The Destructive Low Bid Myth

The Destructive Low Bid Myth

by Simplar Institute

About 150 years ago, our forefathers bestowed the competitive bidding concept on us in order to curb corruption, inefficiency, and mismanagement by government officials. In New York, the competitive bidding requirements of Canal Law, Sec. 30, appear to date back to legislation enacted in 1847. The major objectives of competitive bidding were “to protect the public against collusive contracts, to secure fair competition on equal terms to all bidders, to remove not only collusion but temptation for collusion and opportunity for gain at public expense, to close all avenues of favoritism and fraud, to secure the best values for the public at the lowest possible expense, and to provide opportunity for exact comparison of bids in order to give equal advantage to all desiring to do business with government.”

A Legacy Turned Sour

So, that’s how awarding contracts to the lowest bidder started. Sounds right, even today. The problem is that the objective of competitive low-bid contracting was never to control construction project cost; it was to keep government officials honest. Nevertheless, purchasers of construction services quickly came to believe that the low bidder would deliver the project for the lowest cost. Contractors themselves bought into the myth of low bid efficiency and the industry was off and running based on an erroneous belief that became the very foundation of all construction contracts. However, recent Simplar research reveals that this principle of construction contracting is wrong. Low bid rarely translates to low cost.

Low-Bid

 

In the last few decades, many new procurement methods and delivery systems have been developed. Nevertheless, low-bid (LB) procurement has remained the most popular method. Owners have continued to use the LB system due to the ease of identifying the lowest bidder, even though many owners are not satisfied with the performance of the system. In this system, selection is based solely on the price presented in contractors’ bids. Contractors develop detailed bids after carefully reviewing the complete (or nearly complete) set of plans and specifications. The goal is for the bidders to propose to construct the project for the lowest possible cost. The bid with the lowest price proposal is automatically awarded the project so long as it is deemed responsive to the owner’s minimum requirements.

Best Value

In Best Value Procurement, the presumption is that the owner will receive what they need at better costs relative to the LB approach with the goal of selecting a more qualified contractor who then delivers superior cost performance during the construction phase and superior life-time value of the project. In other words, by paying the correct cost upfront to partner with a more qualified contractor, the owner will receive lower cost growth in the construction phase than would have resulted from the traditional low-bid approach.

The Research

Does Best Value Procurement Cost More than Low-Bid? A Total Project Cost Perspective

(Brian C. Lines, Raghu Kakarapalli, and Phuong H.D. Nguyen, Department of Civil, Environmental, and Architectural Engineering, University of Kansas, Lawrence, Kansas, USA)

There were two main research objectives in this study.

  • The first objective was to investigate if there was any additional bid cost experienced by owners when using Best Value procurement compared with the traditional low bid approach. In other words, this study attempted to quantify any cost differential of BV-procured contractors relative to low bidders.
  • The second objective was to explore total cost growth in the construction phase delivered by BV selected contractors.

Findings

 

  1. When utilizing BV procurement, project owners pay less than 1% more than the lowest bid amount.
  2. Best Value contractors had 37% less cost growth than the lowest-bid contractors, indicating that cost performance of BV Design-Bid-Build (D-B-B) projects was more favorable than traditional LB D-B-B projects.
  3. The average cost growth of the projects that utilized BV procurement was 7.6% while the average cost growth of the low-bid procurement projects exceeded 12%.
  4. The lowest bidders led to more non-owner-related cost growth (4.41%) compared with BV awards (2.35%).
  5. Only 0.02% cost growth was actively related to the BV contractor whereas 9.67% cost growth came from the owner, designers, and unforeseen factors. (This indicates that BV procurement lives up to its intent of hiring more qualified contractors who are proven to have the skills to perform successfully during the construction phase.) 
  6. Specifically, BV premium contractors had 37% less cost growth than LB contractors. This indicates that owners should not be concerned about upfront cost (if any) of BV because it leads to lower total project costs.

Conclusion

 

This research study into comparative cost growth factors shows that Best Value is the better means to procure more qualified contractors who are able to deliver successful construction services. BV procurement also ties to solid cost performance. This means owners who use BV have the potential to reduce cost growth across their construction programs. The efficiency myth of low bid that has plagued the construction industry for a century has finally been dispelled.

Read More: Best Value Procurement