Construction industry contracts are awarded based on competitive bids for estimated quantities of work. But payment is made on the actual amount of work. Due to the potential difference, contractors can face a financial loss if there is a reduction in work requirements or an increase in the project quantities where they may have to absorb additional costs. There are also instances of windfalls when allocated costs are lower than expected, resulting in increased profit. Research shows that some owners inflate their quantities to account for contingencies. To compensate for this quantity deviation, contractors have been known to submit unbalanced bids, where line-item prices are manipulated to gain an advantage in the bidding process. Not surprisingly, owners expect balanced bids that reflect the cost of line items as well as a share of the overhead costs and the profits. The risks associated with unbalanced bidding, which include losing the bid and change orders imposed by the owner after the contract is approved, highlight the need for a better system.
Researchers Khaled Hesham Hyari and Ahmed Khalafallah propose a new bid adjustment process in their study, “A Legitimate Alternative for Unbalanced Bidding in Unit Price Contracts,” that protects contractors from risk associated with quantity deviations and eliminates the need for unbalanced pricing. The procedure outlined in their paper adjusts the bid prices of all line items before submitting the bid based on the expected variations in quantities of work. The research starts with a literature review of the bidding decision-making process in construction projects, then dives into the procedure development, and concludes with an application example. Learn more about how this study can help contractors develop balanced bids, minimize their risks, and improve their competitiveness in the Journal of Legal Affairs and Dispute Resolution in Engineering and Construction at https://doi.org/10.1061/JLADAH.LADR-994. The abstract is below.
Unit-price contracts are common in public construction projects. Such contracts expose contractors to economic risks due to deviations between owner-estimated quantities and actual quantities of work. Contractors typically respond to such risks by submitting unbalanced bids that are opposed by owners and may lead to the rejection of the submitted bid. This paper presents the development of a legitimate alternative for unbalanced bids and proposes a bid adjustment procedure that can be used by bidders to adjust item rates before submitting the bid based on the envisioned quantities of work. The procedure can be used whether the bidding documents include a changed quantity clause or not and takes into consideration the terms of the changed quantity clause if such a clause exists in the bidding documents. The procedure protects the contractor from financial losses when the project experiences an underrun in quantities. Likewise, the procedure improves the competitiveness of the contractor when the project is expected to experience an overrun in quantities. The procedure is expected to help contractors submit a responsive and balanced bid and eliminate the need to submit an unbalanced bid. An illustrative example is analyzed to show the use of the procedure and its effectiveness in improving the profitability of the contract.
To see if this method can work for you, read the paper in full in the ASCE Library: https://doi.org/10.1061/JLADAH.LADR-994.