Bid shopping is a term used in construction law, defined as revealing bid prices to subcontractors prior to the award of a contract to obtain a lower cost. It might also occur after a contract is awarded when a contractor shops for companies willing to do the subcontracting work more cheaply. Different bid shopping rules exist, based on the type of project and the laws in the region where the project is planned.
Some areas forbid bid shopping because it might encourage the use of inferior materials or poor workmanship to increase profits for the contractor. Bid shopping also could create unfair competition among contractors and subcontractors vying for contracts. In some cases, a contractor might pay employees below the prevailing wage to increase profit levels.
Contract laws in some areas make it illegal to engage in bid shopping and impose penalties for companies that violate the statutes. These laws might require a primary contractor to reveal the identities of subcontractors working on the project. Once the bid is awarded, these subcontractors cannot be switched to companies that will do the work at a lower price. If violations occur, the entire contract could be deemed null and void, and fines might be levied.
These laws protect public agencies from substitutions of subcontractors after bid awards. In some areas, subcontractors must be named in the initial bid proposal based on the percentage of work they intend to perform on the entire project. A company paid one-half of one percent of the total cost of the job is considered a subcontractor that must be named in some regions.
Private projects typically permit substituting bids unless the contract specifically forbids it. On these construction projects, a subcontractor might withdraw a bid after the contract is awarded. In some cases, a subcontractor might submit a bid without any intention of doing the work to aid the primary contractor in getting the award. These practices may or may not be illegal, depending on local laws.
Subcontractors who engage in this practice might later try to sell the bid award to another company. They might find another subcontractor willing to do the job below the price awarded in the bid. The initial subcontractor keeps the difference as a commission, sometimes called a broker’s fee.
Municipal or state projects typically prohibit bid shopping via laws or codes. These laws might also limit the number of subcontractors permitted in the bid proposal to reduce the possibility of bid shopping. Some regions also limit bids to local companies, or give preference to minority-owned businesses.
Bid peddling and reverse auctions describe two other forms of bid shopping. A reverse auction constitutes posting awarded bid amounts on the Internet to solicit lower bids. Bid peddling might be used by subcontractors who try to get work after a bid is awarded. The owner of a company might approach the primary contractor and quote a lower price than the subcontractor named in the bid award.