Abnormally Low Bids definition
We are currently seeing a paradigm shift from (i) pure price based decisions (“Lowest Evaluated Bidder”) to (ii) a more complete analysis (“Most Advantageous Bid”). The World Bank (WB) recognizes that accepting Abnormally Low Bids and Proposals (ALB) can put the contract in jeopardy. It can lead to increased overall costs, contract delays or even the collapse of a contract. WB has given its guidance regarding Abnormally Low Bids and Proposals (ALB), which are defined as follows:
“An Abnormally Low Bid/Proposal is one in which the Bid/Proposal price, in combination with other elements of the Bid/Proposal, appears so low that it raises material concerns with the Borrower as to the capability of the Bidder/Proposer to perform the contract for the offered price.”
It is preferable for the Borrower (Owner/Employer) to avoid receiving Abnormally Low Bids. This can be achieved through:
- adequate market research,
- high quality documentation (RfQ),
- engagement with the market,
- a sufficiently long bid period,
- a pre-qualification phase etc.
In the case of a suspected ALB, there is a requirement to undertake enhanced due diligence on the Bid. The comparison of the price can either be against the Borrower’s budget or in comparison with other bids; we will further explain this below. Due to the complexity of establishing Abnormally Low Bids, the Client may require the input of independent consultants with technical knowledge and experience relevant to the specifications.
If the Bidder is unable to show it can complete the contract for the Bid price, the Bid must be rejected. Clearly, in case of suspected ALB, the burden of proof is on the Bidder. The due diligence regarding potential ALB price must happen before submission of the Bid evaluation report to WB for no-objection.
5 stages of evaluation
If we look more in detail to the process, we identify 5 stages:
1. Identification of potential Abnormally Low Bids.
In any case, identification of ALB should be undertaken on Substantially Responsive Bids only (other Bids should be rejected on beforehand). An objective calculation can establish potential ALB, either with:
(i) the ‘absolute’ approach when fewer than 5 bids were received: We have a potential ALB if Bidder’s price is more than 20% below Borrower’s cost estimate; or
(ii) the ‘relative’ approach: We have a potential ALB, based on a statistical calculation, if the Low Bid is more than one standard deviation below the average of the Substantially Responsive Bids.
2. Clarification with the Bidder.
The Bidder’s capability to perform the contract within its total evaluated Bid price must be established. This is done based on detailed price analysis and on a correlation with the following factors:
- schedule, and
- risk allocation.
A preliminary assessment shall first be performed:
- Has the cost of materials minimal divergence between Bidders, as is usual?
- Are items omitted from the price or consistently under-priced?
The Bidder shall not be asked, nor be allowed, to change its Bid during the evaluation process. The Borrower shall request clarifications to produce a detailed price analysis depending on the issues identified during the preliminary evaluation. The Borrower shall clearly state these issues. Some examples:
- very low overhead & profit; or
- a specific part of the contract with very low prices.
Any misrepresentation by the Bidder shall be subject to WB’s anti-fraud and corruption guidelines and may lead to sanctions. The Bidder shall provide a typical Bid price breakdown identifying separately:
- the cost of Goods/Works (equipment, materials and labor),
- Contingency, and
3. The Bidder prepares a justification.
The Bidder’s justification should include all information requested by the Borrower. The Bidders shall also provide any documentary evidence used for determining its Bid price. Failure to provide the justifications shall lead to bid rejection. No Bidder shall be permitted to withdraw its Bid or add any cost element during the Bid validity period. The explanations may concern the following :
- economics of manufacturing processes & services,
- the technical solution,
- the originality of the works / supplies or services,
- the compliance with applicable standards etc.
4. The Borrower analyzes and verifies
Suitably qualified personnel from, or working on behalf of, the Borrower shall fully analyze the information and evidence given by the Bidder. They shall check the consistency of prices in combination with other elements of the Bid. And also the consistency of resource inputs. The Borrower may evaluate previous satisfactory performance by the Bidder and contract implementation at similar prices.
The Borrower shall determine if the Bid price, in combination with other elements of the Bid, is unreasonably low. If the Borrower is not satisfied with Bidders demonstration of his capability to perform the contract successfully for the price submitted, then the Bid must be rejected, subject to WB no-objection.
5. The Borrower decides and obtains WB’s no-objection.
The Bid evaluation report shall include full details of the basis of Borrower’s decision, including the following:
- unrealistic resource estimates by the Bidder,
- Borrower’s estimates and any shortfall,
- the recommended decision,
- copies of all clarification exchanges and
- Bidders objections to Borrower’s estimates (if applicable).
If the Bidder has failed to demonstrate its capacity, it will lead to Bid rejection. If the Bidder fully demonstrates its capability to deliver the contract for the offered price, its Bid should be accepted.
World Bank’s new methodology regarding the identification of ALBs (Abnormally Low Bids and Proposals) provides Borrowers with a structured approach to address this issue. Projects financed by World Bank and Multilateral Development Banks will be in a better position to achieve maximum value for money.
For the entire guideline, please find herewith the reference document from the World Bank’s website:
AfiTaC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “firstname.lastname@example.org”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publication on LinkedIn and writing to us “email@example.com”.