Bid shopping is an unethical practice that is defined as “the methods that contractors use to secure subcontractor bids that are lower than those noted in the bid that was originally submitted.” Bid shopping typically occurs in one of three distinct ways: before the contract is awarded (pre-award bid shopping), after the contract is awarded (post-award bid shopping), and bidding via an electronic reverse auction. Regardless of which stage in the process bid shopping occurs, it involves a contractor disclosing one subcontractor’s price to another subcontractor as a method of obtaining a lower bid.
This enables the contractor to gain a significant advantage over clients, subcontractors and competition while increasing their own profits. A closely related occurrence is known as bid peddling. This occurs when subcontractors reach out to contractors with an offer to bid less than the bid of their competition. Within the industry, these practices are believed to be in wide use. Throughout its long history, attempts at stopping its prevalence have largely been unsuccessful.
Effects of Bid Shopping
While the argument for bid shopping often includes references to healthy free competition, its practice includes much more sinister undertones. These are further explained below.
Consequences of Pre-Award Bid Shopping
Pre-award bid shopping has been touted as something to stimulate competition, which ultimately proves advantageous to the client’s bottom line. In an attempt to circumvent their competition from underbidding them, subcontractors submit their bids to the general contractor with just minutes to spare. This provides the contractor with no time to find errors, omissions or other discrepancies. These can lead to an increase in costs, debates over the scope of the work in question and prevent the timely execution of work.
Consequences of Post-Award Bid Shopping
There’s no doubt that pre-award bid shopping is harmful to the final outcome of the project. However, the practice of post-award bid shopping is particularly harmful to the industry as a whole, at least in terms of the subcontractors. During this stage of the process, the only one who benefits from bid shopping is the contractor. The contractor reaches out to subcontractors to extract a lower price after already having been awarded the project based on a different subcontractor’s bid. The difference between the two figures is simply pocketed by the contractor. There is no benefit seen by the public or the client when this type of bid shopping occurs.
The contractor originally calls for bids from subcontractors who are able to meet the deadlines and provide for the scope of the project. This solicitation of bids in this manner does not bind the contractors together in any manner nor does listing these bids on the contractor’s own bid for the project. The construction industry’s solution to bid shopping revolves around this occurrence. All bids should include a list of subcontractors that the general contractor is then bound to. Stipulations are included that allow for a change in subcontractors based on acceptable circumstances that are typically beyond either contractors’ control. This includes times when the subcontractor does not have the personnel to complete the job, or when they are not legally able to work.
Once the project is awarded, the contractor uses this security — coupled with the knowledge of the accepted subcontractor’s bid — as part of the motivation to pressure the subcontractors to undercut each other’s bids further. This period of negotiation occurs between the awarding of the contract to the general contractor and prior to that contractor’s agreement with a subcontractor. As such, there is a significant pressure on the subcontractors to not only offer a rock-bottom bid but also to do so as quickly as possible. This can lead to additional mistakes and omissions that can have costly consequences.
The general contractor encourages the subcontractors to use any methods to slash prices, including questionable practices like value engineering, in which design modifications are suggested. Each time the general contractor receives bids from subcontractors, the lowest bid is then used as the benchmark that the competition must beat in order to be awarded the contract. Either the subcontractors must continue to whittle at away at the cost of quality, safety, profit margin or all three, or forfeit the contract altogether.
Summary of Bid Shopping’s Consequences
While bid shopping is not currently illegal, it is understood to be highly unethical. Its continued practice comes as a blow to an industry that has struggled to attain a certain level of professionalism. For decades, organizations such as the American Subcontractors Association (ASA), the Fails Management Institute (FMI) and the Associated General Contractors of America (AGC) have made significant strides in attaining this status for the entire industry.
Moves by organizations like the American Institute of Constructors (AIC), who implemented a strict ethical code for its members, cement this professional image in the eyes of other companies in the industry as well as their clients and the general public. This action has lead to other contractors — both general and specialty — to hammer out their own code of ethics that their employees are expected to adhere to. Often built in as a term of employment, this ethical code tends to be used as a barometer of performance and infractions often draw disciplinary action as a result.
Additionally, the MCAA has issued an official position on the issue.
“The masonry industry believes it is time for the federal government to use its considerable power to end these deceptive practices that cheat the taxpayer and supports legislation requiring general contractors bidding on federal projects to list up front the subcontractors and their bids they plan to use on a project and then justify any subsequent changes.”
The Federal Government’s Stand on Bid Shopping
In spite of numerous contractors and subcontractors being aware of the practice of bid shopping, the federal government has not taken a strong stand against it. According to the U.S. Government Accountability Office (GAO), their research was not able to determine if bid shopping is occurring during the bidding process for construction projects at the federal level. The GAO did acknowledge that the current process of selecting contractors could give rise to the perception of bid shopping. When the agency reviewed a selection of contract files and spoke with agency officials, no evidence of the practice was unearthed.
Numerous construction contractors that were contacted by the GAO spoke of the presence of the practice. However, no evidence of specific incidences of it could be produced. Instead, the GAO pointed out that the perception of bid shopping is exacerbated because many contractors receive numerous bids from subcontractors just minutes before their deadline to submit their proposal to the federal government. This practice does not facilitate the use of a pricing structure from a particular subcontractor. Instead, the subcontractors’ bids are used with the contractor negotiating a price with each subcontractor after the award of the contract.
It is interesting to note that this practice is included in the definition of bid shopping, yet the GAO finds no evidence of the practice. In support of the GAO’s position, the federal government has yet to take action to implement safeguards against the practice. An underlying frustration faced by the industry is without the backing of the federal government to uphold the ethics, there is little motivation for changes at the state and local levels. In the end, the clients are the ones who must shoulder the unwanted side effects of bid shopping.