“An Effective and Ethical Approach to the GC Bid Process” by Chris Carson, PSP, CCM, PMP
Abstract
Stipulated sum open market bidding for design-bid-build is still a popular way to handle project delivery. In this highly competitive market, the primary qualification is financial, proven by the ability to post a bid bond, and once that hurdle is met, the contractor is selected by the apparent low bid.
In the author’s 25 years of experience in various roles in estimating, from materials surveyor to bid captain, he developed a process that could be implemented on all bids, and would allow for the best possible low bid while still working with a solid base of subcontractors. The process allows for quick resolution of subcontractor selections, achieving this goal at bid time, and allowing the project planning to start immediately after NTP without an extensive process of buy-out.
This process covers the entire bidding portion of the procurement from initial choice of projects to bid to scope of work evaluations, and at the same time eliminates the need to engage in the risky and potentially unethical bid shopping negotiations with subcontractors.
Background
The General Contractor (GC) bid market is a difficult and challenging venue, which requires careful judgment, technical expertise, and, unfortunately a bit of luck. In designing a process to make the bid process more efficient and profitable, a quick review of the general problems with open market bidding is useful. Open market bidding is the Design-Bid-Build with Stipulated Sum contracting world of commercial and industrial construction, and traditionally there are multiple issues. Since the Owner is choosing a Contractor based on the apparent low bid, even if there was some type of technical qualification process, the only way to win the award is with the low bid. The low bid market generally cannot disqualify contractors or subcontractors from bidding a project unless the Contractor is not financially capable of handling the work. But the Owner rarely stipulates that the Subcontractors must show financial capabilities, and it falls back on the General Contractor to make these determinations. This means that if a General Contractor is to be successful in this world, the GC cannot work only with his preferred team because he has to consider all bids in order to be competitive.
Needs
The short term needs for this bid process include a transparent process that is designed to promote getting the most legitimate bids in all trades, choosing the right bid for each trade, and ensuring that the bids include full scope of work, all without slipping into “bid shopping”. Bid shopping is the process where a General Contractor receives bids from subcontractors on bid day, but then continues to both accept more bids and discusses the low bids with multiple bidders in an effort to negotiate subcontractors against each other. This negotiation often includes starting with the apparent low bidder and releasing that bid to the other trade bidders so they have an opportunity to undercut the low bidder on bid day. This bid shopping is unethical, unfair, and promotes unhealthy company practices. The author resigned from a Contractor years ago when the other senior management at that firm refused to halt the process of bid shopping. On top of the unethical practice, eventually the subcontractor community recognizes which GCs are bid shoppers and many of the better subcontractors refuse to quote that GC. However, the open bid market is so competitive that a number of subcontractors will willingly engage in the shopping as long as they get an opportunity to “win” a job that way.
The long term goal is to have a robust enough bid process handled ethically that promotes a reasonable and qualified low bid. As one of the author’s first mentors explained, the contractor should provide a bid that represents the lowest price for which he would be willing to take on and perform the work, with the attitude that if the Owner asked for a reduction of one dollar in the bid price, the Contractor would walk away from the project rather than reduce the price. This is certainly a bit extreme, but the point is well taken; the bid should represent a judgment call that the costs in the bid represent accurate costs and the markups are reasonable and acceptable to the Contractor.