What Is Bid Shopping?
Feb 04, 2022
The public procurement process in the construction industry can be a chaotic affair. Contractors and subcontractors both work together on and compete for construction projects. In the fray of competitive bidding, there are many opportunities for unethical conduct to arise. Subcontractors in particular should be aware of the potential for bid shopping.
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What is bid shopping?
Bid shopping refers to the practice of squeezing subcontractors to submit a lower price after a general contractor’s bid has been accepted and the contract awarded. It’s an unethical practice that undermines the bidding system.
Here’s how bid shopping works, according to Dr. Kenneth Sands, a professor in Construction Management at Florida Gulf Coast University who holds a Ph.D. in Environmental Design and Planning: In a competitive bidding process, a contractor preparing a bid might work with Subcontractor A to generate an estimate for part of the work. That information is a valuable component of the GC’s overall bid price, and may play a role in winning the contract.
That figure was vetted for the requirements of the design and accounted for quality. There were no missing items, the scope alignment was done.
After the award of a contract, a GC may engage in bid shopping by taking the subcontractor bid from Subcontractor A and using it to secure a lower bid from Subcontractors B and C, asking them to make a better offer.
Why is bid shopping unethical?
Bid shopping is unethical for a few reasons:
- The information from Subcontractor A may be confidential. They were willing to disclose it to get the bid, but wouldn’t share it with their competitors. It benefits Subcontractors B and C to know what a competitor has already quoted the GC.
- Bid shopping pressures Subcontractors B and C to agree to a lower rate, and perhaps cut corners or lower wages to get there.
- The owner or contracting agency may have awarded the contract partly on the basis of the named subcontractor in the proposal. Using another, cheaper, subcontractor boosts the general contractor’s margins at the expense of everyone else involved.
“You’re trying to beat down the subs essentially to reduce their costs,” explains Dr. Sands. Even worse, a contractor may get “in a scenario where there will be a reduction in quality overall, because of the changes that a company may need to make in order for them to meet that number.” They may reduce the amount of manpower, the level of skill of the workers, or use substandard materials in the job.
At a minimum, bid shopping compromises the relationships between agencies, contractors, and subcontractors. It also distorts free-market pricing; either by inflating initial subcontracting estimates (because they will later be negotiated down) or deflating them with unsustainably low estimates. Ultimately, bid shopping reduces competition and the diversity of the bidding pool. Contractors and subcontractors won’t want to participate if their work on proposals, instead of getting them jobs, will be used to award worse offers to other people.
“Ethically, if a sub gave you the lowest price, and they have all of the scope of work included,” Dr. Sands says, “they should be selected and awarded the project.”
Bid shopping is also a violation of the ethical code of conduct of the Associated General Contractors of America, explains Dr. Charner Rodgers, who holds a Ph.D. in architecture and a masters of civil and environmental engineering.
Bid shopping vs. bid peddling
Another form of bid shopping is bid peddling, which is slightly different. Bid peddling is when a subcontractor who did not participate in a contractor’s invitation to bid on a proposal swoops in post-award and submits a proposal for the work. This is an advantageous move for the subcontractor, who avoids disclosing pricing or other information to multiple general contractors who are all bidding on the same project.
While this seems like a strategic move, bid peddling undercuts relationships between contractors and subcontractors. It also puts similar pressure on subcontractors as those from bid general bid shopping, namely undercutting competitive and fair subcontractor bid prices.
How to protect against bid shopping
There are a few ways to minimize bid shopping, though none of them are foolproof.
- Subcontractors can protect themselves by conditioning their bids to expire after a certain point. This would prevent contractors from trying to undercut them by risking losing the subcontractor’s bid if they did.
- Legal provisions can be set to make bids confidential, so they can’t be shared with other suppliers.
- Project awards can require contractors to state their intended subcontractors and be prohibited from changing them after the contract is awarded.
- A third party could manage the bidding process via a bid depository, though the current design-bid-build process often precludes this, and there are very few in use in the United States.
Subcontractors can bring lawsuits alleging bid shopping, says Dr. Rodgers, but they’re rarely successful.
Having a diverse and competitive bidding pool can help ensure that bad actors face local market consequences for bid shopping, helping to discourage the process.
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