How to Know When Bidding Practices Cross the Line

Originally published as an Op-Ed by the Oregon Daily Journal of Commerce on February 18, 2022.

As economic stimulus and infrastructure spending increase, an unfortunate side effect is an environment that encourages unethical and illegal bidding practices.

The construction industry relies on competitive bidding to ensure that participants receive commensurate value for their efforts. Similarly, public and private owners alike depend on the competitive bidding process to obtain lower prices, promote innovation, encourage efficient utilization of goods and services, and provide a level playing field for participants in the construction industry.

When confidence in the integrity of the bidding process is eroded, these goals are undermined. Unethical and illegal bidding practices also diminish confidence in the procurement process and result in the inefficient allocation of resources. Discussed below are several categories of unethical and illegal bidding practices.

One common complaint about the bidding process involves the practice of bid shopping. Bid shopping is the disclosure of the low bidder’s price to other bidders in an attempt to obtain an even lower bid. Bid shopping frequently occurs when a prime contractor uses the low bid as leverage in post-bid negotiations with other subcontractor bidders.

Although bid shopping is legal, for several reasons, the construction industry generally condemns the practice. For example, bid shopping can limit competition, as subcontractors may choose not to submit bids to general contractors that have a reputation for bid shopping. Bid shopping also can result in increased construction costs when subcontractors artificially inflate their bids in anticipation of having them shopped. Other potential negative impacts include increasing claims, encouraging corner-cutting, project delays, and harming the reputation of the industry generally.

The Associated General Contractors of America has stated that it is “resolutely opposed to the practice of bid shopping” and refers to it as an “abhorrent” business practice. Similarly, the American Society of Professional Estimators has described bid shopping as “unethical,” “unfair” and in violation of its Code of Ethics.

A related practice is bid peddling, which occurs when a bidder makes a post-bid offer to lower its price in an attempt to displace the low bidder and receive an award of the contract. Like bid shopping, bid peddling is legal but considered unethical. Yet another related (and legal) practice is bid chiseling. Bid chiseling occurs when there are post-bid negotiations with the low bidder aimed at decreasing the amount of the bid without changing the scope of work.

Although the construction industry generally condemns bid shopping, peddling and chiseling, it has struggled to develop effective solutions to eliminate them. For example, bid listing requirements on public projects (such as the first-tier subcontractor disclosure requirement under Oregon law) have limited bid shopping to some extent. The AGC has been opposed to bid listing statutes and has instead advocated for contractors to voluntarily hold themselves to ethical standards.

In contrast to the above unethical practices, the next category of conduct—bid rigging—is illegal. Bid rigging is the practice of conspiring with another bidder to bid (or not) with information that would typically not be known to a bidder. The term bid rigging covers a wide variety of illegal bidding conduct. Examples of bid rigging include agreements between two or more bidders to: submit identical bids, share profits with a contractor that does not submit a bid, submit higher or lower bids in rotation, set up territories or allocate the market to restrict competition, or agree not to submit bids.

The goal of these practices is to determine the winning bidder in advance or otherwise influence the award of the contract. In many jurisdictions these illegal practices carry significant consequences if the behavior is discovered: criminal sanctions, debarment of claimants, and civil damages, including the potential award of compensatory and exemplary damages.

Discussed below are several strategies that firms can use to reduce the prevalence of these unethical and illegal practices:

• Educate and train employees about proper bidding procedures.
• Require that employees act ethically and in compliance with the law.
• Encourage employees to treat all bidders the same and discourage favoritism.
• Establish protocols for bidding and communicate them to the bidders in writing in advance.
• Encourage competition by soliciting multiple bids.
• Evaluate and consider reducing or eliminating potential barriers to increased competition.
• Streamline the bidding process and seek to reduce bid preparation costs.
• Allow bidders adequate time to prepare and submit their bids.
• Stay abreast of market trends and pricing changes.
• Open lines of communication with bidders and encourage them to contact management when they believe they may have been treated unfairly. Conduct post-bid interviews and solicit feedback.
• Keep records of bidding and contract awards and evaluate them for irregularities and potentially concerning trends.
• Investigate and take action to correct or otherwise address inappropriate behavior.

Unethical and illegal bidding practices are unlikely to disappear. However, the above strategies can go a long way toward limiting these practices and mitigating their effects, while at the same time raising the stature of the construction industry.