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Unbalanced Bids

Unbalanced Bids. Part 04-03 – Unbalanced Bids March 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.

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Unbalanced Bids

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  1. Unbalanced Bids Part 04-03 – Unbalanced Bids March 1, 2001

  2. Purpose • To acquaint students with the concept of unbalanced bids and why Contractors submit them, and why Owners allow this practice.

  3. Learning Objectives • Students should be able to compute the advantage, in terms of Net Present Value, of a simple unbalance bid example.

  4. 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.”

  5. Lets Assume the Following “Engineers Estimate.” Work Units and Corresponding estimated $$ Amounts per contract period.

  6. 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.

  7. Look at the NPV at 10%

  8. 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?

  9. 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

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

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

  12. 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.

  13. Class Assessment • Please take a minute to write 1 sentence on the “muddiest” topic.

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