As spring makes way for summer, companies can shift focus from potential projects to a more manageable number of awarded projects. Although estimators have already analyzed countless details, the bidding process also encompasses lost projects and requires judgment calls under short deadlines.
When your team revisits the details of each awarded project, they should ask if any details in the bid documents are unclear, in which case the “duty to inquire” might require that you seek clarification.
Silence Is Not Golden
If a bid document contains a defect, discrepancy, conflict, error, omission, ambiguity, inconsistency, or otherwise lacks clarity or remains open to interpretation, the duty to inquire can shift risk significantly if clarification is not promptly sought.
The consequences of failing to seek clarification can be harsh. Contractors can lose legal protections that are central to doing business, like the Spearin doctrine (allowing contractors to rely on bid documents) or not allowing parties to take advantage of their own drafting mistakes.
The duty to inquire should not be filed away after bid lettings. Courts have held contractors responsible for failing to seek clarification of apparent, obvious, or “patent” problems, yet generally do not shift the risk if the problem was hidden or “latent.” As lost bids make way for awarded contracts, it is reasonable to expect that several previously hidden problems may now become apparent.
The Duty to Inquire Upstream
When submitting bids on public jobs, the duty to inquire can often be found spelled out in the bid documents.
South Dakota DOT Specifications (2004) offer a good example. Under Section 2.5, bidders are required to investigate the project site and contract documents, and the Contractor “shall immediately notify the Department of any apparent error, omission, or ambiguity in any part of the bid package.” Section 5.4 additionally provides:
The Contractor shall not take advantage of apparent errors or omissions in the Contract. If the Contractor discovers an error or omission, the Engineer shall be immediately notified of the error or omission and its perceived consequences. The Engineer will make corrections and interpretations as necessary to fulfill the intent of the Contract.
This is a common requirement. For example,
- Iowa DOT Specifications (2012) include similar provisions in Section 1102.09, Section 1104.01, and Section 1105.04.C.
- Minnesota DOT Specifications (2014) include similar provisions in Section 1205.1, Section 1504, and Section 1508.
- North Dakota DOT Specifications (2014) include similar provisions in Section 102.05 and Section 105.05.
- The South Dakota DOT is scheduled to publish new specifications in 2015. The final draft of those specifications currently being reviewed includes similar provisions in Sections 2.6 and 5.4. (The new Section 5.4 also incorporates the “project Q&A forum” recently implemented in South Dakota.)
The Duty to Inquire Downstream
The duty to inquire can also apply when accepting bids from lower tier contractors, subcontractors, and suppliers. When applied in this direction, an obligation to ask for clarification is not generally written into the contract, but has been adopted by courts.
The Iowa Court of Appeals decided a case last year allowing the prime contractor to accept an unrealistically low bid from an insulation subcontractor, because the prime contractor lacked the expertise to recognize the subcontractor’s error. Portzen Construction, Inc. v. Cal-Co Insulation, Inc.
The question was whether the prime contractor knew, or should have known, that the subcontractor’s bid was “too good to be true.” Even though the bid was only 10 percent of the next lowest bid, the Iowa Court of Appeals decided that the prime contractor reasonably believed that this was explained by the type of insulation in the next lowest bid being “a lot more labor intensive” than the type proposed by the low bidder.
Based upon the experience and subjective knowledge of the prime contractor, the Iowa Court of Appeals decided the subcontractor’s mistake was not obvious, so the prime contractor had no duty to ask for clarification.
The standards applied by courts can vary depending on circumstances, and across state lines. The subcontractor in Portzen lost after relying on a Minnesota case in which an offer to pay $15,000 was mistakenly written as $50,000, and then promptly accepted by the other party. Speckel by Speckel v. Perkins. In that case, the Minnesota Court of Appeals did not consider any special knowledge of the party accepting the offer, but decided that this party had a duty to seek clarification because the context of the offer should have put a “reasonable” person on notice that the amount of the written offer was a mistake.
Should experienced contractors be held to a higher standard than start-up contractors? What is “reasonable” or “obvious” on our project? Different standards make it harder to predict how a situation would be decided in court—all the more reason to practice early prevention.
Manage Risk by Asking Questions
Clearly, it is risky to ignore problems once discovered. A few steps taken on every project can provide a simple strategy for managing that risk:
- Shortly after being awarded a contract, revisit all plans and specifications in detail.
- Identify all requirements that may be open to interpretation.
- When accepting bids, look for large deviations between the low and next lowest bids.
- Ask for clarification from whoever provided the document.
- Carefully and promptly document the answer.
Addressing issues before bid time is always best. However, when “bid” documents become “contract” documents may be the first real opportunity to discover significant problems that were not obvious at the estimating phase.
The duty to inquire is intended to discourage end-of-project claims by encouraging parties to resolve issues early and to maintain a level playing field by constraining project participants from taking advantage of obvious conflicts. Whether legally required or not, raising issues early, when options are greater, reinforces our good faith commitment to building a successful project.
Build it right. Keep it real.
© 2015 Welle Law P.C. No unauthorized use or reproduction.
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