As far as I understand, the actual "punishment" is government agencies keep track of how badly particular contractors underbid and will simply add that amount to their bids when considering, so they're going for "lowest bid," but the bid they're considering isn't necessarily the bid the contractor puts forward. So theoretically, that provides an incentive to be more accurate, but it only works if there is sufficient competition in the first place and at least some of the competitors are even capable of being accurate.