Germany: control of abnormal prices - no pain no gain?

Introduction

If the price or cost of a bid appears to be abnormally low in relation to the service to be provided, the contracting authority must request clarification from the bidder. The current crises and existing supply issues of the companies often lead to significant price fluctuations, so that contracting authorities may be confronted even more with the question if price and performance are in an appropriate relationship. The decision of the European Court of Justice, which focuses on the requirements for the handling of abnormally low prices, will not make things any easier for contracting authorities.

1. Abnormal low price: What applied in Germany before the decision of the European Court of Justice

Neither union law nor national public procurement law provisions (e.g. Section 60 VgV, Section 16d No. 3 EU VOB/A) define when a price is considered to be abnormally low. However, national case law on public procurement law has developed certain percentages as take-up thresholds for the purpose of a uniform review practice, at which the contracting authority is obliged to verify the appropriateness of the bid price. According to national public procurement law, an obligation of the contracting authority to verify is assumed if the bid is 10% to 20% lower than the bid of the next-placed bidder (OLG Düsseldorf, decision of 2nd August 2017 - VII-Verg 17/17; 25th April 2012 - VII-Verg 61/11). Due to the established threshold in national public procurement case law, contracting authorities have been able to easily identify abnormally low prices and keep the grounds for a price verification low.

2. The decision of the European Court of Justice

The European Court of Justice has ruled following a reference a preliminary ruling requested by a Bulgarian court concerning the interpretation of the provisions of the European Directives on abnormally low prices (C-669/20 of 15th September 2022, EU:C:2022:684, Veridos).

Facts:

In 2018, the Bulgarian Ministry of the Interior invited bidders through a non-open procedure for the design, construction and management of a system for issuing identification documents. Two companies were invited to submit bids. The company whose bid was unsuccessful objected to the award decision on the grounds that the competitors bid was abnormally low. Bulgarian public procurement law provides the following regulation in this regard:

"If the bid of a participant to be evaluated is more than 20% lower than the average of the bids of the other participants in terms of price or cost with regard to the same evaluation factor, the contracting authority shall require a detailed written justification of how the bid was prepared; this justification shall be submitted within five days of receipt of the request."

In the first instance, the application was rejected on the grounds that the provision was not applicable. The referring court requested the European Court of Justice, inter alia, whether the contracting authority must always verify the existence of abnormally low bids and whether this also applies if the legally defined evaluation criterion is objectively not applicable and no other criterion has been announced in advance.

The decision:

The European Court of Justice first pointed out that, according to established case law, it is up to the Member States and in particular the contracting authority to specify the threshold for the existence of abnormally low bids (inter alia, European Court of Justice, judgment of 27th November 2001, Lombardini and Mantovani, C-285/99 and C-286/99).

However, it is remarkable that, according to the European Court of Justice, the contracting authority must identify the bids which appear suspect in the light of all the features of the subject matter of the invitation to tender concerned. Thus, there is a general obligation of the contracting authority to identify abnormally low bids, to request clarification from the bidders and, on this basis, to take a decision on the exclusion of these bids.

The European Court of Justice explicitly clarifies that the gap between the bid prices cannot be the only criterion:

“Comparison with other, competing tenders, however useful it may be in certain cases for the purpose of identifying any anomalies, cannot constitute the sole criterion used by the contracting authority in that regard.” [Rn. 37]

The decisive factor for the identification of abnormally low bids is therefore the consideration of all aspects of the specific award procedure. The non-applicability of the criteria provided under national procurement law and the number of bids submitted are not relevant in this respect.

Since the European Court of Justice found that the interpretation of Directive 2009/81 is applicable to Articles 56 and 69 of Directive 2014/24, which are essentially identical, the decision is relevant for the entire upper threshold law.

3. What are the consequences of the decision for the awarding practices of contracting authorities in Germany?

Clearly, contracting authorities must now rethink their procurement practices when it comes to pricing verification. The European Court of Justice has reinforced the criteria for a review of the bid price for its appropriateness. If a comparison with the other competing bidders alone is no longer sufficient, what other criteria are important? The following criteria should be considered in an overall view when assessing if price and performance are in an appropriate relationship:

• Prices of other bidders (in case of differences between 10% - 20%: strong indication)
• Estimation of contract value
• Experience/Data from other tenders
• Can the legal provisions (e.g. fare conditions, payment of minimum wages) be complied with at the price offered?
• Subject matter of the contract: Are price differences (even if the gap between the bid prices is under 10%) usual in the market for the concrete subject matter of the procurement?

For example, the delivery of a standard product for which only the distributor's margin causes a price difference, even a small price difference can cause an obligation to verify the price, whereas in the production of an individual system for the contracting authority, price differences can be usual, and a verification of the price may not be justified.

When checking the appropriateness of the prices in relation to the offered service, contracting authorities may therefore not stop at the comparison of the bid prices. The question of the inappropriateness of a price may arise not only based on a significant gap to the next lowest bid, but also in the case of a significant difference from prices submitted in comparable award procedures or prices that occur for the service according to experience. However, it should not be forgotten that the contracting authority still has a margin of discretion in deciding and assessing whether a price appears to be abnormally low based on the above-mentioned criteria (limited reviewability in a review proceeding).

5. No free license for unauthorized price checks!

But be careful: A comprehensive obligation of the contracting authority to verify prices does not provide a free license for price checks. If the contracting authority requires a clarification of prices from the best bidder without fulfilling the conditions of the national provision, it will constitute a violation of the bidder's rights. The contracting authority would unlawfully impose additional requirements on the bid and the bidder (OLG Karlsruhe, decision of 6th August 2014 - 15 Verg 7/14).

6. Price checks in a country comparison

A brief overview of the price clarification procedure if an abnormally low bid has been submitted:

Germany:

If the contracting authority identifies an abnormally low price, the contracting authority must give the bidder an opportunity to explain the price and prove its appropriateness.

The procedure is as follows:

• The contracting authority must give the bidder the opportunity to prove with its arguments that the bidder is capable of providing the service in accordance with the contract and in compliance with the law. An appropriate deadline must be provided for the response.
• After being invited to respond, the bidder is obliged to cooperate. The explanations can refer in particular to the following points (Section 60 para. 1 Procurement Ordinance): The economic efficiency of the manufacturing process, the technical solutions chosen or the exceptionally favorable conditions available to the company in the supply of the goods or in the provision of the service, the specifics of the supply or service offered, compliance with the obligations under Section 128(1) of the Act against Restraints of Competition, in particular the environmental, social and labor regulations applicable to the company.
• If the bidder cannot clarify sufficiently the low level of the price or the cost, the bid must be rejected. However, the result of the verification may also be that a bid which shows a disproportion between the price and the performance may nevertheless be awarded the contract. A so-called below-cost bid exists if the revenue which the bidder is expected to receive from the contract is below the cost price which the bidder expects to incur as a result of the public contract. A below-cost bid is not per se inadmissible (see below in the conclusion).

Netherlands:

On the basis of Section 2.116 of the Public Procurement Act 2012, if a contracting authority suspects an abnormal low price, the contracting authority must ask the bidder to explain how the bidder came about the seemingly abnormal low price.

The procedure is as follows:

• The contacting authority who suspects an abnormal low bid informs the bidder of this fact and asks the bidder for an explanation.
• The bidder may then give an explanation, for which a non-exhaustive list is included in Section 2.116(2) of the Public Procurement Act 2012. This list contains grounds such as: the effectiveness of the construction works, the production, or the offering of services. Furthermore, technical solutions may provide for a justification of abnormal low prices, et cetera.
• The contracting authority will investigate the explanation given and do so in close contact with the bidder (District Court of The Hague, decision of 28th February 2022 ECLI:NL:RBDHA:2022:1606).
• The contracting authority may only exclude a bidder if the explanation given for the price is insufficiently convincing in light of objective measures. The same applies if a contracting authority finds that the bidder’s price is abnormally low due to a breach of the rules set out in Annex X to Directive 2014/24/EU or due to the bidder receiving state aid which was granted contrary to Article 107 TFEU.

Belgium:

The obligation to investigate abnormal prices is subject to the following limitations:

• For public procurements in classical sectors, this obligation shall not apply to pro-curement procedures involving a negotia-tion phase (including the negotiated pro-cedure without prior publication of a con-tract notice). This exception is however only applicable to supply or service pro-curements with an estimated value below the European thresholds or a work con-tract with value below 500,000 EUR;
• For public procurements in the utilities sectors, this obligation shall not apply to procurement procedures involving a negotiation phase (including the negotiated procedure without prior publication of a contract notice). This exception is howev-er only applicable to supply or service procurements with an estimated value below the European thresholds or a work con-tract with value below 1,000,000 EUR;
• For public procurements in the defence and security sectors, this obligation is not applicable to procurement procedures in-volving a negotiation phase, regardless of the subject-matter of the procurement, nor its estimated amount.

The procedure is as follows:

The contracting authority must invite the bidder to provide the necessary written justifications relating to the composition of the price or cost considered abnormal.

Deadline

Twelve days unless the invitation specifies a longer period. In case of a negotiated procedure without prior publication, the contracting authority may specify a shorter period in the procurement documents, subject to an expressly reasoned provision.

Proof

The burden of proof for sending the justifications lies with the bidder. To justify its prices, the concerned bidder may invoke one of the following elements:

• the economics of the construction process, the product manufacturing process or the provision of services;
• the technical solutions chosen or the exceptionally favourable conditions available to the bidder for carrying out the work, for providing the products or the services
• the originality of the work, supplies or services proposed by the bidder
• whether the bidder has received any legally granted public assistance.

In addition, when examining the prices or costs of the bids, the contracting authority shall invite the bidder to provide written proof of compliance with the obligations applicable in the fields of environmental, social and labour law, including the obligations applicable in the field of welfare, wages and social security.

Documentation:

The Council of State has recently provided some guidelines concerning the obligation for the contracting authority to state reasons in the award decision when it considers that the prices proposed are not abnormally low or high.

In its judgment of 1st July 2022, the Council of State ruled that the contracting authority is not required to state in the reasons for its decision when it does not consider a proposed price to be abnormal. The obligation to state reasons is only applicable when a price appears to be abnormally low or high and the contracting authority invites the bidder to justify the price. The decision to reject a tender because it presents an abnormal price must also be formally motivated.

The Council of State added that, even if the contracting authority does not have to indicate - in the first instance - the reasons why the proposed prices appear normal, it must nevertheless be clear from its decision or, at the very least, from the administrative dossier of the procurement that it has carried out this verification.

Finland:

According to section 96 of Act on Public Procurement and Concession Contracts, the contracting authority shall require the bidder to provide an account of the prices or costs of any tender that seems to be abnormally low.

The procedure is as follows:

If a contracting authority considers a bid abnormally low and is deliberating to reject the bid, the contracting authority shall always request an account of the grounds leading to abnormal pricing.

• The Act on Public Procurement and Concession Contracts does not entail any specific justifying procedure, but the section 96 includes some examples.
• According to it, tender’s explanation may relate to a manufacturing method; economic and technical solutions for performing a service or for a construction method; exceptionally low-cost terms and conditions of procurement; originality of public works contracts, goods or services; compliance with environmental, social and labour law obligations; subcontracting; and state aid received by the bidder.
• If the bidder fails to deliver additional explanations in satisfactory manner requested by the contracting authority regarding the work methods and pricing of the bid, the contracting authority is entitled to dismiss the bid on abnormally low pricing basis (Supreme Court of Finland, KHO 2020:147).

Conclusion

Due to the stricter requirements concerning pricing verifications according to the decision of the European Court of Justice, one thing becomes apparent again: It is important that the contracting authority provides a reliable documentation! The award notice must show that the contracting authority considered various criteria while verifying the appropriateness of the price offered. The reasons why the contracting authority carries out or does not carry out a price verification must be documented in the award notice.

Bidders in the award procedure should be aware of the issue of verifying the appropriateness of prices in comparison to performance (by now at the latest) and know that bid prices of other bidders are not the only decisive criteria. To properly comply with a request for price clarification by the contracting authority, bidders should consider the following aspects:

• During the preparation of the offer, bidders should already ensure that the offer calculation is prepared on a secure and verifiable basis. Bidders must always make sure that statutory provisions (fare conditions or minimum wage requirements) are fulfilled, and that the fulfilment can also be proven.
• The aspects considered for the calculation of the bid price should be documented to be able to submit the declarations and verifications within the deadline in case of a price verification.

However, the decision of the European Court of Justice does not eliminate the possibility for bidders to submit a below-cost bid. Thus, a below-cost bid by newcomers for the purpose of entering the market or by companies to gain market share remains eligible for an award.