Unblanced Bid

The Effects of
Unbalanced Bidding
Engineering contract
Name \ Hazem Eshtewi

Reg No. \ 11313017
Supervised By \ Dr. Medhat Lashien
The Effects of Unbalanced Bidding
Contents
Contents ................................................................................................... 1
Introduction ............................................................................................. 2
Unbalanced bids....................................................................................... 4
Theoretical models ................................................................................... 5
Empirical studies ..................................................................................... 8
The Impact of an Unbalanced Bid on the Change Order Process ........... 10
Mathematically Unbalanced Bid ......................................................... 12
Materially unbalanced Bid .................................................................. 13
Changes .............................................................................................. 14
A bid-unbalancing method for lowering a contractor’s financial risk ..... 20
References ............................................................................................. 23
1
Introduction
An owner and contractor may agree to structure the contract on
specified unit prices for the estimated quantities of the work; Unit
price contracts are somewhat more
common on public works,
engineering, and road building
projects.
In a unit price arrangement, the

contractor is able to provide the owner with a specific price for a
particular task or scope of work. However, the actual quantity or
number of units may be undetermined or unknown. Accordingly,
the owner agrees to pay the contractor only for the actual units
that the contractor provides, installs, or constructs on the project.
 The schedule of unit prices based on approximate quantities of

the items of work.
 Most countries use the metric system of measurement process

in the unit price contracts, but in the United States, there
common use of the British system (cube square foot - cubic
yard) in the measurement of construction works.
 The unit prices for a particular item of work will vary from job
to job.
2
 If the quantity of an item is small, that Item will require

proportionately more labor per unit and therefore the cost per
unit will be higher. This fact is recognized by most unit price
contracts.
The primary advantage to the owner in a unit price contract is

that he can proceed with the work with a minimum of risk and it
is Fair basis for competition.
The owner's primary disadvantage in a unit price contract lies

in the possibility of serious inaccuracies in the approximate
quantities of work and a greater expenditure than originally
expected, the exact final price of the project is not known to the
owner until the completion of the project
This contract is suitable only for construction and supplier

projects that involve accurate identification of different types of
3
items, but not their numbers, in the contract documents. In

addition, the most important disadvantage is unbalanced bids and
this report will define the effects of unbalanced bidding in
projects.
Unbalanced bids
It is usually advantageous for a contractor to use unbalanced
bidding strategies in order to benefit from the uneven distribution
of markup among the project’s component items. The contractor
has to decide on the unit prices of all the project’s activities so
that the summation of the project’s
component items equals to the tender
price. This strategy leads contractor to
price some items with a high markup
and others with a low one in order to
compensate.
Tendering relatively high unit prices
on items scheduled for early completion and proportionately
lower prices for other items is a type of unbalanced bidding. Well-
managed unbalanced bidding can help to obtain monies earlier for
financing the later stages to improve cash flow of the project.
Contractors may provide their own estimate of the quantities for

each items of the contract. If their estimations differ from those
in proposals, overpricing items expected to exceed the proposal
4
estimates while underpricing the ones that appear to be

overestimated could formulate another type of unbalanced
bidding.
This strategy can help the contractor to submit a lower bid or

improve the profitability of his tender. However, there can be
substantial risk.
The earlier work targeting unbalanced bidding, which consists

of both theoretical modelling and empirical studies.
Models
Theoretical Empirical
Theoretical models
There is a lack of exact definition of unbalanced bidding.
Models are one way of making concepts more concrete. Two
types of models have been developed regarding unbalanced
bidding. A first type focuses on assisting practitioners to detect
possibilities for unbalanced bidding in the tendering stage and
how to exploit these. The detection models supports clients’
interests and exploitations models assist contractors in optimizing
the skew.
5
The second types of models are not designed to provide direct

practical guidance to unbalanced bidding. Rather, they focus on
predicting and measuring the extent of the phenomena in order to
determine efficiency effects. The present paper belongs to this
latter category.
In particular, there are two prominent papers in this category.

The first is Ewerhart and Fieseler, who model a UPC contract
where two tasks are required in order to complete a project; 1 unit
of material and h hours of labour. The contractors have private
information about their type, i.e. being fast or slow in order to
finish the task. The client does not know this information; hence,
contractors are better informed than the client is.
The UPC auction starts by the client announcing his estimate

on the number of hours required to complete the project. This
estimate will be underestimated for slow types and overestimated
for fast types.
Based on their type, the contractors submit bids i.e. price

vectors of material and labour. Final payment is based on the
vector product of prices and quantities, where the latter is actual
hours put into the project and one unit of material.
The usual prediction of unbalanced bidding applies; the slow

types face an underestimated client prediction of hours and will
mark up the price for labour and compensating the price for
6
material downwards. This will result in a corner solution i.e. one-

sided bidding, where slow types will submit null bids for labour
by fast types and for material.
The model predicts that the most inefficient types i.e. the
slowest contractor, will win the bidding process.
This is because the slowest contractor will be able to exploit the

gap between the estimated hours and the actual hours put down.
The slow types profit function is increasing in hours.
Ewerhart and Fieseler express this as the slow types are being
subsidized. In the extended version of the model, it is shown that
the subsidy to inefficient contractors will force the efficient ones
to bid more aggressively, having a positive effect on client cost.
The second prominent article is Athey and Levin, who model

unbalanced bidding in timber auctions. These auctions differ
from construction projects as the buyers of timber harvest rights
are the bidders, and not the sellers as in a construction project.
The model consists of two species of timber and allows the

buyers to invest in private information. The buyers inspecting the
tract before the auction in order to estimate the proportion of
timber species do this.
The auction starts with the Forest Service (seller) announcing

their estimated proportion of timber species and total amount. In
7
reverse order from the above model, the buyers will mark up the
price on overestimated timber types and compensate through
bidding a lower price on the underestimated type in order to
secure a high bid ex ante and pay less ex post. Payment is made
by the actual amount of timber and the ex-ante prices.
As in the above model, a risk neutral bidder will end up in a

corner solution submitting the buyer’s reservation price (in the
extreme; zero).
The two models differ in respect to what there is asymmetric

information about. In Ewerhart and Fieseler the contractors are
better informed about their own ability while in Athey and Levin
they are better informed about the project’s characteristics. Even
so, both papers predict corner solutions that entail zero price
bidding on overestimated quantities.
Empirical studies
The empirical work on unbalanced bidding has focused on
capturing the correlation between differences in prices and
quantities respectively.
Athey and Levin (2001) have data from both oral (N=697) and
sealed (N=63) timber auctions. The study has data on the sellers
estimated volume and proportion of timber type, ex ante bids and
ex post (actual) volume and proportion of timber type.
8
This data enables the authors to calculate actual payments.

Some control variables as number of bidders are also included.
The overall conclusion is that private information is used in the
bidding by the buyers. However, the information rents are to
some extent offset by competition.
This empirical result can be related to the theoretical argument
put forward in Ewerhart and Fieseler about the inefficiency of
unbalanced bidding being offset by strengthen competition by the
efficient contractor.
Regarding sealed bidding, which is the most common auction
form used in construction, the study show that 65 percent of the
winning bids are skewed in the expected direction. In other
words, the direction in which the theory predicts, i.e. raising bids
on overestimated type of timber.
The empirical models regress the skew parameter, i.e. dollars
spent on the overestimated species of wood, on the sellers’
misestimate of the tract with some control variables. In
accordance with theory, the correlation is positive, which the
authors interpret as the winning bid incorporating the superior
information into the bid.
Bajari et al test three types of mark-ups in construction auctions,
where one is the existence of unbalanced bidding. The data
consist of 414 paving contracts from California between the years
1999 and 2000, which contains 1939 bids from 271 contractors.
9
The actual ex post quantities and “Blue book” prices are also
available.
This data makes it possible to regress quantity overrun on the
dependent variable percentage difference between the winning
and the blue book price. In accordance to what the theory predicts
the correlation is positive, indicating that on average a 10
percentage overrun on quantities will result in a mark-up of
approximately 0.27 per cent.
The Impact of an Unbalanced Bid

on the Change Order Process
As both public and private owners become more cognizant of
the perils of incomplete and ambiguous contract documents, their
attention has been focused on improving the quality of these
documents.
The hoped-for benefit is that there will be fewer claims from

contractors based upon the implied warranty of the adequacy of
the plans and specifications. An equal amount of attention should
be directed towards the bid forms and a proper evaluation of the
bids.
Due to the nature of certain projects, bids are requested in unit

price format with the low bid determined by an extension of the
10
unit price by an (owner furnished) quantity estimate. It is

relatively easy to detect an unbalanced bid in the evaluation of a
unit price contract. In fixed price lump-sum contracts, the process
is more difficult and since it contemplates completion of all work,
is it even necessary.
The unbalancing of a bid is the shifting of part of the cost of

work for one element of the work to another element of the work.
The degree to which this is accomplished determines whether a
bid is simply mathematically unbalanced or materially
unbalanced. In public sector contracts, an unbalanced bid is
objectionable because it:
 Constitutes an advance payment.

 May not ultimately prove to be the best offer.
 Is detrimental to the concepts of competitive bidding.
In general, these characteristics are significantly problematic to

warrant the rejection of the bid, or if procedures allow, a
negotiation aimed at the balancing of the bid without changing
the total bid.
Private owners, on the other hand, are not burdened with
procurement regulations that prohibit this type of activity. They
have invested a great deal of time in the planning and
development of the project, the design and production of contract
11
documents and once the project has been bid, the pressure to start
work may obscure a need to identify and eliminate an unbalanced
bid.
Not only are unbalanced bids difficult to detect in a lump sum
bid, but it can be argued that if the entire project is constructed,
an imbalance will have no effect by the end of the project.
Unfortunately, somewhere along the way the owner may add or
delete work and if it affects the unbalanced work, the change
order process is adversely impacted.
Mathematically Unbalanced Bid
A mathematically unbalanced bid is one in which each bid item
(or breakdown of scheduled values in a lump-sum contract) fails
to carry its proportionate share of the overhead and profit in
addition to the necessary costs for the item. The results are
understated prices for some items and enhanced or overstated
prices for others.
A common example is Front End loading, wherein activities
scheduled to be performed early in the project (such as demolition
or site work) have values encumbered with an excessive
proportion of planned overhead costs and anticipated profit. As
innocuous as it may seem, this “advance payment” characteristic
is objectionable. If excess funds are paid at an early stage of the
contract, the potential exists for an inadequate amount to properly
complete the project and protect the owner’s interests. Another
12
serious problem, and the subject of this article, is that it will be

difficult to establish a cost basis for equitable adjustments when
contract quantities or work is changed.
Materially unbalanced Bid

A bid that is materially unbalanced has shifted not only a
disproportionate amount of overhead and profit, but also some
portion of the actual cost of elements of work. In this situation,
the price (or scheduled value) for some work can be understated
and significantly less than the actual cost of that work, with an
overstatement of prices for other aspects of the work.
One illustration of the hazards of this type of bid is a case where

a contractor anticipated an overrun in a the line item bid for
drilling and grouting subsurface voids in order to mitigate the
effects of subsidence.
Costs for other parts of the work were shifted to the unit prices
for the drilling and grouting. When the drilling and grouting work
was eliminated from the contract, the contractor complained that
it had not been fairly compensated for the understated line items
of work that it had performed. In its decision, the Board of
Contract Appeals held the contractor responsible for the
unbalanced nature of the bid.
13
While this court did not view the unbalanced bid as objectionable
as others have, the costs of the resulting dispute between the
government and the contractor could have been avoided had the
imbalance been detected prior to the award.
As previously, noted, an unbalanced bid is flawed and it may

prove not to be the most advantageous to the owner. An
uncorrected unbalanced bid carries increased potential for
disputes and claims with the increased costs of resolution for both
the owner and the contractor.
Changes
The process of reaching agreement on the amount of an
equitable adjustment should be straightforward and generally
adhere to the difference between the cost of the work prior to the
change and the cost after the change. In unit-price contracts, price
adjustments are often triggered by variations in quantities that
exceed the thresholds contemplated by the contract.
A new unit price is determined after agreement is reached

regarding the amount of the adjustment to the unit price. The
presence of unbalanced unit prices often adds an obstacle to the
process.
Contractors seeking to obtain an advantage because of an
inaccurate quantity estimate quote prices below cost for items
14
perceived to be under-run and overstate prices for items in which

a large overrun is anticipated. The risk of this strategy is that
variations may not occur, that they will be contrary to
expectations or that the overstated elements will be deleted from
the contract.
The dispute that arises from this scenario is whether a contractor

is entitled to maintain its original profit structure, thereby
continuing the advantage of the
unbalanced bid. Decisions have
supported two opposing theories
relating to the basis for the
equitable adjustment. For example,
in a situation in which unit prices
were inflated in anticipation of an
overrun, and the overrun
subsequently exceeds the variation
in quantity threshold, an owner
would expect to be entitled to relief from the overstated prices.
Several courts have found otherwise, reasoning that the basis for
any adjustment is the difference between the performance cost of
the overrun units and the performance cost of the contract
(estimated quantity) units.
15
If the unit price was overstated because of an excessive mark-

up for overhead and profit, this approach will continue to burden
the owner with the inflated prices. The owner will pay for the
consequence of a bad quantity estimate and the failure to identify
an unbalanced bid. It is of some consolation that an additional
cost would have been incurred at the outset if the quantity survey
had been more accurate.
Therefore, if the contractor’s costs are the same for the base
contract units and the overrun units, no adjustment is warranted.
In this example, the owners could have benefited from
identification of the imbalance and would not have been obligated
to pay inflated prices for the overrun units. The issues would not
exist if the quantity estimate were accurate.
Nevertheless, the owner and the contractor were additionally

burdened with the time and expense of resolving the dispute. In a
more recent decision, the United States Claims Court decided that
the basis for the adjustment should be the actual performance
costs of the overrun units less the contract price for the units.
The court’s reasoning was that once the variation in quantity

threshold has been exceeded, contractors should obtain relief
from understated prices, and owners should not have to continue
16
to pay overstated prices that create a windfall for the contractor.

The Burnett decision is consistent with an earlier case that
involved a lump-sum contract and an unbalanced schedule of
values.6 In this example, a dispute (that appears to have taken 18
years to resolve) occurred when the parties could not agree on an
equitable adjustment for elimination of an element of the work.
The contract was for the construction of a subway project and the
work in question was the trenching excavation and backfill for
the installation of underground cables
In a schedule of values that was submitted and approved for the

purpose of calculating
progress payments, the
contractor listed
approximately $1,300,000
for the trenching work.
Subsequently, the contractor negotiated a subcontract for the

trenching at a substantially lower cost. Prior to the initiation of
the work, the owner changed the requirements and decided to
have the cables installed above ground. The overstated trenching
price, incorporated in the schedule of values, contributed to the
dispute submitted to the Army Corps of Engineers Board of
Contract Appeals for resolution. The board ruled that the schedule
17
of prices was presumed to be reasonable and that the owner could

base the credit for the equitable adjustment on the schedule’s
prices for the work.
The board also concluded that a credit should be the scheduled

amount plus an additional 5 percent for profit on the deleted work.
Based upon the board’s ruling, the owner issued a deductive
change order. Predictably, the contractor appealed to a district
court that reversed the board’s decision stating that the schedule
of prices were “simply an allocation…for administrative
purposes under lump-sum contracts,” and remanded the matter to
the Board of Contract Appeals to determine a reasonable cost for
the work deleted. The board ultimately decided to utilize a cost
estimate prepared by a consultant to the owner and ruled that the
equitable value for the deleted work was $360,548. The owner
refused to adopt the board’s recommendation and continued to
use the schedule of values amount (plus 5 percent) as the basis of
the deduction. The contractor appealed to the district court, and
for a second time that court again ruled in the contractor’s favor.
The owner then appealed the district court’s decision to the U.S.
Court of Appeals. The Court of Appeals held that the equitable
adjustment was to be determined on the basis of cost and that the
line item values in the schedule could not be used to establish the
reasonable costs of the eliminated trenching.
18
In the General Railway Signal Co. example, the contractor and

the owner waged a battle for 18 years before the matter was
finally settled. This is a good example of how unbalanced bids,
and in this case the unwitting approval of an unbalanced schedule
of values, contributed to the evolution of the claim. The owner
had sufficient reason to question the schedule of values and failed
to do so.
Both parties incurred expenses that were entirely avoidable.

This case should be remembered by owners and contractors as an
example of the negative consequences of an unbalanced bid or
schedule of values. It is possible to identify an unbalanced bid, in
both unit price and lump-sum
contracts. Bids and schedules
of prices should be evaluated
and tested as a matter of
procedure to verify that the
project owner will not be
encumbered with an unbalanced bid or schedule. The process of
determining the imbalance is simple and represents a minimal
effort when compared to the potential costs of administering a
contract with the imbalance or refuting claims that arise from
under or overstated prices.
19
A bid-unbalancing method for

lowering a contractor’s financial
risk
A method is presented for unbalancing bids and optimizing the
allocation of overall project profits to individual activities by
considering the financial parameters of a project (bid mark-up and
projected cash flow), in conjunction with lowering the exposure
to possible financial disorder in the project. The method utilizes
the general concept of entropy and a variant of it (hereby termed
‘monetary entropy’, HM) as measures of a project’s perceived
level of disorder, in order to distribute the total bid mark-up to the
project activities.
The entropy-based bid-unbalancing method seeks to minimize

a possible financial disorder (the monetary entropy) resulting
from limited monetary resources available to the project and from
badly developed project cash flows.
The intended primary users of the method are contractors

during the initial bidding stage of a project.
When planning and executing construction projects one cannot

emphasize strongly enough the need to consider the effects that
imposed resource constraints (including financial constraints)
20
have on the sequencing of the tasks, on the overall project

duration and on the project profitability. In fact, resource-
availability constraints are common real-life construction
scheduling problems that limit a firm’s ability to deliver the
project under construction as originally planned. To that effect,
project schedules need not only include activity precedence
relations and activity duration assignments, but also resource
assignments (including cost) for all activities in the network.
In general, resource-constrained scheduling problems (RCSP) are

NP-hard optimization problems, the solution space of which (and
thus the complexity of the solution) increases drastically with a
project’s network size. A number of solution methodologies exist,
the most common of which are a combination of implicit
enumeration and heuristic techniques.
Bid-unbalancing as a resource-constrained construction

scheduling problem Should one consider money as a resource, the
bid unbalancing problem leads itself to a variant of the classical
resource-constrained scheduling problem (RCSP), in which an
optimal allocation of resources (money) is sought, subject to
constraints (the project budget) imposed on the project.
There are, in general, two categories of scheduling paradigms
that can be used in addressing resource constrained problems:
21
serial scheduling and parallel scheduling. In the former paradigm,

a priority list of activities is determined at time zero, with the
order of activities in the priority list independent of the resource
constraints. Given the priority list, activities are scheduled at the
earliest possible time at which the precedence constraints are
satisfied and the resources are available (Sakellaropoulos and
Chassiakos, 2004; Senouci and Eldin, 2004; Liu et al., 2005;
Colak et al., 2006). In the latter scheduling paradigm, the order of
activities is not determined at time zero. Scheduling decisions, in
this case, are made when activities are planned to begin and
resources are available.
In terms of parallel resource-constrained scheduling, the

fundamental issue is which among competing activities will
receive the required resources first.
The answer to this question is a dynamic optimization problem

with the planner dynamically evaluating his options at every
junction in the construction process.
22
References
 Management and Innovation for a Sustainable Built
Environment ISBN: 9789052693958 20 – 23 June 2011,
Amsterdam, the Netherlands.
 Improving the Procurement Process – Unbalanced Bids Jeff
Griffiths, Auditor Jan 07.
A fuzzy-based model for unbalanced bidding in
construction, Abbas Afshar, Iran University of Science and
Technology, Tehran, Iran.
 A bid-unbalancing method for lowering a contractor’s
financial risk, SYMEON E. CHRISTODOULOU,
Department of Civil and Environmental Engineering,
University of Cyprus.
 The highs and lows of unbalanced bidding models, David
Cattell Bond University.
 The Impact of an Unbalanced Bid on the Change Order
Process, Frank A. Manzo.
 Course book (engineering contracts)
23

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The Effects of

Name \ Hazem Eshtewi

Theoretical models ................................................................................... 5

Empirical studies ..................................................................................... 8

The Impact of an Unbalanced Bid on the Change Order Process ........... 10

Mathematically Unbalanced Bid ......................................................... 12

Materially unbalanced Bid .................................................................. 13

A bid-unbalancing method for lowering a contractor’s financial risk ..... 20

In a unit price arrangement, the

 The schedule of unit prices based on approximate quantities of

 Most countries use the metric system of measurement process

 If the quantity of an item is small, that Item will require

The primary advantage to the owner in a unit price contract is

The owner's primary disadvantage in a unit price contract lies

This contract is suitable only for construction and supplier

items, but not their numbers, in the contract documents. In

Contractors may provide their own estimate of the quantities for

estimates while underpricing the ones that appear to be

This strategy can help the contractor to submit a lower bid or

The earlier work targeting unbalanced bidding, which consists

The second types of models are not designed to provide direct

In particular, there are two prominent papers in this category.

The UPC auction starts by the client announcing his estimate

Based on their type, the contractors submit bids i.e. price

The usual prediction of unbalanced bidding applies; the slow

material downwards. This will result in a corner solution i.e. one-

This is because the slowest contractor will be able to exploit the

The second prominent article is Athey and Levin, who model

The model consists of two species of timber and allows the

The auction starts with the Forest Service (seller) announcing

As in the above model, a risk neutral bidder will end up in a

The two models differ in respect to what there is asymmetric

This data enables the authors to calculate actual payments.

The Impact of an Unbalanced Bid

The hoped-for benefit is that there will be fewer claims from

Due to the nature of certain projects, bids are requested in unit

unit price by an (owner furnished) quantity estimate. It is

The unbalancing of a bid is the shifting of part of the cost of

 Constitutes an advance payment.

In general, these characteristics are significantly problematic to

serious problem, and the subject of this article, is that it will be

Materially unbalanced Bid

One illustration of the hazards of this type of bid is a case where

As previously, noted, an unbalanced bid is flawed and it may

A new unit price is determined after agreement is reached

perceived to be under-run and overstate prices for items in which

The dispute that arises from this scenario is whether a contractor

If the unit price was overstated because of an excessive mark-

Nevertheless, the owner and the contractor were additionally

The court’s reasoning was that once the variation in quantity

to pay overstated prices that create a windfall for the contractor.

In a schedule of values that was submitted and approved for the

Subsequently, the contractor negotiated a subcontract for the

of prices was presumed to be reasonable and that the owner could

The board also concluded that a credit should be the scheduled

In the General Railway Signal Co. example, the contractor and

Both parties incurred expenses that were entirely avoidable.

A bid-unbalancing method for

The entropy-based bid-unbalancing method seeks to minimize

The intended primary users of the method are contractors

When planning and executing construction projects one cannot

have on the sequencing of the tasks, on the overall project

In general, resource-constrained scheduling problems (RCSP) are

Bid-unbalancing as a resource-constrained construction