Doing PM Business
E-Procurement, Reverse Auctions and Bid Shopping

Paul Giammalvo

In the past week, our company was asked by a major NYSE listed client to participate in an “E-Procurement” auction. This prompted some research on the subject, resulting in the withdrawal of our proposal to the client. However, the experience was sufficiently disturbing to warrant writing an article on the topic.

As our IT and Telecom colleagues follow quickly behind the leadership of Construction in adapting “Best Practices of Project Management”, recent events would indicate that along with the “Best Practices” they are also adopting some of the “Worst Practices” as well.

I’m speaking of the unethical and destructive practice of “Bid Shopping/Bid Peddling”. Defined simply, Bid Shopping is where a company receives bids from legitimate, qualified bidders, knocks some percentage OFF the low price, and then uses that number, either to beat down the prices of other bidders or even worse take that number outside to others not on the original bid list. Bid Peddling is where a potential subcontractor or vendor approaches an owner or Prime Contractor with the offer that he/she will do the work for the same price or some percentage lower than the lowest responsible bidder.

Unfortunately, as the competition heats up in all sectors, we are seeing more of this insidious, unethical and highly destructive practice. And with “Reverse Auctions” becoming more and more prevalent, the danger of Bid Shopping/Bid Peddling (BS/BP) is becoming more, not less pernicious.

In 1995, the Associate General Contractors of America, the American Subcontractors Association, and the Associated Specialty Contractors issued this joint statement on the issue of bid shopping and bid peddling:

What are the impacts of BS/BP? There is nothing for free. Responsible bidders, faced with an open, transparent and fair bidding process are compelled by market forces to reduce their price to the lowest possible RESPONSIBLE price, based upon their perception of the risks assumed. In order to stay in business, they must find a very narrow band between the risk of not winning a tender, and making a profit commensurate to the risks assumed. Failure to perform within this narrow band allows market forces to weed out incompetent and inefficient contractors. However, when unscrupulous owners/prime contractors employee bid shopping, subcontractors have little choice other than to cut corners in quality, safety or some other method in order to make up for this unfair pressure.

What can be done about it? First, Senator Paul Jankorski, (D-PA) has introduced H.R. 1348 to make it unlawful for Prime Contractors to bid shop subcontractor/vendor quotes. Recognizing the problem to be a global one, Australia has taken a lead in making Bid Shopping/Bid Peddling an ethics issue in all their model codes. In both the USA and Australia, the use of “Filed Sub-Bids” is becoming increasingly more common. Using this method, sub contractor bids are made separately to the owner. The owner then presents this list of “approved” subcontractors for use by the General or Prime contractor. In doing so, the prime contractor is able to select the sub-contractor she prefers, adding only her own overhead and markup for coordination/management and any specific risks the Prime Contractor accepts that the sub does not.

As one of the first steps in recognizing Bid Shopping/Bid Peddling is not an acceptable practice, professional organizations representing project management practitioners should start by adding a clause in their Codes of Ethics and/or Codes of Conduct specifically making this practice an ethical violation. At the same time, those same professional organizations should lobby to incorporate “No BS/BP” clauses in all contracts. And lastly, those same professional organizations should be certain that they themselves do not engage in this practice.

As we globalize, and move towards the use of “Reverse Auctions” and “E-Procurement, we stand in danger of seeing more of these questionable practices being adopted or adapted, especially by many of the developing nations. We are also seeing evidence of these practices in projects funded by multi-lateral and NGO donors. As we seem to be moving ever more quickly towards a truly global economy, now more than ever we need to make certain that we advocate only the “Best” and not the “Worst” practices. The global professional organizations representing the Project Management Practitioner can and should take a firm stand on this practice, and do so sooner rather than later. On an individual basis, as sociologists and politicians advocate when faced with peer pressure to try drugs, when faced with the request to participate in “reverse auctions” or other practices leading to bid shopping, we need to “simply say no”.

As a footnote to this story, when we withdrew our bid on the grounds that the practice was unethical, (substantiated with statements from the American Institute of Constructors, http://www.aicnet.org/, Associate General Contractors of America, the American Subcontractors Association, and the Associated Specialty Contractors) the client withdrew the request.

About the Author:

Paul Giammalvo photo Paul D. Giammalvo, CDT, PMP, CCE, MScPM, is Director of the ASEAN Project Manager's Center of Excellence, Inc. (APMX) For over 12 years, he has been provided Project Management training and consulting throughout SE Asia. He is active in the Association for the Advancement of Cost Engineering International, (AACE); Construction Specifications Institute (CSI); Construction Management Association of America, (CMAA) and serves on the Global Project Management Forum Steering Committee. Email Paul G. Giammalvo or visit Paul's Website

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