A recent article by my pal, and occasional guest poster, Craig Martin (@craigmartin_jd) asks the question: “Does a General Contractor Have to Tell a Subcontractor that its Bid is Too Low?” In his great post on a recent Nebraska decision concludes that the answer is no, so long as the subcontractor had all of the facts necessary to properly bid a job. As a construction attorney that represents all levels of the construction “food chain” and that works in the Commonwealth of Virginia where the contract is king, I see the logic and legal reasoning behind such a decision. Frankly, from a legal perspective, and absent some sort of “hiding the ball” it should be up to a subcontractor (or general contractor for that matter) to properly investigate and bid the job.
That’s the legal part of this. However, there is a second question: “Should a general contractor tell a subcontractor that its bid is too low?” This and its corollary: “Should a general contractor accept a bid it knows to be too low?” are practical questions that when answered incorrectly can cause serious headaches on a job site for everyone involved.
Even the clearest of contracts and the plainest of specifications and plans (all necessary items for a smooth project) do not always result in accurate bidding. Humans are involved in this process and therefore Murphy’s Law will often apply. Subcontractors will at times either miss something that is part of the specified scope of work or try to squeeze a margin or two to get a job. This can result in everything from a properly low bid to one that is so low that the general contractor or owner will know the job cannot be done for the amount bid.
It is this second category of bid that I am discussing here and that will likely cause problems, cost overruns and possibly litigation down the road as the construction project progresses. Even where a subcontractor signs a contract for the amount bid, it will inevitably be forced to either seek more money through change orders or possibly walk from the job to avoid further losses if the underbid is too great. Either of these results cause at best additional headaches and paperwork and at worst the need to supplement or replace the subcontractor’s work at a premium followed by back charges to the sub and calls to a lawyer to try and recoup the losses.
This is where the answer to the practical questions posed above come in. If you, as an owner or a general contractor, know that the GC or subcontractor has grossly underbid the job and that it has clearly missed something, you need to decide if the risk of accepting this low bid and suffering the possible consequences outweighs a phone call or e-mail to either decline the bid or simply point out the possible missed items.
A conversation with the subcontractor will also let you know (particularly where it’s a subcontractor that you haven’t worked with before) if that sub is one that you want on your project. In other words, is the underbid due to a lack of professionalism or a one time mistake? If the former, take the chance to avoid the problem. Absent a state rule requiring a GC to accept the lowest subcontractor bids, you can decline to work with that subcontractor. If the latter, you may be able to head off issues like those listed above through cooperation.
In short (yes, I know it’s too late), while a contract for a fixed sum is legally enforceable and it may look like a windfall when a subcontractor grossly underbids a job, from a practical perspective, dealing with the issue of such a bid on the front end can save time, headaches and attorney fees that will eat into your bottom line.
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Communication is one of the most vital tools used in the construction industry. Good communication skills can help you be successful and poor communication skills will contribute to failures and problems.
With that in mind, yes, the General should inform the Sub that his/her bid appears to contain an error and ask the Sub to review the project’s SOW and his pricing factors. However, the General has only two options: Accept the bid and require the Sub to perform the project for the price quoted or reject the bid, due to an obvious error. If the Sub states his price is good and it is the lowest bid, the Sub will be required to perform the work for the price quoted; without any additional reimbursements for unforeseen elements. Most bidders would withdraw their bid if an obvious error is discovered.
Absolutely…in a completive bid situation you don’t need an unqualified bid that you may have to use because all the other GC’s are using that bid too…..every body looses
As someone who has bid a substantial amount of “public work”, the unfortunate reality of the low bid format is that subcontractor quotes are rolling off the fax machine (yes fax machine) ten minutes before the GC bid is due to the awarding authority. This pricing is usually distributed to all bidders and you, as the GC, have to make a split second decision about carrying that low number. Should you be lucky (or unlucky) enough to win the job, only then do you have the opportunity to properly evaluate those sub quotes. At that point, it is very difficult to pass on those low numbers.
Ultimately, the entire system is flawed. In an attempt to ensure “fairness” public agencies have actually created a system that is heavily biased to low price providers, which often times has a detrimental impact to project delivery.
Thank you all for your perspectives. Of course practical realities kick in to make the issue more cloudy than it may seem at first blush. I do agree that the system needs some tweaking though.
“You get what you pay for” someone once said.
A new client of mine once told me. A responsible GC does not want the problems that are introduced by a sub that obviously is not experienced in the scope of work, lacks the needed experience to bid the project, or is more than likely already having money problems. And as soon as they (sub) realize they are loosing money on yet another project the issues start compounding. Requesting change orders for every little thing, excessive COR amounts, reducing man power or not showing up at all so they can work on the next project they think will save thee business. Inability to man the project or purchase needed materials, hitting the GC up for advances, etc.
No one wins where integrity does not exist.
“You get what you pay for”; Wise words still today. Its a crying shame what has become of what was once a very respected industry.
BTW, the new client I mentioned earlier, well that was 13 years and many successful projects ago.
Is there a legal obligation by the owner to disclose bid errors before they accept a low bid? What is the precedent for an Owner who has contracted with a subcontractor when they know there are omissions in their bid?
There are two parts to the subcontractor issue in states with a Subcontractor Listng Law such as California. First, is the financial issue of not having enough money in your bid too do the work, but the Second and just as difficult to deal with is being stuck with the subcontractor that produced the low bid if you listed him.
For a certain group of subcontractors, the whole effort becomes a dance of getting listed by any means. People forget that while a GC estimator may bid two or three per months, the subcontractor’s estimator is bidding one or two jobs per day. W=ho do you think has the experience advantage? Subcontractors of this ilk often use the ploy of throwing out a ridiculously low bid as bait to start a conversation with the GC’S estimator about where the other bids are. Often they will offer to raise their price to the other bidders in exchange for this information. The will use words like help and protection to encourage the GC estimator to cooperate in their ploy. If the GC estimator cooperates, not will the evil sub bid all of his competitors at a price just below the legitimate low bid subcontractor, but he will ultimately raise his price to the cooperating GC citing a clerical error or vendor price change.Possibly too late for the GC to incorporate it into his bid.
As a result of this situation, we have a company policy. If a subcontractor is more than 10% low we will tell them only that We will not tell them whether they are 11% low or 30% low and we will only offer them the option of pulling their bid. No adjustment. We believe this approach protects subcontractors who have made an innocent error while minimizing benefit to unscrupulous operators and reducing our competitive disadvantage.
The best way to fair bidding. For example, a GC or CM takes a number of bids for each trade. Say you have 6 bids for framing or any other trade. Add the sum of all bids per that trade. Divide that number by the number of bids (6), which will give an average price. Award the contract to the company closest to the average price, which will do away with the low bid that probably missed something or made calculation mistakes and the high bid that is usually high because they didn’t really want the job. This will create more stability with the owner, the GC or CM as well as the subs and does away with unscrupulous operators.