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Detection Tool for Unbalanced Bids

Detection Tool

Unbalanced bidding is a cash flow management Detection Tool strategy that is recognized as an illegal/disqualifying practice by public owners; and unethical practice by most private owners. This Detection Tool practice provides the awarded bidder with unjustified advantages at the expense of the owner. Unfortunately, limited tools and techniques are currently available to identify and detect unbalanced bids during the evaluation process. This paper presents an innovative detection tool to identify unbalanced bids in unit price contracts during the bid evaluation process. The proposed technique develops BMDI graphs to visualize total markup variation patterns during the project lifetime to detect unbalanced bids. The proposed method also uses Monte Carlo simulation to take in consideration the impact of cost uncertainties and risks. An illustrative example was presented to show the capabilities and features of the proposed method in determining the status of submitted bids during the evaluation process.

Cash flow management is a concern for contractors as payments from owners lag behind project expenditures. This time lag adversely affects the contractors’ cash flow and cause contractors to partially finance their projects. Unbalanced bidding, which is considered an illegal/unethical practice, may be used as a risky mitigation strategy [1] . Unbalanced bids can occur in fixed and unit price contracts. However, this study focuses on unbalanced bids in unit price contracts. In unit price contracts, unbalanced bids can be prepared by manipulating the item’s prices without affecting the total bid price [2] . Unfortunately, it is usually difficult for owners to determine the existence and/or extent of potential inflation/deflation of bid item prices [2] . The difficulty comes from the fact that the award decision depends on the total bid price. The variations in the items’ unit prices are usually not considered. They may be due to legitimate reasons such as variations in the bidders’ expertise. They may also be due to a deliberate manipulation of unit prices to hide certain advantages, construction means, or proprietary technologies, or due to an honest mistake or a bad business decision.

Cattell [2] classifies unbalanced bids into three groups, namely, Front-End loaded, Back-End loaded, and Quantity Error Exploitation. Front-End loaded bids inflate the prices of early stage activities to positively impact the contractor cash-in flow. They usually result in owner overpayments when the value of time is considered [3] . In other words, Front-End bids allow for an interest-free loan from the owner to the contractor. Equally important, the overpayments would weaken the owner’s position and reduce the contractor’s incentives to complete the project. Back-End loading consists of inflating the prices of late schedule items. This pricing strategy is not common in relatively short duration construction projects that located in low inflation rate countries such as the United States. In Quantity Error Exploitation scenarios, the contractor increases the unit price of items in which actual quantities are expected to exceed the ones stated in the bid documents [2] . For example, in one of the contracts awarded by the Florida Department of Transportation (FDOT), the bid winner, inadvertently or deliberately, offered a high unit price (i.e., $420/ft versus $171/ft) for trench support sheet. As the owner’s offered quantity was 30% of the actual one (i.e., 500 ft versus 1729 ft) the contractor was able to submit the lowest bid. Unfortunately, FDOT did not detect this problem, which resulted in additional unnecessary cost of $516,180 [4] . Quantity Error Exploitation bids, which are more difficult to detect than other types, may have severe consequences on the owner cost.

The US public and private sectors have different approaches to unbalanced bids. The federal code of regulation (48 C.F.R. § 15.404−1 (g)) forbids unbalanced pricing because of its adverse consequences on performance risk and payments. However, unbalanced bids are not forbidden in the US private construction industry sector. However, they are considered as unethical and risky acts. Moreover, the private sector strives to detect unbalanced bids in advance as a preventive action.

Significant research work has been conducted to address unbalanced bids. However, most of the published research work has focused on developing optimization models to help contractors maximize their profit while submitting the lowest possible bid price [5] [6] [7] . Moreover, limited tools and techniques have been published to help owners/clients detect and prevent unbalanced bids during the tender evaluation process. This paper presents an innovative detection tool for unit price projects that helps owners/clients to visualize the distribution of markup along the project timeline and detect unbalanced bids.