Understanding the Bidding Process: When the Lowest Bid May Not Be the Best Bid

Construction starts with a building or homeowner asking several contractors to bid on the work. Before inviting them to bid, the owner should learn more about each contractor's capabilities and reputation for honesty.

Bids will depend on such factors as labor costs, overhead, delivery schedules, building permits, risk management, profit margin (often 30 percent), and even the site of the construction. While the bidding process usually ensures competitive pricing, the lowest bid is not necessarily the best one to accept if the owner wants high-quality work. A look at the various factors driving low bids may deter owners from making a mistake in bid acceptance.

Reasons for Low Bids

Sometimes contractors simply don't conduct enough research to accurately estimate their projected costs. Others may intentionally bid low in order to increase the odds of getting the work, intending all along to cut corners later by using shoddy materials or submitting change orders (with additional compensation tied to the change request). A more reputable contractor would cut its 30 percent profit margin, not corners.

Basically, the lowest bid is likely to equate with low-quality workmanship. Make sure you are well-informed before accepting it.

Risks to Owners

Owners need to recognize the fact that a low-bid contractor still intends to make a profit. To do so, it will need to cut costs. In addition to skimping on materials, the contractor might reduce the number of supervisors and laborers on the project. This could endanger safety, create mistakes in the work and delay completion.

Inclement weather, delays in material availability and design errors are factors that cannot be predicted, but usually happen; they can cause significant impacts to the bottom line of a construction project. A low-bid contractor is unlikely to go out of his or her way to compensate for these challenges.

Thus, the low bid that appears to be a bargain is a risky venture, if accepted.

Choosing the Best Bid

Owners should strive to select the contractor that bids closest to the true costs. While owners seldom have the facts to determine these costs, it is reasonable to assume that the bid representing the average (or mean) among all the competitive bids—the one in the middle of the spread between bids—is the consensus of all contractors bidding. Thus, this bid is closest to being based on true costs.

Working with contractors that use estimating software is an approach that can help to eliminate low bids caused by mistakes and underestimated costs. With a spreadsheet, calculator and pencil, estimating costs is difficult. Software will yield greater accuracy. Moreover, estimating software can plug in “what if” scenario planning, which then makes adjustments to the proposed bid so the contractor won't lose money.

A bid 10-25 percent lower than its competitors is attractive at first glance. But a dramatic gap between the lowest bid and the others should signal to an owner that completing the project will cost more than the low price quote. This will result in cost overruns or less-than-satisfactory work.
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