Abnormally low tender, a qualified offer and two conflicts of interest
Your firm is architect for a HK$380M, 16-storey office redevelopment for a family-owned investment company. Seven tenders were returned against a fixed-price 24-month contract on the HKIA/HKIS Standard Form with quantities. The lowest, HK$306M, is 12% below the next (HK$348M) and 18% below your pre-tender estimate of HK$372M. Its covering letter states the contractor will seek an extension of time for any delay in approval of shop drawings and excludes HK$9M of provisional sums for the curtain wall. The tender documents required unqualified offers and stated that arithmetic errors would be corrected by the client. During checking you learn that the client's project manager is the brother-in-law of the low bidder's managing director, and that your firm's own interior design subsidiary has submitted a separate bid for the fit-out package, which the client intends to award at the same time.
1. How should the lowest tender be treated in your tender report?
Read the worked answer
Treat it as non-compliant unless the qualification is trivial and can be disregarded without changing price or risk. Here it is not trivial.
Qualification. A covering letter reserving a right to EOT for any delay in shop drawing approvals rewrites the risk allocation, and excluding HK$9M of provisional sums makes the price not comparable with the others. Under the tender rules stated in the documents (unqualified offers), the correct action is to reject it as non-compliant, not to negotiate. Negotiating with one bidder after tenders close is unfair to the others and, if it changes the basis, undermines the tender.
Arithmetic errors. Correct them under the stated procedure and tell the bidder. If the correction pushes the price up, the bidder is normally bound by the corrected price; if it changes the ranking, report that to the client before any award.
Abnormally low price. Being 12% below the next tender and 18% below the estimate is a warning, not a disqualification. Before any award, ask for a priced breakdown of major rates (concrete, rebar, curtain wall, M&E), the programme and labour histogram, cash flow and funding, proposed subcontractors, and current workload. Check for unbalanced bidding - front-loaded rates, low rates for likely variations - and for a price that assumes a shorter programme than the contract allows. Consider a clarification meeting and, if you proceed, enhanced security: a larger performance bond, a parent company guarantee or a larger retention, plus a clear written warning about the risk of failure and re-tendering.
Recommendation. Do not award to the low tenderer on the present offer. Either invite the second tenderer (HK$348M is within the HK$372M estimate) or re-tender with the provisional sums properly carried. Report the reasoning, not just the conclusion.
2. How do you handle the two conflicts of interest?
Read the worked answer
There are two separate conflicts and they are handled differently.
The client's project manager and the low bidder. This is a conflict on the client's side of the table and it taints the evaluation. Put it in writing to the client's board or audit committee, not just to the project manager. Recommend that the project manager be removed from the tender evaluation and any post-tender negotiation, that the evaluation be reviewed independently, and that the client consider whether his conduct breaches his duties. You should not continue to advise on the award as if nothing had happened. Record when you learned of it and what you did.
Your firm's subsidiary and the fit-out package. Your firm cannot advise the client on the award of a package in which it is a bidder. Disclose in writing and propose one of: withdraw the subsidiary's bid; keep the bid but erect an information barrier so the bid team does not see other fit-out tenders, with the client appointing an independent consultant to evaluate and recommend; or decline to advise on the fit-out while limiting your role to the main contract. The right route depends on the client's consent and on whether the subsidiary could gain any unfair advantage through the firm.
Also check whether the HKIA Code of Professional Conduct requires disclosure of any commission or benefit from contractors or suppliers; it does for benefits received, and the same principle applies to related-party bidding.
Test. Would a reasonable observer, knowing the facts, think the advice might be influenced? If yes, disclose and step back from the decision. Do not let the client's commercial timetable push you into an award before these issues are resolved.
3. The client wants to award to the low bidder anyway to save HK$42M. What do you do?
Read the worked answer
Say clearly, in writing, what the risks are and what conditions you would require; then respect the client's decision if it is informed and lawful, while protecting your own position.
Advice. Awarding to a non-compliant tenderer that has qualified the risk allocation gives the client a price it cannot rely on. The HK$42M saving may be consumed by the excluded provisional sums, EOT claims and the cost of completing a failed contractor. The comparison is not like-for-like.
If the client still wishes to proceed, require as conditions: a signed contractor's offer that withdraws the qualifications and carries the provisional sums, so that the tender is compliant; a full priced breakdown and a programme reviewed by you; enhanced security - performance bond or parent company guarantee, and a realistic retention; a pre-award meeting to confirm resources; and an express written acknowledgement of the risk by the client.
Your position. Do not sign a tender report that says the tender is compliant when it is not. Record your advice and the client's decision. If the client instructs you to proceed without removing the qualifications, take advice on whether you can continue; an architect who certifies under a contract that does not reflect the tender documents may be exposed.
Also keep the conflict issues separate: no award until the project manager issue and your subsidiary's position are resolved.