FACT and Fallacy in the Competitive Construction Bid Process

Good morning. I am offering this observation article about the competitive bid process in a series of postings beginning today. When the last in the series is posted, the entire article will be circulated.

FACT AND FALLACY IN THE COMPETITIVE CONSTRUCTION BID PROCESS

Over time, many in the field have lost faith in the construction bid process.  The original theory was to offer a package of information that could be offered to qualified bidders (many of whom aren’t really) and the package would be complete enough to assure that every bidder is pricing the same scope of work with the same or equivalent products to be completed within the same time period. The original theory made many broad based assumptions. Most of those assumptions are the dynamic drivers for the reasons the bid process doesn’t work, at least in its current form.

The current process has turned into something akin to watching a bad movie with really good FX. On the surface it looks really good but in reality, the outcome isn’t real at all…….it just looks that way.

I guess the reason we expect too much from the process we have today is that we don’t understand or recognize the parts in the bid process. I am not referencing the bid process for the public sector at the moment but that has its own set of problematic procedures.

Begin with the process of bidding itself. We believe the process to be linear. A Construction Contract Bidder (A₀) obtains a set of construction documents which include complete drawings and a specification manual (project manual) from an architect or engineer and begins the process of bidding. In a couple of weeks, the contractor A₀ submits a cost to construct C₀ plus the anticipated profit the company expects to make. The two calculations C₀ + OP₀ become the actual bid submitted (B₀). The entire process seems controlled and appears to represent a competitive market place unfettered by the very factors that the theory “in practice” was designed to eliminate.  But the theory put into practice failed to account for the variables and other processes that actually shape the bid process. The theory put into practice actually exacerbates the problems that the bid process was intended to solve.

The analysis of the inner workings of the competitive bid process can’t be limited to the simple linear/non linear discussion. There are other components other than the theories that make up today’s bid process.

To be complete in our discussions on the facts and the fallacies within the process, we also have to discuss the types of bids in the process, the opposing goals of the parties including the end user, the internal and external variables that the affect process before, during and after the bid compellation and analysis process, the assumptions about the players from differing player POV and the before, during and after process effects of further subjective qualifiers of the bids and a factor that I can’t recall ever being discussed in the bid process and that is the permutation/combination effect of contractors, sub-contractors and sub-sub-contractors.

Lastly, we will take a look at the assumptions about the construction industry to determine their validity and how those gross assumptions actually directly and indirectly affect the competitive bid process.

To say the least, the bid process is anything but simple. It is non linear and seemingly exponentially quadratic functional output of a series of formally and informally linked dependencies of an endless population of known, unknown and unrecognized variables which produce a non-repetitive, non-reproducible and unpredictable output which we in turn use to award a contract. The amount of human subjectivity in the process is often too high to make the output reliable, especially when the other uncontrollable, unknown and unrecognized variables are also in play.

To truly understand the competitive bid process, we must study and understand the expectations, the intent, and the behavior of all the players. Don’t for a minute discount the opposing goals of the players, the number of sub-tier players or the external factors that are always in play during the competitive construction bid process.

There are many types of the competitive bid process. This discussion is limited to two of them. First is the tired old selection of the apparent low qualified bidder by a series of predetermined and logical but rudimentary steps in a process that can be influenced accidentally or purposefully. This process is one we are most familiar with.  This arcane process is supposed to render the most qualified low bid that will complete the pre-defined scope of work (some will say schedule of work).

The second type, which is gaining popularity in other countries, is the selection of the contractor bid, the A₀B₀ that is closest (in absolute value terms) to the mean (average) of the bids submitted. The variant of this method selects the first value A₀B₀ below the “average bid” submitted during the competitive bid process. The average bid method of awarding a contract is to interested observers and statisticians a more accurate and reliable bid. This type of bid is less prone to change orders or what this article refers herein after as a CO₀. The change order itself is a natural result of the time honored, but flawed, qualified low bid process. We will consider more about the unintended consequences of the “low bid” selection process when we discuss the goals of differing parties.

One must realize that in using the apparent low bidder approach to awarding a construction contract, any contractor {A₀, A₁, A₂………} can accidentally or purposefully submit the lowest bid. This is where one of the contradictions in the “apparent low bid” selection begins to surface. A contractor using this method can establish an artificial floor for bids to be considered which isn’t what the process was designed to accomplish.

Using the average bid method takes that ability away from anyone in the pool of contractors to artificially establish a floor or ceiling in submitting bids for the project. Using the average bid method makes it impossible for a contractor to submit a bid that is accidentally or purposefully the “average” of all bids in the population of bids being offered for consideration. Therefore the process becomes more pure and representative of the established intent, which is to make a choice that provides the most value to all parties being considered.

The calculation symbols used in this paper are derivitives of symbols used by Photios G. Ioannou, Associate member, ASCE, and Sou-Sen Leu in the paper “Average-Bid Methodf-Competitive Bidding Strategy”.