On November 3, 2007
By Scott Wolfe Jr
Today, general contractors face less and less time within which to form and submit their proposals. Today’s negotiations are often by cell phone; CAD drawings are sent as online attachments; deadlines and details are sent by e-mail. Preparing a proposal for an owner was always complicated; these days, it can be chaotic.
Subcontractors, accordingly, must act with even greater speed to get their bids to the contractor. It’s commonplace for subcontractor and supplier bids to reach the general contractor’s offices minutes under the wire: the general contractor furiously chooses between bids, and finalizes a proposal just in the nick of time.
And in the midst of all this scrambling, risk is being analyzed, assessed, and undertaken. The construction business is all about risk: profit is made in correctly assessing the risks of unknown future complications against estimated time and money expenditures. Figure your risk right, and you make money. Calculate risk wrong, and you can go bankrupt.
When is the bid a contract?
Submitting a bid does not create a legally-binding contract. It merely creates an “offer” under the law — which must be “accepted” by the contractor and accompanied by his promise of payment (“consideration”) before any contract is formed.
Before the offer’s acceptance, the bid can be freely withdrawn by the subcontractor — even if the general contractor relied upon the numbers in that offer to form his proposal, or overall bid. Of course, until the bid has been accepted and accompanied by a promise of payment, the contractor is free to choose a competitor — he’s not contractually bound by the bid, either.
What if there are errors in the bid?
Subcontractors sometimes submit bids that are wrong. Perhaps there are time errors, and the bid conflicts with previous commitments. The numbers may be inaccurate: anything from math errors to sudden changes in supply costs can impact the precision of a bid.
If these errors are substantial enough, the subcontractor may have no choice but to advise the general contractor that the bid is withdrawn. If this occurs prior to acceptance, then no contract has been formed. Even if the general contractor relied on the bid, the subcontractor is contractually in the clear.
However, if there has been acceptance and a contract has been formed, then the subcontractor will technically be breaching a legal agreement. Here, legal negotiations should occur to extricate the subcontractor as quickly and as smoothly as possible from the unworkable situation.
What about Bid Shopping?
After the project has been landed, the winning general contractor will begin to corral his crew. It is at this point that the subcontractor faces the possibility of a general contractor asking that his price be lowered, or face losing the job to a competing subcontractor who offers to do the work for a lower price.
Why do this? Maybe the general contractor lowballed his offer just to get the job, and is trying to create a profit after he’s got the deal. Maybe he just wants to get as much money as he can. Maybe a better offer hit his desk minutes after the deadline, and it’s a better choice for the project. Maybe the alternative sub is his brother-in-law. There can be many reasons for this to happen.
This is known as “bid shopping.” It is frowned upon within the industry as being unethical, and it has been held to be illegal under both state and federal law. It also occurs all the time, nationwide, and has been a standard practice in the industry for many years.
In bid shopping, the subcontractor is forced to lower his price or lose the job. There can be a third option: to seek legal redress.
Federal Law
As early as 1938, Congress was trying to deal with bid shopping in federal projects. A congressional law was passed to require subcontractors to be identified in “bid lists” by general contractors; however, President Franklin Roosevelt vetoed the legislation because of the untenable amount of agency supervision needed to make sure the law was followed.
Today, Congress is still trying to curtail bid shopping in public contracts. The Construction Quality Assurance Act of 2007 is a bill currently pending before Congress. On October 25, 2007, it was referred to the House Subcommittee Government Management, Organization & Procurement for further review. However, as of October 30th, WashingtonWatch reported that 67% were against the law’s enactment, and only 33% were for it. Prior versions of this legislation dating back seven years have failed to make it into law.
State Law
Many states have passed laws forbidding bid shopping in public contracts. Washington State, for example, has passed legislation (Wash.Stat. 39.30.060) which includes the following language:
Washington
Substitution of a listed subcontractor in furtherance of bid shopping or bid peddling before or after the award of the prime contract is prohibited and the originally listed subcontractor is entitled to recover monetary damages from the prime contract bidder who executed a contract with the public entity and the substituted subcontractor but not from the public entity inviting the bid. It is the original subcontractor’s burden to prove by a preponderance of the evidence that bid shopping or bid peddling occurred.
Louisiana
Louisiana has passed legislation to curtail bid shopping, as well. However, Louisiana law codifies what many other states have made available to subcontractors through their common law. This is the application of the equitable doctrine of “promissory estoppel” to the situation to prevent the general contractor from being unduly enriched at the subcontractor’s expense by the bid shopping practice.
The Louisiana statute (La.Civ.Code art.1967) provides:
A party may be obligated by a promise when he knew or should have known that the promise would induce the other party to rely on it to his detriment and the other party was reasonable in so relying. Recovery may be limited to the expenses incurred or the damages suffered as a result of the promisee’s reliance on the promise. Reliance on a gratuitous promise made without required formalities is not reasonable.
Other States
In other states, while there may not be actual statutes forbidding bid shopping in private and public contracts, their courts have fashioned a remedy through the promissory estoppel doctrine as well as basic contract law.
Industry Realities
Legal avenues do exist for subcontractors to fight against bid shopping. However, the realities of the marketplace discourage their use. Construction involves a close-knit community: subcontractors build a reputation in the area that must be maintained, and challenging a general contractor does not make for good future relations with other contractors, general or sub. No one wants to work with a troublemaker.
Furthermore, in many communities, there are relatively few general contractors. Many general, or prime, contractors specialize in a certain type of project (hospitals, schools, etc.) and are national enterprises. Subcontractors working in these specialty areas cannot afford to offend these powerhouses with threats of litigation.
Still, hiring a lawyer to assess the situation and analyze the legal possibilities can be well worth the subcontractor’s time, especially if the bid shopping threatens the loss of a major project. A law firm specializing in construction matters may be able to find a creative compromise that provides the subcontractor relief in the short term without risking his long term success.
For more information:
Washington Watch
http://www.washingtonwatch.com/bills/show/110_HR_3854.html
The Construction Quality Assurance Act of 2007 (read the entirety of the proposed legislation here):
http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.3854
Percy J. Matherne Contractor, Inc. v. Grinnell Fire Protection Systems, 915 F.Supp. 818, 824-25 (M.D. La. 1995) (applying La.Civ.Code art. 1967 to subcontractor bidding situation).
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