In the previous chapter, the bidding and contract award process was extensively discussed. The point was made that this process is consistent and predictable for the public sector of the industry, but not for the private sector. This chapter deals with an additional aspect of the bidding process applying to the public sector: mistakes in bids.

Firm Bid Rule and Doctrine of Mistake

Clearly, public owners are subject to many restrictions in the advertising, bidding, and contract award process as illustrated by federal law and the federal construction procurement policy. Similarly, these same procurement rules impose an important requirement on bidders called the firm bid rule.

The firm bid rule is not limited to federal government contracts but is a consistent feature of all public procurements. Under this rule, a submitted bid is understood and required to be firm. The price is fixed, not subject to negotiation, and the only terms and conditions of the bid are those established by the owner’s bid documents. Once the construction contract is awarded, the bidder is legally bound to perform the contract according to those terms and conditions. An exception to this in the federal practice are those instances when the government calls for proposals leading to a negotiated contract. Under these circumstances, the bidder’s proposal would be subject to further discussion under rules determined in advance by the government and stated in the request for proposals.

Not only are public bids required to be firm, but public owners also require that bid security be provided to guarantee that the low responsive and responsible bidder will enter into a contract and furnish the required bonds. As discussed in Chapter 9, this security will usually be a bid bond or a certified check in the amount of 10% of the bid price. When used, certified checks are returned uncashed to the unsuccessful bidders, usually the day following the bid opening. The check is returned to the successful bidder when the required bonds and insurance policies are furnished and the contract signed. If the successful bidder then fails to sign the contract and furnish the required bonds and insurance policies, the bid security is forfeited.

Since the terms and conditions of the contractor’s bid, except for the pricing, are entirely determined by the owner, the firm bid rule imposes immense liability on public bidders. For the bid price, they undertake a firm obligation to perform the contract work strictly in accordance with the owner’s terms and conditions, typically consisting of section after section of highly technical specifications. Not only that, the bidder must perform all of the contract work within fixed time limitations that are often very restrictive.

The severe implications of the firm bid rule raise the question of what happens when a low bidder makes a mistake and submits a bid with a price lower than intended. Under the doctrine of mistake, the bidder on federal contracts and in most states may be relieved of the duty to perform the contract and, in certain circumstances, may be allowed to correct the bid and still be awarded the contract. Several logical reasons underlie this concept.

First, from the standpoint of equity, one party to a contract should not be permitted to profit unconscionably because of a mistake of the other party. A corollary point is that a bid containing a mistake does not represent the intent of the bidder, and a contract based on such a bid cannot represent a meeting of the minds. Without such a meeting of the minds with respect to the three elements required for contract formation-offer, acceptance, and consideration-there can be no proper, legally binding contract.

The doctrine of mistake, as it has been applied by our courts, usually has resulted in bidders who make a mistake in their bids on federal contracts (and other public contracts following the federal policy) being allowed to withdraw. In this case, the potential contract would be said to be a rescinded contract. When the contract has been rescinded, both the bidder and the bidder’s surety are released from the normal obligations guaranteed by the bid bond.

Generalized Rules for Withdrawal

If low bidders were indiscriminately released from the obligations of their bids whenever they claimed that they had made a mistake, the integrity of the public bidding process would be undermined. Bidders who were low by large margins could avoid performing the contract by the simple expedient of claiming that they had made a mistake. Therefore, the kinds of mistakes that permit bidders to withdraw are strictly limited, and our courts have defined narrow generalized grounds for withdrawal. The following six separate tests for withdrawing a bid must be met by a bidder who has made a mistake in a bid:

1. The claimed mistake must be material—that is, it must make a significant difference in the total bid price.
2. The claimed mistake must be subject to objective determination. This means that the nature and magnitude of the mistake must be clearly demonstrable by examining the bid or bid preparation documents.
3. The claimed mistake must be clerical in nature as opposed to a mistake in judgment. An example of a clerical mistake would be a mistaken total for a column of figures or some other demonstrable arithmetic mistake. An example of a mistake in judgment would be overestimating the productivity of a pile driving crew, resulting in an estimated cost for that work that was far too low. In an Iowa case, a contractor was relieved of its bid because of a bid error attributed to a last-minute recording of a subcontractor’s price as $22,000 instead of the correct price of $220,000. The contractor had requested bid withdrawal immediately after the bid opening.^[1] Similarly, in a New York case, a contractor who had intended to make a last-minute price reduction of $21,300 inadvertently transposed this reduction to the final bid papers as $213,000. The contractor informed the owner immediately of the mistake and requested withdrawal of its bid. When the owner refused to allow the contractor to withdraw and awarded the contract, the contractor refused to perform, and the owner sued for monetary damages and for forfeiture of the contractor’s bid bond. The contractor and surety moved to have the alleged contract rescinded. The court ruled for the contractor stating: There was never any meeting of the minds of the parties which could give rise to a contract since the bidder never submitted its real bid but instead, an erroneous one not at all expressing its intent.^[2] However, in a case where the bid involved the construction of bridge decking over the Mississippi River between Missouri and Tennessee, the Missouri Supreme Court refused to excuse a bidder who had claimed two separate mistakes, one involving the use of incorrect labor rates and the second involving the omission of state sales tax. The court concluded that both mistakes were judgmental, not clerical. The court also concluded that the bidder conducted a poor pre-bid investigative analysis of the local conditions affecting its bid.^[3] These cases illustrate the distinction that courts make between judgmental and clerical errors.
4. It must be clear that the owner would unconscionably profit from the mistake if the bidder were not allowed to withdraw. This is really an extension of the first test mentioned, that of materiality.
5. The position of the owner must not be prejudiced except for the loss of bargain resulting from allowing the bidder to withdraw. If the bidder who submitted a bid that was too low as the result of a mistake is allowed to withdraw, the owner obviously loses the benefit of the bargain that otherwise would have been enjoyed. This consequence of bidder withdrawal is inevitable. However, the owner should lose nothing else. This test is usually associated with the timeliness of the bidder’s claim of mistake. If the bidder waited for a considerable period before calling an obvious mistake to the owner’s attention, the owner will lose a great deal of valuable time in addition to the obvious loss of the bargain of the low price.
6. The bidder’s mistake should not have resulted from a failure to perform some positive legal duty or from gross or culpable negligence. In other words, if the bidder made no effort to ascertain the local laws and regulations that clearly affect the contract work or prepared the bid in a haphazard and careless way that indicated gross negligence, relief may not be granted.

Timeliness in Reporting Mistakes

Timeliness in reporting a bid mistake as soon as possible is a key element in gaining relief from the consequences of the mistake. Failure to do so could very well preclude the bidder’s right of withdrawal because of the requirement that the owner’s position not be prejudiced beyond loss of bargain. Delay in declaring the mistake could easily result in such prejudice.

Proof of Mistake

Before the bidder and bidder’s surety are released from the obligations of the bid, proof of the mistake is required. The burden of proof is on the bidder, and the proof must be clear.

The best evidence to prove a mistake is the written bid preparation “papers,” which can include anything written, ranging from the formal bid preparation sheets on the bidder’s stationery, to computer printouts, to even such things as notations on telephone memo pads or scraps of paper such as the back of an envelope. Finalizing a bid is often a stressful and frenetic affair resulting in many opportunities for making mistakes. A bidder who has made a mistake cannot afford to be shy and must be prepared to explain exactly how the mistake occurred.

Duty to Verify a Low Bid

Not only do bidders for public construction contracts have certain rights when they discover a bid mistake, but some public owners also have a duty to verify the low bid when a mistake is suspected. There are three important points in connection with this duty to request bid verification.

1. The federal practice requires the government to seek verification of the low bid when a mistake is suspected or should have been suspected. The government normally does this by promptly requesting the low bidder to check the bid and confirm in writing that it is correct and represents the intent of the bidder. The government request for verification should be made in writing.
2. The fact that a low bid is substantially lower than the next lowest bid or substantially lower than the government estimate is in and of itself cause to suspect that a mistake was made.
3. When a specific mistake is suspected, it is not enough that the government merely seek general verification of the bid. In these circumstances, the government should direct the bidder’s attention to the specific area of the bid where the mistake is suspected and request confirmation of the bidder’s intent with respect to that specific area of the bid.

The following cases illustrate this point. In the first case, a public utility in Oregon took bids for a project in which the specifications stated that concrete-encased duct banks were to be used under railroads or roadways in filled areas. The electrical drawings did not show any railroads or roadways or any other clear indications of duct banks extending under these kinds of surface features. Even after the issue of an addendum consisting of additional drawings, the presence of duct banks under railroads or roadways was unclear. When the bids were opened, the owner’s consulting engineer suspected that most bidders had failed to provide for concrete-encased duct banks under road areas and recommended that the owner contact the low bidder before the contract award and ascertain that they had included the cost of concrete encasements for the duct banks under roads in their bid. The owner did contact the low bidder but only inquired whether they were satisfied with their bid. The inquiry did not mention the particular mistake that was suspected by the engineer. The low bidder rechecked the bid, did not discover the mistake, and confirmed the bid and executed the contract.

Once the contract was underway, the owner sent the contractor a set of drawings clearly indicating the requirement for concrete encasement around the duct banks and the location of duct banks under various roads. The contractor immediately informed the owner that the duct bank encasement work on the new drawings constituted a constructive change to the contract and would require additional compensation. A dispute ensued that eventually wound up in court.

The Court of Appeals of Oregon was not persuaded by the owner’s contention that they had warned the contractor by requesting them to recheck the bid prior to award of the contract, ruling instead that when the owner had reason to know the low bidder had likely made a mistake and strongly suspected where the potential mistake lay, the so-called warning was completely insufficient. The court further ruled that the concrete encasement requirement constituted a change to the contract and that the contractor was entitled to additional payment.^[4]

In a federal case, the U.S. Claims Court (now the United States Court of Federal Claims) ruled that the government improperly accepted a bid knowing that the bid contained a mistake and knowing the general area where the mistake was made. Bids were taken for the construction for a health center in Utah where the bidders were given approximately a seven-week period in which to prepare their bids. The project required a modular storage system (MSS), which the specifications indicated must be manufactured as a unit by a single manufacturer. The bid documents indicated that a separate addendum would be issued prior to the bid date listing those firms qualified to manufacture the MSS.

The specifications made continuous reference to a particular manufacturer for the MSS system. The addendum that was to have been issued no less than 72 hours prior to the bid opening was never issued. The trial testimony indicated that the government architect had discussed the addendum with the government but was told that there was insufficient time to issue it. The architect’s proposed addendum indicated only one manufacturer qualified to supply the system, and that manufacturer was different than the one referenced in the specifications.

The low bidder, whose bid was considerably below the government’s estimate, orally advised the government on the day of the bid opening that their bid did not contain any costs for the MSS. Later, in response to an oral inquiry from the government for confirmation of its bid, the low bidder confirmed its bid in writing, believing (according to the trial evidence) that the nonissue of the addendum meant that no costs were intended by the government to be included for the MSS. The oral “inquiry” from the government consisted of a telephone call from a government representative to the contractor’s office leaving a message with a person who answered the phone that only requested bid confirmation. There was no reference of any kind to the costs for the MSS system. In ruling for the contractor, who eventually went to court after the contract was awarded, the court noted that the government had actual knowledge that the low bid did not include costs for the MSS because they had been so advised orally at the bid opening. Under these circumstances, a request for bid verification that did not specifically refer to this problem was judged to be insufficient. The court said:

Such failure, in light of the defendant’s actual knowledge that D & D was misreading the specifications, i.e., believing that receipt of the Addendum was a condition precedent to including bidding costs on the MSS, indicates at the very minimum of bad faith on the government’s part, and ordinarily would entitle plaintiff to an equitable adjustment.

The court concluded that the contractor was entitled to an equitable adjustment for costs of the MSS system that had been omitted from the bid.^[5]

The owner’s request for verification for a low bid can produce a completely different result. A number of years ago, the author’s company had submitted a bid for a subway project that was 20% below the second low bid and the owner’s estimate. The bid had been based on our interruption of the requirements for support of the underground openings required by the project. We received both an oral and written notification that our bid was very low along with the request that we confirm our bid in writing. After checking the bid for errors and finding none, we carefully explained by letter our interpretation of the ground support specifications upon which our bid was based, and that, based on that interpretation, our bid was correct. Upon receipt of our letter, the owner, a major rapid transit district, advised that our interpretation of their specifications was erroneous and construction of the project according to our interpretation and by our intended methods would not be acceptable to them. Following an extended series of conferences, the owner finally agreed that our interpretation of their specifications was possible, although not what they had intended. All bids were rejected, and the project readvertised for bids with revised drawings and specifications making clear exactly what the owner required. The author’s company was once again the low bidder, although at a considerably higher figure. Had there not been a requirement for bid verification on the part of the owner, this misunderstanding regarding the ground support requirements for the job would have not surfaced until after the contract had been entered into, probably resulting in a major dispute.

Possible Outcomes on Mistake Verification

A number of outcomes are possible under federal rules when a bid mistake has been discovered and verified. The usual result is that the mistaken bidder withdraws the bid, and the potential contract is rescinded. However, that is not always the case.

First, if the lowest responsive, responsible bidder who has made a bid mistake is willing to waive the right of relief, the discovery of the bid mistake will not matter, and the bidder will be awarded the contract at the original bid price. If the magnitude of the error is not too great, many bidders will elect this option. In most cases, waiver of the bidder’s right of relief will be effected by the bidder’s simply remaining silent after the mistake is discovered—that is, not informing the owner that a mistake was made.

Second, in some circumstances, a better result for the bidder on a federal government contract may be obtained with a contract reformation. The bidder may be allowed to correct the mistake resulting in the contract being reformed rather than rescinded, as when a mistaken bid is withdrawn. In this case, the reformed contract price will be the original bid price corrected upward by the amount of the mistake. Such a correction is allowed only when the correction does not alter the order of bidders in terms of lowest bid price to highest.

Formerly, the government would permit this option only when it could be conclusively shown on the face of the bid itself what the dollar amount of the intended bid would have been without the mistake. In effect, this is what occurs when the government makes upward corrections in erroneous unit price extensions and errors in the addition of the total of the individual bid items in a schedule-of-bid-items bid. More recently, bidders have been allowed to make upward corrections to the contract price based on demonstration of a mistake in the bid work papers as well, as distinct from a mistake demonstrable on the face of the bid, provided that reference to the bid papers clearly establishes the amount of the intended bid. For instance, the Comptroller General of the United States supported a government contracting officer’s decision allowing a bidder who had misplaced a decimal point when transposing the cost of subcontracted electrical work to correct its bid, raising the bid total to within one percent of the second low bidder. When the second low bidder filed a protest, the Comptroller General ruled that it was proper to allow bid correction because the bidder submitted clear evidence of both the existence of a mistake and the intended bid price. The bidder’s worksheets indicated not only the misplaced decimal point but also the intended markup to be applied to the subcontract work. Therefore, it was possible to determine the intended bid price with precision.^[6]

The Comptroller General acted similarly over the objection of the second low bidder in another case by allowing the low bidder to increase its bid by the amount of omitted home office overhead cost. The bid preparation worksheets indicated that the bidder intended to include home office overhead costs of $370,000, but because of a decimal point mistake, included only $37,000. The low bid was corrected upward by $333,000, still leaving it low. The correction was allowed because the low bidder’s worksheets furnished convincing evidence of the intended bid price.^[7]

However, the Comptroller General refused to reverse a contracting officer’s determination that a low bidder not be allowed to increase its bid when the bidder claimed that they had mishandled the interrelationship between their base bid and certain option items. When the contracting officer examined the low bidder’s bid preparation papers, he discovered that it was possible to arrive at two different bid prices. The Comptroller General said that a mistaken bid can be raised only when the bidder can provide clear evidence of the intended bid amount and that when examination of the bid papers indicated that it was possible to arrive at two different bid prices, this standard had not been met. The bidder was allowed to withdraw its bid but was not allowed to make an upward correction.^[8]

A third point is that contract reformation is possible even when the bid mistake is not discovered until after the contract has been entered into. However, the reformed contract total can never exceed the price of the next higher bid.

Finally, if the correction of a mistake would result in the contract price increasing to a figure higher than that of the second lowest bid, the only remedy available to the bidder is the withdrawal of the mistaken bid and rescission of the contract. If the contract has already been entered into, the only possible remedy would be cancellation of the contract.

Promissory Estoppel

General contractors commonly rely on price quotations from subcontractors and material suppliers to competitively and accurately determine their costs for significant portions of their work. Very few can efficiently execute all of the work required by the typical prime construction contract, and most tend to build organizations that focus on performing particular kinds of work only. In addition, few prime contractors are also construction material suppliers. Therefore, general contractors bidding for prime construction contracts depend on price quotations received from subcontractors and material suppliers, the lowest of which will be included in the general contractor’s bid to the owner.

The subcontractors’ and material suppliers’ price quotations are based on the drawings and specifications that are part of the bidding documents prepared by the owner for each project. These are the same documents upon which the general contractor relies, and it is presumed that the general contractors, subcontractors, and material suppliers all have the same understanding of the requirements of the project drawings and specifications when the price quotations are offered and received. Further, when subcontractors and material suppliers tender their price quotations to general contractors, they understand that the general contractors will rely on these quotations and consider them to be in strict conformance with the project drawings and specifications unless advised otherwise. The subcontract and material supply price quotations are typically received only a short time before the prime contract bids are due.

If the subcontractor or material supplier should then refuse or otherwise fail to honor the quotation, the general contractor who is determined to be the low bidder and awarded the prime contract usually is forced to obtain the subcontract work or materials from others whose price quotation was higher. Since the price differential would not have been included in the prime contract bid to the owner, the general contractor has been damaged. These damages can be recovered under the doctrine of promissory estoppel.

Concept of Promissory Estoppel

The following cases illustrate the application of the preceding rules. In an Alaska case, the low bidder had relied on an electrical quotation received prior to its bid to the owner. Two days after the bid opening, the electrical contractor informed the prime contractor that it had omitted certain work from its subcontract bid and would be unable to perform the electrical work at the quoted price. Following the prime contract award, the prime contractor awarded the electrical subcontract to the second low electrical bid and sued the low electrical bidder for the price differential. The low electrical bidder defended the suit, arguing that its quotation was nothing more than an offer to enter into a subcontract and that no binding subcontract was formed since the prime had never formally accepted the offer.

In ruling that the original electrical subcontractor was liable on the basis of promissory estoppel, the Supreme Court of Alaska indicated that the subcontractor would be held to its bid if it was foreseeable that the prime contractor would act in reliance on the bid by incorporating it into the prime contract. The court further said:

It is industry custom for subcontractors to submit bids at the last moment. This trade practice has evolved because of the industry demands for firm, current prices. The custom is facilitated by the ease with which a bid can be placed without the formalities of a contract. However, if the contractor is to deliver a set price to an owner, these bids must be binding for a reasonable time.^[9]

In a federal case, the U.S. Court of Appeals also ruled that a subcontractor was bound to its quotation to a prime contractor submitting a bid to an owner. In a contract for the construction of a storage reservoir, the prime contractor informally requested bids from subcontractors for earthwork and piping. The low subcontract bidder submitted their quotation and, at the prime’s request, confirmed it with a detailed written breakdown. After award of the contract to the prime contractor, the subcontractor advised that they would be unable to perform the subcontract work on the project due to “changes in our workload and other developments.” The prime contractor awarded the subcontract for the work to the next lowest subcontractor available and sued the original low bidder for the $155,056 price differential. The U.S. District Court held that the subcontractor was liable for the price differential based on the doctrine of promissory estoppel. The U.S. Court of Appeals affirmed.^[10]

On the other hand, an Illinois court refused to hold a subcontractor liable on the grounds that the prime contractor was unable to prove that its reliance on the sub-bid offer was reasonable and justifiable. The court found that there was such a great disparity in bids received from subcontractors for the same work that the prime contractor should not have relied on the low bid without verification. The court said:

We hold that the trial court properly refused to apply the Doctrine of Promissory Estoppel because Nielsen knew, or should have known of the obviously mistaken bid by National. Consequently, such reliance as Nielsen claims it placed on National’s bid was as a matter of law not reasonable.^[11]

Although the preceding discussion has been framed in terms of price quotations to general contractors in a bidding situation, the doctrine of promissory estoppel is a general legal principle that can be applied to other situations in construction as well. Construction owners, for instance, can have an expectation induced as well when receiving bids from contractors. When a bid bond or other form of bid security is required, however, the owner’s interest is protected without resort to the doctrine of promissory estoppel.

Conclusion

This chapter concluded an examination of construction industry bidding practices with a brief discussion of the firm bid rule, the doctrine of mistake, bid rescission and reformation, and promissory estoppel. The next seven chapters focus on the operation and interpretation of the contracts that result from the bidding and award process.

Questions and Problems

1. What is the import of the firm bid rule? Does it apply to all federal projects? To most? To what type of project does it not apply? What is the import of the doctrine of mistake? Why is it so important to contractors bidding competitively today?
2. Why doesn’t a contract based on a bid containing a mistake represent a meeting of the minds? Could a meeting of the minds result if the contractor elected to waive the normal right to relief?
3. What does “rescinded” mean in the context of a contract based on a bid containing a mistake? What are the six tests that must be met in order for the potential contract to be rescinded when a bidder declares a mistake in the bid?
4. Does a bidder who has made a mistake in the bid have to prove the existence of the mistake before being allowed to withdraw the bid? What is the best way to prove the existence of the mistake? What are bidding “papers”? What do they include?
5. What three points does this chapter make about a public owner’s duty to verify a suspected bid mistake?
6. Once a bidder has proved the existence of a mistake and has established grounds for withdrawal of the bid, what are the three possible outcomes under federal rules? What is a reformed contract? In the recent past, what two requirements had to be met for a federal contract that had not been awarded to be reformed on account of a bid mistake? How have these requirements changed?
7. Why is timeliness so important with respect to declaring a bid mistake? What does “loss of bargain” mean in this connection? Is it affected by the timing of the declaration of a bid mistake? What is affected?
8. Does the doctrine of promissory estoppel depend on the existence of a contract? What is the central idea of the doctrine? What are the four aspects of today’s competitive bidding situation discussed in this chapter that make the doctrine so important? Does the doctrine apply to other situations in construction?
9. What are the four necessary elements that must be proved to recover damages under the doctrine of promissory estoppel? Distinguish between reliance and reasonable reliance with reference to the doctrine. Give an example of this distinction in the typical sub-bid/prime bid situation.
10. A material supplier gives a clear, firm quote to a contractor, who is bidding a well-publicized construction job. The supplier knows the contractor is bidding the job as a prime contractor when the quote is given. The price quoted was reasonable compared to other quotes that the contractor received for the same material. The contractor uses the supplier’s quote in the prime bid, is the low bidder, and is awarded the prime contract. The supplier then refuses to furnish the material, and the contractor has to spend an additional $200,000 over the amount of the supplier’s quote to obtain the same material from another supplier.
    1. Is the contractor likely to get a judgment for the $200,000 by suing the supplier? Why or why not?
    2. If, at the time the quote was given, the supplier did not know that the contractor was bidding the job as a prime contractor and did not know why the contractor wanted the quote, would the contractor be likely to get a judgment for the $200,000? Why or why not?
    3. If the supplier’s price was 40% of the next lowest bid and, without further contact with the supplier, the contractor used the price in the bid, would the contractor be likely to get a judgment? Why or why not?
    4. If the contractor had received the supplier’s price so late that it could not be used in the prime bid to the owner but took the price over the phone anyway, and the supplier then refused to furnish the material for that price, would the contractor be likely to get a judgment? Why or why not?