When folks outside the industry ask me how highway jobs are bid and won, the first thing I tell them is that price is what really matters. What does that mean? Well, almost all highway work is “low bid”, meaning that the contractor with the lowest price and a compliant bid wins. How about quality, reputation, or past performance of each bidder? For the lion’s share of jobs let through state highway departments, counties, and cities, those factors are not part of the decision-making process. It’s nearly always all about the compliant low bid.
When large amounts of taxpayer dollars are being spent, states are loathe to risk any implication of impropriety. A low bid system theoretically levels the playing field and creates a free and open market for contractors to compete on price.
Each state does it a little differently, and the following is generally representative of most states with a few minor exceptions.
Let’s say our state department of transportation (DOT) and is considering soliciting bids from contractors to resurface a section of the interstate and add a lane in each direction for a 3-mile stretch. Years beforehand, funding was allocated based on the need for this project. The federal government typically covers 90% of the cost and the state chips in the remaining 10%. So, the funding dollars are set aside while pre-letting activities (such as right-of-way acquisition, engineering, community outreach, and internal reviews) are conducted.
The DOT pre-advertises the project in a public letting “look-ahead” showing upcoming projects to be bid in the next 12 to 18+ months. A letting is a group of jobs that are bid at the same time across the state. Lettings are conducted monthly. The pre-advertisement may include the project name, location, a brief description of the work, an estimated range of construction cost (e.g. $10MM to $15MM), and when the project is forecast to be bid. Projects are advertised on DOT’s website a month before bids are due.
The bid package for our widening project includes:
A proposal
Special provisions and standard specifications
Drawings (or a scope of work)
Bid forms
Bonds
The proposal outlines the contractual obligations associated with the job, such as the number of days the contractor is allotted to construct the project and/or a firm completion date. Penalties may be assessed to the contractor for inexcusably completing the job late, ranging from $250 per day to $100,000+ per day depending upon criticality of the project. (Sidebar: A friend is on a mega project where the damages are $500,000 per day!!) There are unique requirements on this job like when work can be performed (such as days, nights, weekends) and when lane closures are permissible. Proposals include these types of nitty gritty details.
Our DOT has a set of standard specifications that detail exactly how all our jobs are to be designed, bid, built, supervised, measured, paid for, inspected, tested, analyzed, accepted, rejected, and disputes resolved. These are kind of universal standards that apply to each job to ensure consistency statewide. The standard specifications get updated every 10 years or so. In between updates, things change. Perhaps a new material or testing procedure is introduced that saves taxpayer money, a specification is found to be outdated or a unique attribute of this job requires deviation from the standard specs. These types of exceptions are addressed in the bid via special provisions that override the standard specs. Special provisions and standard specifications are like cooking recipe for a construction project, they tell you the serving sizes and what temperature to turn the oven to. Ultimately, it’s the contractor’s responsibility to follow the recipe and build a finished product that meets the requirements.
Risk is almost entirely all on the contractor. No contractor can take exception to the special provisions or standard specifications unless approved in writing before the bid is due.
Drawings show the work to be performed including limits, layout, sequencing, typical sections, and other pertinent information. Contractors typically use the drawings to conduct their own independent quantity takeoffs to prepare their cost estimates.
The bid form is based on the DOT’s summary of estimated quantities, or a list of all associated items of work on the project such as cubic yards of excavation, tons of a particular type of asphalt, linear feet of a certain diameter of pipe, mobilization, and so on. Most highway work is unit price work, meaning that the DOT provides the contractors with a summary of estimated quantities. There may be 500+ bid items depending on project complexity. Contractors are responsible for providing a unit price for each bid item which is then multiplied by the DOT’s estimated quantity for the total bid item price. Each contractors’ bid item prices are combined to provide a total bid price. The contractor with the lowest compliant total bid price is determined the “Apparent Low Bidder”. Bids are submitted electronically and the apparent results are posted within 15 minutes for all to see.
Here is how measurement and payment work: Upon award, all contractor unit prices become a binding part of the Contract. It is nearly impossible to change a unit price after award, with a few exceptions such as a significant quantity over-run, under-run, or scope change.
There are a handful of lump sum items such as mobilization that the contractor is basically guaranteed to get paid for as long as she eventually completes the project. For measurable items with non-lump sum units of measurement (e.g. feet, tons, square yards), the contractor only gets paid for the actual work she satisfactorily puts in place per the plans, specs, or Engineer’s direction. This does a few things: One, it makes takeoffs critically important to the contractor because she should check the DOT’s quantities before submitting a price. Next, the DOT only pays for the work that gets correctly installed. So, if the plans call for 400 square yards of sidewalk and it turns out that only 350 square yards are needed in the field, the DOT only pays for 350. Makes sense, right? Well, there is a flip side. Let’s say the DOT’s quantity is understated and field conditions require that 1,000 square yards are required when only 350 square yards were estimated at the time of bid. The DOT must compensate the contractor for the 1,000 square yards required. So, unit price work gives the Contractor quantity protection, which reduces contractor risk. Contractors are given around 30 days to review the bid documents and seek written clarification from the DOT on any discrepancies. The questions and responses are made available to all bidders and become part of the contract documents through what is called an addendum.
The DOT requires that each contractor provide a performance bond with their bid. A bond is a document provided to a DOT by the contractor from the contractor’s surety provider guaranteeing that the project will be completed. Should the contractor fail to complete the project, the surety company guarantees to pay the owner for the losses incurred and then finish the project satisfactorily, which may include hiring other contractors to complete the work at the surety’s expense. A bond protects the DOT and the taxpayer if the contractor gets in trouble or becomes insolvent.
Back to the bid. So, let's say the apparent low bidder is confirmed, and their bid is found to be compliant meaning that they provided all the required documentation with their bid. What happens next? Well, the DOT compares the low bid amount to the DOT’s estimated construction cost and then determines if it will award the project or rebid it. It is rare but not unheard of for a job to be rebid due to bids coming in over budget. If the low bidder submitted a noncompliant bid, their bid is deemed irregular and the next lowest compliant bid takes it's place. Once the DOT awards the project to the low bidder, the bid tabulations showing each contractor’s prices for every bid item is made available to the public. Upon award, contracts are signed between the DOT and the contractor. Finally, work on our widening project may begin shortly thereafter.
And that, as they say, is that! This is how the lion’s share of highway work is bid. There are exceptions and progressive contracting methods such as lump sum, design-build, public private partnerships (PPP), CMGC, and CMAR which we will address in forthcoming posts.
Thanks for reading. At Edgevanta, we are building a technology to help solve the project acquisition process for highway contractors.
Sincerely,
Tristan Wilson
CEO and Founder
Edgevanta, LLC
