10/28/2019 by Daniel Salmon, Esq.
Can contractors “shop” bids after obtaining and using them to obtain contract awards? Generally speaking, the answer is yes under Virginia law. However, the law varies in other jurisdictions. While this may not seem necessarily fair, jurisdictional views vary. For example, Virginia holds that bids are a means by which the prospective subcontractor (SC) and prospective general contractor (GC) agree to potentially agree upon a subcontract award, if the Owner makes an award to the GC. However, other jurisdictions see it differently and allow the GC to hold the SC to the bidding process.
This means that, for practical purposes, if Virginia law applies, the GC can shop bids after being awarded a contract and SCs can reject prospective subcontracts, even if the SC’s bid was used by the GC in submitting the GC’s bid or proposal to the Owner. Various efforts have been made to avoid this result, both by GCs and SCs. Additionally, there are practical concerns for both sides in that bid shopping is generally disfavored and viewed as a sharp business practice as is refusing to honor a submitted bid – both with potentially significant long-term business consequences, even if there are no legal consequences.
Construction contracts typically undergo a tiered bidding process. First, the Owner requests bids from GCs for the scope of the overall project. Before submitting bids, the GC then seeks its own bids from SCs for different tasks. The GC then submits its bid to the Owner, relying upon quotes received from the SCs. While the GC is typically bound to the bid it submits to the Owner, the GC is not bound to the SC bids used in its proposal. Thus, absent valid contractual prohibitions, the GC may seek alternatives to the SCs used in its winning proposal. However, depending on jurisdiction, a SC may be bound to its bid, for at least long enough to allow the GC to accept the SC’s offer.
In Virginia, a GC’s detrimental reliance on a SC’s bid does not bind the SC, so long as the SC revokes the offer before the GC accepts. When a party detrimentally relies on another’s promise, even without a valid contract, courts in some jurisdictions may hold the other party to said promise under a theory of promissory estoppel. However, Virginia does not recognize this theory of promissory estoppel and generally requires the formation of a valid contract. This is consistent with Virginia’s position on teaming agreements, wherein parties agree to negotiate in good faith, which are also treated as mere “agreements to agree” and not as valid contracts. In short, as previously stated, GCs in Virginia are generally free to bid shop after a contract award.
Most states other than Virginia follow the Drennan doctrine on promissory estoppel when dealing with GC-SC bidding. Drennan v. Star Paving was a 1957 California Supreme Court case that involved a GC bidding on a school construction project and a SC that mistakenly underestimated its bid for paving services. The SC revoked its offer after the GC received the award, but before the GC could accept the SC’s offer. Nonetheless, the court held in favor of the GC, stating that “it is only fair that [the GC] should have at least an opportunity to accept [the SC]’s bid after the general contract has been awarded to [the GC]” in reliance on the SC’s bid, but noted that “a [GC] is not free to delay acceptance after [it] has been awarded the general contract in the hope of getting a better price.” Thus, in Drennan jurisdictions, the SC is typically liable for performance, but may be relieved of such liability if the GC attempts to bid shop, renegotiate, or unduly delay acceptance.
Despite the general Virginia law, GCs in Virginia may be able to mitigate the risk of a SC dishonoring its bid by including language that specifically provides for an acceptance period in the event of award or entering into an actual subcontract with all aspects negotiated pending the award. You should consult your attorney for advice on specific bids and contract needs if you wish to more formally structure such relationships.
About the Author:
Daniel is an associate in the Construction & Government Contracts practice group working out of the Norfolk office of Vandeventer Black LLP. His primary focus is supporting his practice group, but he is also interested in technology law and business law.
Daniel received his J.D. from Washington University in St. Louis. During law school, Daniel completed the InSITE Fellowship, where he worked on several interdisciplinary teams that provided consulting services to early-stage start-up companies. Additionally, he served as a federal judicial extern to the Honorable Nancy J. Rosenstengel of the Southern District of Illinois. Daniel also served as an Associate Articles Editor for the Washington University Jurisprudence Review. For more information, contact Daniel at email@example.com.