Beware the Low Bid

What Low Bids Often Reveal—and Why Contractor Due Diligence Matters

By Christina Fanning, Technical Director, Construction Services  |  Partner Engineering and Science, Inc.

Originally Published in the 2025 CLRM Journal

When it comes to selecting a contractor for a construction project, the temptation to choose the lowest bid can be compelling. After all, who doesn’t want to save money? However, a low bid does not always mean low cost. In many cases, it signals hidden risks and long-term complications that outweigh the initial savings. To avoid costly pitfalls, it is essential to take a closer look at the reasons behind a low bid and to perform an evaluation of the contractor’s qualifications.

What Drives a Low Bid

At face value, a low bid might appear to save money, but the underlying reasons for its attractiveness may come with expensive consequences. To make an informed decision, it is important to consider what might be driving the price down.

Win the job at any cost: Some contractors may submit low bids to make it attractive to the borrower and secure a project, even if it means little to no profit for the contractor. The contractor’s strategy is to seek recoupment of losses or gain of additional profit at the expense of the project through change orders once the work begins. Change orders typically come with markup for overhead and profit, and 15-20% is a standard markup for the industry. This means that even if a contractor starts with a 2-3% profit margin, they can significantly increase their earnings over the course of the project by charging for change orders.

Incomplete plans: Incomplete, inadequate, or uncoordinated plans are one of the most significant contributors to unexpected project costs. Missing or unclear details—such as undefined HVAC requirements, unspecified electrical breakers, or vague material choices—create opportunities for contractors to request clarifications, via requests for information (RFIs), to architects both before and after construction begins. Contractors often recognize information gaps during the bidding process and anticipate that if unresolved during the bidding process, there will be opportunities to generate profitable change orders during construction. Each clarification or adjustment to contractual documents once construction begins can lead to a change order, often at costs that far exceed what would have been included in the original bid had the information gap not existed. For example, a contractor may discover after the project begins that a specified breaker does not meet the requirements of the HVAC equipment, requiring material upgrades, additional labor, and schedule adjustments. Such errors create a lack of confidence in the construction documentation causing contractors to make assumptions that may further inflate costs post-bid. The cumulative effect is a project that exceeds its budget and timeline, often dramatically.

Stay competitive with other bidders: Competitive bidding often compels contractors to keep their bids as low as possible, even when they recognize that plans are incomplete, inadequate, or uncoordinated. To avoid bidding higher than competitors, contractors may choose not to account for missing details in their bids. Ideally, contractors would submit RFIs to clarify ambiguities pre-bid, prompting architects to issue addendums that ensure all bidders have the same information. Addendums allow for an “apples-to-apples” comparisons of all submitted bids and reduce the risk of hidden costs. However, tight timelines often prevent this process, leaving contractors to bid on original plans and to address the missing elements later through change orders. This practice places the burden of additional costs squarely on the client once a contract is executed and construction is underway. The drive to remain competitive can thus result in artificially low bids that obscure the true cost of the project.

Lack of sophistication: Unsophisticated contractors represent another critical risk. A lack of sophistication in a contractor can manifest in multiple ways. They may lack the necessary expertise to accurately estimate project costs, resulting in bids that are unrealistically low. Inexperience often leads to underestimating the complexity of the project causing contractors to overlook essential components and mismanage project demands. Additionally, unsophisticated contractors often lack the necessary skills for effective vetting of subcontractors, leading to struggles with subcontractor management. This can result in delays, quality issues, and unanticipated costs. Furthermore, inadequate supervision by an inexperienced contractor can leave critical tasks unfinished or improperly executed, creating a domino effect of delays and increased expenses. When selecting a contractor, ensuring their experience and organizational capabilities align with the project’s complexities is paramount to avoiding sophistication level problems.

Maintaining of workforce: During economic slowdowns or periods of reduced demand, contractors may bid low simply to keep their workforce employed and their business operational. This approach prioritizes short-term survival over profit and can lead to financial instability. Contractors bidding work for this reason are more likely to rely on change orders to improve their financial position.

Mitigating Risks Associated with Low Bids

A thorough Contractor Evaluation (CE) has proven as an effective way to mitigate the risks associated with general contractor performance, especially those associated with unsophisticated contractors since construction projects rely so heavily on the contractor’s ability to deliver on time, within budget, and to the required quality standards. A CE provides a comprehensive assessment of the contractor’s qualifications with respect to a specific project, ensuring they have the experience, capacity, and resources necessary to meet project demands. This evaluation is especially critical when dealing with unsophisticated contractors who may lack the systems or expertise to navigate complex projects. Even the most qualified contractors can struggle with bandwidth on large or overlapping projects, making a CE an invaluable tool for identifying potential risks early and reducing the likelihood of delays, cost overruns, and other issues.

Key aspects of a Contractor Evaluation include:

• Financial Health: Contractors should have sufficient financial resources to cover general conditions for at least two months across all their ongoing projects. A lack of financial stability can lead to delays and be the cause for upfront mobilization payments.
• Experience and Track Record: Reviewing a contractor’s history of completed projects ensures they have successfully managed similar scopes and complexities. For instance, a contractor accustomed to single-family residential projects may not have the expertise to manage a complex commercial development, such as a multi-story hotel. This step verifies their ability to meet quality standards and deliver on time.
• Bandwidth and Capacity for Supervision: Evaluating the contractor’s current and upcoming workload confirms whether or not they have the capacity to dedicate adequate resources to your project. Overcommitted contractors often struggle with timelines and quality control. Equally as important is ensuring that the contractor has sufficient on-site supervision as full-time, experienced supervision often prevents mismanagement and ensures that trades are coordinated effectively, reducing the risk of delays and errors.
• Licensing and Compliance: Verifying that contractors hold the necessary licenses and meet regulatory requirements minimizes legal and compliance risks. Using borrowed licenses or performing trades without proper qualifications are red flags.

• Fraud and Reputation: A contractor’s reputation and ethical history are vital to the evaluation of a contractor’s character. Vetting the contractor includes checking for red flags such as lawsuits, tax liens, or repeated bankruptcies. Patterns of creating multiple LLCs to obscure financial issues or evade past liabilities can also be revealed. Researching references and conducting interviews can uncover critical information, helping to avoid a contractor with a history of misrepresentation or fraud.
• Key Personnel: Assessing the qualifications and experience of key personnel, such as project managers and superintendents, helps ensure that the team has the expertise to manage project complexities. Stable, experienced leadership is crucial to success.
• Other Considerations: Comprehensive evaluations often include assessing the availability and condition of necessary equipment; evaluating the contractor’s approach to vetting, selecting, and supervising subcontractors; and evaluating their safety record to ensure adherence to industry standards.

Pairing a Contractor Evaluation (CE) with a Document and Cost Review (DCR) further strengthens the due diligence process by addressing critical risks often associated with low bids and incomplete plans. A DCR provides a detailed, third-party assessment that focuses on the completeness of project plans and ensures costs are appropriately aligned with the project’s scope. This process not only identifies omissions and exclusions—such as overlooked geotechnical and environmental needs such as necessary site stripping due to unsuitable soils or a need to remove an underground tank—but also highlights red flags commonly found in low bids, including underpriced or poorly defined scopes of work. Additionally, a DCR helps ensure plans are thorough and timelines are realistic, helping to minimize the likelihood of costly change orders and delays if left to be discovered during construction. Together, a CE and DCR can provide a comprehensive view of potential risks and necessary adjustments prior to a financing commitment. Together, these tools equip stakeholders with actionable insights to proactively address gaps and protect the investment from unexpected surprises.

A Case in Point: Lessons from a Low-Bid Contractor

A four-story hotel project in Tennessee faced major delays and cost overruns after the borrower selected the lowest-bid general contractor (GC). Despite the Contractor Evaluation (CE) having identified red flags, including financial instability and the GC’s location three hours from the site, the bank allowed the borrower to use the low bidding GC, citing the borrower’s sufficient financial resources to cover the loan. However, the lender insisted on additional protection for the project procured through a Completion Commitment (CC), which included a full suite of construction risk management services. During construction, additional red flags quickly emerged with the GC frequently billing ahead for self-performed work and failing to provide proper documentation and lien waivers, putting the project at high risk of liens. The GC struggled with poor quality control, unqualified subcontractors, and insufficient scheduling, leading to rework and significant delays. By the 50% completion mark—delayed by nine months and already over budget—the GC was terminated by the borrower for cause and the CC was invoked by the lender. This action allowed Partner to step in and, since Partner had been involved from the start of the project, a replacement contractor was able to be secured within one week. Thanks to the actions allowed via the CC, demobilization of subcontractors was avoided, and construction resumed smoothly. This case highlights the risks of prioritizing low bids and the importance of leveraging due diligence findings to ensure project executions and successful outcomes.

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Selecting the right contractor involves more than comparing numbers on a bid sheet—it requires a comprehensive understanding of the risks and nuances that come with each proposal. Low bids may seem attractive, but without proper due diligence, they often lead to costly surprises. By prioritizing a holistic pre-construction evaluation process that combines contractor qualifications with project readiness reviews, stakeholders can make informed decisions that set the stage for success. Doing the necessary due diligence upfront is far more cost-effective than addressing problems after they arise.