You cite change orders in your defense:

>For example: change orders. A project gets designed and approved, the contractor gets his contract and starts digging. Two weeks into excavation, the project engineer tells the contractor "oh, that tunnel needs to be built 20 feet deeper and moved 15 feet to the south."

But I think it's worth pointing out that change orders are probably THE primary mechanism of gouging used by contractors in 'lowest-bid-wins' scenarios, as you should know.

What often happens is that contractors lowball, knowing that they will make up the margin on the change orders which are not competitively bid. A well designed RFP can mitigate this somewhat by requiring menu pricing on add/deducts for the most common in-field changes, but it can't account for everything, and bidding contractors look for open ended RFPs and exploit them.

There may only be a few 'shady contractors' out there as you say, but a)low-bid systems bring them to the top of the short list, and b)I'd wager almost every 'reputable' contractor's change order margins are higher than for the exact same work that was competed in a public RFP.

Just my thoughts on that. Raised an eyebrow since change orders are the primary mechanism for inflating post-award margins.

Edit:

Also want to point out that my use of the word 'gouging' is kind of a loaded term:

>But I think it's worth pointing out that change orders are probably THE primary mechanism of gouging used by contractors in 'lowest-bid-wins' scenarios

Are these contractors gouging? They are not doing anything illegal, but it can fall into questionably ethical territory. But from many contractor's point of view, they are stuck bidding on a system that is designed somewhat unethically.
From a systems standpoint, when the only factor in winning a bid is lowest cost on the delivery of a product that will unquestionably have change orders, you get a scenario where the following is actually happening.

1)Firms provide goods and service for margin 'a+b' which is averaged over the life of the project

2)Only margin 'a' is competed

3)Margin 'b' is projected but undefined and can be adjusted by the Firm after the award based on margin 'a'

Is it ethical to even ask a Firm to submit a bid based on margin 'a' set equal to margin 'b' knowing that the system is designed to produce competing bids distributing the total product margin unevenly between the two variables, weighting 'b' much more heavily and minimizing 'a' in order to win the bid and work at all?

I don't think so, and what happens is you get a system that is almost explicitly designed to inject increased total project costs and increased variability.

I think that under this system, it's an incredibly gray area on the how ethical increased post-award margins on change orders are. Just the fact that an increase occurs does not strike me as unethical, but there is absolutely zero doubt that some of the margin increases are absolutely unethical and drive the total product margin up well past what it would have been if bid under a possibly more efficient system (throw out high and low bids for example).

If gouging is going to happen, it's going to happen on a change order, but it's not so black and white.