Bidding in Construction: Should Losing Bidders be Compensated?

Published: Jun 4, 2014

After the bids on certain projects are over and a contract has been awarded, a natural question arises: “Should the losing bidders be somehow compensated for the time, effort and money they’ve put into developing the proposal?”

A recent project that spurred interest in this question was the California High-Speed Rail, which will span more than 800 miles with trains going up to 200 miles per hour. In February, the California High-Speed Rail Authority proposed that losing bidders (in the second phase of the project, concerning a 60-mile stretch) be compensated with stipends of up to $2 million per contractor. Recently, the proposal was accepted and it was announced that all four losing bidders will receive the $2 million stipend.

But even before the proposal was accepted, it caused controversy as to whether this was the right way to spend taxpayer money. Let’s look at the two sides.

The “Yes” Side of the Argument

The California High-Speed Rail Authority justified their decision with the argument that the $2-million reimbursement would encourage bid competition. This could potentially lead to better-quality bids, that are also lower in cost, saving a lot more taxpayer money in the long run.

The Authority’s estimate is that in preparation for the bid, it cost each contractor close to $6 million to create a proposal, so the $2 million in awards will at least partially compensate them for the investment. Furthermore, the contractors had to prove they, indeed, invested a large sum of money in developing the bid. Finally, the Authority said that bids of little or no value would not be considered for the stipend.

But perhaps the strongest argument in favor of the proposal is that the state of California now has access to four good quality proposals. Some of them contain ideas which are applicable to similar projects and, therefore, contractors deserve to be reimbursed for them.

It’s important to note that a proposal like this is not without precedent. It’s a standard practice for high-cost projects and, in the case of California, has already been implemented by Caltrans. Stipends were also available during the first phase of the project.

The “No” Side of the Argument

Of course, the Authority’s proposal is not without its critics. During a public discussion of the proposal, Richard Tolmach, California Rail Foundation’s president, called it “a little bit rich,” citing a similar project in Texas where the amount of the entire stipend (to be split up among contractors) was $2 million.

High-speed rail bidders pool

Image Source : UT San Diego

But for many people the issue might have less to do with the amount of the compensation, than with the concept of compensating contractors in the first place. A recent poll, conducted by UT San Diego, found that 76% of respondents think that losing bidders should receive no monetary awards. For comparison, 7% said $500,000 would be an appropriate reimbursement, 2% think it should be $1 million and the remaining 13% agree that $2 million is what the contractors deserve.

Some say that this is a waste of taxpayer money and that it’s not the best way to conduct bidding in construction. Jon Coupal, president of the Howard Jarvis Taxpayers Association, thinks this is much like a contractor bidding on a home construction project. If they really want to win the project, they will make sure their bid is of high quality and offers good value for the client’s money. He further adds that the stipend is “almost an incentive to submit a bid, any bid, just because of the two million dollars.”

This is a brief overview of the two sides of the argument. What is your take on the issue? Do you know of other projects that have adopted a similar compensation for the losing bidders? We’d love to hear your thoughts in the comments section below.

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Victor Lance is the founder and president of Lance Surety Bond Associates, Inc. He began his career as an officer in the U.S. Marine Corps, serving two combat tours. As president of Lance Surety, he now focuses on educating and assisting small businesses throughout the country with various license and bond requirements. Victor graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan's Ross School of Business.