How to justify an abnormally low price to the contracting authority?

In public procurement procedures, contractors are often called on to justify the price they offer. If the explanation is too general or imprecise, the offer can be rejected.

Art. 90(1) of Poland’s Public Procurement Law expressly states that the contracting authority is required to summon a contractor to provide an explanation if the contractor offers a price or cost, or a material component of the price or cost, that appears abnormally low in relation to the subject of the contract and raises the contracting authority’s doubts as to the contractor’s ability to perform the contract in compliance with the requirements set by the contracting authority or requirements arising under separate regulations.

Failure to present a calculation of the price in line with the contracting authority’s expectations, or presenting the barest statements on the correctness of the calculation, can prevent the contracting authority from accepting the explanation. The contractor should also strive to provide a full explanation of the offered price, including for example by presenting the detailed method for coming up with the price (National Appeal Chamber ruling of 11 January 2017, cases KIO 2381/16 and 2382/16).

For example, the contractor cannot merely state that the price in its offer represents the balance of advantageous conditions available to the contractor contributing to the price. In each instance it is necessary to cite the factors and describe them in specific detail. When citing circumstances that the contractor claims enable it to offer a better price, it should provide specific information about its costs or the savings achieved through such circumstances.

Moreover, under the consistent line of case law, limiting the explanation to claims not backed by evidence concerning e.g. vast experience, excellent organisation, optimisation of costs, implementation of the latest technology, or even a favourable location not far from the site of contract performance, is deemed to be no explanation at all. In that case the contractor is complying with the request only formally, i.e. by submitting a document that states nothing in particular—providing no substantive content or information useful to the contracting authority for evaluating the costs or price in the offer (National Appeal Chamber ruling of 6 June 2016, Case KIO 800/16).

For example, it is insufficient to provide a general statement that the contractor enjoys attractive rebates on the purchase of materials and equipment.

When seeking to justify its price through available discounts, the contractor should include evidence in the clarifications as to the amount and scope of rebates it relied on in calculating the price in its offer. Such a contractor should present circumstances and evidence for favourable conditions for contract performance available to the contractor that are not also available to other contractors operating on the same market (National Appeal Chamber ruling of 19 January 2017, Case KIO 28/17; similarly, ruling of 23 December 2014, Case KIO 2615/14).

And when for example seeking to justify lower costs of contract performance by pointing to the advantageous location of the contractor’s offices or workers, the contractor should provide a detailed calculation of the extent to which these factors lower the figures making up the price. In its decisions to date, the National Appeal Chamber has tended to accept the position that such proximity can indeed lower the contractor’s costs, e.g. for rent, transport, purchase of additional office equipment, or the time and expense of delivering engineers and inspectors to the site (National Appeal Chamber ruling of 27 August 2014, Case KIO 1680/14). However, when relying on any such favourable factors, it is important in each instance to support such claims with relevant evidence, e.g. by presenting a table of factors contributing to the price, broken down by such items as the cost of maintaining offices and vehicles, transport of workers, and the like.

Contractors should first and foremost ensure that their explanations provide a precise calculation of all essential amounts that must be incurred for the contract to be performed in compliance with the requirements for the procurement. Such information should therefore be specific enough that the contracting authority can verify it by comparing it with data available on the market, and ultimately test the accuracy of the information. The information should demonstrate objective circumstances, backed by evidence, enabling the contracting authority to determine that the price is offered at a realistic level.

The best solution in most cases may be to submit clarifications containing an objective presentation of the items in question and the accounting and cost aspects (National Appeal Chamber ruling of 6 June 2016, Case KIO 800/16). As indicated, the contractor must not only explain what factors contribute to the level of the price offered, but also how they affect the price.

Przemysław Gruchała, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners