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Should You Always Take The "Low Bid"?

As the security manager for your company, you have just designed a new video surveillance system to observe your parking lots. You prepared a written bid specification, and submitted it to several security systems contractors in the local area. You conducted a pre-bid walkthrough with all the bidders to fully explain the system that you require.

 

It's two weeks later and you have received three bids. One is for $140,000, one is for $120,000, and one is for $75,000. What gives? How can there be so much disparity in the bid prices?

 

The low bid of $75,000 is well below the $125,000 that you budgeted and you sure have a lot of places where you could use that extra $50,000. Should you accept the low bid?

 

As a general rule, a variation of 10% to 20% in security system bids is normal. Variations of greater than this sometimes occur, but a bid that is 50% lower than the next lowest bid should always raise a warning flag.

 

Most qualified security systems contractors pay about the same wages to their employees and usually pay about the same prices for their equipment. Although some larger companies purchase in volumes that allow them to receive reduced prices for equipment, this savings is often offset by the increased administration and overhead costs incurred by the larger company.

 

Large variations in bid prices or an unusually low bid can be caused by any one of the following:

  • Contractors not proposing equal quality equipment. This is often occurs when there is no bid specification or when the specification does not clearly define the equipment requirements.
  • Contractors not proposing same quantity of equipment. This most often occurs when the quantity of equipment is not clearly spelled out in the bid specifications or other design documents. If the specification says "provide cameras to view parking lots" and does not spell out the number of cameras or camera locations then this type of variation is almost certain to occur.
  • Contractors not proposing same type of accessories. One contractor may be providing equipment with all available accessories, another may be providing a "bare bones" configuration. For example, one contractor may be providing environmental camera housings that include a sunshield, a heater, and a blower. The other contractor may only be providing a simple outdoor housing with none of these accessories. Unless accessory items are clearly called out in the specifications, major deviations in bid prices can be expected.
  • Contractors underestimate or overestimate amount of installation labor required. This is the one of the most common reasons for deviations in bid prices. Estimating the labor required for any given installation is not an exact science and is highly subjective. Unlike other construction trades, there are no recognized industry standards for estimating the installation of a security system.
  • Mistakes made in estimating. Bids are often put together hurriedly and under pressure. It is not uncommon for an estimator or salesperson to be finishing up the bid only hours before it is due. We have evaluated hundreds of security system bids and have found mistakes in a large percentage of them. Often when we evaluate a bid that is substantially lower than the others we find that the bidder has left one or more major cost items out of his or her bid.
  • Contractors proposing different levels of after-the-sale support. Items such as training, system programming and configuration, and warranty service are not free and cost the contractor money to provide. Each contractors idea of what constitutes "training" may differ greatly. One contractor may be planning on hiring a professional trainer from the manufacturer to conduct formal classroom training, another contractor may be only planning on having one of his technicians spend a few hours with you briefly explaining the system. Unless requirements for training and other support services are clearly spelled out in the bid specifications, this can be a major cause of discrepancies in bid prices.
  • Contractor deliberately underbids job (good motives). This is often known as "buying a job", and can be done for several reasons. In some cases, a contractor is relatively new and wants to use your job as a "showcase" that he can use as a reference to obtain future jobs. In other cases, a well-established out of state contractor may want to establish a local office in your city and wants to get the job to establish a local presence. A contractor may also see the potential to do lots of future work with your company and may underbid this particular project in order to get his "foot in the door" with your company.
  • Contractor deliberately underbids job (bad motives). There are a small number of unscrupulous contractors who deliberately underbid jobs with the intention of going after change orders in order to complete the job. These contractors are experts in finding weaknesses in your specifications and will take advantage of every ambiguity and omission. While much more common in the general construction trades than in the security industry, there are a few security systems contractors who take advantage of this technique, particularly on government jobs.

 

We recommend that you proceed with caution when evaluating an unusually low bid. There may be legitimate reasons why a bid is unusually low, and it is important that you fully understand these reasons before you enter into contract with the low bidder or dismiss the low bid out of hand. Here are a few suggestions for evaluating low bids:

  1. Ask the low bidder and the second lowest bidder for a detailed, line-by-line itemization of their bids. The itemization should list quantities and types of equipment, manufacturer and model number, and unit cost for each item. Some bidders are hesitant to provide this level of detail, but it is the quickest way to identify discrepancies or omissions in bids.
  2. Have each bidder provide an installation schedule that shows how they intend to complete the installation and in what time period. Make sure that the schedule indicates the number of installers and other employees that will be on site during each period of the installation.
  3. If not clearly spelled out in the bids, have each bidder provide specific details about how they intend to provide training, system programming and configuration, and warranty service for this project.
  4. Check references of low bidder to see if they have a demonstrated track record of completing projects of this size and type. Request financial statements to determine if low bidder has financial resources to perform a project of this magnitude.
  5. If an obvious problem hasn't been identified after having completed the steps above, arrange a face-to-face meeting with the owner or general manager (not just the salesman) of the company submitting the low bid. Be frank; explain that his company has submitted a bid that is substantially lower than the other bidders and that you would like him to explain how this is possible.
  6. Consider retaining the services of an independent security consultant to evaluate your bid specifications and each bid proposal.
  7. If everything checks out to your satisfaction, consider awarding the contract to the low bidder with the provision that he provide a performance bond for the project. This type of bond typically costs between 2% and 5% of the contract price and is a usually a good investment. The performance bond protects you in two ways. First, if a contractor has the ability to obtain such a bond, it is a good sign that he is experienced and financially solvent. Secondly, if the contractor defaults on the project, the bonding company will step in and pay to have the project completed by another contractor.

 

Please contact us if you have any questions, or need help in evaluating bids for security products or services.

 

 

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