Contractors have chafed at what they see as financing an owner’s project through the withholding of retainage. As we have seen, more and more state legislatures are trying to help them out by putting limitations on the amount and length of time that retainage can be held.
Not content to sit back idly while owners and upper-tier contractors hold their money, however, many contractors and subs have engaged in the guerilla warfare of front-end loading their schedules of values or disproportionately pricing individual bid items, to allow them to make up for the withholdings.
More owners are catching on to the risk of accepting an unbalanced bid or paying on an unbalanced schedule of values: If the contractor’s margin is paid out early in the job, insufficient funds may remain to pay for the rest of the work (this can also lead to problems for an owner with a contractor’s surety too). For public work, more statutes and regulations are being passed to try to deal with the situation.
Here are two examples of the risk a contractor runs by disproportionately pricing its various items of work:
In Matter of L.W. Matteson Inc. B-290,224 (Comp. Gen. 5/28/02), a federal contractor protested the rejection of his bid under Federal Acquisition Regulation 14.404-2(g), which allows a bid to be rejected if the prices for any line items are materially unbalanced (meaning overstated or understated). The regulation notes that the agency is not required to reject the bid, but the contracting officer is required “to consider the risks to the government associated with the unbalanced pricing in making the award decision, and whether a contract will result in unreasonably high prices for contract performance.”
Even assuming that, as Matteson asserted, its inclusion of later work in an earlier bid item was inadvertent, its “pricing approach created the potential that [Matteson] could recover a disproportionate share of the contract price early in the performance period” and for this reason, the General Accounting Office supported the agency’s decision to reject the bid and award the project to the second low bidder.
In M. J. Paquet Inc. v. New Jersey Department of Transportation, 794 A. 2d 141 (N.J. 2002), the contractor was a little luckier. Paquet submitted what was admittedly (but again, “inadvertently”) an unbalanced bid, and then protested when the DOT proposed to delete the profitable work from the contract for unrelated reasons. Paquet sought an equitable adjustment to make up for what it would lose, and the DOT rejected it, based on a spec section that said that the department would not consider “any claim for additional compensation arising from the bid on an item ... inaccurately reflecting the cost of such work or containing a disproportionate share of the bidder’s anticipated profit, overhead or other costs.” (794 A.2d at 151).
Because Paquet wasn’t claiming additional compensation — or at least the phrasing was ambiguous, the court refused to use the clause to bar Paquet’s claim. The court went on to give a discussion of the evils of front-end loading and unbalanced bidding, and cautioned that its decision was “limited to the unique facts of this appeal.” Had the spec section been worded a little more artfully, Paquet could have found itself deeply out of pocket.
The lessons taught by both of these decisions is similar. A contractor who chooses to submit an unbalanced bid takes several risks: one, that he might be violating a statute, regulation or contract provision, which might get him disqualified or terminated if discovered; two, that if the lower-priced item is increased or the higher-priced item decreased, he may suffer financially; and three, if the owner is public and has a False Claims Act (or equivalent), the contractor might find himself in criminal court.
All in all, the contractor inclined to gamble might be better off in Las Vegas, Atlantic City or a riverboat casino than rolling the dice on a schedule of values.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800, e-mail to [email protected].