My very first article for this magazine (“What Goes Around Comes Around,” ELECTRICAL CONTRACTOR, October 2012) was about how some of my ethics formed in relation to the electrical construction industry. It also contained a brief paragraph about bid shopping. I think it’s about time I delved deeper into this problem.
There are several definitions of bid shopping. As far as electrical estimators are concerned, it is a practice in which a general contractor discloses the bid price of one subcontractor to another in an attempt to obtain a lower bid price. Bid shopping can occur before and after the project owner awards the prime contract to the general contractor.
Ethical vs. legal
Is bid shopping ethical? I read dozens of references while preparing for this article, and as expected, they often contradicted each other. Here are some examples:
- Davis Sterling Law: “There are two types of bid shopping and both are considered unethical.”
- Webster’s New World Law Dictionary: “Bid shopping is defined as ‘The legitimate practice…’”
- Associated General Contractors of America: “Bid shopping or bid peddling are abhorrent business practices…”
I also found many discussions of bid shopping’s legality. I was surprised to find, in most cases, the type of bid shopping electrical estimators are exposed to is perfectly legal.
My primary problem with bid shopping is that electrical estimating is time-consuming and expensive. From small bids taking a few hours and costing under $1,000 to large bids taking hundreds of hours and costing tens of thousands of dollars, electrical estimating consumes resources a contractor cannot afford to waste.
As electrical estimators, most of us consider bid shopping to be an unfair way for owners and general contractors to get ECs to lower their prices. However, many estimators participate in this practice, as it is often perceived to be the only way to get a project.
Consequences of participating
There are also several dangers involved when you participate in bid shopping. First, is the person shopping numbers to the subcontractor telling the truth? Let’s say the GC was quoted $100,000 to do the work, then calls you to say they have a price of $90,000 and asks you to beat it. Do you accept the offer? Are you confident that your estimate accurately represents your costs, or do you rationalize that if someone else can offer that price, you can, too? This is dangerous territory. I have watched as several competitors had to close their doors after trying to beat shopped numbers.
Consider a story one of my customers told me. He said that a competitor was always a couple of percentage points below his number for one particular GC, and it happened every time he bid to them. My customer decided to quote a number below his cost. The GC got the job with the sub, to which he price-shopped. After the sub lost money on the project, he had the nerve to call my customer and ask him if he could really do the job for that price. My customer asked him how he knew what price he submitted. End of conversation.
There are other consequences to consider, including a loss of trust between the EC and the general contractor. By keeping and analyzing bidding records, it is fairly easy to find out who is shopping your bids. Once subcontractors discover who is shopping their numbers, they can either raise their numbers to that contractor, or stop bidding to them altogether.
Another consequence is that bid shopping encourages subcontractors to accept contracts for projects that are less than their actual cost. The owner will suffer additional costs from the subcontractor’s efforts to break even or make a profit. Quality issues, substitutions, schedule difficulties and inflated change orders are a few of the additional costs that can be passed on to an owner. Probably the biggest impact to the owner and general contractor occurs if the EC goes out of business before finishing the project.
In an effort to prevent GCs from shopping their bids, many subcontractors submit them just minutes before the deadline, hoping the contractor won’t have time to shop their bids to other subcontractors. The consequence here is that the contractor may be unable to deal with scope issues, errors, exclusions and qualifications. This can result in mistakes in the electrical or general contractor’s bid, which can lead to many problems during the execution of the contract.
I will continue my thoughts about bid shopping next month.
About The Author
CARR has been in the electrical construction business since 1971. He started Carr Consulting Services—which provides electrical estimating and educational services—in 1994. Contact him at 805.523.1575 or [email protected], and read his blog at electricalestimator.wordpress.com.