American Bar Association
Forum on the Construction Industry
Bid Mistakes and Relief
Joseph Kovars
Ober, Kaler, Grimes & Shriver
James F. Nagle
Oles Morrison Rinker & Baker
April 24-26, 2008
La Quinta Resort and Club — Palm Springs, California
©2008 American Bar Association
Bid
Mistakes and Relief
“Oops I did it again.” — Britney
Spears
The rules on mistakes in bid have to walk a fine line
between fairness to the mistake-maker and to the other bidders.[2] Consider the example where the owner’s
estimate was $1 million and all the other bids are clustered around $1 million,
but someone quotes $400,000. While some
owners might be tempted to immediately award to the low bidder, that action is
not in anyone’s best interest. In that
situation, the owner would likely be awarding a contract that would be a
termination for default waiting to happen and may tie the owner and the
contractor up in bankruptcy. Moreover,
the acceptance of a bid containing an obvious inadvertent error cannot result
in a binding contract.[3] One purpose of the mistake in bid rules is to
insure that the integrity of the competitive bidding system is protected by
preventing bidders from taking advantage of the exposed prices and changing
market conditions.[4]
Public owners are typically required by law (and private
owners often out of prudence) to send a bid verification letter. Three options then arise: (1) if the
contractor can prove both the nature of the mistake and the intended bid, it
will be allowed to raise the bid; (2) if the contractor cannot prove both (by a
preponderance of the evidence), it may be allowed to withdraw; or (3) the
contractor, whether it alleges a mistake or not, may be entitled to take the
contract at the low price. For example,
the contractor may state that $400,000 is its bid and it can do the job, or,
recognizing that it is a mistake but being unable to provide the necessary
proof, may be willing to accept the loss on a high visibility project,
especially if it feels it will lead to other work. Nonetheless, even if a contractor verifies
its bid, the owner, especially a public owner, is fully within its rights to
reject the bid.[5]
Section 14.407-2(a) of the
Federal Acquisition Regulations (“FAR”), entitled “Apparent clerical mistakes,”
states that:
Clerical or computational errors often readily present
themselves as bids significantly out of the range of other bids received. Clerical or arithmetic errors are the most
common types of mistakes for which relief is granted.[6] Such relief can also be granted for clerical
or arithmetic errors made by suppliers and subcontractors.[7]
Typically, a clerical mistake means the same as a simple
mathematical or other transcribing mistake.[8] Clerical errors arise when the contractor
commits an unintended typographical or mathematical mistake such as addition or
multiplication errors, failure to include components such as overhead and
profit, or reversal of discount and cost rates.[9]
Chris
Berg, Inc. v. U.S.,[10]
is a pre-FAR case illustrating the government’s duty to verify a bid containing
an obvious mistake, and to allow that mistake to be corrected pre-bid when its
nature is clerical. In Berg, a contractor made a computational
error, which resulted in its submitted bid price for a Navy project being
significantly low. Suspecting an error,
the Navy asked for the price to be reconfirmed.
In doing so, the contractor discovered the errors, and sought to reform
its pricing, which apparently would have had no effect on it being the low
bidder. The Navy refused to allow the
reformation, providing the contractor only the options of accepting the
contract at its bid price or rescinding its bid.
The Berg
contractor chose to execute a contract for its bid price, while simultaneously
reserving its rights to a contract modification correcting the bid
mistake. The pre-FAR regulation to be
adhered to by the Navy in its procurements, the Armed Services Procurement
Regulation (ASPR), allowed a bidder either to rescind a mistaken bid, or, if
proof was available that correction would not displace lower bids (again a
fairness issue), to reform the bid.
The Berg Court, in
ruling in favor of the contractor’s right to have reformed his bid, and its
motion for summary judgment, characterized the Navy’s actions as violative of
its own procurement regulations. It said
that the procurement regulations are “law which governs the award and its
interpretation as fully as if it were made part thereof.”[11] Characterizing the Navy’s actions in the
matter, it strongly held that “the award of the contract to plaintiff at the
bid price, with knowledge of its mistake and over its protest, was a clear-cut
violation of the law.”[12]
The bid mistake procedures are not designed to permit
bidders to correct judgmental errors or incorrect premises that the bidder discovers
after the opening of bids.[13] Relief is precluded for mistakes in
judgment. Such mistakes include errors
in the estimate of the cost or quantity of materials.[14] “Mathematical errors refer to clearly evident
errors, such as misplacing a decimal point, or erring in the processes of
addition, subtraction, division or multiplication. The choice of an algorithm in preparing its
offer is a mistake in judgment, not a mathematical or arithmetic mistake.[15] As the court said in Ruggierio v. United
States,[16]
“the mistake . . . must be . . . a clear cut clerical or arithmetic error, or
misreading of specifications, and the authorities cited do not extend to
mistakes of judgment. When a bidder
makes a business judgment, it assumes the responsibility that the judgment may
be faulty and is “taking a conscious gamble with known risks.”[17]
In Giesler v.
United States,[18]
the Court stated “misreading of the specifications includes mistakes such as
omissions of costs or mistaken belief about what is called for in specifications. In that case, the Giesler court reversed the trial court holding that a contractor’s
failure to read the specifications cannot be considered a misreading of the
specifications and that such a mistake based upon a mistaken judgment does not
entitle the contractor to reformation of its contract.
The Giesler case
continued that generally “contractors are barred from obtaining equitable
relief for mistakes in their bids that arise from other than ‘a clearcut
clerical or mathematical error, or a misreading of the specifications’.”[19] The Court went on stating that its case law
interpreting the Government’s duty to examine bids for mistakes uniformly
evaluates the duty only in instances where the alleged error was contained in a
contractor’s original bid, not in other subsequently submitted papers.[20]
After the opening of bids,
contracting officers shall examine all bids for mistakes. In cases of apparent mistakes and in cases
where the contracting officer has reason to believe that a mistake may have
been made, the contracting officer shall request from the bidder a verification
of the bid, calling attention to the suspected mistake. Section 14.407-3(g) of the FAR
requires that:
(i)
That its bid is so much
lower than the other bids or the Government’s estimate as to indicate a
possibility of error;
(ii)
Of important or unusual
characteristics of the specifications;
(iii)
Of changes in requirements
from previous purchases of a similar item; or
(iv)
Of any other information,
proper for disclosure, that leads the contracting officer to believe that there
is a mistake in bid.
Regarding the adequacy of the verification request, in Klinger
Constructors, Inc.,[21]
the Board summarized the requirements as follows:
(T)he
bid verification request should aim at informing the bidder of all the
pertinent factors that indicate to the Contracting Officer that an error might
have been made. The adequacy of
verification will turn on an assessment of the reasonableness of the
contracting officer’s disclosure.
“The man who makes no
mistakes does not usually make anything.”
—
Edward
J. Phelps
Typically a mistake must be either
mutual or, if unilateral by the contractor, so apparent to the agency as to
charge the contracting officer with notice of the probability of mistake.[22] If the mistake alleged for the first time
after award is a mutual mistake where the owner and the bidder have made the
same mistake so that the contract does not express the agreement that the
parties intended, the contract may be reformed to reflect the true intent of
the parties.[23]
Imputing knowledge to the owner can be difficult. For example, if a low bid was very close to
the owner’s estimate and the owner had no actual knowledge of any mistake in
the low bid or in the government estimate, then absent facts which reasonably
would alert one to suspect the mistake in bid, the Contracting Officer has no
duty to ask the low bidder to verify its bid or to review the government
estimate for error.[24] A difference in bid price alone is not
necessarily enough to put a contracting officer on notice that a mistake has
been made even if the price differential is great.[25]
Hunt Constr. Co. v. U.S.,[26]
demonstrates that the government need not provide an opportunity to all bidders
to reform their bids based on its knowledge of one bidder’s mistake. The Hunt
Constr. plaintiff was the successful bidder on a Department of Veteran’s
Affairs construction project. It brought
suit to collect taxes it claimed were not included in its bid, but were
required to be paid by it in connection with the project. The solicitation for bid included a notice
that all applicable taxes were to have been included in the bidders’
pricing. However, it also included a
clause stating that any available exemptions from taxes should be sought by the
bidders.
During the course of the project, the contractor requested
that the government designate it as a government “purchasing agent”, apparently
in hopes that governmental exemption from certain taxes would then accrue to
the contractor via such agency. The
government, feeling such designation not in its interest, declined to do so,
and the contractor was left with a tax burden not accounted for in its bid
pricing.
One of the Hunt
Construction plaintiff’s assertions was that under 14.407-1 the government
was obligated to verify its bid before the award, because it had constructive
notice, through an exclusion of taxes in another bidder’s proposal, that an
ambiguity regarding taxes existed in the IFB.
Eschewing this argument, the Court of Appeals reiterated the FAR
14.407-1 general rule that a known bid defect should prompt a verification by
the awarding agency, but refused to apply it in the matter.
Pointing out that the plaintiff was arguing not that a
mistake in its own bid should have prompted a verification, the court said,
“the government, when confronted with one bidder’s unreasonable interpretation
of the contract, does not have an obligation to verify other bids to ensure that no other bids incorporated the same
unreasonable contract interpretation.”[27]
The Hunt Constr.
holding is consistent with the general rule that the government’s duty to warn
a bidder of problems in a bid is limited to situations in which the awarding
agency knew or should have known that a bid: a) included an obvious
typographical error; b) included an obvious computational error; or c) was
based upon an obvious misreading of the project specifications.[28]
This concept is particularly well illustrated by J. Rose Corp. v. U.S.[29],
a case in which a contractor asserted that its unit price bid for excavation
was so low as to have required a verification of its bid by the Corps of
Engineers. While the contractor’s unit
price for “unclassified” excavation was significantly lower than the
government’s estimate, the contractor’s overall bid was less than two percent
lower than the government’s estimate for the project. Despite the fact that the next lowest
bidder’s price was nearly $100,000 higher, the Claims Court determined that
“under all the circumstances presented at trial, plaintiff’s bid was not so low
as to necessarily alert the contracting officer that the bid was the result of
plaintiff’s mistake…..nothing in the bid, aside from the price differential,
could have alerted the contracting officer to the possibility of an error.”[30]
The most common situation where the owner is held to be on
notice of the possible error is a wide disparity between the low bid and the
other bids and/or the owner’s independent estimate.[31] Often this will be a judgment call since if
there are a cluster of bids relatively close to the putative awardee, a mistake
may not be suspected.[32]
The burden continues to remain squarely with bidders to
assure themselves that their pricing is accurately presented. Without sufficient and apparent reason for
the need for a verification, a contracting agency has no obligation to assure
itself that every bid is without error.
In cases like Hunt Constr. and
J. Rose, it was the bidder’s, not the
government’s failing that was the cause of any ill-considered estimating done,
and contracting undertaken by the bidders.
“When a mistake is suspected, the contracting officer must seek
verification of a contractor’s bid; yet, government officials are not required
to speculate as to the bases of the contractor’s bid.”[33]
While there are relatively few litigated cases where the
owner actually knows of an error and awards without adequate verification, it
does happen.[34]
Under the federal
system: FAR 14.407‑4 states:
Mistakes alleged or disclosed after award shall be
processed as follows:
(i)
The contractor’s file copy
of the bid,
(ii)
The contractor’s original
worksheets and other data used in preparing the bid,
(iii)
Subcontractors’ and
suppliers’ quotations, if any,
(iv)
Published price lists, and
(v)
Any other evidence that
will serve to establish the mistake, the manner in which the mistake occurred,
and the bid actually intended.
The claimant must prove two
things: the nature of the mistake and
the expected bid. The general rule is
that both must be proven by a preponderance of the evidence. However, a preponderance of the evidence is a
sliding scale. If the closest bid is
$600,000 and the awardee’s bid is $400,000, and the awardee alleges a mistake
and wants to go from $400,000 to $425,000, that will be allowed. However, if the awardee wants to raise the
bid to $599,999, even though theoretically the same preponderance of the evidence
will attach to avoid harming the integrity or the process, the owner will
typically demand strict proof and scrutinize it thoroughly.
The contractor must also show what the intended bid would
have been. This is especially important
in sealed bidding when all the bids are publicly known by that point. Caselaw indicates that it is not necessary to
prove the intended bid down to a dime, but it must be in a relatively narrow
range. The closer the correction brings
the bid to the next low bid, the greater the need for clear evidence and the
stricter the examination of that evidence.[35]
Clear and convincing evidence of an intended bid price
cannot be ascertained where the work papers of the bidder seeking correction do
not adequately account for profit or overhead in the bid, since an unexplained
failure to provide such customary items call into question what bid price was
actually intended.[36]
The Comptroller General of the United States has allowed
correction when the contractor has been able to prove by clear and convincing
evidence that an error occurred, the manner in which the error occurred and the
amount of the intended bid price.[37] Types of evidence presented are normally
affidavits, bid preparation worksheets, even if they have erasures on them,
since that goes to the weight to be accorded such documents.[38]
Most of the above rules were designed for sealed bidding
(IFBs) but they also apply to Negotiated Contracting. FAR 15.508 dealing with negotiated
procurements (Request for Proposals (“RFPs”)) states that “mistakes in a
contractor’s proposal that are disclosed after award shall be processed
substantially in accordance with the procedure for mistakes in bids at
FAR 14.407‑4.” FAR 15.306
addresses pre-award mistakes.
FAR 15.306(a)(2)
states:
If award will be made without conducting discussions,
offerors may be given the opportunity to clarify certain aspects of proposals (e.g., the relevance of an offeror’s past performance information and adverse
past performance information to which the offeror has not previously had an
opportunity to respond) or to resolve minor or clerical errors.
FAR
15.306(b)(3)(1) adds that in other circumstances such communications may
address “Ambiguities in the proposal or other concerns (e.g., perceived deficiencies, weaknesses, errors, omissions, or
mistakes (see 14.407))” [emphasis added].
In an RFP a correction of a mistake is appropriate where the
existence of the mistake and the proposal actually intended can be clearly and convincingly
ascertained from the RFP and the proposal itself.[39]
Typically, contracting officers resolve mistakes in RFPs
during the discussions process. The
purpose of the discussions is to allow the contractors to be aware of the
owner’s concerns about their proposals, and especially those areas where there
are deficiencies or possible mistakes so that the contractors can take those to
heart in preparing their final proposal revisions. So it is incumbent upon government
negotiators to be as specific as practical considerations will permit in
advising offerors of the corrections required in their proposals.”[40] The agency’s failure to discuss specific
deficiencies in the offeror’s proposal may preclude meaningful discussions
which is a requirement.[41] Merely correcting a mistake is not considered
to be the entrance into formal discussions under the FAR.[42] The correction of a mistake, without
conducting discussions with all offerors, is appropriate only where the
existence of the mistake in the proposal actually intended can be clearly and
convincingly established from the RFP and the proposal itself.[43]
The issue of a unilateral mistake in bid was discussed in Information International Associates, Inc.
(“IIA”) v. The
The Court cited McClure
Elec. Constructors, Inc. v. Dalton,[45]
in which the United States Court of Appeals for the Federal Circuit set forth
the elements of proof necessary to establish a unilateral mistake in the
context of a government contract:
The contractor must show by clear and convincing evidence
that:
(1) a
mistake in fact occurred prior to contract award;
(2)
the mistake was a clear-cut, clerical or mathematical error or a misreading of
the specifications and not a judgmental error;
(3)
prior to award the Government knew, or should have known, that a mistake had
been made and, therefore, should have requested bid verification;
(4) the
Government did not request bid verification or its request for bid verification
was inadequate; and
(5) proof
of the intended bid is established.[46]
The Court reviewed the facts
against the five elements focusing primarily on item (3). The Court stated that the CO should have been
alerted to a possible error in [IIA's] Air Force Base pricing as a result of
“Abstract of Proposal/Quotations” to compare [the IIA and Awardee's] final
monthly and yearly proposed prices for the five Air Force Bases.”
The Court further stated that “price disparity alone is not
enough to impute the CO with constructive notice of a possible error in [a]
bid, if there are other factors that reasonably could explain the
difference”. The Court went on to state,
however, that “the size of the disparity between the IIA's bid and the next
lowest bid, as evidenced by the Air Force Base abstract, and the absence of
other factors negating an inference of error, should have alerted the CO to the
mistake.” The Court decided that IIA
“had established by clear and convincing evidence that the CO should have known
of a possible error” in the IIA final proposal revision. The Court reformed the contract and awarded
$174,882 plus interest for 2 years to IIA.
Typically the contractor must be presented with three
options: either taking the bid at the
offered price, a correction upward or to withdraw. If a
bidder requests permission to correct a mistake and clear and convincing evidence
establishes both the existence of the mistake and the bid actually intended,
the agency head may make a determination permitting the bidder to correct the
mistake; provided, that if this correction would result in displacing one or
more lower bids, such a determination shall not be made unless the existence of
the mistake and the bid actually intended are ascertainable substantially from
the invitation and the bid itself.
While FAR 14.407-3 precludes the use of mistake correction
techniques to make non-responsive bids responsive, the Comptroller General has
sometimes permitted limited correction of a non-responsive bid at the same
standards he used to correct bids which displaced low bids are satisfied.[47]
When a bidder requests to
correct a mistake in its bid, and clear and convincing evidence establishes
both the existence of a mistake and the bid actually intended, correction will
normally be allowed.[48] For instance, Section 14.407-3(b) states
that: “If—
If the evidence is clear and
convincing as to the existence of a mistake and the bid actually intended and
the bid as uncorrected and corrected is the lowest price received, the agency
had been determined to allow bid correction but not bid withdrawal. FAR 14.407-3(b). On the other hand, if “(1) the evidence of a mistake
is clear and convincing only as to the mistake but not as to the intended bid,
or (2) the evidence reasonably supports the existence of a mistake but is
not clear and convincing, an official above the contracting officer, unless
otherwise provided by agency procedures, may make a determination permitting
the bidder to withdraw the bid. “ FAR 14.407-3(c).
Sometimes allowing one offeror
to correct its bid can be considered to be improper and unfairly prejudicial to
the other proposers because it allows one offeror to change its proposal after
the bid date or date for receipt of initial proposal.[49] In Roy
McGinnis & Company, Inc.,[50]
the agency was held to have incorrectly allowed a bidder to correct mistake and
the protest by a competitor was sustained.
Where a contractor seeks rescission, that remedy is
typically available only where reformation is not.[51]
Reformation is to reflect the true agreement of the parties
on which there was a meeting of the minds and typically permissible only with
plain mistakes, usually clerical or mathematical.[52] To establish reformation, the contractor must
show by clear and convincing evidence that: a mistake in fact occurred before
contract award; the mistake was a clear cut, clerical or mathematical error or
misreading of the specifications and not a judgmental error; before the award
the government knew or should have known that a mistake had been made and,
therefore, should have requested bid verification; the government did not
request bid verification or its verification request was inadequate; and proof
of the intended bid is established.[53]
If the bidder refuses to accept the contract at its bid
price, the owner may then have recourse to the contractor’s bid bond.
“The cautious seldom err.” —
Confucius
Construction bidding is often chaotic, full of pressure and
drama. Many subcontractor and supplier
bids are submitted to the general contractor minutes before the general
contractor’s bid is due. The general
contractor frequently must make quick decisions based on limited facts and
under extreme time pressures. Not
surprisingly, bid mistakes are often made.
In many cases, the bidder is not “free from blame” and, in
fact, may be guilty of an “egregious blunder.”[54] Nonetheless, the law of bid mistakes provides
an equitable remedy to avoid overreaching by the other party, who knows or
should know about the costly mistake and accepts the bid anyway.[55]
The general contractor who gets caught in the bid mistake
web may have several options to consider -- against the owner to rescind the
bid or change (reform) the price; or against the subcontractor who gave him a
mistaken bid but then seeks to walk away from it.
“To
err is human, to forgive, divine.” — Alexander Pope
The general contractor who discovers a bid mistake after bid
opening and before contract award usually will request permission from the Government’s
Contracting Officer to correct or withdraw the bid. The procedures are addressed in FAR
14.407. If the Government refuses the
request, the contractor has several options.
It may pursue a bid protest at the GAO/Comptroller General[56],
or it may file a disappointed bidder action at the Court of Federal Claims.[57] If the Government insists on making the award
anyway, despite the claim of mistake, some contractors have sued for
reformation[58] or
rescission[59]; others
have filed a claim at a board of contract appeals for equitable adjustment
under the Contract Disputes Act.[60]
The strategy of accepting the contract and then pursuing a
claim sometimes backfires. In Wickham Contracting Co. v. United States[61],
the bidder discovered an error in contract drawings and pointed it out to the
Government. The Government told the
bidder to withdraw its bid or accept the contract as bid. The bidder, thinking the mistake was by the
Government, confirmed its price. After
award, the contractor made a claim. The
court denied the claim. By confirming
its bid, the court held, the contractor assumed the risk of the error.
A bidder may not, however, protest award to a competitor by
claiming the competitor’s price was so low it surely must have made a
mistake. The disappointed bidder has no
standing to claim an error in the bid of another.[62] The one exception is where the bid of the
disappointed bidder is rejected for mistake but another bid containing a
substantially similar mistake is accepted.[63]
Reformation in price, even where otherwise available as a
remedy, may yield only half-a-loaf.
Cases have held that the recovery, or price adjustment, may not exceed
the difference between the low bid and the second low bid. One case suggests that the difference in
prices is the ceiling on the damages[64]
while another refers to it as the measure of them.
In a number of cases, the Government asks for verification
of the bid and the general contractor confirms its price, only to discover
later, to its chagrin, that it did in fact make a bid mistake. Does the earlier confirmation kill the
contractor’s chances of obtaining relief?
The answer, generally, is “no.”[65] The cases, however, are very fact specific,
and the overall test is one of “reasonableness.”[66] The key is whether the Government has made an
adequate effort of verification, based on the facts available to it at the
time. Nonetheless, the courts tend to be
ambivalent about how far the Government’s hunt for the mistake should go.
In Ruggiero, for
example, the bidder’s pre-bid telephone call to an unidentified Government
representative was held to be sufficient to put the Government on notice of the
bid mistake. The court noted that the
telephone was a channel of communication permitted by the IFB, so “we do not
think the [contracting] officer can wrap himself in a cloak of ignorance . . .
”. The court also held:
If
persons seeking to do business with the Government are decently treated by it,
there will be more of them and they will offer more favorable terms, while
experiences such as the [Plaintiffs] have undergone, will, if common, cause
many to take their business elsewhere.[67]
Contrast Ruggiero
with Dakota Tribal Industries v. Untied
States.[68] In the latter case, the bidder – a small
business contractor in the SBA’s Section 8(a) program – relied on a supplier’s
quote for a material that did not meet the specifications. The court faulted the bidder for not
verifying the supplier’s price, which was half that of the next-lowest
price. The bidder countered that the
price was a problem also apparent to the Government, which had received a
breakdown of cost elements. Overall,
however, the bid was 8% to 13% higher than previous bids on a similar contract.
Accordingly, the court ruled that Government had no reason
to believe the bid contained a mistake.
The court held the bidder was liable for the mistakes of its suppliers.[69] In conclusion, the court rebuked the bidder
as follows: “[t]he contracting officer
must seek to ensure that the bid is fair, but it is not required to act as
‘nursemaid’ for bidders.”[70]
In addition, the courts have repeatedly held that “mere
price disparity” is insufficient to put the Government on notice of a bid
mistake.[71] This rule, it seems, can be taken too far,
for it is the rare situation that the Government at first knows more than that
the prices seem out of line with each other.
At the very least, the price disparity should start the verification
process and the Government should share what it knows. If the bidders’ confirmation reveals no
further issue, the verification duty is satisfied.[72]
The rules for bid mistakes are generally the same in the
state contract arena.[73] The Model Procurement Code permits both
correction or withdrawal of bids, before or after contract award, under certain
conditions.[74] Some states, however, permit only rescission
of the contract and not reformation of the price, either by the equitable
doctrine of “mistake” or by regulation.[75] In these states, the courts reason that the
remedy of reformation is not available because the mistake was not mutual and a
price revision impairs the integrity of the bidding process. Further, the courts cannot re-write the
contract for the parties.[76]
In some states, however, no remedy at all is available to
the bidder who makes a bid mistake. In
these states, the public bidding statute requires the bidder to keep its bid
open pending contract award and to forfeit its bid bond if it refuses to
execute the contract. These statutory
requirements, the courts have held, give no leeway in affording relief to the
bidder,[77]
even when the mistakes are obvious to the public owner. For example, in Clark Construction,[78]
the bidder wrote in the figure for one bid item as $368,000 but wrote out the
words “three hundred and sixty-eight dollars.”
The overall bid of $1,119,609 was based on the $368,000 sum. The bid instructions stated that written
words controlled over figures. Applying
this instruction, the public owner accepted a bid of $816,977. The bidder refused to perform and sued for
relief. Because of the statute, the
court held it had no option but to forfeit the bid bond. In J.D.
Graham,[79] the
bidder proved a bid mistake of $100,000 and notified the public owner within
hours of bid opening, but was denied any relief.
When bids are conducted between private parties, the common
law rules of “mistake” provide the framework for analysis.[80] There can be no meeting of the minds where
the offeree knew or should have known of the bid mistake. The offeree is not permitted “to snap up an
offer that is too good to be true; no contract based on such an offer can then
be enforced by the acceptor.”[81] In fact, under such circumstances, the
offeree is not hurt when the bidder rescinds its bid. “To be denied the privilege of taking
advantage of another’s mistake is not to suffer damage.”[82]
As in the world of public contracts, a general request for
verification may not be enough. Where
the other party suspects a particular error, non-specific inquiry -- such as,
whether the bidder is “satisfied” with its bid -- is not enough to eliminate
the suspicion; a perfunctory verification of this sort is simply doomed to
fail.[83]
“More people would learn
from their mistakes if they weren’t so busy denying them.” — Harold J. Smith
General contractors almost
always must rely on subcontractor quotes when assembling the general bid. On top of that, the general contractor’s bid
usually must remain firm for a period of time and the promise to keep the bid
open is secured by a bid bond; by contrast, the subcontractor seldom provides a
bid bond, unless required by statute.[84] If the general contractor is awarded the
project, and the subcontractor refuses to perform, the general contractor then
must re-procure the work at a price inevitably higher than the original
bid. As a result, the general contractor
is saddled with the increased subcontracting cost before it even breaks ground.
Two legal theories have been advanced against subcontractors
in these situations: breach of contract and promissory estoppel (also called
detrimental reliance).
The general contractor frequently claims that the
subcontractor is not free to withdraw because the parties have reached a
binding contract. As discussed below,
general contractors quickly learn, to their dismay, that traditional rules of
contract law often fail to provide a remedy.
“If we practice an eye for
an eye and a tooth for a tooth, soon the whole world will be blind and
toothless.”—Gandhi
Merely receiving a subcontractor’s bid and relying on it
does not, by itself, create a contract.[85] A subcontractor’s bid is an offer which the general
contractor must accept to create a contract.[86] By informing the subcontractor that its bid
was “low,” the general contractor does not accept the bid and create a binding
contract.[87] Also, listing the subcontractor in the
general bid does not create a contract or commitment between the general
contractor and the subcontractor.[88] Finally, in the construction world, the
“mirror image” rule requires that the acceptance be an exact mirror image of
the offer. In many cases, the general
contractor fails to accept the offer without modifying it in some way.[89]
For example, in Neshaminy
Constructors, Inc. v. Concrete Building Systems, Inc.,[90]
the general contractor called the subcontractor after the bid opening to
request that it break out a price for shop drawings and start that work before
the owner made the prime contract award.
Later, it sent a letter of intent that contained terms different or
additional to the subcontractor’s proposal.
The court held that the general contractor made a counteroffer, which
acted as a rejection, terminating the original offer of the subcontractor. The subcontractor, therefore, was free to
withdraw.
When there is a “battle of the forms” in a construction
transaction, that is, when the general contractor and subcontractor exchange
dueling form subcontracts, the most likely result is that no contract is
formed.[91]
Because traditional principles of contract law often fall
short in providing a remedy to general contractors, courts developed the
doctrine of promissory estoppel.[92] Section 90 of the Restatement (Second) of Contracts provides as follows:
A
promise which the promisor would reasonably expect to induce action or
forbearance on the part of the promise or third person and which does induce
such 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.
In the construction bidding context, the general
contractor’s reasonable reliance on the bid of a subcontractor holds the
subcontractor to its bid for a reasonable period of time. If the subcontractor refuses to perform, the
general contractor may obtain damages equal to the difference between the
subcontractor’s bid and the amount paid to the replacement subcontractor. As a whole, the doctrine has the “practical
effect of encouraging subcontractors to be cautious when formulating their bids
. . . and satisfies the needs of the modern construction industry.”[93]
There are four elements to be provided for recovery:
(1)
a clear and definite offer;
(2)
a reasonable expectation that the offer will
induce reliance in the other party;
(3)
actual and reasonable reliance by the offeree;
and
(4)
a detriment, which can only be avoided by
enforcement to the offer.[94]
Each element is discussed below.
First, the subcontractor’s bid must be to perform a defined
scope of work for a fixed price.[95] It must not be a mere estimate or an
invitation to make an offer. A bid
which says it is informational only and that there is no obligation until a
contract is executed does not qualify as a “firm offer”; it is not one that may
be relied upon.[96] In addition, a subcontractor’s bid that is
ambiguous as to the scope of work covered also does not qualify.[97]
Next, the general contractor must prove the subcontractor
submitted its bid with the expectation that the contractor would rely on
it. Today, it is generally understood
that the subcontractor’s bid is submitted to induce a contract award.[98] In Citiroof
Corp. v. Tech Contracting Co., Inc.,[99]
the court noted that expectation that the general contractor will rely on the
sub-bid may dissipate through time. In
other words, the longer the general contractor waits to inform the subcontractor
that it has relied on the bid, the less the subcontractor anticipates that its
bid is likely to be accepted.
The general contractor’s reliance must be both actual and
reasonable.[100] This is where the battle lines are most
frequently drawn. It seems common sense
that the general contractor must actually use the subcontractor’s bid price in
preparing its bid to the owner.[101] Some contractors, however, persist in
pursuing claims even when another subcontractor’s price was used. These claims inevitably fail.[102]
What happens if the general contractor “uses” the
subcontractor’s bid but adjusts it in some way?
In Neshaminy Constructors, the
general contractor disagreed with the subcontractor over the costs of using a
particular crane. The subcontractor
valued the item at $200,000. The general
contractor thought no additional costs would be required. In its work papers, the general contractor
“split the difference,” adding $100,000.
It thought the issue would be worked out later. The court noted that the general contractor
was not free to ignore the terms of the subcontractor’s bid.[103] In Alaska
Bussell Electric Co., by contrast, the court upheld a jury verdict in favor
of the general contractor where the electrical subcontractor bid $477,498 but
the general contractor used $488,606 in its bid to the Government. The jury reduced the damages by the
difference, or $11,108.[104]
The reasonableness of the reliance depends on several
factors. The passage of time between the
bid day and communication with the subcontractor may make reliance
unreasonable.[105] In addition, as discussed below, the
reasonableness of the general contractor’s reliance is frequently evaluated in
reference to the general contractor’s bad behavior. Pre-bid, the bad behavior may involve
“snapping up” a bid too good to be true—i.e.,
a bid infected with a mistake. Post-bid,
the bad behavior includes bid shopping and bid chopping.[106]
Just as the general contractor may employ the equitable
doctrine of mistake in dealing with the owner, so too the subcontractor may
advance similar reasons why it is not reasonable to rely on its bid. A bid mistake is perhaps the most common
scenario that leads to a promissory estoppel claim. The doctrine of promissory estoppel does not
extend, however, to a subcontractor bid that the general contractor knew or
should have known was materially erroneous.[107] As stated in Drennan Paving v. Star, “[a]s between the subcontractor who made
the bid and the general contractor who reasonably relied on it, the loss
resulting from the mistake should fall on the party who caused it.”[108]
The bid verification duties of the general contractor depend
upon the circumstances. In their
treatise, Bruner & O’Connor suggest that, as a rule of thumb, a disparity
of ten per cent or more in bid prices triggers the duty to verify.[109] A number of cases, however, have permitted
much larger differences to slide through, provided the overall circumstances do
not raise a red flag.
In Architectural Metal
Supplies, Inc. v. Consolidated Systems, Inc., for example, the discrepancy
of 56% between two bids to supply metal decking was not, by itself, sufficient
to put the contractor on notice of a bid mistake.[110] And in Powers
Const. Co., Inc. v. Salem Carpets, Inc.,[111] the difference between the first two bids was
more than double; the difference between the first and third bids was two and
one half times. Testimony was adduced,
however, from the general contractor that it is “not uncommon” to have
differences between high and low bids of subcontractors that are “more than
double.” A jury verdict in favor of the
general contractor was affirmed on appeal.
Likewise, in Riley Bros. Constr.,
Inc. v. Shuck,[112]
the general contractor did not believe that a masonry subcontractor’s bid was
too low, even though it was 24% lower than the second bid. The president testified that bids for such
work may vary by 25% to 40%, due to a bidder’s schedule, supervision and crew
skills. The court upheld judgment in
favor of the general contractor.
When the general contractor seeks verification, the
verification must be adequate under the circumstances. A non-specific request to confirm a paving
subcontractor’s bid that was 290% lower than the second bid and 350% lower than
the third bid did not excuse the general contractor. Eight witnesses testified that they had never
seen a disparity in paving bids that large.[113] In another case, by contrast, the general
contractor asked the roofing subcontractor to confirm its bid, after seeing a
disparity of 50%. The subcontractor
discovered one of two bid mistakes and raised its price slightly, leaving a
disparity still of 40%. The court found
that the general contractor’s reliance on the bid was reasonable, because “it
is not the responsibility of the general contractor to guarantee the accuracy
of the subcontractor’s bid.”[114]
Because promissory estoppel is an equitable doctrine,
recovery to the general contractor may be denied, even if the other elements
are proved, unless the general contractor shows that “injustice can only be
avoided through enforcement of the promise.”[115] “Injustice” is a relatively undefined
element, which gives the courts broad discretion.[116] Generally, unless the general contractor has
“clean hands,” the doctrine of promissory estoppel is not available.
Courts, however, consistently reject claims where there is
evidence that the general contractor engaged in bid shopping or bid chopping.[117] Bid shopping is the practice in which the
general contractor uses the lowest bid it receives to persuade other
subcontractors to lower their bids or submit a bid lower than the “shopped
bid.”[118] Bid chopping (a.k.a., bid chiseling) occurs
when the general contractor, post-bid, asks the subcontractor to lower its bid
without reducing the scope of work.[119] In both cases, although subcontractors regard
them as unethical, the practices are fairly widespread. General contractors may not realize, however,
that bid shopping or bid chopping will cause the court to reject a later claim
of promissory estoppel, either on the ground that the contractor failed to rely
on the bid or that the activity resulted in a counteroffer. Simply put, general contractors who expect to
hold subcontractors to their bids, must likewise resist the temptation to chop
or shop that bid.
ENDNOTES
[1] For detailed
information, see Gammon & Allen, Post
Award Relief for Mistakes in Bids, Briefing Papers No. 88-11 (October
1988). 8 Briefing Papers Collection 213;
Feldman, Government Contract Awards: Negotiation and Sealed Bidding, Clark
Bossian Callahan (1994); Bastianelli, et al., Editors, Federal Government Construction Contracting, ABA, 2003, Chapter 3, Sealed Bidding, by James F. Nagle
and J. Todd Henry; and Tom Petouska, Mistakes
In Bid, Unilateral Mistakes, Contracts Unlimited Inc., 2004-2007.
[2] The Federal Acquisition
Regulation (FAR) and Federal case law provides the most detailed guidance on
the procedures to be employed when dealing with mistakes in bids. Since these rules apply nationwide and
because the rules of many states are patterned after the federal rules, we
shall focus on this body of law.
[3] See
Wender Presses, Inc. v. United States, 343 F.2d 961 (Ct. Cl. 1972) (No
enforceable contract can exist where the bidder seeking avoidance advises the
Contracting Officer of a mistake before award, even after the bid opening.)
[4] See
Black Diamond Energies, Inc., B-241370, 91-1 CPD ¶ 119.
[5] See Drataros Construction, Inc., Comp.
Gen. B-254600, 94-1 CPD ¶ 1.
[6] E.g., Paragon Energy Corp. v. United
States, 645 F.2d 966 (Ct. Cl. 1981) recons. denied, 230 Ct. Cl. 884
(1982).
[7] R.T. Richards Construction Company, Comp.
Gen. B-258923, 95-1 CPD 103.
[8] Ralph
Korte Construction Company, Inc., B-225734, 87-1 CPD ¶ 603.
[9] Government
Micro Resources, Inc. v. Department of Treasury, GSBCA 12364-TD, 94-2 BCA
¶ 26680.
[10] 426
F.2d 314 (Ct. Cl. 1970)
[11] 426
F.2d at 317, paraphrasing G.L. Christian
& Assoc. v. U.S., 312 F.2d 418, 160 Ct. Cl. 1, rehearing denied, 320 F.2d 345, 160 Ct. Cl. 58, cert. denied, 375 U.S. 954, 84 S.Ct. 444
(1963)
[12]
[13] (Innovative Refrigeration Concepts, B-242515,
91-1 CPD ¶ 332); Zeta Construction
Company, Inc., B-244672, 91-2 CPD ¶ 428.
[14] Government Micro-Resources, Inc. v.
Department of the Treasury, GSBCA 12364-TD, 94-2 BCA ¶ 26680.
[15] Rockwell International Corp., ASBCA
41095, 95-1 BCA ¶ 27459.
[16] 420 F.2d 709 (Ct. Cl. 1970) at 335.
[17] Liebherr
Crane Corp. v.
[18] 232 F.3d 864 (Fed. Cir. 2000).
[19] Id
at 872, citing Liebherr Crane
Corp. v. United States, 810 F.2d 1153, 1157 (Fed. Cir. 1987).
[20] See McClure
Elec. Constructors, Inc. v.
[21] ASBCA
41006, 91-3 BCA ¶ 24218 at 121, 125.
[22] See Northern NEF, Inc., ASBCA No. 44996,
94-3 BCA ¶ 27094.
[23] Jim
Sena Construction Company, IBCA 3761, et al., 98-2 BCA
¶ 29891. But see Foley Company
v. United States, 36 Fed. Cir. 788 (1996).
[24] Triax Pacific, Inc., ASBCA No. 41891,
94-1 BCA ¶ 26380.
[25] Packard Const. Corp., ASBCA No. 45996,
94-1 BCA 26512.
[26] 381
F.3d 1369 (Fed. Cir., 2002)
[27] 381
F.3d at 1376 (emphasis in original)
[28] See
CTA, Inc. v.
[29]
[30]
[31] See
Government Micro-Resources, Inc. v. Department of Treasury, GSBCA 12364-TD,
94-2 BCA ¶ 26680 (Bidder’s price was 62 percent less than the government’s
lowest estimate, 31 percent less than the supplier’s schedule price, and 33
percent less than the other vendor’s comparison quote.)
[32] See
R.J. Sanders, Inc. v.
[33] Troise v. U.S.,
[34] See Walter Straga, ASBCA 26134,
83-2 BCA ¶ 16611.
[35] Vrooman
Constructors, Inc., Comp. Gen. B-226965.2, 87-1 CPD 606.
[36] R.J.S. Constructors, Inc., B-257457,
94-2 CPD ¶ 130.
[37] 53
Comp. Gen. 232 (B-179084) 1973.
[38] See
H.A. Sack Company, B-278359, 98-1 CPD 27.
[39] Contrak International Corp., B-237122.2,
90-1 CPD ¶ 481.
[40] 52
Comp. Gen. (B-177008) (1973).
[41] Cotton
& Company, LLP, Comp. Gen. B-282808, 99-2 CPD 48.
[42] R&B Rubber and Engineering, Inc.,
B-214299, 84-1 CPD ¶ 595.
[43] PHP Healthcare Corp., B-251799, 93-1 CPD
¶ 366.
[44] 74 Fed. Cl. 192 (2006).
[45] 132 F.3d 709 (Fed. Cir. 1997).
[46]
[47] United
Food Services, 65 Comp. Gen. 167 (B-218228.3), 85-2 CPD ¶ 727.
[48] See
[49] See Contack International Corp.,
B-237122.2, 90-1 CPD ¶ 481.
[50] B-239710, 90-1 CPD ¶ 251.
[51] McDonald Welding and Machine Company, Inc.,
ASBCA No. 36284, 94-3 BCA 27181.
[52] American President Lines, LTD v.
[53] Solar Foam Insulation, ASBCA No. 46921,
94-2 BCA ¶ 26901.
[54] Ruggiero v.
[55]
[56] H.A. Sack Co., Inc., B-278359, 98-1 CPD
¶ 27 (1998).
[57] Griffy’s Landscape Maint., LLC v. United
States, 46 Fed. Cl. 257 (2000).
[58] E.g., Information Int’l Assocs., Inc. v.
[59] Ruggiero, 420 F.2d 709.
[60] Wickham Contracting Co., Inc. v. United
States, 212 Ct. Cl. 312, 546 F.2d 395 (1976).
[61]
[62] PHT Supply Corp. v.
[63]
[64] Shepard v.
[65] H.A. Sack Co., Inc., B-278359, 96-1 CPD
¶ 43, 1998 WL 20,722.
[66] Chernick v.
[67] 420
F.2d at 716.
[68] 34
Fed. Cl. 593 (1995).
[69]
[70] Id. at 597, citing Aydin Corp. v. United States, 229 Ct. Cl. 309, 317, 669 F.2d 681,
687 (1982).
[71] Wender Presses Inc. v.
[72] E.g., McClure Elec. Constructors, Inc. v.
[73] Bruner
& O’Connor on Construction Law § 2:117 (2002).
[74]
[75] City of Baltimore v. DeLuca-Davis Const. Co.,
210
[76] DeLuca-Davis Const. Co., 124 A.2d at
560.
[77] Clark Constr. Co., Inc. v.
[78] 451
So. 2d 298.
[79] 854
P.2d 917.
[80] Restatement
(Second) of Contracts §§ 151 to 158; Bruner & O’Connor on Construction Law
§ 2:117.
[81] Rushlight Auto. Sprinkler Co. v.
[82]
[83] Ace Electric Co. v. Portland General Elect.
[84] See
Massachusetts General Laws, Chapter 199, Section 44B(2).
[85] Electro-Lab of Aiken, Inc. v. Sharp Constr.
Co. of Sumter, Inc., 593 S.E.2d 170, 173 (S. C. Ct. App. 2004); AROK Constr. Co. v. Indian Constr. Services,
848 P.2d 870, 873 (Ariz. Ct. App. 1993); see generally, Kovars &
Schollaert, “Truth & Consequences: Withdrawn Bids and Legal Remedies,” 25 Construction Lawyer 5 (Summer 2006)
(“Kovars & Schollaert Article”).
[86] Fletcher-Harlee Corp. v. Pote Concr. Contractors,
Inc., 482 F.3d 247, 250 (3d Cir. 2007).
[87] Leskie v. Haseltine, 155
[88] Neshaminy Constructors, Inc. v. Concrete
Building Systems, Inc., E.D. Pa. 2007, 2007 WL 2728870.
[89] Under
the Uniform Commercial Code § 2-207, by contrast, the “mirror image” rule has
been abrogated. The parties may exchange
forms containing different terms and still reach a contract agreement.
[90] Neshaminy Constructors, Inc. v. Concrete
Building Systems, Inc., supra.
[91] E.g., Victoria Air Conditioning, Inc. v.
Lebco Constructions, Inc., 752 S.W.2d 625 (
[92] Some
jurisdictions apply the same doctrine but call it “detrimental reliance.” See Pavel
Enterprises, Inc. v. A.S. Johnson Co., Inc., 342
[93] Alaska Bussell Elec. Co. v. Vern Hickel
Constr. Co., 688 P.2d 576, 580 (
[94] Restatement
(Second) of Contracts § 90; Kovars & Schollaert Article, note 85, supra.
[95] Pavel Enterprises, note 48, supra, 674 A.2d at 533.
[96] Fletcher-Harlee Corp. v. Pote Concrete
Contractors, Inc. note 86, supra.
[97] Camosy, Inc. v. River Steel, Inc., 253
[98] Drennan v. Star Paving Co., 333 P.2d 757
(
[99] 159
[100] Hankins Constr. Co. v. Reiman Corp., 511
N.W.2d 113, 117 (1994).
[101] Pavel
Enterprises, supra.
[102] E.g.,
Lahr Constr. Corp. v. J. Kozel & Sons, Inc., 640 N.S.Y.2d 957, 960 (N.Y. Sup.
[103] Neshaminy Constructors, Inc. v. Concrete
Building Systems, Inc., supra. See generally, Bruner & O’Connor on
Construction Law § 2:109.
[104] Alaska Bussell Electric Co. v. Vern Hickel
Constr. Co., supra.
[105] Pavel Enterprises, Inc. v. A.S. Johnson Co.,
supra.
[106] Kovars
& Schollaert Article, supra.
[107] Kovars
& Schollaert Article, supra,
fn.56.
[108] Drennan v. Star Paving, supra.
[109] Bruner
& O’Connor on Construction Law § 2:129.
[110] 58
F.3d 1227 (7th Cir. 1995).
[111] 283
S.C. 302, 322 S.E.2d 30 (S.C. App. 1984).
[112] 704
N.W.2d 197 (
[113] Tolboe Constr. Co. v. Staker Paving &
Constr. Co., 682 P.2d 843 (
[114] Citiroof Corp. v. Tech Contracting Co., Inc.,
159
[115] Preload Tech, Inc. v. A. B. & J. Const.
Co., Inc., 696 F.2d 1080 (5th Cir. 1983); Restatement (Second)
Contracts § 90.
[116] See
Kovars & Schollaert Article, supra.
[117] E.g., Drennan v. Star Paving, supra; Pavel Enterprises v. A. S. Johnson Co., Inc., supra.
[118] Kovars
& Schollaert Article, supra.
[119]