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You chose way of punishment. It is better to split work into 3 parts: 2/3, 2/9, and 1/9, and assign 2/3 to winner, 2/9 to second winner, and 1/9 to third winner. In this case whole ecosystem will grow around these auctions, which will produce into better market and lower prices automagically.

What if the lowest bidder is nowhere to be found?

For larger projects, the contractor is required to be bonded to cover things like this.

the point of this process was procurement in increments less than $3,500 to avoid many regulations.

Is $1 a large project?

Since the amount at risk is the amount of the bid prior to yours, that should determine both the amount of any bond requirements and, if there is a sharp cutoff, the cutoff for the requirement for a bond.

If lowest bidder is nowhere to be found, then the next lowest bidder gets the work.

They could require a deposit to bid, I suppose.

So you get two friends and they bid $2 and $1.