Unitec States --
Environmental Protection Agency
Agency
Office of Water
Program Operations (WH-547)
Washington DC 20460
June 1978
vvEPA
Water
Report to Congress
Waste Water Treatment
Contracting and
Bid Shopping
OOOR78001
-------
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
JUN 2 8 1978
THE ADMINISTRATOR
Honorable Walter F. Mondale
President of the Senate
Washington, D.C. 20510
Dear Mr. President:
I am pleased to submit herewith the United States Environmental
Protection Agency Report to the Congress of the United States on
Wastewater Treatment Contracting and Bid Shopping. This report is
submitted in accordance with the direction of the Joint House of
Representatives-Senate Conference Committee for amendments to the
Federal Water Pollution Control Act. The direction of the Conference
Committee is contained in the conference report accompanying H.R. 3199
in the section entitled "Water Treatment Contracting and Bid Shopping."
In that section, the conferees directed me to "review implementation
of Section 204(a)(6) provisions to determine if any modification of
regulation or law may be necessary or appropriate." In undertaking this
review, I was to focus particularly upon whether or not principal sub-
contractors and equipment suppliers should be named in bid submissions
for treatment works. I was also to review whether the requirements of
204(a)(6) have been interpreted as requiring low-dollar treatment
equipment in practically all cases.
In our report, we have sought to define both the scope and context
of these issues, particularly.the extent to which suggested remedial
actions could be utilized under the requirements of the Act and its
implementing regulations; and the advisability of altering such policies
if necessary. By presenting and considering the comments of other
interested parties, the report reflects the full range of opinions
available to the Agency during our deliberations.
U.S. Environmental Protection Agency
Region V, Library
230 South Dearborn Street
Chicago, Illinois 60604
-------
-2-
As you will see, the report concluded that neither regulation changes
nor further legislation are necessary or appropriate. The report spells
out in detail the basis for this conclusion.
I trust that the report proves fully satisfactory to you and the com-
mittee. If such is not the case, or if you or any member have additional
questions, please contact me.
Sincerely yours,
Barbara Blum
Acting Administrator
Protec
on
-------
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
& WASHINGTON. D.C. 20460
JUN 2 9 1978
THE ADMINISTRATOR
Honorable Thomas P. O'Neill, Or.
Speaker of the House of Representatives
Washington, D.C. 20515
Dear Mr. Speaker:
I am pleased to submit herewith the United States Environmental
Protection Agency Report to the Congress of the United States on
Wastewater Treatment Contracting and Bid Shopping. This report is
submitted in accordance with the direction of the Joint House of
Representatives-Senate Conference Committee for amendments to the
Federal Water Pollution Control Act. The direction of the Conference
Committee is contained in the conference report accompanying H.R. 3199
in the section entitled "Water Treatment Contracting and Bid Shopping."
In that section, the conferees directed me to "review implementation
of Section 204(a)(6) provisions to determine if any modification of
regulation or law may be necessary or appropriate." In undertaking this
review, I was to focus particularly upon whether or not principal sub-
contractors and equipment suppliers should be named in bid submissions
for treatment works. I was also to review whether the requirements of
204(a)(6) have been interpreted as requiring low-dollar treatment
equipment in practically all cases.
In our report, we have sought to define both the scope and context
of these issues, particularly the extent to which suggested remedial
actions could be utilized under the requirements of the Act and its
implementing regulations; and the advisability of altering such policies
if necessary. By presenting and considering the comments of other
interested parties, the report reflects the full range of opinions
available to the Agency during our deliberations.
-------
-2-
As you will see, the report concluded that neither regulation changes
nor further legislation are necessary or appropriate. The report spells
out in detail the basis for this conclusion.
I trust that the report proves fully satisfactory to you and the com-
mittee. If such is not the case, or if you or any member have additional
questions, please contact me.
Sincerely yours,
Barbara Blum
Acting Administrator
-------
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY REPORT TO THE CONGRESS OF
THE UNITED STATES ON WASTEWATER TREATMENT CONTRACTING AND BID SHOPPING
TABLE OF CONTENTS
Executive Summary Page
I. Introduction 1
A. Purpose
B. Direction of the Conference Committee
C. Background
D. Definitions
E. Scope of EPA's Study
II. Current Practices 6
A. Federal Procurement
B. Federal Assistance Programs
C. Construction Grants Program
D. State and Local Statutes and Procedures
III. Summary of Comments and Recommendations 12
A. The Water and Wastewater Equipment Manufacturers
Association (WWEMA) Position
B. The Associated General Contractors (AGC) Position
C. Other Comments on the WWEMA Proposal
D. General Comments
E. Recommendations of the Joint ACEC/WWEMA/AGC Committee
IV. Discussions of Issues 27
A. Nonrestrictive Specifications
B. Emphasis on Low-dollar Equipment
C. Post Bid-opening Bid Shopping
E. Naming in Bid Submissions
V. Conclusions 33
VI. Recommendations and Proposed Actions 36
-------
APPENDICES
A. Direction of the Federal Water Pollution Control
Act Amendments Conference Committee
B. Groups, Agencies and Individuals Contacted and
Providing Input to the EPA Study of Wastewater
Treatment Contracting and Bid Shopping
C. Comments and Recommendations submitted to EPA C-l
as Input to the Study
1. WWEMA Brief C-l
2. AGC Position C-80
3. Input from MAG members C-104
4. Input from other sources C-142
5. Recommendation of the joint ACEC/WWEMA/AGC C-162
Committee
-------
Executive Summary
This report to Congress is in response to direction from the Joint
Conference Committee on the 1977 Amendments to the Federal Water Pollu-
tion Control Act. The conferees directed the Administrator to review
the implementation of the Section 204 (a)(6) nonrestrictive specification
provision enacted by Public Law 92-500 in 1972, to determine if any
modification of regulation or law may be necessary or appropriate. The
review was particularly focused to evaluate the emphasis on low-dollar
treatment equipment and whether principal subcontractors and equipment
suppliers should be named in bid submissions on construction grant
projects to prevent bid shopping.
The study by EPA has involved reviews of specifications and bidding
procedures at the Federal state and local levels, analysis of substan-
tial input from various interested parties, review of ongoing EPA studies,
and discussion of the issues with groups representing grantees, consulting
engineers, contractors and equipment suppliers.
The nonrestrictive specification provision of Public Law 92-500
provides: "that no specifications for bids in connection with such works
shall be written in such a manner as to contain proprietary, exclusion-
ary, or discriminatory requirements other than those based upon perfor-
mance, unless such requirements are necessary to test or demonstrate a
specific thing or to provide for necessary interchangeability of parts
and equipment, or at least two brand names of comparable quality or
utility are listed and are followed by the words 'or equal1.11
EPA's implementation of this provision interrelates these statutory
nonrestrictive specification requirements with fundamental Federal re-
quirements pertaining to competition and issuance of specifications. Cost
effectiveness, including life cycle costs, was established as an accep-
table procedure for determining performance in support of the use of
restrictive specifications.
The nonrestrictive specification requirements encourage free and
open competition among subtler bid items which meet the requirements of
the project. This competition has fostered both technological develop-
ment and a growing marketplace among subcontractors and suppliers.
Such competition is appropriate for public contracting but can also be a
factor in bid shopping. The possibility of bid shopping is affected by
the parties involved in the competition, the timing as to when the
competition takes place and the competitive procedures utilized. Bid
shopping occurs when the prime contractor uses the lowest sub bid as
leverage to achieve even lower bids from competing subcontractors.
Competition appropriate for public contracting can also encourage the
selection of subtier bid items which have a low first cost. Quality can
be maintained, however, by rigid adherence to the specifications, the
-------
use of cost effectiveness and life cycle costing rather than first cost
in the selection of items and through the process of carefully reviewing
bid items proposed by the contractor for use in the project. The EPA
and the grantee will be further assisted in assuring compliance with
specification requirements through a program established by interagency
agreement between EPA and the Corps of Engineers which will expand con-
struction project inspection and monitoring.
The input to the study has indicated widely diversified opinions as
to which are the best procedures to be followed for bidding on construc-
tion grant projects. Only the wastewater equipment manufacturers strong-
ly support a mandatory requirement for naming or listing specific
subtier items in the prime bids. The general contractors and other
groups are opposed to such a requirement being mandated by law or Agency
regulation. A few commentors could accept a listing requirement on a
voluntary basis at the discretion of the grantee. A joint committee
involving representatives of the consulting engineers, the equipment
manufacturers, and the contractors jointly proposed that EPA identify an
acceptable prequalification procedure that would meet the nonrestric-
tive specification requirements for competition and which could be
utilized on a voluntary basis by grantees and their engineers to prequalify
major items of equipment. In prequalification the engineer or the
grantee or both review potential equipment items through a competitive
process and establish a list of those which are acceptable for the
project.
Current statutes and EPA regulations neither prohibit nor require
naming or prequalifying of equipment suppliers in municipal contracting
for construction grant projects. In accordance with EPA regulations on
contracting, grantees may use their own procurement systems and proce-
dures which meet state and local law provided minimum Federal require-
ments are met. This is consistent with the emphasis on increased state
and local decision-making in the FWPCA and its implementing regulations,
as well as OMB guidance on state and local assistance programs.
A review of ongoing EPA studies has indicated several which indirectly
relate to this study. These deal with subjects such as factors affecting
the performance and reliability of completed treatment facilities and
the economics of the equipment industry. The preliminary results of
these other studies are not inconsistent with the recommendations of
this study. The preliminary results of the economic study which focuses
on the views of the equipment industry, indicate many of the same conten-
tions raised by the equipment industry in comments and recommendations
furnished as input to this Congressionally directed study. Because of the
mix of business from various sources, the economic verification of these
contentions was not readily discernible. The preliminary recommendations
of the economic study are for further review in this area.
-------
An extensive body of state and local laws and regulations exists in
the area of specification and bidding procedures for public contracts.
These procedures can be applied to contracting under construction
grants to the extent that they do not conflict with minimum Federal
requirements. Some states and local governments have procedures which
control bid shopping to varying degrees through a variety of mechanisms.
The imposition of mandatory Federal requirements in this area would
superimpose such requirements on state and local procedures and may
conflict with state and local statutes or ordinances on bidding.
In accordance with construction grant requirements, the naming of
innovative products and processes in the specification may be justified
if required to demonstrate or test a specific thing or if found to be
cost effective. In the 1977 Amendments to the Federal Water Pollution
Control Act the use of innovative technologies is encouraged by allowing
up to 15% higher life cycle costs in the cost effectiveness analysis
of such technologies and by permitting the Federal grant participation
for such technologies to be increased from 75% to 85% of the eligible
costs. Modification or replacement grants are also allowed where the
selected innovative technology fails to perform, as long as such failure
is not based on negligence. The use of innovative technologies would
normally be considered during project planning and design. However,
the procedures developed to implement these provisions can be used for
prequalification of items prior to bidding or during bidding provided
the documents soliciting proposals clearly indicate the emphasis that
will be placed on innovation and life cycle costs.
Based on the review and analysis of the comments and proposals
offered regarding bid shopping, equipment listing and prequalification
of major items of equipment, EPA recommends against any Federal direc-
tion in the form of legislation or regulation changes in this area.
Aside from the technical considerations used in arriving at this recom-
mendation, serious thought was given to the desirability of Federal
intrusion into local bidding and contracting procedures where a signi-
ficant body of state and local laws and regulations exists. Imposing
Federal requirements in this area would be inconsistent with other
goals to increase state and local responsibility and decision-making.
EPA intends to continue to permit the use of anti-bid shopping
procedures including listing on construction grant projects where such
procedures are established by state and local requirements or preference.
In order to permit the consulting engineer and the grantee to take
a more active role in the selection of quality equipment items necessary
for the successful operation of the completed facility, and still maintain
the open competition appropriate for public procurements, EPA plans to
review basic prequalification procedures to identify, for voluntary use,
the necessary minimum elements for prequalification which would comply
with the nonrestrictive specifications requirements for adequate compe-
tition.
m
-------
I. Introduction
A. Purpose
This report is submitted to Congress by the United States Environ-
mental Protection Agency (EPA) in accordance with the direction of the
Joint House of Representatives - Senate Conference Committee for amend-
ments to the Federal Water Pollution Control Act. The direction of the
conferees is contained in the conference report accompanying H.R. 3199 in
the section entitled "Water Treatment Contracting and Bid Shopping."
This section, which can be found in the House of Representatives Report
No. 95-830, 95th Congress, 1st Session, pages 113-4, are reproduced in
Appendix A of this report. The amendments were signed by the President
on December 27, 1977 and became Public Law 95-217.
B. Direction of the Conference Committee
The conferees directed the Administrator to review the implemen-
tation of the section 204(a)(6) provisions enacted by Public Law 92-500
in 1972 in order to determine if any modifications of regulation or law
may be necessary or appropriate. The review was particularly focused to
include an evaluation of whether principal subcontractors and equipment
suppliers should be named in bid submissions for treatment works so as
to prevent bid shopping. Also highlighted for review was the interpre-
tation of section 204(a)(6) nonrestrictive specification provisions as
requiring acceptance of low-dollar treatment equipment proposed for
construction grant contracts.
C. Background
This section of the report provides a brief summary of background
issues in order to set the stage for additional discussions. The items
covered are discussed in more detail in subsequent portions of the
report.
Section 204(a)(6) of Public Law 92-500 enacted in October 1972
provides that:
"Section 204(a) Before approving grants for any project for any
treatment works under section 201(g)(l) the Administrator shall
determine -- ... (6) that no specification for bids in connection
with such works shall be written in such a manner as to contain
proprietary, exclusionary, or discriminatory requirements other
than those based upon performance, unless such requirements are
necessary to test or demonstrate a specific thing or to provide
for necessary interchangeability of parts and equipment, or at
least two brand names or trade names of comparable quality or
utility are listed and are followed by the words 'or equal1 ."
-1-
-------
This statutory provision, commonly referred to as the nonre-
strictive specification requirements, was implemented in Agency regu-
lations (40 CFR 35.936-13). These regulations interrelate the
statutory nonrestrictive specification requirements with fundamental
Federal requirements pertaining to competition and issuance of speci-
fications. Additional program requirements were also furnished to the
EPA regions. (Nonrestrictive Specifications, Program Guidance Memo-
randum PG-19A, issued August 8, 1975, later renumbered Program Require-
ment Memorandum PRM 75-5). The application of these nonrestrictive
specification requirements emphasizes that maximum free and open
competition must be maintained in the preparation of specifications on
construction grant projects.
Under prior practices, the consulting engineer or the municipality
had normally selected the items they considered acceptable in the design,
and specified those items, sometimes by brand name. Some state and
local procedures required the words "or equal" or "or approved equal"
where brand names were used. But contractors were generally not en-
couraged to substitute items for those named. Under the new requirement
most engineers have chosen to use "two brand names or equal" language
in their specifications rather than to use performance specifications,
or to use cost effectiveness analyses to demonstrate life cycle cost
advantages in support of specifying a single item. Competition has
improved and considerably more subtler items are entered in the compe-
tition under the new system. These items are frequently, but not always
preapproved by the engineer prior to bid opening. Under many contracts
"or equal" items can also be approved by the engineer or the grantee
after contract award.
It is the contention of the equipment suppliers that regardless of
these individual contract variations, a result of the new requirements in
addition to increased competition, is that equipment items incorporated in
treatment plant construction are now sometimes selected by the prime con-
tractors based on low price, rather than by the consulting engineers based
on prior experience, design preference, good start-up and post-construction
services, or other intangible but equally important factors.
This is the type of situation which has caused the equipment sup-
pliers to raise objections and suggest that prime bidders should be
required to identify suppliers in their bids and not be allowed to easily
substitute others after contract award. On the other hand the prime
contractor must contend with bidding substantial sums of money based
on numerous subtier proposals which may not have been received until
the last minute, may not be finalized or binding on the supplier, may
not meet the technical, timeliness or warrantee requirements of the
specifications and may be completely different and not comparable
with the other proposals being evaluated. More detailed discussions
of the concerns of equipment suppliers and prime contractors, as well
-2-
-------
as those of grantees and engineers are provided in subsequent por-
tions of this report.
In the development of regulations and guidance on bidding, EPA
has taken the view that there is no compelling Federal interest in
mandating specific bidding procedures, so long as the state and local
practices utilized comply with the minimum Federal requirements identi-
fied in EPA regulations. Accordingly, EPA regulations in general neither
prohibit nor require the types of procedures for inhibiting bid shopping
that have been suggested by equipment suppliers. Provided that the min-
imum Federal requirements are met, state and local laws and procedures
govern most questions which arise in the contracting process under the
construction grants program. This is consistent with the program emphasis
on increased state and local decision-making. State and local entities
utilize a wide variety of contracting procedures, some which are consis-
tent and some which are not consistent with the equipment suppliers' recom-
mendations. This report indicates some of the wide divergence of opinion
as to the best procedures for bidding on construction grant projects.
D. Definitions
There is no general agreement on a precise definition of "bid shop-
ping." The differences in definition seem to be a question of when bid
shopping occurs rather than what it entails. The Water and Wastewater
Equipment flanufacturers Association, Inc. (WWEMA) state in a legal brief
on the subject that bid shopping "refers to the prime contractor's
shopping for a lower bid after the prime bids have been opened". (WWEMA
Briefing, pg 3). The Comptroller General has identified bid shopping as
the efforts of a prime contractor to reduce prices quoted by his sub-
contractors, by shopping that bid to other subs, but only after contract
award. (See e.g. 43 Comptroller General 206(1963)). Bid shopping has
also been defined by a Commission on Government Procurement, estab-
lished by the Congress in 1969, as the prime contractor's use of the
lowest subcontractor bid, at any time, as leverage to achieve a lower
bid. For the purpose of this report bid shopping refers to any post
bid-opening efforts by a prime contractor to use the lowest bid received
on a subcontract as leverage to gain an even lower bid.
The terms "bid shopping" and "bid peddling" have sometimes been
used interchangeably. However, bid peddling more precisely refers to
post bid-opening action by subcontractors, to undercut a previously low
bid by another subcontractor. This usually occurs in concert with bid
shopping by a prime contractor. Accordingly, the term bid shopping as
used in thi's report will also include the parallel practice of bid
peddling to the extent that it occurs.
In the construction grants program "nonrestrictive specifications"
are specifications which in accordance with Section 204(a)(6) of the
Federal Water Pollution Control Act (FWPCA) do not contain "proprietary,
exclusionary or discriminatory requirements other than those based on
-3-
-------
performance." The use of two brand names followed by the words "or
equal" also complies with the nonrestrictive specifications requirements
of the statute. It should be noted that restrictive specifications are
permitted by the FWPCA under certain circumstances such as demonstration
of a particular thing or interchangeability of parts.
"Prequalification" or "preapproval" of major equipment items refers
to a procedure whereby the engineer or the municipality or both review
potential equipment items through a competitive process and establish a
list of those that are acceptable for the project. If prequalification
is utilized, provisions must be made to assure that free and open com-
petition is maintained in the prequalification process consistent with
the FWPCA and its implementing regulations.
In the context of this report "naming" or "listing" refers to a
requirement in the bidding documents that a prime contractor name a
single subcontractor or supplier for certain items that are so speci-
fied. If established, a listing requirement must be clearly set forth
in the invitation for bids. The actual listing requirement may take
several forms. For example the prime bidder may select from a list of
prequalified suppliers or under certain defined circumstances may propose
an equivalent supplier. Prequalification and listing are discussed in
more detail in subsequent portions of this report.
E. Scope of EPA Study
The conduct of the EPA study involved reviews of Federal, state,
local and industry specification and bidding practices, analysis of
substantial input from interested parties, review of ongoing EPA
studies, discussion of the issues with the EPA Management Advisory Group
(MAG), and the participation in joint meetings with groups representing
consulting engineers, contractors and equipment suppliers.
Some groups and individuals submitted detailed recommendations on the
bidding procedures in the EPA construction program. WWEMA submitted a
legal brief in support of a regulatory listing requirement. The Asso-
ciated General Contractors (AGC) submitted arguments opposing any listing
requirements. In addition to the unsolicited inputs from various sources,
comments and recommendations were requested from other interest groups,
MAG members and Federal agencies. Since many of the basic procurement
issues in the study involve question of law and legal interpretate the
study was conducted in close coordination with the EPA Office of General
Counsel. The ten EPA Regions were polled for input on current procedures
and recommendations regarding the issues covered in the study. A list of
groups contacted and those providing input to the study is included in
Appendix B and copies of comments and recommendations submitted are
included in Appendix C. Procurement procedures for both direct Federal
-4-
-------
procurement and Federal assistance programs were reviewed to determine
specification and bidding practices in these areas. The statutes and
regulations of several states were reviewed to identify contracting and
bidding procedures at state and local levels.
In addition, EPA participated as an observer in a series of joint
meetings with representatives from AGC, WWEMA and the American Consulting
Engineering Council (ACEC). As a result of these meetings a better
understanding of the concerns of the various groups and some joint
recommendations, primarily in the area of prequalification, were devel-
oped. The recommendations are further discussed in Section III. E. of
this report.
In the course of the study the comments and recommendations from
the various interest groups were thoroughly reviewed and analyzed.
The issues were identified, researched and analyzed, conclusions were
reached and recommendations were formulated.
-5-
-------
II. Current Practices
A. Federal Procurement
Extensive regulations and procedures exist in direct Federal
procurement for specifications and bidding on Federal construction
contracts. Construction contracts in Federal procurement like other
contracts for public work are usually awarded based on formal advertise-
ment and competitive bids. Every effort is made to foster maximum free
and open competition which results in the lowest price to the Government
and fair and reasonable compensation to the contractor. Proprietary or
sole source specifications are ocasionally used where a particular item
is required for a certain justifiable purpose.
In Federal procurement, obligations to list suppliers or inhibit
bid shopping have not been recognized unless imposed by agency reg-
ulations and guidelines or statutes. However, despite the detailed
consideration given to procurement procedures by the Federal Government,
prequalification procedures and requirements for naming of suppliers, or
other requirements inhibiting bid shopping are almost non-existent.
The Department of Interior dropped its listing requirements in
1975, shortly after losing a United States Court of Claims case in-
volving the Department's refusal to allow a contractor to substitute
another subcontractor for the listed subcontractor. (40 Federal
Register 17848 (April 28, 1975) and 29722 (July 15, 1975)TT^
The General Service Administration (GSA), after publishing notice
of its intent to delete the GSA requirement for prime bidders to list
certain subcontractors in their bids, (42 Federal Register 27966
(June 1, 1977)) has apparently decided to maintain the listing require-
ment with some modifications. Under the GSA requirement, prime bidders
must list subcontractors having a certain percentage of the work for
heating, ventilation, and air conditioning (HVAC), electrical, vertical
transportation (elevators/escalators) and other general categories of
work in the specifications. The current regulation requires the listing
of subcontractors when their work comprised more than 3.5% of the total.
An increase in this percentage, possibly to 6% is one of the items being
considered in the revisions and modifications to the GSA procedures.
Prequalification of equipment items is also generally not required
or used in Federal contracting. The procurement of standard items is
usually based on extensive systems of technical and performance speci-
fications which exists in most direct Federal procurement programs.
Specialized items necessary for a particular purpose are usually pro-
cured directly by the Government for installation by the contractor.
Direct procurement by the Government usually involves some type of
competition, even if the specialized item is available from limited
sources. In the absence of technical or performance specifications
and if time is of the essence, the Government may specify items by
brand name followed by the words "or equal". This latter method is
the least preferred method of Federal procurement.
-6-
-------
B. Federal Assistance Programs
Specification and bidding procedures in Federal assistance
programs are significantly more diversified than those involved in
direct Federal procurement for a variety of reasons. First, statutory,
regulatory and Federal agency requirements vary among the different
programs. Also a variety of state and local requirements normally
apply to the contracting efforts since these government entities are
usually doing the contracting under assistance programs. Moreover, the
programs themselves vary as to the type of assistance provided. Assist-
ance can be in the form of grants, loans, loan guarantees, revenue
sharing, or technical assistance. For the purpose of this report the
discussion is limited to contracting under grants-in-aid to state and
local governments, which is the type of assistance provided by the EPA
construction grant program.
The one common element for procurements under grant programs is the
application of Attachment 0 to OMB Circular A-102. ("Uniform Adminis-
trative Requirements for Grant-In-Aid to State and Local Governments"
recently reissued at 42 Federal Register 45828-91, September 12, 1977)
The purpose of Circular A-102 is to set broad uniform guidance for
Federal grantor agencies to follow in their grant programs. Attachment
0 of the Circular, which deals specifically with procurement under grant
programs, is currently under revision. In the area of bidding and
specifications the revisions being considered do not significantly alter
the existing Attachment 0 requirements. Under Attachment 0, grantees may
use their own procurement regulations which reflect applicable state
and local laws, rules and regulations, provided that procurements made
with Federal grant funds adhere to certain defined standards. There
are no provisions in Attachment 0 requiring or prohibiting either pre-
qualification or listing in contracting under grants. The provision of
maximum open and free competition is emphasized, and specifications
containing features which unduly restrict competition are not per-
mitted. However, "brand name or equal" descriptions may be used to
define the salient requirements of a procurement.
Attachment 0 provides broad guidelines upon which Federal grantor
agencies are to base specific program requirements. Agencies are not to
establish additional requirements unless required by Federal law or
Executive Orders. Accordingly, state and local procurement procedures
are used to a great extent in Federal grant programs and any prequali-
fication procedures or listing requirements for bidding and contracting
are imposed by the State or the local agencies who are recipients of the
grant funds.
-7-
-------
C. Construction Grant Program
The EPA construction grant program is a major Federal program
established under the Federal Water Pollution Control Act (FWPCA) to
provide grant assistance to local governments for the purpose of abating
water pollution resulting from municipal wastewaters. The EPA construc-
tion grant subagreement regulations (40 CFR 35.936 through 35.938) indi-
cate EPA requirements relating to procurement of engineering services
and construction contracts under this program. Since Attachment 0 re-
visions were being considered when these subagreement regulations were
developed, EPA was granted permission to deviate from the specific
requirements of the existing Attachment 0. In the construction contract
bidding area there are no significant differences between the broad
guidance of Attachment 0 and the requirements of the EPA regulations.
Construction contracts are normally procured by formal advertisement and
competitive bidding, using state and local procedures and the Federal
requirements established to implement the provisions of the FWPCA.
EPA has not imposed any prequal ification procedures, listing re-
quirements, or anti-bid shopping requirements upon its grantees. Con-
sistent with Attachment 0, as well as the emphasis on increased state
and local decision-making in the FWPCA and its implementing regulations,
EPA does not prohibit grantees from establishing such requirements in
their specification and bidding procedures provided minimum Federal re-
quirements for adequate competition are met.
When properly imposed by the grantee, prequalification procedures,
listing requirements and bid shopping prohibitions are enforceable
under the EPA bid protest procedures described in EPA regulations at
40 CFR 35.939. This provision in the EPA regulations was established
to clearly define expedient procedures for the equitable administrative
resolution of disputes arising out of procurements under construction
grant projects. The GAO has admonished Federal grantor agencies to
provide for such procedures. Additionally, the establishment of
such protest procedures is consistent with proposed revisions being
considered for Attachment 0, although not required under the existing
Attachment 0. In order for the grantee's procurement requirements
regarding prequalification listing or anti-bid shopping to be upheld
in protest under the EPA regulations, these requirements must not be
contrary to the minimum Federal requirements for adequate competition
and must be clearly identified and defined in the grantee's procure-
ment procedures.
A poll of the ten EPA regions indicated that a variety of pre-
qualification and listing procedures have been used in local govern-
ment contracting under the construction grants program. The imposi-
tion of such procedures has depended upon the public contracting
requirements of state and local statutes and regulations. These
-8-
-------
state and local requirements are discussed further in the following
section of this report. Although no strong positions were taken,
most regions indicated that prequalification procedures and to a lesser
extent listing requirements could probably improve project performance
and reduce delays, even considering the additional time that might be
required for such procedures. However, only one response suggested tnac
these procedures should be mandatorily required by regulation. The
majority position was that the use of these procedures should continue
to be permitted as they currently are under the existing regulations
with a possible clarification which would clearly indicate the accep-
tability of such procedures in the construction grant program.
D. State and Local Statutes and Procedures
An extensive body of state and local laws and regulations
exists which deal with specification and bidding procedures in public
contracts. Grantees may use these procedures for contracting under
construction grant projects to the extent that they do not conflict
with the minimum requirements of the EPA construction grant regulations.
Some of these state statutes have provisions dealing with bid
shopping and in accordance with EPA regulations are applicable to
construction contracting under the construction grant program. Sev-
eral of these statutes were reviewed in the course of the study.
Although these statutes vary widely in both form and content, they
can be grouped into three general categories: Subcontractor listing
requirements, subcontractor filing requirements, and multiple prime
contractor bidding.
Subcontractor listing is the best known and most widely used ap-
proach to solving bid shopping problems. Under this method of bidding
the general contractors are required to list proposed subcontractors by-
name in their bids and are not allowed to make substitutions without
demonstrated justification and the consent of the contracting authority.
When this requirement is employed, any subcontractors who will perform
more than the stated minimum percentage or dollar amount of the total
job must be listed by the general contractor in his bid (e.g., in
California, any subcontractor who will perform more than ^ of 1% of the
total amount bid must be listed). Instead of determining applicability
by percentages or dollar amounts some states required the general con-
tractors to list subcontractors who will perform certain specialty work,
(e.g., mechanical, electrical, plumbing, heating and ventilation).
There are some weaknesses in this method of controlling bid shopping,
First, because of time constraints the general contractor may be required
to list a subcontractor without having fully evaluated the subtier bid
proposals. Second, there is no legally binding contract between the
proposed subcontractor and general contractor prior to the award of the
-9-
-------
prime contract. This allows the listed subcontractor to restrict the
scope of work or to seek additional compensation prior to entering into
the subcontract. Finally, since general contractors are not required to
list subcontractors for those portions of specialty items of the job
which they will perform themselves, the listing requirement can be
circumvented by a general contractor who does not list subcontractors
and "shops" for the best price from a subcontractor who is then retained
as an employee of the general contractor.
The second category of anti-bid shopping statutes, subcontractor
filing requirements, is used primarily in Massachusetts. Under this
method, the specifications for a particular job contain separate sec-
tions for various classes of work for which the awarding authority deems
it necessary to review sub-bids. Subcontractors then file their bids
for the various classes before the general bids are received. The
prospective general contractors select among the prequalified subcon-
tractors and name those whom they intend to use for the job in their
bids. After being awarded the contract the general contractor cannot
substitute subcontractors without obtaining the approval of the awarding
authority.
The third system employed to protect subcontractors from bid shop-
ping is the multiple prime contractor bidding method. Statutes which
require this method of bidding generally provide for the total job to be
split into subparts and contracts awarded for each segment of the job.
An example of this method is that employed in New York where separate
bids are received for the plumbing, heating and ventilation, electrical,
and mechanical portions of the work. A variation to this method is
employed in New Jersey where bids are received for the total job and
individual segments of the job. The contract is awarded to the lowest
bidder for each segment or lowest total bidder if his bid is less than
the total of the low bids on the segments.
This method reduces the opportunity for bid shopping by elevating
firms who would normally be subcontractors to the status of prime con-
tractors. However, bid shopping below the prime contractor level is not
eliminated or affected. The major criticism of this system is the
increased cost of project administration. A project management firm
must generally be hired to coordinate the work of the different segments.
The American Bar Association (ABA) is presently developing a Model
Procurement Code for State and Local Governments which contains two
provisions of interest to this study. The current draft of the Code
includes a provision which would allow prequalification of potential
suppliers of services, supplies, and construction. The purpose of
this prequalification provision is to reduce the administrative burden
of making numerous responsibility determinations during bidding. Under
the provision as currently drafted, a prequalified supplier could be
-10-
-------
found nonresponsible after bid opening, or a supplier who was not pre-
qualified could be found responsible. Therefore, such a prequalifica-
tion provision does not preclude a subsequent evaluation of responsi-
bility which could add or delete suppliers. The subsequent addition
or deletion of suppliers after prequalification could result in pro-
tests and other bidding delays.
Another provision in the current draft of the Code deals with a
qualified products list. Under this provision, if time does not permit
post award testing, a specification could include or reference an
appropriate qualified products list. Preparation of the qualified
products list would require adequate public notice and competition.
This provision recognizes the benefits that can be gained in public
contracting through a competitive prequalification process. While it is
doubtful that an up-to-date qualified products list could be maintained
for the constantly changing variety of equipment items in the wastewater
treatment industry, certain major items of equipment could be prequali-
fied for individual projects.
Although a few jurisdictions are using draft provisions of the Model
Procurement Code, it should be recognized that even after finalization
and endorsement of the code by the ABA it will be some time before a
significant number of local governments have adopted it.
-11-
-------
III. Summary of Comments and Recommendations
A. The Mater and Wastewater Equipment Manufacturers Association
(WWEMA) Proposal
WWEMA submitted excerpts of a brief to the Administrator by
letter dated December 2, 1977, and later furnished the entire brief.
(See Appendix C). The essential position of WWEMA is that bid shop-
ping/peddling is detrimental to EPA, its grantees and the public in-
terest. WWEMA submits that these practices must be controlled through
Federally imposed listing requirements. Grantees would impose the
actual sanctions for any failure of a prime level bidder to conform to
the requirements. The sanctions would include automatic disqualifi-
cation of a nonconforming bid as nonresponsive and contract termination
or monetary penalities (20% of the relevant subcontract price Is sug-
gested) for unauthorized substitution.
WWEMA presents a number of arguments on behalf of their position.
Briefly summarized, these arguments include:
1,. Bid shopping is unethical. The ability to shop after bid
opening "rewards the ruthless and unethical prime and discourages
responsible conduct on the part of the subcontractor." The low bidding
prime contractor subverts the competitive process by having "a chance"
to receive a lower bid, without a concomitant price decrease to EPA or
the grantee. The subcontractor is forced to perform at a loss or "is
tempted to unethical conduct in the form of doing an inadequate job."
(WWEMA Brief, pp 4-6, 9 and 12)
2. Bid shopping adversely impacts competition from subcontractors.
The risk and loss involved in bidding on an EPA assisted pro-
ject are accelerated. Subcontractors are entirely without recourse to
bid shopping by the prime contractor with the low bid. Contract perform-
ance is often only minimally profitable, at best. Subcontractors may
refuse to bid to "known" bid shoppers or pad their initial offers, in
expectation of later shopping. (WWEMA Brief, pg. 8 and 9).
3. Bid shopping results in inflated contract prices. If subcon-
tractors pad their bids, only the prime level bidder obtains the benefits
of subsequent price reductions resulting from bid shopping. Accordingly,
the prime bid is artificially high. Even if the prime lowers his bid in
anticipation of being able to bid shop, the risk involved in not know-
ing how much reduction can be achieved adds some cost to the bid.
-12-
-------
4. Bid shopping discourages research and development by equipment
suppliers.
Bid shopping reduces profits to waste treatment equipment
suppliers thereby eliminating the justification for research and
development expenses. This is detrimental to the long-range goals of
cleaning up the Nation's water because new and innovation technologies
will not be developed by private enterprise if it is not profitable.
(WWEMA Brief, pp 10-11).
5. Bid shopping may lead to delays in the ordering of equipment.
If bid shopping is allowed, a subcontractor will not order
equipment until a firm subcontract is finally negotiated, which may
cause substantial delays. (WWEMA Brief, pg 11).
WWEMA suggests that EPA impose a listing requirement and bid shop-
ping prohibition through a formal rulemaking. The regulation suggested
by WWEMA would apply to any contract having an estimated total cost in
excess of $150,000. Under this regulation an EPA grantee would have
several tasks. First, each Invitation For Bid (IFB) must contain the
listing requirement set forth in the regulation. Second, the grantee
through its consultant must determine the subtler categories of work for
which listing is required. WWEMA suggests application of listing re-
quirements to categories exceeding 3% of the estimated prime contract
cost. Third, the grantee would review requests for substitutions and
hold hearings, at the request of the affected subcontractors. Fourth,
the grantee may terminate a prime's contract or impose a sizeable
penalty (20% of the original subcontract price) for an unauthorized
subtler substitution. (WWEMA Brief, Appendix I).
EPA also has some responsibilities under the WWEMA proposal.
First, the Agency must determine that each grantee has included the
regulatory clause in its IFB. Second, the Agency must determine that
the specifications include the appropriate listing form. Third, the
Agency may be called upon to determine some bid protests regarding the
listing requirement. According to WWEMA, these would be limited to
instances where the proposed contractor failed to complete the form,
the grantee failed to include the proper forms, or the prime challenges
the categorization of subcontract work. WWEMA contends "that no new
grounds for protest are provided under the proposed regulation."
(WWEMA Brief, pg. 17).
-13-
-------
B. The Associated General Contractors (AGO) Position
By letter of January 31, 1978, the AGC submitted its comments
to the Administrator on the issues identified in the Congressional
Conference Committee Report and the WWEMA brief. (See Appendix C for
the AGC submittal). Aside from complete opposition to the WVIEMA pro-
posal, the AGC comments are of particular interest with respect to its
assessment of the problem. AGC contends that no bid shopping "problem"
exists in the procurement of equipment under EPA construction grants.
Instead it is the bidding practices of equipment suppliers which are
responsible for the confusion, the lack of commitment by prime con-
tractors and the subsequent need for negotiations complained of by WWEMA.
A clear summary of these AGC conclusions is provided at the beginning of
Jie AGC comments:
"It is the view of the Associated General Contractors of America
(hereafter AGC) that the listing of principal subcontractors and
equipment suppliers by bidders for EPA grantee construction con-
tracts will not serve a useful purpose, but would only serve the
economic self-interest of suppliers in the negotiation of purchase
orders. AGC submits that a bid shopping problem does not exist in
the market for manufactured water treatment equipment. To the
contrary the major problems present in this field today result from
the failures of the equipment manufacturers to substantially meet
their responsibilities in the market-place." (AGC Comments, pg 1).
AGC presents a number of arguments in opposition to a listing
requirement. Briefly summarized these arguments include:
1. Equipment Suppliers Bidding Methodology Necessitates Subsequent
Negotiations. The primary element of AGC's concern is the
manner in which bids are compiled. AGC's contention is that normal bid-
ding practice among equipment suppliers does not provide for assurances
that offered equipment will conform to the specifications of the grantee.
Additionally, prices may not be given to the general contractor until a
few hours prior to submission of the prime level bid, with frequent
telephonic negotiations. The conclusion of this process is a "gamble,"
in AGC's words:
"The methods used by equipment suppliers in submitting quotations
to prospective prime contractors under the EPA construction program
is chaotic. It is a normal pattern of conduct for the manufacturer
to offer a product that it will not assure is in compliance with
the owner's plans and specifications. Moreover, the manufacturer
will not identify, with specificity, the aspects of the equipment
that do not meet the owner's requirements. It is then left to the
general contractor to make these determinations. Magnifying the
burden imposed on the general contractor, the equipment manufac-
turers normally do not provide prices covering their proposals
until short hours before the bid opening. Even when prices are
-14-
-------
furnished, usually 10 to 12 hours before bid opening, they are not
firm and salesmen for the suppliers continue to telephone price
reductions, frequently reaching 40 to 60 percent of the original
price quotation, immediately prior to bid opening. By that time,
it is impossible for the general contractor-bidder or his sub-
contractors to meaningfully evaluate quotations for the equipment.
Instead, the generally contractor must gamble with the equipment
prices to be included in its bid." (AGC Comments, pg 2)
The AGC comments include examples of "typical proposals" received by
prime bidders. Based on these typical proposals, AGC argues that the
prime bidder must assume a number of key burdens: (a) estimate a price;
(b) make basic technical evaluation of the equipment to determine its
compliance with specifications; and (c) check all exceptions to pro-
posals to determine that all tie-in work or interfacing is covered by
the estimate. Most importantly, notes AGC, these types of bidding
procedures:
"effectively prevented the finalization of any prospective purchase
orders before prime contract bidding. The result had to be ne-
gotiations following bid opening. If not successful with these
negotiations, the contractor must then go to another manufacturer."
(AGC Comments, pg 14).
AGC does not make an argument in favor of the concept of bid shopping
(which it deems an unwholesome practice, as indicated in the AGC Code
of Ethics). AGC asserts that "post bid-opening negotiations, "would
not be necessary:
"if the manufacturers would offer equipment meeting the owner's
plans and specification, and if the manufacturers would provide
their price quotations to prospective contractors so that an
effective evaluation and negotiation of work scope could be
performed before bid opening." (AGC Comments, pg 14).
The equipment suppliers listing requirement proposed by WWEMA would, in
AGC's opinion,
'"lock-in" the general contractor to a single supplier, who could,
after bid opening, demand whatever price it desired to bring its
non-conforming proposal into compliance with the owner's specifi-
cations." (AGC Comments, pg 14).
2. The WWEMA proposal is administratively unworkable. AGC high-
lights the following problems it perceives if EPA adopted the WWEMA
proposal: (a) administrative burden on EPA and grantees to promulgate
and implement new regulations; (b) strain on grantee resources, and
project efficiency, because of the need to conduct preaward evaluations
-15-
-------
of contractors' lists, and review and act upon substitution request; (c)
administrative bid protest would drastically increase because of ques-
tions of bidder responsiveness under a listing requirement (AGC presents
ten basic issues from GAO protest cases where questions could arise and
argues that otherwise responsive low bidders may be discarded resulting
in higher contract costs); and, (d) contract claims and litigation will
ensue, primarily as a result of decisions on substitutions. (AGC Com-
ments, pp 14-18).
3. No Federal agency requires the listing of equipment suppliers
bids. The GSA requirement concerns the listing of certain
principal subcontractors but does not extend this requirement to suppliers
of equipment under prime contracts or to suppliers under subcontracts.
(AGC Comments, pp 18-19).
4. No Federal/Ioca! government intervention in these commercial
relationships is appropriate. AGC makes two basic points
in this regard. First that general contractors:
"have historically demonstrated their ability to manage their own
subcontractor and supplier relationships, and the imposition of
added governmental interference in that relationship can only
serve to frustrate that demonstrated ability." (AGC Comments,
pg 19).
Second, that governmental regulations and decision-making is inappro-
priate, as a general rule, in this area which so closely involves basic
questions of business and professional judgement.
C. Other Comments on the WWEMA Proposal.
The following comments are representative of those received by EPA
on the WWEMA proposals. These comments were received as a result of
discussion of the WWEMA proposal with the EPA Management Advisory Group
(MAG) and a request for comments on the proposal. It is interesting to
note that other than WWEMA members, all responses except one were opposed
to the mandatory listing requirement proposed by WWEMA. The one response
from a consulting engineer that was not opposed was more ambivalent than
supportive and also suggested some changes to the WWEMA proposal. (See
Appendix C for copies of actual responses).
1. Comments were received from Bart T. Lynam, General Superin-
tendent of the Metropolitan Sanitary District of Greater Chicago (MSDGC),
by letter, dated January 6, 1978. Mr. Lynam, upon review of the WWEMA
brief, offers the following recommendations:
-16-
-------
"The proposal for a regulation mandating identification of sub-
contractors in bid documents for contracts funded by the U.S.
EPA should be rejected. However, we feel that grantees should
be allowed the option of including such requirements in their
bid documents in whatever manner they deem necessary to either
comply with State and local requirements or to mitigate potential
effects of bid shopping and bid peddling on bid prices for such
contracts."
The basis for Mr. Lynam's recommendations includes his observations
and comments in the following areas:
a. Bidding methodology. In this respect, Mr. Lynam independently
concurs with the position of AGC that post-bid opening negotiations are
vital due to the inability of the general contractor to determine either
an accurate price or conformance of listed equipment to the specifica-
tions during the bid preparation period:
"Experience shows that submittals of bids by subcontractors gen-
erally occurs a very short time before the bid opening. Prime con-
tractors are forced to accept bids at the last moment with little
or no opportunity to determine if the low bidder fully understands
the requirements of the contract documents or if the equipment to
be provided meets the specification. Given this situation, it is
difficult to see how primes can obtain better competitive sub-
contract bids before bid opening by the application of the
proposed regulation."
b. Lower prices. Mr. Lynam points out that the WWEMA proposal
does not prohibit or restrict "puffing" by subtier offerers. The
essential argument is that any purportedly excess profits would merely
be shifted from the prime to the subcontract level, and not result in
lower bid prices.
c. Quality control. Mr. Lynam suggests that the desire to
reduce costs and increase profits is universal, as is a grantee's
concern that such efforts do not impair adequate performance. Ac-
cordingly, bid shopping can have little effect on job quality, if the
grantee and the consulting engineer are vigilant in preventing com-
pletion of work which fails to conform to the specifications:
"A major portion of the construction residency manpower and expense
is directed towards prevention of detrimental shortcuts, improper
procedures, inferior or non-specification materials, and other
items which would produce an inferior project. If this were not
the case, then the argument that bid shopping can result in
shoddy work may be valid. Equipment or installations performed
under a "no bid shopping regulation" will not provide guarantees
for the grantee or the U.S. EPA of the quality of work to be
performed or the material to be supplied. The only such guarantee
is a rigorous inspection of work and assurance of complete adher-
ence to the specification for materials and equipment."
-17-
-------
d. Potential delays. Administrative burdens and inefficiencies
are additional factors in Mr. Lynam's recommendation against the WWEMA
proposal:
"One other factor which influences my opposition to the WWEMA
proposal is the potential delays associated with awards of
contract under such constraints. Prior to formal award of a
contract, all subcontractors and equipment to be provided would
have to be reviewed for acceptability. It would appear that.
the refusal to accept a subcontractor or equipment submittal
could result in a withdrawal of bid by the prime contractor
or at least delays in obtaining an acceptable substitute. If
one assumes that the unacceptability occurred because of a non-
specification subcontract bid, it must be assumed that a sub-
stitute would result in a cost increase to the prime contractor.
Would the grantee then be required to escalate the prime's bid
by that additional cost?"
Mr. Lynam also highlights the inevitable delays attributable to
protest, other disputes and litigation as important factors in this
regard.
e. Present EPA grantee practice. Mr. Lynam expresses concern
that the WWEMA proposal will eliminate the flexibility necessary for
a grantee to determine the manner in which conformance with the speci-
fications will be made, with no increase in the bid price:
"Under most contracts administered by the District today, sub-
contractors need not be identified until formal award of the
contract has been made. Subcontractor must then be approved
as the work progresses. If a subcontractor is found unaccep-
table to the District, the contractor is forced to provide a
substitute, acceptable to the District, within the bid price.
Likewise, equipment submittals must meet specifications or a
substitute provided at no additional cost. The leverage which
the District has after award of the contract is significantly
greater than that which would exist if such determination were
made prior to formal award."
"I am aware that a number of AMSA" (Association of Metropolitan
Sewer Agencies)" members require submittal of subcontractors and
equipment suppliers with the bid. In some circumstances, this
District may find it to be advantageous also. In fact, such a
requirement is placed on prime contractors to identify minority
and small business contractors and the dollar value of the work
to be subcontracted to each with the initial bid documents.
This requirement is intended to assure compliance with the
District's Affirmative Action Program in determination of the
lowest responsible bidder. The excercise of such an option
does, in my opinion, provide ample opportunity for flexibility
by grantees in determining the mechanisms they will utilize in
obtaining bids for their projects."
-18-
-------
2. Comments on the WVIEMA listing proposal were received in a
letter, dated January 15, 1988, from Charles W. Carry, Assistant
Director, Department of Technical Services, County Sanitation Dis-
tricts of Los Angeles County, transmitting a memorandum from VInee
DePalma, Assistant Office Engineer. Those comments, due to their
succinct summation of concerns, are fully set out below:
"The Districts are required by State Law to have the contractor
list on his bid proposal form, all subcontractors who will per-
form work which has a value in excess of % of 1 percent of the
project cost. A subcontractor is defined as a contractor who
contracts directly with the prime contractor and who supplies
material and labor at the project site. In California the sta-
tutory requirements for substitution of subcontractors closely
parallel the requirements set forth in the proposed regulation.
We do not feel the need for any additional regulations in the
area of listing of subcontractors or equipment suppliers and,
in fact believe that such a regulation could be, at times,
counter-productive. Some of the reasons for this are as
follows:
1. Such a regulation would cause the bid form to be very lengthy.
In the pre-bid rush to complete the form properly, while
receiving last-minute sub-bids, the contractor would be
exposed to a very high risk of a costly error.
2. A mistake or omission on the form would result in the bid
being declared non-responsive. Should a low bid be de-
clared non-responsive, the agency can either award to the
2nd low bidder, assuming his bid is in order, or reject
all bids and readvertise. The former alternative certainly
results in higher costs, the latter often has the same re-
sult, not to mention increased administrative costs.
3. The proposed regulation closely parallels California
Statute regarding listing of subcontractors (not includ-
ing material and equipment suppliers); however, there
are significant differences in the area of substitution
of subcontractors. This would make such a substitution
by a California agency confusing, at best.
4. The proposed penalty for substitution without approval, even
if legal, would force the prime contractor on most construc-
tion contracts deeply into the red and cause him to either
finish the contract while trying to minimize his losses or
to default. Neither alternative is especially appealing for
most agencies.
-19-
-------
5. The regulation could be circumvented in the area of material
and equipment suppliers by the contractor intentionally list-
ing material or equipment which does not meet specifications.
When his bid is acceptable and he is informed that he must
supply specified material or equipment, he is free to shop.
In summary it is our recommendation that control of bid shopping
and peddling be left to the local agencies."
3. Comments on the WWEMA listing proposal were received from
Billy T. Sumner, Partner in Barge, Waggoner, Sumner and Cannon,
Engineers and Planners, by letter dated January 16, 1978. Mr. Sumner
acknowledged that if listing were established, preapproval of equip-
ment would probably be required in order to protect the prime con-
tractor. While he sympathized with the problem being addressed,
Mr. Sumner believed that the WWEMA proposal would be unworkable in
practice. Specific areas of concern mentioned include:
a. Categorization of subcontractor work. Mr. Sumner indicated
that it would be unwise for the consulting engineers or the grantee
to separate the work into subcontract items, and dictate these to the
prime contractor who is normally the expert in this area:
"Specifications cannot always be written to completely segre-
gate and categorize each and every type of work that might be
subcontracted. It would be risky to start breaking down the
contract documents into portions that apply vis-a-vis those
that do not apply to a given operation. A threshold of three
percent is too low."
"Most engineers would need counsel of general contractors to
completely categorize all work."
b. Twenty percent for unapproved substitutions. Mr. Sumner
questions the legality of "a pre-set penalty without reference to actual
damage."
c. Relationship between the grantee and the sub. Mr. Sumner also
questions the direct relationship between the owner and the sub during
the substitution hearing process proposed by WWEMA.
4. Comments on the WWEMA listing proposal were received from
E.J. Peltier, Consultant with Sverdrup and Parcel, Associates Inc.,
Engineers and Architects. Except for problems with the dollar amount
and percentage for applicability and the penalty clause, Mr. Peltier
did not see anything "too drastic" in the WWEMA proposal. Mr. Peltier
also furnished an example of listing on a Metropolitan St. Louis Sewer
District Project.
-20-
-------
5. Comments were received from Dr. William J. Katz, Director of
Technical Services, Metropolitan Sewerage District of the County of
Milwaukee, by letter dated January 20, 1978. Dr. Katz agreed on the
need to more adequately formalize subcontractor selection. He described
use of a "construction management system" whereby the grantee directly
acquires the major components of the project for installation by the
contractor. The WWEMA proposal was not specifically addressed except
for the general comment that it has "the potential to decrease the
frequency and magnitude of the incidents" (i.e., subcontract bidding
problems).
D. General Comments
General comments and recommendation to EPA on specification
bidding procedures resulted primarily from a direct questionnaire re-
quest to other Government departments and agencies and interested groups
involved with the construction grants program. (See Appendix B for a
list of commentors and Appendix C for copies of actual responses).
The input from other Government entities was utilized in the preparation
of Section II of the report dealing with Current Practices and is not
repeated here. The following summaries are representative of general
comments received:
1. The Association of Metropolitan Sewer Agencies (AMSA) whose
members are comprised of relatively large metropolitan sewer agencies
responded to the EPA questionnaire by letter dated March 13, 1978. EPA
had already received responses from several AMSA members with specific
comments on the WWEMA proposal. Some of these comments were discussed
in the previous section of this report.
AMSA is opposed to the imposition of mandatory prequalification or
listing requirements but could accept provisions permitting prequalifi-
cation or listing to be utilized by grantees on a case-by-case basis.
AMSA points out that in some cases, prequalification might be construed
as price fixing. AMSA further recommends that the nonrestrictive speci-
fications requirements of EPA regulations be modified to allow three or
four models or types of equipment to be specified and eliminate the "or
equal" terminology.
2. The EPA Management Advisory Group (MAG) has discussed con-
struction grant bidding and specification procedures on several
occasions. The MAG is comprised of individuals who have special
expertise in various aspects of wastewater treatment, environmental
concerns and public participation and who are appointed by the
Administrator to advise the Agency on matters involving the con-
struction grants program. Although many MAG members responded as
individuals to our request for comments on the WWEMA proposal, the
MAG has not as a group taken a position or provided recommendations
to EPA on the bid shopping issue in the construction grant program.
-21-
-------
A MAG subcommittee on bidding has, however, developed a subcommittee
report which identifies some bidding procedure issues and suggests
general solutions and specific recommendations in this area. The sub-
committee report has not been formally adopted by the MAG. The report
deserves mention however because it is indicative of the diversity of
opinion as to the best procedures to be followed. Prequalification is
indicated in the report as unworkable because of the time and expense
i nvolved:
"There have been suggestions that all equipment of all manufac-
turers desiring to submit bids to be checked by the owner's engineer
prior to the bid date. This suggestion is without merit as the
cost to the owner and taxpayer cannot be justified. Much satis-
factory equipment would necessarily have to be checked for com-
pliance with the probable result that it would never be selected
as the lowest and best bid item by the contractor. Because of
design changes occurring almost constantly, no blanket approval
ought to be given even to manufacturers who have an established
reputation for excellent performance. Present procedure of
checking the design and details of the apparent low bidder is the
most cost-effective means of handling this item of work. The
delay that would be occasioned by such preliminary review of
all equipment is also not acceptable."
A specific recommendation of the MAG subcommittee report is that
listing requirements be left to the grantee's discretion:
"Allow the grantee, at his discretion, to require general con-
tractor to include in his bid the identification of all major
subcontractors and major equipment suppliers. Restrict all
deviations or changes except where they are shown to be, without
question, in the owner's or public interest."
Such a listing requirement would seem to require some form of pre-
qualification to assure that the items would be acceptable for the
project. Also as explained previously prequalification and listing are
not prohibited by current EPA regulations or program requirements and
can be instituted by any grantee who so desires.
The additional MAG subcommittee recommendation is noteworthy in
that is suggests that provision be made for new equipment manufacturers'
entry into the market:
"In order to provide entry into the market by new equipment
manufacturers, permit the contractor to name any major man-
ufacturer's equipment as a deductible alternative if he first
designates an approved or named item of equipment as his base
bid. Determination of the low bid shall be based on the base
bid."
-22-
-------
3. The National Clay Pipe Institute (NCPI) provided comments
and recommendations primarily with regard to the nonrestrictive
specifications requirements, by letter dated March 1, 1978. The main
thrust of the NCPI recommendations is that EPA withdraw from being
involved in contracting and bidding procedures which they consider to
be a state and local matter. The NCPI response references the uniform
guidance for procurements under Federal grant programs found in Attach-
ment 0 to OMB Circular A-102 and in accordance with that guidance
recommends that more responsibility be delegated to state and local
governments. The NCPI also suggests that section 204(a)(6) of the
FWPCA be amended by adding the following language to the existing pro-
vision:
"provided, however, that a State agency which has been or may
be delegated authority by the Administrator to review plans
and specifications under Section 203(a) and which considers
that the State laws which govern municipal procurement operate
substantially to provide the same protection as provided by
the limitations of this paragraph may request the Administrator
to approve, and the Administrator, if he agrees, shall approve
the State system of procurement as used by municipalities in
such State."
EPA has a regulatory provision similar to this at 40 CFR 35.936-21.
Under this regulatory provision the Administrator may certify state or
local procurement systems for use in lieu of EPA procurement procedures
if the state and local procedures provide the same protection as the EPA
requirements. Compliance with Federal statutory provisions is required
for approval of a state or local procurements system and certification
does not release the grantee from compliance with statutory require-
ments. The suggestion by the NCPI unlike the EPA regulation, would
permit deviation from statutory provisions of the FWPCA.
4. Comments were received from the American Concrete Pipe Asso-
ciation (ACPA) by letters dated December 14, 1977 and January 27, 1978.
The ACPA correspondence supports the existing regulation (40 CFR 35.936-
13(a)) which permits the selection of a single pipe material for a
particular project. ACPA recommends that procedures permitting such
selection not be modified as a result of the EPA study.
E. Recommendations of the Joint ACEC/IMEMA/AGC Committee
A joint committee with representation from American Consulting
Engineer Council), WWEMA and AGC was established during the Spring of
1977 to discuss bidding procedures under the EPA construction grants
program. The purpose of the committee was joint resolution of issues of
mutual concern regarding bidding procedures, and the formulation of
recommendations to EPA where the committee felt improvements were possible,
-23-
-------
EPA was invited to participate in the four committee meetings which
were held over the past year. The EPA position and participation at
these meetings has essentially been as a neutral observer, with the
understanding that the Agency would welcome suggestions for improvements
that the group as a whole could agree upon.
A summary of the position of the three groups involved with the
joint committee follows:
1. ACEC could support procedures permitting prequalification
of major items of equipment provided the engineer's fee reflected
the additional engineering work required by the prequalification
process.
2. WWEMA strongly supported prequalification of equipment
ahead of bidding and naming of specific equipment items by prime
contractors in their bids.
3. A6C supported procedures which would permit prequalification
for major items of equipment, but was strongly opposed to any listing
or naming requirements.
The committee in its meeting on February 3, 1977, adopted a joint
proposal on prequalification of equipment. (See Appendix C) The pro-
posal was offered to correct certain construction bidding problems
perceived by the committee. These concerns are expressed in the pro-
posal adopted by the committee:
"The objectives of the Federal Water Pollution Control Act are
in jeopardy because of the price-dominated marketing climate
that has been prompted by EPA regulations covering purchase
of equipment for wastewater treatment plants. Because of poor
equipment, some plants do not function as designed. Once the
equipment has been delivered, there is little incentive for
the manufacturer to assist in making it work.
Since initial cost is the dominant factor in determining the
equipment that will be purchased for the next project, there
is little reason for an equipment manufacturer to provide
either design assistance or operation and maintenance support.
This assistance is essential both during the design of the
facilities and when the plant is placed in operation."
The Joint Committee further documented the essential concerns of each
party in this regard (underlining added):
-24-
-------
"From the Contractor's viewpoint, the inability to determine
whether an equipment manufacturer's offering will meet the
specifications is a serious shortcoming. Contractors must
evaluate a multitude of proposals in a very short period.
In addition, many Contractors do not have a staff that is
technically qualified to evaluate the equipment manufacturer's
offering to determine whether it is equivalent to the equipment
required by the specifications.
From the Owner's view, it is important to obtain high-quality
equipment that will perform the function required for many
years in the future. Minimum maintenance and long life are
two characteristics that are particularly difficult to obtain
and evaluate when first cost is the dominant selection factor.
For some items of process equipment, the function may be dif-
ficult and expensive and should be completed before the manu-
facturer starts manufacture of the equipment required for a
particular project. Life cycle costs and energy consumption
must be evaluated as well as first cost.
From the Engineer's viewpoint, the review and evaluation of
equipment, must be performed at some stage in the project.
If a prequalification approach is used, the Engineer's eval-
uation is performed early and the Engineer can be sure that
equipment purchased meets the criteria established for the
project. However, when prequalification is employed, addi-
tional engineering effort will be required to evaluate multiple
proposals of equipment Manufacturers which must be reflected
in the Consulting Engineers fee structure.
from_the Equipment Manufacturer's and the Contractor's viewpoint,
the ability to obtain an advance determination of whether equipment
is acceptable eliminates an element of uncertainty, and makes it
possible to bid knowing who the competitors will be. Prequalifi-
cation provides an opportunity for the equipment manufacturer to
have his product thoroughly evaluated without the pressure to
award a contract. An Equipment Manufacturer who failed to submit
his equipment for evaluation during prequalification would be
precluded from consideration at the time a contract was awarded."
The proposal adopted by the joint committee reflect their common support
of procedures which permit prequalification of major items of equipment:
"Prequalification of major items of equipment can provide signi-
ficant improvement in the quality of equipment and ability of
treatment plants to function as designed while retaining the
competition that is mandated by P.L. 92-500."
-25-
-------
It should be noted that nothing in existing EPA regulation or
program requirements prohibit prequalification or listing procedures.
Both in fact, are used by grantees in the construction grant program
to varying degrees based on state and local statutes and procedures.
Basically, the committee recommends that EPA identify procedures
which could be used by grantees and their engineers at their discretion
For prequalifl.'ati '>n of :n?,:'o." items of
"it ; :. t-e^iwrn'.-..^ o . -. ifc-'f , tr.ft E'-V, rav.f.r.-- r.he Korcl,;r:, oV
f"a--!9A to perrrit tie of an agreed-up^n p-requar-fl cation pro-
cedure for WcStewater treatment equipment. The requirement
for inclusion of the criteria he (the engineer) will use in
evaluating (Pcge 2 of PG-19A) can be retained ir the pre-
qualificution documents. It is further recommended that the
term "or equal" not be imposed as a requirement in the bid
specifications for the project when a proper prequalification
procedure has been employed."
The joint committee proposal did not recommend that the equipment
selected by the prime bidder be listed in the bid and no procedure was
suggested to guide post-contract changes among equipment suppliers.
-26-
-------
IV. Discussion of Issues
Various aspects of the issues involved in this study of bidding
procedures under construction grants have been covered in previous
sections of this report. The purpose of this section is to provide
a succinct discussion of these issues based on the review and analy-
sis of current procedures and input to the study in the form of
comments and recommendations from outside "
" '.:<: , i - j ,1 S
The nonrastrictive specification requirements in Section 204(a)
(6y of the FWPCA were establishes in 1972 by Public Law 92-50').
This provision requires: "that no specifications for bids in connec-
tion with such works shall be written in such a manner as to conta'*!
proprietary, exclusionary, or discriminatory requirements other than
those based upon performance, unless such requirements are necessary
to test or demonstrate a specific thing or to provide for necessary
interchangeability of parts and equipment, or at least two brand
names of comparable quality or utility are listed and are followed
by the words 'or equal !."
The requirement for nonrestrictive specifications promotes com-
petition among suppliers who wish to bid on subtier work on construc-
tion grant projects. It encourages the entry of new equipment suppliers
and innovative items into the bidding market. Nonrestrictive specifi-
cations are consistent with the provision of maximum open and free
competition required for public procurements.
While nonrestrictive specifications encourage maximum competition
among subtier items, the grantee and his engineer can still maintain
control over what will be acceptable for the project, through the pre-
paration of the specification and the acceptance or rejection of "or
equal" alternatives proposed by the contractor. Further, if the engi-
neer believes that, there is no comparable product to the one he is
comptemplating in his design, he may perform a cost effectiveness anal-
ysis including operation, maintenance and other life cycle costs, and
based on adequate written justification he may specify a single item.
Current procedures require this justification to be forwarded and
reviewed together with the project plans and specifications.
In accordance with construction grant requirements, innovative or
patented products and processes may be named in the specifications if
found to be cost effective or if required to demonstrate or test a
specific thing. The 1977 amendments to the FWPCA, enacted by Public
Law 95-217 encourage the use of innovative and alternative technologies
on construction grant projects, by allowing up to 15% higher life cycle
costs in the cost effectiveness analyses for such technologies, and by
-27-
-------
permitting the Federal grant participation for innovative and alter-
native technologies to be increased from 75% to 85% of the eligible
costs. The amendments also provide for 100% modification or replacement
grants where innovative or alternative technologies fail to perform, if
such failure is not based on negligence. Regulations implementing these
provisions were proposed in the Federal Register on April 25, 1978.
(43FR17690-720) This emphasis on innovative and alternative technologies
should further encourage research and development efforts in the waste-
water treatment industry.
The use of innovative technologies would normally be considered
during project planning and design. However, the procedures devel-
oped to implement these provisions could be used for prequalifi-
cation of items prior to bidding or during bidding provided the
requests for proposals or the bidding documents soliciting proposals
clearly indicate the extent to which innovation and life cycle costs
will be considered in the prequalification process.
B. Emphasis on Low Dollar Equipment
The nonrestrictive specifications requirements emphasizing
maximum free and open competition, can encourage the selection of
subtier bid items which have a low cost. However, cost effectiveness
analyses may be performed to consider the life cycle costs of specific
items and, as discussed in Section A above, those items which are
innovative or alternative in accordance with Public Law 95-217, are
allowed to have up to 15% higher life cycle costs in the cost effec-
tiveness analysis. During bidding where specific items have not been
identified, quality can be controlled by strict adherence to the tech-
nical requirements of the specifications and through the process of
approving bid items for use in the project.
Any system of competitive bidding appropriate for public pro-
curement necessarily encourages and indeed mandates that the con-
tractor seek out the materials, equipment and construction practices
that will provide the desired end product at the lowest cost. Such
competitive procedures have always served the public interest in
procurements for public facilities. In order to preclude the instal-
lation of low quality equipment, the engineer must either write his
specification in such a way as to assure the installation of equipment
which, in the long run, will prove most cost-effective or he may estab-
lish the quality and salient features of the necessary equipment by the
naming of two items which meet the requirements of the design. As
indicated in Section A. above, a cost effectiveness analysis may be
used during design to consider life cycle costs including operation and
maintenance in selecting and specifying treatment equipment. Cost.
effectiveness may also be used as a criteria for approving equip-
ment during bidding and contracting. However, the emphasis that
will be given to this criteria in the competition during bidding
must be clearly identified in the bid documents.
-28-
-------
Except for emphasizing competition and performance and the use of
"two brand names or equal" instead of "one brand name or equal," the
nonrestrictive specification requirements of Public Law 92-500 have not
significantly changed public contracting procedures.
A new Interagency Agreement between EPA and the Corps of Engineers
dated January 20, 1978 will expand step 3 construction project inspections
and monitoring by utilizing additional Corps construction personnel to
augment current step 3 project reviews. The basic agreement is currently
being implemented by subagreements at the EPA Regional office and Corps
Division office levels. This program will assist the EPA and the grantees
in preserving the construction integrity and maintaining the quality of
subtler items by helping to assure compliance with specification require-
ments.
In addition to this joint program with the Corps of Engineers, EPA
has also established a Value Engineering program which involves project
reviews from the standpoint of quality, reliability and costs. This
program looks at costs in terms of required facility performance and
therefore provides some additional quality and costs controls.
C. Post Bid-opening Bid Shopping
The perceived detrimental effects of bid shopping have been
extensively documented by WWEMA in their input to this study. This
input was presented in Section III A of this report and is not repeated
here. Although some of the statements in the WWEMA brief have been
questioned by other commentors, no arguments have been raised regarding
the undersirability of the practice of bid shopping. However, serious
problems were identified with proposals to legislate or regulate bid
shopping out of existence by imposing a mandatory listing requirement.
These comments were also previously presented in Sections III B and C of
this report.
In states where bid shopping is viewed as a problem, a variety of
bidding procedures have been imposed to control bid shopping. These
bidding procedures have met with varying amounts of success, and all
seem to have certain drawbacks. However, the states involved have
accepted the drawbacks, in order to control bid shopping which they
considered a problem. This is of course within their prerogative. The
imposition of mandatory anti-bid shopping requirements at the Federal
grant program level may conflict with existing state requirements in
this area and would be inconsistent with program emphasis on increased
state and local decision-making.
-29-
-------
Although WWEMA has supplied lists of construction grant projects
where bid shopping has occurred, municipal grantees have not high-
lighted the effects of bid shopping as posing a serious problem to the
successful completion of their Federally assisted projects.
Consulting engineers, while concerned with the effects of price
emphasis on the quality of equipment installed, have likewise not
identified bid shopping as a significant problem. As explained in the
subsequent section, many of the concerns regarding quality can be an-
swered with a prequalification procedure.
AGC and at least one AMSA member have identified a need to maintain
flexibility in subcontracting and to allow for post-bid negotiations on
some aspects of subtier bid proposals, which are normally not clearly
defined prior to bidding.
D. Prequalification of Major Items of Equipment
Prequalification of major items of equipment has been recom-
mended as a procedure which would improve bidding and contract perform-
ance on EPA construction grant projects. It was further recommended
that EPA identify an acceptable prequalification procedure which could
be used at the discretion of EPA grantees. These recommendations were
made by a joint committee of ACEC, WWEMA and AGC and were covered in
detail in Section III E of this report.
Prequalification is a procedure which results in a list of quali-
fied equipment items which meet the requirement of the design. Pre-
qualification as a concept is not prohibited by the FWPCA or EPA
regulations, provided adequate competition is maintained in the pre-
qualification process. The key to an acceptable prequalification
process is adequate advertisement for equipment proposals and adequate
time for equipment suppliers to respond. The information necessary for
consideration and the criteria for determining acceptability should be
clearly identified. Adequate time is required so as to not limit the
number of firms responding. If not handled properly, a prequalification
system could have the result of concentrating subtier contract awards to
a few well known firms that have gained recognition in their respective
fields. The public interest would not be served by providing a mechanism
to ease subcontractor bidding problems, if at the same time, adequate
competition is reduced. Furthermore, prequalification without proper
advertisement and competition may involve anti-trust implications under
the broad sanctions of anti-trust legislation enacted to assure free and
open competition and to prevent price fixing.
-30-
-------
A properly conducted prequalification process could resolve many of
the bidding issues which have been raised by groups concerned with
bidding on construction grant projects. The grantee, the engineer, the
state and EPA would have better assurances that quality equipment was
being installed on construction grant projects. The contractor and the
equipment supplier would know in advance which equipment would meet the
requirements of the specifications.
Adequate competition can be maintained through the use of pre-
qualification while also permitting the engineer and the grantee to take
a more active role in selecting equipment items which meet the require-
ments of the design and operation of the facility. Operation and
maintenance costs and procedures may be considered in the development
of criteria for the acceptability of items in the prequalification
process. However, the extent to which operation and maintenance or
other life cycle factors will be considered should be clearly indicated.
New and innovative products and patents could also be recognized by the
grantee and the engineers in the prequalification process. As explained
in Section A above, the 1977 amendments to the FWPCA provide for certain
financial incentives for the use of innovative and alternative tech-
nologies in construction grant projects. Cost effectiveness may also be
considered during prequalification, however, the extent to which cost
effectiveness will be used as a criteria in the prequalification process
must be clearly identified in the documents requesting prequalification
proposals.
Some protests could result from equipment suppliers not being
prequalified. However, these could be dealt with, under Agency regula-
tions in an equitable and expeditious manner, provided the engineer has
adequately documented the requirements of the equipment being sought
and the grounds for rejection of those items which did not meet these
requirements.
While prequalification could result in improvements in bidding on
construction grant projects, a mandatory prequalification requirement
would preempt the grantee's responsibility for bidding and contracting
under the grant and may conflict with state and local laws and regula-
tions on bidding procedures.
E. Naming in Bid Submissions
The advantages and disadvantages of naming or listing of
subcontractors and equipment suppliers in bids by prime contractors
have been discussed extensively in previous sections of this report.
Widely differing views on proper procedures have been presented by
the various groups involved in the construction grant program. WWEMA
alone strongly supports a mandatory listing requirement. AGC and
other groups are opposed to such a requirement being mandated by
law or Agency regulation. A few commentors could accept listing on
a voluntary basis.
-31-
-------
Listing is not prohibited by current EPA regulations, and may be
used by EPA grantees as long as adequate competition is maintained in
the listing process. In fact, based on state and local requirements, a
variety of listing procedures are in current use for bidding on con-
struction grants projects.
While a listing procedure could eliminate bid shopping on those
items for which listing is required, other problems have been identified
with such a requirement. Some of the disadvantages of mandatory listing
requirements have already been discussed. An important factor is the
need to allow flexibility in bidding and contracting in order to
avoid contingency bidding by prime bidders. Since there is no binding
contract between the contractor and the subcontractor prior to bidding,
post bid negotiations are frequently necessary to bring the scope of
work or other features of a subtier proposal into compliance with the
specification. Even with a mandatory listing requirement, as suggested
by WWEMA, bid shopping would not be prevented in the lower tier sub-
contracts. Perhaps the most compelling disadvantage of a mandatory
Federal listing requirement would be the unwarranted Federal intrusion
into contracting and bidding procedures established by state and local
laws.
-32-
-------
V. Conclusions
The construction grants program was established under the Federal
Water Pollution Control Act to aid municipalities in their efforts to
abate pollution from municipal wastewater. Consistent with a goal of
the Act to increase state and local decision making, grantees are re-
sponsible for the settlement and satisfaction of all contractual and
administrative issues arising out of procurements under their grants.
Grantees may use their own procurement systems and procedures which meet
applicable requirements of state and local laws, to the extent that such
systems and procedures do not conflict with the minimum requirements
established by the FWPCA and EPA regulations. An extensive body of state
and local laws exists in the area of construction contracting and bidding
procedures. State and local bidding procedures deal with bid shopping
and subcontractor listing in a variety of ways. The imposition of mandatory
listing requirements on municipal grantees is inconsistent with the
increased emphasis on delegation of responsibility and decision-making
to state and local governments. Input to this study from grantees,
municipal associations, consulting engineers and general contractors has
supported the position that such Federal interference is inappropriate.
Although many states have their own anti-bid shopping requirements,
the listing of equipment suppliers and the prevention of bid shopping
have not generally been recognized as a major item of concern in Federal
legislation or regulations. Efforts to promulgate Federal legislation
which would require listing of equipment suppliers and limit subcon-
tractor substitution have had limited success. Federal agencies that
have established regulations in this area have seriously questioned the
wisdom of such actions and in at least one agency, the regulation was
dropped. In the construction grant program, bidding is typically
handled at the local level. Public interest does not demand the intru-
sion of the Federal Government in this area, especially when such inter-
jection is not consistent with other objectives of Federal legislation
to increase state and local responsibility. Despite the possible det-
rimental effects of bid shopping there is a demonstrated need to main-
tain flexibility in subcontracting to avoid contingency bidding. Man-
datory listing places a burden on the general contractor to enter into a
contract with a subcontractor whose proposal may not meet the requirements
of the project.
Prequalification of major items of equipment is a procedure which
could result in improvements in bidding and contracting under the con-
struction grants program. However, mandatory prequalification, as with
mandatory listing requirements, would impose Federal requirements
which should be left to state and local preference. A joint committee
of ACEC, WWEMA and AGC support a recommendation for a voluntary prequali-
fication process in the construction grant program. Uhile prequalification
is not prohibited by current regulations, the joint committee recommended
-33-
-------
that EPA go a step further and establish a prequalification procedure
acceptable to the Agency which could be used by grantees on a voluntary
basis. In the process envisioned by the joint committee, equipment
could be prequalified during project design by a competitive process.
Adequate competition could be maintained in the prequalification process.
The engineer could assure that the items prequalified would meet the
requirements of his design. The contractor in selecting among the
prequalified items could be assured that the items selected would meet the
requirements of the specifications. The quality of equipment installed
and the treatment facility performance could be improved through such a
process.
Under the FWPCA and its implementing regulations the proprietary
specification of innovative technologies may be. justified if required to
demonstrate or test a specific thing or if found to be cost effective.
The 1977 Amendments to the FWPCA enacted by Public Law 95-217 and regu-
lations proposed to implement these amendments further encourage the use
of innovative and alternative technologies on construction grant projects
by allowing up to 15% higher life cycle costs in the cost-effectiveness
analysis for such technologies, and by permitting the Federal grant parti-
cipation for innovative and alternative technology to be increased from
75% to 85% of the eligible costs.
This study of the bidding process is considered to be conclusive
from the standpoint of bidding procedures utilized in the construction
grant program. However, EPA has several on-going and planned study
efforts which involve the design and construction of publicly owned
treatment works (POTW's) and the wastewater equipment industry to a
certain extent. These studies are summarized briefly here for infor-
mation purposes. An operation and maintenance cause and effect survey
is being conducted to identify, quantify and rank the causative factors
within the broad categories of administration, maintenance, design and
operation which have resulted in poor plant performance. The study is
not complete. While preliminary results indicate that plant design may
be an important factor influencing operation and maintenance, they do
not indicate equipment quality as a frequent factor in poor plant perform-
ance. A process and mechanical component reliability study is being
conducted to determine how variability in process and component relia-
bility effects total plant or system performance. The process relia-
bility phase of the study is currently under way, but the phase dealing
with mechanical component reliability was just recently started and
results are not yet available. A study of the economic effects of
environmental regulations on the pollution control equipment industry is
currently under way. This study is scoped to look at basic supply and
demand aspects, and capital and employment requirements in the industry;
and the economic effects of air, water, and resources recovery environ-
mental regulations on these factors. The preliminary results of this
economic study which focuses on the views of the equipment industry
-34-
-------
indicate many of the same contentions raised in the WWEMA Brief fur-
nished as input to the Congressionally directed study of contracting and
bid shopping. While the lowering of profitability and the resulting
impediment to innovative technology have been cited, the economic verifi-
cation of these problems was not readily discernible because of the mix
of business from various public and private sources. The results of the
economics study are expected to be available later in calendar year
1978. The preliminary recommendations are for further review in this
area. An additional study involving the quality of equipment installed on
construction grant projects in planned for Fiscal Year 1979. These
studies are all part of EPA's efforts to determine the effectiveness of
Agency programs and to identify the effects such programs might have on
various elements of the public and private sectors.
-35-
-------
VI. Recommendations and Proposed Actions
EPA, upon review and analysis of the comments and proposals offered
regarding bid shopping, equipment listing and the prequalification of
major items of equipment recommends against Federal direction in the form
of legislation or regulation changes in this area. Aside from the purely
technical considerations used in arriving at this recommendation, serious
thought was given to the desirability of Federal intrusion into local
bidding and contracting procedures, where a significant body of state and
local laws and regulations exists. Further, imposing Federal mandatory
requirement in this area is inconsistent with the goal of the Act, to
increase state and local decision-making.
EPA intends to continue to permit the use of anti-bid shopping
procedures, including listing on construction grant projects where such
procedures are established by state and local requirements or preference.
In order to permit the consulting engineer and the grantee to take
a more active role in the selection of quality equipment items necessary
for the successful operation of the completed facilities, and still
maintain the open competition appropriate for public procurements, EPA
plans to review basic prequalification procedures to identify, for
voluntary use, the necessary minimum elements for prequalification which
would comply with the nonrestrictive specifications requirements for
adequate competition.
In order to further facilitate the use of innovative technologies
in construction grant projects, EPA plans to reemphasize existing guide-
lines which permit the use of proprietary specifications for innovative
products and processes.
-36-
-------
APPENDICES Page
A. Direction of the Federal Water Pollution Control A-l
Act Amendments Conference Committee
B. Groups, Agencies and Individuals Contacted and B-l
Providing Input to the EPA Study of Wastewater
Treatment Contracting and Bid Shopping
C. Comments and Recommendations submitted to EPA C-l
as Input to the Study
1. WUEMA Brief C-l
2. AGC Position C-80
3. Input from MAG members C-104
4. Input from other sources C-142
5. Recommendation of the joint ACEC/WWEMA/AGC C-162
Committee
-------
APPENDIX A
DIRECTION OF THE CONFERENCE COMMITTEE
Conference Report Accompaning H.R. 3199,
95th Congress, 1st Session, House of Representatives
Report No 95-830, Pages 113-14
\VATKU TREATMENT CONTRAOTINO AND KID SHOUTING
Information was received that section 2(H(a)((>) of the 1972 Act
which provides that no bids for equipment for treatment works may
specify particular brand names, lias been interpreted in current regu-
lations in a way which requires acceptance of the low-dollar treatment
equipment bid in practically all circumstances. Also, there is concern
that post-contract bid shopping for lower-tier equipment suppliers by
successful bidders for grantee, construction contracts has increased.
Information on potential problems posed by post bid-shopping and
the emphasis on low dollar bid, has also been presented to the Environ-
mental Protection Agency by concerned equipment suppliers. The, con-
ferees direct the Administrator to review implementation of the
section 204(a)(6) provisions to determine if any modifications of
regulation or law may be, necessary or appropriate. The Administrator
is expected to include in the, review an evaluation of whether or not
principal subcontractors and equipment suppliers should be named in
bid submissions for treatment works. The Administrator shall submit
this report to Congress within .'] months after enactment of t his Act.
Tho Adminisl rator should include, an out line of any proposed act ions,
together with recommendations for any necessary legislation.
A-l
-------
APPENDIX B
Groups, Agencies, and Individuals Contacted
and Providing Input to the EPA Study of
Wastewater Treatment Contracting and Bid Shopping
Management Advisory Group
Joan S. Arnold
Vice President, Straco Const.
Camden, New Jersey
Jeff Brewer
President, Brewer Construction Co.
Oklahoma City, Oklahoma
Charles W. Carry
Assistant Dept. Head
Tech. Services Dept.
Los Angeles County Sanitation Dists.
Daniel B. Drawbugh
Chief, Bureau of Water Quality
Management
Pa. Dept. of Environmental Resources
William Gibbs
Partner, Black & Veatch
Kansas City, Missouri
Consul Engrs
Frederick Jordan
President, Jordan Associates
San Francisco, California
Dr. William J. Katz
Director of Technical Services
Metro Sewerage Dist.
County of Milwaukee
Bart T. Lynan
General Superintendent
Metro Sanitary Dist. of
Greater Chicago
Eugene T. Peltier
Consultant, Sverdrup & Parcel
Assoc. Inc.
St. Louis, Missouri
Robert Perry
Assist. Executive Secretary
Water Pollution Control Fed.
Washington, D.C.
Frank P. Sebastian
Sr. Vice Pres., Envirotech
Menlo Park, California
Jacqueline Swigart
Kentuchiana, Regional Planning
and Development Agency
Louisville, Kentucky
Robert Taylor
Director of Water Compliance
and Hazardous Substances
Connecticut Dept. of Environmental
Protection
Donald C. Tillman
City Engineer, City of Los Angeles
Los Angeles, California
Patricia Ann Williams
Representing Public Interest Groups
Associated with the League of Women
Voters
Phoenix, Arizona
B-l
-------
Associations and Groups
American Concrete Pipe Association
Washington, D.C.
American Consulting Engineers Council
Washington, D.C.
American Public Works Association
Washington, D.C.
Associated General Contractors
Washington, D.C.
Association of Metropolitan Sewerage Agencies
Washington, D.C.
National Association of Counties
Washington, D.C.
National Clay Pipe Institute
Washington, D.C.
.National League of Cities
Washington, D.C.
Water and Wastewater Equipment Manufacturers
Association
McLean, Virginia
Water Pollution Control Federation
Washington, D.C.
Federal Departments and Agencies
Department of Interior Naval Facilities Engineering Command
Department of Transportation US Army Corps of Engineers
Federal Highway Administration
Urban Mass Transportation Adm. US Environmental Protection Agency
Federal Aviation Administration Region I through X
General Services Administration
B-2
-------
Joint ACEC/WWEMA/AGC Committee
American Consulting Engineers Council (ACEC)
Joseph E. Hardee
Moore, Gardner & Associates
Ashborne, North Carolina
William A. Herrmann
Zurheide-Herrmann, Inc.
St. Louis, Missouri
John H. Robinson
Black & Veatch
Kansas City, Missouri
Larry Spiller
American Consulting Engineers Council
Washington, D.C.
J. Donald Stanley
Stahley Engineering & Associates
Helena, Montana
Everett Thompson
William and Works
Grand Rapids, Michigan
Water and Wastewater Equipment Manufacturers Association (WWEMA)
Thomas F. Davy Edward Mullinex
Nicholas Engineering and Research Corp Schander, Harrison, Segal & Lewis
Belle Mead, New Jersey Counsel., WWEMA
Philadelphia, Pennsylvania
,0ren E. Hopkins
Envirotech Corporation James E. Robertson
Salt Lake City, Utah Peabody, Wells, Inc.
Roscoe, Illinois
W. Jackson Lettes
Fairbanks Morse Pump Division George N. Rufenacht
Colt Industries Ecodyne-Smith '& Loveless Division
Kansas City, Missouri Lexena, Kansas
Don D. Mar pie
Union Carbide Corporation
Tonawanda, New York
Elmer J. Martin
Envirex Corporation
Waukesha, Wisconsin
Richard Millward
Dorr-Oliver, Inc.
Stamford, Connecticut
Frank P. Sebastian
Envirotech, Corporation
Menlo Park, California
Frank E. Si mo
Eaton Corporation
Kenosha, Wisconsin
John H. Sproule
Envirex Corporation
Waukesha, Wisconsin
B-3
-------
Joint ACEC/1MEMA/AGC Committee (Continued)
Associated General Contractors (AGO)
Joseph P. Ashooh
Associated General Contractors
Washington, D.C.
Charles H. Au
Roger J. Au & Son Inc.
Mansfield, Ohio
Jeff Brewer
Brewer Construction Co.
Oklahoma City, Oklahoma
Marshall G. Browne
Bay-Con Corporation
Sandusky, Ohio
P. R. Burns, Jr.
Burns Construction, Inc.
Las Cruccs, New Mexico
Joseph F. Cairnes
Perini Corporation
West Palm Beach, Florida
Larry G. Conner
Aaron J. Conner General Contractor
Roanoke, Virginia
M. P. Dumnesnil
Dumnesnil Construction Co.
Lafayette, Louisiana
B. R. Ertell
Stimm Associates
Buffalo, New York
Bruce C. Gilbert
Great Lake Construction Co.
Cleveland, Ohio
Richard J. Halloran
The Conduit & Foundation Corporation
Philadelphia, Pennsylvania
H. C. Heldenfels
Heldenfels Brothers
Corpus Christi, Texas
William F. Lee
Lee Construction Co,
Charlotte, North Carolina
James L. Preston
United Excavator, Inc.
Lexington, Kentucky
F. Michael Swal 1 ing
Swelling Construction Co., Inc.
Anchorage, Alaska
F. Thomas Westcott
Westcott Construction Corporation
N. Attleboro, Massachusetts
B-4
-------
APPENDIX C Page
Comments and Recommendations Submitted to EPA as
Input to the Study
1. WWEMA Brief C-l
2. AGC Position C-80
3. Input from MAG members C-104
4. Input from other sources C-142
5. Recommendation of the joint C-162
ACEC/WWEMA/AGC Committee
-------
mw\
Water & Wastowatcr Equipment
Manufacturers Association, Inc.
7900 Wcstpark Drive
Suite 304
McLean. Virginia 22101
703/893-1520
''.COMMII 11 i
i ii k
1 VII.
i ;l V
"''"
S/ / 1/1
l.i If
V*J 1 ,11
.//. h.
lull 1 >
1' 'fl,
If h I '
I .1 'A 'i
f ll> .|. .
A ',( hi-c
h.m H
// if
' '
(/"/ll
'"" "»
December 2, 1977
Mr. Douglas Costle, Administrator
United States Environmental Protection
Agency
401 M Street, S.W.
Washington, D.C. 20460
Dear Doug:
In further regard to our correspondence (your letter of
July 8, 1977) and discussions regarding the problems of
post bid peddling and shopping in the Construction Grants
Program, we understand that the House/Senate Conference
Committee adopted the language of the Senate report and
that, assuming the Clean Water Act passes, your office will
be asked to review implementation of the Section 204(a)(6)
provision to determine if any modification of regulation
or law may be appropriate.
In anticipation of passage of the Act and to facilitate
consideration of this matter by the EPA, WWEMA has pre-
pared a brief on anti-bid peddling and shopping and has
drafted a proposed regulation on this subject.
Attached are excerpts from the brief. We will hand
deliver the complete brief, together with all appendices,
to the office of Mrs. Joan Bernstein next week.
We appreciate EPA's interest in this severe problem facing
the equipment manufacturing industry and hope this informa-
tion is/6T5 assistance to the Agency in reaching a solution.
Frank P. Sebastian
President
FPS/f
Attachment
cc: Mrs. J. Bernstein
C-l
-------
Before the
Environmental Protection Agency
In the matter of
ANTI-BID SHOPPING AND
BID PEDDLING REGULATIONS
Brief submitted by The "
and Wastewater Equipment
Manufacturers Association, Inc.
advocating the adoption of a
regulation to eliminate bid
shopping and bid peddling.
MONTELEONE & McCRORY,
DARRELL P. IlcCRORY,
5900 Wilshire Boulevard, Suite 2900,
Los Angeles, Calif. 90036,
(213) 937-1533,
Attorney-for the Association.
C-2
-------
TOPICAL INDEX
Page
Introduction ...... 1
Background; Definitions ...... 2
I. THE PRACTICES OF BID SHOPPING AND BID PEDDLING ARE
DETRIMENTAL TO GRANTEES, THE EPA, AND THE PUBLIC AND
SHOULD BE CONTROLLED 4
A. Bid Shopping Controverts Accepted Competi-
tive* Bidding Procedures and is Widely Con-
deiuned. as Unethical. 4
B. Cost Reductions Obtained Through the Use of
BTcT"Shopping Accrue Only to the Prime Con-~
tractor and Do Not Benefit the Grantee and
EPA_., 6
C. Bid Shopping Causes Subcontractors to Inflate
oT"71? ad """Their Initial Bids, Upon Which the ~
Price to the Grantee and EPA is Based, and to
Refrain_frgm Bidding Altogether.
D«, B_id Shopping Pressures Subcontractors to Do
Shoddy Work or to Work at a Loss,_anjl^jLt Re-
wards Primes for Unethical and Ruthless Con-
duct.
E. Bid Chopping is Detrimental to the Long-Ran_ge_
Interests of the EPA and the Nation in that
Rese_arch___and_ Development of Wastewater Tecjrr-
nology is ^Discouraged as a Result of the
Practice. . .......... . . .~T ,.
F. Equipment May Be Ordered Sooner if Bid List-
ing is Required. .......... ,
G . Sunun ary of the Adverse Effects of Bid S 1 1 op -
~ Peddling. ....... ~ '. ',~~ .' .
II. Mi EFFECTIVE ANTI-BID SHOPPING AND BID PEDDLING REGU-
LATION CAN BE ADMINISTRATIVELY WORKABLE, WOULD MINI-
MIZE PROTESTS, AND WOULD NOT BURDEN THE EPA OR ITS
GRANTEES. .............. ......... 12
A . The Propojsed Regulation Will De Ef fecti ve ,
Easy to Administer, and Fair. ......... 11
C-3
i
-------
Page
1. The proposed regulation will be ef-
fective. 13
2. The proposed regulation is easy to
administer 14
3. The proposed regulation fairly se-
cures the benefits sought while pro-
viding for those instances when a
prime contractor must legitimately
employ an unlisted subcontractor 15
B. The Proposed Regulation Minimizes Delays and
Protests. 16
Conclusion 18
APPENDIX I PROPOSED REGULATION
APPENDIX II Comment, Bid Shopping and Peddling in the Sub-
contract Construction Industry^, 18 U.C.L.A.L.
Rev. 389 (1970) .
APPENDIX III Note, Another Look at Construction Bidding and
Contracts at Formation, 53 Va. L. Rev. 1720 (1967)
C-4
ii
-------
Introduction
Questions have arisen whether the practices of bid
topping and bid peddlin>, on EPA construction grant projects
are contrary to the public interest and, if so, whether ef-
fective regulations to prohibit such practices can be formu-
lated without creating an undue administrative burden.
In this brief, it is contended that bid shopping
and peddling are, without question, inimical to the public
interest, and, in Part I hereof, some of the detrimental ef-
fects of bid shopping and peddling are discussed. It is fur-
ther contended that these undesirable practices can be elimi-
nated by regulations which are both effective and simple to
administer. A copy of such a proposed regulation is attached
hereto as /Appendix A and is discussed in Part II of the
Brief.
C-5
-------
Background; Definitions
On EPA financed construction projects, subcontract
work is immensely important and often constitutes the great
majority of the work. Specialized, sophisticated equipment,
supplied and installed by industry manufacturers, is an inte-
gral component of most wastewater treatment works. The prime
contractor's role on such projects is in good part that of a
broker of subcontracts. It is of considerable interest to
the EPA and the public that the subcontracting process shall
result: in the furnishing of quality equipment at an economi-
cal price to grantees, thereby giving taxpayers the most for
their tax dollars.
In theory, subcontracts are procured on the basis
of a widely accepted competitive bidding procedure. The
prime contractor takes bids from prospective subcontractors
and accepts the bid of the lowest responsible subbidder. Un-
fortunately, the theory has been undermined by the twin prac-
tices of bid shopping and bid peddling. The prime contractor
who is awarded the contract finds himself in a vastly im-
proved bargaining position; he controls the subcontract mar-
ket for that project. Ke only has a commitment to do the job
for a set price. In this position, it is to the prime's ad-
vantage to attempt to reduce his costs. A major cost is the
amounts he must pay to subcontractors.
Bid shopping is the practice the prime contractor
employs to reduce his subcontract costs. The prime takes the
C-6
2
-------
low subbid received prior to bid opening and asks whether
other subbidders can beat this price.
If the subcontractors who were not low prior to bid
opening initiate the process by lowering their original bid
to the prime, the practice is called bid peddling. Bid ped-
dling is simply the reverse side of the coin.
Manufacturers of major items of specialty equipment
are in the same position as are other subcontractors. They,
too, have submitted subbids and may peddle if they were not
low subbidders or may be shopped if they were the prime's low
subbidder. Because, on EPA projects, equipment is a very
substantial part of the costs, the prime has a great incen-
tive to reduce equipment subcontract costs and inflate his
profits in this area, without any benefit to the grantee.
"Bid shopping," as used in the explication of it
above, and as used throughout this brief, refers to the prime
contractor's shopping for a lower bid after the prime bids
have been opened. This is not to be confused with the legit-
imate practice of procuring the lowest possible subbid from
subcontractors before the prime contractor submits its bid.
(A regulation prohibiting bid shopping will actually enhance
pre-bid opening competition and will lead to a lower price)
for the grantee and EPA and a healthier wastev/ater industry.
"Subcontractor," as here used, refers not only to
those ordinarily considered subcontractors but also to major
equipment suppliers who, on EPA projects, hold a position
similar to that of ordinary subcontractors.
C-7
3
-------
I. THE PRACTICES OF BID SHOPPING AND BID PEDDLING ARE
DETRIMENTAL TO GRANTEJSS,. THE EPA, AND THE PUBLIC AND
SHOULD BE CONTROLLED.
A. Bid Shopping Controverts Accepted Competi-
tive Bidding Procedures and is Widely Con-
demned as Unethical.
Competitive bidding throughout the construction in-
dustry adheres to the theory that all bidders should submit
their best bid and that the contract should be awarded to the
lowest responsible bidder. Bid shopping perverts this ac-
cepted practice by allowing the winning prime contractor
(hereinafter, "prime") a second chance to receive" a lower
bid. All the benefits of this second chance accrue only to
the prime and not to the grantee and EPA.
Once the prime uses a subcontractor's or equipment
supplier's (hereinafter, "subcontractor") bid in preparing a
bid for the grantee, a subcontractor is generally bound by
the terms of his bid. The theory of estoppel protects the
prime. But the subcontractor is not reciprocally protected.
Even though the subcontractor has incurred costs in preparing
his bid, the courts find no action in reliance on the implic-
it promise by the prime to accept the low subbidder. The bid
would have been prepared whether the subcontractor was low or
not. Since the subcontractor has not detrimentally acted in
reliance, estoppel is inapplicable, and the prime is legally
free to shop for a lower subbid.
C-8
4
-------
The winning prime is. in a strong position. First,
his subcontractor is bound to him but he is not reciprocally
bound to the subcontractor. Second, he has a monopoly over
awards of work on the job. See Electronic & Missile Facili-
ties, Inc. v. U.S. for the Uses of H. W. Moseley, 306 F. 2d
554 (1962). Third, he knows the amount of his subcontrac-
tor's bid and the amounts of other would-be subcontractors'
initial bids. He can reveal the bid of his subcontractor to
the others and ask whether they can beat the subcontractor's
price, that is, he can bid shop.
The prime may be in an even stronger position if he
is privy to select information about the bids. Perhaps he
required subbidders to reveal equipment or techniques they
planned to use. The prime can now reveal information provid-
ed by one subbidder to others/ in hopes that the other sub-
contractors will make use of this knowledge to lower their
bids.
Recognizing the fundamental unfairness inherent in
the bid shopping illustration sketched above, the Associated
General Contractors of America have condemned bid shopping in
their Code of Ethical Conduct (1960 ed.):
"Ethical conduct with respect to subcontractors and
those who supply material requires that:
1. Proposals should not be invited from anyone who
is known to be unqualified to perform the pro-
posed work or to render the proper service.
2. The figures of one competitor shall not be made
known to another before the award of the sub-
contract, nor should they be used by the con-
tractor to secure a lower proposal from another
bidder.
5
C-9
-------
3. The contract should preferably be awarded to
the lowest bidder if he is oualified to perform
the contract but if the av/ard is made to anoth-
er bidder, it should be at the amount of the
latter's bid.
4. In no case should the low bidder be led to be-
lieve that a lower bid than his has been re-
ceived. "
The American Architect's Handbook similarly disap-
proves of bid shopping. See American Institute of Archi-
tects, Handbook of Architectural Practice, Book IV, p. 702
(1958) .
B. Cost Reductions Obtained Through the Use of
Bid Shopping Accrue Only to the Prime Con-
tractor and Do Not Benefit the Grantee and
EPA.
The theory of competitive bidding is that free and
open competition will produce the lowest price for the gran-
tee, and government. This theory is perverted by the practice
of bid shopping because a large part of the competition goes
on after the price to the grantee and government has been
set. That price is, therefore, artificially high.
It might be answered that primes will lower their
profit margins and reduce their initial bids in expectation
of later reductions of their subcontracting costs. But this
tactic entails a large amount of risk since the prime cannot
know how much of a reduction he can expect. A price is al-
ways paid for the bearing of a risk; the grantee and EPA pay
this price.
6
C-10
-------
On L'PA wastewater treatment grant projects, subcon-
tract work constitutes the majority of the work required.
The amount of risk a prime making such deductions bears would
be great indeed. Primes should not be in the business of
bearing these unnecessary risks which can only contribute to
the financial insecurity and insolvency of many primes.
Moreover, it is not clear that primes actually do
reduce their initial bids in expectation of future reductions
of subcontracting costs, perhaps because the risks inherent
in it are simply too great.
C. Bid Shopping Causes Subcontractors to Inflate
or "Pad" Their Initial Bids, Upon Which the
Price to the Grantee and EPA is Based, and to
Refrain from Bidding Altogether.
Subcontractors have responded to widespread bid
shopping with tactics of their own, all of which are detri-
mental to the interests of the industry and EPA. One re-
sponse is to refuse to bid to known bid shoppers altogether.
See Comment, Bid Shopping and Peddling in the Subcontract
Construction Industry, 18 UCLA L. Rev. 389, 395 (1970); Note,
Another Look at Construction Bidding and Contracts at Forma-
tion, 53 Va. L. Rev. 1720 (1967) . Competition is then re-
duced. A second response is to pad the initial price. See
Ring Constr. Corp. v. Secretary of War. 8 T.C. 1070 (1947);
Comment, supra, 18 UCLA L. Rev. 389 (1970); Note, supra, 53
Va. L. Rev. 1720, 1737 (1967) [reporting a survey of Virginia
7
C-ll
-------
subcontractors in which a number indicated that they would
"puff" their bids]. Padding is sensible, given a practice of
bid shopping, since the subcontractor will get a second
chance to submit his lowest bid but would not have the oppor-
tunity to raise his price later if he happens to initially
bid lower than necessary. Moreover, at the bid shopping
stage, the subcontractor will be fully aware of the price he
must beat.
When there are few potential subbidders or more
complex bid preparation requirements, more initial paidding
and abstinence from bidding can be expected. To illustrate,
if there are ten subcontractors, no one is likely, to submit a
bid greatly lower than would have been necessary to secure
the award. Bidders may be reluctant to pad because the
prime, with so many subbidders to choose from, may bid shop
only lower subbidders. Blatant bid shopping, such as reso-
liciting from all ten, might be avoided as too detrimental to
the prime's image. But, if there are only two subbidders,
there is a greater possibility that the competition will bid
well above the low subcontractor's bid. There is more reason
to pad in hopes that this turns out to be so.
When bid preparation costs are great, there is good
reason for a subbidder to refrain from bidding entirely, es-
pecially if subcontractors are required to submit work sheets
or other submittals which show how they arrive at their bids.
Competition may utilize these work sheets in preparing its
own costs, cutting its overhead, and pirating ideas.
8
C-12
-------
It is apparent that the inhibition on competition
is greatest when competition is already least. In EPA fi-
nanced jobs, submittals, which reveal bid preparation meth-
ods/ are often required from subcontractors. Frequently, on-
ly a few subcontractors or suppliers bid due to the highly
technical nature of the work and equipment. It can be ex-
pected that padding and refraining from bidding are greater
actual or potential problems on EPA financed jobs.
D. Bid Shopping Pressures Subcontractors to Do
Shoddy Work or to Work at a Loss, and it Re-
wards Primes for Unethical and Ruthless Con-
duct.
It is apparent that the prime most willing to bid
shop has the competitive edge. Bid shopping rewards the un-
ethical and ruthless prime.
The subcontractor also is tempted to unethical con-
duct in the form of doing an inadequate job.
"[S]ubcontractors who are forced into post-award
negotiations with the [prime] often must reduce
their sub-bids in order to avoid losing the award.
Thus they will be faced with a Kobson's choice be-
tween doing the job at a loss or doing a less than
adequate job." Comment, Bid Shopping and Peddling
in the Subcontract Construction Industry, 18 UCLA
L. Rev. 389 (1970).
The question arises why any subcontractor would do
the job at a loss. The answer is particularly applicable to
EPA jobs which involve high bid preparation or planning
costs. It will be advantageous to go ahead with the job if
C-13
9
-------
the bid price is less than the marginal cost of completing
the job. For example, if the subcontractor has already in-
curred preparation costs of $10x and can complete the job for
$100x, the subcontractor will reduce its bid down to $101x.
This will minimize its losses. Only $9x instead of $10x will
be lost by accepting a contract of $101x.
E. Bid Shopping is Detrimental to the Long-Range
Interests of the EPA and the Nation in that
Research and Development of Wastewater Tech-
nology is Discouraged as a Result of the
Practice.
The Federal Water Pollution Control Act Amendments
of 1972 expressed a national goal of eliminating water pollu-
tion by 1985. To this end, it and subsequent acts of Con-
gress have authorized the expenditure of billions of dollars,
in what has been called the largest public works project in
history, to clean up our nation's waterways. In part, these
sums are expended directly for research and development of
the technology necessary to clean our waterways. Additional-
ly, through the construction grants program, it was expected
that private enterprises would participate in advancing waste
treatment technology to the point where the Nation could at-
tain its national clean water goal.
It is evident that private enterprise will spend
money for research and development only if an area of invest-
ment is profitable. Bid shopping unfairly takes profits due
C-14
10
-------
the suppliers of waste treatment equipment and gives them to
prime contractors. Bid shopping thus reduces profitability
of those companies who must anticipate profits in order to
justify expenditures for research and development of new
equipment and technology needed if the nation's waters are to
be cleaned.
F. Equipment, May Be Ordered Sooner if Bid List-
ing is Required.
Demand for specialized components of many EPA fi-
nanced projects is great and has frequently led to delays in
receiving equipment. Furthermore, much of the equipment used
must be custom-made; this takes time. If a subcontractor is
the prime's low bidder but may be bid shopped, that subcon-
tractor cannot yet order equipment. This fact can result in
delays and unexpected increased costs to the subcontractor.
If a bid listing regulation makes use of the subcontractor
mandatory, however, the subcontractor can order equipment im-
mediately and avoid delays and price increases.
G. Summary of the Adverse Effects of Bid Shop-
ping and Peddling.
Ihe practice of bid shopping and bid peddling is
detrimental to grantees and the Government. First, contract
prices are higher to both as a result of the practice. Sub-
contractors pad their bids to the prime to allow room for ne-
gotiation and reduction later. Subcontractors refuse to bid
to primes with reputations as notorious bid shoppers. Most
C-15
11
-------
importantly, competition which could and should lower the
price to the grantee and government goes on after the prime's
price to the grantee and government has been determined. On-
ly the prime benefits from this competition. Second, bid
shopping harms subcontractors and decreases subcontractor
competition. It increases the risks and loss involved in
preparing bids. It forces upon subcontractors the "Hobsian
choice" of doing the job at a loss or cutting corners in do-
ing the work. It discourages research and development to the
extent that EPA contract work becomes minimally profitable
for equipment suppliers. Delays result because equipment
cannot be ordered immediately. Third, bid shopping is unfair
and widely recognized as unethical. The practice- rewards the
ruthless and unethical prime and discourages responsible con-
duct on the part of the subcontractor. Bid shopping perverts
the accepted competitive bidding practice, forcing upon sub-
contractors a "second round" of competition.
A bid listing requirement can bring fairness, low-
er costs, and true competitive bidding back to EPA projects.
II. AN EFFECTIVE ANTI-BID SHOPPING AND BID PEDDLING REGU-
LATION CAN BE ADMINISTRATIVELY WORKABLE, WOULD MINI-
MIZE PROTESTS, AND WOULD NOT BURDEN THE EPA OR ITS
GRANTEES.
It has been established that bid shopping and ped-
dling have numerous harmful effects and are practices inimi-
cal to the public interest. The question remains whether bid
12
C-16
-------
shopping and peddling can be eliminated by a practical regu-
lation which does not unduly burden grantees or the EPA. As
shown below, the answer must be in the affirmative.
The Waste and Wastewater Equipment Manufacturers
Association, Inc. respectfully proposes that the Administra-
tor adopt a regulation, a copy of which is appended hereto as
Appendix A, to prohibit bid shopping and peddling.
It is suggested that the regulation be added at 40
CFR §35,938-10. This addition would require slight modifica-
tion of §35.938-9.
A. The Proposed Regulation Will Be Effective,
Easy to Administer, and Fair.
1. The proposed regulation will be ef-
fective.
First, the proposed regulation requires primes to
list subcontractors for certain clearly specified categories
of work. It requires the grantee to provide a form for this
purpose so that mistakes will be absolutely minimized. The
prime only needs to fill in clearly marked blanks.
If the prime fails to complete the listing form,
the bid must be rejected as nonresponsive.
Second, the proposed regulation requires primes to
employ the listed subcontractor unless clearly specified and
unambiguous grounds for substitution exist. If the prime in-
sists on bid shopping and fails to obtain substitution as
provided, the grantee terminates the contract or assesses a
penalty of twenty percent (20%) of the subcontract price. A
C-17
13
-------
flexible enforcement mechanism is provided. It is anticipa-
ted that most primes, if they infringe, will be assessed a
penalty. No disruption of the job will occur. The possibil-
ity of reduction of the contract price coupled with the pos-
sibility of termination will be adequate to induce compli-
ance.
2. The proposed regulation is easy to
administer.
The grantee has four (4) simple functions under the
proposed regulation. First, it copies the contract provi-
sion, set out verbatim in the proposed regulation, into its
Information for Bidders.
Second, the grantee must determine the categories
of work for which listing is required. Engineers will have
little difficulty with this requirement as they must be inti-
mately familiar with the job after preparing the specifica- .
tions. /Only categories of work exceeding three percent (3%)
of the estimated cost need be listed, eliminating the small
items of work.)
Third, if the prime wishes to substitute an unlist-
ed subcontractor for any one of the enumerated acceptable
reasons, the prime prepares a simple request for substitution
stating his reasons. The grantee advises the listed subcon-
tractor of the request and holds a hearing on the matter if
necessary. His determination to allow or disallow the sub-
stitution is final.
C-18
14
-------
Fourth, if a prime fails to follow the simple sub-
stitution procedures, the. grantee assesses a penalty or ter-
minates the prime's contract after holding a hearing on the
matter.
The proposed regulation affects the EPA less than
it affects the grantee. First, the EPA should determine
whether the grantee has the required clause in its Informa-
tion for Bidders. This is simple to determine since the
clause is fully set forth in the proposed regulation.
Second, the EPA determines that the Specifications
include the form entitled List of Subcontractors and Equip-
ment Suppliers.
Both of these tasks are extremely simple.
Since the grantee's determination as to the exist-
ence or nonexistence of the grounds for substitution is fi-
nal, the F,FA is not involved.
Third, the EPA may entertain a small number of pro-
tests if grantees ignore the clear mandate of the proposed
regulation by awarding the contract to a bidder who fails to
complete the prime's own bid listing form.
3. The proposed regulation fairly se-
cures the benefits sought while pro-
viding for those instances when a
prime contractor must legitimately
employ an unlisted subcontractor.
The proposed regulation recognizes that primes may
legitimately be compelled to employ a subcontractor other
15
C-19
-------
than the one listed. In those instances, the prime can sub-
stitute a subcontractor of his choice after requesting per-
mission of the grantee.
Substitution is to be permitted if the subcontrac-
tor fails to perform his contract, fails to execute a subcon-
tract, becomes insolvent, is not properly licensed, or per-
forms substantially unsatisfactorily in the eyes of the gran-
tee. The grantee is to provide a hearing on the issue of
substitution if the affected subcontractor requests one.
Thus, the proposed regulation secures the benefits of full
and fair competition without locking the prime into an unac-
ceptable subcontract.
B. The Proposed Regulation Minimizes Delays and
Protests.
One of the most frequent concerns voiced about
anti-bid shopping regulations is that they will spawn pro-
tests. Under the proposed regulation, it is believed that
protests will be rare and the issues simple.
First, primes can protest if the grantee fails to
include the contract clause "Listing of Subcontractors and
Equipment Suppliers" set forth in the proposed regulation or
the List of Subcontractors and Equipment Suppliers form which
the grantee must prepare. The existence or nonexistence of
these forms is objectively determinable. Second, a prime
could protest the categorization of subcontract work. As a
practical matter, primes will not make such protests, which
16
C-20
-------
must be commenced within one week after the IFB is published,
because the categorization means little or nothing to them.
Furthermore, categorization, done by grantee's engineers,
will conform to accepted trade practice and is unlikely to
engender controversy. Third, a prime can protest if the
grantee awards the contract to a prime which failed to complete
the listing form. Again, a failure to complete the form will
be clear from the face of that document. Either the blanks are
filled in or not.
It is believed that no new grounds for protest are
provided under the proposed regulation.
Subcontractors' rights would still be limited by
40 CFR |35.939(j)(6). Hence, subcontractors would not be pro-
vided any new grounds to protest under the proposed regulation.
Even if the above protest section were amended to
allow subcontractor protests under the proposed regulation,
the protests would be fully as simple to resolve as prime
contractor protests. Note that subcontractors will never be
able to protest from an adverse ruling permitting substitution
since protests are limied to contentions that the contract
should not be awarded in a particular way. Substitution would
occur only after the award of the contract.
Protests, then, will be an extremely minor problem
under the proposed regulation.
Delays are, of course, generally a result of
lengthy protests which are not anticipated. The only other
17
C-21
-------
possible delay anticipated as a result of the proposed regu-
lation is the possible ten (10) day delay in the event that
substitution is requested and challenged. This is of little
consequence.
Additionally, the project will be expedited in that
subcontractors will be able to order necessary equipment or
begin its manufacture and preparation earlier than is now the
case. Subcontractors will be sure that the subcontract will
be awarded to them once the award to the prime is made and will
be able to prepare to perform at that time.
The General Services Administration (GSA), who is
responsible for direct federal procurements, has operated for
several years under regulations which require subcontractor
listing. The avowed purpose of the GSA regulations is to prevent
bid shopping and peddling, which practices the GSA has investi-
gated and found to be contrary to the public interest. The GSA
has recently reviewed its regulations and reconfirmed their
necessity. The regulation proposed in the following is simpler
and would be less complex to administer than existing GSA
regulations.
Conclusion
Bid shopping and peddling reduce the effectiveness
of the competitive bidding system and cause numerous ill effects
including higher construction costs to EPA grantees. The
practices can be effectively controlled in a manner that would
restore fairness to the wastewater treatment works construction
industry. A regulation can be effective, fair, and e~3y to
administer.
18
C-22
-------
The Water and Wastewater Equipment Manufacturers
Association, Inc. respectfully requests that a regulation to
control the practices of bid shopping and bid peddling be
adopted by the Environmental Protection Agency.
C-23
-------
APPENDIX I
C-24
-------
PROPOSED. REGULATION
§35.938-10 BID SHOPPING AND PEDDLING
(a) The EPA finds that the practices of post bid
opening bid shopping and bid peddling deprive the public of
the full benefits of fair and orderly competition among
prime contractors, subcontractors and equipment suppliers.
Grantees shall prohibit such practices in accordance with
this subsection.
(b) As used in this subsection, "subcontractor"
shall mean the individual or firm with whom the bidder pro-
poses to enter into a subcontract for manufacturing, fabri-
cating, installing, or otherwise performing work under this
contract. "Subcontractor" includes any supplier of equip-
ment with whom the bidder proposes to contract if
(1) the equipment supplier performs work, such as installa-
tion, on the project; or (2)the equipment supplied is manu-
factured specially for the project; or (3) the equipment
supplied, although not manufactured specially for the project,
is ordinarily used only for wastewater treatment purposes.
(c) For any construction project receiving grant
funds for the construction of wastewater treatment works and
having a total estimated cost of more, than $150,000.00, the
grantee shall determine categories of work for which sub-
contractors' names must be listed in accordance with the
Listing of Subcontractors and Equipment Suppliers specified
C-25
-------
2
in paragraph (d). The grantee shall publish these categories
in the Proposal or a separate form provided to bidders for
the purpose of listing subcontractors. The grantee shall
make reference to the specific sections of the Specifications
describing each category of-work for Which subcontractors are
to be listed. Categories designated shall include those which
the grantee estimates to comprise at least three percent (3%)
of the total estimated cost of the contract.
(d) For any construction project receiving grant
funds for the construction of wastewater treatment works
and having an estimated total cost of more than $150,000.00,
the grantee shall include the following in the Information
for Bidders:
"Listing of Subcontractors and Equipment Suppliers
(A) For each category in the List of Sub-
contractors and Equipment Suppliers, which is included
as part of the bid forms, the bidder shall submit the
name of the individual or firm with whom he proposes
to contract for performance of such category. The
bidder may enter his own name for any category which
he will perform.
(B) If the bidder intends to subcontract
with more than one subcontractor for a category or to
perform a portion of a category with his own personnel
and subcontract with one or more subcontactors for the
balance of the category, the bidder shall list all such
individuals or firms (including himself) and state the
portion (by percentage or narrative description) of the
category to be furnished by each.
(C) Failure to provide a complete List of
Subcontractors and Equipment Suppliers shall cause the
bid to be considered nonresponsive.
(D) The work of each category shall be per-
formed by the listed individual or firm unless substitu-
tion is permitted by the Owner in accordance with para-
graph (E) and (F) . Failure to obtain approval for sub-
stitution or failure to proceed with the work by or
through the named subcontractor or supplier shall be
grounds for termination of the contract or assessment
of a penalty under paragraph (G).
C-26
-------
-.1"
(E) Substitution shall be permitted by the Owner
only under the following conditions:
(1) When the listed subcontractor or supplier,
after reasonable opportunity to do so, refuses or fails
to execute a written contract with the contractor, when
such written contract based upon the general terms, con-
ditions, plans, and specifications for the project in-
volved or the terms of such subcontractor's bid is pre-
sented to him by the prime contractor; or
(2) When the listed subcontractor or supplier
becomes bankrupt or insolvent; or
(3) When the listed subcontractor or supplier
refuses to perform his subcontract; or
(4) When the subcontractor is not properly
licensed; or
(5) When the Owner determines that the work
performed or equipment offered by the subcontractor is
substantially unsatisfactory and not in accordance with
the plans and specifications or that the subcontactor is
substantially delaying or disrupting the progress of the
work,
(F) Prior to approval by the Owner of substitution:
(1) The prime shall submit to the Owner a
written request for substitution, specifying the reasons
for the request.
(2) The Owner shall notify the listed sub-
contractor or supplier of its receipt of said request
for substitution and shall supply the subcontractor or
supplier with a copy thereof. The Owner shall further
notify the listed subcontractor or supplier that it shall
have five (5) working days to object either orally or in
writing to the substitution.
(3) If within five working days after receipt
of notice of the request for substitution, the subcon-
tractor objects, the Owner shall on at least five working
days notice, hold a hearing on the prime contractor's
request. The Owner's determination as to the existence
or nonexistence of the grounds for substitution shall be
final.
(G) In the event that the prime contractor makes a
substitution of a listed subcontractor or supplier with-
out obtaining prior approval in accordance with para-
graphs (E) and (F) above, the Owner shall, after holding
a hearing, in its sole discretion either terminate the
contract or assess a penalty against the prime contractor
of twenty percent (20%) of the original subcontract price.'
C-?7
-------
-4-
(H) In a hearing according to paragraph (G) above,
it will be rebuttably presumed that the cost to the prime
contractor of any equipment proposed to be substituted is
less than the equipment named in the specifications and if
the substitution is approved, the contractor's price shall
be reduced by an amount equal to the net savings."
C-28
-------
APPENDIX II
Comment, Bid Shopping and Peddling in the Subcontract Construction
Industry, 18 U.C.L.A. L. Rev. 389 (1970).
C-29
-------
COMMENTS
BID SHOPPING AND PEDDLING IN THE
SUBCONTRACT CONSTRUCTION INDUSTRY
I. INTRODUCTION
At common law both the general contractor and subcontractor
were left unprotected in the construction bidding process. Anytime
prior to the general contractor's formal "acceptance" of the sub-
contractor's "offer" both parties remained uncommitted.1 As a
result, many commercially detrimental practices evolved within this
fbidding process. Modern courts, recognizing some of the problems
.created by the common law approach, have attempted to afford
some protection at least to the general contractor in the subcon-
tract bidding situation. Led by the California Supreme Court's
decision in Drennan v. Star Paving Co.,2 this change in the tradi-
tional approach to construction bidding has eUmioated any fear
by the general contractor that a subcontractor would; back out of
his sub-bid after it had been relied upon in the preparation of the
general contractor's own estimate on a prime contract. While this
change reduced the injustices that sometimes resulted under the old
approach, it has tended to increase the ability of the general con-
tractor to engage in post-award negotiations, a practice which has
pervasive detrimental effects on the parties involved in the bidding
process.
This state of the law has resulted from the inappropriate
response of the legal system to regular practices of the construction
industry. The law that governs general/subcontractor bidding re-
lations was formed in the context of a factual mistake in the bidding
.process rather than in the context of usual commercial practices.
^Consequently the law affords insufficient protection for the parties
Fin circumstances more typical than those of a mistake in bid-
Sling. By framing the law which regulates subcontract bidding in
[the rarefied air of "offer and acceptance" and "unilateral mistake"
[rather than in the real world of commercial practice, the legal sys-
tem has fostered unethical bid shopping and peddling. Recognizing
evil effects of these practices, a few courts and commentators
e 'sought and suggested methods of controlling them. However,
£*" MA. COMW, COWIN On CONTRACTS §§ 22-94 (rev. ed. 1963) [hereinafter cited
MB* Count],
* SI CaL 2d 409, 333 PJd 757 (1958)
389
C-30
-------
390 UCLA LAW REVIEW [Vol. 18: 389
since other courts to a large extent continue to deal with these
problems in a traditional frame of reference, relying upon cases
involving mistake, attempts at control have been inadequate.
Courts should look to the problemsbid shopping and peddling-
as they exist in practice and form pragmatic solutions to them.
n. THE HISTORICAL FRAMEWORK
At common law, the seal made offers firm without the necessity
of consideration.3 The dissolution of this rule left a void in the
law of contract formation,* particularly within the typical general
contractor-to-subcontractor relationship of the construction indus-
try- It is common practice for a general contractor to subcontract
out part of the,work on a prime contract. Typically, the general
contractor will .receive estimates from several subcontractors on a
particular item of work- The general will then usually "take,"
but not contractually- "accept," the lowest of these estimates
and use it in preparing its bid on the overall contract. From this
point until a formal acceptance of the subcontractor's offer, the
absence of contractual liability has assumed great significance.
The first major case dealing with the general contractor/sub-
contractor3 relationship was James Baird Co. v. Gimbel Bros. Inc.6.
As in many of the cases which have made the law in this area of
urn tract formation, Baird deals with a mistake in the bid prepara-
tions and the attempt of the mistaken party to avoid the result of
bis error.* In Board, Judge Learned Hand rejected the general's
contention that the subcontractor should be held to his bid under
t&e doctrine of promissory estoppel.8 That doctrine, which had
recently been generalized in section 90 of the Restatement of Con-
tracts,9'was viewed.by the court, as designed, to avoid the harsh
'*,St* CatKDr, rapro. note 1, at § 240; Crane, The Magic of the Private Seal, 15'
Connc L. RJT. 24. (19LS).. -
* CcatBEf, supra, note I, at 5 257; 1 S. WHXETOK, A TREATISE ox TSZ LAW or
GxrnucTS J 55 (3d ed.' 1957) [hereinafter cited as WHXISTON].
. B The term, "general contractor" [hereinafter often referred to as "general"] as
used in this Comment means the party bidding on the prime construction contract.
"The term "subcontractor" means the party bidding on specific portions of the
construction contract being' bid upon by the general (first tier subcontractors). The
term "awarding authority" refers to the party, either government or private, which
lets the prime contract. -... . ^, .v < ' | ' ' . :
64 F.2d 344 (2d Or. 1933). '.'". ' '".' '"'"' ' ' '
T In Baird 'the defendant, a linoleum subcontractor, underestimated by about
one-half the proper cost of the job. The subcontractor, upon recognizing his mistake,
refused to perform the job at the price submitted even though the general had
relied upon that estimate in preparing its own bid. Id. at 345. " '
Id. at 346.
oar CONTRACTS 5 90 (19J2). The Restatement does not use the
C-31
-------
: .;; . CONSTRUCTION BID SHOPPING 391
results of allowing a donative promisor to repudiate his promise
after it had been relied upon by the promisee. But, Judge Hand
concluded, the doctrine had no application in a commercial trans-
action sucz as that involved in Baird, where "an offer for an ex-
change is not meant to become a promise until a consideration has
been received."10
Thus Baird barred the use of promissory estoppel as a method
of holding the subcontractor to his bid. In a jurisdiction adhering
to the Basrd view, therefore, both the general and subcontractor
are left unprotected by the law in the typical bidding situation,
unless of" coarse there has been a formal acceptance of the subcon-
tractor's bid,u The general, under Baird, is free, even after the
award ot-t&e prime contract based on an estimate including the
subcontractor's bid to negotiate with other subcontractors for
lower prices. The consequences of this freedom depend upon the
nature of the market If the market for subcontract construction
jobs is consperitive, the general would prefer to be able to negotiate
for lower, bids alter the award of the prime contract. If, on the
other hand, prices for subcontracting services are increasing, the
general woold want to hold the subcontractor to his original bid.
This uncertainty is incongruous in a commercial system in which
the parties are often forced to depend upon one another.
la its decision in DreTtnan -a. Star Paving Co.,12 the California
Supreme Ccnrt attempted to alleviate some of the problems created
in the constrncstrc bidding process by the common law. As in Baird,
term ^praoaassiTj- estoppel, but that- doctrine and the rules oc section 90 are generally
5 204. Sf* lUkM-iuil-* Boyer, Promissory Estoppel: Riqiurtrr.tnts and Limitations of
Hit DoeirbMvSS. C- PA. L. RET. 459 (19SO).
10 6+E2±3S-J4*. Although the Raird derision was followed by the majority of
ju"«'i'^';Tt 2^r~^- Hand's view of the. narrow scope of section 90 was never hilly
accepted, S«i^e- .Sober! Gordon, Inc. v. IngersoU-Rand Co, 117 F.2d 654 (7th Cir.
1941); Ncrtii-eszrn Eafc Co. v. EHermin, 69 SD. 397, 10 N.WJd 879 (1943).
However, «""" courts still apply the Baird rationale, refusing to apply section 90
to other t^am -aoo-targaln promises. See, e.g., Wright v. United States Rubber Co.,
230 F. Supp.61fi (D. Ore. 1967); Tatsch v. Hamiltoo-Ericksoa Mfg. Co, 76 N.M.
729, 413 P.2d 137- (1966)., -. ...... . . .
Scholarly caoiment on the Baird approach to the firm offer problem was mLted.
Compart Sharp, Paeta Sunt Seruanda, 41 CotffM, L. REV. 753 (1941) and CORBIX,
tupra note 1, at J SI -with S. WOJUSTO^, A TRXATISE ON THE LAW or CONTRACTS
S 139 n.15 (rev. ed, 1936) and ALI, U^TTORK REVISZD SAIJCS ACT 123 (proposed final
draft No. 1, 1944). _,... v .-'.._
11 The general could protect himself before the award of the subcontract by
use of a bid hood or option contract. However, neither these nor other such devices
are frequently used in the construction industry. See Schultz, The Firm Offer Puzzle:
A Sfudy of Biuaiaj Practice in the Construction Industry, 19 U. CHI. L. REV. 237,
262 (1952) [hereinafter cited as Schultz].
« SI CaLzd 409, 333 PJd 757 (1958). '
C-32
-------
392 UCLA LAW REVIEW [Vol. 18: 389
Drennan arose in the context of a bid mistake by the subcontractor,
resulting in bis attempt to withdraw the sub-bid subsequent to its
use, but prior to its formal acceptance, by the general. Unlike Balrd
however, Justice Traynor, writing for the court in Drennan, found '
a way to hold the subcontractor to his bid. The court first found in
the subcontractor's offer an implied subsidiary promise not to
revoke for a reasonable length of time.13 The court was then able
to apply the doctrine of promissory estoppel to this implied promise
and hold that the general's reliance on the paving subcontractor's
bid had the effect.of. making the bid irrevocable. Thus a general'
contractor would now be permitted the option of accepting the bid
within a reasonable time.1*
By rejecting the Baird rationale, Drennan paved the way for
the application of promissory estoppel in the context of commercial
transactions,1* This expanded scope of section 90 offers the general
13 Once the court bad implied the subsidiary promisea promise cot supported
in the form of either part performance or considerationit used the reference in com-
ment b of section 45 (the unilateral contract provision) to section 90 as a means
of invoking promissory estoppel SI CaL 2d at 414, 333 PJd at 760. See RESTATE-
HEST or CQWTBACTS § 45, comment 6 at 54 (1932). This subsidiary promise was
necessarily implied in the subcontractor's offer because: "[reasonable reliance result-
Log in a foreseeable prejudicial change La position affords a compelling basis . . .
for implying a subsidiary promise not to revoke an offer for a bilateral contract."
SI CaL 2d at 414, 332 PJd at 760.
It should t-e noted that under the Second Restatement the court would have
hrm able to t.-ikg a more direct approach. New section 89B provides in part:
(2) An offer which the offerer sbouM reasonably expect to induce action
or forebearauee of a substantial character on the part of the offeree before
acceptance mtt which does induce such action or forbearance is binding as
an option contract to the extent necessary to avoid injustice.
/RrsTAiracnrr (SzoBco) or COMTBACTS § 89B (Tent. Draft No. 2, 1965). See also id.
5 S9B, ninjtriKoi} A.^"''
** Actual recovery for the general contractor in Drennan was damages measured
by the difference- between'the defendant-subcontractor's bid price and the actual
oat for the subcontract work.
13 It seems dear that the real object of the court in Drennan was to make
promissory estoppel applicable in a commercial context, albeit by a circuitous route,
and in effect to overrule Batrd.
This expansion of section 90 is signiSont in light of other developments in the
application of that doctrine to such areas as pre-agreement negotiations, iee, e.g.,
Hoffman v. Red Owl Stores, Inc., 26 Wis. 2d 683, 133 N.W.2d 267 (1965); employ-
ment relation contracts, see, e j, Thomson v. International Alliance of Stage Employes,
232 Cal. App. 2d 446, 42 CaL Rptr. 785 (1965); Pitts v. McGraw-Edison Co., 329
FJd 412'(6th Cir. 1964); and the production of goods, see, e.g, Haveg Corp. v.
Cuyer, 226 AJd 231 (Del. 1967). See generally Henderson, Promissory Estoppel and
Traditional Contract Doctrine, 78 YALI LJ. 34J" (1969) [hereinafter cited as Hender-
son].
However, Justice Traynor's application'ot the theory'in Drennan is not so
sweeping an application of section 90 as it tnay seem at first glance. In reality, the
effect of Drennan is to keep an offer open for a reasonable time after the general
contract is awarded. If the general delays his acceptance or reopens negotiations h*
will not be able to bind tha subcontractor.
C--33
-------
1970] CONSTRUCTION BID SHOPPING 393
full protection against the subcontractor wishing to' back out of his
sub-bid after the general has justifiably relied thereon. Hence, one
of the difficulties left by the common law approach, namely, a gen-
eral committed to do a job at a given price but with no subcontractor
to perform at the bid estimate, is resolved by the Drenmn decision.
In a jurisdictioa following the California doctrine, the general is
thus placed in a stronger position than under the Baird approach.18
The Drennan holding permits the general to negotiate for lower bids
if the market is competitive or to choose, instead, to hold the sub-
contractor to his bid if prices are increasing.11 Under Baird the
subcontractor could be in an advantageous or disadvantageous
position depending upon the nature of the market Under Drennan,
however, the general is able to choose whether to hold the subcon-
tractor to his bid or not depending upon its own market position,
thereby eliminating any possible advantage to the subcontractor.
Most of the caseslike Baird and Drennanwhich form the
body of law governing subcontract bidding deal with a mistake in
the bidding process.1* The most common factual situation is that
of a computational, error by the subcontractor and the subsequent
revocation oi his bid. Many courts have chosen to deal with this
problem in traditional contract terms. Unless the subcontractor has
specifically made Hs offer "firm,"1* the withdrawal of his-bid prior
.to the formal acceptance by the general operates as an effective
revocation and frees the subcontractor from any liability on the
proposed contract. However, it is dear that in many cases the
general is put in an unfair posiima by this result. That is, the
general is oomrnittsd to the prime contract but has no subcontractor
to perform at the sub-bid price he relied upon in the preparation of
his Giro f^tzmatE.13* This problem b?.s been alleviated through the
application of promissory estoppel by the Drennan court.
19 Severs! sBBz»-!=rre adopted the Drcmtan doctrine. See, e.?., CM. Leavell &
Co. v. Grale 1 . ' : / : v"- ' -f. _ " -
19 The turn refers to an offer which contains an assurance against revocation
within a reasonable tim*. Sit Sharp, Potto. Sunt Seroanda, 41 Count. L. REV. 783,
793 (1941).
20 This- would generally occur hi the context of rising pries for the type of
C-34
-------
394 UCLA LAW REVIEW [Vol. 18: 389
A separate problem in the subcontract bidding process is the
intentional bid withdrawal by the subcontractor.21 However, the
Drennan rationale can apply to an intentional withdrawal as well
as to a withdrawal prompted by a mistake in the bidding process.22
When neither general nor subcontractor had engaged in the
commercially detrimental practices of bid shopping and peddling,
Judicial focus on the issue of a mistake in the bidding process was
adequate.'. However, the widespread existence of these practices
necessitates a different focus by the courts, one which is sensitive
both to the individual needs of the parties and to the need for a
more stable commercial environment.
TTT_fi BID SHOPPING AND PEDDLING
One of the principle results of the Baird/Drennan approach"
to subcontract bidding has been the development of "bid shopping"
and "bid peddling" practices. Bid shopping is the use by the gen-
eral of one subcontractor's low bid as a tool in negotiating lower
Hds from other subcontractors. Bid peddling, conversely, is the
practice whereby subcontractors attempt to undercut known bid
prices of other subcontractors in order to get a job.23 In most cir-
cumstances, bid peddling is simply a response of competing sub-
contractors to the bid shopping activity of a general, and insofar
ss- a, solution to rhjs problem is concerned, bid shopping and ped-
may be treated as one.
Bid.shopping and peddling have long been recognized as un-
u~y" CGuSufuCuGIi tlEuc GfgiuL6
-------
1970] CONSTRUCTION BID SHOPPING 395
but common, practices have several detrimental results. First, as
bid shopping becomes common within a particular trade, the sub-
contractors mil pad their initial bids in order to make further
reductions during post-award negotiations. This artificial inflation
of subcontractors offers makes the bidding process less effective.29
Second, subcontractors who are forced into post-award negotiations
with the general often must reduce their sub-bids in order to avoid
losing the award. Thus, they will be faced with a Hobson's choice
between doing the job at a loss or doing a less than adequate job.28
Third, bid shopping and peddling tend to increase the risk of loss of
the time and money used in preparing a bid. This occurs because
generals and subcontractors who engage in these practices use,
without expense, the bid estimates prepared by others.27 Fourth, it
is often impossible for a general to obtain bids far enough in ad-
vance to have sufficient time to properly prepare his own bid
because of the- practice, common among many subcontractors, of
holding sub-bids until the last possible moment in order to avoid
pre-awardLbid shopping by the general.2* Fifth, many subcon-
tractors refuse to submit bids for jobs on which they expect bid
shopping. As a result, competition is reduced, and, consequently,
construction prices are increased.19 Sixth, any price reductions
gained through, the use of post-award bid shopping by the general
.will be of no benefit to the awarding authority, to whom these price
reductions would normally accrue as a result of open competition
2* Se« Btng Cnirrtr. Corp. v. Secretary of War, 8 T.C. 1070, 1039 (1947);
HJL Rz?. No. 434. Sjto, Cong, 1st Seas. 5 (1957). la testimony before congressional
committees iwTrr:':'"'r; a Federal Construction Contract Procedures Act, an act
vekinz to odr post-award negotiations, one notes the curious circularity of the
bid shopping problem. In oppwiiluu is tis let, vfnr.rzl contractors have argued
for the Bt'*"-iy at post-award nsgocariocs to deflate subcontractor's bids which
are inflated ><«"" «* of such negodatioas. Bearing} on S. 29O7 Bejora a Subcomm. of
the Senate.Cama^ on tht Jiuiiriarj. 82d Cong, 2d Sess. 173-75 (1952).
2« See, fcjE^^iJS Constr. Corp. TT_ Secretary of War, 8 T.C. 1070, 1075-76
(1947).
2T por mecanicii specialty subcontractors (see note 62 infra) this risk is
great because- "»«iiinarin; with regard to these specialties is an expensive process,
requiring highly trained technicians to estimate the cost of various mechanical
specialty work. This expensive process, however, is not the case in calculating and
assembling the rmt of brickwork, plastering, excavation, etc. each of which can be
figured accurately on a mathematical bash." H.R. REP. No. 434, 85th Cong., 1st Sess.
10 (19S7)."
2S Storings on S. 1644 Before the Subcomm. o/t tke-Senate, Comm. on the
Judiciary, 84th Cong, 1st Sess. 80-112 (1955).
29 The perversion of the free market system noticed in the fifth and sbth items
of the text has been strongly urged as a reason to end bid shopping and peddling by
proponents of a Federal Construction Contract Act. H R. RZP. No. 434, 85th Cong.,
1st-Sess. S (1957); S. RZP. No.. 1119, 84th Cong, 2d Sess. 3 (195S); HJR. REP.
No. 892, &3d Cong, 1st Sess. 4 (1953); S. REP..No. 443, 83d Cong, 1st Sess. 2
(1953). St* text accompanying notes. 61-43 infra.
C 36
-------
396 UCLA LAW REVIEW [Vol. 18: 389
before the award of the prime contract. Free competition in an open
market is therefore perverted because of tie use of post-award bid
shopping.30
It is necessary to distinguish, between bid shopping and ped-
dling that takes place after the prime contract has been awarded
and that engaged in prior to the award. Pre-award bid shopping is.
a form of free competition in an open market. Generals competing
for the prime contract will seek the lowest possible sub-bids. In
practice, however, the often superior bargaining position of the
general makes these negotiations unfair.31 Yet, the harmful effects
of pre-award bid shopping axe not extensive.33
In the case of post-award bid shopping, however, the detri-
mental effects are more pervasive. Here the negotiations take place
in a market completely controlled by the general who has been
awarded the prime contract; post-award bid shopping is therefore
ranch less like free competition. Moreover, any reduction in the
sub-bid will be to the detriment of both the subcontractor and the
: *» Set, «.f. Ring Com.tr. Corp. v. Secretary of War, 8 T.C. 1070, 1076 (1947).
Subcontractors are faced with the prospect of cutthroat competition resulting
in the rmn of many subcontractors, and loss in profits to others. Generals are often
injured by some of the practices of subcontractorssuch as last minute submission
of biostaken in response to- bid shopping. Furthermore, a general who does not
^T1^;* in bid shopping b at a competitive disadvantage against those who do. That
is, a «*Tr*T general may include a smaller percentage of profit in his bid and
thereby underbid the non-shopping general with the expectation of regaining this
piuJit fag by shopping for lower sub-bills alter the award of the prime contract.
The extent and success of this tactic will depend upon the percentage of subcontract
cnrh ia the total price of the general contract. The percentage can vary greatly from
nahstrr to industry. la some cases the percentage is high; the general contractor is'
EttSemore th*n an overseer who has subcontracted out much of the work. Post-award
b=».5uOypug a la '*» "v a potentially lucrative source of additional profit.
The party wbo invariably loses in a post-award bid shopping situation is the
amxczng authority. When bid shopping is used by the general after the award of
the nrane contract, the awarding authority is faced with the possibility of poor
workmanship, because subcontractors who are forced to reduce their price may rely
mr inferior quality methods and materials in order to reap some profit,
" - ** Set. Schultz, rjfra note 11, at 270. By disclosing the bid of one subcontractor
to orthea in an attempt to obtain lower bids from them, the general is using his
superior position to an unfair advantage, both in terms of relative size and in terms
of the general's role as the holder of a bid prepared at the cost of another potential
subcontractor. Subcontractors will still feel a profit squeeze, impairing their incentive
and ability to perform to their best capacity. Southern California Acoustics v.
C.V. Holder, Inc, 71 CaL 2d 719, 726 n.7, 456 P.2d 975, 981 n.7, 79 CaL Rptr.
319, 325 n.7 (1969).
32 The subcontractor b not as greatly injured as be b in the cose of post-award
negotiations where he has relied to his detriment upon the expectation of being
awarded a contract. Furthermore, when the bid shopping takes place before the award
of the prime contract the general's intent b to lower bis prime bid in order to win
the contract. Therefore, any reduction in the sub-bid price will be reflected in the
general's bid; the awarding authority win besent from these negotiations.
C-37
-------
400 UCLA LAW REVIEW [Vol. 18: 389
Section 2-205 of the Codeso is based upon what the authors
felt was established business practice.81 By making all offers firm,
that section arguably -eliminates the necessity for a showing of
reasonable reliance by the offeror to bind the offeree.52 Further-
more, it has been proposed that section 2-206 of the Code, by
allowing acceptance "in any manner and by any medium reasonable
in the circumstances,"53 would place the point of reasonable ac-
ceptance in the construction industry at the time when the general
submits his prime bid containing the subcontractor's offer.64 By
binding both parties when the general uses the subcontractor's bid,
post-award bid shopping practices would be eliminated. At the
same time, the awarding authority would get a better price for its
job, for now the competition would all occur before the prime con-
tract has been awarded.
In the abstract this approach seems to offer a possible solution
to the bidding problems of the construction industry. However, the
proposition that the Code places the time of acceptance of a sub-
contractor's offer at the moment of use of the subcontractor's bid
by the general requires a very strained reading of these Code sec-
tions. Article 2 of the Code, by its own terms, applies only to
transactions in "goods."M Since very few construction contracts fit
this definition but rather deal only with "services," any application
bei mckta&ev. Oder nifht :ur Perfckten gelangten Vertragen, 4 Jahrbucher Fur Dri
Dogmatik DCS Hrutigen Romischen Ucd Deutschen Privatrechts 1 (1861). That doc-
trine acrvauoa the theory that contracting parties are under a contractual duty to deal
in good faith- with each other during the negotiation stage or else face liability to
the eztent of reliance by the wronged party. French law, while not so advanced on
tiis point, also is free of the restraints placed on the common law by the bargain
pnDcrple. See "BT^sl^r- £ Fine. Cul&a. fn Contrahendo. Bar^nininr in. CfnnA Fnitti^ /?>*//
Frtfdon of Contract: A Comparative Study, 77 HARV. L. Rzv. 401 (196-t). See also
1 WmiiiVH, supra, note 4, at § 6JA. It is interesting to compare the different ap-
proaches to this problem in the contact of the emergence of the reliance principle as an
alternative method (to the traditional bargained for consideration) of fixing con-
tractual responsibility. See Henderson, supra note IS.
'» «An offer by a merchant to buy or sell goods in a signed writing which by its
terms gives assurance that it will be held open is not revocable, for lack of consider-
ation, during the time stated or if no time is stated for a reasonable time, but in no
event may such period of irrevocability exceed three months^ but any such term of
assurance on a form supplied by the offeree must be separately signed by the offeror."
UNIFORM COHMZROAI CODK § 2-205.
81 See Corbia, The Uniform Commercial CodeSales; Should It Be Enacted?,
S9 YAIZ L.J. 821 (1930).
62 If only this provision were to become the law in the bidding process it would
operate to further decrease the bargaining position of the subcontractor. See Note, The
Uniform Commercial Codt as a Prcm'tie Jar, Judicial Reasoning, 65 Count, L. Rzr.
880, 889 (196S).
63 Uiraroiiit CoicvoaoAi. CODE 5 2-206(1) (a).
6* Once Around the Ftag Pole, supra not* 48, at 835.
CODE 5 2-102.
e-ss
-------
1970J CONSTRUCTION BID SHOPPING 401
of the Code to this area must be effected through judicial reasoning
by analogy.5* While the proponents of the Code intended it to be
ultimately embodied in the general law," the firm offer sections
have as yet had little application outside the area of sales.68 More-
over, section 2-205 only applies to offers "in a signed writing" and
therefore is rather limited in its application to construction bidding
where written offers are not always common practice.09 Most
important]/, an interpretation of Article 2 that a contract is always
formed when a general submits his bid arguably lacks the flexibility
necessary in a modem and widely divergent commercial context hi
which trade practices vary greatly from one section of the industry
to another.*1*
D. Federal aad State Legislation
Since, in most cases, the general contractor does not need to
procure sub-bids for work other than that within the mechanical
specialty fieM^"1 it Is primarily within this subcontracting area that
bid shopping problems arise.63 Consequently, mechanical specialty
contractors hzve continually advocated legislative action to elimi-
nate these practices. In the United States Congress, mechanical
specialty contractors' associations have supported the Federal Con-
88 ""GooAf mmm aD things (grcinffing specially manufactured goods) which are
movable at tie rm^ of identificuian. to the contract for sal: other than the money
ia TvhJdj six pries a to be paid, iavesiment securities (Article 8) and things in
action. .. J*TJsnTBU* CosocotcwL Cent 5 2-105(1). In many cases there is no sale
of goods at all bivrived faj a. construction, subcontract- Frequently, however, the sub-
contractor snppfirt the materials be wiH use oa the job. In this sense an argument
.rnulH h« umie T4*** the subcontractor is selling "goods" under the UCC definition.
However, sine? Use- essence of a construction subcontract is clearly one of service,
such a rsnit-S-rankeiy. Set WIffiam H. Wts« & Co. v. Rand McNally 4 Co., 195 F.
Supp. 6i21 {5-DOO1 1961); Note. Tfit Uniform Commercial Code as a. Premise JOT
Judicial Rasemf. (a COLT7U. L. Rrv. 880 (1965).
5T GSQCUC- CcnacncxvL Coc« f 1-102, Comment 1; Corbin, supra note 51.
See alto Vokt Contram; ike Uniform Commercial Code: Its Onin Twin Keys: Uni-
formity tout Cftnotk, 50 CoK.vtix L.Q. 49 (1964).
5* See, tjv E.A. Coronis Associates v. M. Cordon Constr. Co., 90 N.J. Super. 69,
216 AJd 246 (1366)~S«« alto Wilmington. Trust Co. v. Coulter, 41 Del. Ch. 548, 200
AJd 441 (196*)_
59 Set Note, Another Look at Construction Bidding and Conlractt at Formation,
53 VA. L. Rrr. 1720, 1729 (1967).
80 It has been argued that the Code allows for Eziibility in this area by allow-
ing a contract to be formed with open terms. Once Around tkc Flag Pole, supra note
48, at 837; Uxcro»M COMICESCIAI. CODE § 2-305(1), 2-311(1). However, this provi-
sion is infrequently used. See Schulti, supra, note 11, at 264. See also Air Tech Corp.
v. General Elee. Co., 347 Mass. 613, 199 NJE.2d 538 (1964).
l S. Rxf. No, 617, Federal Construction Contnct Act, S4th Cong., 1st Sess. 10
(1953).
83 "Mechanical specialty" subcontracting refers, in general, to such fields as
plumbing, heating, piping, air conditioning, and all types of electrical work. See S.
1644, 84U» Cony, 2d Sess. J 3(3) (1956).
C-39
-------
402 UCLA LAW REVIEW [Vol. 18: 389
struction Contract Act and the Federal Construction Contract
Procedure Act as a means of reducing bid shopping and peddling.63
Various forms of these bills were introduced into Congress as early
as 1932. They have always been vigorously opposed by general
contractors associations and have never managed to gain congres-
sional approval.
In comparison, several states have enacted legislation requiring
prime contractors to list the names and work to be performed by
their subcontractors when bidding on public construction con-
tracts.5* These statutes act to reduce the amount of post-award bid
shopping to a limited degree because the consent of the awarding
authority is required for any change in the listed subcontractor.95
However, it has been held that these statutes confer no legal rights
on the listed subcontractors. In Klose v. Sequoia Union High School
DrrtTJci8" the relevant sections of the California Government
Code87 were interpreted as not being "aimed at conferring rights on
the subcontractors, but [were] all aimed at protecting the public
and the awarding authority."68
E. Legislative Reform and a New Focus
On August 5, 1969, the California Supreme Court, the same
ccnrt that decided Dremian, changed the rule established by Klose
and evidenced a change in judicial focus in Southern California
Acoustics v. C. V.Holder, Inc." The facts in Acoustics were charac-
teristic of the bid shopping problem.70 The Acoustics company (the
« S. Rz?. No. 617,.84th Cong., 1st Seas. (1955) ; H.R. RIP. No. 434, 85th Cong.,
JtstSea. (1957).,
^ Sec, e.g^ CAC- Ckcrr CODE § 4104 (West 1966); MASS. AJTX. LAWS ch. 149,
§3 44A-E (1969); NJ.l-.A2rr. STAT. § 52:32-2 (1969); N.Y. STATE FJU. LAW 3 13S
CifidGnney 1940).
*5«, «.ff, Cu. Ga+T Coos § 4107 (West Supp. 1969).
«* 113 CaL App. 2d 636, 255 PJd 515 (1953).
« CAT, GoVr CODE 5 4104 (West Supp. 1969).
« 113 CaL App. 2d at 641, 258 P.Zd at 518.
w Ca]. 2d 719, 456 P.2d 975, 79 CaL Rptr. 319 (1969).
TO Southern California Acoustics, a licensed specialty subcontractor, submitted
» telephonic bid for the furnishing and installation of acoustical tile in a school to
be btnlt for the awarding authority. C.V. Holder submitted its bid for the prime
contract listing plaintiff, as required by law, as the acoustical tile subcontractor. Holder
was awarded the prime contract and executed a written contract with the awarding
authority. A local trade newspaper reported that Holder had been awarded the job-
and included in its report the names of the subcontractors listed in Holder's bid.
The Acoustics company, after reading the report, and acting on the assumption that
its bid bad been accepted, refrained from bidding on any other jobs so as to remain
within its bonding limits. The general requested and was granted the school district's
permission to substitute another subcontractor for the Acoustics company. Although it
is unclear from the trial record, the court stated that the plaintiff had apparently been
listed inadvertently in the bid in place of the desired subcontractor. The Acoustics
C-40
-------
1970] CONSTRUCTION BID SHOPPING 403
subcontractor) brought an action for damages against Holder (the
general) and the school district (the awarding authority) incurred
because Acoustics relied upon being awarded the subcontract after
Holder iised its bid and was awarded the prime contract.
The court of appeals affirmed dismissal of the complaint in
reliance on the Klose decision.71 Unlike Drennan, where the general
was trying to hold the subcontractor to a bid, here, the issue was
whether a subcontractor could justifiably rely on the use of its bid
by a prime contractor and thereby bind the general.
The supreme court, oa traditional "offer and acceptance"
grounds, predictably rejected any argument as to the existence of
a contract between Holder and the Acoustics company.7- Further-
more, the court rejected Acoustics' claim that reliance on Holder's
use of its bid and Holder's failure to promptly reject its offer made
the doctrine of promissory estoppel applicable. The Acoustics
company had not relied, said the court, on any implied promise by
the Holder company, but instead only on a listing of subcontractors
required by law.73 Thus, unlike Drennan, the court found no subsi-
diary premise and therefore no basis for the application of promis-
sory estoppeL7*
Even, though rejecting the subcontractor's attempt to apply
the Drenr.cn doctrine in reverse, the court was still able to find for
the plaintiS. In 1963, the California legislature had adopted the
Subletting- and Subcontracting Fair Practices Act.75 Prior to the
passage or this act in 1963, it was settled by Klose that the pro-
visions of the Government Code which required the listing of sub-
on those companies listed. But the 1963 amendments to the Gov-
ermnexc Code were interpreted by the court in Acoustics as
eliminating both of the grounds for denying relief in Klose. The pre-
ambie-m. the 1963 Act stated, that the purpose of the Act was to end
bid shopping practices and protect subcontractors;78 such a state-
company Sxst sought a writ of mandamus to compel the school district to rescind its
contract aiti Holder and, having lost on demurrer, brought another action for dam-
ag*s against Holder and the school district. Id.
"" Southern California Acoustics v. C.V. Holder, Inc., 70 Cal. Rptr. S09 (2d
Dist 1963), vocated,,Jl Cal. 2d:719, 456 P.2d 973, 79 Cal. Rptr. 319 (1969).
7Z The court held to the Klose view that the listing of a subcontractor in response
to a statutory command cannot b« construed as an expression of acceptance.
" 71 CaL 2d at 723, 456 P.2d at 979, 79 Cal. Rptr. at 323. See Drennan v.
Star Paving Co, Si Cal. 2d 409, 414, 333 P.2d 757, 760 (1958). See oho text accom-
panying notes 12-14- supra.
'* Set text accompanying notes 13-14 supra.
n Ch. 2125, §3 1-14. [1963] Cal. Stits. 4410-14, amending and renumbering
sections 4100-08 of the Government Code.
78 "The legislature finds that the practices of bid shopping, and bid peddling
C-41
-------
1970J CONSTRUCTION BID SHOPPING 397
awarding authority. The price on the overall contract having al-
ready been set, the general's purpose here is simply to drive down
his own cost, increasing his profit at'the expense of the subcon-
tractor."
It is dear that contract is a legal device primarily designed
to support the market system.34 Yet in the area of subcontract
bidding, the law of contract has, in reality, perverted the market
system. By allowing, and indeed fostering, the practice of bid shop-
ping, particularly after the award of the prime contract, the ef-
ficiency of the bidding system as a means of market competition is
greatly reduced. Instead of supporting market institutions in order-
to promote general economic welfare,33 the law regulating subcon-
tract bi«irii"5 has in fact inhibited market functioning.
IV. AarrziCPTS AT ENDING BID SHOPPING AND PEDDLING
Because of the undesiiability of bid shopping and peddling
there have been several varied attempts to mitigate their effects
upon the subcontract bidding process. Common to all the proposed
solutions, however, has been their relative ineffectiveness.39
A. General Industrial Reform
There have been some attempts within the industry itself to
curb such, unfair bidding- practices.37 These intra-industry attempts
have T**^n directed pnrEarQy at the prevention of bid shopping
tarooza .the formation of canons of ethical practice and the per-
.--** Ss£i=r Ci£f=r=ii Ass-stia v. C,V Hnlder. Inc. 71 CaL 2d 719, 726 n.7,
456~£M-97S, 981 aJ, 79 CaL Ratr. 319, 325 n.7 (1969). "
3*-CaBttact law is often, said to reflect the fundamental societal goal of the
ai'iiW.P II-TTT Q£ the best possible balance between economic freedom and order.
Scg g~..i»nf Economic Objectives m a Changing World, ECONOMICS /eT> MATERIALS 1-9 (1953).
** It >"«, for instance, been suggested that the bid shopping problem in cou-
«!nu Hun bi(iaing can only be solved if Drennan is discarded and courts return l.o
the ti jiTIriimal approach of Boird. Note, Construction ContractsThe Problem of
Offer end Acctptance in the General Contractor-Subcontractor Relationship, 37 U. Cc*.
L> Rzv. 798 (1968). While thb would end the seeming inequity of a unilaterally
bound subcontractor, it b not a desirable solution. This argument, like much of the
discussion Ln this area of the lav, focuses attention on the wrong issue. Removing
the protection which Drtnnan afforded the general against unethical subcontractor
would cot eliminatealthough in some situations it would act to reducethe bid
shopping problem and'would once again leave generals unprotected. Instead ' of
forming on such issues as' "mutuality," courts should look at the bid shopping
problem in the context of normal business activities.
31 These practices have long been considered unethical by many trade association].
See, *.£, note 24 rupra.
C-42
-------
398 UCLsl LAW, REVIEW [Vol. 18: 389
suasion of association members to abide by these canons. Such
attempts have been, however, largely futile. Ethics in the construc-
tion industry are, it would appear, situational at best. Any attempt
to penalize violations of these codes of ethics may restrict price
competition and be an unlawful restraint of trade.38 Other proposals
by the construction trade associations which would alleviate such
problems as last minute bids,39 deliberate vagueness in bidding,40
and uncertainty as to which subcontractor's bid was used,41 have
little effect upon bid shopping itself because they treat the effects
bat igBore the causes of that detrimental practice.
B. Bid Depositories
creation of "bid depositories" has been one of the major
responses in those fields of the construction industry where bid '
shopping and peddling has "reached great proportions. A bid deposi-
tory is a facility, usually created and operated by a trade associa-
tion, for the collection of subcontract bids.'12 The sub-bids for any
gives job on which bids have been invited are sent to the depository
a short time prior to the date set by the general for the opening of
bids. Tk» depository keeps the subcontractors' bids closed and
confidential Tmtfl the hour bids are opened by the general, who
then makes the bid quotations known to all subcontractors partici-
pating in the depository-*3
Bid depositories have proven, in some cases, to be an effective
m'^Tts of controlling bid shopping. There are, however, some very
serious problems involved with their use. A depository, since it
»S«tS
-------
1970} CONSTRUCTION BID SHOPPING 399
regulates bidding practices, is subject to the very broad sanctions
of the Sherman Act. Price fixing, bid, comparing, and dividing of
profits, ail clearly potential antitrust violations, are no less so when
performed through the vehicle of a bid depository.44 It seems cer-
tain that any unreasonable inhibition of competitive bidding will
be held to be a combination in restraint of trade and violative of
the Sherman Act45 While recent cases have recognized that many
of the restraints on competition caused by bid depositories were
designed to, and did in fact, eliminate the harmful practice of bid
shopping/* those decisions have placed restrictions on the sanctions
availahlff to bid depositories-which greatly limit the utility of those
institntL0ns.iT
C. The Uniform Commercial Code
The approach of the Uniform Commercial Code to the
sale of goods has been proposed as a possible solution to the bid
shopping problem,48 The Code rejects the common law approach
to contact formation in favor of more realistic rules for construing
an offer to contract.4*
** OS TJJSjC. §i 1, 2 (19**). Set, e.g., United StaUs v. Associated Nevada Dairy-
men, Irr^ 1955 Trade Cas, J 63472 (D. Nev. 1955) (price firing) ; United States v.
Brcofcrr Eas'r Co, 1940-43 Trade Cas. I 56,183 (EX). Mich. 1942) (dividing of
profits); Uniied States v. Eagiatering Survey & Audit Co., 1940-43 Trade Cas.
I 56,019 (EJD. La. 1940) (ommmiag of bids).
u I- **<* eaiBer ra*v<-% mm-tt abolished the entire depository upon finding some
of the pa*-*"* of a bid depositary in violation of tie Sherman Act. Later cases,
huuiciciy izre held that the hid depository agreement itself was not a per se
vioaiiaa o£ the: Srifrman Art eyes though some of the rules of an agreement did
violate the at* St* United States v. Bakersfield Associated Plumbing Contractors, Inc.,
V533 ~;'- O». i vZZSX \SJ5. Csi. 1SES), 1159 Trsd: Cos. * £9,256 (S-D. Cal. 1959).
* Ser 1S33 Trade Cas. f 67/37 at 74^05.
-------
40* UCLA LAW REVIEW [Vol. 18: 389
ment of legislative intent contradicted the Klose holding that the
only aim of those sections was" to provide an opportunity to the
awarding authority for investigation and approval of any subcon-
tractors. Furthermore, the amendments revised the section dealing
with substitution of subcontractors.77 That section would now allow
for substitution only in those specific circumstances in which the
listed subcontractor was unwilling or unable to perform.78 Thus,
no substitution would be allowed in the case where the general had
shopped for a lower sub-bid after the award of the prime contract.
Accordingly, the court held the Klose decision to be no longer viable
and these sections of the Government Code to confer the right on
the listed subcontractor to perform the contract unless valid statu-
tory grounds for substitution exist.
Acoustics effectively eliminates the practice of post-award bid
shopping in California's public construction jobs;73 but the decision
is inapplicable to other than public bidding situations. Furthermore,
since the decision is based upon an interpretation of a section of the
CaEfornia, Government Code, it will probably carry little weight as
precedent in other jurisdictions. The listing statutes of other states
more closely resemble the old California statuteinterpreted by
Klose to confer no rights on the listed subcontractorrather than
the statute relied tipon by the court in Acoustics under which a
fmrfmq; of legislative purpose to end bid shopping is relatively
easy.80
Despite the recovery afforded the plaintiff-subcontractor, the
court in Acoustics, did not fashion a viable general solution to the
hid shopping problem. If this detrimental practice is to be effec-
; -overy dealt with, it is necessary that the. courts recognize bid
shopping" and peddling as an issue apart from traditional contract
in- connection with the construction, alteration, and repair of public improvements
ofSa result in poor quality of material and workmanship to the detriment of the
public, deprive the public of the full benefits of fair competition among prime con-
trzctocs and subcontractors, and lead to insolvencies, loss of wages to employees, and
other evuV CAL. GoVr CODE § 4101 (West Supp. 1969). .
71 Former section 4104 was amended and renumbered section 4107.
78 The court found significant the fact that all of the situations of subcontractor
substitution listed by the court in Klose as necessary to efficient construction of public
facilities were now covered by the amended statute. 71 Cal. 3d at 726 n.8, 456 PJd
*t 975 n.8, 79 CaL Rptr. at 319 n.S.
79 It is post-award bid shopping that was of major concern to the court. The
effects of post-award bid shopping are more serious than-'those of pre-award bid
shopping. Sit text accompanying notes 31-33 tuftra. ''?>'
w The listing statutes of the other states, like the old California statute, are
aimed at giving the awarding authority the opportunity to confirm the capability of
subcontractors to perform work on the job. The California legislature is the only one
which has professed any purpose of protecting the subcontractor from shopping
gcneralx ' . "
T.-45
-------
1970] CONSTRUCTION BID SHOPPING 405
formation (Baird) or detrimental reliance by generals on reneging
subcontractor's bids (Drennan). In a sense, however, Acoustics
may be a step in that direction. For even though the factual cir-
in Acoustics were not unlike those in Baird and Dren-
the Acoustics court focused upon the problem of bid shopping
and not upon the issues of contract formation. That focus, when
more generally made by courts, and when followed to its logical
conclusion, is the key to the elimination of detrimental bid shop-
V. PKOMISSOSY ESTOPPEL A PBOPOSED SOLUTION
Ones a court has focused on bid shopping and peddling as an
authentic and separate issue in the subcontract bidding situation, it
should be able to work a practicable solution to this problem. Prom-
issory estoppel, extended beyond Drennan, could be used as a tool
to effectively inhibit bid shopping practices.
In Acoustics, the court rejected the subcontractor's argument
that section 90 should be applied in a Drennan-\ike manner to
bind the general.82 It would seem that a more realistic approach,
openly applying the reliance principle to a bargain situation, would
have enabled the court to use the promissory estoppel doctrine.83
la oraer for promissory estoppel to be applicable, all the re-
quirements of section 90 must be met.84 Thus, there must be a
promise t'"^t was relied trpon.8* In Drennan, the court found the
TiVf> R/arif ajuf nremtan, arose in the context of an error in the
s="71 Cal. Id at 723-24/*S4 ?-2d at 979, 79 Cal. Rptr. at 323.
S* 5*»-3EJTdersonT cipm note 15.
o* "A-ommjs* which the promisor should reasonably expect to induce action or
forbeusncron the part of the promisee or a third person and which does induce juch
action or forbearance is binding if injustice can be avoided only by enforcement of
the promise. The remedy granted for breach may be limited as justice requires." RJE-
STATQCErr (SiCCXD) 07 CONTRACTS § 90 (Tent. Draft No. 2, 196S). This provision
reflects a. cnac^e from the original Restatement provision which made a finding of
injusiztz a threshold question; given such a finding, the court would apply the
estoppel. The Second Restatement allows for partial enforcement of a contract as
juste requires. Partly as a result of that change, the requirement that the action or
forbearance have a "definite and substantial character" has also been deleted. See
[tneroKy Boyer, Promissory Estoppel: Rcqwcmenls and Limitations of the Doctrine,
98 U. PA. L, Rzv. 459 (1950).
All elements of section 90 (promise; reasonable expectation by the promisor of
reliance by the promisee; reliance In fact by the promise*; and injustice but for en-
forcement of the promise) must be satisfied before the doctrine can be invoked. See,
«.g, EjV. Coronii Associates v. M. Gordon Constr. Co., 90 N.J. Super. 69, 216 A7d
246 (App. Div. 1966); N. Litterio & Co. v. Classman Constr. Co., 319 F_Zd 736
(D.C Cir. 1963).
83 Bard v. Kent, 19 CaL 2d 449, 122 P2d 8 (1942). See also Hilltop Properties,
C-46
-------
406 UCLA LAW REVIEW . [Vol. 18: 389
prerequisite promise implicit in the subcontractor's bid, and that
this subsidiary promise not to revoke the sub-bid was necessarily
implied38 in order "to preclude the injustice that would result if
the offer could be revoked after the offeree had acted in detrimental
reliance thereon."*7 In Acoustics, however, the court refused to find
an analogous subsidiary promise by the general because the sub-
contractor had failed "to allege facts showing the existence of any
promise by [the general] . . . upon which [the subcontractor] had
detrimentally relied."88 This finding of an implied promise to award
the contract to the subcontractor whose bid was used in preparing
the estimate which won the prime contract is crucial to an applica-
tion of promissory estoppel. Such a promise should be implied in
many casesto paraphrase Drennanto preclude the injustice that
would result if!' the general contractor could use the bid of the
subcontractor in. winning the prime contract and then be permitted
to shop for lower sub-bids. Once that promise has been implied,
the issue would then be whether or not the promisor (general)
should reasonably espect its implied promise to induce reliance on
tie part of the promisee (subcontractor). This would be a factual
determination depending upon the circumstances of the particular
case and the common practices within the trade. This solution
allows for a great deal more flexibility than those previously pro-
posed.8* A general contractor would not be bound to a subcontractor
ia every instance where he used that subcontractor's bid. That re-
sult, is unnecessarily broad, too greatly limiting the general's free-
dom, to contract-90 Rather, only in those circumstances where the
general has engaged in post-award bid shopping, and where there is
e^dence-of .detrimental, reliance by the subcontractor, will the
IOK.T. State, 233 CaJL App. 2d 349, 43 Cal. R?tr. 605 (1963); CORSE*, luprs note 1,
3* Set note 13 & accompanying tert supra.
** Drennan r. Star Paving Co., SI Cal. 2d at 414, 333 PJd at 760.
» 71 CaL 2d at 723, 4S6 P.2d at 979, 79 CaL Rptr. at 323. The court held
thai the plaintiS-subconiractor had relisd upon the listing of subcontractors as re-
qciied by section 4104 of the Government Code and not upon any promise from.
the general .., ." '". , .
*? The Uniform Commercial Code and bid depository approaches previously
discussed both suffer from the disadvantage of being overbroad. The Uniform Com-
mercial Code approach binds all genemls at th; moment they use a subcontractor's
bid, irrespective of trade practices and whether or not there has been any bid shopping.
The us« of bid depositories effectively eiiminala both pre-award and post-award bid
shopping but does so at the expense of unnecessarily limiting competition. The promis-
sory estoppel approach, while not so effective as an inhibitor of _bid shopping, does ,
not suffer from these weaknesses., -
»o The promissory estoppel approach would have no effect on pre-award bid
shopping. That practice, however, is less detrirrsatal than post-award bid shopping.
Sci text accompanying notes 31-33 supra.
C-47
-------
1970] CONSTRUCTION BID SHOPPING 407
doctrine of promissory estoppel be used to bind the general con-
tractor.
In the Acoustics case, for example, the subcontractor, upon
reading in a. trade newspaper that the defendant-general had been
awarded the prime contract and assuming that its bid had been
accepted, refrained from bidding on other construction jobs in order
to remain within its bonding limits. While it is unclear from the
case, it may be reasonably inferred that the subcontractor's as-
sumption was based on the common practice in the local acoustical
tile subcontracting industry, and was reasonably to be expected by
the general,*1 Assuming for the sake of example that the general
was not mistaken in his listing of the plaintiff but rather felt it
could obtain a lower price by shopping for other sub-bids, promis-
sory estoppel should be applied to bind the general and prevent
post-award bid shopping.82
In WS&zfru -o. Favret,^ the leading case holding that no con-
tractual relationship is created between the subcontractor and the
general whea the general uses the subcontractor's bid, the applica-
tion of promissory estoppel would have similarly allowed the court
to reach a better result In that case, Williams, an electrical sub-
contractor, submitted his bid to Favret who used that estimate in
preparing his bid on a federal government contract. When sub-
mitting his electrical sub-bid, Williams advised Favret: "If our
estimate used wire us collect prior to June 6 or else same is with-
drawn." The. general, in order to protect himself, answered by
telegram; trWe used your bid. for wiring on barracks and dis-
pensary Guifborx.'7** The bid by Favret was accepted by the gov-
ernment ami is. was awarded the prime contract. Williams, after
learning of the award to the general, ordered supplies and began
making arranssjzeats to perform the electrical subcontract. How-
ever, after a long delay, Favret, in answer to a letter of inquiry,
advised wiiiiam^ that he had given the work to someone else. On
81 Set genfraCy Schnltr, jufra note II. The use of promissory estoppel in this
manner is somewhat analogous to the UCC approach previoiisly discussed. See text
accompanying notes 48-60 ju^ro. The UCC approach would hold that reasonable
acceptance in the construction industry would be at the moment the general submits
his bid containing the subcontractor's offer. This result is too gmeral. It would neces-
sarily bind the parties in all circumstances, even where no bid shopping activities had
occurred. The bid shopping problem is a special one and nrmot be solved by so
general and simple a solution.'
93 If the general could show that the listing of the subcontractor in the trade
paper had been inadvertent, the general could attempt to rescind the contract on the
basis of mistake.
" 161 F-Zd 822 (5th Cir. 1947).
M Id, at 823 n.1.
C-48
-------
40S . UCLA LAW REVIEW [Vol. 18: 389
these facts the court held for the defendant relying upon tradi-
tional offer and acceptance doctrine.93 This despite the fact "that
Favret, after accepting Williams' bid, shopped around and found
he could get someone else to do the work at a lower price."98 Here,
again, is an instance vrhere promissory estoppel should have been
applied. It seems clear that it was necessary to find an implied
promise to accept the subcontractor's bid in the actions of the
general and the common expectations of the trade.97 The general
could not reasonably have believed the subcontractor would not
rely on being awarded the electrical subcontract
On the other hand, there are instances where justice would not
be done by binding the general to the subcontractor whose bid was
relied upon in preparing the prime bid. For instance, in Klose
there was clear evidence that Basin (the general) had erroneously
listed Klose (the subcontractor) in its bid on the prime contract.03
La fact, the publicly listed figure for the electrical work was not
that submitted by Klose but rather that of another subcontractor
whose bid was some ?500 lower." When the error was discovered,
the other subcontractor was substituted for Klose. There was no
evidence of any reliance by Klose upon being awarded the sute
contract, nor of any bid shopping activities.100 In these circum-
stances the application of promissory estoppel to bind the general
to a subcontractor who had not submitted the lowest sub-bid and
who was in fact Ested in error would serve no useful purpose.101 If
it had been shown, however, that there had been no mistake, but
rather that the general had shopped for lower sub-bids after the
award of the prime contract, the result should be different In such
a case, the conn should carefully examine tlic lacLs Tor any justifi-
able reliance (J-£- ordering of supplies, turning down of other jobs,
hiring of extra workers, etc,) upon which to base an application of
»5 Id. at 824 (dissenting opinion).
94 Id. at 824-25 (dissenting opinion).
»T See id. at 824.
» 118 CaL App. 2d 636, 638, 258 PJd 515, 516 (19S3).
» Id. ,-. .'.-.- . - . ' * . ..
100 Id. If the circumstances were such that listing the subcontractor was the
result ol an error, but the subcontractor had relied upon th.it listin? in anticipation
of being awarded the contract, the cose would be more difficult. Under present law
the subcontractor would simply have to bear the cost of his reliance, no contract yet
in existence- Under the promissory estoppel approach oBered here the result would
be the same, no bid shopping having taken place. Any discussion of the equities
involved and the proper allocation of the burden of risk in this situation is beyond
the scope of this Comment
101 That would, in fact, be the result bj a public construction job under the
Acotutia rationale. Sie tat accompanying cotes 75-78 supra.
C-49
-------
1970] CONSTRUCTION BID SHOPPING 409
promissory estoppel to bind the general and prevent him from gain-
ing the fruits of his detrimental bid shopping.
By this flexible application of the promissory estoppel doctrine
to the subcontract bidding situation courts would be able to effec-
tively inhibit post-award bid shopping practices while at the same
time allowing for other approaches, such as those used in the tradi-
tional 1fo» of cases, in non-shopping situations.
VL CONCLUSION
The commercially detrimental practice of bid shopping and
peddling ^5 been engendered, in part, by judicial decisions made
in a vacant By creating the law which governs subcontract bid-
ding in the context of cases involving a mistake in the bidding
process, courts have formed a legal system inappropriate for more
typical industry practices. As a result, bid shopping and peddling
have become common in many areas of the subcontract industry.
These practicesparticularly when in the form of post-award ne-
gotiationshave extensive detrimental effects. Courts faced with
subcontract bid shopping cases should not rely on the traditional
approach formed by Baxrd and Drennan but instead should take a
realistic look at the problems that exist in the bidding process and
fashion practicable solutions to them. The promissory estoppel doc-
trine can serve as a useful judicial tool in seeking that end.
THOMAS P. LAMBERT
C-50
-------
APPENDIX III
Note, Another Look at Construction Bidding and Contracts at
Formation, 53 Va. L. Rev. 1720 (1967).
C-51
-------
NOTE
ANOTHER LOOK AT CONSTRUCTION BIDDING AND
CONTRACTS AT FORMATION
From the time a general contractor (general) receives bids from
contractors (subs) until he formally accepts one of those bids, the parriesj,
are not adequately protected by the common law. Although they" arev
forced by the commercial context to rely upon each other during '.this4
period, ac common law their relationship cannot be contractual until the:.
general responds with the requisite promise of acceptance. To some.ex~i
tent the promissory estoppel doctrine has alleviated the general's problems,
by binding' the sub to perform according to the terms of his bid. But';
this protection is one-sided, and despite the view of some courts that!
promissory estoppel is a panacea, it appears that in confining the scope^o5?j
protection to the genera], the doctrine in fact raises serious problems.
The Uniform Commercial Code (UCC), in its attempt to conform
commercial law to business practice, offers new methods of dealing with
this recurrent problem. At least one commentator has found in the Code
what he believes to be a single and conclusive answera contract should
^
arise as soon as the general uses a sub's bid in preparing his own bid for
the prime contract. While this answer may be sound theoretically, one
apparent danger is that it, like other pervasive answers to complex problems,
may be no more than an oversimplification.
An empirical examination of the general-sub puzzle, along the lines of.
Professor Frankdyn Schultz's 1952 survey, of Indiana contractors, appears'
"to be the mosr suitable way both to test the validity of the above "answer^
and to find an alternative if that answer proves to be defective. Indeed,
in its emphasis upon conforming commercial law to business practice, .thec
UCC seems to dictate that any answer to the problem must be grounded^
in the facts of the business world. This Note, by examining the practices of;-
over 100 generals and subs in Virginia, suggests an approach to the general-^
sub puzzle in the context of the UCC's acceptance of "commercial reason-)
ableness" and "trade usage" as relevant factors. While variations in business^
practice necessarily mean that the particular conclusions reached cannot be1
applicable in all locations at all times,, neverthele^:; these conclusions i\~.
lustrate the inadequacy of making determinations in a factual vacuum and'
illustrate the importance of looking to business reality for a solution to
the puzzle.
PRE-UCC.-
Offers at common law arc freely revocable prior to acceptance unless-
[ 1720]
C-52
-------
1 »irho 1
LIBRARY
Co7i?tnictio7i Bidding 1721
by some special conbiderauon.1 This doctrine, however, fre-
quently causes inconvenience for businessmen, who need to be able to pre-
ict with certainty the future conduct of those with whom they deal. As
j result, several mediods of avoiding this uncertainty have developed. Be-
stks the opdon contract2 and the sealed promise,1 some states have adopted
written obligation acts, which provide for the enforceability of written
promises regardless of consideration.*
However, the, promissory estoppel doctrine* is the most significant
mans of avoiding the common-law rule in the general-sub context. Under
this doctrine the general receives limited protection if he uses the sub's bid
ro compute his own bid to the awarding authority." Section 90 of the
of Contracts defines the doctrine as follows:
ll A. CGMHN, Co^*TJLAC^^ i 38 (rev. ed. 1963) [hereinafter cited as CORBIN]; G.
GIU.MORE, Coimutcn i5 30, 32 (rev. ed. 1965) [hereinafter cited as GRISMORE};
RiSTAT£.\u>rr or COXTXACXS, S 41 (1932); L S. WruosroN, CO.VTRACTS S 55 (3d ed. 1957)
[hereinafter cited as "WnxmoM].
= CoRaux S 43; WtLWsro:* SJ 61, 6LA-
»CoMiN S Z5Z; Woxcmw S 61.
«£.£, N.Y. Pns. Pao». LAW S 33(5) CMcKinney 1962); see Braucher, The Cam-
msu)n and the Lav of Contracts, 40 CoaxEii L.Q. 696, 701 (1955). See also UNIFORM
CoMMEKCiAi Coot i 2-705; Corbin, The Uniform Comrnerciil CodeSjies; Should It
B< F.rjcted?, 59 YAI* L.J. 821, 827-29 (1950). See generally RESTA-TEMJENT (SECOND)
<* COXTTLMTTS $ 89fb), comment d at 139-40 (Tent. Draft N'o. 2, 1965).
5 RESTATEMENT or CONTRACTS $ 90 (1932). The Restatement does not use the term
promissory estoppel. C/_ CORSJX 5 204. Toe term was introduced by Professor Willis-
ten. WrmsTOfl S 139 (Isr ed. 1920); see Boyer, Promissory Estoppel: Requirements
o*l LomtaaoTU of tbf Doctrine, 98 U. Pi. L. Rxv. 459 (1950).
Sit N. Li=3=Sv^=--- G!=n= Ca=srr. Co, ?t9 F2d 736 (D.C. Gr. 1963)v Air
Cbmiidoning CO.TC.TGenards Constr. Co, 200 F. Supp. 167 (D. Hawaii 1961), affd, 318
F-d 410 (9tfa Cr. J5»i}): E_\. Coroois Associates T. M. Gordon Constr. Co., 90 N.J.
' Super. 69, U*. A ?^-7JX CApp. Dir. 1966); Reynolds v. Te-torkina Constr. Co, 237 Ark.
JSi. 374 S.\VJd 81» (IS64); Union Tink dr Co. v. Wheat Bros, 15 Utah 2d 101, 387
P-'J 1000 (1964)7 Dn-man v. Star Paving Co, 51 Cal. 2d 409, 333 P.2d 757 (1958); Har-
rif v. Lillis, 24 Sou 2d 689 (La. 1946); Northwestern Eng'r Co. v. EUerman, 69 SJD.
»9T. 10 N.WJd 879 (1943). But see James Baird Co. v. Gimbel Bros, 64 F^d 344 (2d
Gr. 1933), where Judge Learned Hand rejected the applicability of the promissory
°w>ppel doctrine ro the general-sub relationship. This decision received immediate and
«vere criridsm.- £^, 28 Iu_ L. REV. 419 (1933); 20 VA. L. REV. 214 (1933). While
*venl other coara hare refused to apply promissory estoppel in this context, none has
]cttpred Judge Hand's rationale. See Robert Gordon, Inc. v. Ingersoll-Rand Co, 117
F-J 654 (7th Cir- 1941) (general unable to prove justifiable reliance or irreparable
d«rinwnc); Tatsch T. Hamilton-Erickson Mfg. Co, 76 NJVL 729, 418 P.2d 187 (1966);
Southwestern Sales 4 Serv. Co. v. T.T. Watson, Inc, 172 So. 2d 239 (Fla. Dist, Ct. App.
"*>) (estoppel cannot be predicated on truthful statement of future intent); Hedden
T- Lupinsky, 405 Pa. 609, 176 AJd 406 (1962) (general's letter to sub varied terms of
and constituted a counter-offer); R.J. Daum Conscr. Co. v. Child, 122"Utah 194,
' P.2d 817 (1952) (general's reply a counter-offer).
SOUTHWEStfeftN UNlVERSITt
LllBRARY
C-53
-------
1722 Virginia Ld'u Review [Vol. 53:1720
A promise which the promisor should reasonably expect to induce
action or forbearance of a definite and substantial character on the
part of the promisee and which does induce such action or forbear-'
ance is binding if injustice can be avoided only by enforcement of
the promise.7
Each of these elements must be satisfied before a general can-^takt
advantage of the doctrine to hold a sub to the terms of his bid.8
Thus a sub's estimate which is clearly not intended as an offer can-
not be considered a "promise." * Similarly, the sub's bid must actually
mdrcrr substantial reliance.111 If ;he general relies on the sub's bid to
T Modifications of this section are contemplated. RESTATEMENT (Stcu>D> OF',GON~
T3MC3 > 90 (Tent. Draft No. 2, 1965) provides:
A promise which the promisor should reasonably expect to induce action or
forbearance on the pan of the promises or a third person and u-hich does induce
snch action or forbearance is binding if injustice can be avoided only by enforce-
ment of the promise- The remedy granted for breach may be limited as justice
requires. ' '
A proposed section of the new Rertxtsvient has direct relevance to the construction
biddiaj process. Section 89(b) (2) reads:
(2) An offer which the offerer should reasonably expect to induce action or
forbearance is binding as an option contract to the extent necessary to avoid
injustice- :.";
See ii, illustration 6V sr H2-43. This provision is A restatement of Judge Traynor's
holding in Drtrman v. 5or Paving Co, 51 Gil. 2d 409, 353 P.2d 757 (1958). Although
Jciise Travnor did nor consider the sub's bid an option, he found an implied secondary
promise to keep the ocer open for a reasonable time. This implied promise became ir-
revocable ones the general relied on ic by using it in his bid. Id. at 415, 333 P-2d at 760;
ie*47 CAUT. L- REV.-40J (1959); 59 COLUM. L. REV. 355 (1959); 11 STAN. L. REV-54(5
(1959).
a N. Lirrerio 4 Co, v. GUssman Consrr. Co., 319 FJd 736, 739 (DC. Cir. 1963)fE-A.
Coronis Associates v. .\L Gordon Conscr. Co, 90 N.J. Super. 69, 216 A.2d 2+6 (App-.Div!
l%6)u«e Boyer, nrprx noce 5.
Some courts trear promissory estoppel merely as a replacement for consideration.
Porrer v. Commissioner. 60 F.2d 673, 675 (2d Cir. 1932) ("species of consideration");
Allegheny College v. National Cruunuqua County Bank, 246 N.Y. 369, 159 NJE. .173
(1927;; C.H. Leavel] & Co. v. Grafe 4 Associates, 90 Idaho 502, 414 P.2d S73 \1966)
(dictum). The preferred approach is to use the doctrine as a flexible device to reach
equitable results. Thus in N. Litterio i Co. v. Classman Constr. Co., supra, the court
held a sub to the terms of his promise although the general's acceptance had varied the
terms of the offer. Rather than relying on technical common-law contract rules, the
court used promissory estoppel to mch a sensible result. See Hoffmnn v. Red Owl
Stores, Inc, 26 Wis. 2d 683, 133 N.\V.2d 267 (IW) (promissory estoppel npplied although
offer too indefinite to be accepted); Boycr, JT/^TJ note 5, at 482-91. Co-ntrj, Hcddcn v.
Lupinsky, 405 Pa. 609, 176 A.2d 406 (1962); R.J. Daum Constr. Co. v. Child, 122 Utah
194, 247 PJd 817 (1952).
Leo F. Piazza Paving Co. v. Bebek & Brkich, 141 Cal. App. 2d 226, 296 P-2d'36S
(1956). See generally Boyer, ntfrra note 5, at 4<5i-79.
10 Lazarus v. America'n Motors Corp., 21 Wis. 2d 76, 123 NAV.2d 54S (1963). Se:
also Robert Gordon, Inc. v. Ingenoll-Rand Co., 117 F.2d 654 (7th Cir. 1941).
C-54
-------
1967J Construction Bidding 1723
compute his own COM of performing the prime contract, this element
is satisfied.11 However, the general loses his protection if he demon-
strates his lack of reliance by continuing to bargain with the sub or
bv failing to reply promptly to the sub's offer.12 Furthermore, the
senerol is not justified in relying on mistakes in the sub's bid. which
are Lir^e enough-to put him; on notice,13-or mistakes which he has
induced himself.14
Bwt the critical issue is whether the sub should reasonably have expected
the "cnezal to rely on his bid, and whether the general's reliance was
rc-^^xubifc1* Courts appear to have taken three different approaches in
lieciding these fundamental issues. Only recently one court stated that a
general's reliance upon a sub's bid cannot constitute promissory estoppel.1"
A second^ more realistic approach was taken by Judge Traynor in Drermcm
\\ Stzr Rirrag C0,1T when he applied the promissory estoppel doctrine on
the basis- of what he believed to be normal commercial expectations.18
But the danger of this approach is that it can freeze the courts into a con-
clusion winch cannot be justified by the facts since no consideration is
given to the-possibility that practices within the particular trade differ from
normal commercial expectations. Finally, some courts have held that these
issues should be resolved by examining local custom within the particular
trade.1* For example, in N. LJtterio c> Co. v. Classman Construction
"S« N~- Uusrio & Co. v. Classman Conscr. Co, 319 FJd 736 (D.C. Cir. 1963);
Schulzz. Tex- t'iim Offer P-uszlc A Study of Bitsrmsi Practice in the Ccmrtrufnon
InJus^j, 19 U. Go. L. RET. 237, 248-49 (1951) [hereinafter cited as Schulrz), Contra,
Robot Gordon. Inc. v. IngersoU-Rand Co, 117 F.2d 654 (7th Cir. 1941); R.J. Daum
Consg. CQ.T. Oild, 122 Utah 194.247 R2d 817 (1952).
L*See R-J-Drom Cocstr. Co. T. Child, 122 Utah 194, 247 P.2d 817 (1952); Dreniun
v. Star P-tvuq: Co, Jl CaL 2d 409, 33i PJd 757 (1958) (dictum); Schulrz at 248-49.
IS Union Tank Car Co. v. Wheac Bros, 15 Utah 2d 101, 387 P.2d 1000 (1964); see
Robert Gordon, lac. v. Ingtrsoil-Rand Co, 117 F.2d 654 (7th Cir. 1941); Southeastern
Sales i Serr. Co. v. T.T. Watson, Inc, 172 So. 2d 239 (Fla. Dist. Ct. App. 1965) (dictum).
"Cenrcx Constr. Co. v. James, 374 F.2d 921 (8th Cir. 1967).
15 Boyer suggou that this objective test is a compromise measure adopted in the
face of zn isrolerablc dilemma. To enforce the promise in all cases would be a hardship
to the otferor. while to deny enforcement would result in hardship to the offeree.
Boyer. ntprj note 5, at 470-71.
lsTatsch T. Hamikon-Erickson Mfg. Co!^ 76 N-M. 729, 418 P.2d 187 (1966).
iT5lCal.2d-»09,333PJd757 (1958)..
13 Id. at 414, 333 PJd at 761. Later California decisions, however, seem to con-
sider the question of reasonableness one of fact and generally decide the question
on the basis of usage in a particular locality. See, e.^ Maclsaac & Menke Co. v.
Freeman, 194 CaL App. 2d 327, 333, 15 Cal. Rptr. 43, 52 (1961). Judge Traynor
did giTe some consideration to local usage in making his decision, see 51 Cal. 2d at 416,
3>3 P.2d at 761, but he apparently drew inferences from general experience in determin-
ing reasonableness.
S*r, ?.£, E.A. Coronis Associates v. At. Gordon Conitr. Co., 90 N.J. Super. 69, 216
A.2d 24/5 (App. Div. 1966). '
C-55
-------
172-f Virginia Law Review [Vol. 53:1720
Co.^rhe general informed the sub that its bid was being used, but the sub dis-
covered a mistake in the bid and refused to sign the subcontract. In re-
versing a summary judgment for the general, Judge Fahy stated that be-
cause of the sparse record, the court lacked the relevant facts for deter-
mining whether the general's reliance was justified. The case was remanded
for a decision as to whether "by reason of local custom in the trade'- -I
the general's reliance was reasonable. Although this approach lacks certainty",
it azJeast ensures a realistic result.
Bat even when the promissory estoppel doctrine is properly applied,
its value and adequacy are limited because it protects only the general
comrscror. Although the sub is bound once the general uses the bid, the
general has the choice of reopening negotiations with other subs. This
allows him to use the low bid as a lever to deflate bids from other subs
(bid shopping) and encourages other subs to undercut the lo%v bidder
after tie prime contract has been awarded (bid peddling). The general
can tins enforce the bid against the sub or, at his option, give up the
bid made firm by promissory estoppel and shop for lower bids. The sub
has no eqxrivalent power.
As bid shopping becomes widespread in a given area, subs puff their
mirial bids to leave room for later negotiations, thus fictionalizing the
bidding- process.23 Moreover, when a sub accepts a lower price to avoid
losing a contract, he may be tempted to cut comers, producing a less
satisfactory job.?4 Additionally, the awarding authority receives no bene-
fit- CI'TTC-- irhas already agreed to pay the general a fixed sum.25 In short,
onlr ibc general benefits in this situation.
.» o
'Ahhoogh extra] udicai methods have been formulated to meet these'
s^nie common law has largely ignored them. Ever since James Baird
FJM 736 (D.C dr. 1963). Compare Hsdden v. Lupinsky, 405 Pa. 609, '612,
175 AJd 406, 407-08 (1962).
22 A few courts have recognized the one-sided nature of the protection afforded by
die decline. Williams v. Favret, 161 FJd 822 (5th Cir. 1947); Milone & Tucci,
Inc. r. Booa Fide Builders, 49 Wash. 2d 363, 301 P.2d 759 (1956).
=3&? Ring Consrr. Corp, 8 T.C. 1070, 1075 (1947); H.R. RF.P. No. 434, 85ch Cong.,
1st Sess. 5 (1957) (accompanying H.R. 7163). This tendency to inflate bids generates
a vicious circle. Inflated bids are one of the reasons advanced by generals for the
necessity of post award negotiations with subs. Hurrngs on S. 2J07 Before a Subccrrrm.
of the Camrn. on the Judiciiry, Report of the FTC, 82d Cong., 2d Sess. 173-75 (1952);
Joint Hearings on S. 8J8 Before the Subcanrm. of the Comrn. on the Judiciary, 83A
Cong, 1st Sess. 154, 168 (195J).
2*See Ring Constr. Corp., 8 T.C. 1070, 1076 (1947)
215 For example, some states and the federal government require generals to submit a-
list of proposed subs; this list can only be altered for good cause. E.g., C.u_ GOV'T
CODE S 4104 (West 1966). While this requirement protects the awarding authority
C-56
-------
1967] Construction Bidding 1725
Co. v. G'rmbel Brothers-'1 the courts have uniformly refused to treat: the
general's use of die sub's bid as acceptance which would bind the general.
Instead, the sub's bid is treated as an offer to form a bilateral contract,
and the general is bound only if he accepts by a return promise.28 For
example, in MUone & Tucci, Inc. v. Bona Fide Builders^ the general used
the sub's bid in his proposal buc later discovered it was not the lowest
bid. After being awarded the general contract, the general gave the sub-
contract to another sub. Although the trial court had found that con-
struction iittinsay usage dictated that an implied contract was created by
the general's'-use of the sub's bid in this situation, and accordingly had
decided that :ne general was bound, the Washington Supreme Court re-
versed on the ground that there had been no return promise.
By rejecting nsage as a valid basis for concluding that the offer had been
accepted, the court adhered to common-law dogma.30 Although a prior
course of dealing;11 or custom32 has sometimes been considered a sufficient
from substandard wort by untrustworthy subs, it has been held to confer no rights
on the sub. Klose T. School Dist, 118 CaL App. 2d 636, 25S P.2d 515 (1953). Sie aha
Kiely Corp, T. Gibson, 231 CaL App. 2d 39, 41 Cal. Repcr. 559 (1964); CM- GOV'T CODE §
4103 (West 1966). But see People T. Inland Bid Depository, 233 Cal. App. 2d 851, 44
Cal. Rptr. 206 (19d5).
Subs have funned "bid depositories'* as a form of self-regulation, buc these deposi-
tories arguably violate the antitrust laws. See Christiansen v. Mechanical Contractors
Bid Depository; 230 F. Supp. 186 (D. Utah 1964); United States v. Arizona Consol.
Masonry 4. Pbscning- Contractors Ass'a, 5 TRADE R£G. RJEP. ([962 Trade Cos.) 1 45,059
(D. Ariz. 1962>7 Cored States v. Bafcersfield Associated Plumbing Contractors, Inc.,
1958 Trade Cas_ I 69X87 (SIX Cal), modified, 1959 Trade Cases fl 69,266 (SD. Cal.
iv5S). FurtueiJjfcjre, the depository cannot control nonmemb«rs and his not proven
completely ssBSianty-See generally Schueiler, Bid Depositories, 53 MICH. L. RJEV. 497
(1*50).
" 64 F.2d 3-** Cd Or. 1933).
2SThe gl»mii~Lu to which this doctrine can be carried is illustrated in WilJiams v.
Favrer, 161 ₯2d SZZ (5th Cir. 1947). The general's bid was due June 6. Clearly in-
tending to ftmialgr the negotiations before that date, the sub wrote: " 'If our estimate
used wire as coCccr prior to June 6 or else same is wichdrast-n.' " Id. at 823 n.l. The
general thereaftsr wired: ** *We used your bid ...."* Id. The court refused to recog-
nize the existence of a contract-".
2349 Wash. 2d 363, 301 P.2d 759 (1956).
s*See Albert T. RP. Famsworth Co, 176 F.2d 193 (5th Cir. 1949); Robert Gordon,
Inc. v. Ingersoll-Rand Co,'117 F.2d 654 (7ch Cir. 1941); O.C. Kinney, Inc. v. Paul
Hardeman, Inc^ 151 Colo. 571, 379 P2d 628 (1963). This rule has been criticized ns
"nonsense." Levie, Trade Usage and Ciutcmt Under the Ccmmon Ltnu and the
Uniform Commercial Code, 40 N.Y.Ui,. Rzv. 1101, 1110 n.40 (1965)
31 Arnmons v. Wilson 4 Co, 176 Miss. 645, 170 So. 227 (1936); Colc-Mclnryrc-
Xorfleec Co. v. Holloway, 141 Tenn. 679, 214 S.W. 817 (1919); Hobbs v. Massisoit
Whip Co., 158 Mass. 194, 33 N.E. 495 (1893); COHBIN V 75; GSISMORE \ 51; RZSTATE-
ME.NT OF CO.XTTMCTJ 5 72(1) (c) (1932); WILJUSTON 5 649.
32T.C. May Co. v. Menzies Shoe Co., 184 N.C. 150, 113 S£. 593 (1922); COKBJN
C-57
-------
1726 Virghtia Law Review [Vol. 53:1720
basis for a court's implying acceptance from an offeree's silence, trade, usaoe
has generally been restricted to a constructional function.''13 Thus while
usa^-e may be examined to interpret contract terms once the parties aie
found to be in a contractual relationship,5* it cannot be used to establish
thar relationship." The UCC offers a realistic escape from this limitation!*;;
UCC
As a threshold problem, Article 2 of the UCC applies only to "trans-i
actions in goods."3* While some contracts in the construction indus^
Cry frc this definition, many do not since they involve transactions for
"goods sad services."." Even though not expressly applicable, however,-
the Cooe-will undoubtedly influence judicial solutions to bidding problems;
S 75; Waujsnw J 649; cf. 'GWSMORE S 51; RESTATEMENT OF CONTRACTS \ 72(1)((J
(1937). Set gmrrallj Levie, ruprj note 30; Note, Custom and Trade Usage: Its Ap-
pjcmoii jfl Cermnfrcul Dealing} and the Common LJW, 55 COLV.M. L. REV. 1192 (1955-)'j
Csstom has been considered a basis for implying acceptance from [he offeree's silence
less often crtzn has a prior course of dealing.
: SOJ«8C* J 54?; GJUSMOM ij 99, 106; WILLISTON >i 648, 651-54; Levie, nipra note 30,
The gscncnoq berween cnssom and usage is often hazy at best. Courts frequently
c^ieuvAlcs a crade usage as a cnstom in order to enforce an agreement. E.g., T.C. Mair
Co. T_.\L=mes Shoe Co, 134 N.C 150, 113 S.E. 593 (1922). Furthermore, evidence of
trade osagT s nsually relevant, and sometimes indispensable, in proving a prior course
of Ar-X**a Now, Custom jnd Trjde Usage: Its Application to Commercial Deal'rngt
oh* tbe Common LKJ, 55 COLCM. L. REV. 1192, 1194 (1955). -<
»*Disna=3 Disc. Corp, r^ Sherwood Disdlling Co, 180 FJd 800 (4th Cir. 1950)^
Fr%32iee=r!iTOornns Co. T. B->LS. Int'l Sules Corp, 1?0 F. Supp. 116 (S.D.N.Y. 1960);
Wacc y. Bauuu, 259 S.W^d 677 (Mo. 1954). See sources cited, supra note 3J; RE-.
STATEMZCT or CONTRACTS 5> 250, 246 (1932); 9 J. WICMORZ, EVTDENCE 5 2462 (3d ed.
^940>. Some caum forhiii Iciroducdcr. of e»iuence of usage to vary' or add to the terms
of a c"'-''".'. which contains no- ambiguities on its face. See Booher v. Williams, 341
IIL App-rW-9S N^L2d J13 (1950); Highley v. Phillips, 176 Md. 465. 5 A.2d 324 (1959)'!
«N«sonal Bankv. Burkhardt; ICO U5. 686 (1379); Savings Bank v. Ward, 100 US.
195 (ISo»H Tearw=>se« Enamel Mfg. Co. v. Stoves, Inc., 192 F.2d 863 (6rh Cir. 1951)',
cer^desZe*, 342 US. 946 (1952); Ghiselin v. John Hancock Mut. Life Ins. Co, 79
CaiApp.Zd438. ISO PJd 50 (1947).
s*U:w>OKM CO.M.NURCI.AL Cooe J 2-102. "'Goods' means all things (including specially
rmraxracmrsi goods) which are movable at the thne of identification to the contract
for sale other rf»an the money in which che price is :o be paid, investment securities
(Article 8) and things in action." UNIFOAM COMMERCIAL CODE S 2-105(1) (emphasis
added). - - .. -;
There is a dearth of authority interpreting the term "goods" under the L'CC. The
official comments point our that "[T]he definition of goods is based on the concept
of nxrrabiEty and the term 'chatteb personal' is not used." UNIFORM COMMERCIAL
Cooe-§ 2-10J, comment 1. The Statute of Frauds, The Uniform Sales Act, and sales
tax cases may be the frame of reference. - Where the service aspect predominates and
the exchange of personal property is only incidental, che contract is not a contract for
sale. WilHam H. Wise Jc Co. v. Rand McNally Sc Co., 195 F. Supp. 621, 625 (S.D.N.Y.
1961) (contract to princ and bind books not a contract of sale); York Heating &
-------
1967J Construction Bidd'mg 1727
The UCC refiects a careful and studied attempt bv some of the most
competent legal minds to formulate a modem and workable scheme
governing commercial transactions. Although the Code was initially
hmited in scope, the framers intended it ultimately to be assimilated
into the general body of law.38 The Code solutions to recurring prob-
lems can be profitably Compared with judicial precedents and can be
ir>cd as a "bads for reasoning" to allow the common law to mature and
keep pace with modern commerce.33^ The logic of such an approach can
readily be ddnocsrrated. Assume two transactions between a sub and a
jeneral, taking place on the same day and concerning the same job; one
involves only goods, the other involves goods and services. There seems to
be no reason for the legal consequences of the two transactions to differ
merely because the Code is directly applicable to one, but not to the
other/0 If the Code presents a betrer solution, it, b'ke any other precedent,
should assist the court in reaching a just result.41
Ventilating Ox T. Fbsnnery, 87 Pa. Super. 19 (1926) (contract to install heating system
not a contract for sale). Similarly, where goods have been incorporated into a building,
rarhcr than sold separately, the courts have held that there is no contract for sale.
Unired States v. San Francisco Elec. Contractors Ass'n, 57 F. Supp. 57 (NX). Cal. 1944);
Cr\btal Recreajdoa Inc. v. Searrle Ass'a of Credit Men, 34 Wash. 2d 553, 209 P.2d 358
i IV49) (contract to conscrucr and install restaurant fixtures not within Uniform Sales
Act;. In Sai Fcmc-sco the court nomi char "[yjou cannot uke a composite process
of construction axxL. - . split ... [irl into . . . component elements . ..." 57 F. Supp.
it 67. But tfae fu-L rbat the transactioa between the general and the owner is not a
contract for sale- does noe necessarily mr-irc that there is no contract of sale between
g:neral and sob szacrr the concept of movability may be present in the hrter cose
bur nor in the fortocr. The concept or goods under the L'Cu has been broadened to
cover '"specialty- TnaDtrncrured goods," UNIFORM COM_MESCI\L Cone $ 2-105(1).
The lack of "powive guidance" as to the scope of article rwo is admitted by Pro-
fessors Buna, Seeoti ami SpeideL, who suggest that the distinction between a contract
tor goods and > contract for goods and services is less important under the Code than
under prior law. C. BUXN, H. S.VEAD & R. SPEIDEI, AN INTRODUCTION TO THE. UNIFORM
COMMERCIAL Ccoe 5 2_5 at 34-35 (196+) [hereinafter cited as BUNN, SNEAD & SpEiotL].
-^ UNIFORM Co>tMEJia.^i. CODE 5 1-102, comment, 1. Professor Corbin expressed
similar hopes. Corbin, The Uniform Carrrmercial CodiSales; Should It Be Enacted?,
59 YAI£ L.J. 321 (1950).
-9ThJs philosophy is carefully and fully explored in Note, The Uniform Commtrcijl
CoJf as j Premise for Judicial Reasoning, 65 COLUM. L. Rxv. 880 (1965). For a ca*e-
notr which urges the application of the Code by analogy, see 73 HAav. L. REV. 895, 898
(1965).
There are limits, to this philosophy. Thus the framers recognized that the Code
should only be applied by analogy to those situations where the justification for the
Code provision would apply to the analogous area. UNIFORM COMMERCIAL CODE
5 1-102, comment 1.
40 One court chose to ignore the Code even though the transaction appeared to be a
sale of goods. Tacch v. Hamilton-F_rickson Mfg. Co., 76 N.M. 729, 418 P.2d 137
< 1966) (sale of twelve rabies with benches).
4' See Schulrz at 244 n.22 (di'scussinx the Statute of Frauds):
C-59
-------
1728 Virginia Law Review [Vol. 53:1720
If the Code is applied to the general-sub relationship, it would appeal-
to be relevant in two ways. First, application of the Code's firm-offer
provision could alleviate partially the uncertainty caused by the ability- of
the sub to withdraw his bid. Second, the Code's liberal approach to con-
tract formation offers a means to restore mutuality to the bidding process..
Firm Off ay
Based on what was regarded as an established practice among businessmen.
to make finn otters/2 Section 2-205 of the Code provides:
An ocer by a merchant to buy or sell goods in a signed writing
which by its terms gives assurance that ic will be held open 'is
noc revocable, for lack of consideration, during the time stated or
if no time is. stated for a reasonable time, but in no event may such;
period of irrevocability exceed three months; but. any such term of
assurance, on a form supplied by the offeree must be separately signed
by-the offeror.
Like arrirrrn obligation statutes, this section eliminates any need for the
offerer 10 show reasonable reliance.
Only offers made by merchants come within the terms of this section.
A "merchant^ is defined as one: who "by his occupation holds himself out
as having kaowiedge or skill peculiar to the practices or goods involved in
the transaction.. . . ." 4S To the extent that a merchant has been character-
ized as a "profzsional" rather than "casual" buyer or seller,41 subs should be
Althonsi section 2-205 provides that a firm offer is not revocable- "for
lack of consecration," it does not completely preclude the offerer's with-
drawal of Hs oner. If the offeree has noc accepted within the stated time
or, 'if no time -was stated, within a reasonable rime, the offer can be with-'
drawn. An offer also is revocable if the offeree knows or has reason. to
know that-ihe offerer has made a mistake,45 or if the offeree himself has
Time is some authority for the proposition that a bid for plumbing installa-
tion ... will be said to differ from the ordinary contract of sale and chat the
Science will be narrowly construed not to apply, but it is difficult to understand
. why a sales transaction which is important enough to require a writing should
become less important when the sale is coupled with the work of installation.
The results of the writer's questionnaire indicate that contractors generally make no
dJfferennarioa. between the two types of transactions. See ic.xt at 1739-40 mfra. ' .
*-See Corbin, The Uform Commercial CodeSale!; Sbmild It Be Enacted?, 59
YALE L.J. 82 1,827 (1950); Schultz ac 237 n.3.
*3 UMFOKM COMMERCUL CODE 5 2-104(0.
NX, SNE.*D 4 SPEIDEL 5 2 j5 ac 37.
framers of article 2 state that: "Safeguards are provided to offer relief in the
case of material mistake by virtue of the requirement of good faith and the general
law of mistake." UNIFORM COMMERCIAL CODE 5 2-205, comment 5.
G-60
-------
1967] Construction Riddjng_ 1729
induced the misTake.18 Furthermore, even if a mistake is not large enough
to put the offeree on notice, but nevertheless would impose an unfair
financial burden on the offerer, revocation should be allowed if the offeree
has not proceeded so far in the transaction that he cannot be returned to
the status quo/1
It has bcsa argued that the Code's firm-offer provision should not be
applied lighrJy to the bidding process since it would only aggravate the
sub's already inferior bargaining position.43 However, this argument focuses
on the wrong issue. Rather than remove the general's protection from un-
scrupulous-subs, the object should be to strengthen the sub's protection; no
regulation is seldom the answer to incomplete regulation.48
Since secuoa 2-205 only applies to written offers, it has limited importance
in the bidding process. A written firm offer has been at issue in only one
reported case,3* While Professor Schultz indicated that approximately
sixty-six per cent of the bids submitted by subs were "firm bids," 8l it is
not clear ho-w many of these were in writing. In Virginia only 12 of 45
subs and only 7 of 67 generals reported that the/ gave or received written
firm bids.52 Qualified answers in this latter group indicate that the number
of bids -which can be classified as firm offers is even lo%ver.53 Thus the
promissory estoppel doctrine will continue to be of major importance in
defining the sub's obligations-
ComractJ?ormaiio7i Under the UCC
The bck of mutuality which results from binding only the sub would
be c!insn=r=d if a conditional contract were deemed to exist from the
momenz-i ^exuiral uses a sub's bid in his own proposal. Suggested l>y ccrr;-
menara&r'1 this novel approach has not yet been adopted by any court.
C=n« Constr. Co. v. James, 374 F.2d 921 (8th Cir. 1967).
41 S James Baird Co. v. Gimbel Bros., 64 F.2d 344 (2d Cir. 1933)
si Schukz at 264.
K The figures were derived from responses to the writer's questionnaire, which will
be discussed infra.
53 Apparently, many contractors assumed that a bid in writing was "firm," even
though, hr did not meet the other requirements of 5 2-205. The writer undoubtedly
assumed too much legal knowledge on the part of the responding parties when he
drafted this question.
M Ste Note, Once Around the Flag Pole: Cansmiction Bidding and Contracts at
Formation, 39 N.Y.U.L. REV. 816 (1964); 8 B.C. I.vn. I COM. L. REV. 81 (1966).
C-61
-------
1730 Virginia La~^ Revietn [Vol. 53:1720'
However, the possibility of finding such a contract would be enhanced if
the Code were followed since its provisions on contract formation reflect
a broadened conceptual basis favoring a factual approach. Rather than
running the risk of frustrating the parries' intent by focusing on whetb.ec
certain legally operative factors are present to form a contract, the'Codci
gauges legal consequences by looking for an agreement in fact. When such
an agreement exists, the Code attempts to give it effect if there " is a reason^
ably certain basis for giving an appropriate remedy."w Hence Section
2-204(1) of the Code provides that "a contract. . . may be made in any manr-
ner sufficient to show agreement. ..." 38 In turn, an "agreement" is defined.
as "the bargain of the parties in fact as found in their language or by
implication from other circumstances including course of dealing or usage
of mde or course of performance ...." 5T
An examination of the Code's answer to more specific problems relating
to contract formation also reveals its rejection of the formalistic approach
of the common law. Thus the Code replaces the common-law rule that' a
variant acceptance ends the offer with the rule that "[a] definite and season-
able expression of acceptance . . . operates as an acceptance even though
re states terms additional to or different from those offered . . . ." M Also,
technical common-la'w roles pertaining to mode of acceptance, such-as
the requirement thar telegraphic offers be accepted by telegraph, are elimi-
nated by section 2-206r which states that "an offer to make a contract
shall be-construed as inviting acceptance in any manner and by any medium
reasonable in the circumstances . . . ."M Although arguably this 5ecLJorris
Inroad rn prevmsag a. variant mode of expression from barring contract
fotuKiirayit has been suggested that a court should find that a general's use
of a sofa's bid is an acceptance in a "manner . . . reasonable in the circumr
stances." **
15 (jNIFOftM COMMERCIAL CoOK S 2-204 ( J).
^UNWOBM COMMERCIAL CODE 5 2-204.
S~UNITORM COMMERCIAL CODE S 1-201(3) (emphasis added)
48 UNIFORM COMMERCIAL CODE ') 2-207 (1).
59 UNIFORM COMMERCIAL CODE i 2-206(1) (a). Section 2-206 uses two words: "manner?
and "medium." Yet the official comments seem to equate them:
Former technical rales as to acceptance, such as requiring that telegraphic offers"
be accepted by telegraphed acceptance, etc., are rejected and a criterion that the,
acceptance be "in any manner and by any medium reasonable under the circum-
siances," is substituted. This section is intended to remain flexible and its appli-
cability to be enlarged as new media of communication develop or as the more,
rime-saving presenc day media come into general use.
UNIFORM COMMERCIAL CODE S 2-206, comment 1.
60 See Note, Once Around the Fljg Pole: Consmctlon Ridding and Contracts at
Formation, 39 N.Y.U.L. REV. 816, 832-34 (1964); 8 B.C. [NO. 4 COM. L. REV. 81 (1965).
The author of the N.Y.U. Note contends that 5 2-206 merely codifies the common law's
"reasonable acceptance" approach, as formulated in the classic cose of Adams v. Lindsell,
106 Erg. Rep. 2iO (K.B. 1818). The notion that Adorns v. Lindsell is the key is ques-
C-62
-------
I967J Construction Bidding 1731
Whether in determining the existence of a contract one looks for an
"agreement"1" under section 2-204 or for an acceptance "reasonable in the
circumstances" under section 2-206, the approach \vould seem not unlike
that of Judge Fahy in Litterio. Under either section resolution of the issue
demands a factual investigation, and this investigation, in turn, demands
an examination of trade usage.
Trade u^age, as employed by the UCC, is a matter of fact and is grounded
in the practice of a particular industry, market and locality. It is defined
as a practice that has achieved "such regularity of observance in a place,
vocation or trade as to justify an expectation that it will be observed with
respect to zhe transaction in question."81 However, the framers of the
Code deliberately omitted use of the word "custom" with all its attendant
common-law limitations. Unanimity is not required for a usage to be recog-
nized, and in is sufficient that the usage is reasonable and is observed by the
great majority of reputable contractors.62
Because the Code gives no more than a general definition of the nature
of trade osasc, the utility of this concept as a basis for establishing a con-
tractual relationship is problematic. It is left to the courts to decide what
decree of industry-wide compliance with a particular practice is necessary
l)cfore usage- will be found to exist. Although section 1-205(2) provides
that trade codes may be considered as evidence of usage,83 these codes
are of litde assistance in the construction industry, and courts must there-
fore broaden their inquiry to include proof from other sources. At least
one of these sources available to a court is the study carried out by Pro-
fessor Schufcz. Since that srudy is somewhat dated and limited in geo-
graphical scope; however, checking its accuracy by conducting a similar
incjuiry in a uuTczcm geographic.*] locale ?ccrr.cd desirable. IVhJc the re-
sults of riie;Scnultz study and the present study will not be conclusive, they
can serve-.as guides to those who wish to explore usage further.
SURVEY OF VIRGINIA CONTRACTORS
Questionnaires and covering letters explaining their purpose84 were sent to
generals and subs doing business in Virginia. Names of the generals were
tinnable sines the holding was designed to protect a \villing offeree, \vherejs, under
the circumstances being considered, the general must be considered an unwilling
offeree. Also, the court merely decided at what point an acceptance took effecr, noc
whether certain equivocal conduct constituted an acceptance. However, this theorv
can serve as a useful cranquilizer for jurists who need ancient authority to bolster their
opinions.
«i UNIFORM COMMERCIAL Cooe S 1-205 (2).
62 See UNIFORM COMMERCIAL CODE 5 1-205, comment 5.
63 UNIFORM COMMERCIAL Cooe 5 1-205(2).
6* The letter provided in part:
All too frequently the Law has been out of step with business realities. The
C-63
-------
1732 Virginia Law Review [Vol. 53:1720
obtained from the membership roster of the Virginia Branch, Associated
General Contractors of America, Incorporated. Subs' names were obtained
from the 1966 roster of Registered Contractors of the Virginia State Registra-
tion Board for Contractors. Many of the questions and the hypothetical situ-
ations posed in the questionnaire were similar to those used by Professor.
Schultz in his earlier survey. However, since his survey was directed pri-t
manly to section 2-205, changes, were made to broaden the inquiry to in-i
elude contract formation. Fifty-three of 94 subs and 67 of 100 generals"
responded to the questionnairei."
Subcontractor Survey
The subcontractor questionnaire included a hypothetical fact situation
in which the sub's bid was used by the general in preparation of the gen-
eral's bid for the prime contract. Although similar to the hypothetical
posed bv Professor Schultz, this fact situation was augmented by a new;
twist in that the hypothetical general bid shopped and then a\varded the
subcontract to another sub.68 Following this introductory fact situation,
twelve- questions were asked. Several, though not directly related to the
issues of this Note, provide useful background information on bidding and
contracting procedures.
(1) When do ymisnirmt your bid. to the general?
Tne answers given by the subs to this question fall into three groups:
twenty-four hoars or more before the general makes his bid (4), twelve to
twentv-four hours before the general makes his bid (4), one to four hours
reason i am writing my irdcle is to try to gee the law to reflect what business-
uKrrr thinlr ir should be on the basis of their business experience and business"
_a=iis- In order for the law to be in hirmony with business practices and customs,!
ic is necessary to determine whac these practices and customs are. This is where-
--TUBE, con be of great help to me and ultimately to yourself and the other mem-
bers of your profession.
I have selected your company as one of a hundred in Virginia from which I
hope to gain some insight into the facts of the construction industry. The en-
closed questionnaire will aid me in drawing some conclusions as to whac you
mink and do. -.
6> Trie higher percentage of responses from generals is most likely due to the fact
that their names were taken from a professional organization, interested in matters
related to the survey. On the other hand, subs \vere simply taken from a Use of
registered contractors.
**The hypothetical situation read as follows:
Please assume that you have been invited by a general contractor to make a
bid on a portion of the work on a private construction job for which
he is preparing a proposal. Of those subs bidding on that portion of the project
your bid is low and the general uses your bid in his own bid. This comes to
your attention. Later, however, you find out that the general has awarded the
subcontract to another sub at a price slightly louer than your bid price. What
would you do?
C-64
-------
1967] Construction Bidding 1733
before the general makes his bid (42). Of-those in the last category, 26
sured that they withheld their bids until the last one or two hours.
The reason for this late bidding is to minimize bid shopping by the
general. Several subs stated that the rime of bid submission varied accord-
ing to the general with whom they were dealing. Eleven subs indicated
that their bids were submitted "immediately prior to the time the general
is to bid" or "at the last possible minute so the general will have a mini-
mum amount of rime to do his bid shopping." The clear conclusion is
that most subs exerr time pressure on the general by last-minute bidding,
(2) Do you usually submit to the general
[12] a. written bids which state that they will not be with-
drawn for a certain time?
[22] b. oral bids- which state that they will not be withdrawn
for a certain rime?
[20] c. bids which say nothing about whether they will re-
main open?
Of the 54 answers (several subs gave more than one answer to this
question), only 12 indicated that the sub bid in such a way that section
2-205 might cause his bid to be firm. However, 2 other subs indicated
that oral bids submitted immediately prior to bid opening were later
confirmed, by letter. Apparently specifications often mention the period
of rime bios are to remain open since 2 subs stated that they bid ac-
cording' to specifications, and I stated that "specifications . . . are part of
the bid."" Although over 50 per cent make firm bids, less than 25 per cent
make bids-rhar qualify under section 2-205.
(3) When a general decides to use your bid in his own bid to the
awarding authority, does he
[2] zu notify you before using it in his own bid?
[7J b. notify you immediately after using it in his own bid?
[I9j c. notify you as soon as he has been awarded the prime
contract?
[27] d. notify you at some later rime?
Few comments were volunteered on this question. One sub stated that
"the better generals notify subs as soon as possible." The great majority,
however, hears nothing until the general has been awarded the prime con-
tract.87
, 6? Compare Schultz at 265-66, where one-fifth of the subs said they were notified
when the general used their bid in his proposal. Only 17 reported that the general
notified them immediately after the prime contract was awarded.
C-65
-------
1734 Virg'mia Law Review [Vol. 53:1720
(4) // you learn that the general has used your bid in his oi-sn bid
but you also discover that you made a mistake in your bid, do
you feel
[53] a. bound to go ahead and perform the work at your
original bid price?
[0] b. free to withdraw?
The response to this question was only surprising for the unanimity ex-
pressed.*8 Of course, it is easy to be magnanimous when answering a ques-1
tionnaire. Since several generals reported being faced with a situation such
as-tnis.Ave must assume that the subs' responses are not completely repre-
sencmveL Nevertheless, considering the sub bound at this point would seem
to be conrmerciilly reasonable.
(5) Would your answer to the question above depend on whether
the bid you submitted ixas a bid that stated it would not be
Yes: [7] No: [44].
Insread of feeling bound to the general because they said in writing they
would be. the decided majority (85 per cent) believe they are obligated
norwithsandmg rheir silence as to whether the bid would remain open.69
One scb stated that whether or not a bid is "firm" is irrelevant. "Our
word is onr bond and oar reputation paramount." The response to the next
quesdoiviiuraber six, suggests it is the relative position of the parties" rather
j than tne presence of a firm bid which causes subs to feel that they must
scki to meir bids as originally submitted. Curiously, however, 7 indir
cared that their answers to the instant question, number five, would, be
different, depending on whether their bid to the general was "firm,"
althousn 100 per cent had answered in response to question four that they
would consider themselves bound if the general relied on their bid. This
again indicates that some subs may not have been completely frank when
they aiswered question four.
(6) Would you feel compelled to do the jab if
a. you knew the general relied on your bid and you felt
morally or legally bound to him?
Yes: [51] No: [0] Sometimes: [1].
* Compare Schulcz at 267, where 75 subs felt bound while 13 felt free to withdraw.
''Schnltz's questionnaire posed a rise in prices rather than a discovered mistake as the
reason for the sub's withdrawal. This may account for the variant response.
*» Compare Schultz at 269.
C-66
-------
1967] Construction Bidding 1735
b. you feared loss of business reputation that would endanger
future business?
Yes: [17] No: [7] Sometimes: [4].
c. Some other reason (please comment): [3].
These answers indicate that it is the precarious position of the general
jfter he has submitted his own bid which accounts for the sub's feeling
he is bound to his bid. This is bolstered by the response to part b of the
questiononly 17 out of 51 indicated fear of losing business reputation
.is a reason.70 Again, it must be remembered that it is easy to be charitable
\:\ a sknolareti situation. As to part c of the question, 2 subs indicated
that '"pose eioririence with this particular general would be important," and
1 ma inclined that professional "responsibility" was the prime factor.
(7) Do you usually find that additio?ial negotiations betiveen you
and the general are necessary before a satisfactory working
agreement is reached?
Yes: [25] No: [28].
If y oicr answer is uNo" please explain the circumstances.
(S) If you and the general bargain further after you have sub-
mitted your bid -for the subcontract work, are these negotia-
tio-iis conducted
[12} a. before the general submits his bid to the awarding au-
thority?
[SJ b.after.the gsnsra! submit? his bid to the awarding
authority but before the prime contract h.is been
awarded?
TIZ] c. after the award of the prime contract?
These questions suffered from a lack' of clarity. It became increasingly
clear thar in answering, the subs did not distinguish between negotiations
about pries and negotiations about other terms. Thus a typical "No" answer
included the comment: "Bid proposals are usually given per plans and specifi-
cations. Why should negotiations be necessary?" Several mentioned that
the only time they negotiated price was either,when the lowest general
exceeded the amount allotted for the job or when specifications were
changed. Ten subs ' emphasized that they did not tolerate price shop-
^° Compare Schulrz at 268, where 70 subs felt bound to perform at the bidded
price because they knew "The general relied on your bid and you feel morally or
ethically bound to him." Only 4 indicated they would perform because they felt
legally bound.
C-67
-------
1736 Virginia Law Review [Vol. 53:1720
ping. One seated, "No bargaining and no price cutting before or after
bid dme." Another said, "We give only one price and do not negotiate.7
A third said simply that "if he [the general] uses our price, we do the
job at that price or not at all." Yet nearly one-half the subs admitted
they conducted further negotiations. And many of these probably would
agree with the sub who, somewhat resigned to price shopping, pointed out
that "generals always try to beat the bid down."
(9) Do you ever have any difficulty with a general ijho bid shops
(in other words, uses the- low bid ha has received to bargain
irirA other subs to get them to lo-^sr their o
-------
1967] Construction B'tddhig 1737
// so, please describe.
Sines this question overlapped the hypothetical, the responses to both
were combined. By far the largest number (31) indicated they would stop
submitting bids to a bid-shopping general. Seven reported they had tried
a bid depository, and 6 indicated they would "puff" their bids to that
TtneraL Four subs said they would publicize the general's actions to other
subs. Strangely, only 3 listed late bidding as a weapon, although the vast
majority in fact follow this procedure, as is indicated by the response to
question one. Other methods to counteract bid shopping included "trap-
pins"' the genera] by first quoting a low price and then withdrawing.
One sub said only thac he would "get griped"; another said he would
"do nodring." At the other extreme, one sub listed an arsenal of weapons
he employed: "Refuse to bid, quote higher price, quote late, quote only
with cocnmitmenr at time of quoting." Another reported that the best
method to counteract bid shopping was to submit bids only to honest and
compereor generals since "bid shoppers are most always the poorest con-
tractors and credit risks," One harried sub said, "Sorry, don't have time
to wrire 3 book on this subject. Believe me, I could do just that." Signifi-
cantly, no sub mentioned the possibility of taking the general to court.
(12) What objections, if xny, tvould you have if a law court found
that a contract >cas formed so that both you and the con-
tractor tsere bound, to perform as of the time your bid was
used, by the general m his owi bid? This contract would only
take- effect if the general received the prime contract.
This is me most impororrc question, and the response was predictable.
The onhrsurprise was thac complete unanimity was not achieved. Five subs
registered some disenchantment with such a result while 48 expressed their
approval, Many added comments, such as "Wonderful!" or "I think this
is the way ic should be." Of the 5 subs who expressed reservations about
finding'z contract at this point, none was strongly opposed. Two felc that
a general should not be forced to deal with a sub he discovers to be un-
satisfactory after bid opening. Another stated that escalator clauses would
have to be taken into account. The 2 remaining were not satisfied that such
a finding alone would stop bid shopping.
General Contractor Survey
As a rule, the generals volunteered more information than the subs, and
a wealth of information was gathered.. After giving the same instructions
to the generals as were, given the subs, the following hypothetical situntion
\vasposed:
C-69
-------
1738 Virginh La-ui Rfc'tei? [Vol. 53rl720
Please assume that you are preparing to bid as a general contractor
on a private construction job in the neighborhood of 5300,000. In the,
process of preparing your bid you solicit bids from subcontractors
oa a ponion of the work (for example, the electrical work)...You
select the low bid from among those submitted by the subs and''use
it 25 3. basis for computing the price of your own bid. The low bidC
ding sub knows that you used his bid. Shortly thereafter you are,
awarded the prime contract, and on the same day the low biddin^
sub rcUs vou that he made a mistake in his bid and will have to'with-
draw his bid. If you are unable to find another sub at approximately-
the same price, what do you do?
A varierv of answers was given to the hypothetical problem. The largest
number (8) sacsd that they would consider legal action. Another group:
(6) said tnev would absorb the loss and award the contract to another;
sub. Three of these stated that they had actually experienced such'
a siruarioo, thos lending a special credence to their answer. Other answers
ranged from ending business relations or exerting other extralegal pres-
sure to bavins the "ulcer bottle refilled." However, a majority of those!'
responding cad not answer this question, and therefore no fully representa-
tive conchsioTjs con be drawn.71
(1) Warn do you normally receive bids frcrrn the subcontractor in
preparing jour crxm bids?
As wirii tfaersabs, answers, ta rfiis question fell into three categories^ For.
62 responses* die breakdown was as follows:
. £411 One to two hours before the general must submit his bid.
Within twelve- hoars before- the general must submit hii
bkL"
Twenty-four hours or more.
The-response to this question coincides with the answers given by-- the:
subs and dramatizes the pressure under which generals operate. As one
general observed, there is "insufficient time to enter sub price and submit:
bids. S ubs gene oil v hold out unril the last minute to minimize bid shopping,?;
Another noted: "The whole- chain of supply is suspicious of someone:
'leaking' bid information to his competitors." This same general described
preparation of bids in the following terms:
Preparation of bids is a thoroughly hectic affair when it comes to re-
11 Compare Schulcz at 261, where 48 genenls indicated they would "forget it" if
theiub withdrew, 13 said they would "threaten him with everything short of a law-
suit," and 2 said they would "threaten him with suit."
070
-------
1967] Construction Bidding 1739
ceipt of subbids. In our office three in-coming telephones are in con-
tinuous use for rwo or three hours before the bids are due with three
people answering and scribbling down abbreviated notes represent-
ing subbids as fast as they can. It is remarkable that errors and mis-
understandings are rare.
(2) Da subs usually submit
[7] a.written bids which state that they will not be with-
. drawn for a certain period of time?
[14} btoral bids which state that they will not be withdrawn
: fora certain period of time?
[46] cufaids which say nothing about remaining open?
The simlhriiy between the responses of the generals and subs to this
ijuestion indicate* that Section Z-205 of the Code does not cover the large
majority of subs bids,
(3) Do -you. okzjys use the lens bid from among those sub?nitted
by the subs?
Yes: [31] No: [35].
// not, please comment.
The Yes-Noobuttrion has licdc significance by itself. The question calls
f»r an absolute answer, and the responses fortunately tempered the ques-
tion with bosnes-worfd qualifications. Twenty of the 51 answering "Yes"
volunreered Thar they used the low bid unless the low bidder had a poor
reputation or.irxd performed unsatisfactorily on previous jobs. Three others
qualified a»"Ye$r answer bv stating that they used the lowest solicited bid.
Sine: bids arc oniv. solicited from trusrworthy subs, these three answers can
also be placfd in the last category. Twenty-six of the 35 answering "No"
qualified their answers by volunteering that they would not use a low bid
from a sub wrch-a poor reputation or from one who was in financial trouble.
Thus 49 of 66 responding generals volunteered that they would use the
lowest bid unless the sub was considered untrustworthy.
The answers to this question yielded an unexpected premium. The num-
ber of unsolicited responses indicating a serious concern with untrust-
worthy subs gives added credence to the responses to the key question,
number twelve, which will be discussed at a later point.
(4) Do your methods of selecting a matmalman differ in any
from your methods of choosing a subcontractor?
Yes: [16] No: [44].
// so, please comment.
C-71
-------
1740 Virginia Law Review [Vol. 53:1720
':'''*\
The response to this question further illustra'tes "the desirability of apply-
ing the UCC bv analogy to situations not expressly covered. Even those
who answered "Yes" listed only minor deviations from their normal prr>.
cedures, such as the time at which bids are received. There seems to be no
significant difference between the formation of contracts for goods and
contracts for goods and services in the construction industry.
(5) After using a sub's bid in computing the amount of your own
bid -price, do you consider that
[15] a. he is committed to performing the work at the bidded
price?
[46] b. chat both of you are bound to each other as of the-
time you used his bid?
[5] c.thar neither of you is bound until there are further
negotiations or a formal contract is completed?
The answers to this question substantiate the findings of Professor
Schultz.75 Of 66 generals who answered, 46 (70 per cent) felt they were
bound in some way after using the sub's bid. This strengthens the ar?u-
s v O O
ment that. a. conmcr should b« deemed to exist at this point.
(6) Would your answer to the question above be different if the
bid -uar a firm bid (one ^hich states that it 'will not be viith-
Yes: [9] No: [51].
?" frrc:
d'"TfS £?* lifalinv izith firrn bids differ in any
~" ~ " & i rt
methods, of dealing with a bid which is silent as
3er h will reTnarn open? '
Ye- [31 No: [52].
The responses to this question demonstrate the discrepancy between sec-
tion 2-205 and reality in the construction industry. Neither subs nor generals
attribute much significance to whether or not the bid is "firm." The im-
portant factor in either case, is the general's exposed position during the
postbid, preawaxd stage.
(7) // the sub ivithdraius his bid after you have been
the prime contract, would you feel that he has been unjust?
Yes: [65] No: [2].
~'- Compare Schulcz at 260, where 65 generals felc bound to award the job to the sub
whose bid was used, while only 13 felc free to pick another sub.
C-72
-------
SOUTHWESTERN
LIBRARY
J967J Construction Bidding 1741
Here, again, the general's exposed position is predictably illustrated.
(S) Is it ever your practice to use a sutfs bid as an estimate of ivhat
that portion of the job should cost "with an eye perhaps to do-
ing that part of the ixork yourself, finding a better price or
accepting a lower bid from another sub?
Yes-. [llJNo: [54].
Please comment.
The wording of this question may have been unfortunate since a "Yes"
answer without, cpilificaaon would have included two distinct practices
-using bids as estimates and shopping for bids. The "Yes" answers all in-
cluded comments, and none reveals a general who admitted bid shopping.
Several generals answering "Yes" agreed with the following comment:
Only in. the case where one sub-bid is received on a particular por-
tion of the work and the bid when compared with our estimate seems
to be completely out of reason do we feel justified in soliciting addi-
tional bids after the contract award. In this case we would use our esti-
mated price in preparing the bid.
As one general, agreeing with the above, stated:
By doing" so, we commie ourselves to the responsibility for getting
this work done for the price we used. It is normally our custom to
then aizeutpc to negotiate a contract with the subcontractor by point-
ing" out the reasons why we feel the wuvk Miuulu Only CO5C so much.
If wdorE unable to negotiate a contract -with this man, we then pro-
ceed to- negotiate with another subcontractor.
Several answering "No" stated that it would be unfair to request a sub
to expend the time and money to compute a bid, only to have the general
do the work himself. Many reminded the writer that such practices were
unethical under the AGC Code of Ethics.
(9) When you determine that a particular sub is loin bidder and
that you -will use his bid in computing your oizn bid. price, do
you notify him
[0] a. before you use it in your own bid?
[14] b. immediately after you have used it?
[40] c. as soon as you have been awarded the prime contract?
[11] d. at some later time?
Despite the moral obligations which may attach upon use of the sub's
C-73
-------
1742 Virginia Law Review [Vol. 53:1720
bid, most generals do not notify the subs until they Icnrn they have been
awarded the prime contract.73 However, the reasons given for this delay
are significant for their lack of uniformity. Four generals stated that the
delay gave them dme to evaluate the sub. Three stated that this was "ac-
cepted ethical practice." Three others stated that it would "serve no par-
pose" to notify the sub earlier, while 2 attributed the delay to the "rush"
of bidding. Two generals believed prompt notification to be unneces^
sary since, as one put it, "subs have a way of rinding out how. they
stand." One general said the delay allowed him "to 'pin1 down paper work;'^
while another stated that earlier notification was "impractical from, the!
mechanics of contacting them." One general cited the "degree of need to'
place orders for key or critical materials or scheduling his place in the
order of construction." Two said that late notification helped prevent
"mistakes,'* another said it kept "the subs from worrying us," and still an-
other said that earlier notice was "premature." Yet 12 said they would
tell the sub if he called "anytime after bid opening."
On the other hand, 7 generals who notify the sub immediately after
using his hid volunteered that they believe the sub is "entitled" to know;
as one general put it, "the sub is just as interested in knowing where he
stands as we are in knowing where we stand as prime bidder." Similarly,
J others said that notification at this time "establishes better relations
with the sub." ';
Delay in notification can lead to serious enforcement problems if a con-
tract is deemed to exist as of the rime the general uses the sub's bid. The
effect of a deky will be discussed at a later point.
(10) Do the. subf bids submitted to you contain enough specificity
or do ion customarily conduct fztrtber negotiations before c.nn-
Ttg a SJtisfjcrcrry marking agreement?
. This question caused confusion as to whether "negotiations" referred to
price or orber terms. Of those responding, 25 reported that they usually
conduct fanner negotiations while 28 reported they do not. Of those who
do conduce- further negotiations, 20 indicated that the negotiations 'are
undertaken only to clarify terms other than price. For example, one gen-
eral saidv "At least half the time there must be negotiations to clear up
possible misunderstandings." Another stated, "We must explore the sub-^
contractor's concept of his scope, in terms of our overall prime contract.'
Very seldom do subcontractors read the special or general conditions which
are binding on the prime contractor as well as the subcontractor." Another
observed that "negotiations are for interpretation rather than price change.!'
W Compare Schultz ac 259, where approximately two-thirds indicated that they did not
notify the sub until sometime after bid use.
~ C-74
-------
1967J Construction Biddmg 1743
One general said, "Quite frequently we must clarify bids." Another indicated
that sales ta_x inclusion and time of delivery frequently had to be discussed.
Only 2 indicated that they bargained about price. One flatly declared,
"We negotiate with the subcontractor after we have been awarded a prime
contract. Any negotiations prior to this time arc not conclusive."
Although some generals may have been less than candid in their responses,
it seems probable that the great majority does not bid shop. This coincides
with the conclusion of most subs that bid shopping it not a common prac-
tice among "reputable" generals-
(11) If j etc negotiate izith the sub after he has submitted his bid,
do joit do so
[ 19} a. before you submit your bid?
[S] b. after you submit your .bid but before the award of
the prime contract?
[29] c. after the prime contract has been awarded?
The largest group indicated they negotiate after they have secured the
prime contract. Since generals are under severe time pressure before bid
opening, this is probably the only time such clarifications can be made.
(12) What abjectiom, if any, tzould you have If a laix court found
that a contract i:as formed as of the time you used the suWs
bid hi y our bid? This contract would only take effect on the
candinon that you receive the prime contract.
Objections: [28] No objection: [3S].
This was die key question submitted to the general contractors. True
a majority or the generals did not object seems remarkable in view of the
t'jct that the change in the law posited by the question would bind the
general at an-earlier time than is the case under present law. Unreserved
acceptance of che proposal was voiced by 21 generals. Comments ranged
from "AH for it." "Excellent law" and "No objections whatever" to the
following statement by one general: "None. We consider we have a con-
trnct under chose conditions. If such a law were in effect it might serve to
eliminate bid shopping-"' However, it must be noted that 1 nonobjector
added that half his work was performed as a sub.
As in question number three, many generals, both objecting and non-
objecting, commented that.the reliability of the sub was all important.
Thus one objector stated that "a sub's ability to perform is a big cost factor
to the general contractor." Likewise, a nonobjector said that he had no
objection "so long as we have the right to use the second low bid if for
C-75
-------
1744 Virginia Law Review [Vol. 53: 1720"
-
some reason we do noc wish to work with the low bidder." Fourteen non-
objectors qn.T iirted their answers along these same lines. Fifteen objectors
listed this as their primary reason. Thus if this single objection can be
satisfied, and if the votes are realigned accordingly, the result would be
13 objecting and 50 not objecting certainly an overwhelming response,".;'
Lastly, 9 objected because they did not have time to check the items
included in the sub's bid during the hectic bid-opening period and did
noc wane to be bound until after they had had the opportunity to make
such a check. Three nonobjectors similarly qualified their answers.
CONCLUSIONS
On the basis of the information obtained from the questionnaire, several
conclusions cm be drawn.
First, section. 2-205 has little relevance to the bidding process. Few bids
fie the requirements of that section since usually a sub's bid either is oral
or says nothing about being firm. Moreover, neither generals nor subs treat
written firm bids differently from other bids. Thus the premise underlying
section 2-205 namely, that businessmen distinguish written firm offers from
other offers is largely inapplicable in the construction industry.
Nevertheless, promissory estoppel should be used to bind the sub. The
vast majorfrv of both subs and generals agreed that the sub should be
bound as of the time the general uses his bid. This overwhelming concur-
rence should preclude a sub's withdrawal of his bid once the general has
used it in corrrpoting: his own bid for the prime contract. Moreover, several
subs and many generals treated, the sub's bid as firm for the period of rime
stated'in rbe- specifications. "While this does not automatically make the.
offer irrevocable under section 2-205, it does supply a basis for binding-
the sub under- the promissory estoppel doctrine.
The n-mmt anestion whether a contract should be found as of the time
* *
the general incorporates the sub's bid into his own proposal cannot be.
given a simple^ categorical answer. The complexities of the bidding process
render overty simplistic the "solutions" of earlier commentators.7'' Under
certain circumstances a contract could reasonably be found to arise as of
the time the general uses the bid. Under other circumstances, it would
be unjust to bind a general simply because he uses a sub's bid.
Although seventy-five per cent of the generals believed that both parties
were obligated to each other as soon as the general used the sub's bid, many
of these objected to being bound automatically at this point. Some of
their objections can be dismissed summarily. Several generals agreed /sub-
stantially with the following:
74 See Note, Once Armmd the Flag Pole: Construction Bidding and Ccmtrjcts at
Formation, 39 N.Y.UJL. REV. 816 (1964); 8 B.C. IND. & COM. L. Rev. 81 (1966).
C-76
-------
1967] Construction Bidding 1745
Many times the general has to use his best judgment to fill in the
gaps between the price quoted by the sub or suppliers and the con-
tract requirements and then if successful negotiate with the low sub
to have a complete bid.
In such a.srniition there can be no contract since no sub's bid has been used.
Another objection raised by both generals and subs concerns the diffi-
culty of proving whose bid was used. This practicality argument does not
address itself to the wisdom of finding a contract. Ic merely adds an ad-
ministrative difficulty and should not be allowed to shield unethical gen-
erals. Moreover, solutions are available. As in certain public contract bid-
ding, the general could protect himself by posting the names of his subs
with his own bid. This procedure has been recommended by at least one
trade association.73
A more substantial objection raised concerns the vagueness of some bids,
undoubtedly caused by time pressures. As one general stated:
None of them get their final bids to us until shortly before bid time
when the estimators must, within about three hours, take (over the
phone) the sub's bid, gee from him what he has coveredand evalu-
ate all subbidswhich entails adding to or deducting from a subbid,
whatever tie can find is the right price, for the work not included
in some, and the extra work included by others. In a job in which
there rnzy" be- 35 subbid items the estimators may have 150 to 200
snbfaids to evaluate, choose one in each category, transfer the unit
prices- (which are part of so many bids) onto our sheets, then if
there are* alternates, strain evaluate rh« bids to s?e v/hich one Is
low cur each of the alternates, add those bids up, add the alternates
up> pocthem in our bid, say a prayer, and submit our bid.
This same general provided a possible solution:
If all of. the sub bidders send us preliminary letters, outlining the
basis of their bids, this last minute rush is slightly easier, but most
of them don't.
75 NATIONAL JO«:
-------
1746 Virginia Lav Review [Vol. 53:1720;
The extent of this problem is uncertain. If plans and specifications are used,'
the sub's bid must comply with them. The uncertainties in the sub's bid may'
be of several different kinds. The sub simply may have failed to specify.
all the details, such as delivery and payment terms, which would be ex-
pected to be included in a final agreement. The responses indicated1 that
this- was generally the case. Section 2-204(5) of the Code provides 'fo£
rhis contingency, and there should be no objection to binding the parries
contractually. On the other hand, the sub's bid may be unresponsive to the
general's request. In the hectic period prior to the submission of the generaTs
biiLir is understandable that the general might inadvertently use such a bid,:
onlv to discover his error at some later time. Since the sub has failed' to
complv with the general's plans and specifications, he should not be allowed
to rcao the benefit of the general's error.
i W
The principal concern of most objecting generals is the spectre of being
forced to deal with the "unknown" bidder. One general described his ob-
jections to the bid-use proposal as follows:
In a few coses I do not think this would be satisfactory because we
. have had certain subcontractors bid on work who were not registered
and coold nor. qualify to do the work. Also, we have had subcon-
tractors ,bid on work who do not have a sufficient labor force not
sumcdent office personnel to handle a job of this size, and in some
cases where there is only a couple hundred dollars difference between
.thc-two bids, we -will then select the one who is the most capable and
who will do the. best job. In bidding jobs over the State there are
rnanxr nm~ \vhcr. ^c rcCrive bids from people we do noc know or have
never heard of before, and we feel like they should be investigated be-
fore- awarding chern the work. So generally, we would object to this
procedure. -
This problem is dramatically illustrated by the comments of a general who
reported receiving a bid ten minutes before his own bid was due which
was S5.00O dollars lower than the next lowest bid. There simply was noc
sufficient rime to investigate the bid or the bidder, yet since his competitors
most likely had received the same bid, he was torn between using it or
discarding it.
' Because of competitive pressures, a general cannot be criticized for using
a low bid from an unknown sub. Yet it would not be sound to force him
to deal with the sub if he is later found to be unreliable. This so troubled
one general that he drafted a model provision which provided that; i
work and materials and services to be supplied and performed by the specialty
contractor. The price Tor the work may be included ... or it may be tele-
phoned or telegraphed in and in any event it must be given I sic] the prime
' contractor not later thm \rnrr hours prior to the submission of the prime bid.
Id. (emphasis added).
C-78
-------
1967] Construction Bidding 1747
contract should be found "unless later investigation revealed financial
or technical incompetence on the part of the subcontractor, said opinion
registered bv an impartial panel of five or more persons qualified to make
the decision."
A possible solution was suggested by the generals themselves. Although no
question dealt with this possibility, 12 generals volunteered that they
treated sblicred bids differently than unsolicited bids. If a general solicits
bids, he should know in advance the financial position and reliability, of the
sub. Thus if a sub's bid is solicited and is responsive to the specifications,
i: is likely a- trade usage exists that at the rime a bid is used, a contract
is formed- fr is also likely that this usage exists if the general knows the
bub's qualifications in advance. This necessarily introduces the problem of
proving the general's prior knowledge, a task which would not seem overly
burdensome.
In condnson the results of the questionnaire demonstrate that a contract
should be deemed to exist as of the time of bid use, subject to the follow-
ing conditions:
1) The sub-bid should be responsive to the plans and specifications; and
2) The sub should be reliable and capable of performing his side of the
bargain witnoor unreasonabry complicating the general's position.
It is not important whether this result is reached by labeling it a "trade
usage," an acceptance in a. "manner , . . reasonable in the circumstances"
or an updating of the common law. What is important is to give legal effect
to the factual realities of the bidding process in the construction industry,
thereby^ eCmmatin? the evils of bid shopping without unnecessarily re-
; freedom.
/- C. C, Jr.
C-79
-------
THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA
1957 E Street. N.W * Washington. D.C. 20006 (202) 393-2040
S. PETER VOLPE. President LAURENCE F ROONEY. Senior Wee President PAUL N HOWARD. JR , Wee President
LLOYD BABLER. SR , Treasurer JAMES M SPROUSE. Executive Wee President
January 31, 1978
Mr. Douglas M. Costle
Administrator
U.S. Environmental Protection Agency
Washington, D. C. 20460
Dear Mr. Costle:
The Congress, in enacting the Clean Water Act of 1977, directed
that EPA make a study of bid shopping practices in connection with
the procurement of equipment for EPA funded waste treatment projects.
EPA was further directed to make recommendations regarding the need,
if any, for corrective legislation.
Our letter of October 6, 1977 to you, in brief, expressed our
firm opposition to the listing of suppliers as a proposed solution
to the problem of bid shopping. We have further reviewed this sub-
ject in great depth with our members. Their views are contained in
the enclosed statement, reaffirming our opposition to any legisla-
tive requirement for listing.
We appreciate your interest in this matter and we look forward
to the continuation of our efforts to assist in the efficient im-
plementation of the Construction Grants Program.
Sincerely, ./s
J. M. SPROUSE
Executive//Vice President
/ I Executive//
Enclosure
THE FULL SERVICE CONSTRUCTION ASSOCIATION TOR FULL SERVICE MLMBERS
C-80
-------
SUMMARY OF AGC ARGUMENTS
IN OPPOSITION TO LISTING OF SUPPLIERS
Introduction
Listing of suppliers serves no-useful purpose. Bid shopping is not
a problem in the procurement of equipment. The major problem in this field
is the failure of equipment manufacturers to meet their responsibilities in
the market place.
Bidding Procedures
The methods used by equipment suppliers in furnishing quotations to
bidders is chaotic and necessitates negotiations after bid opening.
Compliance with the owner's plans and specifications is not assured
in initial proposals by suppliers. Prices are provided so close to bid
time that no proper evaluation can be made; even these prices are not firm.
The contractor has to negotiate terms after bid opening. If not successful
with these negotiations, the contractor then must go to another manufacturer.
Numerous examples of supplier proposals demonstrate problems created
by the lack of specificity in their proposals: - failure to meet all speci-
fications; no price quotations, until just prior to bid opening; no firm
commitment regarding availability; warranties not consistent with contract
terms imposed on the contractor; proposals made by the supplier to the con-
tractor were still subject to approval by the manufacturers; and require-
ments that contractor pay for equipment when shipped, regardless of the
payment terms in the prime contract.
These examples demonstrate that negotiations are required after bid
opening to effectively evaluate a supplier's proposal.
Given the present pattern of marketing waste water equipment, the only
result of requiring general contractors to list equipment suppliers in their
bids to EPA grantees would be to "lock-in" the general contractor to a single
supplier, who could, after bid opening, demand whatever price it desired to
bring its non-conforming proposal into compliance with the owner's specifi-
cations.
Administration of Anti-Bid Shopping and Bid Peddling Would Be Most Difficult
Grantees are already overburdened by administration of existing EPA
regulations.
A requirement for listing of suppliers would lead to a rise in bid
protests.
Failure to comply with the letter of the listing requirement would
cause rejection of bids. Expensive delays in making contract award will
follow. This has happened in many cases where listing has been required.
C-81
-------
- 2 -
Additional regulations will be required to permit substitutions,
with more of the same problems listed above.
A listing requirement puts EPA and the grantee in the center of the
contractor-subcontractor-supplier relationship.
Summary
WWEMA's brief provides no justification for supplier listing
regulations, using only the age-old arguments against bid shopping and
bid peddling. The brief ignores the real problem, - refusal of suppliers
to offer strict compliance of their products with the owner's specifi-
cations, including all terms and conditions as well as techrical specifi-
cations, and refusal to provide prices and scope of work with their initial
proposals.
AGC recommends requiring suppliers to offer products in strict
compliance with the owner's specifications. Suppliers should provide
sufficient information to enable the bidder to evaluate a proposal.
AGC is adamantly opposed to a listing requirement. The problems
that exist are caused by the failure of suppliers to meet their responsi-
bilities in the free enterprise market place. Listing would not solve
the problem but would only impose greater regulatory burdens on ETA and
its grantees.
C-82
-------
COMMENTS OF THE ASSOCIATED
GENERAL CONTRACTORS OF AMERICA TO
THE ENVIRONMENTAL PROTECTION AGENCY
REGARDING THE PROPOSED LISTING OF
PRINCIPAL SUBCONTRACTORS AND EQUIPMENT
SUPPLIERS IN CONTRACTOR BIDS UNDER THE
EPA CONSTRUCTION GRANTS PROGRAM
The Congressional Conference Committee, in its report
on the Federal Water Pollution Control Act Amendments of
1977, requested the Administrator of the Environmental
Protection Agency to study and report to Congress on whether
or not contractors, under the construction grants program,
should be required to list in their bids their intended
principal subcontractors and equipment suppliers. As stated
in the Committee report, the impetus for this inquiry was
provided by concerned equipment suppliers.
It is the view of the Associated General Contractors of
America (hereafter AGC) that the listing of principal
subcontrators and equipment suppliers by bidders for EPA
grantee construction contracts will not serve a useful
purpose, but would only serve the economic "self-interest of
suppliers in the negotiation of purchase orders. AGC submits
that a bid shopping problem does not exist in the market for
manufactured water treatment equipment. To the contrary,
the major problems present in this field today result from
the failures of the equipment manufactures to substantially
meet their responsibilities in the market-place.
C-83
-------
- 2 -
The Methodology Utilized by
Equipment Suppliers in Furnishing
Quotations to Prospective
Bidders is Chaotic and Necessitates
Negotiations After Bid Opening
The methods used by equipment suppliers in submitting
quotations to prospective prime contractors under the EPA
construction grants program is chaotic. It is a normal
pattern of conduct for the manufacturer to offer a product
that it will not assure is in compliance with the owner's
plans and specifications. Moreover, the manufacturer will
not identify, with specificity, the aspects of the equipment
that do not meet the owner's requirements. It is then left
to the general contractor to make these determinations.
Magnifying the burden imposed on the general contractor, the
equipment manufacturers normally do not provide prices
covering their proposals until short hours before the bid
opening. Even when prices are furnished, usually 10 to 12
hours before bid opening, they are not firm and salesmen for
the suppliers continue to telephone price reductions,
frequently reaching 40 to 60 percent of the original price
quotation, immediately prior to bid opening. By that time,
it is impossible for the general contractor-bidder or his
subcontractors to meaningfully evaluate quotations for the
equipment. Instead, the general contractor must gamble with
the equipment prices to be included in its bid. The more
experienced general contractors compute a price of their own
C-84
-------
for the equipment involved, generally based on a unit price
per pound of steel required for the equipment. They have
found such a method of pricing to be feasible in the absence
of reliable price quotations from suppliers because the
equipment involved normally is not esoteric, consisting
essentially of a steel framework into which various items of
prefabricated equipment such as pumps are incorporated.
Because of this system, the successful general contractor-
bidder can only negotiate a purchase order for the equipment
after bid opening. The manufacturers leave no other opportunity
to finalize a prospective purchase order.
To demonstrate the working of the present system, a
review of typical proposals to furnish equipment for a
treatment facility is illuminating. The following proposals
for various items of equipment were tendered by equipment
manufacturers to prospective bidders for the treatment
facilities for the Southstown Sewage Treatment Agency:
Proposal A -- The supplier offered to
furnish four different items required under the
contract, including sewage bar screens, screw
pumps, sludge pumps and scum pumps. For three
of the four items of equipment, X's proposal
provided that the offered equipment would con-
form to the mechanical specifications of the
owner's engineer. The fourth item, the
C-85
-------
- 4 -
screw pumps, were offered as an alternate to
the specification requirements, and the
offered equipment was clearly not in compliance,
in some unidentified aspects, with the owner's
requirements. It was therefore necessary for
the prospective bidders to either ignore the
proposal for that fourth item or to attempt
to ascertain those areas in which the offered
equipment was in compliance with the owner's
requirements.
The proposal, like every other proposal
described herein, was received without prices
with the understanding that prices would be
furnished at a later time, before bid opening.
As a result, there was no way of knowing
whether the offered items were within the
competitive range.
The proposal was by its terms valid for
a period of 30 days, even though the invitation
for bids provided the owner with more than
30 days to evaluate bids and award the contract.
As a result, prospective bidders had no way of
knowing whether the proposed equipment would be
available at a time an order would have to be
placed.
C-86
-------
- 5 -
Aside from the fact that the proposal
did not include prices, it also provided that
the prices that were later to be offered would
be subject to escalation measured by changes
in the Metals and Metal Product Index.
Prospective bidders therefore had to
consider the risks of price escalation even
though the prime contract would not provide
for the recovery of escalation costs.
The fine print of the terms and conditions
portion of the proposal provided for a one
year materials and workmanship warranty
measured from the date of shipment, while the
general contract provisions required the
contractor to warrant the work for a one
year period measured from the date of sub-
stantial completion of the entire contract
work.
Proposal B -- The manufacturer offered
to provide screw pumps meeting "the
functional requirements of the engineer's
plans and specifications" despite the fact
that the general contractor would have to
furnish equipment meeting the strict
requirements of the owner's plans and
C-87
-------
- 6 -
specifications. Again, prospective bidders
were placed in the position of having to
ascertain those requirements that the proposed
equipment could not meet.
With regard to the price aspect of the
proposal, the proposal provided that the
company's sales representative would contact
prospective general contractors "with full
price information before the opening . . ."
The warranty under this quotation
was also limited to one year from the date
of shipment from the manufacturer.
Proposal C -- This proposal offered
to furnish bio-clarifier mechanisms,
sludge thickeners and sludge holding tanks
"[i]n accordance with [the manufacturer's]
understanding of the owner's specification
requirements.." Again, it was necessary for
prospective contractors to evaluate the
offered equipment to attempt to
determine whether the equipment would
meet the owner's requirements.
This proposal too was limited by its
terms to 30 days even though it was a
practical impossibility for an order to be
placed in that short period of time.
C-88
-------
- 7 -
As with the other proposals, the equip-
ment was warranted for one year from the
date of shipment.
Proposal D -- The prospective supplier
offered to furnish bio-clarifier mechanisms and
air lift pumps. The equipment offered was "of
the Company's standard design offered to meet
the functional requirements of the Engineer's
specifications ..." It was again necessary
for the contractors to evaluate the technical
aspects of the proposal to assure compliance
with the owner's actual requirements as set
out in the Invitation for Bids.
The proposal provided that once prices
were furnished, they would be firm for
30 days from the date of the proposal, which
again would be insufficient time for the
successful contractor to place an order.
The warranty offered with the proposal
was again for a one year period commencing
with the date of shipment.
Proposal E -- This proposal offered
to furnish bio-clarifiers, gear lift pumps,
sludge thickeners, a scum system and sludge
holding tanks. The proposal failed to indicate
C-89
-------
- 8 -
whether the items were offered in conformance
with the plans and specifications. It was
therefore necessary for prospective bidders
to review in detail the technical aspects of
the proposed equipment to attempt to make
that determination.
The General Conditions of the
proposal provided that the proposal would
not result in a binding contract until it
was first accepted by the contractor, and
was then approved by an authorized officer of
the manufacturer. It provided no assurances
that the manufacturer would be bound to all
of the terms of the proposal.
The guarantee offered by the manufacturer
was for 18 months after delivery or 12 months
after the equipment was to be put in service,
whichever was earlier.
Proposal F -- This supplier offered
to provide instrumentation as specified
in the plans and specifications. The warranty
contained in the proposal was for one year
from shipment. Payment was required under the
proposal within 30 days from the invoice date.
This quotation was generally in good order
C-90
-------
- 9 -
from a technical standpoint, but, again,
it was unpriced until shortly before bid opening,
Proposal G -- This- manufacturer proposed
to furnish the scum system. The equipment
purportedly was offered in accordance with
the owner's specifications, but also provided
that "[mjinor dimensional and equipment
design changes will undoubtedly occur, depending
upon the final details required for the
[manufacturer's] standard design."
The proposal provided for a 20 percent
payment at the time of drawing submittal and
a final payment of the remaining 80 percent of
the purchase price upon shipment of the equip-
ment regardless of the payment terms contained
in the prime contract.
Proposal H -- This proposal offered to
furnish pumps, but without
assurance that the pumps would meet the re-
quired plans and specifications. Again, it was
necessary for prospective bidders to tech-
nically evaluate the equipment to determine
whether the equipment would meet the owner's
requirements.
The proposal also provided that for any
delay in furnishing the equipment that was
C-91
-------
- 10 -
not the fault of the manufacturer, the price
would have to be increased one and one-half
percent per month. This of course, placed
additional risks upon prospective contractors
which could not be evaluated effectively
at the time of bidding.
The terms and conditions portion of
the proposal provided that the proposal
was not an offer, and that any resulting
contract would be subject to final accept-
ance by an authorized representative of the
manufacturer.
The proposal offered a warranty for a
maximum period of 18 months from the date
of shipment.
Proposal I -- This supplier offered
to provide a partial sand filter system. How-
ever, the proposal explicitly provided that the
specifications of the owner's engineers were
not to be a part of the purchase order and
that any reference to those specifications
was to be considered as a mere convenience
for reference purposes only.
The proposal provided that the manufac-
turer's representative would contact prospective
bidders "prior to the bid opening to furnish
C-92
-------
- 11 -
you with pricing and answer any questions you
might have."
The proposal further provided that the
manufacturer would have the right, at its sole
discretion, to make partial shipments and that
the shipment date contained in the proposal
was subject to revision or postponement at the
discretion of the manufacturer.
Any contract that might follow from the
proposal was subject to the approval of an
officer of the manufacturer's representative.
Proposal J -- This corporation offered
to provide the waste activated sludge
pump, vertical turbine pumps and super natant
pumps. A price escalation provision was
included in the proposal. The proposal pro-
vided that prices would be telephoned to
bidding contractors a day or two before the
bid opening.
The warranty provided by the proposal
was for one year from the date of shipment.
Proposal K -- This proposal offered
to provide incineration equipment purportedly
in accordance with the owner's plans and
C-93
-------
- 12 -
specifications. Prices were to be telephoned
to prospective contractors on the morning of
the bid opening.
Proposal L -- This manufacturer offered to
provide the sludge combustion equipment. How-
ever, its proposal provided that the information
that was to be submitted with bids would be
furnished at a later date prior to bid opening.
The proposal also provided that the price,
which again was to be furnished later, would
be valid for only 45 days from bid opening,
and it was conditioned upon certain events
including the receipt of notice to proceed
within 14 days of the formal execution of the
contract.
Proposal M -- This manufacturer offered
to furnish lime feeders, slakers, and lime
slurry storage tanks, process metering pumps
and partial instrumentation. The proposal
made no reference to the plans and
specifications. Instead, it contained
13 pages of the manufacturer's descrip-
tion of what it proposed to furnish.
In addition, the proposal provided 30 days
for acceptance. It also contained a price
escalation provision.
C-94
-------
- 13 -
Proposal N -- This supplier offered to
furnish lime feeders and slakers, process
metering pumps and chlorination equipment,
without assurance that the offered equipment
would be in compliance with the plans and speci-
fications. The proposal provided a 60 day
acceptance period, and specified that if
shipment could not be made within 400 days,
the price would be revised. Payment terms
included the requirement for full payment within
30 days of shipment and title was to remain in
the seller.
Each of the above proposals contained technical speci-
fications in varying detail. Most of these typical proposals
required prospective bidders to make techical evaluations of
the equipment offered, even though it would have been more
appropriate for the manufacturer, as the po.ssessor of the
supposed expertise and the manufacturing knowledge to state
whether its equipment complied with the owner's plans and
specifications.
None of the proposals contained prices. Almost every-
one of the proposals included a section describing work that
was not covered by the proposal so that it was also necessary
for prospective bidders to evaluate those exceptions to
C-95
-------
- 14 -
assure that all interface or tie-in work was covered in its
estimate either through the work of a supplier or someone
else. All of this placed inordinate burdens upon prospec-
tive contractors. More importantly, it effectively prevented
the finalization of any prospective purchase orders before
prime contract bidding. The result had to be negotiations
following bid opening. If not successful with these negotiations
the contractor must then go to another manufacturer.
Post bid-opening negotiation would not be necessary if
the manufacturers would offer equipment meeting the owner's
plans and specifications, and if the manufacturers would
provide their price quotations to prospective contractors so
that an effective evaluation and negotiation of work scope
could be performed before bid opening.
Given the present pattern of marketing waste water
equipment, the only result of requiring general contractors
to list equipment suppliers in their bids to EPA grantees
would be to "lock-in" the general contractor to a single
supplier, who could, after bid opening, demand whatever
price it desired to bring its non-conforming proposal into
compliance with the owner's specifications.
Regulations Purporting to Eliminate
Bid Shopping and Peddling Would
Create Severe Administrative Problems
Even assuming, for purposes of argument, the existence
of a real bid shopping problem in the wastewater equipment
C-96
-------
- 15 -
manufacturing market, the promulgation and application of
regulations to supposedly control such activity would give
rise to far greater problems.than the regulations would
cure.
First, regulations amenable to implementation by
grantees would have to be prepared. Such regulations would
have to be added to the lengthy list of existing adminis-
trative burdens imposed on grantees. Implementation efforts
would have to include special bid invitation preparation
precautions. Additional pre-award evaluation efforts would
have to be undertaken by grantees to assure the accuracy of
listings made by bidders. The administration of post-award
substitution requests would also add to the burdens imposed
on grantees.
The required listing of subcontractors and equipment
suppliers would undoubtedly give rise to bid protests, just
as it has when it has been utilized in the direct federal
procurement arena. Noncompliance with the letter of the
listing requirements will often result in the rejection of
bids as nonresponsive with the result that otherwise respon-
sive and low bids will have to be discarded in favor of
higher priced bids. In addition, expensive delays in making
contract awards will inevitably ensue.
Situations giving rise to bid protests will include
questions of (1) whether a listed subcontractor will perform
C-97
-------
- 16 -
all of the work for which it is listed (46 Comp. Gen. 194
[1966]); (2) whether there is a clear relation in the invita-
tion for bids between the listed subcontract work classi-
fication and the particular, applicable portion of the
technical specifications in the contract (50 Comp. Gen. 839
[1971]; (3) whether a listed subcontractor is qualified to
perform the work for which it is listed (46 Comp. Gen. 829
[1966]; 45 Comp. Gen. 84 [1965]); (4) whether the listing of
a proposed subcontractor by its common designation or nickname
rather than by its proper name is satisfactory (51 Comp.
Gen. 831 [1972]; 50 Comp. Gen. 295 [1970]); (5) whether the
listing of two separate subcontractors for one category of
work, where both are to perform a portion of the listed
work, is satisfactory (Comp. Gen. Dec. B-178627 [September 14,
1973]); (6) whether a listed subcontractor can further
subcontract to others a portion of the work for which it is
listed (49 Comp. Gen. 120 [1969]); (7) whether a bidder can
list itself for certain identified subcontract work (46
Comp. Gen. 156 [1966]); (8) whether a bidder can list a
subsidiary or a closely related company for certain listed
subcontract work (47 Comp. Gen. 644 [1968]); (9) whether the
bidder can list alternative proposed subcontractors with its
bid (54 Comp. Gen. 159 [1974]); and (10) whether the classi-
fication of work for which a listing of a subcontractor is
C-98
-------
- 17 -
required meets the cost percentage requirement necessitating
the separate listing (51 Comp. Gen. 264 [1971]; Comp. Gen.
Dec. B-179947 [April 5, 1974]).
All of these issues and others have been raised in
federal government contract protests, and many decisions on
those protests have been rendered by the General Accounting
Office. However, while those decisions may serve as pre-
cedent for grantees in determining protests involving the
listing requirements, there can be no assurance that grantee
agencies and local courts will follow such decisions. It
can only be certain that the listing requirements will give
rise to an added multitude of bid protests. Each bid protest
revolves around its own specific facts, and no two situa-
tions are alike, with the result that there will inevitably
be a multiplication of administrative proceedings and
litigation if a listing requirement is imposed.
In addition to bid protests, contract claims and liti-
gation will flow from the criteria permitting substitution
of suppliers that must accompany listing requirements.
Standards for substitution will have to be promulgated, such
as those provided by the General Services Administration
(GSPR 1 5B-2.202-71), and those standards will have to be
reasonably applied. Improper application of the substitu-
tion standards will result in the grantee being exposed to
court action and resulting damages. For example, in Meva Corp
C-99
-------
- 18 -
v- United States. 206 Ct. Cl. 203 (1975), the United States
Court of Claims dealt with a disastrous situation arising
from the refusal of a contracting agency to permit a general
contractor to substitute another subcontractor for a sub-
contractor originally listed in the general contractor's
bid. The general contractor ultimately received a recovery
of $600,000 from the Government because of the refusal of
the agency to permit the substitution. It is instructive
that the agency involved (The Interior Department) thereafter
dropped the listing requirement.
No Federal Government Agency
Has Required the Listing of Equipment
Suppliers With Prime Contract Bids
While two Federal government agencies have required the
listing of proposed subcontractors in construction contract
bids, no Federal government agency has ever required bidders
to list equipment suppliers. Today, the General Services
Administration, which is the only Federal agency presently
requiring a listing of proposed subcontractors requires only
the listing of principal subcontractors, including those for
the "... mechanical, electrical, and elevator and/or
escalator divisions . . .", as well as ". . . all other
general construction categories of work in the project
specifications . . ." GSPR 11 5B-2.202-70. The listing
C-100
-------
- 19 -
requirement is not extended to suppliers of equipment or to
suppliers to subcontractors or to contract levels below the
first tier subcontract level.
The Imposition of Requirements
for the Listing of Principal
Subcontractors and Equipment Suppliers
Would Impinge Upon the Historic and
Time-Honored Responsibility of the
General Contractor to Freely and
Independently Manage Its Activities
The imposition of regulations and requirements regarding
the listing of subcontractors and suppliers would place both
EPA and the grantee agency in the center of the contractor-
subcontractor-supplier relationship. The general contractors
of America have historically demonstrated their ability to
manage their own subcontractor and supplier relationships,
and the imposition of added governmental interference in
that relationship can only serve to frustrate that demon-
strated ability. Therefore, general contractors must
adamantly oppose any intervention by a Federal or local
agency in those relationships.
C-101
-------
- 20 -
The Brief Submitted by the
Waste and Wastewater Equipment
Manufacturers Association Advocating
the Adoption of Subcontractor and
Supplier Listing Requirements
Does Not Justify the Need for
Such Requirements
The brief submitted by the Waste and Wastewater
Equipment Manufacturers Association does not justify the
need for bid listing regulations. A large portion of the
brief is devoted to the age-old arguments against bid
shopping and bid peddling. However, the brief ignores the
real problems that presently exist in the waste equipment
supplier industry. Those problems, including the refusal of
manufacturers to offer strict compliance of their products
with the requirements of the owner's plans and specifica-
tions, including all terms and conditions as well as technical
specifications, as well as refusal of the manufacturers to provide
prices with their quotations within a time frame permitting
some negotiation with prospective suppliers regarding price
and work scope, are the sole responsibility of the equipment
manufacturers.
Any problems that now exist in this field could be
easily resolved if waste equipment suppliers would follow
the practices of other nechanical and electrical suppliers
and subcontractors, and give firm quotations for the specific
items required by the owner's specifications sufficiently in
advance of bid opening to permit a meaningful evaluation of
such quotations for use in the general contractors' bids.
C-102
-------
- 21 -
AGC's Recommendation Regarding the
Proposed Listing of Principal
Subcontractors and Equipment Suppliers
AGC recommends that efforts be made to require specialty
equipment manufacturers to offer products in strict compliance
with the owner's required plans and specifications. Efforts
also should be made to persuade the manufacturers to provide
price quotations sufficiently in advance of bid opening so
that meaningful evaluations of the work scope to be under-
taken by the supplier and its anticipated cost can be made
prior to bid submission.
The proposed listing of subcontractors and equipment
suppliers does not go to the heart of the problem, and AGC
is adamantly opposed to such a listing requirement.
In summary, AGC recommends that the Administrator
advise Congress that problems exist in the equipment supplier
market because of practices in the free enterprise market-
place that are the sole responsibility of the equipment
manufacturers and that the listing of subcontractors and
suppliers under the construction grants program would not
solve such problems, but would impose greater burdens and
regulations on the EPA and the state and local government
grantees.
Respectfully submitted,
Associated General Contractors
of America
*
/ James M. Spinzmse
x^/Executive Vtce President
C-103
-------
NfCHOLAS I. MKLAS
PRESIDENT
/ ,| [']":'', ; OB? wisEwsrrasv OMIC/HM& ; i>i irj ;>| j I r.~,
' ! '''i ' " , i! i , ; i!- 'ji i'-i i L!._L
100 EASTj ERIE ST, i CHICAGO,;' ILLINOIS 60011! li'. L! j^SI-SC
BOARD OF COMfillSSIONERS
JOANNE H ALTER
JEROME A. COSENTINO
DELORISM rOSTER
WILLIAM A JASKULA
NELLIE L JONES
JAMES C KIRIE
CHESTER P MAJEWSKI
NICHOLAS J MELAS
RICHARD J TROY
January 6, 1978
. 'J.IS18
Mr. Harold P. Cahill, Jr., Director
Minicipal Construction Division (WH-547)
U.S. Environmental Protection Agency
401 ' M" Street, S.W.
Washington, D.C. 20460
Dear Mr. Cahill:
The WWEMA brief on bid shopping and bid peddling provided to the
MAG members at the December 14th meeting has, i,i response to your
request, been reviewed by my staff and .-.yself.
The proposa] for a regulation mandating identification of sub-
contractors in bid documents for contracts funded by the U.S. EPA
should be rejected. However, we feel that grantees should be
allowed the option of including sucli requirement" in their bid
documents in whatever manner they deem necessary to either comply
with State and local requirements or to mitigate potential effects
of bid shopping and bid peddling on bid prices for such contracts.
The documents appended to the WWEMA brief present arguments which
do and do not support the need for sucli regulation. As may be
expected, the WWEMA brief presentr the arguments in support of such
regulation. Despite the argument that there is de facto coercion
applied by prime contractors which forces subcontractors to
respond to the bid shopping tactics, it is evident that without
their cooperation bid shopping would not be a problem. Ci itentions
expressed by parties in litigation cited in the brief and in the
appendices are representations without confirmation. As prime
contractors and subcontractors report diametrically opposite
experiences, the proposed regulations could only achieve a re-
duction of alleged abuses by one group. We cannot accept arguments
which place all the blame on the prime contractors. Thus, we
cannot support a regulation which presumes that such is the case.
C-104
-------
Mr. Harold P. Cahill, Jr. -2- January 6, 1978
It is difficult to refute the arguments contained in the WWEMA
bricC without seeming to case aspersions on members of that
industry; even though such a refutation may he in a purely hypo-
thetical sense. At the risk of alienation, however, I must poJnt
out what I feel to be relevant factors opposing the industry's
position.
The brief states that a prohibition against bid shopping will
enhance pre-bid competition and lead to lower prices. Information
submitted with the brief indicates that there is an apparent effort
by at least some members of the industry to prevent bid shopping
before or a_f_ter award to the prime contractors. Experience shows
that suIrfiiitTals" of bids by subcontractors generally occ-irs a very
short time before the bid opening. Prime contractors are forced
to accept bids at the last moment with little or no opportunity to
determine if the low bidder fully understands the requirements of
the contract documents or if the equipment to be provided meets
the specifications. Given this situation, it is difficult to see
h w primes can obtain'better competitive subcontract bids before
bid opening by the application of the proposed regulation.
With respect to lower prices, the brief argues in every possible
direction and frequently contradicts itself in this respect. For
example, the brief argues that the primes reduce their bids in
anticipation of reducing their costs by bid 'lioppi/g subsequent
to award. As this is somewhat supportive o, ; id shopping, it then
argues that it is not clear that primes ac~. y do reduce their
initial bids in anticipation of lower cost- be achieved by bid
shopping. The brief argues that subcontrot "puff" their bids
to the prime in anticipation of being forc< reduce their bids
subsequent to award arid that reductions fr< ir initial bid
can be accommodated while maintaining the I of profit which
they consider necessary. They then argue t the aw-.rJ price is
inflated and the primes, after bid Chopping, .'chicle a higher
profit figure than they should. In their regulation, however, they
produce no proposal for preventing "puffing" of bids if such a
regulation were imposed. Obviously, if a prime contractor can be
a successful bidder in spite of "r-'Tcd subcontractor's bids", the
same can occur if the regulation - v adopted and then the sub-
contractors would be making a di:, jrtionate profit. The brief
is quite clear that it i:; not on .atter of higher prices to
the grantee and the U.S. FiP'vf but > the present situation allows
prime contractors to get monies t;. the subcontractors feel should
be theirs.
Another argument is that bid shopping pressures subcontractors to
do substandard work or to work at a loss. At the risk of being
cynical, reduced costs and, presumably, larger profits seldom
are secondary to any other factor in the prosecution of work in
today's society. The argument can be made that pressures to in-
crease profits or reduce ]osses--at any point in the project--by
primes or by subcontractors is a problem irrespective of the bidding
C-105
-------
Mr. Harold P. Cahill, Jr. -3- January 6, 1978
process. A major portion of the construction residency manpower
and expense is directed towards prevention of detrimental shortcuts,
improper procedures, inferior or non-specification materials, and
other items which would produce an inferior project. If this were
not the case, then the argument that bid shopping can result in
shoddy work may be valid. Equipment or installations performed
under a "no bid shopping regulation" will not provide guarantees for
the grantee or the U.S. EPA of the quality of work to be perfoimcd
or the material to be supplied. The only such guarantee is a
rigorous inspection of work and assurance of complete adherence to
the specifications for materials and equipment.
For obvious reasons, my response to the VVWEMA brief does not debate,
point by point, the statements therein. As may be expectcl, they
reflect assumptions which place their position in the best possible
light. However, many are not substantiated and reflect that one
viewpoint. While generally agreeing that the practices of bid shopping
a id bid peddling are detrimental, the proposed regulation is one-sided
aiuT provides the opportunity for abuses by the nonregulated party in
this two-party activity.
One other factor which influences my opposition to the WWEMA proposal
is the potential delays associated with awards of contracts under such
constraints. Prior to formal award of a contract, all subcontractors
and equipment to be provided would have to be reviewed for acceptabi-
lity. It would appear that the refusal to accept a subcontractor or
equipment submittal could result in a withdrawal of bid by the prime
contractor or at least delays in obtaining an acceptable substitute.
If one assumes that the unacceptability occurred because of a non-
specification subcontract bid, it must be assumed that a substitute
would res alt in a cost increase to the prime contractor. Would the
grantee then be required to escalate the prime's bid by that
additional cost?
Under most contracts administered by tae District today, subcontractors
need not be identiried until formal award of the contract has been
made. Subcontractors must then be approved as the work progresses.
If a subcontractor is found unacceptable to the District, the con-
tractor is forced to provide a substitute, acceptable to the District,
within the bid price. Likewise, equipment submittals must meet
specifications or a substitute provided at no additional cost. The
leverage which the District has after award of the contract is
significantly greater than that which would exist if sue' determina-
tions were made prior to formal award.
I am aware that a number of AMSA members require submittal of
subcontractors and equipment suppliers with the bid. In some circum-
stances, this District may find it to be advantageous also. In fact,
such a requirement is placed on prime contractors to identify minority
and small business contractors and the dollar value of the work to be
subcontracted to each with the initial bid documents. This requirement
is intended to assure compliance with the District's Affirmative
C-106
-------
Mr. Harold P. Cahill, Jr. -4- January 6, 1978
Action Program in determination of the lowest responsible bidder. The
exercise of such an option does, in my opinion, provide ample opportu-
nity for flexibility by grantees in determining the mechanisms they
will utilize in obtaining bids for their projects.
Further, addressing the practical problems which arise out of the
procurement process, the proposed regulation would promote delays
and time consuming disputes. The Metropolitan Sanitary District's
"Purchasing Act" as well as most other municipal procurement re-
gulations provide for an award to the lowest responsible, responsive
bidder. As long as we are able to equaTeTffe proposals of
contractors on even terms, that is price, we are following the
letter and spirit of our Purchasing Act. It is when bidders are re-
quired to submit additional inform?tion that we have had vime
consuming protests. This would be particularly true if suppliers
and subcontractors were able to file protests, since under the
Federal Regulations they would have "an adversely affected direct
-inancial interest" CFR § 35.939(a). Just a little imagination is
needed to realize the number of protests that could be filed,
contrary to the unsupported assurances set forth on Page 17 of
WWEMA's brief.
Finally, I am told by our legal strff at the Metropolitan Sanitary
District: that the provisions of Sect;c,n (G) of the "Listing of Sub-
contractors Materials and Equipment Suppliers" would most certainly
be contrary to the current law relating to penalties and be declared
void ami unenforceable. The assessment of a 20% penalty even to the
most casual observer seems arbitrary and capricious.
We, therefore, urge the Agency to reject the WWEMA proposal or any
similar attempt to limit grantees' abilities to establish contract
requirements which would best serve the interests of their agencies.
Very truly .yours .
-i. ___iVW*'t, Jf JV '
!. < _l_ , J"T \^ l_ <, .- ' k
IJ^ '
<&;,rt/l#iA
*~s~
-------
SVERDRUP & PAHCEL AXD ASSOCIATES, Inc.
ENGINEERS -ARCHITECTS
8OO N. 12TH BOUXEVARJD
ST. LOUIS, MISSOURI 631O1
E J PELTIER
CONSULTANT
January 9, 1978
Mr. Harold P. Cahill, Jr.
Municipal Construction Division
U. S. Environmental Protection Agency
401 »M» Street, S. W.
Washington, D. C. 20460
Dear Hal:
This is in reply to your request to comment on
WWEMA's proposed regulation in regards to bid shopping.
Except for the suggested amount of the contract and
percentages in the resolution, I see nothing too drastic in
their suggestions.
I question whether paragraph (G) is necessary.
I am enclosing actual specifications on what M5D
in St. Louis has been doing for over ten years. This has
worked very well with perhaps less than five requests for
substitution.
Also enclosed is the A&E's estimate and approved
equipment list, contractors bid tabulation with their equipment
and subcontractor selections.
Hope this will give you some help on how to proceed
on this.
Sincerely,
Enclosures
V
* 1979
C-108
-------
SUBCONTRACTORS
List g_f_Majpr Subcontractors
The undersigned expressly agrees that:
1. if awarded a contract as a result of this Bid, the major
subcontractors used in the prosecution of the work will be
those listed below, and
2. the following list includes all subcontractors who will
perform work representing approximately three and one-half
(3-1/2) percent or more of the Total Base Bid.
3. The Bidder represents that the subcontractors listed below
are financially responsible and are qualified to do the work
required.
Category Name of Subcontractor Address
1 Subcontractors
C-109
-------
BIDDING SCHEDULE.
1. unit fcice Construction items
ITEM NO. 1
650 linear feet rock anchors, complete in place.
at__ _ Dollars & ^ __Cents
(in writing) (in writing)
$ ^ $
(in figures)per linear foot Total(in figures)
ITLM NO. 2
12 each rock anchor tests complete.
at Dollars & Cents
(in writing) (in writing)
$ , $
Each(in figures)Total(in figures)
ITEM NO. 3
220,000 cubic yards of rock excavation.
at Dollars & Cents
$ per cubic yard $ 1__^___
(in figures)Total(in figures)
2. Unit Price Items for Foundations, Protection ana Backfill
ITEM NO. 4
15 thousand feet board measure of timber sheeting and bracing
ordered left in place.
at Dollars & Cents
(in writing) (in writing)
$ per MFBM. $ |
(in figures) Total (in figures)
1'IE'M NO. 5
10,000 cubic yaras of granular foundation material complete in
yLace.
at _ ^ Dollars & ^ ^_^ Cents
(in writing) (in writing)
$ per C.Y. $ ^
(infigures)Total(in figures)
3 Bid
C-110
-------
ITEM NO. 6
300 cubic yards of concrete pipe cradle or encasement complete
in place.
at Dollars & Cents
(in writing)(in writing)
_per C.Y. $
(in figures) Total (in figures)
ITEM NO. 7
2,000 cubic yards of sand or gravel backfill
at Dollars & r__i Cents
(in writing)(in writing)
$ per C.Y. $
(in figures) Total (in figures)
3. LUMP SUM ITEMS
ITEM NO. 8
Base bid for the balance of all the work included for the con-
struction of the Lemay Wastewater Treatment Plant - Aeration
Tanks, Service Building and Instrumentation based on completion of
all work in accordance with the contract documents, the Lump Sum of
Dollars
(in writing)
and Cents $
(in writing) (Th. figures)
Total Base Bid, Lemay Wastewater Treatment Plant -
Aeration Tanks, Service Building and Instrumentation
The sum of Items No. 1 through No, 8 inclusive is
_Dollars
(in writing)
and Cents
(in writing)
Total Base Bid, Lemay Wastewater Treatment Plant -Aeration Tanks,
Service Building and Instrumentation $
(in figures)
4 Bid
C-lll
-------
Cost Basis for Changes
The following supplementary schedule of unit prices will apply
in the event that the District orders in writing additions tb
or deductions from the work detailed on the Contract Drawings
as covered by Lump Sum Item No. 3 in the Bidding Schedule, Lemay
Wastewater Treatment Plant - Aeration Tanks, Service Building
and Instrumentation.
Supplementary Schedule of Unit Prices
Type of Work
Excavation Earth (dry)
Excavation Earth (wet)
Floor Concrete Against Ground
Formed Concrete (walls, including
Forms)
Formed Concrete (Slabs, Beams,
Columns, etc. including Forms)
Reinforcing Steel
Extra Cast Iron Pipe and Fittings
Unit
C.Y.
C.Y.
C.Y.
C.Y.
C.Y.
Lbs.
Lbs.
Unit Price
$
$_ H~~
$
$
$~
$"
It is understood and agreed by the undersigned that the District
reserves the unrestricted privilege to reject any or all of the
foregoing unit prices in this paragraph which it may consider
excessive or unreasonable, or to accept any or all of them,
pursuant to the provisions of the General Conditions, as unit
prices applicable in the event additions to or deductions from
the work to be performed on Lump Sum Item No. 8, Lemay Waste-
water Treatment Plant - Aeration Tanks, Service Building and
Instrumentation, are ordered by the District.
Rid Conditions
ft is expressly understood and agreed that the foregoing total
bd.se bid is the basis for establishing the amount of the bid
security on this bid on the Lemay Wastewater Treatment Plant -
Aeration Tanks, F.crvioo Building and Instrumentation and that this
tnt.il base b i d is not to be construed to be a Lump Sum Bid. It is
further understood that quantities in the bidding schedule for unit
price items are approximate only, and that payment of a contract
will be made only on the actual quantities of work completed
in place, measured on the basis defined in the General Conditions,
Contract Specifications or other 'Contract Documents.
The undersigned has carefully checked the above bidding schedule
aqainst the Contract Drawings and Specifications and other
Contract Documents before preparing this bid and accepts the
said quantities to be substantially correct, both as to
classification and amount, and as correctly listing the complete
work to be done in accordance with the Contract Drawings,
Specifications and other Contract Documents.
5
C-112
Bid
-------
Ma^or Lquipment Items
The total base bid as set torth in the bidding schedule includes
the cost of major equipment items as supplied by the following
manu tacturers .
Centritugal Fans
Air Diffusion Equipment
Motor Control Centers
Instrumentation and
Computer Equipment
Bid
C-113
-------
'
M
«. j
*»
sM
SS
!
5°
3°
5
l s
-
^ {«
T
ii
a
ssa
y ,.
f if *p " , i
$rt
^ '
?} V
33>'9
^P4
$<
^
li
*N^
tft
."i
SIS
M
-U44
00
o
C-114
-------
U
^r
u
3S
&
.
??
3:
f
ttt
-+f
4iM
-+tt
1.4
]__
-I-
i-
-U
4-
HJ
-4i
fr
I-
Ml '
UlULuli
11- It
llii
C-115
-------
X
C-116
-------
C-117
-------
15042 North 2nd Street
Phoenix, AZ 85022
January 10, 1978
Mr. Harold P. Cahill, Jr.
Director
Municipal Construction Division (WH-547)
United States Environmental Protection Agency
401 "M" Street, S.W.
Washington, D. C. 20460
Dear Mr. Cahill:
Here are some comments on WWEMA's Prepared brief on "Anti-Bid
Shopping and Bid Peddling Regulations."
I feel that if P.L. 92-500, Section 204(6) is changed,the grant
projects will be tied up with more bid protests and red tape.
P. L. 92-500, Section 204(6) is adequate as stated.
Sincerely yours, ,
(Mrs.)Patricia A. Williams
MAG
cc: Mr. Eugene Peltier
Consultant,
Sverdrup & Parcel & Assoc., Inc.
8 Ladue Forest
St. Louis, MO 63124
C-118
-------
"I/I "'
£== CONTRACTORS =3SS
1500 PARK BOULEVARD, CAMDEN, NEW JERSEY
HENRY C
JOAN S. ARUOI.D
VIcc-P'. sldenl
609-829-7784
January 13, 1978
Mr. Harold P. Cahi.ll, Jr., Director
Municipal Construction Division (WH-547)
U. S0 Environmental Protection Agency
401 "M" Street, S. W.
Washington, D. Cc 20460
Dear Mr. Cahill:
RE: Request for comment on brief
submitted by the Wpste and Waste-
Water Equipment Manufacturers
Associations , Inc. advocating the
adoption of a regulation to
eliminate bid shopping and bid
peddling.
I cannot .agree that an anti-bid shopping and bid peddling
regulation as put forth in the brief o^ the WWEM^ can be
administratively workable, would minimize protests, and would not
burden the EPA or its grantees. On the contrary, there are many
projects where listing of subcontractors and suppliers has been
required by the contract documents and these hf;ve given rise to
numerous protests which have delayed award of the project.
In discussion with other contractors I find firm opposition
to listing in view of the fact; that in 'iany instances qut nations
received from suppliers arc not comparable with respect to quality,
delivery date, terms of payment, and degree of shop fabrication to
actual field erection costs.
I am told that often the equipment manufacturer sends in a
scope letter which puts all ti - performance responsibility basically
on the contractor, and place-1
-------
Harold P. CahJ.ll
January 13, 1978
Page Two
To touch on points listed by WWEMA in proposed regulation -
"Listing of Subcontractors, Materials and Equipment Suppliers" -
Items A to H (condensed)
(A) Submitting of name, of firm with whom contractor proposes to
contract for performance of each category.
COMMENT: //hen forced co list, owner 5s assigning to the contractor
and shorld take the responsibility for the assignment. Is the owner
willing to bear the burden, n Ejtrer contractor submits listing, for
late deliveries and defective materials ?
(13) Listing of all firms by bidder (including himself) and stating
the portion (by percentage or narrative description) of the
category to be furnished by each.
COMMElN i1: Delays and increased costs are incurred on projects where
unnecessarily complicated break-downs for equipment and sur.-s must
be incorporated into the bid. The detailed break-downs generate
confUKjon and the potential for errors, which may result 5n unduly
high or low bids and subsequent disputes or litigation.
(C) Failure to provide complete list shall cause the bid to be
considered nonrespensive.
COMMENT: W'.iaf: If there are three suppliers available for a certain
type of equip,u?nt. and only one of uhe three choo-'es to quote a
contractor... .and t''at at an outlandishly high price ? The contractor
then is forced into a non-responsive position or a risk position.
Does this not leave the unethical supplier in a position of controlling
who will be low bidder arid ac what price ?
(D) Substitution / Termination
COMMENT: Included in (E) and (G) below.
(E) Conditions for Substitution:
COMMENT: Look at the climate of the bid situation....where sub-
contractors bids are submitted IMMEDIATELY prior to the tirna general
contractor is to bid.
C-120
-------
Harold P. Cahi11
January 13, 1978
Page Three
Referring to the VA. Law Review attached to the WWEMA brief:
(Page 1744): Often the prime did not have time to check the items
included in the sub's bid during the hectic bid opening period and
did not want to be bound until after they had had the opportunity
to make such a check.
(Page 1745): Many times the general must use his best judgment to
fill in the gaps between the price quoted by the sub or suppliers
and the contract requirements and then, if successful, negotiate with
the low sub to have a complete bid.
(Page 1746): Because of competitive pressures., a general cannot be.
criticised for using a low bid from an unknown sub. Yet it would not
be sound to lorce him to deal with the sub if he is later found to be
unreliable.
Under substitutions, the list would of necessity have to cover
many more thai'; the five points mentioned in the proposed regulation.
To name a few.... perhaps the sub cannot or refuses to meet the EEO
standards; unknown to the prime, the sub is in arrears in payment
to the union pension funds, causing work stoppage; a jurisdictional
dispute ensues over the suV's work force. Many more can be added
to complicate the prime's position with the sub and make it necessary
for him to seek out an alternate.
(F) Prior to approval by Owner on substitution requirerne ts.
COMMENT: Ten working days to handle substitution and challenges
seems highly optimistic ! Further, will the subcontractor, who
is not bound by a contract vLi:h the owner, accept the owner's
determination as to the existence or non-existence of the grounds
for substitution as final ?
(G) Owner's right to terminate the contract or assess a penalty
when prime makes a substitution without obtaining prior approval.
COKIIENT: Again, this right of owner to terminate the contract or
assess a penalty will lead to u:ore protests....more delays.... possible
litigation.
The EP'A is justifiably seeking to protect the ownerb interest in order
to keep its own cost down. However, is it detrimental to the owner,
once he has a firm low price reached through competitive bidding,
that the contractor does all in his power to show a profit on the job ?
C-121
-------
Harold P. Cahill
January 13, 1978
Page Four
(H) Reduction of contractor's price if cost of equipment proposed
to be substituted is lower....contractor's price shall be reduced
by an amount equal to the net savings.
COMMENT: Are we to understand that net savings infers compensation
to the contractor for loss of anticipated profit on this item ?
Regarding subcontractor protests, WWEMA .states that protest.::
will be an extremely minor problem under the proposed regulation.
I disagree I be'.ieve it will spawn protests, causing added dc-
The brief states on Page 18 that GSA has operated for several yet:
under regulations which require subcontractor listing, and has rect-ucly
reviewed its regulations anl reconfirmed their necessity.
I quote from a recent article in the Engineering News Record (June 23,
1977) :
" GSA QUESTIONS VALUE OF BID SHOPPING RULE
A controversial General Services Administration (GSA) rule that "cquirc-d
bidders on its construction projects to submit a list of their
contractors is under attack again, this time by GSA itself.
Contending that the rule delays contract awards and causes financial
losses, GSA proposed in the J;-ne 1 FEDERAL REGISTER that it be eliminated.
The rule, auopted in 1963, was intended to prevent bid s. ping by the
low bidder for lower subcontract prices. It requires bj s to list
their subcontractors on designated major categories of v. - and any
other category comprising 3.57» of the
-------
Harold P. Cahill
January 13, 1978
Page F.i ^e
In conclusion I would suggest thought be given to the
following:
To alleviate bid protects and speed up Lhe EPA program,
encourage lump a urn bidding, xvith award on the lump sum price
without Lhe listing o If equipment or suppliers,
If the owner wants competition, the engineer has an
obligation to develop a standard of quality ana hold Lo it. Terms
and conditions should be complete and clear in the contraccual
provision" of the docuinencs GO that competitive bidding provides
for competition .
Better bidding procedures wculd reduce overall costs.
Preqaallficai'ion prior to bid tins would be desirable inasmuch as
furnishing a list of manufacturers wlvse equipment would be approved
by the engineer would tend to eliminate the possibility of
manufactaL'e-"s quoting equipment which did noc meet specifications,
Prequali 2 Lear ion would stimulate competition whereas ] it; ting would
stifle it.
Some contractors with whom I have spoken stated that listing
of equipment manufacturers might possibly be acceptable to contractors
when the equipment manufacturer is willing to state in his proposal
that all equipment will be ir strict accoi dance with plan;- and
specifications and no F NE FRl'NT. If they are to be listed, they
should £3cu.ne the tespo sibility. However, since it is extremely
difficult co fill out a jid form and list everything conceivable,
something such as the A hour bid plan which has been uueu in the
Carolinas would be necessary.
In conclusion, contractors are qualified to judge which of
their potential subs or sun pliers are qualified add competent, and
should have the right as prime contractors to exercise this judgment...
the right to change either sub or supplier because of reasons lie sees
fit.
You]?/s/
JSA/js
CC: MAG MEMBERS
5an ff. Arnold
C-123
-------
Water & Wastewater Equipment
Manufacturers Association, Inc.
7900 Westpark Drive
Suite 304
McLean, Virginia 22101
703/893-1520
EXECUTIVE COMMITTEE
President
Frank P Sebastian, Jr
Env.roiech Corporation
firs! V ce Sres:
-------
-2-
need to rectify contractors problems on equipment scoping terms
and conditions and warranties. This paper also recommends the
listing of manufacturers of equipment in order to prevent bid
shopping and peddling.
Lastly, I would like to invite MAG's support for the WWEMA
brief that was recently submitted to EPA. However, we do this
in full recognition of the need to correct the problems
suffered by other members of our industry referred to above,
i.e., an effective program of pre-qualification, proper
equipment scoping, and full understanding of supplier terms and
conditions, all in a time frame that removes the hectic last-
minute activities currently focused upon the contractor. It is
believed that the regulations proposed in the brief will be
effective, fair, and easy to administer. They will effectively
control the practices of bid shopping and peddling in a manner
that would be in the public interest and restore fairness to
the wastewater treatment works construction industry.
In conclusion, we would like to point out that GSA has recently
re-affirmed the principle of the listing requirement. We
sincerely hope that WWEMA1s concerns and recommendations will
be given appropriate attention in EPA's report to the Congress.
Sincerely yours,
Frank P. Sebastian
President
Attachments
cc: Eugene J. Peltier
Members of MAG (w/o attachments)
John M. Scheer
C-125
-------
BIDDING PROCEDURE
Submitted by MAG Subcommittee on Bidding
(Final Version)
1. PROBLEMS RESULTING FROM PRESENT PROCEDURE
Many problems result from the present procedure which includes overly
zealous adherence to the principle of non-restrictive specifications as
set forth in the language of Section 204 (a)(6) of Public Law 92-500.
a. Protests and resultant delays from required investigative,
justification efforts, and even litigation.
b. The general contractor's ability to bubrnit a fully qualified bid
without jeopardizing his own position is greatly reduced because
of the last minute price submittals and adjustments fay subcon-
tractors and suppliers who are trying to protect their own posi-
tions. Late prices and adjustments are frequently made on equip-
ment which is determined subsequently not to meet the specifica-
tions .
c. There is a failure to recognize basic differences between con-
tractors and equipment manufacturers. Competent companies in
tha latter category usually have sustained substantial costs and
efforts over a period of years in research and development,
organizational support to owners and engineers in advance of the
project, in effective bid preparation, in installation and
operational check advisory services, and finally in creating
adequate field staff for servicing and repairing their products.
Contractors are particularly vulnerable to 3ast minute price
changes where there may be a failure to communicate such changes
to all bidders.
d. The consulting engineer's contribution to the project is reduced
because he is not permitted to exercise his professional judgment
fully, including consideration of latent differences in equipment,
and differences in operation and maintenance costs-
e. Extensive postbid shopping and peddling now occurs after the sub-
mi ttal of the general contractor's bid. This is not in the
owners' interest, the public in most instances, because reduction
in prices accrues to the advantage of the general contractor
rather than of the owner. The owner loses the advantage of truly
competitive bidding.
f. There have been suggestions that all equipment of all manufactu-
rers desiring to submit bids be checked by the owner's engineer
prior to the bid date. This suggestion is without merit as the
cost to the owner and taxpayer cannot be justified. Much unsatis-
factory equipment would necessarily have to be checked for com-
pliance with the probable result that it would never be selected
as the lowest and best bid item by the contractor. Because of
design changes occurring almost constantly, no blanket approval
C-126
-------
(Revised 10/8/197
EXCERPT OF TESTIMONY PRESENTED TO THE HOUSE COMMITTEE ON
PUBLIC WORKS AND TRANSPORTATION
BY
WATER & WASTEWATER EQUIPMENT MANUFACTURERS ASSOCIATION, INC.
2) Non-Restrictive Specifications, Section 204(a)(6) of PL 92-500 -
EPA interpretation of the current law, under Program Requirement
Memorandum 75-5, is resulting in what WWEMA Members believe to be
an unfavorable trend toward low bid equipment selection, and post-
bid shopping by construction companies.
The unfavorable consequences of Section 204(a)(6) of the Clean Water
Act include:
A) Reduction in the allowance for technical judgement permitted the
municipal owner and consultant in selecting equipment that best meets
their needs.
B) Low quality equipment resulting in substandard operating perfor-
mance.
C) Discouragement of innovative technology.
D) A tendency to minimize consideration of operating costs, service
life, reliability, and serviceability of equipment, unrelated to
initial capital bid prices.
I7WEMA recommends the elimination of Section 204 (a) (6)? cr prequali-
fication of eligible suppliers; or the Senate report on mandatory
EPA re-evaluation. As an alternative to eliminating Section 204(a)(6)
we suggest a new subparagraph (7) be added to read as follows:
"(7) That solicitation for bids in connection with such
works shall require the bidder to name the principle
subcontractors (or its own firm when it will perform the
work) and principle equipment suppliers. Grantees shall
determine the catagories of work and equipment for which
subcontractors' and suppliers' names are to be supplied."
C-127
-------
- 2 -
April 1, 1977
ought to be given even to manufacturers who have an established
reputation for excellent performance. Present procedure of check-
ing the design and details of the apparent low bidder is the most
cost-effective means of handling this item of work. The delay
that would be occasioned by such preliminary review of all equip-
ment is .also not acceptable.
Bid bonds, considered in some quarters to be a remedy for non-
responsive bidding, are unacceptable as protection for the owner's
interest. Attempts to collect on bid bonds nearly always result
in litigation, with delays and additional expense due to legal
costs and inflation.
2. GENERAL SOLUTIONS
a. A greater demonstration of integrity and responsibility by all
parties is essential.
b. Allow the engineer more latitude in meeting the obvious intent
of Section 204(a)(6) concerning non-restrictive specifications
and to utilize his expertise and judgment in determining the total
cost of equipment bids and his knowledge of a manufacturer's
experience and past performance in his overall evaluation,
c. Eliminate postbid shopping and peddling.
d. Encourage ethical bidding procedures and discourage revelation of
sub-bids by the contractor as a means of improving his position-
e. Allow owner and engineer some leeway in determining the lowest
and best bid even to the point of allowing payment of a premium,
say 1-5%, when there are latent differences in equipment design,
serviceability, delivery, or other substantial reasons.
3. SPECIFIC RECOMMENDATIONS
a. Allow the grantee, at his discretion, to require general contrac-
tor to include in his bid the identification of all major subcon-
tracts and major equipment suppliers. Restrict all deviations or
changes except where they are shown to be, without question, in
the owner's or public's interest.
b. In order to provide entry into the market by new equipment manu-
facturers, permit the contractor to name any major manufacturer's
equipment as a deductible alternative if he first designates an
approved or named item of equipment as his base bid. Determina-
tion of the low bid shall be based on the base bid.
C-128
-------
MEMORANDUM
Anti-Bid Peddling and Shopping
Guidelines/Regulations
Following are some suggestions regarding bid peddling and shopping
appropriate for discussion with EPA, AGC, ACEC and WWEMA Joint
Committee.
AMENDMENT OF EPA GUIDELINES/REGULATIONS
The EPA Regulations, at 40 CRF 35,936-3, now read as follows:
Competition
It is the policy of the Environmental Protection Agency to
encourage free and open competition appropriate to the type
of project work to be per formed.
In view of the bid peddling and shopping problem, the above regulation might be
amended by adding the following:
Because the practices of bid peddling and shopping in connec-
tion with the construction grants deprive the public of the
full benefits of fair and orderly competition among prime
contractors, subcontractors and suppliers, grantees should
prohibit such practices v/here appropriate.
The above addition is merely a general, statement in accordance with a California
statute and with similar provisions in the American Institute of Architects
"Handbook of Architectural Practice," and in the "Code of Ethics" of the
Associated General Contractors of America. (The I-7ater and Uastewater Equipment
Manufacturers Association has no document of Terms and Conditions,) Bid peddling
and shopping have long been recognized as unethical by those construction trade
organizations.
The term "orderly" in the suggested provision especially relates to the interests
of prinn contractors. One difficulty arising out of bid peddling and shopping
is that v/hen subcontractors anticipate that bid peddling and shopping will occur
on a project, sub-bids are held until the last possible moment and thus make it
C-129
-------
Anti-Bid Meddling and Shopping
Guide!ines/Rcgula t ion s
Page Two
impossible for general contractors .to obtain bids far enough in advance to
have sufficient time to properly prepare their own bids. If prohibitions
against bid peddling and shopping are combined with pre-qualification procedures,
prime contractors should be in a position to prepare their bids in an orderly
fashion.
Prevention of bid peddling and shopping is also clearly advantageous to the EPA
whose interest is to complete as many sewage treatment projects as; possible
with limited funds. Should bid peddling and shopping become carmen on EPA-
funded proj ects (as appears to be the trend), subcontractors will pad their
initial bids in order to make further reductions during post-award negotiations.
This artificial inflation of subcontractors' offers make the bidding process
less effective and can cause increased costs uo the EPA. Further, any price
reductions obtained through the use of post-award bid peddling and shopping are
of no benefit to the EPA, to whom these price reductions would normally accrue
as a result of open competition before the award of the prime contract. As
stated by the Court in Ring Construction:
"The party who invariably loses in a post-award bid shopping
situation is the awarding authority. When bid shopping is
used by the general (contractor) after the award of the
prime contract, the awarding authority is faced with the
possibility of poor v.orkrnanship, because subcontractors
who are forced to reduce their price may rely on inferior
quality methods and materials in order to reap some profit."
Bid peddling and shopping is also contrary to the goals of the EPA in a less
obvious, but longer term, respect. This is so because oneway equipment suppliers
may attempt to maintain profitability in markets where bid peddling and shopping
is prevalent is to restrict their efforts in product improvement and development
and concentrate on reductions in product cost. Such stifling of innovations is
detriirental to the long-term interests of the public. Also the practice creates
an unfair and competitive situation for manufacturers providing technological
developmants and information during the design stage.
SPECIFICATION PROVISIONS
PROHIBITING BID PEDDLING AND SHOPPING
The above suggested regulation and the existing Codes of Ethics are not self-
executing.
It would be most helpful to the industry to have approval
by the EPA, say, via a Program Requirements Memorandum,
of a uniform provision which can be used by grantees, when
writing specifications for projects to be funded by EPA
grants, to prohibit bid shopping and peddling. Absenc
such a uniform provision, there may be disputes regarding
a grantee's intent on a particular project. The uncertainty
of the present situation is aggravated by the fact that laws
in many states arc unclear and are in conflict with federal
case law.
C-T30
-------
Anti-Bid reddling and Shopping
Guideline s/Pegula t ions
Page Ihree
For example, state laws are often unclear as to the
effect of a failure to name subcontractors and suppliers
where a specification calls for a listing of the names
of those parties. Further, there are conflicts between
state and federal law as to whether a failure to list
subcontractors and suppliers is a matter of responsi-
bility or responsiveness. Still further, state and
local law is sometimes insufficient to prevent bid
shopping even where subcontractors and suppliers have
been named by a prirr.e contractor in his bid proposal.
A uniform EPA policy in this area could do much to pre-
clude disputes, protests and litigation.
C-131
-------
LISTING OF MANUFACTURERS OF EQUIPMENT
Ea^.h bidder shall enter in the spaces provided below the names of the
manufacturers of equipment which he proposes to furnish, This require-
ment is to prevent bid shopping and peddling; failure to list a manu-
facturer, or the listing of irore than one manufacturer, for any one of
the itars of equipment listed below shall render a bid nonresponsive.
Upon award of a contract, the owner shall direct that the named equip-
ment shall be furnished. Substitutions will be permitted only if the
named equipment does not meet the specifications or the manufacturer is
unable to meet delivery requiranants of the construction schedule.
Preliminary acceptance of equipment listed by-manufacturer's nane shall
not in any way constitute a waiver of the specifications covering such
equipment; final acceptance will be based on full conformity with the
specifications covering the equipment.
Failure to furnish all information requested below shall be cause for
rejection of the bid.
List of Principal Equipment Manufacturer
C-132
-------
COUNTY SANITATION DISTRICTS
OF LOS ANGELES COUNTY
1955 Workman Mill Road / Whittier, California
Mailmg Address /P O Box 4998, Whittier, California 90607 JON D. PARKHURS
Telephone (213) 699-741 1 / From Los Ange'es (213) 685-5217 Chie1 Engineer and General Manage
January 15, 1978
Mr. Harold P. Cahill, Jr.
Director, Municipal Construction
Division
United States Environmental
Protection Agency
401 M. Street, S.W.
Washington, D.C. 20460
Dear Hal:
I asked Mr. Vince DePalma, our Assistant Office Engineer, to
review WWEMA's proposed regulations on Bid Shopping and Peddling.
His summary comment is that efforts in this regard would best be
left to local agencies to include where appropriate, but it is not
advisable to invoke a generalized EPA regulation.
Mr. DePalma's-detailed comments are attached. I hope they
prove of value in your deliberations.
Very truly yours,
Charles W. Carry
CWC:ld
cc: Eugene J. Peltier
J Ml 2 3.1978
C-133
-------
PROPOSED REGULATION ON BID SHOPPING AND PEDDLING
This is to comment on the subject proposed regulation as recom-
mended by WWEMA.
It may be appropriate to review the Districts' policy and exper-
ience in this area. Over the past 2^ year,-; the Districts have awaidcd
23 construction projects under the Clean Water Grant Program totalling
$ftO million. On construction contracts where large items of equip-
ment are; critical to the design and performance of the project, th<=
District often purchases such equipment directly from the ma ufacturer.
This procedure obviourly eliminates all bid peddling or shopp-irg. Sup-
pliers of certain other items of equipment on construction projects are
required to be listed on the bid proposal form by the contractor.. The
equipment to be listed is selected by the Districts' Engineering staff-
based on its cost and on the basis of its relative importance to the
project. Mo fixed percentage of project cost is used as a guideline
for inclusion of equipment in this list. The list is generally brief,
ranging from 2 or J items on a small project, to about a do'/.en items
on a large project. An attempt is made to keep the list brief in the
interest of avoiding mistakes as a result of last-minute changes in
suppliers at bid time. To the best of our knowledge, this list bar en-
abled the contractors to obtain the lowest prices prior -_o submitting
his bid and has prevented bid peddling and bid shopping.
The Districts arc required by Stdite Lav; to have the contractor
list on his bid proposal form, all subcontracted rj who will perform
work which has a value in excess of % of 1 pan. t of the project cost.
A subcontractor is defined as a contractor who tracts directly with
the prime contractor and who supplies materia1 labor at the project
site. In California the statutory requirement substitution of
subcontractors closely parallel the reovi'"emer :t forth in the pro--
posed regulation.
We do not feel the need for ar y additloiu-'l regulations in the
area of listing of subcontractors or equipment suppliers and, in fact,
believe that such a regulation coul;. be, at times, counter-productive.
Some of the reasons for this are as follows:
1. Such a regulation would cause the bid form to be v^ry
lengthy. In the pre-bid rush to complete the form
properly, while receiving last-minute sub-bids, the
contractor would be exposed to a very high risk of a
costly error.
2. A mistake or omission on the form would result in the
bid being declared non-responsive. Should a low bid
be declared non-responsive, the agency can either
award to the 2nd low bidder, assuming his bid is in
order, or reject all bids and readvertise. The former
alternative certainly results in higher costs, the
C-134
-------
latter often has the same result, not to mention in-
creased administrative costs.
3. The proposed regulation closely parallels California
Statute regarding listing of subcontractors (not in-
cluding material and equipment suppliers); however,
there are significant differences in the area of sub-
stitution of subcontractors. This would make such a
substitution by a California agency confusing, at
best.
4. The proposed penalty for substitution without approval,
even if legal, would force the prime contractor on most.
construction contract^ deeply into the red a/id cause him
to either finish the contract while trying to minimize
his losses or to defauli . Neither alternative is es-
pecially appealing for most agencies.
5. The regulation could be circumvented in the area of ma-
terial and equipment suppliers by the coritractO' inten-
tionally listing material or equipment which does not
meet specifications. When his bid is accepted and he
is informed that he must supply specified material or
equipment., he is free J.-o shop.
In summary, it is ou/ recommend, n that control of bid shopping and
peddling be .left to the local a ies.
C-135
-------
BARGE, WAGGONER, SUMNER AND CANNON ENGINEERS AND PLANNERS
THlRTrCMH FLOOR PARKWAY TOWCTS
DAN BARGC, JR
4O4 _AMFS HOBERTSON PARKWAY W.LIIAM L WAC,' ON>:p
OIL LY T ^USM) uf^
NAShVILLF, TfMNFSOEl; 37319 ( I H) 2M-I5OI WILLIAM H CANNON
KL" 11 NLTM N I-'AT c
i 1 f 1 ^-.O TMOM Vj D I UL
January 15, 1978 MMCS ly MU1 Mt.,,
D I X O N L N O R i M ' U ; ~\ / | i">
W M HUNT L ft O v\ ' '.
fiC. HARD G ,SA , I C N
J£ Mf 7) T RL YNOL :"j
JAMLL. A WILG j:>
THOf-lA^ WGOn/.M-) A.&
JOHN H W R ! O i - f
Mr. Harold P. Cahi 11 , Jr.
Director, Municipal Construction Division
Environmental Protection Agency
-rOI M Street, S.W.
Washington, D.C. 20kGO
Re: WWEMA Position en Bidding
Dear Hal:
Generally, I sympathize with the problem being addressed. As with most regula-
tory activity, it is difficult not to over-kill. The correction of a perceived
ill frequently creates a cross-fire hazardous to many that are innocent of any
wrongdoing. My specific comments arc confined to the points that I deem more
critical in Appendix I - Proposed Regulations.
(a) Is this factual? Has i£PA actually reached such conclusions?
(b) There is ambiguity in the use of the word "supplier."
Could it incltjd' niunuf acturers' representatives, jobbers,
distributors, or dealers, for ir.jtancc?
(c) Specifications cannot always be written to completely
segregate and categorize each and every type of work that
might be subcontracted. It would be risky to start breaking
down the contract documents into portions trial apply vis-a-vis
those that do not apply to a given operation. A threshold of
three percent is too low. The bid form would be ridiculously
long.
(d)(F)(1) What is meant by "subcontractor's bid'" Who says he has to
bid? Suppose the prime has terms and conditions other than
those prepared by the engineer?
(d)(E)Ct) An illegal sub should not be proposed by a prime.
(d) (F) This is unnecessary if a sub is guilty of any of the patently
irresponsible conditions under (E).
(d) (F) (2) How does the Owner get a relationship with a sub that warrants
direct communi cat i on?,_ .-.-_- ;- Ji
ACEC - APVVA - APBA - AUtA - A'
C-136
-------
Mr. Harold P. Cahi11, Jr.
January 16, 1978
Page 2
(d)(G) How does the subcontract "price" get into the picture? This
is between the prime and his sub. Is a pre-sct penalty
without reference to actual damage legal?
(d)(H; What doe^ this mean? How is "price" determined if not shown
on the bid form?
In sum.nary I would say:
1. WWEMA's approach sounds good on the surface but would prove unworkable
i n pract ice.
2. Most engineers would need counsel of general contractors to completely
categori ze al1 worK
3. Pre~npproval of equipment may be needed to protect prime.
k. I am in favor of something, but I d~n't know exactly what.
Sorry, Hal, about this lousy response, but it'r the best I can do for now.
cc: MAG Members
C-137
-------
CITY OF Los ANGELES
CALI FORNIA
BOARD OF PUBLIC WORKS
MEMBERS
WARREN A HOLLIER
PRESIDENT
S M MARCUS
VICE PRESIDENT
JAMES W HALL
DAVID LOZANO
MAX W STRAUSS
JOHN PROUD
SECRETARY
DEPARTMENT Of
PUBLIC WORK
BUREAU OF
ENGINEER1M
DONALD C TILL^
CITY ENGINEER
ROOM 8OO, CITY I
LOS ANGELES 9<
TOM BRADLEY
MAYOR
JAN 17
Mr. Harold P. Cahill, Jr., Director
Municipal Construction Division
United States Environmental
Protection Agency
Washington, D. C. 20460
Dear Hal:
Your memo of January 4, 1978 requested comments from
MAG members concerning bidding problems associated with the
construction grants program.
There is one item that has caused considerable un-
necessary work and confusion. This is the requirement to comply
with the statutory time limits of the Davis-Bacon Act.
The Davis-Bacon Act requires that the latest prevailing
wage determination be used for all bids. We have no objection
to this requirement, however, the Act further stipulates that
the latest wage determination published 10 days prior to bid
opening shall be included in all bids.
It is almost an impossibility to comply with the 10-
day limitation for the following reasons:
1. The wage rates are published on a
random basis.
2. The receipt of the Federal Register
is not always prompt.
I, therefore, would recommend that legislation be
enacted to amend the Davis-Bacon Act to either:
1. Require the publication on a regular
basis (i.e., quarterly or the first
day of alternate months) either the
new rates or a notice that no changes
have been made since the date of the
previous notice.
JAN 2 3.1979
ADDRESS ALL COMMUNICATIONS TO THE CITY ENGINEER
C-138
AN EQUAL EMPLOYMENT OPPORTUNITY
AFFIRMATIVE ACTION EMPLOYER
-------
JAN 11 1978
Harold P. Cahill, Jr. -2-
2. Change the 10-day requirement to 30
days. This would allow sufficient
time to notify all of the prospective
bidders.
I would recommend alternative number one as it
would be easier to ascertain the latest prevailing wage
rates.
Sincerely,
DONALD C. TILLMAN
City Engineer
DCT/RSH:kem
cc: Eugene Peltier
C-139
-------
OF THE COUNTY OF MILWAUKEE
P.O. BOX 2079 MILWAUKEE, WISCONSIN 53201
PHONE 271-2403
Sewerage Commission of the City of Milwaukee Metropolitan Sewerage Commission of the County of Milwaukee
January 20, 1978
Mr. Harold P. Cahill Jr.
Director of
Municipal Construction Division
U.S. Environmental Protection Agency
401 M Street, S. W.
Washington, D.C 20460
Subject: Building Procedures
Construction Contracting in the Construction
Grants Program
Dear Mr. Cahill:
We have reviewed the proposal sent us by Water and Waste-
water Manufacturers Equipment Association Inc. regarding
the subject bidding problems. The proposed procedure has
the potential to decrease the frequency and magnitude of
the incidents. Several of us have utilized a similar
system wherein the prime bidders were requested to render
a breakdown of their quotations on a sheet which was a
part of the bid documents. Coincident with this, they also
had to list and indicate each subcontractor and his involve-
ment in the work to be performed. This method did not
negate all problems but certainly kept them to a control-
lable minimum.
There are several other methods which have been used more
frequently in the private sector in securing bids and
managing construction which eliminates the bid shopping
and allows the owner the opportunity of obtaining the best
price and job. Some of these have not been totally ac-
ceptable on projects which are EPA grant funded.
A method wherein a prime contractor is not secured and
bid packages are bid independent of one another, resulting
in a group of contractors working directly for the owner
is one way to achieve control. Also in conjunction with
this, the owner acquires the major components. This places
1974 Amer. Soc. of Civil Engrs. Landmark Award 1974 Amer. Soc. of Civ\l Engrs. Wisconsin Engr. Achievement
C-140
-------
-2-
more responsibility on a management team but tends to maximize
control and has the potential to reduce overall project costs
and the total time frame from concept to completion. This
method has developed over the last decade, gaining accept-
ance primarily in the private sector and on a few EPA grant
funded projects. The management system has been identified
by several terms, one of which is generally referred to as
Construction Management. Due to the numbers of people on
the owners staff and other routine commitments, the Cons-
truction Management team is usually composed of personnel
contracted by the owner to function on his behalf. This is
one of the basic approaches to be considered for each pro-
ject in the Milwaukee Pollution Abatement Program during
the project delivery analyses.
This method varies from the traditional approaches. Current
regulations need to be reconsidered with possible revisions
to allow for a fuller use of the Construction Management
system, where applicable on a project. Since the end result
is to achieve clean water as quickly and economically as we
can, changes in the bidding systems and procurement proce-
dures should be considered and executed.
Please contact me if we can be of further assistance in this
matter.
Sincerely yours,
Dr. William J. Katz
Director of Technical Services
C-141
-------
United States Department of the Interior
IN REPLY R£FER TO
BUREAU OF MINES
2401 E STREET, NW.
WASHINGTON, D.C. 20241
February 27, 1978
Mr. James R. Murphy (WH-547)
U. S. Environmental Protection Agency
401 M Street, S.W.
Washington, D.C. 20460
Dear Mr. Murphy:
Some time ago Jim Ewing requested my comments on the practice of bid
shopping, etc. I have completed the enclosed questionnaire which Jim
sent to me. I hope it will help in your survey.
Sincerely yours,
/
I. A. Herickes, Deputy Chief
Division of Procurement
Enclosure
C-142
-------
in
ui
o
*
X
-*
o
i
u.
o-
S
V)
fl
>
U
n
fl*
B
&
0
u
U-g
fi
* £
lilt
II
$
1
o
»5
Ul
5
1
H
0
C-143
-------
NATIONAL CLAY PIPE INSTITUTE
Washmo.on Office Tel (2O2> 296-527O
March 1, 1978
Mr. Douglas M. Cos tie, Administrator
Environmental Protection Agency
401 M. Street, S.W.
Washington, D. C. 20460
Dear Mr. Costle:
The National Clay Pipe Institute is composed of nearly all of the U.S..
manufacturers of Vitrified Clay Pipe (VCP). Our product is widely spec-
ified and has been installed on many EPA funded projects since the begin-
ning of the federal water pollution control program. Our members are-
well experienced in processing bids under the limitations of the non- restric-
tive specifications paragraph, Section 204 (a) (6) of PL 92-500 (FWPCA, 1972).
We believe that the cited paragraph has caused unnecessary complexities and
needless delays in processing contracts under the construction grants program.
It is for this reason that we offer our comments and recommendation to assist
the Administrator in compiling his report to the Congress pursuant to the
"Water Treatment Contracting and Bid Shopping" provision in the Conference
Report accompanying H.R. 3199, 95th Congress (H. Rept. No. 95-830).
The comments and recommendation are designed to apply to materials
procurement only. They do not include any reference to the bid shopping
phase of this problem in as much as this practice is rarely encountered in our
experience in pipe material procurement.
We would appreciate receiving, prior to the submission of your report to the
Congress, a response to these comments and recommendation when you have
formulated a position thereon.
Sincerely,
President
Enclosure
C-144
113O SEVENTEENTH STREET. NW WASHINGTON. DC 2 O 0 3 8
-------
THE NON-RESTRICTIVE SPECIFICATIONS PARAGRAPH;
COMMENTS AND RECOMMENDATION
Although the legislative history concerning the non-restrictive specifications paragraph
furnishes no guide to the purpose of the Congress in adopting it, its function is clear. It
is to insure the type of free and open competition which is required on all federal and federally
assisted construction projects. Nevertheless, other construction grant programs admin-
istered by the Economic Development Administration (EDA) and the Farmers Home Ad-
ministration (FmHA) are not burdened, as is the EPA program, with the detail of admin-
istration of this or similar sections.
Consequently, these other agencies are free to pursue the objectives of their programs
under the clear guidance of Attachment O, OMB Circular No. -A-102 , Procurement
Standards? A pertinent section of that directive is quoted.
"Grantees.may use^their own procurement regulations which reflect
applicable State-and local laws, rules and regulations "provided that
procurements made with Federal grant funds adhere to the standards
set forth as follows.v». (c) (2) Invitations for bids or requests for
proposals shall be based upon a clear and accurate description of the
technical requirements for the material, product, or service to be
procured. Such description shall not, in competitive procurements,
contain features which unduly restrict competition. 'Brand name or
equal' description may be used as a means to define the performance
or other salient requirements of a procurement, and when so used the
specific features of the named brand which must be met by offerers
should be clearly specified. "
-1-
C-145
-------
On the other hand, the cumulative effect of the direct obligation laid on the
Administrator, EPA by Section 204 (a) (6) (the Section), coupled with the
protest procedures established by EPA to insure fairness in its implemt-
atlon, has been negative.' The results have been: encouragement of protests
additional delays and the repeated insertion of the Administrator into the
procurement process at the municipal level. To what end? Are the waters
cleaner for this ? Is competition on EPA projects so much keener than on
FmHa projects ?
It is our contention that there is simply no need for this provision in the
statute authorizing the EPA construction grant program. However, we
recognize that there may be practical'difficulties in the way of its deletion.
We recommend, therefore, that the Section be modified to apply the general
rule of procurement under federal grants. This is to authorize the appli-
cation of State or local law}: so long as such law effectively provides the
same fundamental protections as the federal law. The States and municipal
corporations have, over many years, developed a strong body of statutory
and case law to provide these safeguards. Thus,
"The purpose of the provisions so generally found in constitutions,
statutes, city charters and ordinances reguiring that contracts
with public authorities (exceeding a certain stipulated amount) be
let only after competitive bidding are to secure economy in the
construction of public works and the expense of public funds for
materials and supplies needed by public bodies... and to promote
actual, honest and effective competition...".
64 Am. Jur. 2d Public Works and Contracts, §37, p. 889.
-2-
C-146
-------
The OMB Circular acknowledges the widespread existence of these local
controls by authorizing their application to federal grants, while insisting on
certain standards, including, as noted above, the self-same limitations on
"brand name (s) or equal', " as are imbedded in the Section. We are unaware
of any substantial difficulties suffered by-EDA-or~FmHA-in operating4heir con^-
- struct!on programs under the OMB Circular. We believe that EPA can achieve
the same degree of release from administrative detail as is enjoyed by these
other agencies by modifying the Section to permit the application of the OMB
principles.
A large body of what may be termed "protest law" has arisen and will increase -
inexorably in EPA so long as the Section is left undisturbed and so long as there
are disappointed contractors and potential suppliers prepared to trod the quick "
and easy path to"the EPA protest-arena, WefTib ont believe that it is in EPA's
best-interest to allow this fiituatton.to continue, -
The procedure we are recommending would be wholly consistent with the
delegation section of 40 CFR 35.936-21 (1977) now contained in the EPA
Regulations. The States have shown little disposition to utilize this section.
We believe that its transfer into the statute will increase its visibility and raise
the level of State participation in this method of procurement.
Moreover, the adoption of this approach is harmonious with EPA's continuing
effort to delegate to the States its control over administrative details, where-
-3-
C-147
-------
ever practicable. Futhennore, the unending EPA search for means to implement
Section 101 (f) of FWPCA, 1972 would be promptly rewarded, while simultaneously
encouraging others to join in the universally-expressed desire to minimize paperwork.
RECOMMENDATION
That Section 204 (a) (6) of FWPCA:; 1972 be amended by adding a proviso para-
graph, the purpose of which would be to grant to the Administrator the authority
to approve,"on request, the application of State or local procurement law.to EPA
grants," if the Administrator-is satisfied that such procurement meets the Btandards_-
of the Section and OMB Circular. AJ02i--^
Draft legislative_language to implement the ^ibove recommendation is attached aa.
Exhibit A. -
-4-
C-148
-------
SUGGESTED LEGISLATIVE CHANGE TO
SECTION 204 (a) (6). FWPCA. 1972
ADD THE FOLLOWING:
"provided, however, that a State agency which has been or may be delegated
authority by the Administrator to review plans and specifications under Section
203 (a) and which considers that the State laws which govern municipal procure-
ment operate substantially to provide the same protections as provided by the
limitations of this paragraph may request the Administrator to approve, and
the Administrator, if he agrees, shall approve the State system of procurement
as used by municipalities in such State. "
EXHIBIT A
C-149
-------
ASSOCIATION OF METROPOLITAN SEWERAGE AGENCIES
SUITE 200, 1015 18th ST., N.W., WASHINGTON, D. C. 20036 (202) 659-9161
MEMBER AGENCIES
(March, 1974)
SmttT Anchorite Area Boroufk, AX
City of Phoenii, AZ
City if Tycsn, AZ
City of Itt Anfelet, CA
Coillty Sanitation Districts of
Los Anielei County, CA
East Biy Municipal Utility District
Oakland, CA
County Sanitation District!
of Onnte County, CA
City of Sacramento, CA
County of Sacramento, CA
City of San Dieft, CA
City and County if San Francisco, CA
City of San Jose, CA
Metropolitan Denver Sewate
Disposal District No. 1, CO
The Metropolitan District
(Hartford County), CT
Miami-Dade Water and
Sewer Authority, Fl
City of Atlanta, SA
City and County of Honolulu, HI
Metropolitan Sanitary District
of Greater Chicafo, IL
City of Indianapolis, IN
City of Wichita, XS
Louisville and Jefferson County
Metropolitan Sewer District, KY
City of Baltimore, MD
Washin|ton (D.C ) Suhurhai
Sanitary Commission, MD
Metropolitan District
Commission (Boston), MA
Detroit Metro Water Dept., Ml
County of Wayne, Ml
Metropolitan Sewer Board
(Minneapolis-St. Paul), MN
City of Kansas City, MO
Metropolitan St. Louis
Sewer District, MO
City of Omaha, NE
Berfen County Sewer
Authority, NJ
Middlesei County
Sewerace Authgrity, Nl
Passaic Valley Seweritn
Commissioners, NJ
City of New York, NY
City of treenskoro, NC
Metropolitan Sewer District
of Greater Cincinnati, OH
Cleveland Retional Sewer District, OH
City of Columhus, DH
City of Dayton, OH
City of Portland, OR
Alleejheiy County Sanitary
Authority, PA
City of Philadelphia, PA
City of PriKideict, III
City of Memphis, TN
Metropolitan Government if
Nashville and Davidson County, TN
City if Dallas, TX
City if Fort Worth, TX
City of Houston, TX
Hampton Deads
Sanitation District, VA
Municipality if
Metropolitan Seattle, WA
City of Charleston, WV
Metropolitan Sewer District
of the County of Milwaukee, Wl
March 3, 1978
Mr. James R. Murphy
United States Environmental
Protection Agency
401 M Street, S. W.
Washington, D.C. 20460
Dear Mr. Murphy:
Enclosed is a hasty preparation of your questionnaire attached
to your letter which reached us on February 24. Rather than
take the time to submit it to our appropriate committees, we
have made some assessments and filled it in as best as possible.
Hope it is of assistance.
Sincerely,
Ron M. Linton
C-JSO
-------
in
o
Ul
T:
0
I
0.
JO
I
it
!
A
-sPf
liiis
t
*
*
v.
5 ?:
I/I
*
Vt
If!
i!
Ul-
II
$
~
01
ni
x
l-
0
C-151
-------
14 MAR 1978
MOON LANDRIEU, President
HARRY McCALL. JR., President Pro-Tern.
Sewerage & Water Board OF NEW ORLEANS
C/TY HALL CIVIC CENTER
STUAKJ H. BREHM. JR /Vfn/ ORLEANS, LA., 70165 586-4588
Executive Director
March 9, 1978
Mr. James R. Murphy
401 "M" Street
Southwest Washington, DC 20460
Dear Mr. Murphy:
At the request of Mr. Richard Sullivan, of the American Public
Works Association, I am attaching a copy of the survey form
that was submitted to us concerning specification and bidding
procedures.
Should you need further information please do not hestitate to
contact me.
very truly,
'/~>
Stuart H. Brehm, Jr,
I Executive Directc
SHBjr/dmp
Attachment
ccs: Mr. Joseph Sullivan
Mr. Richard Sullivan
C-152
-------
C-153
-------
DEPARTMENT OF THE ARMY
OFFICE OF THE CHIEF OF ENGINEERS
WASHINGTON, D.C. 20314
J978
REPLY TO
ATTENTION OF:
DAEN-CCZ-M
21 March 1978
Mr. James R. Murphy
401 M Street, S. W.
Washington, D. C. 20460 (WH-547)
Dear Mr. Murphy:
inclosed, pursuant to the recent request of Mr. Cahill, are the replies
of the Corps of Engineers to your questionnaire.
I trust this information will be of assistance to you in your study of
these problems.
Sincerely yours,
1 Incl
as
J. LANKHORST
Acting Chief Counsel
C-154
-------
1
fl
ta u
do this
ence da
no
pe
at
doe
nb e
w
o
2;
O
s
Engine
efore, there
hich io base
Co
ther
on w
rt
o-
O
0)
00
rt
O
2
ngjr
Th
C,
c
- O
c
A:
c
_
n!
- - e
>-,
oil wrj
experience da
estimate.
O
- l-r
3
O
-
-------
FRANCIS T. PURCELL.
.a.i«
fY/
MICHAEL R. RENDER, P.E.
COMMISSIONER
13 APK 1978
COUNTY OF NASSAU
DEPARTMENT OF PUBLIC WORKS
MINEOLA, NEW YORK 1 1501
March 31, 1978
U.S. Environmental Protection Agency
401 "M" Street, S.W.
Washington, B.C. 20460
ATT: Mr. James R. Murphy
RE: Study on Bid Shopping Practices
Gentlemen:
The American Public Works Association forwarded a copy of your
letter to them on the EPA study on bid shopping practices. Mr.
Richard H. Sullivan, of APWA, requested my Department's views
on the subject.
We have reviewed the relevant information, and are returning
herewith the filled-in "Specification £ Bidding Procedures"
questionnaire.
Very truly yours,
ichael . Pender, P.E,
f Commissioner
MRP:FVR:rs
Enc.
cc-w/Enc.:
R. Sullivan
J. Gillen
F. Merklin
F. Flood
C-156
-------
^^ibflri r jr.. Hf ip t*
i
$
ttl
I*
ID
re K
1
"S
n) T) Q)
3 .H J5
4-13 -
H n o
en 5 -H
£ C 0)
o O >
3*H m
-M ^±
CJ
.5
O 10
-p -I-1
in
V 0
c o
a)
4- 4-'
o
-c a;
r
rj
5
a*
IJ
p
en
o
01 v
cn
4-ff-
P. HJ
o
01
o
o
UH t-i
cn ->
cn
0)
u
o t.
p o
w
-------
amencan
Concrete
December 14, 1977
Upe
association
Mr. Douglas M. Costle, Administrator
U. S. Environmental Protection Agency
401 M Street, S. W. , Room 1200
Washington, D. C. 20460
Mr. Cos tie;
In the last section of the EPA Conference Report, House Report No. 95-830,
there is a provision instructing the Administrator of the Environmental Pro-
tection Agency, within three months, to review the bid and award policy for
equipment as originally outlined in Section 204 (a) (6) of Public Law 92-500.
This section of the 1972 law deals with EPA's policy on the bid and award
procedure for waste treatment equipment, but, when this was implemented
into the regulations as paragraph 35.935-26 "Nonrestrictive Specifications"
the section dealt with the bid and award policy for not only equipment but
for pipe and materials . Of particular interest to the concrete pipe industry
is the last sentence of that paragraph which states: "With regard to materials,
if a single material is specified, the grantee must be prepared to substantiate
the basis for the selection of the materials."
Our industry strongly supports this bid and award policy for pipe and materials,
and I wanted to bring this to your attention to define the two issues, so that
your response to the Congress will not affect our coverage in the regulations
but deal only with the problem identified with regard to equipment.
Thank you very much for your consideration of these comments, and my very
best personal wishes for the Holiday Season.
incerely,/'
Richard E. Barnes
President
REB:rs
cc: Government Relations Committee
8320 old courthouse road Vienna Virginia 22180 (703) 821-1990
C-158
-------
amencan
/^Noncn
Cpipe
association
January 27, 1978
Mr. Walter Brodtman
U.S. Environmental Protection Agency (WH-547)
401 M. Street, S.W., Rm. 1219A
Washington, D.C. 20460
Dear Mr. Brodtman:
At the MAG meeting on January 23, we learned that you have the lead
responsibility for the bid shopping provision in P.L. 95-217, and develop-
ing recommendations for Congress. As imput on this issue, we are attaching
our letter to Doug Costle of December 14, 1977. We would appreciate your
consideration of the points made in the attached letter as an official position
of our industry. If Questions arise, please call me. We would also appre-
ciate reviewing your draft on this issue.
Very truly yours,
Cyrijf I. Malloy
Vice President Government Relations
Enclosure
C-159
8320 old courthouse road Vienna Virginia 22180 (703) 821-1990
-------
STATEr
STATE BOARD OF HEALTH
An Equal Opportunity Employer
March 20, 1978
INDIANAPOLIS
Address Reply to:
Indiana Slate Board of Health
1330 West Michigan Street
Indianapolis, IN 46206
MAR ;5;4
Mr. James R. Murphy
401 "M" Street, S.W.
Washington, D. C. 20A60 (WH-547)
Dear Mr. Murphy:
Re: Bid Shopping Questionnaire
As requested by Mr. R. H. Sullivan's memorandum dated
March 6, 1978, I am forwarding the questionnaire pertaining to
Bid Shopping practices.
Very truly yours,
.ph C. Pickard
Assistant Commissioner
for Environmental Health
EABohner/jm
Enclosure
cc: Mr. R. H. Sullivan
C-160
-------
0
in
&
o
&-
Ul
0
*5
I
B
-*-
c
i
U--
u
J
a
<
^-
i
»V
|
-V i
X
V
X
z_, ^
. X
^s
S
_ X
.^_L v
-------
Report of the
ACEC-WWEMA-AGC Subcommittee on
Prequalification of Equipment
October 5, 1977
PREQUALIFICATTON OF EQUIPMENT FOR
WASTEWATKR TREATMENT FACILITIES
The objectives of the Federal Water Pollution Control Act are In
jeopardy because of the price-dominated marketing climate that has been
prompted by EP7v regulations cohering purchase of equipment for wcists-
water treatment plants. Because of poor equipment, some plants do not
function as designed. Once the equipment has bern delivered, there is
little incentive for the manufacturer to assist in making it work.
Since initial cost is the dominant factor in determining the equip-
ment that will be purchased for the next project, there is little reason
for "n equipment manufacturer to provide either design assistance or oper-
ation and maintenance support. This assistance is essential both during
the des.'gn of the facilities and when the plant is placed in operation.
From the Contractor's viewpoint, the inability to determine whether
an equipment manufacturer's offering will meet the specifications is a
serious shortcoming. Contractors must evaluate a multitude of proposals
in a very short period. In addition, many Contractors dr not have a staff
that is technically qualified to evaluate the equipment manufacturer's
offering to determine whether it is equivalent to the equipment required
by the specifications.
From the Owner's view, it is important to obtain high-quality equip-
ment that wil1 perform the function required for many years in the future.
Minimum maintenance and long life are two characteristics that are parti-
cularly difficult to obtain and evaluate when first cost is the dominant
selection factor. Life cycle costs and energy consumpticn must be evalu-
ated as well as first cost.
From the Engineer's viewpoint, the review and evaluation of equipment-
must be performed at some stage in the project. 7f a pro qualification
approach is used, the Engineer's ev?1 vuition is performed early and the
Engi.neer can be sure that equipment purchased meets the criteria estab-
lished for the project. However, when prequalification is employed, addi-
tional engineering effort will be required to evaluate multiple proposals
of Equipment Manufacturers, which must be reflected in the Consulting Engi-
neer's fee structure.
From an Equipment Manufacturer's and the Contractor's viewpoint, the
ability to obtain an advance determination of whether equipment is accep-
table eliminates an elemen^ of uncertainty. Prequalification provides an
opportunity for the equipment manufacturer to have his product thoroughly
evaluated without the pressure to award a contract. An Equipment. Manufac-
turer who failed to submit his equipment for evaluation during prequalifi-
cation would be precluded from consideration at the time a contract was
awarded.
(Over)
C-162
-------
- 2 -
Proqualification should be completed early enough in the project so
that designs can be tailored to tho requirements of equipment that is con-
sidered acceptable by the Engineer. It should be possible to prequalify
equipment manufacturers on the basis of description that describes in a
general fashion the types of equipment and processes that will be required.
When final project specifications arc prepared, the Engineer must
list those i*-ems of equipment th.it have prequalified and will be considered
acceptablo.
The call for submission of proqualiLJcation data should be advertised
in the same manner as is required for advertisement: of the pr< ject with a
cut-off fixed for submission of prequalif icati on data.
If EPA needs documentation that the Engineer has considered the equip-
ment of all manufacturers who respond to the advertisement for prequoJifi-
catioa, a statement will be submitted with the drawing.:- and specifications
listing all manufacturers who respond and indicating those whose products
have been included.
Prequalification of major items of equipment can provide significant
improvement in the quality of equipment and ability of treatment plants
to function as designed while retaining the competition that is mandated
by PL 92-500.
The following steps are proposed for prequalification:
Prequalification documents are prepared by Engineer early in Step 2,
Prwqualification documents reviewed by Owner, State, and EPA.
Adver c j semen I" of Prequalif ication.
Review by Engineer of prcquaJ if icat-i on data and determination of
acceptability of the equipment of all manufacturer-: who respond
to advertisement.
Engineer required to include at least two acceptable sources for
each major item of equipment, except where, a single source is
selected under EPA's PRM 75-5.
Project drawings and specifications prepared, talcing into account
all acceptable sources.
Final specifications list names of Equipment Manufacturers who
have prequalified.
Final drawings and specifications reviewed by Owner, ^tate, and EPA.
Construction contract advertised.
Bidding Contractor selects equipment from one of prequalified
sources.
Contract awarded to lowest qualified bidder.
C-153
-------
ADVERT l^MIENT FOR EOUll'HKNT OUAI,i F.ICAT10N
COUNTY OF FUCHHUND
BOX '/)/.
ROOK ING; I AM, N. C. 20^79
Design,operational and inanufac Luring SPECIFICATIONS for
major i.'i|U i pmen t I'or tho cons true L ion of WASTEWATER
FACILITIES consisting o L' Llic following:
A. Regional Pumping o la Lion of 1.0 MGD Capacity.
13. Wastewater Treatment Plant (1.2 MGD) with following unit:
1. Two Aeration Basins of 600,000 gallons capacity
each with floating aerators.
?.. Two Clarifiers complete with necessary mechanisms.
3. Sludge Drying Beds.
'4. Reaeration Basin with floating aerator.
5. Final Settling Pond of 1,200,000 gallons capacity.
6. Chlorine Contact Chamber with gas chlorination
facilities and mixing.
Equipment qualifications will be received by County of
Richmond, through their Consulting Engi r-ocrs for abc. ")
project, Moore, Gardner & Associates, Inc. of Ashe1 o,
N. C., until the close of business on October 31» 1-'. .',
then analyzed, reviev/ed and evaluated as tc cost effective-
ness for- inclusion in construction of wastewater facilities
project for County of Richmond.
The owner, through their engineers, will prepare a list'.ng
of acceptable equipment for use in this project, said
listing to become a part of the bid documents.
Preliminary design data arid detailed information on this
project may be examined, reviewed and discussed with the
Consulting Engineer, Moore, Gardner ft As.sociates, Inc.,
110 West Walker Avenue, Asheboro, N. C. 27203 (Telephone:
919/625-6.111).
C-164
-------
NON-DLSCHIMJ NATION ifJ EMPLOYMENT:
Potentia.l suppliers of equipment to hi: .incorporated on
this v/ork v/ill be required to comply with t.he provisions
of the President ' s Executive? Order- No. ll'j'/l;, the provisions
of Executive Order No. 312/iG. Title VI of the Civil Rights
Act of 196A (Davis-Bacon Act), the Anti-Kickback Act, the
Contract V/ork Hours Standard Act, and-or the provisions of
any previous Executive Orders dealing with non-discrimination
in federally assisted construction contracts (1111^ or
Potential suppliers must, certify that they do not and will
not, maintain or provide .for their employees any facilities
that are segregated on a basis of race, color, creed or
national origin.
The Board of Commissioners reserve the right to require
only that equipment which v/ill, in their judgement, best
secure the efficient and most cost effective operation of
proposed wastewatcr facilities.
MIC! 10 LAG W. DOCKERY
CO'INTY L.JGINEER
COUNTY OE RICHMOND
NORTH CAROLINA
ENGINEERS:
MOORE, GARDNER & ASSOCIATES, INC.
CONSU LTIMG ENG INEERS
ASHEBORO, NORTH CAROLINA
C-165
-------
PREQUALIFICATIi'M OF EQIMPMKNT
Prcqual If ication data for (equipment to bo considered for a codpiece-mix
activated .sludge wastcwatcr treatment plant at Fort Mudge, Texas will be
received by AHC Consulting Engineers, 2000 Old Town Road, Big City,
Arkansas, until Feb 20, 1984.
The proposed treatment plant includes a raw vast rwater pumping station,
gril removal, primary sedjnu'iit.al.ioii, aeration ba:;in, final .sed iriontat i on,
aerobic .sludgo digestion, subsnrfar.e sludge inject, ion, and clicmical feed-
ing facilities lor lime, alum, ferrous sulfate, and chlorine.
The major items of equipment contemplated for this project include:
Raw Wastewatcr Pinups
Cal)le-()perated Screens
Grit Removal F<|uipnient
Circular Sludge Collecting UquJ i ment
Svirface Aeration r",(]ui)iment
Sludge Injection I^uiiprient
Chemical Feeding Equipment.
Equipment Manu fee turors arc warned that major items of equipment will be.
evaluated on the oasis of prequalification data. The equipment of a
manufacturer who fails to submit ciata during the prcqualificat ion period
niav be excluded whea the project is bid.
The Project Engineer for this project is I, M. Fp.irguy, tclephon^
(501)999-1111.
AbC Consulting Engineers
C-166
-------
RECOMMENDATION REGARDING EPA PG-.19A
)ol.icvod that: a proper prcqualificat.ion procedure,
leqa.l advertisement for the subinittal of quaiifi-
:h regard tc wastewater treatment equipment will
It is believed
including a
cations, v;ith
fulfill the intent of the requircmcnts set forth by EPA in
PC-1.9A for "free and open competition".
The U. S. Government does, in fact, legally advertise
(with cut--oCC dates for submit'als) for projects, goods and
services and apparently considers that procedure to provide
for "free and open compctition" in its normal course .of pro-
curement. Prequalification f equipment by way of legal
advertising with a cut-off date for submittals should be con-
sidered in no different light.
On Page 2 of PG-19A, the EPA establirhcs the authority
of the AE by stating that the AE is "the most qualified to
determine" when discussing acceptability of an "or equal"
product. It should follow then, that, the AE should be able
and permitted to publish a listing, through a proper pre-
q"ali f: ication procedure, for equipment which would be accept-
able for installation in a project and still fulfill the intent
of PG--9A.
It is recommended, therefore, that EPA revise the wording
of PG-19A to permit use ol: an aareed-"pon prcqualification
procedure for waste-water tieatment equipment. The requirement
for inclusion of "the criteria he will use in evaluating"
(Pago 2 of PG-19A) can be retained in the prcqualification
documents. It is further recommended that the term "or equal"
not be imposed as a requirement in the bid specifications for
the project when a proper prcqualifdcation procedure has been
or ployed.
C-167
------- |