Over the last few years, I have noticed an increase in the number of construction contracts using “open book” provisions.  The term “open book” describes a contract provision that allows Owners full transparency into the General Contractor’s sub-contracts.

It should be noted that “open book” provision are not the same as audit rights.  Audit rights allow an Owner to inspect the GC’s payment requisitions, invoices, and even sub-contracts (typically after the expense has been incurred).  “Open book” provisions grant Owner’s the right to review sub-contractor bids prior to award.

This may seem like a straightforward provision, but in order to realize the full benefit of such a model it’s important to include a well-defined procurement policy.

A procurement policy establishes rules for how your GC solicits sub-contractors.  These rules are meant to ensure that only qualified contractors are included in each bid and that the lowest comparable quote is awarded.

Here are the 6 terms that need to be addressed by your procurement policy.

Minimum Criteria

In order to be included in a bid, establish that each subcontractor must meet a minimum set of criteria. This criteria may include minimum insurance requirements, requiring proof of certification or proof of licensure, minimum safety ratings, minimum bonding requirements, or other requirements.

Minimum Bids

Your procurement policy should require the GC to receive a minimum number of bids.  Typically your policy should require that for each solicitation a minimum of 3 qualified bids must be received.  Please note the statement needs to clearly state that 3 bids must be received not that 3 bids must be solicited.  It is entirely possible that three bids are solicited but only one is received.  This effectively gives you no choice and therefore no way to verify the competitiveness of the bids.

Spend Tier

It is a good idea to establish a spend tier that allows single source awards for low dollar contracts.  A spend tier allows the GC to handle low cost work more efficiently without requiring a minimum number of bids.  The spend tier should be a low value (relative to the total cost of your project).  Consider setting the spend tier somewhere between 1% to 5% of the cost of work.

Self-performed work

If your GC intends to self-perform any portion of the work, you need to define terms that ensure his quote is competitive.  Your policy should require that all self-performed work be bid against a minimum of two other qualified bidders.  Require that the GC submit his bid 24 hours ahead of the other quotes to ensure all bids are quoted fairly.  Also give yourself the option to accept single source awards from the GC without requiring him to solicit additional quotes.  This provision gives you control and allows you to handle awards simply if you trust your GC.

Bid handling

Just like any solicitation, it’s important that bidders have everything they need to provide an informed bid.  List the minimum information that the GC must include with each solicitation.  Make a special note to require the GC to provide bid forms for each solicitation.  Most GC’s don’t do this and the bids come back in various formats which make bid comparisons difficult.  There should also be terms to define how bids will be received and who will receive them.  Requiring that bids be submitted in a sealed envelope and that all parties be present in order to unseal the bids is a good way to control and monitor the bids.

Bid Awards

Making the bid award is another key term that should be addressed.  Your policy should address who will have say in award decisions and how disagreements will be handled. When an award decision is made, it’s important that the decision be documented.  Don’t forget that the contract is between the GC and the subcontractor, but with an “open book” provision the Owner is involved in award decisions, how much they are involved and what authority they have must be defined.

Closing

“Open book” provisions are a great way to control a GC bid.  These provisions also relieve both parties of risk and promote cooperation between both parties.  Establishing expectations for how this provision will be employed is essential for ensuring alignment throughout.  Write in these expectations into your contract and let all of your potential GC’s know that this is what you expect.

So tell me your experience.  Have you ever worked with an “open book” contract?  Did you have a procurement policy in the contract?  Was the bid successful?

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One thought on “Best Practices: Open Book Bidding

  1. I know we are in a completely different industry, but we deal with this sometimes as the subcontractor working with a primary. When working with a good primary contractor, they understand margins & intent and it is actually really beneficial to be transparent with them. With others that are penny pinchers, it can start a slippery slope of haggling that leaves a bad taste in everyone’s mouth. I have to honestly say I am mixed on this topic (as it applies to my industry) but it definitely has a time and a place.

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