College of Engineering Spring 2011

Department of Civil Engineering Contracts & Specifications

Chapter 5
Competitive Bidding

5-1 Concept of Competitive Bidding

5-1.1 Purpose
• The competitive bidding requirement serves two primary purposes: reducing
construction costs and promoting fairness
• The desire to minimize cost by maximizing competition causes some project owners
to reject all bids if not enough are received.
• The promotion of fairness is a strong purpose of the competitive bidding system.
Project contracts should be awarded on the basis of the contractor's ability and
willingness to offer the low price

5-1.2 Public versus Private Bidding

• When a private owner solicits bids, it is motivated only by financial savings. It wants
the work performed at the lowest possible cost. The appearance of fairness is not a
consideration.
• As a result, bidding on private contracts consists of competitive negotiation. The
owner usually selects two or three companies it is familiar with. Each company is
invited to price the work. Frequently the owner makes changes in the scope of work
in order to reduce prices. Sometimes one company is played off against another in
order to reduce prices.
• It is important to remember that the private bidding of contracts bears no
resemblance to the rigid, formal system of competitive bidding of public contracts.

5-1.3 The Bid Documents

5-1.3-1 Invitation to Bid
5-1.3-1.1 Purpose
• For the owner to solicit bids from contractors
• For the contractors (bidders) to decide whether they have:
a. The necessary qualifications
b. The desired work capacity
c. The required licenses
d. The time to prepare the bid
5-1.3-1.2 Methods
• Closed invitation (open to selected bidders only)
a. Personal contacts
College of Engineering Spring 2011
Department of Civil Engineering Contracts & Specifications

b. Pre-qualified bidders' list

c. Letter of invitation
• Open invitation (open for all responsible bidders)
a. Responsible = Financial, Experience, resources
b. For private projects, Pre- and post- qualifications are used to select
responsible bidders
c. For public projects, pre-qualification is used to select responsible bidders
d. Advertisement in national and international newspapers is usually used for
open invitation
5-1.3-1.3 Contents
• Project Identification: owner, A/E, Project Title, Address, Date
• Project Description: project type, size, major characteristics
• Bid Type: lump sum, unit price, segregated, alternates
• Construction Duration: project duration in calendar days
• Bid Opening: when, where, who, public or private
• Examination & procurement: where, deposits, refunds
• Pre-qualification: required or not, type of information needed
• Right to reject: all bids or any bid
• Laws & regulations: major laws/regulations applicable

5-1.3-2 Instructions to Bidders

• Requirements for responsive bid submission
• Conditions affecting the award of contract: criteria and procedure

5-1.3-2.1 Contents.
• Will the documents be issued to sub-contractors?
• Time limits and arrangements for examination of documents
• Interpretation of documents during bidding process: who, where, how, reply
time
• Are substitutions allowed? Procedure.
• Type of bid : Lump sum, proposed substitutions,
• Preparation of bid : number of copies, signatures required
• Bid security: bond/cashier certified check, payable to whom, time kept, return/
forfeiture conditions
• Are performance/payment bonds required? What is the time limit to furnish them
• Is the sub-contractors' list required? What's the submittal time of the list?
• Identification of submitted bids: how to identify the bidder, submittal
procedure, late bids
College of Engineering Spring 2011
Department of Civil Engineering Contracts & Specifications

• Are modification or withdrawal of the bids allowed? Time limits and procedure
for modification or withdrawal of bids.
• What are the causes for bidder disqualification?
• Is there special laws and regulations to abide to?
• Is the pre-bid conference required? Where? When? Who attends the conference?
• Is liquidated damages required? Amount?
• Bid evaluation: basis, right to reject any or all bids
• Execution of the contract: procedure, signatures

5-1.3-3 Bid Form

• It is the form that carries the final bid amount
• It is prepared in the form of " from: bidder to: owner"
• Blank spaces to be filled by bidders
• The bid form is included for uniformity, fairness, completeness

5-1.3-3.1 Contents.
• BID ID:
a. To: name and address
b. From: name and address
c. Title and number of the project
• Acknowledgment : all documents, addenda, examination of the site & documents
• Bidder obligations:
a. Execute the contract
b. Forfeit bid bond if defaults
• Basis of bid: lump sum, unit price, alternates

5-1.3-4 Bid Bond

5-1.3-4.1 Definitions.
• Surety bond: written document given by principal & surety to obligee
guaranteeing a specific obligation
• Principal: party under obligation(contractor)
• Surety: party guaranteeing principal's performance (bonding company)
• Obligee: party benefiting from bond (owner)
• Indemnity Agreement: Between principal and surety guaranteeing that
surety will not incur any loss by providing the bond

5-1.3-4.2 Purpose
College of Engineering Spring 2011
Department of Civil Engineering Contracts & Specifications

• Assurance to owners, subcontractors and suppliers of financial backing of the

contractor's obligations.
• Submitted with bid.
• Will be used if the lowest bidder refuses contract.
• Absence of bid bond in a bid is a reason for disqualification.

5-2 Bid Evaluation

5-2.1 Responsiveness
• In order to be eligible for contract award, a bid must be responsive.
• If a bid deviates or takes any exceptions to the terms of the bid, it is considered as
non-responsive.
• Failure to acknowledge all amendments made to the bid documents during the bid
process makes a bid non-responsive
• A bid must be responsive at the time of bid opening. Once the bids are opened,
no bid can be altered.
• For a bid to be responsive, it must be submitted on time.
• If a bid or a supplement to a bid arrives after the first bid has been opened, the
correct procedure is to refuse to physically accept or open that envelope.

5-2.2 Bidder Responsibility

• In addition to submitting a responsive, a bidder must be deemed responsible in
order to be eligible for contract award.
• Responsibility is determined by examining the company financial condition, its
managerial competence, its production capability (i.e., sufficient equipment and
labor), and its history of performance on similar projects.
• Bidder responsibility is determined at the time of bidding. The fact that a
company had severe problems in the past may not be relevant to present
responsibility.
• An owner can not rely on past history alone in making a finding of non-
responsibility. There must be shown that those problems likely exist today. A
history of defaults is certainly relevant to responsibility determination.
• Unlike bid responsiveness, bidders may provide additional information or correct
or clarify information after bid opening .
• Some owners may conduct a responsibility inquiry before distributing bid
packages (pre-qualification).
• The responsibility of prospective bidders is examined in order to arrive at a short-
list of qualified bidders.
College of Engineering Spring 2011
Department of Civil Engineering Contracts & Specifications

• It is expensive and time-consuming to pre-qualify bidders. This procedure is

primarily used for projects that are unique or extremely sophisticated because
bidder responsibility is of paramount concern and there are a limited number of
prospective bidder to begin with.

5-2.3 Unbalanced Bids

• An unbalanced bid is a bid where one portion of the work does not carry its
reasonable share of direct cost, overhead, and profit. This cost and profit are
carried in other work items under the contract.
• Unbalanced bidding occurs most commonly on unit price bids and also on fixed-
price contracts.
• Contractors submit unbalanced bids for one of two reasons. The first is to "front
load" the contract in order to get more money sooner and to reduce their risks and
their financing charges.
• The other reason for unbalancing a bid is to speculate on quantity overruns on a
unit price contract. If a contractor that the estimated quantity of item A is
understated and the estimated quantity is overstated, it may bid an unrealistically
low price for item A and unreasonably high price for item B. If the contractor is
awarded the contract and its prediction proves to be right, it will reap a large gain
by performing large volumes of item B at an inflated price.
• Unbalanced bids are not in the interest of the owner. No owner wants to pay large
amounts of money on quantity overrun.
• In an attempt to avoid this problem, owners commonly state in bid invitation that
unbalanced bids will be considered non-responsive.
• However, it is very difficult for public project owners to reject a bid as non-
responsive because it is unbalanced.

5-2.4 Computing the Bid Amount

• In order to determine the low bidder, it is necessary to compare the various bid
amounts. On fixed-price contract, the total bid amounts are compared. Other types
of contract such as unit-price contract requires more computation.
• Frequently, the bid invitation will list certain alternate package of work that the
owner wants the contractor to provide prices for. A bidder who is low on one
alternate may not be low based on other alternates.
• The owner has the discretion to base the contract award on any alternate or on a
combination of alternates it chooses.
College of Engineering Spring 2011
Department of Civil Engineering Contracts & Specifications

5-3 Bid Security

5-3.1 Bid bond
• Assurance to the owner that the contractor that was awarded the contract will
execute the contract.
• The bid bond, which is typically in the amount of 10% of the total bid amount, is
submitted with the bid.
• If a bidder receives a notice of award and refuses to execute the contract the bid
bond will be forfeited. The owner will retain, from the bond proceeds, the
difference between the low bid and the second low bid.
• The purpose of the bid bond is to compensate the owner for the additional costs
incurred because of the lower-bidder to honor its bid.
• Submitted with bid.
• Will be used if the lowest bidder refuses contract.
• Absence of bid bond in a bid is a reason for disqualification.
• The contractor is known as the "principal". The owner is known as the "oblige".
the bonding company, which guarantees the principal's performance, is known as
the "surety".
• The principal and the surety enter into a contract whereby the surety agrees to
provide bonding, or security, for the principal's contractual endeavors.
• The principal agrees to honor all its contractual commitments so that the surety
will not have to pay out on the bonds.
• The principal also agrees to reimburse the surety for any amounts paid out on
bonds. Typically, the principal must pledge all its assets to the surety in order to
get bonded.

5-3.2 Owner's Right to Reject Bids

• Public owners do not have the authority to reject any bid at their discretion. This
would be contrary to the concept of competitive bidding.
• Public owners do, however, have the right to reject all bids and decline to award a
contract.
• If there are problems with project financing or necessary regulation approvals, it
is preferable for the owner to ask the bidders to extend their bid acceptance
periods. This will give the owner more time to resolve the problem and avoid
rejecting all bids.
• A bidder faced with such a request may extend its acceptance period, holding its
bid price firm and keeping its bid bond on line to secure that bid.
College of Engineering Spring 2011
Department of Civil Engineering Contracts & Specifications

• Alternatively, the bidder may decline to extend its acceptance period and walk
away from its bid with no negative consequences

5-4 Mistakes in Bids

5-4.1 What is a "mistake"
• A "mistake" in the competitive bidding process context must be of factual or
arithmetic nature (e.g., failure to correctly total a column of sub-items).
• A "mistake" can not involve an error of judgment such as the failure to properly
estimate the cost of performing the work or misreading of a section of the
specifications.
• However, the failure to include the cost of a specified piece of equipment or
material is usually considered factual, not judgmental.

5-4.2 Bidder's Right to Withdraw Bid

A bidder is entitled to withdraw its mistaken bid if:
• the mistake is both factual and "material". A "mistake" is material when it
affects prices,
• there is no gross negligence on the part of the bidder,
• it would be impossible for the owner to enforce the bid,
• the bidder promptly notifies the owner of the mistake,
• the owner can be returned to its prior position.

5-4.3 Bidder's Right to Correct Bid

• A bidder may correct its mistake and receive the award only if the nature of the
mistake is mathematical.
• A bidder that made mistake involving the omission a piece of equipment will not
be allowed to correct its bid.

5-5 Sub-contractor problems

5-5.1 Holding Sub-contractors to Their Quotations
• The prime contractor obtains quotations from sub-contractors orally, over the
phone, fax, etc. All of these lack the ingredients of an enforceable contract (price,
payment, schedule, scope).
• Quotations are usually given at the last minute because: 1) time constraints, 2)
fear of "Bid Shopping".
• Sub-contracts are executed later after the contractor is awarded the contract. This
create a problem because the contractor priced its binding offer on the basis of the
sub-contractor's price.
College of Engineering Spring 2011
Department of Civil Engineering Contracts & Specifications

• The doctrine of "promissory estoppel" protects the prime contractor from a key
sub-contractor backing out. It says that if a party relies to its detriment on the
promise of another party, the other party must be held responsible to its promise
to avoid harm to the first party.

5-5.2 Mistakes by Sub-contractors

• A mistake by a sub-contractor will never a reason for a correction of the bid.
• Because of the doctrine of promissory estoppel, a sub-contractor will not get
relief from the prime contractor for its mistake once the prime contractor has
submitted a binding bid in reliance to the sub's quotation.
• However, contractors will not be allowed to exploit known mistakes by their sub-
contractors