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ConstructionPro Week, Volume: Construction Advisor Today - Issue: 73 - 09/17/2010

Lack of Transparency Masks Favoritism in Bidding Process

A key ingredient of the competitive bidding process is transparency. Everyone has access to the required scope of work and the budget available to procure that work. Once sealed bids are opened, they become public information. When a bid is accepted for contract award, grounds for selection are stated on the record.


Transparency keeps the competitive bidding process honest. It also maintains public confidence in the integrity of the system. When procurement authorities refuse to operate in the open, it should be cause for concern.

 

In a recent California case, a public project owner provided a copy of the low bid to the second low bidder immediately after bid opening, enabling the second low bidder to get the low bid rejected. The low bidder asked to see the second low bidder’s submittal. The owner stalled. The low bidder was eventually provided with the documents, but only after its petition for injunctive relief had been denied. The low bidder then discovered that the second low bidder had the same problem of which it had complained regarding the low bidder. A court called this “favoritism most foul” on the part of the public project owner.

 

What is your experience regarding transparency in the public bidding process? Are decisions well documented and the documents available to all? Or, is information parsed out on a “need to know” basis? For those of you working for procurement authorities, what transparency mechanisms are in place to maintain both the appearance and substance of even competition?  As always, I welcome all comments.

 

In next week's issue of Construction Claims Advisor . . .

  • Owner Manipulated Bid Process with Alternative Combination Package
  • Differing Site Condition Did Not Cause Settlement of Piles
  • Arbitration Demand Not Extinguished by Statute of Repose

 

Bruce Jervis, Editor
Construction Claims Advisor

 

Comments

This happens all too often in today's bidding environment. To see a "last and Final" bid request turn into an absolute circus, when the owner or a GC starts shopping a number, is truly unethical behavior. Why doesn't our education system require a course in Ethics 101, as part of a Construction Management degree?

A public Elementary school was up for bid in Snohimish Washington. There were a number of extablished companies who bid. NONE of the bids were accepted. The GC went with thier "buddy" who was not even part of the orginal bid. This is how they operate. Low number because they don't need estimators. They just say they will beat any price given by a responcible subcontractor. This is for Division 9.

 

Did the owner get the best number? YES. Did the owner get a company who can preform? That is yet to be seen.

I contacted the GC and them them we are never bidding to them again. It is a shame that our customers are our enemies. It makes for some customer service challengs.

I have not participated in the public bidding sector in a while. However, I wanted to comment on the few posts already made.

 

There is a big difference from how the Public Owner needs to operate and how the General Contractor (GC) needs to operate. Once a public bid has been awarded to a GC, how that GC goes about establishing contracts with their subs and vendors is up to them. The public owners contract is with the GC, not the subs.

The public owner has a responsibility to be transparent regarding its contracts. This is because the term 'public' meaning it is using tax payer dollars to fund the project. The public owner needs to be up front with its bidding process, records and documents it recieves and why is selected the GC it did. The GC's contracts are their responsibility.

As far as the public owner is concerned, the GC is responsible for meeting all the obligations of the contract. Whether they sub the work or self perform should make little to no diffence, so long as the terms of the contract are met. If the terms of the contract are not met, including poor construction, that is an issue between the public owner and the GC. If damages are sought, the owner would seek them from the GC. The GC would then go after their sub.

Public contracts require transparancy because they are paid for with tax payer money. Private contracts are paid for with private funds and thus not subject to the same rules. The argument could be made that contracts between a GC and their subs are private contracts.

Behaving ethically can be an advantage. One subcontractor I know decided to do just that. He called in all his suppliers and told them that if they quoted him a job and they were low, if he got the job, they had the job for the price they quoted. NO SHOPPING. It took a month for it to sink in that he meant what he said. All of a sudden he was getting all the work he could handle because he had lower material prices going into the bid. Today he is one of the largest local contractors in his field

 

I think the "bidding" process has many flaws outside of the transparency issue.

 

It has been my practice to not disclose the cost estimate / budget. The cost estimate / budget (not a pot of money, but a true cost estimate / budget) should be used as an internal document. I need for contractors to tell me "how much the job will cost" not know "how much I have to spend".

Also, it has long been determined that "low bid" wins. Seasoned contractors have known for years, even on firm-fixed priced contracts, low ball on the front end and change order on the back. There have been several lawsuits because of this. The low ball bid should have been deemed "materially imbalanced" instead of marketed as "a great deal". Second and third ranked firms are viewed as "too high", when in fact they end up in the same bottom line arena.

A lot of construction is moving away from "bids" and into the request for proposals arena. Yeah, how much it costs is still important but your track record (good and bad), knowledge, experience, staffing, equipment, etc. are equally, if not more important.

What's important, that at the time of the bid opening, a firm had the "lowest bid" or at the end of the project, you realize you spent more money and the project is eight months behind schedule?

What EXACTLY do you want transparent?

A/Es face the same issues, except the decisions are more subjective. Public projects are by law required to be awarded to the most qualified A/E firm, but what defines most qualified?

 

We interviewed for a project and yesterday were informed that it was awarded to a less qualified competitor. We did not challenge their decision, but did request that the board justify their decision. So far, they have not repsonded.

The reality is that they hired the same firm they always hire. Everybody knows that the decision had nothing to do with qualifications and everything to do with questionable ethics and backroom politics.

I personally have encountered exclusionary non-transparent public bidding, as a specialty subcontractor, with this process never even being known to the Owner, so I believe transparency is very important to make sure bids are open and competitive to all GC's and subcontractors to offer the best pricing to the Owner. It is basic economics to know that less competition equals higher prices to no advantage to the taxpayers. 
As for what a GC does after the bids are let if bid form requires listing of major subcontractors, ie; Electrical, Plumbing, HVAC, etc. it can reduce some after bid shopping as it encourages transparency. 
The sad part is there will always be GC's who bid shop and I agree with previous poster, stop bidding that GC, in this cut throat construction market it will be just a matter of time before that GC finds your trade is not the only one who refuses to bid them and in order to continue they will need to review their ethics manual.

 

From a manufacturers perspective, it often appears that the low bid (price) seems to be ruling the roost.
The lowest bid should often be scrutinized very carefully. Many building systems, as in Division 7, for example, a multitude of components make up the 'complete system'. Low bids need to be looked at and have the pertinent questions asked: are all components be included by specification? While this subject may be more partcular to the sub contractor aspect, it does affect the GC's responsibility to the Owner. The adage - you get what you pay for - seems to be much more appropriate these days (unfortunately).

 

What customers ultimately want is value for their money. When a customer starts with the value as low cost only. That means they don't value any other aspect of the project or job performance. That's a bad customer. Unfortunately, there are a lot of them out there, especially in the construction industry, and we have to work with many of them. That said, the only way to make a difference is to add value. Bring the deliverables to a higher level than expectations and drive the customer to add value back to you by getting referrals and documenting success to influence better client relationships and more discriminating customers.

 

Public Works bidding has far less transparency within the Contracting side then with a Public Owner. 
In Practice the General Contracting firms are more open book with the Private client then with a lump sum Public Owner.

 

I have worked under the NY and the NC system of public bidding and the NC system has it all over the NY system. Being a subcontractor on a public bid in NY amounts to how well you know and work with the winning GC and has little to do with pricing, because after the bid, the GC will shop your price to his favorite and pocket the difference.

 

In NC, every public bid submitted by a GC requires that he also submit with the bid, the names of his major subcontractors in the areas of PLBG, HVAC and Electric, and may go even farther in some cases to masons, steel, etc. But the name of his subs is included in the GC's bid when turned in. It is not cast in concrete either. Appeal can be made to the owner to change a subcontractor that was listed if the GC proves that the sub made a math error in the bid and/or cannot complete the work at the previous price. It is up to the owner at that point, but the responsibility for obtaining accurate pricing for the GC bid is the GC.

I find this a very fair way to deal with subs on any bid. There may be some last minute shuffling around before the bid, but that's up to the GC and how he runs his business. But at least with the NC system, the GC does not have the opportunity to shop subs after the bid, which in NY happens on every public job that is not bid as Individual Prime.

Because the State of Wisconsin has a consolidated building program, the State of Wisconsin enjoys a high level of tranparency on its state building projects.

 

To explain, the Wisconsin Department of Admininistration/Division of State Facilities is the single point source and custodian of capital building information. This “one stop shopping” makes communication and information easily accessible and convenient for agencies and private providers. For example, centralized advertisement of bidding at DOA/DSF guarantees the most widespread dissemination of bid opportunities and information. And, as one of the few owners in the U.S offering this service, DOA/DSF’s innovative E-Plan makes bid documents available from one source 24/7.

Transparency of the bidding process is indeed a critical component to fairness of public works contracting, but don't forget about compliance with the bid requirements, too. The costs of complying with public works statutes during construction are not cheap. When a contractor in the bidding pool chooses to disregard these requirements because enforcement is so infrequent, that contractor holds a distinct and unfair advantage in the low-bid process regardless of transparency.

 

Too much transparency may lead to collusion between bidders. It may be good for project owners to treat budget, name of bidders, and ranking of bidders as internal information prior to award. However, the project owner should avoid bid shopping since it is very unethical. The rest of the information may be divulged after the contract award. 
The case raised by Derek illustrated the good thing that followed after NO SHOPPING policy was implemented.

 

Many years ago, our mechanical contracting firm submitted a sealed bid to a public school district in a large midwestern city. We were low bid. All bids were rejected and the project was rebid. We were low on the second bid as well. Again, all bids were rejected. The third time, two alternates were included by the owner to add options to the boiler package. The bid form had a line for the base bid identified as such. For each alternate, two lines identified as "Alternate 1" and "Alternate 2", with a blank line following. We were low again on the base bid and with the alternate add prices. However, the second low bidder was awarded the job. When I asked why, the explanation was that the contractor awarded the job did not specify that the alternates were ADDS to his price, so the school board arbitrarily SUBTRACTED the alternate prices from his base bid, making him low. The real reason, I believe, is the winning contractor was a minority-owned business and the school board members were 80% minority in a heavily minority populated city and school district. We are not minority owned. I have never worked for that school district again.

 

I have been used for bid shopping many times. 85% I have been the lowest bid but the different GC's always give the job to his buddies. The "good old boy network" I still receive calls from these generals asking for bids, which I now deem a waste of my time and refuse to do. The bidding process is long and cost time ie money. I am a minority owned company so if anything that should score me points. My work speaks for itself the Generals I do work for and have for over 10 years are very happy with work and quality. None the less after 5 years of being called at the last minute to please bid this job I have finally thrown in the towel on that who you know game.

 

A good point was made regarding "transparency" and the project budget. It may not be in the public project owner's best interest to disclose that budget. So long as no bidders are given that information, nondisclosure seems fine.
On a broader note, as construction procurement has moved in the direction of negotiated procurement and competing weighted technical scores, it seems harder to monitor the ethics of the public project owner evaluators; hence, less "transparency." Do you agree?

 

Jan. 16 2010--CHARLESTON, W.Va. -- The owner of a Charleston company that installed window treatments in Gov. Joe Manchin's office and those of his chief deputies admitted Friday in federal court that he performed work for the state in 2005 without previously submitting a bid or estimate.
Clark A. Diehl, 63, owner of Wallpapers in Stock Inc., pleaded guilty to one count of tax evasion and one count of mail fraud. He faces up to 25 years in prison when sentenced by U.S. District Judge John T. Copenhaver Jr. on May 19. Diehl said that the work had already been completed in 2005 when he submitted invoices to the state. Upon learning that the invoices violated state law that requires competitive bidding, he submitted phony bids from at least two other entities to make it look as though Wallpaper in Stock was the lowest bidder, he said."I provided the services and work to the state of West Virginia, and at the time I discovered I wasn't going to get paid, I falsified documents to get paid," he said. When the state finally did pay Diehl $29,732.07 for the project, it sent the money directly to the State Tax Department to be put toward Diehl's pre-existing tax debts, an arrangement that Diehl had approved, Assistant U.S. Attorney Hunter Smith said.
September 19, 2010: On July 31, 2006, an employee of the Louis Berger Group, a contractor handling some of the most important U.S. rebuilding projects in Afghanistan, handed federal investigators explosive evidence that the company was intentionally and systematically overbilling American taxpayers. Neither the whistleblower's computer disk full of incriminating documents nor a trail of allegations of waste, fraud and shoddy construction, however, prevented Louis Berger from continuing to reap hundreds of millions of dollars in federal contracts. In fact, two months after the government learned of the employee's allegations, the U.S. Agency for International Development tapped Louis Berger to oversee another $1.4 billion in reconstruction contracts in Afghanistan. The decision to brush aside the allegations and the evidence and keep doing business with Louis Berger, underscores a persistent dilemma for the Obama administration in Afghanistan and elsewhere. Cronyism, Corruption, and Diminished Economic Performance: First and foremost, above incidents of cronyism and corruption are hall marks of the A&E and Constructions industries. Transparency only exist is the minds of those few who speak of it. The professional selection and bidding processes in America are corrupt to the core, Period! Beyond the myriad anecdotal stories available around the world, the correlation and causation between cronyism, corruption, and reduced economic performance has been robustly analyzed and established by a number of economists who have rigorously examined the phenomena from a variety of perspectives: In 2009, Alexander Butler, Larry Fauver, and Sandra Mortal found “a strong impact of corruption and political connections on financial market outcomes” and concluded that “state corruption and political connections have strong effects on municipal bond sales and underwriting,” and that the greater the level of “pay-to-play” corruption in any given municipality, the greater the credit risk and the higher the bond yields and underwriting fees. Those higher bond yields translate directly into higher taxes. The bottom line is lowest bidder contract awards and the most qualified selections are simply myths. It has been and will always be about the bottom line and the bottom line is money, Period!! 

 

I work exclusively in the federal arena. Those contracts are supposed to conform to the Federal Acquistion Regulations (FAR). A contractor doing federal work must be as conversant with the FAR or more so than the highest paid lawyer in town, as they charge too much for just advice. The FAR is very easy to interperet. Each one of the Part 52 clauses has a companion dialog earlier in the book that explains the background and meaning in pretty clear language. Yes I have experienced Contracting Officers (KO) that violate the rules. As most of the federal work over $5M is design-build and an RFP with a technical evaluation, contractor ranking, and the best value clause; they are by FAR definition a negotiated contract. The Technical and price proposal are evaluated by two seperate boards that are not allowed to talk mto each other. There is no public bid. The proposers technical proposals and price proposals cannot be accessed under the "Federal Information Act" provisions. You can request a de-briefing if you are not the awardee. I have seen KOs drag their heels on the debriefing especially if the award was made on best value as they have a hard time explaining those decisions and not reveal government board reports and the KO decision making process. In today's market we see very few awards that are not obviously based on price and not best value. The final award price is reported on the Federal Business Opportunities a public access site so we know that in the end plus we do discuss these things with each other after award. Where most of the hanky panky is played is the under $100K arena. We have seen many requests for quotation (RFQ) that have information that is not adequate to price competively or not even pricable. Requests for additional information are ignored; there is therefore only one quote from the contractor that was consulted prior to issuing the RFQ and knows what the end user wants. These RFQs are handled by low end contracting employees that have no clue what the requestors want so talking to them is fruitless. There is not enough dollars involved to blow the wiatle on these and run the risk of getting the reputation of a rabble rouser.

 

Yes I have personal experience with that. By the way I worked for the government on the technical side of developing scope of work and working with the procurement people for 26 years.

I also refuse to work with contractors that bid shop or sub-comntractors/suppliers that hold their price till 1/2 hour before bid time.

This is a great article. Wow, so many of these things I never thought of before. I often read posts, even on this site, and I think they are great, but I don’t take the time to leave a comment. I’m going to start leaving more comments for sure.

 

 

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