Are low bids always too good to be true?

Isn’t it good news if one bid is significantly lower than the others? Charles Lilley and Alex Ottaway reveal why a bargain contract price could actually be a sign of inexperience, or even a litigious contractor.

Imagine three consultants are appointed to advise on the results of a tender. One of the bids is a lot lower than the others.

How do the consultants respond?

1. The first is jubilant, exclaiming, "look at the immense saving the purchaser can make!" He thinks the contract should be awarded to this tenderer.
2. The second is more circumspect, warning, "you get what you pay for." She thinks the tenderer may well cut corners and do a poor job.
3. The third – who we think takes the correct approach – considers the detail of the bid, and compares it with the others. He asks questions. Has the tenderer made incorrect assumptions? Has it misunderstood the complexity of what is required? Has it legitimately found an ingenious way to save cost?

We recently encountered an example of what can go wrong when a purchaser accepts a low bid without properly scrutinising it and engaging in clarification meetings with the relevant tenderer.

The project involved coastal protection works comprising a series of offshore rock reefs. The marine site conditions meant that there would be a lot of downtime. As the site was tidal, if the tide was too low, crane barges and other vessels could not access the site.

One tenderer totally failed to appreciate the downtime involved in doing the coastal protection work

However, severe storms, winds, and very large waves were also common in the area. This meant that, even during those opportunity windows when the tide was high, there was a risk of additional downtime due to bad weather.

One tenderer totally failed to appreciate the downtime involved in doing the work.

It was a civil engineering company accustomed to working on land, and its bid was based on the incorrect assumption that work could be carried out at all times.

Unsurprisingly, its programme was far more optimistic than any other tenderer, and its bid price was significantly cheaper. The purchaser was attracted by the low price and accepted the bid. The contractor learnt about harsh marine conditions the hard way, and was in significant delay.

From the contractor’s perspective, the job went from being profitable to loss-making. The contractor sought to recover its losses by making claims based on adverse weather and physical conditions, even though it had no such entitlement contractually. Although the weather and physical conditions were harsh, they were not unusual for that marine area.

The works were delivered late. The purchaser had to spend additional time and expense dealing with the contractor’s persistent and unmeritorious claims, even though the risks had been successfully passed to the contractor, with a consequential impact on the delivery of the project.

Some of these difficulties could have been avoided had the purchaser properly scrutinised and understood the erroneous assumptions on which the low bid was based.

What can tenderers do?

We are seeing a promising trend, in that tenderers are resorting to independent internal committees to review proposed bids before they are submitted.

The independent reviewers may spot issues that those engrossed in the detail of the bid may have missed, or assumptions that should be tested.

The delivery team should also be involved at bid stage and work closely with the estimators, which in our experience does not happen very often. These review procedures may minimise the risk of the tenderer getting burnt, like the contractor in the marine project.

If it looks too good to be true, it probably is

Problems can originate from the very beginning of the process, which is why it is prudent to ensure that proper tender evaluation procedures are in place.

The low bid in our coastal protection example was a product of the contractor failing to appreciate the location-specific risks.

However, we have encountered other situations in which contractors deliberately under-price bids in order to win the work, adopting a claims-focused approach in order to recover some of their costs.

When a purchaser comes across a low bid, it would be well advised to ensure its commercial team scrutinises the bid closely and engages in clarification meetings with the relevant tenderer before deciding whether to accept it. The purchaser would then be faced with a commercial decision: whether to continue exploring the possibility of awarding the contract to that tenderer, or award the contract to someone else.

• Charles Lilley is Partner, and Alex Ottaway is Senior Associate at Bryan Cave Leighton Paisner. This article was originally published in "10 Early Warning Signs – Spotting The Risks in Construction and Engineering Projects", a thought leadership report by global law firm Bryan Cave Leighton Paisner (BCLP). You can download the full report here.

Image: Ignorance of local conditions is no excuse. Surf’s up at Porto Covo, Portugal (Alvesgaspar/Creative Commons/CC BY-SA 3.0)