Unbalanced Bids Part – Unbalanced Bids March 1, 2001

RAT # Take out a sheet of paper and put your name on it, etc. Take 2-minutes to define an unbalanced bid.

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

Let’s Say The Project was Actually Bid and Executed like this. Engineers Estimate on Top; Contractors plan on Bottom. The $$ sums are the same.

Look at the NPV at 10%

Class Discussion What 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. <- Total

You Bid You assume that the Estimate is in Error and you bid $10 for the rock and $.95 for the dirt. <- Total

You just made an extra $45,250 The estimate was in error by 5,000 CY of Rock and You made money. <- Total

Class Discussion What 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.