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Buyer beware? How to avoid price shocks in public contracts


Thursday, March 7, 2019

The Irish public sector spent €12bn on goods, services and works last year according to the Office of Government Procurement.  As public bodies are required by European and Irish legislation to hold tender procedures for most contracts above €25,000, competition can be fierce amongst companies bidding for public contracts.   One win could open new markets and opportunities for a successful bidder. This opportunity often leads to aggressively priced bids for the public sector which (in theory) delivers value for money for the taxpayer.

However, pricing a bid too aggressively can be a double edged sword for all parties involved. The private sector may find the price bid as unsustainable (as evidenced by the troubles of many major outsourcing companies in the UK and Ireland), whilst the public sector may be forced to increase the budget for a particular contract as their contractor looks to exploit any possible nook or cranny to increase their profit margin. We have identified five steps for public bodies to follow to limit price shocks at a later stage.

First – planning is everything. Speak with potential bidders before your tender process to understand what the market price is and their capabilities.

Second – provide bidders with as much relevant information as is reasonably possible during your tender and ensure the risks transferred to the contractor are appropriate. Bidders will often “price for risk” if there are any elements of a tender that are uncertain – a good tender process will allow bidders to quantify certain risks and consequently provide greater price certainty.

Third – ensure your contract and specification are as well developed and accurate as they can be. If the specification is vague or does not include an item at tender stage and the specification is revised during the life of the contract, the price will almost inevitably increase – and the public body’s ability to amend the contract is limited by EU and Irish public procurement legislation.

Fourth – decide how important price is in conjunction with quality, and look not just at the price bid today but the life-cycle costs as well. A €500 20 year old car may appear to be a better deal than a €5,000 3 year old car. However, the €500 car will be less fuel efficient, cause more pollution, require more trips to the garage and require scrapping in the next five years. Public bodies are entitled to factor in these life-cycle costs as part of their tender evaluations as long as they are upfront and non-discriminatory in determining these costs – and could result in better value for money for the taxpayer in the long run.

Finally – check for abnormally low tenders. If a public body receives a bid that appears to be very aggressive or “abnormally low” – i.e. substantially lower than the estimated price the public body had in mind at the start of the process – it should ask the bidder to explain how it has priced its bid.  If the public body is not satisfied with the bidder’s explanation, it can – although it is not required to in most instances – exclude the bidder from the process.

Whether a bid is “abnormally low” is not an exact science. A difference of 10% or 20% does not necessarily mean that a bid is abnormally low – nor does it mean that all bids are on the level if they are within 1% of one another. Public bodies should look at the quality promised by the bid as well as the price and determine whether it stacks up – if a bidder is promising Michelin star quality at fast food prices, public bodies should look again at the bid and ask for an explanation.

When it comes to procurement, there are no absolutes. And yes, hindsight allows everyone to have a perspective on what SHOULD have happened, as opposed to what ACTUALLY happened. That’s especially the case when public tender processes are under a spotlight and cost overruns may be a fact of life. However, taking these five steps can help to considerably reduce the governance and financial exposure of not doing so.

For further information, please contact our Procurement Team.


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