Tender risks: under-priced bids, inflation and trapped contracts

The tender stage concentrates four distinct types of risk, whose mechanisms and consequences differ. Confusing them leads to errors of analysis and of decision.

• The under-priced bid: a contractor offers an abnormally low price, through a pricing error, through aggressive commercial strategy, or to win the package intending to recover its margin through variations. The most frequent and most expensive risk.
• The high bid: the offers received significantly exceed the design estimate. The signal: the market is tight, the tender package is incomplete, or the brief has drifted without budget reassessment.
• Inflation between design and tender: the interval between producing the design estimate and receiving the offers mechanically generates a price gap where sector inflation has not been provided for.
• The incomplete package: a badly structured pricing schedule, imprecise specifications, undefined interfaces between packages. The contractor prices what it understands and re-prices the rest as a variation.

An abnormally low offer results from several non-exclusive causes: an error of quantity in the contractor's pricing, a whole package forgotten or a unit confused; a deliberate loss-leader strategy with the intention of recovering the margin through variations; undeclared subcontracting at prices insufficient to assure quality; or simply an empty order book pushing the firm to accept a loss-making contract to keep its teams working.

Detection rests on two complementary tools. Comparison between offers: an abnormally low offer shows against the others, and a gap of more than 20 % against the median is a strong signal. Comparison with the economist's estimate: a gap of more than 20 % against the tender estimate merits deep investigation item by item. These thresholds are vigilance thresholds specific to this page: the public procurement code sets no numerical threshold for an abnormally low offer, and, on public contracts, an offer dearer than the estimate is only unacceptable if its price exceeds the appropriations allocated to the contract (L2152-3).

On public contracts the procedure is framed: the client must ask the suspect contractor for written justification before any decision to exclude or to award. On private contracts the same discipline applies. Asking for a justification note item by item either validates the offer, the contractor justifies its prices through preferential supply or an optimised organisation, or confirms the risk. On public contracts, the buyer then requires the contractor to justify its price, and rejects the offer if its justifications do not satisfactorily account for the low level of the price (L2152-6, R2152-3 and R2152-4). It renegotiates the suspect items only where the procedure allows it: never in a tender procedure, where it may only ask the contractor to clarify the content of its offer (L2124-2, R2161-5 and R2161-11); under the adapted procedure, only if it announced the negotiation, or reserved the option, from the launch; under the negotiated procedure, with all tenderers (R2161-17). On a private operation, negotiation is free, subject to good faith, which requires keeping to the rules announced to the contractors.

ℹ A fictitious example: the low bid that cost 180 k€ A developer awarded the structural package of a 16-dwelling scheme to the lowest bidder, 22 % below the median of the four other offers. The economist had flagged the anomaly; the client preferred the apparent saving of 85 k€. Six months later the contractor filed four variations for "unforeseen conditions" totalling 138 k€, slowed the site for lack of cash, and was eventually placed in administration at 60 % completion. The cost of re-tendering: a further 42 k€. Final position: the "low bid" cost 180 k€ more than its award price, that is 95 k€ more than the initial median offer.

Analysing offers is not reading totals, it is comparing item by item between the offers received and the reference estimate. Here is the grid of anomalies, followed by a worked example on six packages with four contractors.

The grid reveals immediately that contractor B is suspect on several packages, earthworks, structure, façades, with a total 15.6 % below the median, and 14 % below the estimate: a structural anomaly, not an accident. Contractor C shows a high bid on the steel frame, up 35 %, to be investigated. Item-by-item analysis of contractor B will reveal either an error of quantity on the structural package or a deliberate low-bid strategy on that pivotal package.

The interval separating the design estimate from the offers received is an often neglected source of risk. In a period of sector inflation, assuming, as a hypothesis, a rise of 4 to 8 % a year on some materials, every additional month between design and contract signature erodes the budget provision.

On a 3 M€ programme with 18 months between design and contract signature, inflation at 4 % a year generates a 180,000 € gap between the design estimate and the offers received. If that provision was not built into the design budget, the client faces an uncomfortable choice: absorb the gap, relaunch a tender with a reduced brief, or postpone the project. On public contracts, once the offers are in, these choices go through a procedural decision. An offer dearer than the estimate is not unacceptable for that reason: it is only unacceptable if its price exceeds the budget appropriations allocated to the contract, determined and established before the procedure is launched (L2152-3). If a tender procedure has received only irregular or unacceptable offers, the buyer may continue under the negotiated procedure, provided the initial terms of the contract are not substantially altered (R2124-3, 6°). It may also declare the procedure discontinued and inform the contractors of the reasons as soon as possible (R2185-1 and R2185-2); the courts review the reason of general interest relied on, and, according to the DAJ, a budgetary reason requires the existence and origin of the extra costs to be demonstrated. A reduced brief that substantially alters the initial terms requires a new procedure.

ℹ The price indexation clause: the contractual protection Protection against inflation risk works through two complementary tools. The budget provision: build into the design budget a price revision provision calculated over the anticipated interval between design and contract signature, multiplied by the expected sector inflation. And the indexation clause in the works contracts: on public contracts, a works contract at a firm price must provide for the updating of its price (R2112-10). It applies if more than three months pass between the date on which the contractor set its price in the offer and the date performance begins, at the economic conditions of a date three months before that start, and not at notification (R2112-11). For a contract that refers to the CCAG-Travaux 2021, the date of the offer is that of its submission, or of the submission of the final offer after negotiation (art. 9.4.2), and the index is the one set by the contract's specific documents; failing that, a variation sets the coefficient from the INSEE BT or TP index matching the nature of the works (art. 9.4.3). On a private contract, the updating is the one the contract provides. That clause protects the contractor against material inflation between its offer and the actual start, and mechanically reduces the tendency of contractors to build an inflation safety margin into their prices. Revision, for its part, applies during the performance of a contract at a revisable price, according to the contract's formula (R2112-13; CCAG-Travaux 2021, art. 9.4.4); the provision covering price variation is a separate line in the client's budget.

An incomplete or badly structured tender package is a time bomb. A contractor responding to it prices what it understands and ignores or omits what it does not. Work not described becomes a potential variation. Interfaces between packages not contracted for generate conflicts of responsibility. Imprecise specifications let the contractor install lower-quality materials while arguing they meet the stated requirements.

• Interfaces not contracted for: who is responsible for the weathering between the façade package and the roofing package? If neither specification explicitly names the party responsible for each interface, each contractor will assume it is the other. The interface will be badly treated and will generate defects.
• Imprecise quantities in the bill: a bill with units too coarse, "site set-up, lump sum", lets the contractor price to a minimum and overrun into variations. Items carrying substantial risk must be described in detail and explicitly provided for.
• Insufficient specification: a specification saying "aluminium windows" without stating the thermal, acoustic, security and finish characteristics lets the contractor install the cheapest joinery on the market. The precision of the specification correlates directly with the quality of the work delivered.

The economist's task at award goes well beyond reading totals. It comprises four concrete actions.

• Comparative analysis item by item: detecting price anomalies package by package and item by item against the reference estimate and the median of the offers.
• Checking the completeness of the offers: making sure each contractor has priced every item of the schedule; items at zero or missing are identified variation risks.
• Producing the award report: a summary document presenting for each package the offers received, the anomalies detected, the recommendation to award or to seek justification, and the updated budget.
• Assisted negotiation: on packages with a confirmed low or high bid, the economist can support the client in negotiating, with the technical and economic justifications that found the corrections sought.

The tender and award stage concentrates four families of risk: the under-priced bid, which guarantees massive variations if undetected; the high bid, signalling a tight market or an incomplete package; inflation between design and contract, which requires a budget provision proportional to the interval; and the incomplete package, which generates variations and disputes. The item-by-item analysis grid, comparing each offer with the reference estimate and the median of the competitors, is the systematic detection tool. An apparent saving of 85 k€ left untreated cost 180 k€ in the example. An indexation clause protects against future inflation. The economist's award report is what allows an informed decision.

The nature of the figures quoted

The percentages and amounts quoted on this page are orders of magnitude for framing, not measurements. They illustrate mechanisms and proportions, and they substitute neither for a tender exercise nor for an estimate prepared on drawings.

• The economic risks of a construction project: the complete picture
• Site risks: abusive variations, disputes and securing the final account
• Material and inflation risks: protecting yourself contractually
• Tender analysis at the award stage