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Procurement Perspectives: The negative affect of low-balling contracts

Stephen Bauld
Procurement Perspectives: The negative affect of low-balling contracts

Municipal contracting is not for everyone.

Many contractors that I work with or talk to at construction events have stopped bidding government work for a multitude of reasons.

Most stem from the fact that someone, usually an unqualified contractor, will drop in a low-ball tender price with no real intention of doing the work for the price they bid.

As I have mentioned many times, municipal tenders need to be very specific as to the specifications they are requesting the contractors to bid on.

Contractors will bid on what they see in the documents, not how the project should be constructed. Only after they are awarded the contract do they start to point out the discrepancies by way of costly change orders.

The loss of good potential contractors is bad enough, but one must ask whether the open contracting process actually saves money.

In many cases, the answer is no.

It is time-consuming and costly to run and leaves little latitude for the municipality to push down contractors below their first offer, once the most competitive contractors have been identified, by playing each against the other, and by using the municipality’s negotiating and contracting experience to identify ways in which the offered prices can be shaved down.

The private sector, on the other hand, does have the ability to negotiate with contractors and suppliers.

As a result, this added option also has the opportunity to create a better outcome with respect to the value for money proposition for the owner.

Municipal procurement can also lead to the problem of low-balling, which is deliberately underbidding the contract price to secure the contract, and then leveraging profit by charging work within the scope of the contract as an extra, or by using substituted materials or other improper practices.

To avoid these problems, more resources must be devoted towards monitoring the project, which increases the administrative cost of the contract.

Open contracting creates the appearance that the contract goes to the most cost-effective contractor, although if good potential contractors are deterred from bidding by the process, there is reason to doubt this.

By awarding contracts this way, potential controversy surrounding the award of public contracts is diffused. There is no doubt that you have some merit by this approach.

In the private sector, the board and shareholders will be satisfied if a contract is brought in within budget, performed properly and punctually and if the bottom-line profit provides a satisfactory rate of return.

Since so many municipal services are provided cost free at the point of use (e.g., public transit and public housing), profit and return on investment are not standards of measurement that can be applied to the public sector.

Therefore, there is a natural tendency more towards process.

Moreover, one cannot ignore the conclusion of countless auditor generals who state a competitive system of procurement does tend to lead to lower prices than those that are secured when public procurement moves away to a less competitive system, such as pure direct negotiation on a single source basis.

The question then becomes whether it is possible to craft a more effective method of competition than the one to which the present fully open tendering process naturally tends. While openness has its advantages, it may need to be approached in a modified way. This is especially true in cases where there are a large number of potential contractors who may reasonably be expected to bid.

One positive aspect that municipalities have adopted over the years is maintaining proper records of past contract performance. By doing so, this process has systematically excluded contractors who have previously carried out work poorly or who have been difficult for the municipality to manage.

Stephen Bauld is a government procurement expert and can be reached at

Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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