Competitive Bidding
The following is an excerpt from a discussion between a client and me. In his desire to try to get the lowest possible bid, he suggested a strategy and wanted to know what I thought of it.
Client:
I think there is one more bid out there. I think I should call a couple of companies and tell them they can bid on it and the bid to beat is X$. What do you think of that strategy?
Me:
How many bids do you have?
Calling more companies and asking them to bid is no problem, especially if you feel you do not have enough bids, but I am not a fan of that Strategy at all. While it might get you the lowest bid, it will most likely not be the lowest project cost, which is an important distinction. Here is what typically goes wrong in that scenario. At best: The next contractor wants to be lower, so they will start including even cheaper materials and lower allowances. There is a point at which the bid no longer resembles the Scope or Work. If the Scope of Work still reflects what you want, then you should let the Scope drive the price, not the other way around. At Worst: The honest and competitive people will become disinterested and pull out all together.
If there is an imbalance between the Scope and the Bids, then now is the time to modify the Scope. The better way to proceed is to start evaluating the bids we have, and communicating with all the contractors. Acquiring the bids is only the end of the initial stage of the Bidding Process. Now we need to evaluate the bids to make sure they are realistic, inclusive, and appropriate. If you want to stay in control, we are going to have questions about the bids regarding, allowances, material quantities and selection, timing, etc. Answers to those questions can affect the bid.
Contractors will typically hold their bid 30 days, not more. That is because material costs change over time. While seemingly unpredictable, in actuality the cost of the raw material commodity globally, drives the cost of the finished material locally. The more material there is and the closer to the supply chain you are, the more this is true. Libya, an important oil-producing nation is currently in turmoil. It is unclear what is going to happen there, but it looks like Muammar Gaddafi is going to have to flee. While the U.S. does not use that oil for making Asphalt and uses very little of it at all, Europe uses a good percentage of Libyan oil. Following the laws of supply and demand, if Europe starts having to use a greater percentage of oil from American suppliers, the cost to America will go up. Everything then is likely to follow, as is the nature with the global market. We saw this 15 years ago, when China underwent their big construction boom of the 90’s. At the same time America was in a building boom and at one point, the cost of copper was increasing every 15 to 30 days.
If you want to invite additional bidders, I would start by calling all of the current bidders and letting them know that you have unfortunately had to extend the bidding period and ask them if they are able to hold their price another 30 days. No reason should be necessary. Then I would call all new contractors, invite them, but set the timeline upfront so that you do not lose the interest of the people who already got you their bids. When you receive all of the bids, complete the Competitive Bidding Process.
