Tendering, bidding and procurement law

Most construction work, and nearly all public construction work, is awarded through competitive bidding. A call for bids sets the rules, contractors price the work and submit bids, the owner evaluates them and awards a contract. Each step has legal consequences. A mistake in a bid can cost a contractor hundreds of thousands of dollars; an unfair evaluation can expose an owner to damages for lost profit; a subcontractor's late withdrawal can leave a general contractor carrying a loss. This lesson explains the law that governs bidding, from the formation of bid obligations to mistakes, evaluation, privilege clauses and challenges.

Why bidding law exists

Competitive bidding protects owners and taxpayers by obtaining fair prices, and protects bidders by promising them that the competition will be run fairly. Bidders invest real money in estimating, often thousands of dollars per bid, on the understanding that the owner will compare bids on the stated criteria and award accordingly. The law of tendering, in both countries, exists to enforce that understanding without destroying the owner's legitimate need to choose the best bid.

American bidding law is divided by owner. Federal procurement follows the Federal Acquisition Regulation (FAR), which sets detailed rules for sealed bidding and negotiated procurement and gives disappointed bidders the right to protest to the Government Accountability Office (GAO), the agency or the Court of Federal Claims. State and local public owners follow state procurement statutes and municipal codes, usually requiring award to the lowest responsive and responsible bidder. Private owners are generally free to choose any bidder unless they have made a binding promise in the bid documents.

Sealed bidding and responsiveness

Under the FAR, sealed bidding (FAR Part 14) is used when award can be made on price and price-related factors. Bids are opened publicly and award goes to the lowest-priced responsive bid from a responsible bidder. A bid is responsive if it complies in all material respects with the invitation for bids: it offers to do exactly what was asked, on the stated terms, without conditions. A bidder is responsible if it has the financial resources, experience, equipment, integrity and capacity to perform; responsibility is judged before award and may be shown by information submitted after opening. Negotiated procurement (FAR Part 15) allows award on best value, weighing price against technical and past performance factors stated in the solicitation.

State and local public owners usually follow similar principles.

• Bids are sealed, opened publicly at a stated time, and read aloud.
• Award goes to the lowest responsive, responsible bidder, unless the statute allows best value or all bids are rejected for good reason.
• Bid bonds or deposits, often 5 to 10 % of the bid, secure the bidder's promise to sign the contract.
• Post-bid negotiation that changes the work or price is generally not allowed in sealed bidding.

Private owners in most states may award to any bidder, negotiate after bids, or reject all bids, unless their bid documents promise otherwise. Some courts have held that a private owner who promises a fair process can be liable for breaching that promise, but American law does not have a general equivalent of Canada's Contract A.

Bid mistakes

Estimating under deadline pressure produces mistakes: a column not added, a page of the bid form missed, a subcontractor price entered without its cents point. What happens when a bidder discovers a mistake after bids close?

Under FAR 14.407, a bidder may seek relief for a mistake discovered before award. If the bidder presents clear and convincing evidence of the mistake and of the intended bid, the agency may allow correction, provided the corrected bid remains low; otherwise it may permit withdrawal. After award, relief is rare and requires showing that the contracting officer knew or should have known of the mistake. State courts apply similar equitable rules, generally allowing withdrawal where the mistake is material, clerical rather than judgmental, made without gross negligence, promptly reported and the owner is not prejudiced.

Contracting officers and owners must also check for obvious errors. An owner that accepts a bid it knows is wildly low because of a mistake may not be able to enforce it, and a low bid can also signal a bidder likely to fail.

Evaluation, privilege clauses and fairness

Owners protect themselves with privilege clauses, such as the lowest or any bid will not necessarily be accepted, and with discretion clauses allowing them to waive irregularities. Both are useful, but neither is unlimited.

In federal procurement, evaluations must follow the solicitation's stated factors and their relative importance. A protester that shows the agency departed from the stated criteria, treated offerors unequally or made an unreasonable judgment can win corrective action, such as re-evaluation or a new award decision. GAO decides most protests within 100 days. State public owners must apply their statutes; a court may set aside an award to a non-responsive bidder, and disappointed bidders may recover bid preparation costs, and in some states lost profit, for an unlawful award. Waivers of minor irregularities are allowed only when the irregularity gives no competitive advantage.

Subcontractor bids

General contractors build their bids from subcontractor prices received in the final hours before closing. What if a subcontractor whose price was carried refuses to sign at that price?

Many states apply the doctrine of promissory estoppel to subcontractor bids, following the California Supreme Court in Drennan v. Star Paving (1958). If the general contractor reasonably relied on a subcontractor's bid in preparing its own, the subcontractor may be bound not to withdraw. The general contractor is not usually bound to the subcontractor, however, which allows bid shopping; some states and public owners require general contractors to list their major subcontractors in the bid and restrict substitution, as California does under its Subletting and Subcontracting Fair Practices Act.

Good practice for owners and bidders

• Owners: state all evaluation criteria and mandatory requirements clearly; decide whether you want a binding bid process; apply the rules consistently; keep detailed evaluation records.
• Bidders: read every mandatory requirement; ask questions before closing; check arithmetic and missing scope; qualify nothing unless qualifications are allowed; know the withdrawal and mistake rules.
• Both: keep a record of addenda and clarifications, and of who said what during bid periods.

Bid rigging and collusion

Competitive bidding only works if bids are independent. Bid rigging, in which bidders agree among themselves who will win, take turns submitting the low bid, or submit deliberately high cover bids to create the appearance of competition, defrauds owners and is treated as a serious crime in both countries.

Under section 1 of the Sherman Act, bid rigging is a felony prosecuted by the Antitrust Division of the Department of Justice, punishable by fines of up to $100 million for corporations and $1 million for individuals, or twice the gain or loss, and imprisonment for up to 10 years. Federal and state agencies can also suspend or debar contractors involved in bid rigging, and false certifications of independent pricing, required by FAR 52.203-2, can lead to False Claims Act liability.

Owners and estimators should watch for warning signs in bid results: the same company always winning in a region, bids with identical errors or handwriting, unusually large gaps between the winning bid and the rest, or losing bidders becoming subcontractors to the winner. Joint ventures and teaming arrangements are lawful when disclosed and genuinely competitive, but they must be structured with care.

Electronic bidding and bid closing

Most public owners now accept bids electronically through procurement portals. Electronic bidding raises its own legal questions. A bid is generally late if the portal records it after the closing time, even by seconds, and owners usually treat closing times strictly to protect fairness. Bidders should upload well before closing, confirm receipt, and keep screenshots. When a portal fails, the bid documents and any addendum issued by the owner govern whether the closing is extended. Owners should state the official clock, the treatment of system failures and the format of acceptable signatures in the bid documents, and they should keep a complete electronic record of submissions and openings.

Bidders should also keep their own records of the bid period: the addenda received and acknowledged, the questions asked and the answers given, the subcontractor and supplier prices received and the time each arrived. If the award is challenged, or if a mistake or withdrawal becomes an issue, these records show what the bidder knew and relied on when it priced the work, and they are often the only evidence of what happened in the final hours before closing.