Monday, May 20, 2013

Bid Shopping and Bid Peddling

It is a commonly held belief among contracting professionals, both in and out of the Government, that contractor practices of "bid shopping" and "bid peddling" lead to poor quality contract performance.

Bid shopping occurs when a successful prime contract low bidder, after project award, uses the successful subcontract low bids as the beginning point for a post-award auction to the same or other subcontractors to agree to perform the subcontract work at an even lower price. Assuming the prime contract is fixed price, the savings accrue only for the benefit of the low-bid prime contractor, not the Agency, the project, or the taxpayer.

Bid peddling occurs when other subcontractors approach the successful prime contractor bidder after award of the prime contract and offer to perform the subcontract work at a lower price than submitted by the subcontractor whose sub-bid price was relied on by the successful prime contractor (and ultimately the Government). As in bid shopping, any savings from this practice accrue to the prime contractor.

These practices seem to occur most often in fixed price contract types; service, manufacturing, construction, and engineering but the one that is getting the most attention these days is construction projects. It is especially hard on subcontractors who have put their heart and soul into a bid and have it used by a prime contractor to justify its bid, only to have the prime contractor go out and shop or peddle the work.

At one time, sealed bidding where low cost was rewarded was the norm. Today, many of these solicitations use other factors upon which award is made (e.g. past performance). According to the Quality Construction Alliance, there has been a precipitous decline in use of low-bid selection in recent years and this decline can be attributed to one glaring defect in the low bid system - bid shopping and bid peddling. In low-bid selection, the agency awards the prime contract on the basis of the successful bidders' single low bid for the project as a whole. However, after the award, the prime contractor and subcontractors can engage in bid shopping or bid peddling. From there almost invariably, negative consequences for the project ensue, such as undisclosed change work orders, substituted materials, lower quality, delays, and claims. Contracting officers want to avoid this and for this reason, have moved away from sealed bids.

Recently, legislation was introduced in the House (H.R. 1942) that would prevent bid shopping and bid peddling on construction contracts over $1 million. This isn't the first time such legislation was introduced. It was introduced back in 2011 but died in committee. The proposed legislation would require bidders to list subcontractors in their bids and then would have to use them during performance. There's a little bit of wiggle room in the proposed legislation but not much. Contractors that violate the law will be subject to suspension and debarment proceedings.

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