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Bid shopping is the practice of disclosing bid prices to subcontractors to obtain a lower cost before or after awarding a contract. It may encourage the use of inferior materials and create unfair competition. Some areas prohibit it, and laws protect public entities from subcontractor replacements. Bid retailing and reverse auctions are other forms of bidding buying.
Bid shopping is a term used in construction law, defined as the disclosure of bid prices to subcontractors prior to awarding a contract to obtain a lower cost. It could also occur after a contract is awarded when a contractor goes to companies willing to do the subcontracting work more cost-effectively. There are different bid purchasing rules, depending on the type of project and the laws of the region where the project is planned.
Some areas prohibit bidding buying because it may encourage the use of inferior materials or poor workmanship to increase profits for the contractor. Bid shopping could also create unfair competition between contractors and subcontractors vying for contracts. In some cases, a contractor might pay employees below the prevailing wage to increase profit levels.
Contract laws in some areas make it illegal to engage in bid buying and impose penalties for companies that violate the statutes. These laws may require a prime contractor to disclose the identity of subcontractors working on the project. Once the bid has been awarded, these subcontractors cannot be transferred to companies that will do the work at a lower price. In case of violations, the entire contract could be considered void and penalties could be applied.
These laws protect public entities from subcontractor replacements after bids have been awarded. In some areas, subcontractors must be named in the initial tender proposal based on the percentage of work they intend to perform on the entire project. A company paid half of one percent of the total labor cost is considered a subcontractor that must be named in some regions.
Private projects typically allow tender substitutions unless the contract expressly forbids it. On these construction projects, a subcontractor may withdraw a bid after the contract has been awarded. In some cases, a subcontractor may bid with no intention of carrying out the work to help the main contractor secure the award. These practices may or may not be illegal, depending on local laws.
Subcontractors who engage in this practice may later attempt to sell the bid award to another company. They may find another subcontractor willing to do the work below the price quoted in the offer. The initial subcontractor keeps the difference as a commission, sometimes called a broker’s commission.
City or state bills typically prohibit bidding shopping by law or code. These laws may also limit the number of subcontractors allowed in the tender offer to reduce the possibility of buying tenders. Some regions also limit offers to local businesses or give preference to minority-owned businesses.
Bid retailing and reverse auctions describe two other forms of bidding buying. A reverse auction is the publication of winning bid amounts on the Internet to solicit lower bids. Bid selling could be used by subcontractors looking to get work after a bid is awarded. A business owner could approach the main contractor and propose a lower price than the subcontractor named in the bid award.
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