“Level Up” to Avoid Bid Splitting

Generally, when a procurement project exists, estimated costs are determined for the labor, material, and equipment for all components of the project. Once estimated costs are determined for the project, a single purchase or contract award will take place for all components of the project. The contract is awarded following a competitive process which is based on the agency’s original estimated project cost.

Sometimes, when an agency has a large project with multiple components or phases, there is a business decision to split the project and conduct a competitive process and contract award for individual components of the project. When an agency makes a decision to split a project, it must also avoid a potential audit finding from splitting the project into individual components solely for the purpose of getting the individual purchases or contract awards below bidding requirements, which is known as “bid splitting.”

What Is Bid Splitting

In the City Bidding Book, MRSC shares the following regarding bid splitting:

Although the statutes only refer to public works when prohibiting bid splitting, the State Auditor’s Office has expressed that neither projects nor purchases should be artificially split so that the cost of each contract is below the bid threshold. The SAO has also indicated that the entity should not disaggregate purchases solely for the purpose of getting the individual purchases below bidding requirements (bid splitting).

In my opinion, even with statutes generally pointing to public works, this excerpt highlights audit risks for any type of purchase (materials, equipment, supplies, services) where bid splitting could occur, regardless of whether it is for a public works project or not.

In addition to audit risk, bid splitting can increase administrative burdens and costs for an agency since the agency must conduct multiple competitive bids and awards and manage multiple contracts. Another burden arising from this practice is that it forces the agency to function as the “General Contractor” for the project, coordinating deliverables from different contractors for multiple components on a single project. In contrast, a single competitive bid and contract award for a project results in consistent alignment with statutory requirements for public procurement, as well as cost efficiencies.

An agency may still have some business reasons to split components of a project and make separate contract awards. However, if a project split is done and purchases or contract awards occur at a lower competitive bid threshold than the total project cost required, the agency has “split the bid” and now has an audit concern in addition to all the other challenges highlighted above.

Let’s look at a scenario in which an agency can successful divvy up a project for individual contract awards by doing what I like to call a “Level Up” approach. This approach can help an agency avoid bid splitting.

The Scenario

The Port of Anytown has a public works project which involves both equipment and installation, necessitating different types of contracted work. As the table shows below, the port would like to split the overall project components and plans to award the equipment and installation separately.

The port reviews MRSC’s  Find Your Contracting Requirements tool to better understand the legal requirements it must meet for this public works project. Accordingly, competitive requirements for this project are as follows:

• If the estimated project cost is $40,000 or less, an agency may use a minimal competition process, a small public works roster, or formal competitive bidding process. 
• If the estimated project cost is more than $40,000 but less than $350,000, an agency may use a small public works roster or formal competitive bidding process.
• If the estimated project cost is more than $350,000, an agency must use a formal competitive bidding process.

While the port sees that if Component 2 (Installation) were a standalone project (not part of the larger project), it would fall within the minimal competition process. Rather than conducting this competitive option, the port makes sure the project split does not result in bid splitting and instead chooses to “Level Up” by using the total estimated project cost of $67,000 as the applicable competitive bid limit for each of the two phases and follows the higher competitive limits related to the total estimated project cost as follows:

The “Level Up” approach follows the competitive process of the complete project (total project estimates combined), and in doing so, the port avoids bid splitting. Without doing this, it may have appeared that the port had chosen to split the project and award each component separately to keep costs below the most restrictive competitive process related to the total project cost.

Conclusion

I recommend the “Level Up” approach — using the competitive process of a total project estimate for all components of a project — when an agency has a project and it intends to split the purchase or contract awards. Doing this will provide an agency with the ability to bid and award components of a project separately and alleviate any audit concerns about bid splitting by following the most competitive requirements for total project costs.