Contracting authorities' protection: identification and evaluation of abnormally low prices in tendering procedures

As a procurer, you are certainly looking for the best value for money. However, sometimes you may receive a bid with a price that seems suspiciously low. If this is the case, you should see a warning light come on. This is because an extremely low bid price can hide risks that can lead to an unreliable contractor, poor performance or even failure to complete the contract. How to deal with such a situation and protect your investment? This article will give you practical advice on how to spot risky bids early and avoid problems that could cost you time and money.

Author of the article: ARROWS (Mgr. Alexandra Johnová, office@arws.cz, +420 245 007 740)

What is an exceptionally low bid price?

Section 28(1)(o) of Act No. 134/2016 Coll., on Public Procurement (hereinafter referred to as "PPA") defines an exceptionally low bid price as a price or cost that appears to be exceptionally lowin relation to the subject of the contract. Importantly, the law does not specify any particular threshold and the assessment is always up to the contracting authority, which must consider all the circumstances of the contract in question. However, the contracting authority may set its own criteria for assessing an abnormally low tender price in the tender documentation, either by a specific amount or by the way it is calculated.

The main objective of this institute is to protect contracting authorities from unrealistic bids at which the contractor would not be able to properly perform the contract, which could lead to non-completion of the contract, a reduction in quality or a subsequent increase in price.

In which types of procurement procedures can the institute of exceptionally low tender price be applied?

The institution of exceptionally low tender price is primarily regulated in § 113 of the Public Procurement Act, and it is mainly applied in the above-limit public procurement regime. However, the law does not exclude its application in other types of procurement procedures. For example, in the simplified sub-limit procedure, the provisions of Section 113 of the PPL do not apply by default, but the contracting authority may reserve their application in the tender conditions.

Furthermore, the contracting authority retains the possibility to assess the tender price as exceptionally low within the meaning of Article 48(4) of the ZZVZ and, if the price is not justified by the tenderer, the contracting authority may exclude the tenderer. The legal regulation of Section 113 of the ZZVZ, which is located in the part of the Act regulating public procurement in the over-limit regime, is special and contains stricter rules than the general legal regulation in Section 48(4) of the ZZVZ.

Thus, we have a general legal regulation of the exceptionally low tender price set out in Section 48(4) of the ZZVZ and a special legal regulation for public contracts awarded in the over-limit regime and also for cases where the contracting authority reserves the application of this special legal regulation, namely under Section 113 of the ZZVZ.

When and how the contracting authority assesses an abnormally low tender price pursuant to Section 113 of the ZZVZ

As already mentioned, the abnormally low tender price relates to the subject-matter of the public contract. The tender prices of other tenderers may suggest to the contracting authority that the tender is abnormally low, but they cannot be taken as an infallible indicator, as they may be overestimated, either intentionally or unintentionally, and the evaluated price may thus correspond to the real value, even though it may not correspond to the contracting authority's expectations.

In assessing the tender price, the contracting authority is also required to assess the individual costs or essential items constituting the tender price.

However, the assessment of an abnormally low tender price cannot be considered to be, for example, a mere comparison of the valuation of certain items in the budget with those of other tenderers or a comparison of the tender prices with those of other tenderers, instead of a comprehensive assessment of the level of the tender price in relation to the subject-matter of the public contract.

The law clearly states that the assessment of tender prices in terms of abnormally low tender price must be carried out by the contracting authority before the notice of selection of the contractor is sent. The decision as to whether the price submitted by one of the tenderers falls within the category of abnormally low tender prices and thus poses the real risks described is fully within the competence of the contracting authority or the relevant evaluation committee.

The contracting authority may specify in the tender documentation or in the invitation to tender the price or costs that it will consider to be an abnormally low tender price or may specify the manner in which the abnormally low tender price will be determined. However, the contracting authority should only use this power where it has concluded, on the basis of objective data, that the suppliers will not be able to perform the public contract properly if the price or specific costs in question are below the specified level. At the same time, this possibility does not relieve the contracting authority of its obligation to request an explanation from the tenderer of prices or costs that are lower than those set out in the tender documentation.

However, the contracting authority may consider a tender price or cost to be abnormally low even if it does not set out such an abnormally low tender price in the tender documentation or in the invitation to tender or at least does not specify how it is to be determined.

Therefore, if the contracting authority finds that the tender price or costs constitute an abnormally low tender price, it must ask the tenderer to justify in writing how it determined such abnormally low tender price. This request must then clearly indicate what information in the tender price submitted is perceived by the contracting authority to constitute an abnormally low tender price and (if possible) the contracting authority must also indicate what supporting documents the tenderer has to provide to substantiate the amount of the tender price or costs.

In addition, the contracting authority must require the tenderer to confirm, in accordance with section 113(4) of the PPA, that:

• in the performance of the public contract, ensure compliance with the obligations arising from the legal regulations relating to the subject matter of the public contract, as well as labour regulations and collective agreements applicable to the employees who will participate in the performance of the public contract; and
• that it has not received unlawful public aid.

If the tenderer does not confirm these facts in its justification of the abnormally low tender price, these shall be grounds for excluding it from the tender procedure.

The tenderer's justification of the abnormally low tender price

A tenderer may justify an abnormally low tender price in particular by using the following arguments referred to in Article 113(5) of the PPL:

• the economic aspects of the production process, the services provided or the design methods,
• the technical solutions used or the exceptionally favourable conditions available to the tenderer for the performance of the contract, or
• the originality of the works, supplies or services.

However, this is not an exhaustive and closed list and the tenderer is not precluded from using other arguments to justify the abnormally low tender price.

At the same time, as already mentioned above, the tenderer must also include in its justification confirmation of the obligations referred to in Article 113(4) of the Public Procurement Act.

Review of the justification by the contracting authority

The law does not set any time limits by which the tenderer must submit the justification to the contracting authority, but the contracting authority is obliged to set a time limit, as it is a clarification of the information pursuant to Section 46 of the PPLA, in accordance with the principle of proportionality pursuant to Section 6 of the PPLA.

If the contracting authority or the committee considers that the justification is not complete, they may ask the tenderer more than once in relation to the exceptionally low tender price. Upon receipt of the justification, it is for the contracting authority or the committee to assess whether it is sufficient and credible. They must consider whether the tenderer can realistically perform the contract at the price offered and to the required quality. The law provides several examples of legitimate reasons that a tenderer may use to justify an abnormally low tender price, which are set out in Article 113(5) of the PPA and have already been discussed above.

However, it should be borne in mind that it is not sufficient to use these general phrases and the tenderer must also support its claims with concrete data.

The contracting authority or the committee will then either accept the justification received from the tenderer or the contracting authority will exclude the tenderer. In both cases, however, the contracting authority must give proper reasons for its decision!

When must the contracting authority exclude a tenderer?

The law stipulates in Section 113(6) of the ZZVZ the obligation to exclude a participant in the following cases:

• if it is apparent from the tenderer's justification that the abnormally low tender price is the result of a breach of legal regulations relating to the subject matter of the public contract, labour regulations or collective agreements;
• if the abnormally low price is due to unlawful public aid and the supplier cannot prove that it was granted in accordance with EU rules, in which case the contracting authority is also obliged to inform the European Commission;
• if the justification does not include the mandatory confirmation of compliance with the law and the absence of unlawful aid pursuant to Article 113(4) of the PPA.

Except for these reasons, where the contracting authority must exclude a tenderer from the tender procedure, the contracting authority may exclude a tenderer on an optional basis pursuant to Article 48(4) of the PPL, which will be discussed in more detail below.

Exclusion of a tenderer on the grounds of an abnormally low tender price pursuant to Article 48(4) of the ZZVZ

A tenderer may be excluded pursuant to Section 48(4) of the ZZVZ, unless the special legal regulation provided for in Section 113 of the ZZVZ applies. Thus, if we have, for example, a simplified sub-limit procedure and if the contracting authority has not reserved the application of a special provision (§ 113 ZZVZ) in the tender documentation, it proceeds in relation to the exceptionally low tender price according to § 48(4) ZZVZ.

This provision, unlike § 113 ZZVZ, does not oblige the contracting authority to examine the abnormally low tender price. However, if the contracting authority suspects that the tender price is abnormally low, it may ask the tenderer in writing to justify the abnormally low tender price, even repeatedly. Again, the contracting authority must specify in the request what it considers to be the abnormally low tender price and how it requires clarification of the abnormally low tender price, or with what evidence.

The contracting authority, similarly to the legal regulation of the exceptionally low tender price pursuant to Section 113 of the Public Procurement Act in the case of above-limit public contracts, then accepts such justification or not.

The subsequent exclusion of a participant pursuant to Section 48(4) of the PPLA in the event that the contracting authority does not accept its justification is an option of the contracting authority and not its obligation, unlike the reasons set out in Section 113(6) of the PPLA. However, even here, if the contracting authority proceeds to exclude a participant, the exclusion must be duly justified.

Conclusion

An exceptionally low tender price may appear advantageous at first sight, but often carries significant risks. The contracting authority has not only the right, but in some cases also the obligation, to assess such bids in order to avoid problems with the performance of the contract, non-compliance with quality or overpricing. A well-designed procedure and a rigorous evaluation of tenders are the key to a transparent and secure procurement procedure.

If you are unsure how to evaluate an exceptionally low price, please contact us. We can help you set clear rules, prepare the necessary documentation and support you in communicating with the tenderers. You will be confident that your decision will stand up to both legal and practical scrutiny.

Contact us and protect your public contract from the first step.