There is fierce competition for public sector contracts and for that reason tenderers often sharpen their pencils when it comes to price. However, if not approached carefully, this can be a risky strategy for the following reasons:
- Tenders are usually marked on a combination of price and quality and so price is not always the deciding factor. Tenderers should consider the totality of their offering and ascertain whether they need to race to the bottom when it comes to price.
- The Public Contracts Regulations 2015 (“PCR”) which govern above threshold procurements have provisions at regulation 69 to permit contracting authorities to exclude abnormally low tenders.
Contracting authorities want to appoint suitably qualified contractors at the best price and so, for a contracting authority, abnormally low tenders can present the following risks:
- The contractor may not deliver the contract to the standard required; and
- the contractor may seek additional payment and thus not fulfil the contract for the price quoted.
So, when can an authority reject an abnormally low tender?
Looking at the statutory framework, regulation 69(1) of PCR provides that:
Contracting authorities shall require tenderers to explain the price or costs provided in the tender where tenderers appear to be abnormally low in relation to the works, supplies or services.
PCR does not provide a specific definition of “abnormally low” and so consideration needs to be given to the entirety of the circumstances. Therefore, a price which may be abnormally low for one tenderer may be entirely reasonable for another.
The case of NATS (Services) Ltd v Gatwick Airport Ltd recognised that tenderers must be allowed to use their own commercial skills and experience when submitting bids. PCR is to encourage, not stifle, competition and so in that case the Judge said:
Q2
“A key aspect of this is price and tenderers who are keen to secure a project will want to pitch their prices at a level which will be the lowest. They might be keen to break into a market or establish their market share. There is nothing wrong with that for them of for the utilities or contracting authorities, who are (almost) always keen to place contracts at the lowest price and, preferably, at lower than they have budgeted. One needs to consider how, commercially, a tenderer, which is not the incumbent provider or not the market leader, will ever get a contract unless it puts in attractively low prices.”
Regulation 69(2) sets out the means of explanation which can be used by the tender to explain their prices and regulation 69(3) provides that the contracting authority will assess such explanation and information.
Must a contracting authority reject an abnormally low bid?
Regulation 69(4) sets out the power of the contracting authority:
The contracting authority may only reject the tender where the evidence supplied does not satisfactorily account for the low level of price or costs proposed, taking into account the elements referred to in paragraph (2)
PCR therefore gives contacting authorities a power not a duty to require an explanation as to abnormally low tenders and they can only exclude them where the evidence provided does not account for the low price.
Are the courts likely to uphold claims for abnormally low tenders?
NATS (Services) Ltd v Gatwick Airport Ltd was approved more recently in the case of SRCL Limited v The National Health Service Commissioning Board in which the judge concluded that the courts should be “very slow to interpret the Regulations…. as imposing some wide ranging obligation …. to determine whether there is or might be an abnormally low tender”.
Conclusion for bidders
Therefore, when approaching the price section of a tender, bidders should note that whilst an abnormally low tender can be excluded, that it is not a forgone conclusion. The power must be exercised by the contracting authority and other bidders have no ability to strongarm them into doing so.
This article is an outline of the issues for general information. Professional advice specific to the circumstances should be sought. Should you require further information, please contact us.