s bonding limitations would preclude their accepting the work.
Location of the Project
In general, work that is not convenient to the contractor’s main office will not be attended to as easily as closer assignments. Each firm has its own criteria as to its preferred range of operations. Some large firms can operate efficiently anywhere in their state or even the entire country if it is their size and type of work. Other equally large firms and most small firms may specialize in certain geographical areas. Contractors will usually restrict their bidding activities to those projects that are reasonably within their normal operating area. However, in difficult times contractors may have to expand their working range to obtain enough work.
Type of Project
The nature of the proposed project must fit into the contractor’s experience and capabilities. Contractors who are highly experienced in hospitals and colleges are unlikely to attempt bidding competition with others who specialize in regional shopping centers, utilitarian warehouses, or tract housing. They will tend to limit their bidding activities to the building types most familiar to their personnel and customary subcontractors.
A serious limiting factor for contractors is availability of competent supervisory personnel. In particular, it is of extreme importance that the field superintendent to be assigned to the job be capable of managing the work in the field. The superintendent must also be intimately acquainted with the firm’s administrative procedures. It would be extremely tedious to break in a new superintendent on an important new assignment. Consequently, contractors are reluctant to bid new work when a dependable, experienced superintendent is not readily available for the assignment. The risk is that upon being awarded the contract, the firm would not be able to proceed promptly with field work in the most responsible and economical way.
The Competitive Environment
Contractors are usually very interested in the number of bidders involved in a competitive situation. Many would simply decline to bid if they deem the number of competitors to be excessive. Some owner’s feel that the best way to get a low price is to have a lot of bidders. However, when there are too many bidders, there is less incentive for the bidders to work up their best price.
Prospective bidders would also usually be quite sensitive to the identity of the other bidders on the bid list. They would not willingly compete with certain other firms that appear to them to have any undue competitive advantage, such as a smaller overhead. There is also the perception, real or imagined, that some competing firms figure their jobs too close, do not allow for a proper profit and overhead mark-up, or do not provide appropriate contingency allowances. Some firms have the reputation among other contractors of bid shopping their subcontracts or other improprieties and sharp practices that would impair fair bidding competition. Inclusion of such contracting firms on a bid list can sometimes motivate reliable firms to decline the bidding invitation.
Reputation of the Architect
Contractors, when evaluating the advisability of bidding a project will often consider the perceived characteristics of the architectural firm and their consulting engineers. Some architects and engineers have built a fine reputation for excellent quality of contract documents and reasonable, fair contract administration procedures. At the other extreme are design firms well known among contractors for ambiguous, incomplete, and impractical documentation.
A few architects and engineers are known for their one-sided, arbitrary, unreasonable, unfair, or heavy-handed contract administration. The contractor has to decide whether or not to bid work emanating from these offices. If a contingency reserve is added into the bid to cover harsh architectural decisions, it might cause the bid to be overpriced and all of the bidding costs will be lost. Some contractors would just not submit a bid.
Practical contractors reason that it is fruitless to expend valuable resources to bid a job that is not likely to proceed by reason of the owner’s inability to obtain the necessary funds. It is important in the contractor’s decision to bid that there is a sincere belief that the owner is financially capable and that the owner actually intends to promptly award a contract and proceed with the work.
A Fair Bidding Procedure
Considering the high cost of submitting a bid, most contractors want to be taken seriously and treated with consideration. They would not knowingly participate in a bidding process that was unfairly administered. A fair process involves standard conditions for all bidders.
The normal expectations would be that all bidders are treated the same and will be provided the same information. The complete list of bidders should be made known to all bidders. The bidding documents should be made available to all bidders at substantially the same time and all bids should be due at the same time. All addenda and answers to all questions should be released to all bidders at the same time. The bidding period should be of sufficient duration to enable bidders to properly evaluate the job, depending on its type and size.
After bids have been submitted and opened, a summary of all proposals should be provided to each bidder. This is small recompense to the unsuccessful bidders. After return of bidding documents, complete and in good condition, the bidders’ deposits should be immediately refunded.
The Low Bidder
The implicit understanding is that the lowest responsible bidder will be awarded the contract at the price submitted. Without this tacit understanding, contractors would be reluctant to participate in the bidding process at all. Why should they? They only bid to obtain the work, not for bidding practice, or for any other practical reason. If contractors do not sincerely believe that the low bid will be seriously considered, they will not bid the job.
If a contract cannot be awarded at the bid price, then any further price negotiations should be restricted to the low bidder.
The Most Important Factors
Of all of the factors covered in the above headings, the final three (available construction funding, a fair bidding procedure, and award to the low bidder) would be most crucial and virtually nonnegotiable with most experienced contractors. The other matters discussed could be subject to some measure of flexibility in specific circumstances.
Recommended Bidding Procedures
A realistic and fair bidding procedure is described in “Recommended Guide for Competitive Bidding Procedures and Contract Awards for Building Construction,” AIA Document A501- 1995 (AGC Document 325). This document was developed over many years of use and in consultation with architects, engineers, legal counsel, insurance advisors, contractors, and construction owners. It has been developed for use in competitively bid projects and is based on the principle that the contract will be awarded to the lowest qualified bidder.
Instructions to Bidders
In furtherance of maintaining fair conditions during the bidding period, “Instructions to Bidders,” AIA Document A701-1997 is often specified to advise the bidders on how to prepare and deliver the bid.
This article is adapted from one that originally appeared in the December 1993 issue of California Construction Law Reporter. Additional information is available in “A Guide to Successful Construction - Effective Contract Administration,” Chapter 6, Selecting the Contractor, by Arthur F. O’Leary, FAIA, MRIAI, published by BNi Publications.
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