Mitigating the Risks of Abnormally Low Bids in Municipal Procurement

This article outlines strategies on minimizing the risks associated with abnormally low bids in municipal procurement.

An abnormally low bid can be characterized as one where the bid price, in combination with other elements of the bid, appears to be so low that it raises material concerns as to the capability of the bidder to perform the contract for the offered price.[1] Addressing abnormally low bids early in the procurement process is crucial in avoiding potential disputes, additional costs, and delays.

Various factors may contribute to an abnormally low bid, including artificial inflation by competitors, a bidder's intent to renegotiate the proposed price later in the process, financial instability of a bidder, or compromised service quality. Scrutinizing such bids is essential for procuring entities to uphold the integrity of the procurement process and ensuring only those bidders that are able to fulfill their obligations under an agreement are selected.

In situations where the procurement selection criteria are focused on the lowest bid, a procuring entity exposes itself to the risk of selecting an abnormally low bidder incapable of fulfilling obligations, thereby inviting disputes, increased costs, and potential delays in securing a replacement vendor. If a municipality does not declare such vendor non-compliant, other bidders may dispute the selection process on the basis that the acceptance of an abnormally low bid indicates departure from a fair selection process, with concerns about the bid being apparently not serious and the bidder's incapacity to fulfill the contract.

Similarly, given that procurement processes often prioritize selecting the lowest bidder, rejecting an abnormally low bid based solely on its price may expose the municipality to disputes. A bidder submitting an abnormally low bid may furnish evidence justifying their pricing strategy, providing legitimate reasons such as lower overhead costs, efficient organizational structures, and market-average pricing. They may argue that their company is in the process of establishing itself in the market, supporting their position with a description of their future strategy and how the company can withstand a short-term loss.

To address these risks, a procuring entity needs to establish a mechanism to counter abnormally low bids.