Case 3:

Is the Bidding Process Written in Stone?

Antonio A. González-Quevedo

Part I

    A construction company participating in a bid decides to present a quote lower than the actual cost of the project.  But the construction company has deliberately inserted mistakes into the construction drawings they submit which will eventually require changing the contract and adding cost.  Thus the construction company can take the risk associated with bidding lower than cost.  Their unrealistically low bid wins the contract.  Later, the inserted mistakes enable them to generate profits through the costly change orders required to correct the mistakes. 

 This practice is generally accepted in the construction industry both by developers and the bidding construction companies.  While developers presume that the quotes provided by the competing construction companies include expected profit, they also know that mistakes are built into the submitted plans and that the construction companies hope to exploit them later to generate their true profit margins.   Developers reluctantly accept this because they want to start construction as soon as possible.

Questions:

1. Although this practice is accepted in the industry, is the construction company right in making this decision? 

2. Discuss the two alternatives and demonstrate whether the action is ethically right or wrong.

3. Is there anything the developer can and should do to avoid this situation?

Part II:

      The bidding system started in the 1930's when federal government agencies found it necessary to look for ways to reduce corruption.  There are, however, alternatives to the practice described above.  In Germany, for example, the contract is awarded to the firm with the quote closest to the average.  Another bidding system is based on the idea of best value bidding.  This process has two parts: first, a preliminary selection process assesses the bidder's ability to complete the project successfully and competently; then, from among those found competent, developers choose the lowest bid.

 Questions:

1. Alternatives exist to the bidding practice described in the first part.  Would either the German or the best value bidding systems be better?  Why or why not? 

2. What are the ethical problems associated with the practice described in the first part?  Do these problems exist in the German or the best value bidding systems? 

3. Could you design a bidding system that finds a way around these ethical problems?