unbalanced bids part 04-03 – unbalanced bids march 1, 2001

Unbalanced Bids

Part 04-03 – Unbalanced BidsMarch 1, 2001

Purpose To acquaint students with the

concept of unbalanced bids and why Contractors submit them, and why Owners allow this practice.

Learning Objectives Students should be able to

compute the advantage, in terms of Net Present Value, of a simple unbalance bid example.

Basic Idea The basic idea is to “over charge”

for work in the front-end of the contract.

While “under charging” a equal amount at the tail-end of the contract.

And investing the “surplus” for as long as you can “get away with it.”

Lets Assume the Following “Engineers Estimate.”

1 2 3 4 5 6 7 8 9 10 11 12

Work 2 10 20 30 30 30 30 20 10 1 1 1

$$'s 2 10 20 30 30 30 30 20 10 1 1 1

Work Units and Corresponding estimated $$ Amounts per contract period.

Let’s Say The Project was Actually Bid and Executed like this.

1 2 3 4 5 6 7 8 9 10 11 12

Work 2 10 20 30 30 30 30 20 10 1 1 1

$$'s 2 10 20 30 30 30 30 20 10 1 1 1

1 2 3 4 5 6 7 8 9 10 11 12

Work 2 10 20 30 1 1 1 30 30 30 20 10

$$'s 20 20 30 40 1 1 1 20 20 20 10 2

Engineers Estimate on Top; Contractors plan on Bottom. The $$ sums are the same.

Look at the NPV at 10%

1 2 3 4 5 6 7 8 9 10 11 12

Work 2 10 20 30 30 30 30 20 10 1 1 1

$$'s 2 10 20 30 30 30 30 20 10 1 1 1

PV@10%122 132 135 126 106 83 59 31 12 3 2 1

1 2 3 4 5 6 7 8 9 10 11 12

Work 2 10 20 30 1 1 1 30 30 30 20 10

$$'s 20 20 30 40 1 1 1 20 20 20 10 2

PV@10%128 118 108 86 51 54 59 64 48 31 12 2

Class DiscussionWhat will the Owner Say?

Is the the NPV the same? At 0%?, at 10%?

What happens if the Owner Decides to “fire” the Contractor?

Can you name any “notorious” local examples?

Do you think that you can repeat this on an Exam?

Another Example: The Engineer’s Estimate calls for

1,000,000 CY of dirt to be moved at $1.00/CY and 10,000 CY of rock to be moved at $5.00/CY for a total of $1,050,000.

1,000,000 $1.00 $1,000,000

10,000 $5.00 $50,000 $1,050,000 <- Total

You Bid You assume that the Estimate is in

Error and you bid $10 for the rock and $.95 for the dirt.

1,000,000 $0.95 $950,000

10,000 $10.00 $100,000 $1,050,000 <- Total

You just made an extra $45,250

The estimate was in error by 5,000 CY of Rock and You made money.

995,000 $0.95 $945,250

15,000 $10.00 $150,000 $1,095,250 <- Total

Class DiscussionWhat will the Owner Say or Do?

Q: How can the owner guard against this? A: 10% renegotiation rule. A: Better estimates? What if a consultant

made the estimate? A: Change unit price categories.

Q: Should the owner even care? A: If the errors are accidental (random), it

will all balance out.

Class Assessment Please take a minute to write 1

sentence on the “muddiest” topic.