Suicide bidding a cautionary tale for SMEs

This article, written by Matthew Needham-Laing, first featured on the 8 March 2012 in the SME Spotlight pages of the latest edition of Construction News.

The recent ConstructionLine survey of 1500 contractors highlighted the pressure SMEs face from the reduction in tendering opportunities following the Government’s Comprehensive Spending Review last autumn. Clients with reduced construction budgets are searching for cost savings and tendering opportunities are limited. Large companies are consequently muscling in on sectors of the construction market which have traditionally been dominated by SMEs. As contractors struggle to fill their order books, it is all too tempting to tender at a loss in the hope of making a profit from claims at a later date. The collapse of Rok and Connaught provide cautionary examples of what happens if this is your business model.

The problem is that the whole procurement process is driven by cost. Public sector procurement requires work to be awarded either on the basis of ‘lowest price’ or ‘most economically advantageous’ with the temptation for a contracting authority to choose the easy option of lowest price. Even if the contracting authority decides to award the contract on the basis of most economically advantageous bid, while it is more subjective, without some reasonable indication of price or cost (in relation to which other non-price advantages might be taken into account), it will be difficult to determine what is or is not an economically advantageous bid (1).

However SMEs do have some protection from suicide bidding if tendering for public sector contracts. The contracting authority has a duty to investigate abnormally low tenders (2) and arguably this duty extends to the competing tenderers (3). If an SME believes that it would have won the tender but for the abnormally low bid, it must act within 30 days of the date it knew, or ought to have known, of the breach. The SME has the option of requesting interim relief, such as an injunction to suspend the award procedure or damages. In reality the two are inextricably bound together as the Court will consider whether damages are an adequate remedy as an alternative to granting an injunction.

Unfortunately, bidders of private sector contracts have none of this protection. The best that they can hope for is that the circumstances of the tender give rise to an implied obligation on the part of the employer to consider the tender if others are considered, (4) and considers it in accordance with pre-agreed criteria (5).

1 Henry Bros (Magherafelt) ltd v Department of Education for Northern Ireland [2009] BLR 118
2 Directive 2004/18 art.55(1) – Renco SpA v Council of the European Union [203] E.C.R. II-171
3 Morrison Facilities Services Ltd v Norwich City Council
4 Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195
5 MJB Enterprises Ltd v Defence Construction (1951) ltd [1999] 1 S.C.R 619

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