Abnormally Low Bids: When the Lowest Price Loses the Contract

Quoting far below the estimate does not reliably win the contract. It invites scrutiny, a demand for justification, and often additional security, and on some tenders it results in rejection.

What makes a bid abnormally low

There is no single national definition, and tender documents differ. In practice, a bid attracts the label when it sits so far below the buyer's estimate, or so far below the other bids, that the buyer doubts the work can be performed at that price.

Where a tender document provides for it, the buyer may seek a detailed price analysis justifying the rate.

Why buyers care

A contractor who has underpriced has three ways out, and all of them are the buyer's problem:

• Abandon the work, leaving the buyer to retender and re-mobilise
• Cut corners on quality or specification
• Claim aggressively on variations and extensions to recover the gap

The buyer's exposure to all three is larger than the saving on the quoted price. Which is why the response to an unusually low bid is scrutiny rather than delight.

What a buyer may do

Depending on the tender's provisions:

Seek a justification, requiring a detailed rate analysis showing how the price covers material, labour, plant and overhead.

Require additional performance security, so the buyer is better covered if the contractor fails. This is the most common outcome, and it converts a low bid into a bid that consumes more of your capital. See performance bank guarantees.

Reject the bid, where the justification does not satisfy and the tender permits rejection on that ground.

If you are asked to justify

Respond properly and on time:

1. Provide the rate analysis you actually used, item by item
2. Explain any genuine cost advantage: owned plant, an existing site nearby reducing mobilisation, a material supply arrangement, spare capacity
3. Be specific, since a generic assurance that you can perform is not a justification
4. Do not invent a lower cost base than you have, because you will then be held to a price you cannot deliver

Where your price is low because you have a real structural advantage, this is a straightforward exercise and you will usually be fine. Where it is low because you made an error, this is the moment to find out, and it is a better moment than the sixth month of execution.

The transcription error

A material share of abnormally low bids are not strategy. They are a decimal in the wrong place, a rate entered against the wrong item, or a unit misread.

There is generally no mechanism to correct a rate after submission. The bid stands as submitted, and if it wins, the contract is at that price.

The prevention is a final check by someone who did not prepare the sheet: total value, spot-checked line rates, and units. See submitting an e-tender.

Bidding low deliberately

Firms sometimes bid thin to enter a buyer's list or to keep a team occupied. That can be a legitimate decision, made once, with the loss quantified in advance.

What makes it a bad decision is doing it without computing the financing costs that a government contract carries: EMD, guarantee margin, retention and the payment cycle. A price that looks like break-even on direct cost is usually a loss once those are counted.

And a contract executed at a loss consumes the capacity that would have executed a profitable one. See the bid or no-bid framework.

Reading the field first

The way to avoid being abnormally low by accident is to know roughly where the winning band sits before you price. Past award data shows the discount to estimate this buyer has accepted. A bid far outside that band, in either direction, deserves a second look before submission. See reading award data before you bid.