The construction industry has been hit hard by the COVID-19 pandemic. The United States Small Business Administration has reported that approximately $65 billion of Payroll Protection Program loans went to construction industry participants. As the country attempts to transition into the uncertainties of recovery, those up and down the contract chain should be mindful of operational and legal considerations for current and ongoing projects.
This article is intended to provide an overview of some of the variables that have and will continue to affect the construction bidding process in the coming months. It also provides an overview of key legal concepts applicable to the bidding process.
Bidding does not occur in a vacuum. There is more to it than merely performing a scope review and assigning a price. The bid will also consider other project-specific factors (e.g., schedule requirements, location of the work, means and methods) and external dynamics like the volume and type of future opportunities and confidence level in the ability of third parties to deliver services at a transparent cost.
The pandemic has increased volatility associated with many of these variables and, therefore, has augmented risk. Understanding the implications of the broader economic landscape and the downline translation to current and future project bids are critical.
According to the National Bureau of Economic Research, the U.S. economy entered a recession in February 2020. This is an important designation for the construction industry because during periods of economic downturn, future demand for certain segments decreases, while activity in other segments is often accelerated. The following is a brief overview of factors that indicate a decrease in the commercial construction market but an increase for public works and infrastructure projects.
The Architecture Billings Index (ABI) published by the American Institute of Architects captures the change in architecture billings on a monthly basis and is considered an indicator of future nonresidential construction activity (9 to 12 months of lead time).
The May 2020 edition of the ABI indicates that design contracts, inquiries to architects and architect billings decreased sharply from February 2020, with the commercial and industrial sector experiencing the largest drop. A recent report by Dodge Data & Analytics supports this assessment as only seven commercial projects valued at over $100 million entered the planning stage in June 2020 (compared to 17 in June 2019).
Infrastructure & Public Works
It is well established that one lever the U.S. government can pull to stimulate the economy is through investment in infrastructure. This occurred after the Great Recession with the injection of more than $830 billion associated to the American Recovery and Reinvestment Act of 2009 and is currently under consideration as part of the Moving Forward Act.
The Fact Sheet for the Moving Forward Act states that it is a $1.5 trillion plan to “rebuild American infrastructure—not only our roads, bridges and transit systems, but also our schools, housing, broadband access and so much more.”
As construction companies implement a more robust review of their business processes and related costs to help streamline bidding, it is important to have a working knowledge of the basic legal tenets of the bidding process so that operational realities align with the legal bidding framework.
An understanding of some general bid dispute scenarios can serve as a starting point for analyzing a bid dispute, whether it was caused by the pandemic or not.
What Is a Bid?
Construction bidding is governed by a combination of bidding/contract documents, state-specific contract law principles, and, in the public context, the applicable procurement law. On private and public projects, bidding instructions and documents will be critical.
Review them, know them and also understand that while it may be a stated goal in the documents, a private bidding process does not always result in the lowest, responsive bid being accepted. A bid submission on a private project is an offer to enter into a contract that can be accepted, modified (resulting in a technical rejection and counteroffer) or rejected outright.
On public projects, a bid is typically treated as an option extended to the public body by the bidder that might be quasi-revocable. Whether the bidder can be released from a bid that is otherwise responsive (and possibly low) depends on what the applicable procurement law provides. Some allow releases for mistakes, passage of time without a response from the public body or just cause. However, knowing these “outs” before bidding is important.
Remedies Related to Bid Disputes
Several scenarios can cause bid disputes. Below are four common scenarios, each of which can change significantly if facts or assumptions differ slightly. However, understanding the general framework of these scenarios can help construction industry players navigate bid disputes that have already occurred and manage, prepare for and mitigate the effects of those to come as a result of the coronavirus pandemic.
On private projects, a bidder’s ability to withdraw a bid due to a general delay will depend on whether the party seeking bids has already accepted. As a general matter, an offer (here, a bid) can be withdrawn any time prior to acceptance.
If a delay occurs after bid acceptance, withdrawing the bid can be more difficult—arguably, the offer has been accepted and a court might find that a contract exists. Further, equitable doctrines—like justifiable reliance, promissory estoppel—might prevent the bidder from withdrawal.
On public projects, withdrawing a bid can be more difficult, even where the process has encountered a delay. However, procurement laws provide some relief. For example, many acknowledge the economic concept of opportunity cost and allow bidders to withdraw where there has been a delay in making awards.
Where the public body has failed to act (due to lacking funding, a pandemic and political upheaval), bidders should not be held hostage to a stalled project in the bidding phase and can be released if they follow the procedure outlined for doing so. This usually entails submitting a written notice the public body within a certain time frame.
Mistakes in a Bid
If a bidder makes a mistake while bidding a private project and the mistake is significant enough to justify withdrawal, it can make business sense to promptly withdraw the bid prior to acceptance. If the bidder does not discover the mistake until after acceptance, quick, clear communication can prevent future disputes. This can allow the parties involved to identify the mistake, its magnitude and potential effects.
However, generally, a unilateral mistake of fact in contracting does not entitle the mistaken party to rescind or reform a contract. Other doctrines may be available that relieve the bidder from performance, such as impossibility, frustration of purpose or force majeure, but the parties will not know whether they apply, legally, absent court or other dispute resolution, proceedings.
Mistakes in bids on public projects can be costly and time-consuming for the bidder and the public body. Also, because of the legal framework, a bidder is not automatically allowed to withdraw a mistaken bid even if the public body has not accepted it. The type of mistake matters.
Clerical, obvious mathematical and typographical mistakes are usually uncontroversial and can be corrected. But procurement laws might not allow substantive corrections to bids. Often, correcting a substantive bid mistake that renders an otherwise nonresponsive bid a responsive one, is not allowed. If a mistake is discovered after a bid award has been made, as is the case in the Federal Acquisition Regulation, dispute resolution, rather than mistaken bidding, procedures will apply.
Private project bidding is not subject to the same legal protections as public bidding. As such, awards sometimes do not go to low bidders. Barring rare circumstances, there is little recourse for challenging an award that a lower bidder feels is “wrong.”**
Public projects are supposed to be competitively bid and awarded to the lowest, responsive bidder.*** Generally, a party protesting a bid award must contest the bid at an administrative level before pursuing relief in court (also known as exhausting administrative remedies). Processes and procedures for doing so vary depending on the procurement law that applies. Missing a step in the process can be fatal to a bid protest claim.
On private projects, cancellation before an award results in a de facto rejection of the bid (the “offer,” in contract terms). Whether other doctrines will apply that allow bidders to pursue damages against the party soliciting bids will depend on the facts of each case and is beyond the scope of this article.
Public bodies do not solicit bids for projects that they do not intend to pursue. However, there is almost always a way out for the public body to provide notice of bidding cancellation and a “reject all” scenario. Procurement laws often bestow discretion on the public body to cancel bidding where moving forward would not be beneficial to the public (e.g. due to lack of funding).
Whether a project can be cancelled after awards are made can be a matter of contract for both public and private projects. Bidders and those soliciting bids should review bidding documents, instructions, procurement laws, and in the contract documents themselves, the termination for convenience clause.
To address the evolving business landscape, all contractors should proactively consider incorporating an enhanced level of analysis to understand their internal cost structure, key production assumptions and relationships with critical third parties.
Specifically, contractors should focus on the following areas for competitive bids while considering the applicable legal and contractual framework:
- Openly communicate with project partners and agree to key assumptions that will formalize cost-sharing decisions. This may require additional analysis regarding the appropriate contract type to leverage for phased projects with unknown cost and schedule implications.
- Analyze base (minimum) cost structures and include COVID-19 related costs, such as (multiple) remobilizations, additional costs for permitting/inspections, personnel for mass cleaning, reduced efficiencies due to a partially remote office staff, and other costs related to state or project-specific guidelines.
- Track current and ongoing production rates, the impact of shift work and other jobsite constraints and clearly explain assumptions and allowances into bid estimates.
- Understand changing material prices and the downline impact to bids. The Bureau of Labor Statistic publishes changes in raw materials on a monthly basis. (For example, steel mill products decreased by 8.9% between June 2019 and June 2020 while softwood lumber increased by 18.6%).
- Perform enhanced diligence on business partners to validate solvency and confirm ability to perform under various scenarios. Similarly, diversify supplier base should supply chain constrains arise in the future.