Abnormally Low Tenders: How SA Government Evaluators Detect and Reject Below-Cost Bids

What Is an Abnormally Low Tender?

An abnormally low tender (sometimes called a 'below-cost bid' or 'unrealistically low price') is a bid where the price is significantly lower than the government's own estimate, the market average, or what a reasonable contractor would need to perform the contract. The concern is not that the bidder is being competitive — it is that the price is so low that the contract cannot be delivered as specified.

The legal basis for rejecting abnormally low tenders in South Africa comes from the PPPFA: Preferential Procurement Regulations, 2022 (Regulation 11), read with Treasury Regulation 16A9.1. These provisions give evaluation committees the authority to assess the reasonableness of a bid price before making an award.

Why the Government Rejects Low Prices

At first glance, rejecting a low price seems counterintuitive — surely the government wants to save money? In practice, an abnormally low price creates several risks for the state:

• Non-performance — the contractor cannot deliver at the quoted price and abandons the contract, forcing a costly re-tender
• Quality failure — corners are cut to reduce costs, resulting in substandard work that the state must repair at its own expense
• Variation claim abuse — the contractor submits inflated variation orders to recover losses, ultimately costing more than the original budget
• Contractual disputes — the contractor disputes scope or claims force majeure, tying up the contract in litigation
• Supplier insolvency — the contractor goes bankrupt mid-project, leaving the state with a partially completed project and legal complications

The National Treasury's 2024 Supply Chain Management Review noted that projects awarded to abnormally low bidders had a 40% higher rate of contract failure compared to awards within the normal pricing range.

How Evaluators Detect Abnormally Low Bids

Detection typically happens at one of three stages in the evaluation process:

Stage 1: Comparison with the Government's Estimate

Before a tender is published, the procuring department prepares an internal cost estimate (often called the 'engineer's estimate' or 'government estimate'). If your price is significantly below this estimate, the evaluator flags it. Most departments use a threshold of 20% below estimate as a trigger for further investigation.

Stage 2: Comparison with Other Bids

During evaluation, the committee compares all responsive bids. A price that is an outlier — for example, 30% below the average of all other bids — is automatically flagged. The committee will look at whether the low bidder has misunderstood the scope, omitted items, or used unrealistic cost assumptions.

Stage 3: Unit Rate Analysis

Even if the total price is reasonable, evaluators may scrutinise individual line item rates. A bid that shows normal total pricing but has zero-cost or near-zero-cost line items suggests the bidder has cross-subsidised or omitted scope items. This can trigger a targeted 'test of reasonableness' on those specific rates.

The 'Test of Reasonableness' Process

When an abnormally low bid is identified, the evaluation committee must follow a formal process before it can reject the bid:

1. Notification — the bidder is informed in writing that their price appears abnormally low and is asked to provide a written justification
2. Justification — the bidder must submit a detailed breakdown of costs, methodology, and any special circumstances that justify the low price
3. Assessment — the committee assesses the justification against the tender specifications, industry norms, and the government's estimate
4. Decision — if the justification is satisfactory, the bid proceeds to award. If not, the bid is declared non-responsive and excluded

The timeframe for this process is typically 7 to 14 working days. The bidder bears the burden of proof — the committee is not required to prove the price is unreasonable; the bidder must prove that it is reasonable.

Legitimate Reasons for a Lower Price

Not all low prices are suspect. There are legitimate reasons why a bidder may offer a genuinely competitive price that is below the government estimate:

• Economies of scale — the bidder is procuring materials for multiple contracts and enjoys bulk discounts
• Innovative methodology — the bidder has developed a more efficient construction or delivery method
• Lower overhead structure — a smaller, more agile operation with lower fixed costs
• Existing mobilisation — the bidder already has plant, equipment, or staff in the project area
• Strategic market entry — a genuine decision to accept lower margins in exchange for a reference contract

If you have a legitimate reason for a competitive price, document it clearly in your pricing notes. If you anticipate a query, attach a brief cost methodology statement to your bid explaining how you achieve your cost structure.

How to Price Defensively

Defensive pricing means setting a price that is competitive enough to win but not so low that it triggers a reasonableness review. Here is how to find that balance:

1. Know the government estimate — Research previous awards for similar projects. Award prices in the Tenders SA database give you a reliable benchmark for what the government expects to pay. Browse award data for free
   to understand market pricing.
2. Avoid the bottom 10% — If you are pricing in the lowest 10% of your market research sample, you are in the danger zone. Re-examine your cost assumptions.
3. Price every scope element — An abnormally low flag often results from an omitted item rather than aggressive pricing. Complete a scope-to-price map before submitting.
4. Document your methodology — If your price is genuinely competitive due to efficiency or scale, prepare a one-page cost methodology summary and attach it to your bid.
5. Use the 80/20 formula to your advantage — In the 80/20 system, a price that is 10% above the lowest bid loses only 8 points. If you have Level 1 B-BBEE status (20 points), you can afford to be 25% above the lowest price and still tie. Do not sacrifice margin unnecessarily.

The Consequences of a Rejected Bid

If your bid is rejected as abnormally low, the consequences extend beyond losing that specific contract:

• Negative audit trail — the rejection is recorded in the department's procurement system and may be visible to other departments
• Reputational risk — if you are flagged as a 'below-cost bidder', evaluators in other departments may scrutinise your future bids more closely
• Loss of bid costs — you have incurred the full cost of bid preparation with no chance of recovery
• Contractor performance database — persistent abnormally low bidding may lead to your company being flagged on National Treasury's contractor performance database

Conclusion

Abnormally low tender pricing is not a loophole or a strategy — it is a red flag that triggers a formal review process and can result in rejection even if your price scores the maximum points. The most successful tender bidders in South Africa compete on efficiency, not desperation. They know their true costs, they understand the government's estimate, and they price within a range that evaluators recognise as reasonable.

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