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Abnormally Low Tenders: Contracting Authorities’ Right to Request Explanations Has Limits, but Tenderers Must Always Respond
Abnormally Low Tenders: Contracting Authorities’ Right to Request Explanations Has Limits, but Tenderers Must Always Respond
In public procurement, low prices are a natural result of the efficient use of public funds and fair competition. However, a low price may become problematic if it raises doubts as to whether the contract can actually be performed at the price offered. In such cases, the contracting authority must seek an explanation from the tenderer, who, in turn, must be able to substantiate with verifiable facts how the tender price was determined.
RASK attorney-at-law and Head of Public Procurement practice Keidi Kõiv and RASK partner and attorney-at-law Tarmo Peterson note that abnormally low tenders have become an increasingly topical issue in public procurement in recent years.
The law requires a contracting authority to request an explanation of how a tender price was determined if it has doubts as to whether the price is justified. The law also provides a non-exhaustive list of circumstances in which such doubts must arise, for example where there is a significant difference between tender prices. However, doubts may also arise for other reasons, taking into account the subject matter of the contract, market conditions, costs and the content of the tenders.
What is clear is that, in the absence of such doubts, a contracting authority may not ask a tenderer to explain how its price was determined. Doing so would exceed the limits of the authority granted to it by law. For this reason, and to avoid ambiguity, the contracting authority’s request should also explain why the relevant doubts have arisen.
As a contracting authority will generally not know whether or how a tenderer has priced its tender, it cannot be expected to formulate highly specific or leading questions or identify particular evidence that should be submitted. Nevertheless, its request cannot be limited to a general invitation to explain how the tender price was determined, as such a question does not enable the tenderer to provide a substantive response.
The Public Procurement Review Committee has explained in its practice that a request must be sufficiently specific to enable the tenderer to provide an objectively verifiable and fact-based explanation of how its tender price was determined. If the tenderer does not know which particular price component the contracting authority considers problematic, it is difficult to provide a precise and convincing response.
Despite this, tenderers occasionally receive requests that raise questions. For example, a contracting authority may state that its doubts arise from the price of one specific item in the tender. There are certainly procurement procedures in which such concerns may be justified. However, in many procedures the contracting authority has chosen to assess the total tender price. In such cases, if the total tender price itself does not give rise to doubts, there is no justification for scrutinising individual price components.
This has repeatedly been confirmed by the Public Procurement Review Committee, which has explained that the fact that a single price component in a tender is lower than others does not constitute the price of the tender as a whole and therefore cannot, in itself, serve as a basis for assessing whether the tender price is justified. If the contracting authority nevertheless proceeds in this manner, it exceeds the limits of its powers at that stage of the procedure.
The Public Procurement Review Committee has emphasised that it is the tenderer’s responsibility to satisfy the contracting authority that the tender price has been calculated taking into account all works and obligations required under the procurement and in a manner that ensures that the public contract can be properly performed at the price offered, without creating a risk of improper performance.
As a general rule, this means providing a more detailed breakdown of the components included in the price and their relative share of the total price. On the basis of this information, the contracting authority can assess whether the tenderer’s pricing analysis and forecasts are logical and reasonable.
It is therefore not sufficient for the tenderer simply to state that all costs have been taken into account. Each assertion made in the response must be supported by verifiable facts. The contracting authority must be able to understand the data, calculations, assumptions and methodology on which the tender price was based. The explanation must ultimately dispel the contracting authority’s doubts.
This also means that a tenderer cannot simply disregard a contracting authority’s question, even if it appears unclear or irrelevant. The contracting authority is not required to repeatedly ask the tenderer to justify its tender price. If anything in the authority’s request is unclear, the tenderer should ask for clarification or provide additional explanations on its own initiative, as the burden of proving that the tender price is justified rests with the tenderer.
At the same time, the review of an abnormally low tender does not entitle the contracting authority to demand information that would disclose the tenderer’s entire body of trade secrets where that level of detail is not necessary to assess whether the price is justified. For example, it would not be reasonable to require disclosure of all detailed information agreed with subcontractors or other business partners.
The contracting authority must also ensure that its questions do not go beyond the scope of the review. If a question no longer concerns how the tender price was determined but instead relates to another matter, such as how certain contractual obligations have been taken into account, the issue concerns the compliance of the tender with the procurement requirements. Such doubts should no longer arise at this stage of the procedure. Nor may the contracting authority ask about matters that it did not establish as requirements in the procurement documents. Doing so would clearly exceed the limits of its powers.
In practice, another recurring question is whether a tender may include a very low hourly rate. The answer depends first and foremost on the procurement documents and the pricing methodology, particularly on whether cross-subsidisation is permitted.
Where cross-subsidisation is prohibited, it may be very difficult for a tenderer to explain how an extremely low hourly rate covers all costs associated with its tender.
In addition, Section 115(9) of the Estonian Public Procurement Act must be taken into account. Under this provision, a tender must in any event be rejected where it is established that the low price results from non-compliance with applicable employment, environmental or social law requirements, such as minimum wage requirements.
If the tender price does not allow such costs, together with other unavoidable costs, to be covered, even where cross-subsidisation is permitted, there is a serious risk that the tenderer’s explanations will not be considered credible by the contracting authority. Case law has held that allowing labour costs below the statutory minimum wage to be cross-subsidised would effectively amount to permitting dumping and could constitute a manifest attempt to distort competition. Under this approach, a price that is contrary to employment or social law requirements cannot be justified by reference to other parts of the tender or economic activities outside the public contract.
According to Tarmo Peterson, public procurement law and competition law share the common objective of ensuring effective competition in the market. While public procurement law primarily regulates the conduct of contracting authorities, the rules governing the conduct of undertakings, including tenderers, derive from competition law.
Competition law issues arise in public procurement primarily in three areas: prohibited agreements, abuse of a dominant position and State aid. For tenderers, this means, for example, that they must refrain from market sharing and cartel arrangements. Undertakings holding a dominant market position must also avoid pricing below cost where this could amount to an abuse of market power aimed at excluding competitors.
For contracting authorities, this effectively introduces additional elements into their assessment. In addition to examining whether a tender price is justified, it may become necessary to consider whether the tenderer may have entered into prohibited agreements, whether it holds a dominant position and is abusing that position, or whether State aid received by the tenderer is lawful, as unlawful State aid cannot be relied upon to justify a tender price.
Although public procurement law frequently raises the question of whether cross-subsidisation is permitted in a particular procurement procedure, competition law, and indeed public procurement law, does not prohibit below-cost pricing as such.
An undertaking may make a deliberate commercial decision to provide a service at a loss, for example to obtain an important reference or enter a new market. In such a case, the contract may be financed from other economic activities or existing assets. What matters is that all obligations arising from the public contract can actually be performed, employees receive the remuneration required by law, applicable social requirements are complied with and performance of the contract remains economically viable.
According to Peterson, a contracting authority generally cannot prohibit an undertaking from cross-subsidising a contract – that is, covering losses under one contract from other economic activities. This forms part of the undertaking’s economic freedom. Exceptions may, however, be established by specific legislation or the procurement documents.
The situation changes where a below-cost tender is submitted by a dominant undertaking. The Court of Justice of the European Union has held that abuse by a dominant undertaking may be presumed where prices are below average variable costs, as such pricing has no reasonable commercial explanation other than the elimination of a competitor from the market.
Where prices are below average total costs but above average variable costs, establishing abuse requires evidence that the undertaking intended to eliminate a competitor or that the pricing is likely to have an exclusionary effect.
Establishing such an infringement is far from straightforward. It requires defining the relevant market, assessing the undertaking’s market power, and considering barriers to entry and competitive constraints as a whole. In a public procurement procedure, it is not realistic to expect a contracting authority to carry out such an analysis, particularly given that even the Estonian Competition Authority may take years to complete one.
One possible solution can be found in the criterion developed in case law, according to which a manifest attempt to distort competition may be treated as an abnormally low tender. This suggests that the contracting authority does not need to establish a breach of competition law in full. It is sufficient if the circumstances substantiate a manifest attempt to distort competition – for example, if they clearly indicate that a low price is being used to exclude competitors from the market.
What exactly this threshold means in practice, and what minimum level of competition law analysis is required, will need to be clarified by further case law.
If the tenderer’s explanations fail to dispel the contracting authority’s doubts, the contracting authority may reject the tender on the basis of a reasoned discretionary decision. This power must not be exercised lightly, particularly where the concerns relate to a potential infringement of competition law.
The contracting authority must clearly demonstrate that the circumstances amount to a manifest attempt to distort competition rather than merely aggressive pricing. If making such an assessment proves too difficult, the contracting authority may terminate the procurement procedure by a reasoned decision or notify the Estonian Competition Authority of the suspected infringement.
A competing tenderer that considers the contracting authority’s assessment of the justification for tender prices to have been inadequate may challenge the authority’s decision. According to case law, a manifest attempt to distort competition may be treated as an abnormally low tender. Accordingly, the infringement itself does not need to have been established in full; it is sufficient if the circumstances indicate a manifest and fact-based attempt to distort competition.
A competing tenderer may also bring a claim for damages before a civil court and submit a complaint to the Estonian Competition Authority. A claimant seeking damages must prove the infringement, the causal link and the amount of loss suffered. This often requires complex economic analysis. Proceedings before the Competition Authority can, however, be lengthy and may not provide effective protection of the tenderer’s rights. A complaint to the Competition Authority does not replace a civil claim, nor does a civil claim replace a complaint to the Competition Authority.
In conclusion, a low tender price does not necessarily indicate an infringement. On the contrary, it is often beneficial to society and consistent with the general principles of public procurement law, under which public funds must be used efficiently and fair competition must be ensured. It is, however, for the contracting authority to satisfy itself that this is the case by conducting its assessment on the correct legal basis, asking appropriate and relevant questions, and observing the principle of proportionality.
RASK attorney-at-law and Head of Public Procurement practice Keidi Kõiv and RASK partner and attorney-at-law Tarmo Peterson note that abnormally low tenders have become an increasingly topical issue in public procurement in recent years.
Suspicions must be based on specific circumstances
The law requires a contracting authority to request an explanation of how a tender price was determined if it has doubts as to whether the price is justified. The law also provides a non-exhaustive list of circumstances in which such doubts must arise, for example where there is a significant difference between tender prices. However, doubts may also arise for other reasons, taking into account the subject matter of the contract, market conditions, costs and the content of the tenders.
What is clear is that, in the absence of such doubts, a contracting authority may not ask a tenderer to explain how its price was determined. Doing so would exceed the limits of the authority granted to it by law. For this reason, and to avoid ambiguity, the contracting authority’s request should also explain why the relevant doubts have arisen.
The contracting authority’s question must allow for a substantive response
As a contracting authority will generally not know whether or how a tenderer has priced its tender, it cannot be expected to formulate highly specific or leading questions or identify particular evidence that should be submitted. Nevertheless, its request cannot be limited to a general invitation to explain how the tender price was determined, as such a question does not enable the tenderer to provide a substantive response.
The Public Procurement Review Committee has explained in its practice that a request must be sufficiently specific to enable the tenderer to provide an objectively verifiable and fact-based explanation of how its tender price was determined. If the tenderer does not know which particular price component the contracting authority considers problematic, it is difficult to provide a precise and convincing response.
Despite this, tenderers occasionally receive requests that raise questions. For example, a contracting authority may state that its doubts arise from the price of one specific item in the tender. There are certainly procurement procedures in which such concerns may be justified. However, in many procedures the contracting authority has chosen to assess the total tender price. In such cases, if the total tender price itself does not give rise to doubts, there is no justification for scrutinising individual price components.
This has repeatedly been confirmed by the Public Procurement Review Committee, which has explained that the fact that a single price component in a tender is lower than others does not constitute the price of the tender as a whole and therefore cannot, in itself, serve as a basis for assessing whether the tender price is justified. If the contracting authority nevertheless proceeds in this manner, it exceeds the limits of its powers at that stage of the procedure.
A tenderer’s mere assurance that all costs have been taken into account is not sufficient
The Public Procurement Review Committee has emphasised that it is the tenderer’s responsibility to satisfy the contracting authority that the tender price has been calculated taking into account all works and obligations required under the procurement and in a manner that ensures that the public contract can be properly performed at the price offered, without creating a risk of improper performance.
As a general rule, this means providing a more detailed breakdown of the components included in the price and their relative share of the total price. On the basis of this information, the contracting authority can assess whether the tenderer’s pricing analysis and forecasts are logical and reasonable.
It is therefore not sufficient for the tenderer simply to state that all costs have been taken into account. Each assertion made in the response must be supported by verifiable facts. The contracting authority must be able to understand the data, calculations, assumptions and methodology on which the tender price was based. The explanation must ultimately dispel the contracting authority’s doubts.
This also means that a tenderer cannot simply disregard a contracting authority’s question, even if it appears unclear or irrelevant. The contracting authority is not required to repeatedly ask the tenderer to justify its tender price. If anything in the authority’s request is unclear, the tenderer should ask for clarification or provide additional explanations on its own initiative, as the burden of proving that the tender price is justified rests with the tenderer.
At the same time, the review of an abnormally low tender does not entitle the contracting authority to demand information that would disclose the tenderer’s entire body of trade secrets where that level of detail is not necessary to assess whether the price is justified. For example, it would not be reasonable to require disclosure of all detailed information agreed with subcontractors or other business partners.
The contracting authority must also ensure that its questions do not go beyond the scope of the review. If a question no longer concerns how the tender price was determined but instead relates to another matter, such as how certain contractual obligations have been taken into account, the issue concerns the compliance of the tender with the procurement requirements. Such doubts should no longer arise at this stage of the procedure. Nor may the contracting authority ask about matters that it did not establish as requirements in the procurement documents. Doing so would clearly exceed the limits of its powers.
The risk associated with an hourly rate of one euro depends on how the procurement is structured
In practice, another recurring question is whether a tender may include a very low hourly rate. The answer depends first and foremost on the procurement documents and the pricing methodology, particularly on whether cross-subsidisation is permitted.
Where cross-subsidisation is prohibited, it may be very difficult for a tenderer to explain how an extremely low hourly rate covers all costs associated with its tender.
In addition, Section 115(9) of the Estonian Public Procurement Act must be taken into account. Under this provision, a tender must in any event be rejected where it is established that the low price results from non-compliance with applicable employment, environmental or social law requirements, such as minimum wage requirements.
If the tender price does not allow such costs, together with other unavoidable costs, to be covered, even where cross-subsidisation is permitted, there is a serious risk that the tenderer’s explanations will not be considered credible by the contracting authority. Case law has held that allowing labour costs below the statutory minimum wage to be cross-subsidised would effectively amount to permitting dumping and could constitute a manifest attempt to distort competition. Under this approach, a price that is contrary to employment or social law requirements cannot be justified by reference to other parts of the tender or economic activities outside the public contract.
Competition law adds another dimension to disputes over low prices
According to Tarmo Peterson, public procurement law and competition law share the common objective of ensuring effective competition in the market. While public procurement law primarily regulates the conduct of contracting authorities, the rules governing the conduct of undertakings, including tenderers, derive from competition law.
Competition law issues arise in public procurement primarily in three areas: prohibited agreements, abuse of a dominant position and State aid. For tenderers, this means, for example, that they must refrain from market sharing and cartel arrangements. Undertakings holding a dominant market position must also avoid pricing below cost where this could amount to an abuse of market power aimed at excluding competitors.
For contracting authorities, this effectively introduces additional elements into their assessment. In addition to examining whether a tender price is justified, it may become necessary to consider whether the tenderer may have entered into prohibited agreements, whether it holds a dominant position and is abusing that position, or whether State aid received by the tenderer is lawful, as unlawful State aid cannot be relied upon to justify a tender price.
Below-cost pricing may nevertheless be permissible
Although public procurement law frequently raises the question of whether cross-subsidisation is permitted in a particular procurement procedure, competition law, and indeed public procurement law, does not prohibit below-cost pricing as such.
An undertaking may make a deliberate commercial decision to provide a service at a loss, for example to obtain an important reference or enter a new market. In such a case, the contract may be financed from other economic activities or existing assets. What matters is that all obligations arising from the public contract can actually be performed, employees receive the remuneration required by law, applicable social requirements are complied with and performance of the contract remains economically viable.
According to Peterson, a contracting authority generally cannot prohibit an undertaking from cross-subsidising a contract – that is, covering losses under one contract from other economic activities. This forms part of the undertaking’s economic freedom. Exceptions may, however, be established by specific legislation or the procurement documents.
The risk is greater for dominant undertakings
The situation changes where a below-cost tender is submitted by a dominant undertaking. The Court of Justice of the European Union has held that abuse by a dominant undertaking may be presumed where prices are below average variable costs, as such pricing has no reasonable commercial explanation other than the elimination of a competitor from the market.
Where prices are below average total costs but above average variable costs, establishing abuse requires evidence that the undertaking intended to eliminate a competitor or that the pricing is likely to have an exclusionary effect.
Establishing such an infringement is far from straightforward. It requires defining the relevant market, assessing the undertaking’s market power, and considering barriers to entry and competitive constraints as a whole. In a public procurement procedure, it is not realistic to expect a contracting authority to carry out such an analysis, particularly given that even the Estonian Competition Authority may take years to complete one.
One possible solution can be found in the criterion developed in case law, according to which a manifest attempt to distort competition may be treated as an abnormally low tender. This suggests that the contracting authority does not need to establish a breach of competition law in full. It is sufficient if the circumstances substantiate a manifest attempt to distort competition – for example, if they clearly indicate that a low price is being used to exclude competitors from the market.
What exactly this threshold means in practice, and what minimum level of competition law analysis is required, will need to be clarified by further case law.
Possible steps for contracting authorities and competing tenderers
If the tenderer’s explanations fail to dispel the contracting authority’s doubts, the contracting authority may reject the tender on the basis of a reasoned discretionary decision. This power must not be exercised lightly, particularly where the concerns relate to a potential infringement of competition law.
The contracting authority must clearly demonstrate that the circumstances amount to a manifest attempt to distort competition rather than merely aggressive pricing. If making such an assessment proves too difficult, the contracting authority may terminate the procurement procedure by a reasoned decision or notify the Estonian Competition Authority of the suspected infringement.
A competing tenderer that considers the contracting authority’s assessment of the justification for tender prices to have been inadequate may challenge the authority’s decision. According to case law, a manifest attempt to distort competition may be treated as an abnormally low tender. Accordingly, the infringement itself does not need to have been established in full; it is sufficient if the circumstances indicate a manifest and fact-based attempt to distort competition.
A competing tenderer may also bring a claim for damages before a civil court and submit a complaint to the Estonian Competition Authority. A claimant seeking damages must prove the infringement, the causal link and the amount of loss suffered. This often requires complex economic analysis. Proceedings before the Competition Authority can, however, be lengthy and may not provide effective protection of the tenderer’s rights. A complaint to the Competition Authority does not replace a civil claim, nor does a civil claim replace a complaint to the Competition Authority.
In conclusion, a low tender price does not necessarily indicate an infringement. On the contrary, it is often beneficial to society and consistent with the general principles of public procurement law, under which public funds must be used efficiently and fair competition must be ensured. It is, however, for the contracting authority to satisfy itself that this is the case by conducting its assessment on the correct legal basis, asking appropriate and relevant questions, and observing the principle of proportionality.