Bidding & Contract Negotiation:

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Narrative

The architect’s duties in contractor selection may appear relatively minor in comparison to the architect’s role in design and construction. However, the architect’s role in contractor selection is pivotal in terms of establishing sound working relationships, limiting liability to the owner and the architect, and treating contractors fairly.

An increasingly complex design and construction environment necessitates consideration of modes of project delivery that differ from the traditional design-bid-build approach. Certainly, the recent advances in integrated project delivery provide powerful new alternatives to the traditional construction process. No matter what project delivery approach is used, however, contractor selection criteria and procedures should be clear, sound, and strictly adhered to, particularly in publicly bid work. In addition, the owner needs to be informed of the implications of straying from the rules. Attention to detail and the importance of communication should enable a smooth transition from design to the construction phase, or merging of the two project increments, and optimize the chances of achieving a successful project.

Bidding and contract negotiation are two distinct steps in traditional contractor selection. While these may constitute only a small portion of an architect’s overall services, they are a critical bridge between design and construction. Even the best design and most accurate and complete construction documentation cannot ensure success. After all, someone needs to turn the ideas represented in the construction documents into a three-dimensional physical reality. Ultimately, it is the quality of the contractor(s) and the quality of the working relationships among the owner, contractor, architect, and their subcontractors and consultants that will determine just how successful a project will be. Thus, the means used to select a contractor is a critical issue that needs to be addressed as early as possible with the client. The selection process lays the groundwork for the realization of the project and the relationships among the parties involved in the construction process.

Traditionally, contractor selection has followed a design-bid-build strategy, which separates design and construction into distinct increments and limits the choice of a contractor on the basis of lowest cost. Design-bid-build works well for a wide variety of projects of all sizes and is still widely used in the construction industry. In this project delivery method, the owner establishes one contract with the architect for design services and another with a builder (or perhaps several separate contractors each with prime contracts with the owner) for construction. The architect’s role during construction is limited to administration of the construction contract between owner and builder. Having developed a set of contract documents that establish a scope of construction work, the architect releases them to competing contractors who propose a price for completing the work. In most cases, the job is awarded to the lowest responsible bidder.

The bulk of this chapter details how the bidding process works in the context of traditional design-bid-build. Special attention is given to procedural issues and limiting liability. The remaining portion of the chapter provides an overview of contractor selection in alternative approaches to project delivery, including design-negotiation-build, design-build, and construction management. In contemporary design and construction, such approaches are often worth considering for economic, schedule, technical complexity, and project coordination reasons and thus are increasingly common. However, such project delivery methods have very different implications for project coordination and liability, and for the architect’s roles and responsibilities, than does the design-bid-build approach.

The following discussion of competitively bid contracts outlines many of the issues generally associated with contractor selection and project delivery, no matter what delivery method is employed. Following it is a detailed description of bidding procedures, followed by a review of practical and legal pitfalls in bidding and contract negotiation.

PREPARATION

Competitive bidding involves sending complete sets of contract documents to two or more contractors who bid against each other. Usually, the lowest bidder is awarded the contract. The initial tasks in a competitive bidding process include: determining whether the pool of bidders should be open or selective, qualifying contractors, and preparing and issuing the bid package.

Choosing Open or Selective Bidding
The architect and the owner decide whether they will get better results for a project by choosing from a large or a small pool of bidders. Their decision determines whether the bidding process is open or selective.

When attracting a large number of bidders is considered desirable, as is often the case in public sector work, open bidding is used. An “advertisement to bid” is published in trade or government publications or professional journals, inviting any interested contractors to participate. When a limited number of bidders are preferred, a selective bidding process is implemented. An “invitation to bid” is sent to a selected group of contractors based on reputation, recommendation, prior work, or previous relationship with the owner or the architect.

Qualifying Bidders
Prospective bidders are identified based on their ability to successfully undertake a project. In some cases, the contractor’s reputation or relationship with the owner is sufficient, but sometimes it is necessary to establish the qualifications of contractors before bidding documents are issued. This is particularly important in the open bidding process, so unsuitable bidders are eliminated and the administration effort involved in competing a high number of bidders is reduced. AIA Document A305ª, Contractor’s Qualification Statement, may be used in the pre-qualification stage of the open bidding process to help the architect and the owner assess a contractor’s suitability for the project. When completed, the document provides full details of the contractor’s business record, including business history, organization and scope of operations, past record of construction work (type, range of experience, etc.), trade and bank references, bonding company, and details of assets and liabilities.

Preparing the Bid Package
To facilitate contractor selection, the owner may fill out AIA Document G612ª, Owner’s Instructions to the Architect Regarding the Construction Contract. The information in this document is intended to provide information to the architect that will clarify the owner’s requirements and preferences. Once bidders have been identified, a package of information concerning the proposed project is issued. The package includes the following:

• Invitation or advertisement to bid
• Drawings and specifications
• Bid form
• Notice to Bidders
• Instructions to Bidders
• Proposed contract documents
• Bid security details (if required)

Invitation or advertisement to bid - The original invitation or advertisement provides a concise summary of the project. The law usually requires public work to be advertised in generally available publications. Private clients may choose to advertise in trade publications or other venues, depending on the nature of the project.

Drawings and specifications - These documents should be as complete and unambiguous as possible to make it possible for the contractor to bid accurately. They are sent free of charge to bidders. To ensure that unsuccessful bidders return the bidding documents, a deposit is usually required; this is returned upon receipt of outstanding documents. The number of sets for each bidder varies; two may be appropriate for smaller work, while larger projects may require three or more. Projects that are more complex or under time constraints may require extra sets. The architect can require additional payment for the extra work necessary to produce multiple sets. Similarly, if any of the bidders ask for extra copies, these may be provided at the bidder’s expense.

Although contract documents should be complete and unambiguous, it is not always possible to determine the full scope of a project without designating certain alternatives to be decided by the owner at a later time. This need for flexibility can be accommodated in two ways:

• Alternates. An alternate bid may be required or accepted for a specified section of the work, and this should be included in the calculation of the base bid. This procedure can help keep costs within budget but should be used sparingly. It should not be employed to give one bidder preference over the others.
• Unit prices. Unit prices supply a price per unit for materials and/or services. They offer the architect and owner a comparable means of measurement to use in comparing bids. Unit prices also provide an idea of price calculation for unknown quantities or variable factors. Use of this approach should be limited if the overall budget needs to be controlled.

Bid form - This form is sent to all bidders and contains relevant information concerning the project. Each bidder returns the document complete with the price of the work, or base bid, and any other figures that may be appropriate (e.g., alternate bids, substitutions for specified materials or services, etc.).

Notice to bidders - This notice, which may be included in the bidding documents, informs prospective bidders of their opportunity to bid and of the conditions and requirements involved.

Instructions to bidders - AIA Document A701ª, Instructions to Bidders, provides relevant information concerning the detailed requirements of the bidding process. Included are the following items:

• Definitions
• Bidding documents
• Consideration of bids
• Owner-contractor agreement
• Supplementary instructions
• Bidder’s representations
• Bidding procedures
• Post-bid information
• Performance/labor and material payment bonds (see bid security below)

Proposed contract documents - All documents intended for use in the proposed project should be sent to each bidder for examination, including the general conditions (e.g., AIA Document A201ª, General Conditions of the Contract for Construction) and any other applicable addendums or supplementary conditions. A new edition of the contract was published in 2007 with changes to contractor and client responsibilities, which should be checked carefully.

Bid security - In order to ensure each bidder’s commitment to their base bid and willingness to fulfill their obligation to sign the contract if they are selected, the owner may require some form of security, which should be submitted along with the returned bid form. The security might take the form of cash, a certified check, or a bid bond (AIA Document A310ª, Bid Bond).

The bid security could be expressed either in a lump sum or as a percentage of the base bid. Bidders usually prefer the former, as it does not reveal their bid before opening. This amount is usually not less than 10 percent of the bid amount. A successful bidder that refuses to undertake the work for the bid specified may forfeit all or part of the security. The penalty amount is usually determined as the difference between the selected bid and the next lowest bidder, although the penalty cannot exceed the amount of the security.

DURING BIDDING

AIA Document A701ª, Instructions to Bidders, sets forth some commonly used bidding procedures, including the provision of information for use by contractors in preparing and submitting their bids. The summary below reflects these bidding procedures, although of course other procedures may be used to reflect a project’s unique requirements. After the bidding documents have been mailed, it may be necessary for the architect to modify the bidding documents before bids are due. Once bids have been submitted, a bid opening is held and the final selection of the contractor is made.

Modification of Bidding Documents - The owner if necessary may request certain adjustments to the documents before the closing date for bid submission. These are usually in the form of interpretations or substitutions.

Interpretations - If any bidders discover errors or ambiguities in the documentation, they must inform the architect in writing at least seven days prior to the submission date. The architect issues any changes or addenda that result from the inquiry to all bidders.

Substitutions - Should any of the bidders wish to substitute materials or services otherwise specified in the bidding documents, the architect must receive a request for approval in writing at least 10 days before the submission date. If the architect determines the substitution is acceptable, all parties are notified by addendum, although no addendum can be made within four days of the final receipt date except a notice canceling or postponing the request for bids.

Submission of Bids - Bids must be received in writing, contained in sealed, opaque envelopes prior to the time and date specified in the advertisement/invitation to bid. Oral bids are not acceptable, and any bids received after the specified time should be returned unopened.

Bid Opening - If the bids are opened in public they are often read aloud. When bids are opened in private, the bidding information may be sent to all bidders at the owner’s discretion. The owner need not accept any of the bids if they appear too high and may reject any bid not in conformance with the stated requirements. However, the bidding documents do provide that if a contractor is chosen, it will be on the basis of the lowest responsible bid. A decision is usually made within 10 days of the bid opening.

In publicly bid work, the owner is often constrained by law to accept the lowest responsible bidder and thus may be held liable if the selection does not conform to that requirement (i.e., the lowest monetary bid, coupled with the owner’s satisfaction that the contractor can successfully undertake the work). In privately bid work, the owner’s obligation to accept one of the bids is not as clear, particularly when an owner has specifically reserved the right, in its sole discretion, to accept or reject bids. However, even when there is no legal obligation to accept a certain bid, owners may feel compelled from a business standpoint to select the lowest bidder to prevent suspicion of favoritism and avoid ill feeling among contractors with whom they may want to work in the future.

Contractor Selection - Prior to the bid opening, any bidders may withdraw or modify their bids. However, once the bids have been opened, bidders cannot make changes or withdraw from the process for a period stipulated in the bidding documents (e.g., 30 days). Once selected, the successful bidder must undertake the work for the agreed price or risk forfeiting the bid bond (if any). Exceptions to this are sometimes made if a bidder can prove substantial error in the bid calculation, in which case withdrawal might be appropriate, with award of the contract to the next lowest bidder. Alternatively, the contract may be re-bid. Defaulting bidders should be disqualified from any further bidding on the same project, and no bid correction should be permitted, except for minor clerical errors and alterations.

AFTER BIDDING

When a contractor has been selected (usually within 10 days of bid opening), all bidding parties should be informed of the decision. Unsuccessful bidders are often given a list of the bid figures, and the bid deposits are returned once the contract documents have been returned. The successful bidder should be informed of the decision in a way that does not form a legally binding agreement before the contract documents are signed. Usually, the bids of the next two or three lowest bidders are retained for a specified period as a contingency measure.

At this stage, each party to the proposed building contract may provide further information and/or assurances to the other parties. For example, the owner may, upon request, demonstrate to the contractor that sufficient financial arrangements have been made to undertake the project. The contractor, typically within seven days of the contract award, should furnish names of proposed suppliers of materials and equipment, details of the amount of work to be undertaken by the contractor’s forces, and a list of intended subcontractors for the architect’s approval. The contractor may also be asked for a qualification statement (if appropriate and not required prior to selection), evidence of the responsibility and reliability of the work force, and bonds in accordance with the owner’s requirements as expressed in the instructions to bidders.

When these and any other preliminary matters have been dealt with and the contracts prepared, the owner and contractor are ready to enter into the contractual agreement. For more information about owner-architect and owner-contractor agreements, see chapter 11, Contracts and Agreements, in the 13th edition of the Architect’s Handbook of Professional Practice (chapter 10 in the Student Edition).

AFTER THE AGREEMENT

As soon as practical after the owner-contractor agreement has been signed, the contractor should submit a list of proposed subcontractors and suppliers to the architect. Under the single contract system, it is not unusual for prime contractors to sublet parts of the work to other contractors, either because of the size of a project or to take advantage of special skills and expertise the subcontractors have to offer. The contractor may select suitable subcontractors, and the owner typically cannot require a contractor to work with anyone about whom the contractor raises reasonable objections.

The architect or the owner may lodge reasonable objections to any of the names on the contractor’s list of subcontractors, but such objections should be made promptly so the contractor may submit a substitute. If the substitution is acceptable, the contract sum can be adjusted by change order to accommodate alterations in cost caused by the substitution. The contractor should not change any subcontractors for a project without the knowledge and approval of the architect and the owner.

If AIA owner-contractor agreements are being used and subcontracting is expected, it may be advisable to use a standard form of subcontractor agreement. AIA Document A401ª, Contractor-Subcontractor Agreement Form, can be used in conjunction with other AIA documents.

Subcontractors may, in turn, engage other contractors, termed sub-subcontractors to work on a project. The relationship between these parties is similar to the relationship between the contractor and subcontractor, although the prime contractor still has overall responsibility to the owner for the project.

PRACTICAL AND LEGAL SAFEGUARDS

What practical and legal issues are associated with bidding? On the whole, comparatively few legal cases provide guidance about an architect’s liability originating from errors in bidding. Despite this relative dearth of legal authority, architects can take at least some steps to protect themselves from claims by clients, contractors, or subcontractors and to protect the owner’s interests during the construction phase.

Quality Documentation
Court cases involving contractors’ claims based on misinterpretation or inadequate documentation highlight some of the problems an architect may cause or otherwise encounter. Hazy documentation, for example, may induce bidders to build substantial contingencies into their base bids. This could leave an architect open to claims for inadequately estimating project construction costs. Some courts have ruled against architects when bids exceeded estimates by as little as 15 percent, or even less. This is worrisome considering that professional liability insurance often does not cover errors in cost estimating.

When there is limited preparation time, or when owner requirements are uncertain, clarity in documentation may be difficult to achieve. However, clear and carefully produced construction documentation allows for greater precision in bidding and thus a more realistic construction cost.

Other aspects of bidding that can affect cost include requests for alternate design bids and for unit pricing. Architects should exercise special care whenever these optional bidding devices are under consideration.

Clear Rules
Courts have ruled on a number of occasions that owners do not act in good faith when they make what may appear to be arbitrary selection decisions. In one example, an owner decided to award a contract to the second lowest bidder because it was a local corporation. A court ruled this decision invalid because locale was not initially listed as a criterion.

To avoid this type of situation, your notice to bidders and instructions to bidders should be stated very clearly. Be sure to mention every factor you and the owner will use to select the winning bid. In addition, exactly the same data should be sent to all bidders, including any clarification requested by one of the bidders prior to bid opening.

Strict Adherence to Procedures
Once the bid package has been released with its clear requirements, strict adherence to selection procedures will also often help the owner and architect avoid the appearance of unfairness or competitive advantage. Any action that smacks of collusion between the owner or the architect and one of the bidders invites suspicion and perhaps a lawsuit, especially in publicly bid work.

The procedures for bidding laid out in AIA Document A701 offer a series of orderly steps and safeguards that protect the owner and, by implication, the architect from unqualified contractors. At the same time, they provide bidders with an even playing field. Public sector procurement procedures are often similarly designed, and are usually quite specific to help ensure fair and open competition.

To demonstrate fairness, valid bids can be opened in public and late bids returned unopened. The question of what constitutes a late bid has been the focus of a number of court cases brought by disgruntled bidders who felt a late bid gave a competitor an unfair edge. In one case involving a federal project, acceptance of a bid 30 seconds after the time of bid opening was held to be invalid. While some flexibility may be acceptable in special circumstances—mail delivery problems, perhaps—the architect should advise the owner of problems that may result from accepting late bids.

Cautious Rejection of Bidders
Some suits have been brought against design professionals who counseled against hiring particular contractors. In one case, an engineer’s opinion rendered in good faith helped fend off a suit from a bidder the engineer felt lacked sufficient experience to do the work. However, courts have ruled against an owner who decided the lowest bidder was insufficiently responsible based solely on rumors of poor performance or who did not solicit sufficient information on a hitherto unknown contractor. These decisions were based on the concept that the owner exercised insubstantial reasoning in rejecting the contractor. Owners are expected to consider a contractor’s recent performance to verify if earlier problems have been addressed.

An architect who chooses to advise an owner to reject a contractor with the lowest bid should do this with great care, especially in publicly bid work. Architects’ advice on hiring will be most defensible if it is based only on objective, factual considerations and is free of any conflict of interest. When an architect recommends rejection, it is best to record in writing the data and reasoning that led to this decision. Avoid sweeping personal statements and slander. Also make it a point not to record statements that, however innocently intended, may come back to haunt you.
A similar approach should be adopted when an architect demands substitution of a subcontractor. It is estimated that very few architects actually take advantage of their contractual ability to object to subcontractors or suppliers proposed by a contractor. If this power is invoked, however, the rationale for substitution should be clearly and objectively articulated to limit the possibility of a claim from a disgruntled rejected subcontractor.

CONTRACTOR SELECTION AND ALTERNATE DELIVERY METHODS

Design-bid-build is just one of many project delivery approaches used today. Following are brief descriptions of the major alternatives:

Design-Negotiation-Build
An owner may choose to select a contractor on the basis of reputation, specialized expertise, or a past working relationship. In this arrangement, the owner negotiates the terms of the agreement and payment for the work, forgoing the advantage of having the project competitively bid.

Owners choose this delivery method when project requirements justify it, for example, when quality rather than economy is a major determinant. In other circumstances, it may be advantageous to skip the bidding process to get construction underway more quickly. Negotiation can also make it possible to bring a contractor on board before contract documents are complete, which may provide benefits in terms of coordination and communication among the owner, architect, and builder. Usually, a cost plus fee contract, in which the contractor is reimbursed for the cost of doing the work, with a separate fee for overhead and profit, is used for this project delivery method.

Design-Build
The design-build approach, where the owner contracts with a design-builder to provide both the design and construction of the project, is becoming more popular. Architects and contractors may join forces, perhaps through a strategic alliance, to compete for a specific project, or they may establish a design-build firm. A design-build team may be led by the architect or the contractor, although the latter arrangement is more common. The design-build entity may also be a design-build company with architects and contractors under one roof.

Depending on how the agreement is written, professional liability exposure for an architect in design-build delivery may be greater than, the same as, or less than in traditional design-bid-build delivery. The onus is typically on the owner to select and manage the design-build team. In design-build, the design-builder cannot make a claim to the owner for defects in the plans and specifications, since the design-builder is responsible for creating them with its own architect. Thus, the architect is not liable to the owner for errors and omissions in its design, but may be liable to the design-builder.

In design-build, the architect and builder work together from the beginning of the project, allowing them to work out constructability issues early and more easily fast-track the project. The advantages of design-build: time-savings, efficiency, and reduced risk of claims to the owner, are not guaranteed; but, if the design-builder and the architect have a good working relationship, it will be more likely to attain these advantages.

Construction Management
As construction projects have become larger and more intricate, and the design and construction industry has fragmented into ever-greater specialization, new roles have emerged simply to cope with all that complexity. A construction management (CM) approach to project delivery is designed to address these issues. In it, the architect can serve the owner in one of three distinct roles:

CM-adviser - Under a separate and distinct contract with the owner (but not with the architect or contractor), a CM-adviser provides expertise to owners on issues of project scope, constructability, and procurement and management of design and construction services, including contractor selection. The owner gains impartial advice, but must now manage three distinct contracts instead of one or two.

The addition of a CM-adviser works well with the separate design and construction increments of the design-bid-build and design-negotiation-build approaches. On the other hand, it creates potential redundancies and conflicts with the role of the architect in a variety of matters, including contractor selection. It is critical, therefore, to carefully define the CM-adviser’s roles and responsibilities in the contract formulation stage. The CM-adviser may incur liability for input affecting building design and construction.

CM-agent - A CM-agent provides a single point of contact for the owner with an entity that is empowered to act on the owner’s behalf, including having the fiscal authority to contract directly with an architect and builder. An owner who is unusually distant from a project, such as a corporation building in a foreign country, might use this approach. The approach is used infrequently in the public sector because of the granting of fiscal authority.

In terms of contractor selection, the role and responsibilities of the CM-agent and those of the project architect need to be clearly defined to avoid potential conflict. Insofar as a CM-agent acts on behalf of the owner’s interests, he or she may incur liability in addition to that for design and construction decisions.

CM-constructor - The construction-manager-as-constructor delivery method enables the construction manager to assume all the responsibilities and liabilities of a general contractor. The approach is similar to traditional project delivery in that it maintains a contractual relationship between the owner and architect. It also offers some of the benefits of the CM-adviser approach by bringing advice on cost containment and constructability early on in the process. The architect works separately with the owner to develop documentation that delineates the scope, functional requirements, and aesthetics of a project. These scope-of-work documents can then be used either to competitively bid or to negotiate the selection of the CM-constructor, and the CM-constructor architect assists the owner in this process. The CM-constructor’s and the architect’s responsibilities for design and construction decisions must be carefully delineated in the contract documents.

Integrated Project Delivery
In recent years, Integrated Project Delivery (IPD), which is made possible by sophisticated Building Information Management (BIM) has become the focus of much discussion. With IPD, the architect, consultants, contractor, owner, fabricator, and subcontractors joint own a 3-D computer model of the project. Everyone shares in the liability, and collaboration among all parties begins from the inception of the project. Each party shares its expertise as well as the risks and rewards. The IPD approach lends itself to design-negotiate-build and design-build delivery, but as defined above, is less practicable for traditional design-bid-build projects.

—Brian K. Schermer, PhD, RA
Brian Schermer is an associate professor of architecture at the Department of Architecture at the University of Wisconsin-Milwaukee.

—Robert Greenstreet, Int. Assoc. AIA, RIBA
Robert Greenstreet is an architect currently serving as dean of the School of Architecture and Urban Planning at the University of Wisconsin-Milwaukee.