No fixed threshold for abnormally low prices in tenders | In Principle

What is an abnormally low price, and what is just a good bargain? In public procurements, this will be decided not by the market, but by the contracting authority. No price will automatically be deemed to constitute “dumping,” even if it is more than 30% below the other tenders and the contracting authority’s budget. But everyone will pay the price for “cheap” public contracts.

Within the next few years, we expect to see an EU regulation on public contracts which will apply directly, introducing identical public procurement provisions across all EU member states. The initial proposal for a regulation will be published in September of this year, as discussed here by Mirella Lechna-Marchewka in the article “A single law, not 27 versions.” But in the meantime, work is underway on another amendment to Poland’s Public Procurement Law, aimed at reducing the number of cases filed with the National Appeal Chamber. The number of appeals breaks new records every year, and allegedly abnormally low prices are a common basis for appeals.

The justification for the bill to amend the Public Procurement Law and the Act on Court Costs in Civil Cases (UD 409) points to a “noticeable increase in the number of appeals containing allegations of abnormally low prices, referring to procedural issues” as one of the fundamental reasons for the proposed change in Art. 224 of the Public Procurement Law. In a consolidated table of comments from the reconciliation conference, the Public Procurement Office cites the increasing number of procedural appeals in this area as the justification for the entire reform. Market practitioners and commentators consistently point to abnormally low price as one of the most frequent grounds for appeal. The amendment is intended to end this.

When is the price examined based on the directives, and when is it examined under Polish law?

Under Art. 69(1) of the Classic Procurement Directive (2014/24/EU), “Contracting authorities shall require economic operators to explain the price or costs proposed in the tender where tenders appear to be abnormally low in relation to the works, supplies or services.” This provision does not define when a price should appear abnormally low. Under the directive, the contracting authority should assess the information provided by consulting with the tenderer, but it may only reject the tender where the evidence supplied does not satisfactorily account for the low level of the proposed price or costs. The directive does not provide any numerical threshold below which the clarification procedure is automatically launched.

Under Art. 224 of Poland’s Public Procurement Law, however, it is mandatory to examine the price when the total price in a tender is at least 30% below the contract value (with VAT) determined prior to commencement of the procurement procedure, or the arithmetic mean of all tenders filed or not subject to rejection. If the reasons for the discrepancy in prices are obvious, the contracting authority may decide not to conduct an examination.

30% statutory threshold for examination to be eliminated

If the amendment is adopted, the contracting authority will assess the normalcy of prices flexibly, without an objective touchstone, which currently is a difference of 30%. Art. 224 of the Polish act is to be reframed in line with the directive, no longer providing for mandatory examination of prices in reference to any fixed threshold. The amendment would leave the decision to launch an examination within the discretion of the contracting authority, based on its assessment of whether an offered price “appears” abnormally low or “raises doubts.”

The existing 30% threshold has served as an objective, uniform standard: when the threshold is exceeded, the price must be examined, although the contracting authority can skip the examination in obvious situations, for example when the contracting authority realises that its own budget for the contract has been overstated. However, the absence of a fixed standard may lead to situations where different contracting authorities make different decisions at identical price levels, which will result in inconsistency in applying the regulations.

Will the number of appeals decrease or increase?

Consequently, abandoning a numerical threshold may have the opposite of the intended effect: if the issue of abnormally low prices is not resolved at the stage of the contract award procedure, it will have to be examined at the appellate stage. After all, competitors will still accuse the selected contractor of offering abnormally low prices. When the contracting authority does not consider the issue of too-low prices itself, contractors will appeal not against the contracting authority’s action, but against its inaction. This could defeat the intended purpose of the amendment.

This was pointed out by some commenters on the bill. For example, the Public Procurement Law Association, as well as the Office of the President of Poland, predicted that repealing Art. 224(2) would increase the number of appeals, as competitors would challenge the contracting authority’s failure to seek explanations of low prices.

Will offers be selected not ensuring proper execution of the contract?

During the work on the amendment, according to reports by the Public Procurement Office presented at a reconciliation conference, contracting authorities complained that they lose out on good offers due to the procedure for examining abnormally low prices. They must reject good offers when the low price is not adequately explained, as the current practice focuses on the formalism of the clarifications rather than how realistic the price is.

On the other hand, the current explanation procedure has served as a protective filter for public finances, and after all, contracting authorities could decide not to seek an explanation if the reasons for the price differences were obvious.

If the amendment is adopted, the security of implementation of public contracts will depend on the individual perception of prices on the part of specific contracting authorities, whose experiences may differ greatly. The risk of awarding contracts to bidders offering grossly low prices may grow.

We might return to a situation where contracts are signed at prices that don’t reflect the contractor’s true costs, and execution of the contract ends in disputes, annexes, or failure. It could also happen that contracting authorities, to hedge against oversight institutions, will demand excessive explanations of prices. In such cases, the 30% threshold could still serve as a useful touchstone.

Contracting authorities at risk for seeking explanations, but also for not seeking explanations

The proposed change to Art. 224 of the Public Procurement Law increases the contracting authority’s responsibility for making its own assessment of when an obligation arises to initiate an explanatory procedure. Consequently, contracting authorities will be at risk of allegations when they do seek an explanation of the price from a contractor, but also when they decide not to do so. Meanwhile, contracting authorities will have fewer evidentiary instruments at their disposal. Post-hoc inspections, based solely on facts arising during contract performance, could reach negative findings about the actions of contracting authorities, without taking into account that the circumstances were completely different at the stage of the contract award procedure.

It might also happen that the 30% threshold will continue to function, not under the act but as an element of the terms of reference for the procurement. Perhaps contracting authorities will begin to define their own thresholds beyond which they will examine the price for apparently being abnormally low, as well as the conditions for the examination.

Hard to challenge a competitor’s price without a threshold

It could also happen that the number of appeals falls for another reason: not because the contracting authority is no longer required to examine the price, but because potential appellants will not have the evidence they need to meet their burden of proof (and the filing fees for appeals have also been raised).

A contractor questioning the failure to examine an apparently abnormally low price will have to show that the price in the winning offer was abnormally low. But without a threshold triggering price explanations, there will often be no explanations at all, or much fewer of them. This would place appellants in an unenviable procedural posture, as they would be required to prove that the price was abnormally low, but without access to information about factors contributing to the price, which are generally protected as trade secrets.

According to the drafters, the proposed amendment will unburden contracting authorities compared to the current state of the law. But this is not very persuasive. The contracting authority is free of the burden of proof only when the information is not protected as a trade secret. But a great portion of the information about price-determining factors is naturally protected as a trade secret, and thus in practice the burden of proof will still rest on the contracting authority.

There won’t be appeals because there’s no chance of winning

The combination of three elements—the lack of a threshold triggering an investigation of the price; placing the full burden of proof on the appellant; and the natural protection of price-determining factors as trade secrets—creates a regulation that in practice will prevent effective challenges to tenders offering abnormally low prices when the contracting authority does not itself raise doubts about the price. This isn’t a question of “cutting red tape,” but eliminating the right to legal review in this respect.

The very aim of the amendment—reducing the number of appeals by raising the costs and narrowing the grounds for appeal—deserves to be condemned, because it restricts contractors’ ability to assert their legal rights.

Cutting the number of appeals, when achieved by stripping contractors of procedural protections, cannot be equated with improving the quality of the public procurement system. Rather, it would tighten the system at the cost of contractors and the public interest. Instead, the focus should be on simplifying the provisions of the act so that they do not create room for divergent application. In this respect, dropping the statutory threshold for examining the price does not appear proper. Even if there is no threshold set in the act, a threshold will arise in the practice of applying the amended act, and at least to start it will no doubt be 30%.

At any rate, it will be interesting to observe how this situation evolves.

Anna Prigan, attorney-at-law, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners