Price dumping and price manipulation in the public procurement procedure
A contractor taking part in the public procurement procedure has a complete freedom in shaping his price offer. When calculating the price, in addition to willingness to propose price conditions that give the opportunity to have the offer selected as the most favourable one in the light of the criteria set in the Specification of the Essential Terms of the Contract, the contractor must also take into account market realities and avoid situations that could possibly be considered as violating rules of fair competition.
Offering grossly low price or cost in relation to the subject of the order is a separate prerequisite for rejection of the offer on the basis of art. 89 (1)(5) of Act on Public Procurement Law. At the same time, offering prices of goods and services below their purchase prices, i.e. dumping prices, as well as manipulation of individual components of the price, may lead to an allegation of an act of unfair competition, which is also a basis for rejection of the offer under art. 89(1)(3) of the Public Procurement Law. The sale of goods or services below their manufacturing cost or performance, or their resale below the cost of purchase in order to eliminate other entrepreneurs is a sign of hindering access to the market to other entrepreneurs and is stipulated in art. 15(1)(1) of the Act on combating unfair competition as an act of unfair competition (and art. 15 states that is is an act of unfair competition).
Grossly low price
The case-law of the National Appeals Chamber developed criteria according to which it is assessed whether the price offered by the contractor is grossly low.
The price which is considered to be grossly low is
the unrealistic price, improbable compared to the market price of similar orders and other offers. It follows that the price can be grossly low if it is obvious that while complying with market rules, performing of the contract by the contractor for the price given would be unprofitable or if the price in relation to the subject of the order is the price deviating from the order’s value, in particular when the difference would not be justifiable by objective reasons allowing the operator to execute the order without loss and additional financing from sources other than the contractual remuneration (see judgment of the National Appeals Chamber of 17 October 2017, file reference no KIO 2084/17).
It is important to determine whether the contractor will achieve any profit as a result of the contract, because profit-making is the main goal of running a business. Striving to win a public procurement despite having no perspective of making a profit is considered for striving to eliminate competition.
In the event that the price or cost offered, or essential components of the price seem to be grossly low in relation to the subject of the contract and raise doubts of the contracting authority as to whether the subject of the contract may be performed in accordance with the specified requirements or results from separate provisions, the contracting authority asks for explanations, including submission of evidence regarding the calculation of the price or cost. The obligation to request explanations arises if the price differs by more than 30% from the calculation made by the contracting authority.
Request for explanation creates a presumption of a grossly low price which must be refuted by the contractor. For this purpose, the contractor should provide comprehensive explanations and evidence. Making an explanation in a too general and laconic way, without the necessary calculation indicating the profitability and market nature of the price offered, usually leads to the conclusion that the presumption has not been refuted and results in the rejection of the offer.
Price manipulation or manipulation of constituent parts of the price in order to obtain better score in the tender may be considered as an act of unfair competition. An action whereby the contractor indicates in the category subject to a higher score a lower price and transfers the remaining part of the price to a category that does not count or counts less in the final assessment is an example here. This leads to a situation where the total price is high, but the contractor receives higher number of points due to offering the dumped price in one of the categories.
The jurisprudence indicates that
the determination of separately assessed prices at a level that shows their detachment from any market realities, only in order to receive the highest score due to use of the mathematical dependence violates good purchase practices. Transferring costs between separately assessed prices in this way; that on the one hand the price is non-market and absurdly high, while on the other hand, the non-market, grossly low or even symbolic price is aimed at not offering the most favourable conditions to the contracting authority, not competing with price, or quality, but only the use of the balance of criteria to the detriment of both the contracting authority and contractors (cf. judgment of 11 August 2017, file reference number KIO 1536/17).
The fact that the assessment of the contractor’s pricing policy plays a special role in the tender procedure is evidenced by the fact that not only accepting gross disproportions in relation to the cost of individual component prices of the offer in order to eliminate competition is considered to be price manipulation, but also any significant deviation from the correct calculation of prices without being related to their real costs clearly indicating such an intention (cf. judgment of the National Appeals Chamber of 28 March 2017, file reference no KIO 473/17).
In the context of the assessment criteria used in relation to the prices offered, which are in principle the main criterion for selecting the most advantageous offer, contractors should exercise special consideration and caution. Offering a product below the cost of its purchase, whether in relation to the total price or to individual components of the price as it always affects the outcome of the procedure, will be considered in terms of unfair competition and, consequently, may be the reason for the rejection of the offer.
However, it should be emphasized that the mere offering of prices even significantly lower than the competitors’ price does not mean it is an act of unfair competition. It is necessary to show that such an offer violates provisions of the Act of 16 April 1993 on combating unfair competition and cannot be considered as a normal competitive act.