July 17, 2008

Alternative pricing takes fairness, predictability out of bidding

Construction Corner

Clive Thurston

As the rules surrounding bidding and procurement continue to fluctuate and change — sometimes from necessity, sometimes for a better idea and sometimes at the desire of the courts — those involved are often left wondering if there are any rules at all.

Many times, we hear from owners that they want to ensure a fair and equitable bidding process and as such have inserted clauses into documents that try to govern the role of the general contractor (GC) and their relationship to trades and suppliers.

If GCs are to be held to a high level of fairness, should we not expect owners to abide by the same standards?

Case in point: the use of alternate prices on bids and the role they were meant to play and the role they more often end up playing.

Alternate prices are defined as prices “that may be substituted on the base bid as an addition or deduction” and separate prices defined as “prices to be added to the base bid if selected by the owner.”

Today, the distinction between the two no longer exists and the term alternate prices is used.

Designed to provide owners with some options or alternatives on specific items such as mechanical systems, installation methods, or types of materials, it creates problems when used as a method to determine the successful bidder.

It was not intended to create a fishing list for owners or consultants who have not properly prepared their documents or their budgets. What can happen is that an owner with a sufficiently long list of alternates can manipulate those alternates and effectively change the order of the bids.

If that is the case, why do we even try to encourage the best bids if everything is to be negotiated? Let’s just drop any pretense to fairness and throw the whole thing up for grabs.

Changes in the order of bids have been happening at a disturbing and increasing rate. It is not in anyone’s best interest to ignore the bidding law and procedures adopted in Canada by manipulating bids using alternate pricing. The more alternatives asked for, the greater the chance for multiple bid rankings and the greater potential for an owner to be unfair to the bidders.

Owners can insert clauses in the instructions to bidders that give them the right to accept any or all such prices and to alter the bid prices accordingly.

If that is the case, general contractors need to be very careful in how they supply these prices and what the effect could be on their base bid.

Several owners have learned the hard way that long lists of alternate pricing mean fewer bidders, higher base bids, incomplete bids and general confusion. GCs have been dismayed to find all their hard work in preparing the best price go down the drain as an owner uses alternates to change the outcome.

Some more progressive owners have recognized the need to spend more time on the up-front documents, to not release the project until that is done, and to inform bidders that only the base bid will be used to determine relative ranking on price.

Any requested alternate prices are dealt with as changes to the work, if necessary.

This better assures the owner that they are getting a competitive base price. As to whether the owner is assured of getting fair market value prices on alternates, I would argue they are, since once Contract B is entered into, the owner has no further obligation to the other bidders while coming to a negotiated deal on alternate prices with the successful contractor.

(See Double N Earthmovers Ltd v Edmonton, [2007] S.C.J. No.3 (All).2007 SCC 3, [2007] I S. C. R. 116).

If we are to instill a high sense of ethical behavior and morals back into this industry, then it is incumbent on all parties to act in a manner that is fair and reasonable.

Owners should reward the hard work of the low compliant bidder and not misuse alternates in a way that casts a shadow over the bidding process.

(For further information on alternative prices view CCDC23, 2005, 4.8 Bid Form Supplements.)

Clive Thurston is president of the Ontario General Contractors Association.

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