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Bidding on Public Projects: the Calculated Risks of Unbalanced Bids

Wed Oct 14, 2020

By Michael J. Schmidt and Wiley G. Cason

© Alaska Contractor Fall 2020 Edition

The overriding purpose of Alaska’s procurement code is to ensure that the state “receives the best work or supplies at the most reasonable prices practicable.” McBirney & Assocs. v. State, 753 P.2d 1132, 1136 (Alaska 1988). The goal of achieving the best price for work, however, is not always met by simply looking at a contractor’s total bid price.

In the case of competitive sealed bidding for public projects, the state must generally award a contract to the lowest responsive, responsible bidder under AS 36.30.170. However, “unbalanced” bids, which shift costs from one part of the work to another (often by frontloading costs), create risk that the state will end up overpaying on a project, even if the total bid is lower than other offerors. Depending on the severity, unbalanced bids may be rejected as non-responsive if the state determines that they are “materially unbalanced.”

Unbalanced bidding as a contractor tool

Some degree of unbalancing in bids is common. The Alaska Department of Transportation & Public Facilities, or DOT&PF, assumes when it advertises a unit-price contract that each pay item will carry its share of the cost of the work, plus the contractor’s overhead and profit. A bid that fails to do so is defined by the department as “mathematically unbalanced.” Typically, an unbalanced bid suffers no penalty relative to balanced bids, unless it rises to the level of material imbalance.

Courts and the state recognize that a contractor’s allocation of costs between different bid items is fundamentally a business decision. As stated by the Alaska Office of Administrative Hearings (OAH), “[c]ontractors are expected to use their skill and knowledge in making bids …  [and] therefore bidders are given some leeway.”

Materially unbalanced bids — a bid too far

The Alaska DOT&PF standard specifications define a “materially unbalanced” bid as one that either creates a reasonable doubt that the bid will result in the lowest overall cost to the department or else is so unbalanced as to allow a “significant advance payment” to the contractor.

The rule against materially unbalanced bids is designed to protect the state from risk, such as when a project terminates early or the quantities of certain items vary from original estimates. For instance, if a contractor allocates a disproportionate cost to mobilization and the project is terminated, then the state may be left paying the bill for work it did not receive. Likewise, contractors are supposed to base many unit prices on estimated quantities, but if the contractor believes those quantities are inaccurate, it may choose to recover its costs or margins in other items of work.

Whether a bid is materially unbalanced is largely a subjective determination, and it can therefore be difficult — if not impossible — for contractors to predict whether their bids will be rejected on this basis. OAH has acknowledged that these factors are “not precise” and “inherently require exercise of judgment.” However, recent decisions involving contracts with DOT&PF help to shed light on the factors used in such determinations — and may help contractors avoid having bids rejected.

In 2016 the Department, without a protest, rejected the low bidder on a project worth approximately $10 million. There, the total cost of the two lowest bids was nearly identical — separated by only $3,422. The lowest bid, however, included $2 million for an early portion of the work estimated to be worth only $60,000. The Department rejected the bid as materially unbalanced and awarded the contract to the second-lowest bidder. In a subsequent challenge, the excluded contractor argued: (1) that the work would all be performed in a single season and therefore was not a “significant advance payment,” and (2) the engineer’s estimate of the work had been low. The procurement officer upheld the rejection, finding that despite the project’s single-season schedule, the overbid work would be performed early in the contract — and even if the estimate was low, the bid was still “grossly front-end loaded [and therefore] prohibited by law.”

In 2017, the OAH affirmed the Department’s denial of a protest over a contract award worth approximately $20 million. In that case, the low contractor’s bid for its mobilization item exceeded the Department’s estimate, resulting in an alleged $1.3 million “advance” payment. In that case, however, the difference between the two lowest bids was much larger — approximately $1.78 million. The total contract price was also larger, decreasing the relative significance of the overbid work. OAH agreed with the Department that while the low bid was mathematically unbalanced, it didn’t rise to the level of being materially unbalanced and the second bidder’s protest was properly denied.

The 2017 ruling also found that the relative timing of overbid and underbid work could be significant in determining materiality of an imbalance. OAH noted that the amount overbid on mobilization (paid during the project’s first pay period) would be quickly recouped during the project’s second pay period, therefore mitigating the severity of any imbalance.

In 2020, the Department considered a protest over the award of an approximately $40 million contract — which included an alleged “advance payment” of approximately $1.5 million, based on certain bid items exceeding the engineer’s estimates. Although this advance payment was not expected to be immediately recouped, the Department found that the difference between the lowest and second lowest bids — $2.2 million — justified acceptance of the more unbalanced bid. Unlike previous cases, this decision directly acknowledged that the difference between two bids may be a factor in determining materiality of an imbalance, holding “as [the] gap between bids narrows … there is an increasing level of doubt whether an unbalanced low bid offers the lowest ultimate cost as compared to a higher bid that is properly balanced.”

The takeaway

The takeaway of these decisions for contractors is to approach unbalanced bidding with caution. As stated by one commentator, “bidding is as much art as science.” The state’s tolerance for unbalanced bids depends on a variety of factors: the size of the job, the breakdown of the pricing, the difference between the low and second lowest bids — and therefore can never be fully predicted in advance, even by the most experienced bidders.

Michael J. Schmidt is a partner at Oles Morrison Rinker & Baker where he advises contractors on government and commercial contracts and litigation matters. Wiley G. Cason is an attorney at Oles Morrison Rinker & Baker. Raised in Alaska, he is passionate about helping clients creatively address their legal issues in the most economic and expeditious manner possible.