The second low bid method

Abstract

The low bid method has been the most common competitive bid selection approach used for public projects in the U.S. construction industry and worldwide. This method is usually coupled with a prequalification process to ensure that the lowest bidder has the financial capacity, the necessary experience, and enough bonding capacity to take charge of the project and to perform the work according to the project’s requirements. However, driven by their bad financial status or by their urgent need for work, some contractors tend to abuse the free and price-directed competitive nature of the low bid method by deliberately submitting extremely low bid prices in order to enhance their chance of winning and to at least cover their general and administrative expenses. Thus it is possible for the project to be awarded to an accidental or deliberate unrealistic low bid. This often leads to cost overruns, schedule delays, claims and further disputes between parties during construction. Alternatively, an owner could have paid a little more and reduced these risks by eliminating the lowest bid and rather awarding the contract to the second lowest bidder. This paper uses Monte Carlo simulation approach to analyze and model the second low bid method where the contractor whose bid is the second lowest one among submitted bids is awarded the contract. The simulation results are presented in nomographs that are used to determine optimal markup and optimum profit for a given project and to compare the merits and disadvantages of the low and second low bidding methods.