The perils of bid shopping

This practice may have serious consequences for contract formation
August 11, 2010

Even though the American Society of Professional Estimators has recommended against the practice of bid shopping, it is a fact of life in the construction industry.

While owners may sometimes take a contractor's or a designer's bid and try to get a better deal for the same project (especially when planning a design/build job), the issue of bid shopping more frequently appears in the context of a general contractor trying to obtain a lower price from a second subcontractor after the general contractor has been awarded the prime contract using the original subcontractor's price. This practice, commonly known as bid shopping, is not without serious consequences on the issue of contract formation. Recent court cases cast light on how the contracting community is reacting to the perils of bid shopping.

Enforceable rights

Courts generally allow contractors to hold subcontractors to their bids, even though a subcontractor has made an honest mistake in preparing its bid and no formal subcontract was ever created. The reason for allowing contractors to have enforceable rights against the subcontractors is that the general contractor relied on the subcontractor's bid when it used the subcontractor's price in submitting a bid to the owner. The rationale is that since the contractor relied on the subcontractor's bid to its detriment in exposing itself to the risks attendant to entering into a binding contract with the owner, it would be unfair if the subcontractor could back out in light of the contractor's obligations and potential liability to the owner.

This concept of "detrimental reliance" cannot, however, in the context of bidding, be used offensively by a subcontractor against a general contractor who has found another subcontractor to replace the original subcontractor in the absence of special circumstances. For example, suppose the subcontractor submits a low bid to the general contractor, and the general contractor uses that bid in submitting its bid to the owner. In the absence of additional facts, the subcontractor is usually not going to be able to require the general contractor to enter into a contract with the subcontractor if the general is awarded the prime contract. Courts make the distinction that subcontractors are not in the same legal position as the general contractor because they are not in legal jeopardy the way the general contractor is vis-à-vis the owner.

However, by mixing up the facts, a general contractor may lose its ability to force the remorseful subcontractor to perform, and the jilted subcontractor may acquire rights to enforce contractual obligations against the general contractor.

To begin, if the general contractor unsuccessfully attempts to shop its subcontractor's bid after it has been awarded the prime contract, then it will lose the right to enforce the first subcontractor's bid because there is no "detrimental reliance." When a general contractor puts a subcontractor's bid out to competitors to see if it can be beaten, the general contractor cannot be said to be relying upon the original subcontractor's bid to its detriment. If the general contractor is truly relying upon the subcontractor's initial bid, why would it look for a better deal from another subcontractor? If there is no detrimental reliance, there can be no enforceable contract in the absence of the existence of all of the other necessary elements needed for the formation of an enforceable contract.

Subcontractors more forceful

Subcontractors are becoming more aggressive in their attempts to force generals to award them subcontracts if they go through the effort and expense of preparing what is determined to be the lowest responsive and responsible bid, especially in those instances where subcontractors engage in post-bid "value engineering" in order to help the general get its price within the owner's budget. Recent cases in Florida, Illinois and Missouri illustrate this point.

In the case of W.R. Townsend Contracting Inc. vs. Jensen Civil Inc., 728 So. 2d 297 (1999), an intermediate appellate court in Florida ruled that a subcontractor could sue a general contractor for breach of contract where the general contractor failed to award the subcontract to the subcontractor. In this case, Jensen, the general contractor, solicited a bid from Townsend, the subcontractor. Townsend already had contracted exclusively to obtain and place the fill material with another general contractor. Jensen persuaded Townsend to enter into an oral contract with Jensen. The general contractor, after using Townsend's bid, obtained the prime contract but used a different subcontractor. The court ruled that Townsend had sufficiently alleged the making of an oral contract.

In addition, there have been two recent federal jury verdicts in Illinois and in Missouri in which the same plaintiff, Guarantee Electrical Construction Co. of St. Louis, recovered its lost profits on two projects where 1) Guarantee was the initial low electrical bidder; 2) Guarantee engaged in "value engineering" to help the general contractors get their bids within the owners' budgets; and 3) nearly identical promises were made to Guarantee by the general contractors that, "If we get the job, you'll get the job."

Lessons learned

Bidding is an art form with warts and risks. If bid shopping goes on, owners have an interest in sharing in the savings. If general contractors want to force a subcontractor who is looking for an "out" to enter into a contract, it had better not shop the subcontractor's bid and if the subcontractor wants to avoid being the victim of bid shopping, it had better obtain a promise from the general contractor that it will be awarded the subcontract if its bid is low and if the general contractor is awarded the prime contract. In addition, subcontractors are well advised to qualify their bids on the use of a particular subcontract form, in order to defeat the argument that there are missing terms to the oral agreement.

Richard A. Stockenberg (rastockenberg@gjn.-com) is a member of the St. Louis law firm of Gallop, Johnson & Neuman LC, where he limits his practice to construction law.

         
 

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