By: Paul Emanuelli
This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
During bid evaluations, public institutions typically score technical factors before evaluating price. The primary reason for employing this two-envelope approach is to reduce the risk of technical evaluators biasing their scores based on an advanced knowledge of bid prices. Under this two-staged process, once technical scoring is completed, pricing is then evaluated separately, usually by scoring each bid relative to the low bid. The separate technical and price scores are then added together to calculate the final ranking of bidders for contract award. However, in some situations, this approach may result in a flawed evaluation with the contract award going to a bid with unreasonably high, unbalanced, or abnormally low pricing. Purchasing institutions should therefore apply an additional due diligence step in their evaluations and consider pricing within the context of overall contractual requirements. This article discusses procurement rulings from the United States and Canada that consider this type of price realism or best value analysis and surveys European and United Kingdom decisions that provide further guidance on how to deal with abnormally low bid situations.
US Rulings on Price Realism and Unbalanced Bids
Turning first to US federal rulings dealing with price realism analyses, in its January 2014 decision in the matter of Iron Vine Security, LLC, the U.S. Government Accountability Office (GAO) ordered the Department of Health and Human Services to conduct a re-evaluation after finding that the Department failed to properly evaluate the complainant’s pricing information against its technical offering. The dispute dealt with a Request for Quotations (RFQ) for services and materials in support of an information security program. The complainant took issue with how the Department conducted the price realism analysis of its proposed pricing. The GAO agreed with the complainant and sustained its protest.
The GAO found that the price evaluation was flawed since the RFQ rules expressly stated that the price realism assessment would include an assessment of proposed time and materials, but the Department failed to take proposed labour rates into account in that evaluation. While the Department maintained that the RFQ did not require an assessment of labour rates, the GAO disagreed, finding that they were an integral part of a time and materials assessment. The GAO therefore ordered the Department to conduct a re-evaluation of the proposals and, in the event that the re-evaluation changed the original result, ordered that the original contract award be promptly terminated. As this case illustrates, a comparative analysis of price as against other technical factors contained in the bid was not only permitted, it was required in order to perform a defensible evaluation.
Further, in its February 2019 decision in Apogee Engineering, LLC, the GAO ordered a re-evaluation after finding that the government failed to maintain proper evaluation records in relation to its price realism analysis. The dispute dealt with a Department of Transportation Request for Proposals (RFP) for the provision of security assessment services. The complainant argued that the contract award went to an abnormally low bid and that the government failed to conduct a proper price realism analysis. The GAO agreed with the complainant, finding that the government’s contemporaneous evaluation records failed to show that the evaluators had conducted any meaningful analysis of the selected bidder’s pricing against that bidder’s proposed technical approach. The GAO therefore ordered a re-evaluation and directed that the originally awarded contract be terminated and awarded to the complainant if the complainant’s submission proved to be the best bid after the re-evaluation. This case illustrates how a comparative analysis of price against other technical factors contained in a bid is permitted provided that those procedures are transparent and evidenced by contemporaneous evaluation records.
Similarly, in its July 2019 decision in ATA Aerospace, LLC, the U.S. Government Accountability Office (GAO) ordered a re-evaluation after finding that the government evaluators were unable to support the conclusion of their price realism analysis with proper evaluation records. The case dealt with a bid protest in relation to an RFP issued by the Department of the Air Force for research and development services in relation to space experiment programs. In its RFP, the Air Force stated that it would conduct a price realism analysis to assess the reasonableness of proposed pricing prior to making a contract award decision. While the GAO determined that a price realism analysis need not achieve scientific precision, it held that those assessments should not be arbitrary and should be reasonably adequate in assessing the proposed rates. The GAO found that there were significant unreconciled discrepancies regarding proposed work hours in the two bids competing for the space technology research and integrated vehicle experiments contract, and the GAO found no evidence that the Air Force conducted a proper price reasonableness analysis of those bids.
In fact, the GAO found that there were no evaluation records to substantiate the conclusions made in support of the contract award decision. The GAO therefore ordered the Air Force to conduct a re-evaluation and maintain proper records of that re-evaluation. As this case shows, the failure to properly document an evaluation process can undermine the defensibility of any resulting contract award decision and force a purchasing institution to rescind its initial contract award and revisit its evaluations.
Finally, in its November 2020 decision in Pasha Hawaii Holdings LLC, the U.S. Government Accountability Office (GAO) found that the government failed to conduct a proper price realism analysis to determine whether the winning bidder’s price offer was unreasonably low. As the GAO stated, “analyzing whether an offeror’s fixed price is so low that it reflects a lack of understanding of solicitation requirements is the crux of a price realism evaluation.” This analysis is important to guard against future performance issues since, as the GAO noted, “consideration of whether an offeror’s fixed price is so low that it creates a risk that the firm cannot perform its proposed technical solution at the price offered also forms the basis of a price realism analysis.”
The GAO noted that this analysis should not be limited to considering pricing in isolation, but it should also consider pricing in relation to the proposed technical solution. On this point the GAO confirmed that “it is axiomatic that a proper realism evaluation alerts agencies to those aspects of an offeror’s technical proposal which do not appear to be feasible based on what the offeror has indicated in its price proposal.” In other words, while pricing may clearly appear to be abnormally low on its face during initial compliance screening, other pricing may not reveal itself to be too low until later in the process when technical proposals are considered. Given the above, it is not only permissible but prudent to engage in a comparative analysis of bid prices against other technical factors to determine whether bid prices are properly in alignment with contract performance requirements.
As these US federal rulings illustrate, comparing technical offerings to price is an acceptable and widespread practice in bid evaluations. However, these comparative analyses must be transparent and evidenced by thorough contemporaneous evaluation records.
The right to determine whether bid prices are properly balanced against the technical scope of a contract has also been recognized at the state-level in the United States. For example, in its February 2015 decision in Montana Construction Corp Inc. v. J Fletcher Creamer & Son, Inc, the Superior Court of New Jersey, Appellate Division, upheld the Township of Lyndhurst’s rejection of an unbalanced bid. The case dealt with a solicitation for emergency water main and sewer main repairs. The Township rejected two bids that contained unbalanced pricing and the bidders challenged this decision.
As the appeal court summarized, the bidders had submitted bids that contained nominal pricing in certain price categories which, according to a prior lower court decision, rendered the bids unbalanced. The appeal court explained that an “unbalanced unit price bid is one where one or more of the items bid does not carry its share of the cost of the work and the contractor’s profit” and that these types of bids include “front-loaded bids” and “nominal price bids”. The appeal court then explained how unbalanced bids can undermine the integrity of a competitive bidding process.
The appeal court also acknowledged that, while not technically illegal, unbalanced bids cause significant public interest concerns, and that the municipality was justified in expressly prohibiting these bids in its solicitation documents. As this case illustrates, public institutions would be wise to expressly prohibit unbalanced bids in their solicitation documents and perform an analysis of bid prices against technical performance requirements to protect themselves from the type of bid price manipulations that could undermine their ability to properly assess competing prices and obtain value-for-money for their organizations.
Transparency Considerations in Canadian Federal Rulings
The Canadian International Trade Tribunal and its predecessor the Procurement Review Board have also considered the practice of assessing price against the technical requirements in a contract, as well as the duty to ensure transparency in how that evaluation is conducted.
For example, in its February 1990 determination in Re Cardinal Industrial Electronics Ltd., the Procurement Review Board of Canada found that the government must show valid reasons for not awarding a contract to a low bidder. The case involved the acquisition of power supply units for the Canadian Embassy in San Jose, Costa Rica. The complainant, the low bidder, was bypassed in favour of a higher bid. The Board found that the government had improperly relied on undisclosed criteria when it exercised its low bid bypass. In the Board’s view, the government was required as a matter of law and government policy to award to the low bidder unless there is a valid reason for doing otherwise. The government was found liable for departing from the low bid rule based on improperly disclosed and applied criteria. The complainant was awarded its bid preparation costs and damages for its lost profits. As this case illustrates, while assessing technical factors against bid prices is not prohibited as part of a “best value” analysis, the method of performing that analysis must be transparent and documented to be defensible.
Conversely, in its May 1997 determination in Re Hervé Pomerleau Inc., the Tribunal found that the government was within its rights when it applied its pricing calculations under its disclosed “best value” rule. The case involved the design and construction of a facility for the National Research Council of Canada. The complainant alleged that the Council did not adhere to the evaluation criteria and changed its rules midstream. The Tribunal disagreed, finding that the calculations made by the Council fell within the contemplated rules that had been disclosed in the tender call and, more broadly, with accepted industry practices. While the evaluation methodology was only disclosed in general terms, it was applied in a manner that was in keeping with generally recognized industry practices. The Council’s decision to reject the complainant’s tender on best value considerations that factor price against other technical aspects of the contract was therefore upheld.
Just as the US rulings reveal that it is an acceptable practice to assess bid prices against the proposed technical requirements of a contract, these Canadian federal cases illustrate the same thing. Price and technical factors do not have to be evaluated in complete isolation form one another. In fact, the Canadian Free Trade Agreement and the Canada-EU Comprehensive Economic and Trade Agreement both recognize the right to reject abnormally low bids. Whether the purchasing institution is dealing with a low bid award or a high score assessment, pricing is a critical factor in contract award decisions that should be assessed within the context of the overall technical requirements of a contract.
Abnormally Low Bids in Europe and the UK
European and UK rulings have also recognized the legitimacy of considering bid prices in conjunction with the technical requirements of a contract. In fact, while purchasing institutions may be concerned that a bidder will not be able to perform for its stated price, they should proceed with caution before rejecting a bid because its price was too low since, as the following cases illustrate, rejecting bids for abnormally low pricing can subject the purchasing institution to legal challenge.
For example, in its May 2002 decision in SIAC Construction Ltd. v. Mayo County Council, the Supreme Court of Ireland dismissed a legal challenge after finding no manifest error in the County Council’s decision to reject an abnormally low bid. The case dealt with a major sewerage works at Ballinrobe, Ireland. The Court ruled that it was within the Council’s authority to reject the low bid due to concerns that the pricing was unbalanced. The Court also held that it would have been improper to seek a clarification in the situation since that would have amounted to unfairly allowing the complainant to rebid in contravention of applicable Irish and European procurement rules.
In defence of its decision to reject the bid over concerns that it was “unbalanced”, the County asserted that the contractor’s bid contained artificially low costs for certain portions of the work but inflated costs for other parts of the work, which could allow the contractor to secure higher performance payments in post-award scope changes involving the higher-priced categories. The Court concluded that the County had acted within its margin of discretion when it decided to reject the low bid, finding that the decision to reject was not made in an unfettered manner, but was based on a proper consideration of transparent and objective criteria. The Court also rejected the complainant’s argument that the County should have provided an opportunity to clarify its pricing before rejecting the bid, ruling that such a clarification would have amounted to giving the complainant an opportunity to rebid in contravention of applicable procurement rules.
However, most subsequent rulings have imposed higher procedural fairness standards and have required that public institutions allow bidders an opportunity to explain their pricing prior to rejecting that pricing as abnormally low. For example, in its May 2008 decision in Belfass SPRL v. Council of the European Union, the European Court of Justice overruled the rejection of an abnormally low bid after the bidder was automatically rejected without being given the opportunity to address its bid offer. The dispute dealt with a tender call for the provision of cleaning and maintenance services in two buildings occupied by the General Secretariat of the Council in Brussels. Among other things, the specifications provided that the average hourly rate in each tender should not be lower than the average hourly rate fixed by the Belgian General Cleaners’ Union. The Court determined that the complainant was improperly rejected because of what appeared to be an excessively low number of total hours to perform the work, but the Council had denied the complainant the opportunity to address that issue and instead automatically rejected the bid. The Court ruled that the automatic rejection was procedurally incorrect and was therefore annulled.
However, in its November 2014 decision in Computer Resources International (Luxembourg) SA v. European Commission, the European Court of Justice upheld the rejection of an abnormally low bid. The case dealt with a call for tenders by the European Union for new framework agreements for computer services for software development and maintenance, consultancy, and assistance for different types of information technology applications. The Luxembourg-based bidder was given the opportunity to substantiate its pricing since its rates were too low for Luxembourg-based staff to provide the services. The rejected bidder’s bid stated that it would be using staff “in driving distance” from Luxembourg and never stated that it would be using staff from Romania. The Court agreed with the European Union that this information was inadmissible as a post-bid explanation for its abnormally low bid since this would constitute a material change to the original bid, which was silent to the use of Romanian staff. The rejection of the abnormally low bid was therefore upheld.
Similarly, in its January 2016 decision in Agriconsulting Europe SA v. European Commission, the European Court of Justice dismissed a rejected bidder’s lost profit claim after finding that European Commission properly rejected the complainant’s bid as abnormally low. The case dealt with a European Commission tendering procedure for a network facility for the European Innovation Partnership. Only two bidders obtained the minimum scores necessary to be shortlisted for the price evaluation stage. The complainant’s price was EUR 1,320,112.63, while its competitor’s price was EUR 2,316,124.83. Concerns arose over the low bidder’s pricing, particularly in the area of “additional tasks”.
As the Court noted, the “record of the meeting of the evaluation committee held on 20 November 2012 shows that the applicant was ranked in first place and that, since the committee had concerns about the abnormally low nature of the tender, it decided to request information from the applicant concerning the prices for the additional tasks.” The Court also noted that “the Commission informed the applicant that the evaluation committee had found the prices stated for the additional tasks to be abnormally low” and that the Commission had “asked the applicant for detailed explanations on the calculation of the prices offered for additional tasks 1 to 21 and 25, stating that the tender could be rejected if the explanations proved unconvincing.”
The evaluation committee ultimately decided to reject that low bid after finding that the bidder planned to overlap staff between the main tasks and additional tasks, which was in contravention of the tender call specifications. This resulted in the evaluators adjusting the bidder’s technical score so that it no longer met the minimum scoring threshold. The evaluation committee therefore recommended an award to the competing bidder. The low bidder challenged this decision and claimed lost profits as a remedy for what it claimed to be the improper rejection of its bid. The Court ultimately dismissed the claim, finding that the rejection of the low bid for abnormally low pricing was justified and not a breach of applicable tendering rules.
However, in its June 2016 decision in F P McCann Ltd v. The Department for Regional Development, Northern Ireland’s High Court of Justice, Chancery Division, awarded lost profits to a complainant after finding that the government improperly rejected its bid as abnormally low. The dispute dealt with a tendering process for a highway construction project between Belfast and Larne. The Court determined that in the situation it was lawful for the purchasing authority to seek clarification over the complainant’s proposed pricing. However, in considering the evidence, the Court raised a series of concerns over how that decision-making process was administered in relation to the government’s assessment of whether the complainant had submitted an abnormally low tender.
The first concern was that the government took irrelevant considerations into account when assessing the complainant’s pricing. The Court concluded that the board took factors into consideration that were outside of the scope of the evaluation criteria, including the consideration of the size of the complainant’s management team, when it made its decision to reject the bid as abnormally low.
Secondly, the Court found that the complainant was not provided an adequate opportunity to respond to the concerns over pricing. Even though the applicable statutory provisions maintained that a purchasing authority “must” request “in writing an explanation of the offer or of those parts which it considers contribute to the offer being abnormally low”, the Court found that the government failed to seek clarification over the core management team pricing even though that factor contributed to the board’s decision to reject the bid as abnormally low.
Thirdly, the Court found that the government “failed to comply with its obligation to verify the offer or parts of the offer which were allegedly abnormally low.” Rather, the Court found that the government’s attempt to seek clarifications on pricing from the complainant were rushed and incomplete and that the government had failed to clearly identify its pricing concerns to enable the complainant to provide a clear response to those concerns. The failure to provide that opportunity was a breach of applicable procedural rules set out in the statutory framework for dealing with abnormally low tenders.
Finally, the Court expressed concerns over the accuracy of the pricing information provided to the board, finding that it was provided without adequate context, which exaggerated the variation of pricing between the complainant and its competitors. Since these flaws prejudiced the complainant’s rights to a fair evaluation, the lack of due process rendered the decision to reject the bid legally invalid even though there appeared to be valid concerns about the complainant’s pricing. The Court awarded the complainant damages for the lost contracting opportunity. As this case illustrates, government evaluation decisions must meet proper due process standards to be defensible against subsequent legal challenges.
Further, in its July 2018 decision in SRCL Limited v. The National Health Service Commissioning Board (NHS England), the Technology and Construction Court of the English and Wales High Court dismissed a legal challenge brought by a losing incumbent health sector bidder after finding that it had submitted artificially high prices in order to challenge its competitor’s pricing under the abnormally low provisions of the relevant statutory rules. The case dealt with a second-stage invitational tendering process for the provision of clinical waste services. That second-stage process was conducted under a pre-established framework agreement that covered all of England.
The Court noted that SRCL Limited had won prior rounds of second-stage competitions under the electronic reverse auction format, but had then deliberately bid high in the challenged process in order to exaggerate the price differential with the low bidder to support a claim that the low bidder was abnormally low. As the Court found, this was part of the complainant’s strategy to disrupt the use of electronic reverse auctions to preserve its high profit margins. The Court determined that SRCL Limited’s premeditated abnormally low bid challenge was part of the complainant’s attempt to preserve a 25 percent minimum profit margin on the services, something that was threatened by the government’s plan to continue using electronic reverse auctions. The Court rejected SRCL Limited’s assertion that the 25 percent profit margin bid was a competitive price that represented its lowest possible sustainable price.
While the Court found that the statutory provisions relating to abnormally low bids prescribed rules for regulating the government’s conduct in situations where it chose to challenge pricing on the basis that it appeared abnormally low, it determined that those provisions did not create a duty to review low bids on the request of losing bidders to determine whether the winning bids were abnormally low. In summary, the Court found that the abnormally low tender provisions gave the government the right, but not the duty, to investigate low bids and reject them if there was valid concern that the price was not viable. The Court also confirmed that while there was no definition for what constituted an abnormally low bid, the pricing would have to be “below the range of anything which might legitimately be considered to be normal in the context of the particular procurement”.
Finally, even when faced with a no-cost bid, a purchasing institution may be breaching due process duties if it unilaterally rejects a bid for abnormally low pricing without first contacting the bidder to confirm the reasons behind the pricing. For example, in its September 2020 decision in Tax-Fin-Lex v Ministrstvo za notranje zadeve, the European Court of Justice found that Slovenia’s Ministry of the Interior improperly rejected a no-cost bid submitted for a legal information system. The estimated cost of the contract was EUR 39,959.01 and the Ministry rejected that no-cost bid as abnormally low since there would be no financial consideration paid to the low bidder. However, in the circumstances, the Court determined that the Ministry breached the procurement rules by not first confirming why the bidder had offered to provide the service at no cost. The Court ruled that the Ministry failed to consider the value gained by the contractor in winning access to a new market and collecting new references that it could rely on in subsequent bids. Given what would be minimal, if any, incremental costs to the legal database provider to allow new subscribers free access for a limited time, this ruling appears reasonable. Since the Ministry failed to follow up to determine the rationale for the no-cost bid, the Court found that the automatic rejection of that bid was arbitrary and contrary to the procurement rules.
As these global cases illustrate, provided that their evaluation processes are transparent and well-documented, purchasing institutions can consider bid prices relative to the other technical aspects of a contract to inform their ultimate evaluation and award decisions and avoid awarding a contract to bids with unreasonably high, unbalanced, or abnormally low prices.
