One very interesting, or actually scary, situation presents itself when a contractor makes a big mistake with its estimation for a bidding process. Of course I mean a dangerously low estimation for a Lump Sum bid, because an extremely high estimation would cause the contractor to lose the bid and everybody will go into another business.
We all can imagine that the first thing that will happen is an increase in the success chances of the contractor's proposal.
Typically for an important project, an owner (or client) carries a formal bidding process with several bidders, no less than three and probably five respected and prequalified bidders. In that case, the owner's team would be in the position of detecting extremely low or extremely high proposals from the bidders.
“We all can imagine that the first thing that will happen is an increase in the success chances of the contractor’s proposal”
As mentioned before, a bid with a very high price would be generally discarded by the client. Of course, if that bidder is preferred for some reason such as having the highest technical qualification or specific expertise, it is possible for the client to give some feedback to that bidder and offer the chance of a revised proposal. That would be possible in the private market, but not in public bids for government projects.
When a bid is too low, an interesting scenario appears. The client can choose between inform the bidder that its proposal might have a problem (once again, only in the private market) and give that bidder the chance of a revised proposal and, after confirming the bidder's financial capability, award the project to the lowest proposal.
The thing is, the client knows with a high degree of certainty that an extremely low proposal has a problem and the contractor will lose money, will have problems in performing the project and might not complete it. Some clients can take -little- comfort in financial guarantees such as performing bonds issued by banks and contract provisions such as intervention and the capacity of selecting a new contractor to finish the project with all costs charged to the low-cost-awarded original contractor.
In the real world, no bank guarantee is enough compensation for an incomplete project, bank guarantees are designed to discourage a contractor from abandoning the project. On the other hand, interventions and change of contractor are no easy feats.
Furthermore, even if the change of contractor goes smoothly, what about the technical guarantee of the performed construction? A second contractor that needs to complete work initiated by a previous contractor would hardly give any guarantee due to initial conditions of the work not under its control and the original contractor would very likely use all means at its disposal for releasing itself from the responsibility of work that has been touched or completed by third parties. Even though the contract might include provisions related to responsibility for the work in case of intervention or change of contractor by default of the original contractor, those provisions would be very difficult to put in practice.
And what about the ethical connotations of this situation? If a client has a reasonable certainty that a bidder made a mistake and will lose money if awarded, is it ethical to let that contractor enter in a problem with no warning just because the client knows that that contractor has enough financial strength as to absorb the loss? What about the good faith in the contract relationship?
There is another angle to this situation. If the real cost of the project -very likely- is closer to where most of the different bids converge, is it valid for a client to pay less than the real cost just because one bidder made a mistake?
The truth is that contractors are deemed as specialists in the estimation of construction works and have usually far better estimation capabilities than clients. However, clients have access to information not available to bidders: the complete set of proposals and the bid comparison chart.
Responsible clients address these issues with a technical and ethical approach. First, it is a good practice to have an independent estimation of the project cost before the bidding process starts. Secondly, bidding templates that allow for detailed comparison of the works to be performed can help in narrowing down the source of differences and potencial mistakes. And, of course, if it becomes apparent that some bidder made a mistake, to give warning by pointing out such situation is highly advisable, not only for the bidder, but also for the client.
Client and contractor are actually partners: the client needs the project and has the required financial sources, whereas the contractor has the knowledge and the means to transform the project documents into a reality. Partners should collaborate to the common goal of a successful project.
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