ABNORMALLY LOW TENDERS: MAKING

DETECTION OBJECTIVE

IR. ANTONIOS MEGREMIS1

Adviser, Royal HaskoningDHV

ABSTRACT

Abnormally Low Tenders (ALTs) are considered unfavourable for the

economically sustainable execution of (infrastructure) projects. Projects
for which the contract has been awarded to an ALT typically face cost
escalation, lower quality delivered, renegotiation of contract terms,
dissatisfied stakeholders and disputes between client and contractor.
Even though the ALT phenomenon is regulated in the EU Procurement
Directives, there is no commonly acceptable definition of what constitutes
an ALT or a framework to detect such tenders in practice. The introduction
and extensive use of integrated contracts, such as Design and Build (DB),
makes the identification of ALT much more complex. The contracting
agency does not possess a detailed design during tendering, which
hinders the accurate estimation of the project costs. Despite the negative
implications of integrated contracts, the identification of ALTs can be dealt
with in an objective way through developing a standardised framework.
In order to be effective, such a framework should be described on the
tendering guidelines of contracting authorities and be specified in the
tender documents, and not under national or European law.

1. INTRODUCTION

The importance of (transportation) infrastructure projects for the

economy was already recognised in 1776 by Adam Smith in the Wealth
of Nations. The author underlined that the nature of those projects is
such that the profit could never repay the expense to any individual or
small number of individuals, which makes the involvement of the public

1
The article is based on a study at Delft University of Technology in 2013, which was carried
out with the support of the engineering firm Royal HaskoningDHV. The research comprised a
literature study followed by a systematic consultation of a number of costing and legal experts,
both from the public and the private sector. The research was closely supervised by a committee
consisting of: Professor mr dr MAB Chao-Duivis, Managing Director Institute for Construction Law,
Ir LPIM Hombergen, Senior adviseur Rijkswaterstaat, Ir L Heijnders, Adviseur Rijkswaterstaat and
Ir JR Deketh, Leading Professional Royal HaskoningDHV.

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Pt 4] Abnormally Low Tenders: Making Detection Objective 461

sector necessary2. In the past, public infrastructure projects were financed

and constructed completely by the state. The large capital needed
together with cost overruns, often caused by optimism bias and strategic
misrepresentation, resulted in frequently haunted public infrastructure
projects3.
In the late 1990s Western governments core competences were
reassessed, leading to the distribution of several tasks to the private sector.
Executive departments were transformed to agencies, with Rijkswaterstaat
in the Netherlands, Highways Agency in the UK and Transport Scotland
being typical examples. The aim was to exploit the competencies of the
private sector, while adjusting to the limitation of national budgets. The
result was new ways of cooperation between the public and the private
sector for infrastructure development4. Integrated forms of partnering are
now dominant, where the client describes his problem functionally and the
contractor is the party that carries the design.
Problems in the execution persist and ALTs are frequently cited as
the cause of failed partnering, and a factor in the creation of disputes
and poor quality projects5. There is still no clear understanding or at
least consensus about the nature of the problem and how it should be
dealt with, within the law. The aim of this article is to provide an insight
into what constitutes an ALT and to contribute to the establishment of
a framework to objectify the detection of ALTs. The focal point of the
practice-oriented research that forms the background for this article is a
structured consultation of high level cost and legal experts of the public
and private sector. This was conducted mainly in the Dutch context.
However, the problem is analysed and is examined on a European level
as is the potential to cope with it. The research methodology has been
validated in academic terms, as the study was realised in cooperation
with TU Delft.

2. THE PROBLEM OF ABNORMALLY LOW TENDERS

In 1998 the European Commission convened a Working Group to

examine and make recommendations on how to permit fair competition
by making use of mechanisms to detect and rule out abnormally low
offers6. In the report that was published a year later it is stated that the

2
A Smith, An inquiry into the nature and causes of The Wealth of Nations, London 1776.
3
B Flyvbjerg et. al., Megaprojects and Risk: an anatomy of ambition, Cambridge 2003, 5th Edition.
4
S Lenferink, Market Involvement throughout the Planning Lifecycle, Groningen 2013,
Dissertation.
5
J Golden, Abnormally low tenders in public sector procurement, 2013, Society of the
Construction Law.
6
Working group report. DG3, 5 June 1999 on the prevention, detection and elimination of ALTs in
the European construction industry.

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462 The International Construction Law Review [2014

background to that Working Group was the observation that the quality
and value-for-money of construction projects in most European countries
could be improved, life-cycle costs could be reduced and time savings
could be achieved. As indicated by the title of the Working Groups report,
the problem of ALTs is a multidimensional problem consisting of the:
Prevention, Detection and Elimination of Abnormally Low Tenders.
Note that this article focuses on the aspect of identifying ALTs.
In the Dutch construction industry, ALTs were not a problem at the
time the working group was set up. On the contrary, in 2001 a fraud was
revealed where the contractors were fixing the prices to be submitted
during tendering on a level higher than normal7. The revision of the EU
Directive on public procurement in 2004, that stimulated the obligation
for transparency, seems to have put an end to such practices8. Lately,
clients are noticing with increasing frequency that the end prices tendered
by some bidders are substantially lower than estimated and/or than the
other bidders9. The question that arises is, below what point and based on
what datum should a tender be considered suspicious of being abnormal?
From a legal perspective, the problem of ALTs is complicated as the
concept is regulated but ill-defined in the EU Directives. There is no
definition provided for what constitutes an ALT, nor a framework to
identify such tenders in practice. Instead, the homonymous article is
confined to listing the factors in relation to which a tender might be
abnormal. The result is that ALTs are abhorred by contracting authorities
and bidders, among which there is an amorphous consensus that ALTs
should be despised10. The etymology of the term indicates that a tender
should be considered as abnormally low in comparison to some datum.
This could be either some pre-tender estimate of the cost or it could be in
relation to the other bids11. Those two approaches can be encountered in
the national legislation of several EU members.
Coping with ALTs is complex, taking into consideration that both
the contracting authorities and the bidders are aiming for low tenders.
Contractors may submit an ALT accidentally, because of a miscalculation of
the bid price, or deliberately, in an effort to stay in business12. In the latter

7
HAJ de Ridder, Design and Construction in civil engineering, Delft 2009.
8
Directive of the European Parliament and Council No 2004/18/EC, 31 March 2004 on the
coordination of procedures for the award of public works contracts, public supply contracts and public
service contracts.
9
The term contractor and bidder are used interchangeably throughout the text. Formally the term
contractor should be used after the bidder has been awarded the contract. The term client, contracting
agency and contracting authority are also used interchangeably throughout the text to refer to the party
that organizes the tendering process.
10
Golden, op. cit. n. 5.
11
Golden, op. cit. n. 5.
12
M Gunduz and V Karacan, Damage to treasury: Abnormally low tenders in public construction
works, 2009, Journal of Legal Affairs and Dispute Resolution in Engineering & Construction, pp. 130136.

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case, contractors may even tender at a loss intentionally so as to ensure

they have work for their skilled staff to undertake. They reduce their profit
margin, so the tender price is lower than the cost of undertaking the
work and thus they are bound to make a loss. The rationale of this odd
policy is that the contractor is achieving the short term aim of protecting
his cash flow, albeit at the cost of his medium term profit13. Contracting
authorities, because of budget restrictions, strive to limit the cost of
projects materialisation. As a result, receiving low prices in the bids may
be very welcome at one level, especially in times of an economic downturn.
Nevertheless, if a tender proves not to be economically viable the
client will be typically faced with cost escalation and a performance that
has adverse effects on the project. The contractors financial loss leads
to excessive pressure to save costs and reduced expenditure on quality,
innovation, training and safety. These effects are passed on through
the supply chain to sub-contractors that are squeezed, suppliers and
employees. Small and medium size enterprises (SMEs) are particularly
vulnerable due to their more limited financial resources and commercial
strength14. Furthermore, the contract scope is reduced where possible to
limit expenditures and contractors intend to charge the client for extra
work outside the scope of the contract. Finally, the costs of quality control
during contract execution as well as the costs in use and maintenance are
expected to be higher.
Such problems in contract execution create friction between the
contracting authority and the contractor, which often leads to legal
disputes15. The misalignment of objectives between the contracting
authority and the contractor is critical here. Because the client aims for
the project to be completed he is not eager to drive those disputes to
court, which is very time-consuming. On the other hand, the contractors
main aim is to get paid. To ensure this, contractors use the possibility of
going to court as a means of pressure, knowing that the client is motivated
to step back so as to preserve the projects timely materialisation16.
Despite the foregoing, due to the absence of a common definition of
ALTs in the EU Directives, cases of ALTs have been brought to European
courts numerous times. The content of the cases indicates that there
are four distinct questions to be addressed, as it will be seen in the next
section. The first is concerned with the investigation process that should

13
C Lovatt, Undertaking construction works? Make sure your contractor is not committing suicide, 2011,
Farrer & Co.
14
Working Group DG3, op. cit. n. 6.
15
M Regan, Public infrastructure procurement: A comparative analysis of adversarial and non-
adversarial contracting arrangements, 2012, Public Infrastructure Bulletin, pp. 118.
16
A Megremis, Abnormally low tenders: Objectifying detection, Working towards economically
sustainable procurement through a framework for the contracting authority to objectify the detection
of abnormally low bids, 2013, Delft University of Technology (available at: http://repository.tudelft.nl/
view/ir/uuid:76eb4027-f171-44a8-bd85-34f46007f7ec/) (Last accessed 25 September 2014).

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be followed before rejecting ALTs. The second is whether it is permissible

to use automatic formulae (mathematical standards) to identify ALTs. The
third is whether there is a duty for the contracting authority to investigate
ALTs. Still, the most essential question concerns what an ALT is, which
remains unanswered and thus stimulates the interest on the issue.

3. EUROPEAN CASE LAW

3.1. What is the procedure to be followed before rejecting a tender

as abnormally low?
The European Court of Justice (ECJ) case of Impresa Lombardini SpA v
ANAS is a milestone for the procedure to be followed before rejecting
ALTs17. The ruling of the ECJ was that the potential exclusion of bids
as abnormally low should not be automatic. The bidder, as ruled by
the court, should have the opportunity to give an effective explanation
about his bid. Moreover, in paragraph 53 it is clarified that the bidder
should be made aware of the precise points about his bid which gave rise
to questions in the mind of the contracting authority. In practice, the
explanations should be asked in writing and the bidder should respond
within due time. This process was described in paragraph 55 as an inter
partes examination, suggesting that some sort of continuing dialogue may
be necessary in certain cases18.

3.2. Are automatic formulae permitted?

In paragraph 67 of Lombardini case the ECJ stated that whether applying
an automatic formula to identify ALTs is permissible was a matter for
member states to decide on. However, according to the ruling in
Lombardini it was considered to be acceptable to operate a system under
which there is an anomaly threshold of a certain percentage of the mean
discount offered by tenderers from a pre-set base price19. In order to
avoid a breach of the transparency principle, it is imperative that bidders
know beforehand what system is to be applied. Specifically, the formula
can be established either in national law or in the tender documents
as an extra award criterion. Again, the exclusion of bids should not be
automatic. Rather, an automatic formula can only be used to identify
tenders that are suspected of being abnormally low, for which further
investigation is needed.

17
Impresa Lombardini SpA v ANAS (ECJ) Case C-285/99, 2001 I-09233, 27 November 2001.
18
AS Graells, Public Procurement and the EU Competition rules, Oregon 2011, Hart publishing.
19
N Giffin, Abnormally low tenders in procurement law, 2010, Procurement Lawyers Association,
London.

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3.3. Is there a duty for the contracting authority to investigate?

The approach of the EC to the issue of whether there is a duty for
contracting authorities to investigate ALTs is controversial20. This can be
attributed partly of the difference between rejection and non-rejection
cases. The rejection cases involve the exclusion of a very low tender and
are brought to court by the bidder that was excluded. The non-rejection
cases occur where bidders that were not awarded the contract claim that
the winning bid should have been considered to be abnormally low and
thus should have been investigated and potentially excluded.
In two non-rejection cases, namely Morrison Facilities Services Ltd v Norwich
County Council and Varney & Sons Waste Management Ltd v Hertfordshire County
Council, the unsuccessful bidders claimed that the contracting authority
had a duty to investigate if the winning bid was abnormally low and failed
to carry out the investigation21. The claimants arguments were rejected, as
it can be seen in paragraph 17 of the Morrison case and paragraph 157 of
the Varney case. In the Morrison case the judge relied upon the word shall
in paragraph 55 of the 2004/18/EC Directive and stated that it seems
seriously arguable that a contracting authority does come under a duty to
investigate22.
In a rejection case, namely Renco SpA v Council of the European Union,
the bidder that submitted an ALT objected to the rejection and went to
court, where his arguments were turned down23. In the decision it seems
there is some sort of duty to investigate. In paragraph 76, the court stated
that the contracting authority does not need to check each price quoted
in each tender, but it must examine those tenders which are considered
to be suspect. Interestingly, the decision of the court was identical to
the decision in a non-rejection case, namely the PC Ware case24. In the
most recent case of SAG ELV Slovensko a.s. v rad pre verejn obstarvanie,
after the rejected bidder appealed against the decision, the Supreme
Court of the Slovak Republic referred it to the ECJ due to concerns as to
whether the decision breached the principles of non-discrimination and
transparency25. McGowan notes that the courts judgment in paragraph
45 emphasised that the EUs legislature, in enacting paragraph 55 of the
Directive, intended to require contracting authorities to examine ALTs
by asking for explanations26.
20
D Mc Lachlan, Abnormally low and unbalanced tenders, 2012, White Paper Conference, London.
21
Morrison Facilities Services Ltd v Norwich County Council [2010] EWHC 487 (Ch), Varney & Sons Waste
Management Ltd v Hertfordshire County Council [2010] EWHC 1404 (QB).
22
Recent developments in procurement law, 2012, Fenwick Elliott construction law update
seminar, London.
23
Renco SpA v Council of the European Union (ECJ) Case T-4/01, 2003 II-00171, 25 February 2003.
24
PC Ware Information Technologies BV v Commission (ECJ) Case T-121/08, 2010 II-01541, 11 May 2010.
25
SAG ELV Slovensko a.s. v rad pre verejn obstarvanie (ECJ) Case C-599/10, ECLI:EU:C:2012:191,
[2012] WLR(D) 103, 29 March 2012.
26
D McGowan, An obligation to investigate abnormally low bids? SAG ELV Slovensko a.s. (Case
C-599/10), 2012, PPLR, pp. 165168.

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The ruling in the Slovensko case is very recent and thus there is no
subsequent case of an ALT brought to the ECJ to act as an interpretation.
In the absence of a commonly acceptable definition of what constitutes
an ALT, it seems doubtful that there could be a general obligation for
the client to investigate. Overall, it appears there is a tendency in the
rulings of non-rejection cases to indicate explicitly that there is no duty
for clients to investigate tenders, while in rejection cases some sort of
duty is often described. That is the case in two out of three non-rejection
cases and in four out of five rejection cases. This could be attributed to
the courts being more in favour of the clients to avoid a lengthy legal
proceedings delaying the execution of projects, which aim to improve
the social wellbeing. Since a limited number of cases have been examined
this is only a tendency.

3.4. What is abnormally low?

A critical point in the problem of identifying ALTs is to determine which
of the concepts trying to describe the term abnormally low best stand
in court. It is important to underline that although the term abnormally
low seems to refer only to the price of the tender, this is not the case
in the context of the Economically Most Advantageous Tender award
mechanism (EMAT). For example, in paragraphs 29 and 30 of Belfass
SPRL v Council of the European Union the number of hours work necessary
to provide the service were considered abnormally low, even though the
bottom line price was not27. In the decisions of the European Court of
Justice and the Court of First Instance various concepts can be seen that
intend to describe an ALT. Specifically, in the court it has been debated:
Whether a bid is genuine (Amey LG Ltd v The Scottish Ministers,28
Lombardini 29).
Whether it is sound and viable (SECAP 30).
Whether it is reliable and serious (Renco SpA31).
Whether it is serious (PC Ware 32).
In paragraph 20 of Amey LG Ltd v The Scottish Ministers, in which the bid
was rejected as abnormally low, the judge suggested that not all the above
concepts are of the same validity in legal terms. In particular, he claimed

27
Belfass SPRL v Council of the European Union (ECJ) Case T-495/04, 2008 II-00781, 21 May 2008.
28
Amey LG Ltd v The Scottish Ministers (2012) CSOH 181.
29
(ECJ) Case C-285/99 op. cit. n. 17.
30
SECAP SpA v Comune di Torino (ECJ) Case C-147/06, 2008 I-03565, 15 May 2008.
31
(ECJ) Case T-4/01 op. cit. n. 23.
32
(ECJ) Case T-121/08, op. cit. n. 24.

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Pt 4] Abnormally Low Tenders: Making Detection Objective 467

that viability and soundness are objective concepts, whereas seriousness

and genuineness have the potential to be subjective. In paragraph 6 of
the decision it is specified that the rejected bid involved unacceptable
financial and operational risks and could not be considered economically
sustainable. In paragraph 42 it was stated that even though the term
genuine was incorrectly used to describe the tender, this could not
undermine the conclusion that the tender involved unacceptable risks
and was not economically sustainable. In other words, even if a tender
is genuine the client still has to decide if the performance tendered
will be economically sustainable33. Therefore, ALTs should be related to
objective concepts for the economic sustainability of bids.
As Giffin aptly observes, a question that rises is whether economic
sustainability is to be looked at from the perspective of the contractor or
that of the contracting authority34. From the contractors point of view
the economic sustainability of a bid is related to a margin for profit. This
approach can be seen in the report published by the Working Group on
ALTs, where a tender is assumed to be abnormally low if:
in the light of the clients preliminary estimate and of all the
tenders submitted, it seems to be abnormally low by not providing a
margin for a normal level of profit and
in relation to which the tenderer cannot explain his price on the
basis of the economy of the construction method, or the technical
solution chosen, or the exceptionally favourable conditions
available to the tenderer, or the originality of the work proposed.35
The second condition provides the background to paragraph 55 of the
2004/18/EC Directive on ALTs, where any reference to the economic
sustainability of a tender from the contractors point of view was omitted.
Contractors, especially in times of economic recession, may eliminate
their margin for profit to bid lower and win the contract. However, this
does not necessarily entail problems for the project execution and is
not the most adequate approach towards detecting ALTs. As noticed
by Graells, the justification for the empowerment of clients to reject
ALTs has proved to be that they should not award the contract under
circumstances where there is reasonable risk of non-performance of
the contract36. Thus, ALTs should be related to what is described as
economic sustainability of a bid from the clients perspective, i.e. whether
complying with the contract conditions and project requirements will be
very difficult.

33
Golden, op. cit. n. 5.
34
Giffin, op. cit. n. 19.
35
Working Group DG3, op. cit. n. 6.
36
Graells, op. cit. n. 18.

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4. NATIONAL LEGISLATION OF THE 28 EU MEMBERS

Within the European Community, eight out of 28 EU members have

established standards to identify ALTs under national law. In these
countries we can distinguish between absolute and relative evaluating
systems. In the former, the contracting authoritys examination expands
only for the given tender per se without comparison with the other tenders.
In contrast, the relative evaluation correlates the tender to the others37.
In simple terms, relative standards examine the deviation of a tender for
the mean of the tenders, while absolute standards examine the deviation
from the clients cost estimation. Three European countries use absolute
standards and another three countries use relative ones. There are two
countries that use both standards depending on the number of valid bids
that are received. In certain systems there is a requirement for a minimum
number of bids for the standards to be applicable. In all these relative
standards are used. Thus, the requirement for a minimum number of
bids can be related to the trustworthiness of the mean. Moreover, in some
cases the highest and the lowest bids are excluded from the calculation of
the mean, if a certain number of bids have been received. The thresholds
that are used vary significantly as it can be seen in the table below, which
presents the average and the bandwidth of the thresholds used within
relative and/or absolute systems38, 39.

Type of Standards Mean of the thresholds Bandwidth of the thresholds

Relative 20% (1530)%
Absolute 24% (1040)%

Absolute as well as relative standards have both advantages and

disadvantages. The competitive advantage of relative standards is that
they reflect market conditions. On the other hand, relative systems create
space for manipulation of the tender process and require a minimum
number of bids for the mean to be trustworthy. Absolute standards are
advantageous in the sense that they are always applicable, regardless of the
number of tenders, but a reliable cost estimate is required. Establishing
37
A Juhasz, Community procurement in the ECJ case law, 2009, European Integration Studies, Vol 7,
No 1, pp. 5779.
38
Megremis, op. cit. n. 16.
39
The EU countries that have regulated standards are: Belgium, Bulgaria, Hungary, Italy, Portugal,
Romania and Spain. Northern Ireland is part of the EU as part of the UK. The UK procurement
legislation applies to England and Wales. Public Procurement is a devolved policy area in Scotland
and Northern Ireland. Scotland separately transposed the UK procurement legislation into Scottish
Law, which remains substantively similar. Although Northern Ireland has legislative competence in
the area of the public procurement, it has chosen to follow the UK legislation. Still Northern Ireland
has established Procurement Advice Notes (PAN) as administrative means to promote best practice on
specific technical and operational matters relating to the procurement policy. A framework to identify
ALTs, through the use of relative standards, has been established through a PAN.

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the cost estimate as a standard is legally complicated, because the clients

would have to be able to substantiate the estimation of the cost.

5. EUROPEAN PUBLIC PROCUREMENT DIRECTIVES

5.1. Proposal for a new EU Procurement Directive

Since 2011 the EU Commission has been engaged with the very recent
revision of the legislation on public procurement. Under these terms, a
proposal for a new Directive was prepared, the latest negotiated version
of which was accepted by the European parliament and entered into
force in April 2014. ALTs evidently attracted the attention of the EU
Commission in the process of revising the Directive. In recital 103 of the
new Directive, ALTs are described as tenders that might be based on
technically, economically or legally unsound assumptions or practices40.
It is added that where the tenderer cannot provide sufficient explanation,
the contracting authority should be entitled to reject the tender.
The main difference in comparison to the initial 2011 version is that
the homonymous paragraph 69 provided mathematical standards for the
identification of ALTs: Contracting authorities shall require economic
operators to explain the price or costs charged, where all of the following
conditions are fulfilled:
The price or cost charged is more than 50% lower than the average
price or costs of the remaining tenders;
The price or cost charged is more than 20% lower than the price or
costs of the second lowest tender;
At least five tenders have been submitted.41
In recital 103 of the new Directive the description of ALTs has remained
the same as in recital 42 of the 2011 proposal, apart from a phrase that has
been omitted. There it was suggested that in order to prevent possible
disadvantages during contract performance, contracting authorities
should be obliged to ask for an explanation of the price charged where
a tender significantly undercuts the prices of other tenderers. It can be
concluded that, in the process of negotiating the proposal, the general
obligation of contracting authorities to investigate ALTs was rejected
together with the use of mathematical standards. Instead, the EU
Commission decided that the Member States should decide on whether
there is a duty for contracting authorities to investigate ALTs.

40
Directive of the European Parliament and Council No 2014/24/EU, 26 February 2014 on public
procurement and repealing Directive 2004/18/EC.
41
Proposal for a Directive of the European Parliament and of the Council on Public Procurement,
COM (2011) 896.

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The standards in the 2014/24/EU Directive appear to be arbitrary and are

aimed to serve as a base for negotiation42. This can be verified by reviewing
the national legislation of the Member States. The standards allow for a
higher deviation of the lowest tender than any standards encountered
in national law. In other words, the proposed standards encapsulate
the ones currently applied and do not come in conflict with any of
those. Nevertheless, three important things must be noted. First, the EU
Commission opted for relative standards. Second, the deviation from the
second lowest standard was considered to be an indicator of abnormalities.
Last, a minimum number of bids were required for the applicability of a
relative system.

5.2. New EU Procurement Directive

The provisions on ALTs were in the end revised, even though the proposed
standards were not included. Article 69 of the new 2014/24/EU Directive on
ALTs has three main differences in comparison to Article 55 of the previous
Directive 2004/18/EC. The list of details in relation to which a bidder
may be requested to provide explanations on his bid is complemented
by two points about compliance with obligations related to (i) the fields
of environmental, social and labour law and (ii) sub-contracting. Recital
103 elaborates on point (i) by stating Rejection should be mandatory in
cases where the contracting authority has established that the abnormally
low price or costs proposed result from non-compliance with mandatory
European Union law or national law compatible with it in the fields of
social, labour or environmental law or international labour law provisions.
It can be seen that both additional points do not relate to the
subject-matter of the contract, but concern breach of mandatory legislation,
which already constitutes a reason for rejection. In addition, the rejection
of a tender as abnormally low because of non-compliance with Article 71 on
sub-contracting is odd, taking into account the content of Article 71. The
only evident link between Article 71 and ALTs seems to be the reference
that Article 71 makes to Article 18(2), which is redundant as this is already
done in Article 69.
Another difference is in the introductory paragraph 1 of the article.
Specifically, in the 2004 Directive in the process of investigating bids
contracting authorities shall request in writing details of the constituent
elements of the tender that it considers relevant. In the 2014 Directive
this elucidation has been left out. This is controversial as it is expected
that providing explanations in writing is necessary in the investigation
process. Also, the reference to the constituent elements of the tender that
it considers relevant indicates that explanations should be sought about

42
A Megremis, Abnormally low tenders: objectifying detection, 2014, Tijdschrift Aanbestedingsrecht.

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Pt 4] Abnormally Low Tenders: Making Detection Objective 471

certain aspects of the bid, which is another clarification that is practical

and should not be omitted.
The third point of difference is that the article on ALTs is complemented
by paragraph 5 which states: Upon request, Member States shall make
available to other Member States by means of administrative cooperation
any information at its disposal, such as laws, regulations, universally
applicable collective agreements or national technical standards, relating
to the evidence and documents produced in relation to details listed in
paragraph 2. This shows that the EU Commission recognises the need
to enhance the understanding of what constitutes an ALT and how such
tenders should be treated. Thus, the Commission intends to stimulate
transnational cooperation on the basis of exploiting knowledge and
procedures for the detection of abnormally low tenders.

6. IMPLICATIONS OF INTEGRATED CONTRACTS

AND THE EMAT AWARD MECHANISM

The legal framework for ALTs, on a European and a national level,

establishes regardless of the project context, the award mechanism or the
form of collaboration between the client and the contractor. Nevertheless,
those factors are influential and hinder the development of an effective,
unified system to identify ALTs. In particular, the use of integrated
contracts together with the application of the EMAT mechanism, have
proved to have negative implications for the identification of ALTs. The
main forms of integrated contracts, where the design is also in the tender,
(currently dominant for complex infrastructure projects) are Design
and Build (DB), and Design-Build-Finance-Maintain (DBFM)43. Linking
design and construction in a contract makes these activities a black box
for the public client that lacks a detailed design44.
From a theoretical perspective collaboration between the contracting
authority and the bidder is a principal-agent relationship, characterised
by misalignment of objectives and asymmetry of information between the
two parties45. The concept of information asymmetry aptly describes the

43
M Chao-Duivis, M Bruggeman and A Koning, A Practical Guide to Dutch Building Contracts, The
Hague, 2013, Institute voor Bouwrecht.
44
S Lenferink et. al., Towards Sustainable Infrastructure Development through Integrated
Contracts: Experiences with inclusiveness in Dutch infrastructure projects, 2013, International Journal of
Project Management, Vol 31, pp. 651627.
45
K Eisenhardt, Agency theory: An assessment and review, 1989, AMR, Vol 14, pp. 5774. Note that
the term agent is used in the context of economic theory and not as in the law. Traditional economic
theory has characterized procurement as a principal-agent relationship where the government, as a
benevolent principal, intends to accomplish a piece of public work that cannot be performed by itself
and therefore delegates the task to an agent, which could be either a government employee or a private
company. (The World Bank, 2009 Procurement in Infrastructure); See also O Soudry et. al., Advancing
public procurement: Experiences, innovation and knowledge sharing, Florida 2006, PrAcademics press.

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472 The International Construction Law Review [2014

practical complexities that integrated contracts create during tendering.

The client needs, within a short time, to evaluate tenders based on a
reference design that differs from the design and scope of the tenders.
Moreover, the client cannot have an insight on possible optimisations of
the construction process that contractors take into account when building
up their bids. Consequently, the contracting authoritys task to evaluate
bids and potentially identify abnormalities turns out to be very demanding.
In order to provide the bidders with design freedom and to exploit better
their competencies, contracting authorities describe their requirements
through functional, and not technical, specifications46. Describing
the clients requirements in functional terms can create grounds for
misinterpretation. The contractor may misread the specifications and
bid below cost unintentionally or deliberately. At the same time, using
functional specifications may lead to very different design solutions being
offered by bidders. This limits the margin for the client to use the tenders
received as a reference when evaluating whether a certain tender should be
further investigated if suspected to be abnormally low.
The use of integrated contracts has also resulted in a deterioration of the
accuracy of the build-up method that is predominantly used by clients to
estimate costs. With the lack of a detailed design in the possession of the
contracting authority, cost estimation needs to be done on a higher level of
the work breakdown structure where uncertainty about the accuracy of the
constituent elements of the estimate is rather high. Additionally, differences
in the scope for which the client and the contractors estimate the cost are
reflected in cost estimates. In other words, the client needs to evaluate bids
that have differences in scope and also in relation to the conceptualised
scope, possessing an estimate of the range of cost. Under these terms, the
complexity of identifying ALTs is evident.
In practice, there is another level of ill-determination of the scope and
thus of the cost of the project. The scope defined in the tender documents
may be altered when the project is carried out due to complications during
the execution phase. To cope with this difference in scope contracting
agencies are shifting from a deterministic to a probabilistic approach so
as to account for risk and uncertainty, and to achieve more realistic cost
estimates47. An extensive cost reference database is of importance for the
outcome of the estimation, which makes the application of probabilistic
methods still a challenge. The risk quantification and allocation is a very
important parameter in the procurement of integrated contracts, as most
of the risks arise and need to be treated in the design stage48. Failing to take

46
FIDIC, Procurement procedures guide, Geneva 2011.
47
A Clemons, Life-Cycle Cost Analysis: The Colorado Experience, Washington 2012, US
Department of Transportation.
48
De Ridder, op. cit. n. 7.

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Pt 4] Abnormally Low Tenders: Making Detection Objective 473

into account or underestimating certain risks for instance risks related

to soil conditions is a very common path that leads to the submission of
ALTs. Therefore, risk analysis is a parameter that needs to be examined for
the identification of ALTs.
Integrated contracts are typically procured through the EMAT
mechanism, the application of which is now required by the new EU
Directive49. In the context of the EMAT, price involves some sort of
quantification of the performance of the bidders on the qualitative
aspects of the tender. For instance, in the Netherlands the end price
of the bid includes a quantification of quality in fictitious Euros that are
subtracted from the real price50. The drawback is that the contracting
authorities face difficulties in evaluating the qualitative aspects of a tender
and quantifying them in order to measure the contractors performance
and to award the contract. In this context, a tender might be abnormal
either because the real price has been underestimated or because the
qualitative performance has been overestimated in relation to the price.
The EMAT mechanism would be expected to contribute to avoiding
the phenomena of ALTs by alleviating pressure on the price criterion.
However, the fact that clients face severe difficulties in quantifying
quality often leads them to implement the EMAT in a way that the price
criterion still remains dominant. This can be done either by attributing a
disproportionately high weight to the price criterion or by attributing very
similar scores to all bidders for their performance in qualitative criteria.
To conclude, the EMAT mechanism in practice still leaves space to submit
ALTs and also makes it difficult to understand whether the quality that is
offered is consistent with the price that is charged.

7. IMPROVING PROCUREMENT PROCESSES TO

FACILITATE THE DETECTION OF ALTS

Coping with ALTs proves to be a complex problem that requires more

than setting mathematical standards to be solved. The steps that need to
be taken by contracting authorities to deal with ALTs are equally important
to the standards that may be used to identify such tenders. Cost estimates
are a focal point in the evaluation of bids and the transition to integrated
contracts had negative implications for their accuracy. To facilitate the
detection of ALTs the accuracy of the clients cost estimates needs to be

49
Directive 2014/24/EU, op. cit. n. 38.
50
M Dreschler, Fair competition: How to apply the Economically Most Advantageous Tender
(EMAT) award mechanism in the Dutch construction industry, Delft 2009, Dissertation.

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474 The International Construction Law Review [2014

improved. Developing extensive cost reference databases is necessary in

order to enhance the trustworthiness of the estimates.
Another impediment when using the cost estimate in the bids evaluation
process stems from the misalignment between the way clients and
contractors estimate the cost. Because clients and contractors calculate
cost in a different way, the client faces difficulties in understanding how
the bid prices are built up. The differences in the cost estimates of the
client and the bidders go beyond the mismatches in the scope. First, clients
calculate both contract and non-contract costs while contractors calculate
only the former. Specifically, certain costs for instance expropriation
costs are calculated as part of the project cost by the client, but are not
part of the contract and thus not included in the bid price. Second, clients
do not take into account market conditions and base their cost estimates
on business economics, while bidders use market economics. Third, clients
and contractors use methods to estimate the cost with differentiations in
the constituent elements of cost.
A very demanding step that should be taken is to work towards
establishing and adopting a common definition of what is involved in the
cost elements. That would strengthen the clients insight of how prices
offered in the bids were built up. The latter can also be achieved by asking
for price specifications in the bids, an option with both advantages and
disadvantages. The question that arises is on which breakdown of the cost
should the contracting authority ask for price specifications? The meaning
of the breakdown of the cost refers to the analysis of cost based on different
parts of the project and can only be made on a project basis. In all cases, the
level of detail of the specifications cannot be excessive, as that would limit
the bidders design freedom.
Another point of weakness in the way procurement processes are
organized, the improvement of which would facilitate the identification
of ALTs, is related to the EMAT mechanism. The process of quantifying
the performance of bidders on the qualitative aspects needs to be
improved in a unified way. This would allow contracting authorities not
to attribute similar scores to the bidders performance on quality criteria,
which makes it hard to distinguish if the quality offered is abnormal in
relation to the price.
Organising procurement processes efficiently is largely a matter
of experience, which needs to be transformed into knowledge and
expertise. In order to improve the way in which procurement processes
are organised, contracting authorities need to analyse the outcome of
previous tenders. In particular, the characteristics of the market(s) in
which a client operates should be determined. Having an insight on the
efficiency and sensitivity of the market is imperative in order to understand
if deviations in the bids should be expected and up to what point they can
be attributed to market conditions.

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Pt 4] Abnormally Low Tenders: Making Detection Objective 475

8. ESTABLISHING A FRAMEWORK TO IDENTIFY ALTS

Any procedure or standards that might be established for the identification

of ALTs needs to be consistent with the corresponding legal provisions.
The existing legal framework leaves sufficient room for the contracting
authorities to decide how to act with respect to ALTs. Currently, there is
no general duty but only a right for contracting authorities to investigate
for ALTs. The only duty that exists is to ask the bidder for explanations
in writing, on precise points of the bid, before deciding on whether to
reject it. If the explanation provided in due time by the bidder is not
satisfactory, the client has the right to decide if the bid will be rejected.
If the explanation is not satisfactory, the bidder is not allowed to make
any alterations in his bid. In practice, some changes may be allowed up
to a certain extent, provided that competition is not harmed. However,
those changes cannot be of such an extent to overcome the tender being
considered abnormally low.
The application of standards for the identification of tenders for which
explanation is does not transfer any sort of liability to the contracting
authority by itself. Any juridical consequences come with the substantiation
of the clients decision to reject a tender or not, based on the explanation
provided by the bidder. The explanation provided by the contractor, if
acceptable, should be considered legally binding for the fulfilment of the
project. In a different case, asking for an explanation would incite false
statements by the contractors.
Arriving at the point of rejecting a tender is complex for practical and
legal reasons. It is logical that such a decision would be disputed in court
by the rejected bidder. Moreover, in the long term the market could be
discouraged due to the prior rejection of bids. Thus, the aim of clients
should be to avoid rejecting tenders and any framework to treat ALTs should
serve this aim. The objective of a framework to treat ALTs is to provide
information, time and legal means for clients and contractors to align their
expectations and understanding of the collaboration agreement into which
they are going to enter.
Establishing a framework consisting of standards to identify ALTs
can be done on three different levels: in the national law, in the clients
tendering guidelines and/or in the tender documents. Establishing unified
mathematical standards under national law, as it is the practice in various
EU countries, is extremely difficult as they would have to be applicable in
different markets, types of projects and contractual forms. On the other
hand, acting solely on the level of the tender documents does not guarantee
the consistency of the process. Contracting authorities should describe the
process to be followed in tendering guidelines, to achieve uniformity in
decision making and to enhance the transparency of the process and to
preserve competition.

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476 The International Construction Law Review [2014

In particular, contracting authorities should set out tendering

guidelines a non-exhaustive list of factors to be examined for the
detection of tenders for which explanation is to be asked, but only in
qualitative terms. The main factors are deviation from the cost estimates
deviation from the mean of the bids and the risk analysis. The contracting
authorities should specify the exact factors to be examined together with
the thresholds in the tender documents, taking into account the project
context. To avoid false statements by the bidders, it should be clarified
that if the explanation of tender is accepted, it will be legally binding for
the contract execution.
Even though the exact quantitative standards to be set out in the
tender documents need to be to their specific context, some general
characteristics of a potential framework can be determined. Absolute and
relative standards should be used together, depending on the number of
bids. The cost estimate should be used as an indicator when few tenders
are received, provided that the contracting authority has in hand a reliable
estimate. Above a certain number of bids, the mean of all the valid bids
should be used as an indicator. If an even greater number of bids are
received the highest and the lowest should be omitted from the calculation
of the mean, to avoid the effect of extremes.
Up to a certain deviation, either from the mean of the bids or from
the cost estimation, there is ambiguity on whether tenders should be
examined. However, above that point beyond doubt tenders need to be
investigated. Based on this line of reasoning it is suggested that gradual
standards should be set. Up to a certain deviation the investigation should
be optional and only above that point should it be mandatory. In the
former case, the contracting authority should take into account the risk
analysis in deciding whether to investigate the tender or not.
The aforementioned characteristics are enshrined in the framework
presented below, which was developed based on consultation of legal
and cost experts working both for clients and contractors, by means of
two rounds of interviews. It needs to be made explicitly clear that this
constitutes an exemplar of a framework for the detection of ALTs in DB and
DBFM (transportation) infrastructure projects. The only purpose that this
exemplar serves is to indicate the main features of a potential framework to
be set in the tender documents and possibly to act as a guideline for further
research. In order to develop an efficient framework, standards need to be
fine-tuned for each type of project and for the market conditions.

Deviation of tenders Action Number of valid bids Suggested Indicator

1535% Right to investigate <5 Cost estimation
>35% Duty to investigate 57 Mean of all bids
7 Mean of the bids excluding
highest and lowest

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Pt 4] Abnormally Low Tenders: Making Detection Objective 477

9. CONCLUSIONS

ALTs are an ill-defined concept, repelling contractual parties, which tend

to aim for low tenders for misaligned objectives, namely: for the client,
getting the best value for the lowest price; and for the contractor, being
awarded the contract under terms that maximize his profit. The context
in which infrastructure projects are procured throughout Europe,
Integrated Contracts awarded on the Economically Most Advantageous
Tender, enhances the complexity of coping with ALTs. Submitting ALTs is
not only about undermining the price. It can also be about overstating the
quality offered for that price. At the same time, the identification of such
tenders has become much harder. Differing views on risk determination,
which are reflected in differing estimates of the cost by contractual parties,
are an impediment for the detection of ALTs.
ALTs are currently a problem in practice, having detrimental effects
for the realisation of projects across European countries. This is
evidenced by the intention of the EU Commission to enact on the issue
in the current revision of the EU Directive. Setting unified mathematical
standards under European law or national law as it is the case in various
EU members, is very difficult and does not provide an effective solution.
Acting on a legislative level appears to be the right approach prima facie,
because ALTs are a very complex problem that requires a transparent,
objective, legally sound solution. Nevertheless, understanding that a
tender involves high risks of non-compliance with contract conditions
and project requirements can only be achieved if the specific project
context is taken into account. Conversely, if unified standards are set on a
legislative level, they would have to be applicable for all types of projects,
market conditions etc. Therefore, the suggested approach lies in between
the two ends.
The process to identify suspicious tenders, for which explanations
are to be asked from the contractor, should be established in tendering
guidelines. The standards to be examined, deviation from the mean
of the bids if sufficient or otherwise from the cost estimate, shall be
quantified in the tender documents. This two-pronged approach allows
for a context specific, effective process to identify ALTs, the consistent
application of which is safeguarded. Acting on ALTs might create concerns
in the mind of the client about discouraging competitive tendering
or innovation. However, it is expected that a bidder should be able to
substantiate an innovative solution that undercuts the bid price. It should
be communicated to the bidders that the aim of the investigation process
is to align the understanding and expectations of the solution offered in
the tender.
The identification of ALTs is considered to be a step towards economically
sustainable procurement. Developing a framework for the identification

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of such tenders is a very demanding process, but has the potential to prove
beneficial for the contractual parties. Bidders will be motivated to submit
tenders that do not involve unreasonably high risks for achievement of
the project. Contracting authorities will be incentivised to build on their
knowledge and expertise in the field of procurement. Most importantly,
contracting parties will be encouraged to work together as professional
counterparts for the benefit of the society, through the delivery of
successful and resource-efficient infrastructure projects.

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