Business Accounting

Case 17.3 – The Bidding Wars

Scenario:  Kendahl Plastics Corporation contracts with NASA to manufacture component parts used in communications satellites. NASA reimburses Kendahl on the basis of the actual manufacturing costs it incurs, plus a fixed percentage. Prior to being awarded a contract, Kendahl must submit a bid that details the estimated costs associated with each project. An examination of Kendahl’s job cost sheets reveals that actual costs consistently exceed cost estimates quoted during the bidding process. As a consequence, NASA ends up paying considerably more than the bids Kendahl submits.

A Kendahl representative was recently quoted as saying, “We really aren’t overcharging NASA for the work that we do. The actual costs shown on our job cost sheets seem high only because we are forced to understate our bid estimates in order to be awarded contracts. It’s a common practice, and everybody does it. The truth of the matter is companies that quote realistic bid prices are not awarded contracts.”

Let us assume that it is common practice to purposely underestimate bids in order to win NASA contracts: 

As an employee, write an internal memo to your manager addressing the following:

· Is it wrong for Kendahl to take part in this activity as long as it does not overstate the actual costs it incurs?

· If you were part of Kendahl, would you have personally have issues using this bidding practice? 

Research and cite common ethical bidding practices.  What other bidding practices have your read about that you would be ok with using, even though they may be unethical or push the boundaries of being ethical.