When is there an obligation to examine a grossly low price, cost, or other important components?
There is a general principle that contracting authorities should request explanations when a proposed price, cost, or important components of price or cost seem grossly low and there are doubts about whether the contract can be performed. Art. 90(1) of the Public Procurement Act now no longer defines strict mathematical rules for examining a grossly low price. As a rule, whether explanations are requested from the contractor will depend on how the contracting authority assesses the contractor’s bid.
Is seeking explanations an obligation or an option?
At the moment, the law states that a contracting authority has an obligation to investigate a grossly low price if the price, cost, or important components of the price or cost seem to the contracting authority to be grossly low and give rise to concern about whether the contractor has the capacity to perform the contract. The phrases “seem” and “give rise to concern on the part of the contracting authority” are imprecise and allow the contracting authority some discretion, because the contracting authority will request explanations depending on its assessment of the contractor’s bid.
This does not mean that commencing an enquiry is only a right of the contracting authority. The contracting authority is required to start an enquiry when the circumstances in the case suggest that there are grounds for applying Art. 90(1) of the Public Procurement Act. This is when the two prerequisites described above exist. The provision in question indicates that there is an obligation to start an enquiry due to the wording “zamawiający zwraca się o udzielenie wyjaśnień/the contracting authority will request explanations”, and not “zamawiający może zwrócić się o udzielenie wyjaśnień/the contracting authority may request explanations”.
Where a price, cost, or important price or cost component is suspected to be grossly low, the contractor is given an opportunity to explain the factors that led to that price or cost of the bid being quoted before the contracting authority decides to reject the bid. The contracting authority cannot reject the bid before an enquiry is conducted. When the two prerequisites described exist, the contracting authority has an obligation to conduct an enquiry, and failure to do so could be contested by a contractor before the National Appeals Chamber.
Obligation to examine a price 30% lower than the contract value
Art. 90(1a)(1) of the Public Procurement Act provides for a special situation in which a contracting authority has to be concerned ex lege regarding capacity to perform a contract in as required. In cases where the overall price of the bid is 30% or more lower than the value of the contract (plus VAT) or the arithmetic mean of the prices of all of the bids submitted, the contracting authority has an obligation to ask the contractor for explanations regardless of the contracting authority’s assessment of the bid. In such a case, the contracting authority is obligated to request explanations due to a formal, mathematical requirement being fulfilled.
The estimated value of the contract determined by the contracting authority when preparing a public procurement procedure is established as the reference value. If the bid is compared to the arithmetic mean of the prices given in all of the bids, the bids rejected by the contracting authority under Art. 89(1) of the Public Procurement Act, and the bids subject to rejection, should also be considered reference prices. Only bids that were effective when submitted will be considered, however, which means that bids submitted late will not be included in the arithmetic mean.
The mathematical formula only applies to the overall bid, and thus does not apply to a cost. If a cost is 30% below the contract value or arithmetic mean of all of the bids, the question of an enquiry is not determined by a mathematical formula, but according to the general principle under Art. 90(1) of the Public Procurement Act, i.e. where the contracting authority has doubts about whether the contract can be performed at that cost. The general principle under Art. 90(1) of the Public Procurement Act also applies to a price that is only 20% lower than the contract value or arithmetic mean of all of the bids in cases in which the contracting authority has doubts about whether the contract can be performed for the proposed price.
Obvious circumstances do not need to be examined
The obligation to request explanations regarding a grossly low price when a certain percentage is reached is not mandatory in every case, however. Art. 90(1a)(1) of the Public Procurement Act states that this does not apply in situations where the bid and the contract value or arithmetic mean of the bids vary for obvious reasons that need no explanation. This happens for example when the contract value established by the contracting authority before the procedure commences is excessive, meaning that it is much higher than the value based on the market conditions would be, and this is confirmed by the bids submitted in the procedure. Another “obvious situation” is when one contractor makes an excessively high bid, and this renders all of the other bids 30% lower than the arithmetic mean.
Grossly low price in relation to a contract value which has been revised
If there is a major change to market prices or other factors that affect the contract value determined when the procedure commenced, the contracting authority can revise the contract value. It should exercise this option in particular during a long-term public procurement procedure during which the market changes. The contracting authority does have some discretion when determining the factors requiring the contract value to be amended. Meanwhile, this amendment should make possible examination of whether, under the new market conditions, the contract can in fact be performed for the price in the bid.
Where this amendment described above is made, the contracting authority has the power to examine a bid that is 30% or more lower than the amended contract value, plus VAT (Art. 90(1a)(2) of the Public Procurement Act). The aim is to determine whether the price in the bid continues to be adequate in the circumstances that occurred subsequent to commencement of the public procurement procedure. Unlike the situation provided for in Art. 90(1a)(1) of the Public Procurement Act, however, requesting explanations is optional.
Examination of a grossly low price not automatic
Under Art. 90(1) of the Public Procurement Act, which provides for a general principle of examination of a grossly low price, cost, or important price or cost components, the obligation for the contracting authority to examine them is not mandatory and automatic, because the contracting authority has to establish on a case-by-case basis whether the circumstances justify a request for explanations. Under Art. 90(1a)(2) of the Public Procurement Act, on the other hand, there is a right, and not an obligation, for the contracting authority to request explanations. Under Art. 90(1a)(1) of the Public Procurement Act (this relates to the mathematical formula) the obligation to examine a grossly low price is not automatic. The contracting authority does not have to request explanations if it finds obvious reasons that do not need explanation for the difference between the bid and the contract value or arithmetic mean of all of the bids submitted.
What price or cost should cause the contracting authority to be concerned?
The Public Procurement Act does not define the term “grossly low price” which needs to be examined. The term “grossly low price” has been defined in case law, and is a price that is unrealistic and is not credible when compared to market prices for similar contracts and to other bids which would be unprofitable for the contractor. In other words, this is a price at variance with the contract value for which the contractor would not be able to perform the contract without incurring a loss or receiving financing.
There is also no definition of the term “grossly low cost”. A contractor’s bid is examined in terms of a grossly low cost when a cost is included as a criterion for assessment of bids. The definition of the term “grossly low price” established in case law should be applied, respectively, to a grossly low cost. The contracting authority may have defined the cost criterion using a statement of lifecycle costs as an aid in examining whether the proposed cost is grossly low. In such a case, the contracting authority will refer to the data specified by the contracting authority in the TToR and data provided by contractors, being the basis for calculating the cost and the method whereby the contracting authority defines the lifecycle costs according to that data (Art. 91(3d) of the Public Procurement Act). An analysis of the data provided and the method enables not only consistency in assessment of bids, but also examination of whether the proposed cost of performance of the contract might be grossly low. The method of examining whether a cost is grossly low is similar to review of a grossly low price.
Important components of the price or cost
At the moment, not only the overall bid can be examined. The important components of the price or cost can be examined as well. For this reason, a contracting authority can request the relevant explanations from a contractor even when the price or cost of important components of the final price or cost appear to be grossly low.
As in the case of a grossly low price and cost, the term “important component” is not clarified. An important component of a price or cost is a component which ultimately determines the cost or proposed bid due to the significant share in the overall price or cost. Unit prices of certain elements included when calculating a price or cost that do not have a major impact on the ultimate value cannot be grounds for rejecting a bid.
Another indication of the kind of costs that can be deemed to be important components might be the steps in the product life cycle costs listed in Art. 91(3c)(1) of the Public Procurement Act (costs of purchase, use, usufruct, and withdrawal from operation).
Katarzyna Śliwak, legal adviser, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners