By Lisa Cole, Graniterock Asst. General Counsel
It's bid day. You're the prime contractor's lead estimator. Subcontractor bids are flying in from every angle. Your fax machine and email inbox have completely filled up. In the last half hour, you scramble to find the low bids for each scope of work, re-check your numbers, list your subs, and submit your bid.
A few minutes later, you find out you're low, and the agency is going to award you the work.
Can you rely on the prices your subs supplied you with today?
A California Court of Appeal decision published last month cast a bit of doubt on that question.
The case involved the construction of an education building at Diablo Valley Community College in Pleasant Hill. The prime contractor was Flintco Pacific. One of Flintco's subs was TEC Management Consultants. TEC bid the glazing package.
TEC's number was $1.3 million. It was low and Flintco used it.
In the chaos of bid day, that number was just about all Flintco absorbed from TEC's bid. A bottom line price of $1.3 million for the glazing work.
TEC included on its bid a few conditions and disclaimers. One was: "a deposit of 35% is required for this work." Another was: "we will not accept liquidated damages." Still another: "this bid can be withdrawn if not accepted within 15 days."
Upon award, Flintco did what many prime contractors do. They plugged the applicable price into their standard subcontract form and sent it to all of the subcontractors who had been low and listed.
TEC received that standard subcontract form and objected. It refused to sign because the subcontract didn't incorporate the conditions to its bid that TEC deemed essential.
TEC and Flintco came to an impasse. Flintco wanted TEC to sign its standard subcontract, claiming that it’s industry standard that the only essential and binding terms of a subcontractor’s bid on bid day are the price and the time for performance. TEC claimed that all three of the outlined conditions or disclaimers in its bid were essential, and Flintco couldn't demand a subcontract that ignored them.
When TEC refused to perform, Flintco found a new glazing subcontractor, who agreed to perform the work for $300,000 more than TEC's bid price. Flintco then sued TEC to recover that $300,000 delta.
Both the trial court and the California Court of Appeal found in favor of the sub, TEC.
The Court of Appeal rejected Flintco's argument that the "industry standard" dictated Flintco could rely solely upon TEC's bottom line price and schedule terms, and ignore everything else.
Instead, the Court ruled that at least several of TEC's conditions and disclaimers – such as a 35% deposit requirement, a disclaimer of liquidated damages, and a 15-day bid acceptance period – were material parts of its bid.
More importantly, it held that Flintco, when it replied to TEC with a standard subcontract not including those specific conditions and disclaimers, actually submitted a counter-offer to TEC, which had the effect of rejecting TEC's original bid and releasing TEC from it. In other words, the delivery of that standard subcontract form completely reset the negotiating terms between the two parties.
As counsel for a company that regularly bids as a prime contractor, this opinion has prompted me to work with my team of estimators to cast an extra level of scrutiny on the conditions and disclaimers in our subcontractor's bids prior to final bid submission.
If you work within a company that regularly operates as a prime contractor, I hope you consider doing the same.
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