May A Public Entity Reject An Unbalanced Bid?

Recently, a number of the Firm’s local public entity clients have contacted us with questions regarding the issue of “unbalanced bids.” These clients generally want to know when they should reject an unbalanced bid and the guidelines for evaluating unbalanced bids. There is little California legal authority on the subject. Typically, in the absence of California authority, this state’s courts will look to both federal procurement laws and regulations, and decisions by courts in other states. Section 15.814, 48 Code of Federal Regulations, defines a “mathematically unbalanced” bid as a bid “based on prices which are significantly less than cost for some contract line items and significantly overstated in relation to cost for others.” A bidder will typically submit an unbalanced bid with either or both of two goals: 1) To manipulate the bidding process in its favor to win award of the contract, even though the public entity would ultimately pay a higher total price for the goods or services; and 2) To improve their cash flow by front loading a bid’s payment schedule.

However, under federal law, the procuring agency cannot reject a bid based merely on the fact that the bid is mathematically unbalanced—the bid must be “materially unbalanced.” A bid is materially unbalanced if a payment pursuant to the award of a contract to the bidder who submitted an unbalanced bid would result in an “advance payment” to the contractor—as in a front-loaded bid—or result in the public entity paying a higher total price than it would if it awarded to the next low bidder. It seems likely that California courts would follow similar guidelines. On the issue of advance payments, Public Contract Code section 9203 provides that a public entity may only pay for the value of the labor, material, equipment and supplies delivered to contracting entity, less the contract retention of 5 percent. For example, a bidder may submit a bid with the line item for mobilization that is several times higher than other bidders' line items for mobilization. Another line item for work that is to be performed near the end of the project may be a fraction of the other bidders' line item bids for that work. In such a case, if a contracting public entity reasonably determines that an unbalanced bid would result in the contracting entity paying for more than the value of the work provided up to the time the contractor submits a payment application or invoice for the mobilization, the public entity would be in violation of the law if it accepts that bid and makes payment pursuant to the values submitted on the bid documents.

The courts would also likely uphold a contracting entity’s rejection of a bid if there is evidence that reasonably suggests a contracting entity would ultimately pay a higher price for the goods and services provided. In interpreting public contracting laws and issues, California courts have consistently relied on the declared legislative purposes of preventing fraud and favoritism, obtaining the lowest price for the public entity, and promoting fair competition among bidders (See Kajima/Ray Wilson v. Los Angeles County Metropolitan Transportation Authority (2000) 23 Cal. 4th 305, 313 [court should interpret bidding laws to effect their purposes, including, preventing fraud and favoritism, obtaining the lowest price for the public entity, and promoting fair competition among bidders]). Therefore, a court would likely look beyond the mere bid form and make a determination as to whether the bidder manipulated the bid process with the end result being the public entity paying a higher price. The lawyers in Atkinson, Andelson, Loya, Ruud and Romo’s Construction and Facilities departments have a wealth of experience in dealing with bid evaluations, bid protests and other procurement issues arising from the award and performance of public works construction projects.

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