Highlights: During these troubled economic times, there has been an increase in the number of bid disputes seen throughout the construction industry. Owners and contractors need to fully understand how the competitive bid process works in order to successfully navigate their way through it. Contractors who want to challenge the bid process must know when and how to challenge the bids. Owners can minimize the probability that a bid will be challenged by using good front end documents and administering the process fairly. In this article, Sam Wampler illustrates some of the pitfalls and perils of the competitive bidding process, and he provides some best practices for navigating the treacherous terrain of competitive bidding.

With the economy in the tank and struggling to recover, the construction industry, like many sectors in the business world, has been hit hard. The housing market is still weak, commercial construction is almost non-existent in many areas, and public construction has suffered. In Ohio, were it not for the state’s school facilities construction program and federal stimulus money that is starting to surface, the outlook for contractors would be even bleaker than it appears.

The effect of the economy has impacted competitive bidding in several ways—some expected and logical and some not so expected or logical. For example, as one might expect in a down economy, competition has intensified thereby driving down bids in most areas of the state. While this may seem good for owners and taxpayers, and to some extent it is, bid disputes seem to be on the rise.

Moreover, contractors will understandably be looking to gain advantages wherever they can. Some contractors seek these advantages at bid time, and some contractors look for them following the award of a contract.

In some cases, it seems that bidders who are not the lowest are looking for any reason to challenge the bid process. Some bidders may challenge the bid process before bids are even opened (more on that later). We have seen challenges: arising from the bid security (bid bond) furnished by the lowest bidder; objections to the use of alternates where acceptance of alternates changed the status of the lowest bidder; objections to specifying the payment of prevailing wages on school projects; and even objections to the specified bid schedule after the bid opening and before execution of the contract.

There are many traps that can easily be avoided. Using good front end bidding documents and obtaining a fundamental understanding of the competitive bidding process is a good start. In addition, good bidding administration and a fair-minded approach to the competitive bidding process will enhance the opportunity to avoid a bid dispute.

Because competitive bidding has become so intense, Bricker & Eckler decided to change the format of our upcoming program on competitive bidding this year. Last year we launched our first full-day program dedicated solely to competitive bidding. We had more than 75 people in attendance, and from the comments we received, the program was very well received. Following suggestions from some of the attendees, this year we have changed the format to be more interactive (the program will be offered in Columbus on April 7, 2010, with limited enrollment because of the format—see the insert following this article for more information).

This year, Bricker & Eckler will still cover the principals of competitive bidding, statutory requirements, judicial review, and many of the other aspects of competitive bidding. In the afternoon session, however, we will break out into three workgroups, and we will assign each workgroup a competitive bidding problem.

We will task each workgroup with opening bids, reviewing bids, responding to complaints or issues, and making recommendations for rejection, award or otherwise. Members of Bricker & Eckler’s Construction Practice Group will monitor the workgroups’ efforts. Afterwards, each workgroup will explain the issues they identified and how they approached the problem. In this way, each participant will be exposed to all three problems and gain knowledge about the competitive bidding process in a risk-free environment.

So let’s talk about competitive bidding, particularly in light of current economic conditions. What can an owner do to minimize the risk of a bid dispute, and what can contractors do to protect themselves?

First of all, owners should endeavor to provide clear and complete instructions to bidders. This does not stop at the “Instructions to Bidders.” This includes an advertisement that is clear as to what bids are being solicited, when the bids should be submitted, the manner in which the bids will be received, and when they will be opened (date and time). Pre-bid meetings should be clearly announced both as to time and place. In addition, the scope of work also should be as clear as possible as there is always going to be a risk of ambiguity in the bid documents.

Contractors should carefully review the bid documents, including all of the specifications and drawings to ensure that their bid covers all of the work solicited. The contractor should bring any questions regarding its scope of work or the bid process to the attention of the owner (or architect, engineer, or other person as the bid documents may direct) as quickly as possible.

We have seen several instances in the past year where a contractor has sought a change order for an ambiguity that was apparent from the bid documents. Quite often, in these situations, the bid documents will require the contractor to furnish the greater quantity or better quality in its work, and a change order is not justified.

Change Order

A change order is a modification of the contract because of a “change.” Where the bid documents are ambiguous, the bid documents are capable of more than one meaning. If the bid documents are capable of more than one meaning at bid time, the contractor is responsible to seek clarification prior to submitting its bid. Otherwise, a bidder knowing of an ambiguity in the bid documents will often reduce its bid to the lesser of the possibilities thereby giving the bidder an unfair advantage over the other bidders. Later it may try to make up for its reduction in bid through the change order process.

An owner is entitled to expect that the contractor has carefully reviewed the bid documents and that the contractor will perform its work consistent with the interpretation that will provide the greater quantity or better quality in the event of an ambiguity. To protect itself, the contractor should raise the issue pre-bid so that all bidders are submitting their bids with the same understanding. Otherwise, it may find itself obligated to perform work that, while included in its scope of work, may not be included in its bid.

Awards

Contract awards also can have unintended consequences. There is often an inclination to award a contract quickly. This is particularly true when there is a tight schedule or traditionally bad weather months are approaching. Sometimes, an owner’s representative will notify an apparent low bidder that it will be awarded a contract without realizing that the decision to award or not award is up to the public owner. In almost every instance, such an informal notice is not an award. The award of a contract by a public owner occurs at a public meeting by a quorum of a duly elected board upon proper notice and opportunity to be heard.

Ohio Revised Code Section 153.12 gives a public owner 60 days from the bid opening to review the bids, award a contract, and execute a contract with a bidder who is determined to be entitled to the contract (lowest responsible, lowest and best, etc.). This is generally plenty of time within which to evaluate bids and make a recommendation to the governing body who is vested with the power to actually award the contract.

Owners should remember that contractors, particularly contractors in the “new economy,” must be efficient in order to earn a profit. Efficiency means carefully planning your work and executing the work in a timely manner. This includes securing materials and equipment for the work. Notifying a contractor that it will be awarded a contract without formal action of the governing board is not a good practice.

Letting a contractor know that it is the “apparent low bidder” is fine and does nothing more than let the contractor know that it is still in the hunt so to speak. It is a good practice for an owner to make it clear in the instructions to bidders that a contract is not deemed “awarded” until it is fully executed by both the owner and the successful bidder.

In this way, a contractor cannot have a false expectation regarding the contract award. The contractor will know that until the contract is signed by both parties there is no contract and no contract award. This also will protect the owner from claims that the bidder was denied a “property interest” without due process of law in violation of its constitutional rights where the bidder does not ultimately receive a signed contract.

Bid Alternates

The use of bid alternates is an acceptable way for public owners to specify work for their projects without possibly running afoul of sole source limitations. Ohio courts have embraced the use of bid alternates as an acceptable tool for managing a budget as well as providing flexibility in the specification of materials and equipment.

For example, suppose a school district has three school buildings that all use the same manufacturer for their HVAC systems. The school district’s staff is trained and familiar with the maintenance and operation of the equipment from this particular manufacturer and is generally satisfied with its performance. The district’s staff has expressed a desire to acquire the same type of equipment in the district’s proposed elementary school so that staff (and the district) can efficiently maintain and operate the similar equipment.

While it may be acceptable in certain situations to only specify the same manufacturer for the upcoming project, doing so might bring objections from other manufacturers or contractors who do not typically install that brand of equipment. They want the opportunity to compete, and the law gives them that opportunity in most instances.

The better approach is to specify at least two or more manufacturers for the new building and allow the bidders to submit their base bid on any one of those specified. In addition, the bidders should be instructed to provide a bid for an alternate using only the manufacturer desired by the owner. In this way, competition among manufacturers is fostered, and the owner is compliant with the law.

Through the use of a bid alternate, the owner will know the cost of its preferred equipment. If the owner is satisfied with the cost of using its preferred equipment, the owner can accept the base bid and the alternate thereby requiring the successful bidder to utilize the preferred equipment in the installation while still fostering competition.

Prevailing Wages

In Ohio, contractors on public improvement projects are required to pay prevailing wages if the amount of the contract exceeds the threshold amount established by statute and the Department of Commerce. There are, however, exceptions to this requirement. In 1997, the General Assembly amended Ohio Revised Code Section 4115.04 to except school districts from paying prevailing wages.

But, what if a school district board wants to pay prevailing wages on its projects—can it? At least two trial courts confronted with this issue have said yes. Non-union or open shop contractors and their associations have attacked the use of prevailing wages on school projects, albeit unsuccessfully.

Because school district boards are given broad authority to construct school buildings, and because such authority includes specifying the work to be done, if a school district board believes that it will get the building it wants in terms of quality or timeliness by requiring prevailing wages, the school district is within its power to do so. This is a choice left to the sole discretion of the school district board.

Just as a school district can specify types of materials (e.g. vinyl flooring versus ceramic tile) it also can specify the labor rates it is willing to pay if it rationally believes that payment of such labor rates is more likely to produce the type of building it wants. Here again, careful thought should be given to the labor rate specification, and while it may be drafted carefully and within the dictates of the law, a school district board may still have to defend its powers in a court of law.

Having the language of the labor specification spelled out carefully will help. Such a practice may not keep the school district board out of court, but it could help ensure a successful defense of a challenge in the event court action is sought.

Injunction/Damages

The remedy for a disappointed bidder is injunctive relief. But, what if a court denies injunctive relief? Can a disappointed bidder also seek damages? In 2006, the Supreme Court of Ohio held in the case of Cementech v. City of Fairlawn, 109 Ohio St. 3d 475, that a disappointed bidder cannot recover lost profits as damages from an owner who improperly awards a contract to another bidder.

Now pending before the Supreme Court of Ohio is the question of whether a disappointed bidder can recover as damages the cost of preparing its bid. This issue was not before the Court in Cementech. The case has been briefed, argued, and is awaiting a decision. The Court will probably either not permit such damages on the same public policy basis that it decided Cementech, or the Court will announce those circumstances that must exist for a disappointed bidder to recover such damages.

For example, the contractor will likely have to show multiple factors: (1) that it first sought injunctive relief in a timely manner; (2) that the trial court improperly denied the injunction; and (3) that the owner abused its discretion in awarding the contract to another bidder. Unless a disappointed bidder can prove all of these elements, it will most likely be denied recovery of its bid preparation costs. But, the Supreme Court of Ohio will have the last word on this issue in the near future.

Either way, recovery of bid preparation costs presents a much lower risk to a public owner, and the cost of recovering such costs may outweigh the actual recovery in any event (except for claims against the state where there may be a statutory right to recovery of attorneys fees). So, while the issue of recovering bid preparation costs is interesting, its application will probably have little impact on bid disputes in the future.

Conclusion

Competitive bidding in Ohio is a complicated subject fraught with many twists and turns that can land the parties in court. Understanding the process and developing good bidding documents will give owners and bidders the best opportunity to avoid litigation. Until the economy changes, the fierce competition for construction contracts is unlikely to change. Now more than ever, it is important that owners and contractors educate themselves about the process thereby enhancing their prospects of delivering a good product—on budget for the owner and at a profit for the contractor.