Avoiding the Loss from a Miscalculated Bid
September 24, 2014
Even experienced general contractors and subcontractors can make a mistake in calculating their price to furnish labor and materials to a project. The starting presumption is that the risk of such a mistake is on the bidder and the bidder bears the costs of its mistake. See, 2 Bruner & O'Connor Construction Law § 7:9. However, under the appropriate circumstances, a bidder may be relieved from the financial burden of an error under the doctrine of unilateral mistake.
In Maryland, one of the leading cases that determines whether the doctrine will protect a bidder is Baltimore County, Maryland, et al., v. John K. Ruff, Inc., 281 Md. 62 (1977). In Ruff, John K. Ruff, Inc. (“Ruff”) submitted a bid to Baltimore County for a classroom building project. The bid was otherwise accurate except that the employee calculating the total bid price neglected to include the $253,371.00 for labor costs. Not surprisingly, Ruff became the lowest bidder. Although Ruff immediately notified the County of the error, a contract was still sent to Ruff at the bid price, which Ruff refused to sign. The County then sought to recover damages based on Ruff’s refusal to perform the contract at the bid price.
Under the doctrine of unilateral mistake, Maryland courts determining whether a bid may be retracted as a mistake after it becomes enforceable will first look to the amount of the error. The amount of the error is then compared against (i) what the contract price would have been absent the error, (ii) the profit the bidder could have otherwise expected, and (iii) the effect on the financial stability of the bidder if required to absorb the loss. The bidder also must not have been negligent in committing the error. In other words, the bidder must have followed the proper procedures for calculating its bid but simply made an error in good faith. Finally, the court will look to whether the owner or higher tier party can have the work performed by other contractors for a price that isn’t excessively above the price they would have paid to the mistaken bidder if the omitted price component had been included.
In Ruff, the court determined that it would be unconscionable to hold Ruff to its mistaken bid that was approximately 7.5% less than it had intended in good faith to bid. As a result, the contractual obligations were rescinded and the parties went their separate ways as if the bid had never been submitted. It’s important to note that what the court generally will not do is correct the contract price. If the bidder is successful in retracting the bid, they avoid the loss, but they also lose the project.
Although the doctrine of unilateral mistake is not a guaranteed fix to bidding errors and some courts apply it quite sparingly, bidders should be aware that good faith mistakes do not necessarily always leave them at the mercy of other parties. Defenses such as the doctrine of unilateral mistake exist and may provide grounds to avoid substantial losses.