In its February 2015 decision in Montana Construction Corp Inc. v. J Fletcher Creamer & Son, Inc, the Superior Court of New Jersey, Appellate Division, upheld the Township of Lyndhurst’s rejection of an unbalanced bid. The case dealt with a solicitation for emergency water main and sewer main repairs. The Township rejected two bids that contained unbalanced pricing and the bidders challenged this decision.
As the appeal court summarized, the bidders had submitted bids that contained nominal pricing in certain price categories which, according to a prior lower court decision, rendered the bids unbalanced:
Judge Friscia concluded that the term “unbalanced bids/penny bids” in the township’s bid proposal form clearly meant “nominal amounts,” and bidders were forewarned that including nominal amounts in a bid would result in disqualification. The court agreed that the specification regarding unbalanced, penny bids was a non-waivable, material term. Montana’s bid was non-responsive. It included fourteen nominal bid amounts. Its bid “would have produced substantial disparities in costs” that would be “detrimental . . . to the municipality” and “adversely affect a fair and competitive bidding process.” Judge Friscia concluded that Montana failed to establish that the municipality was arbitrary or capricious in finding that Montana’s bid was unbalanced. In doing so, she noted the record evidence that Montana proposed inflated prices for some contract items to compensate for its nominal bid costs.
The appeal court explained that an “unbalanced unit price bid is one where one or more of the items bid does not carry its share of the cost of the work and the contractor’s profit” and that these types of bids include “front-loaded bids” and “nominal price bids”:
One example is “a front-end loaded bid, [which] contains inflated bid items for work to be completed at the beginning of a contract and subsequent offsetting, understated bid items for work to be completed later in the contract.” M.J. Paquet, Inc. v. N.J. Dep’t of Transp., 171 N.J. 378, 399 (2002). A “front-loaded” unbalanced bid poses the danger of placing an irresponsible bidder in a position of bidding higher on the earlier work to be done under the contract and lower on the latter work. Such a bidder could, after having taken his profit out of his early payments on a job, fail to complete the work called for. [Armaniaco, supra, 62 N.J. Super. at 482.]
Another example of an unbalanced bid is not directly related to the timing of the work. Rather, it is one “based on nominal prices for some work and enhanced prices for other work.” Frank Stamato & Co. v. City of New Brunswick, 20 N.J. Super. 340, 344 (App. Div. 1952). That is the kind of imbalanced bid implicated here. The bidder overprices items that could be used in greater quantities than estimated in the proposal, while underpricing those bid items that might be used in significantly lesser quantities. See Boenning v. Brick Twp. Mun. Utils. Auth., 150 N.J. Super. 32, 36-37 (App. Div.), certif. denied, 75 N.J. 537 (1977).
The appeal court then explained how unbalanced bids can undermine the integrity of a competitive bidding process:
This kind of unbalanced bidding presents other risks to the public. In the case of indeterminate items that are subject to a public engineer’s post-contract quantification, there is the risk of “collusion or fraud between the contractor and the engineer whose discretion will be invoked.” Id. at 36. Even absent collusion, where the quantity of an item is uncertain and subject to significant swings, an extremely high unit price for that item, although offset by nominal bids for other items, could present an exceptionally large cost impact, if the highly priced item is required in great quantities. Armaniaco, supra, 62 N.J. Super. at 486-87. The risk is heightened if the contractor retains the discretion to allocate the unit-priced items. To guard against this risk, a municipality is empowered to reserve the right to reject unbalanced bids. Id. at 487.
The appeal court acknowledged that, while not technically illegal, unbalanced bids caused significant public interest concerns and that the municipality was justified in expressly prohibiting these bids in its solicitation documents:
We recognize that unbalanced bids are not per se illegal. See Riverland Constr. Co. v. Lombardo Contracting Co., 154 N.J. Super. 42, 45-48 (App. Div. 1977), aff’d o.b., 76 N.J. 522 (1978). A bid that front-loads costs may be justified by a bidder’s need to cover mobilization costs and “general costs of getting the work started,” which are not otherwise included in the bid. Armaniaco, supra, 62 N.J. Super. at 482. A bidder may purposely propose nominal or below-market prices because of a desire to secure a foothold in a market and underbid its competition. Riverland, supra, 154 N.J. Super. at 47.
Nonetheless, an unbalanced bid may be problematic when: (a) nominal bids on some items are offset by excessive bids on others; (b) the unbalanced bid relates to fraud or collusion; or (c) the unbalanced bid undermines fair competition. “[T]he submission of unbalanced bids distorts the public bidding process and may make a mockery of fair competition between bidders.” Paquet, supra, 171 N.J. at 400 (internal quotation marks and citation omitted). Although unbalanced bids are not per se illegal, a municipality may expressly prohibit them. As we stated, “[U]nbalanced bids are generally allowed absent a specific prohibition in the public entity’s bid specifications or proposal.” M.J. Paquet, Inc. v. N.J. Dep’t of Transp., 335 N.J. Super. 130, 139 (App. Div. 2000), aff’d in part and rev’d in part on other grounds, 171 N.J. 378 (2002); see also Armaniaco, supra, 62 N.J. Super. at 487 (stating that a municipality could reserve the right to reject unbalanced bids to guard against the “catastrophe[e]” of greater than anticipated quantities of a high unit-priced item).
As this case illustrates, public institutions would be wise to expressly prohibit unbalanced bids in their solicitation documents in order to protect themselves from the type of bid price manipulations that could undermine their ability to properly assess competing prices and obtain value for money for their organizations.