New Procurement Framework

World Bank

Abnormally Low Bids and Value Engineering

Shivendra Kumar
November 14-16, 2019
Abnormally Low Bids/Proposals

Definition
• “An Abnormally Low Bid/Proposal is one in which the Bid/Proposal price, in
combination with other elements of the Bid/Proposal, appears so low that it
raises material concerns with the Borrower as to the capability of the
Bidder/Proposer to perform the contract for the offered price”
• ALB provisions apply to and are included in the World Bank SPDs for Goods,
Works, and Non-consulting Services, but these do not apply to procurement of
Consulting Services
[Hereafter, the term bid is used to mean both bid and proposal, and the term bidder to mean
both bidder and proposer]
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 AbnormallyAbnormally
Low Bids/Proposals
Low Bids/Proposals

• When a potentially Abnormally Low Bid/Proposal is identified, the Borrower

shall seek written clarifications from the Bidder/Proposer, including detailed
price analysis
• If the Borrower determines, after evaluating the price analysis that the
Bidder/Proposer has failed to demonstrate its capability to deliver the contract
for the offered price, the Bid/Proposal shall be rejected

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 AbnormallyAbnormally
Low Bids/Proposals
Low Bids/Proposals
Risks - an ALB may appear to represent good value for money, but it
can result in
Additional variation orders and contractor claims leading to cost and time
overruns
Attempts by contractors to lower their costs and consequently quality
An adversarial relationship and disputes
Contract delays or even collapse of a contract, resulting in costly and time-
consuming arbitration/litigation
Serious consequences for subcontractors and sub-suppliers (often MSMEs) due
to delays in payment
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 AbnormallySections
Low Bids/Proposals
I & II – ITB and BDS
Stages – five stages to treatment of ALBs
Identify: a potential ALB based on comparison with available prices from the
market, or with the cost estimate
Clarify: clarifications are sought from the Bidders to provide detailed price
analysis in correlation with the scope, methodology, scope, risks and
responsibilities of the bidder, and to justify that they can complete the contract
for the offered price
Justify: the Bidder provides a justification for its price
Verify: the Borrower analyzes the Bidder’s justification to verify if it is an ALB
Decide: the Borrower analyzes and documents the decision to accept or reject
the Bid.
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 AbnormallySections
Low Bids/Proposals
I & II – ITB and BDS
Identification of a potential ALB
•Identification of an ALB is undertaken on the evaluated Bid prices of
Substantially Responsive Bids only. Approaches to be used are:
•‘Absolute’ approach: if fewer than five Substantially Responsive Bids have been
received, an ‘absolute’ approach is used to identify an ALB based on a
comparison of the evaluated Bid price, and its constituent parts, with the
Borrower’s own cost estimate
•In the ‘absolute’ approach, if the Bid price is 20% or more below the Borrower’s
cost estimate, the Borrower should clarify the Bid price with the Bidder to
determine whether the Bid is Abnormally Low
•There is no industry standard on the subject
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Abnormally Low Bids/Proposals
Identification of a potential ALB
‘Relative’ approach: uses a statistical technique where at least five substantially
responsive bids have been received. A potential ALB is the Bid that is more than
one standard deviation below the average of substantially responsive bids

$M
Bid 1 72
Bid 2 92
Bid 3 82
Bid 4 101
ALT risk zo
Bid 5 53 ne

Average 80
Std. Dev. 17
ALT threshold 63
 AbnormallySections
Low Bids/Proposals
I & II – ITB and BDS
Decision on the ALB
•If the Bidder fully demonstrates its capability to deliver the contract for the
offered price, the Borrower may after analysis of the information decide to
accept the bid and award the contract
•additional performance security shall not be demanded from the bidder
•If the Borrower after analysis of the information concludes that the Bidder has
failed to demonstrate its capability to deliver the contract for the offered price,
the Borrower shall reject the bid
•bid security shall not be forfeited for an ALB
•Bank’s no-objection is required only for contracts subject to prior review

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 AbnormallySections
Low Bids/Proposals
I & II – ITB and BDS
Potential Risks
•Likely increase in complaints due to rejection of ALBs
•Some Borrowers may not have the capability to do a detailed price evaluation to
decide on a potential ALB
•Bidders will not be able to submit a low price to “break into a market”, and
consequently Borrower may lose the opportunity of cheaper purchases, and
break of cartels (if any)
•Some borrowers may need additional consultant support during evaluation
(technical expertise and price analysis)
•Bank’s no-objection may require additional oversight of the evaluation

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 AbnormallySections
Low Bids/Proposals
I & II – ITB and BDS
Minimizing ALBs
•Adequate market research and planning at the PPSD stage
•Clear requirements, and adequate bidding time
•Competitive response
•Issues of adequate and timely responses to clarification requests
•Adequate and appropriate qualification criteria – not too restrictive to scuttle
competition
•Borrower maintains an updated prices data base and prepares a realistic cost
estimate

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 Value Engineering
Sections I & II – ITB and BDS
To identify the value throughout an entire supply/value chain to
consider what opportunities exist to investigate and pursue Value
Engineering
•What is Value Engineering?
•How can it be applied to IPF projects?
•What are the principles and steps involved?
Value Engineering (VE) is a systematic and organized approach to
provide the necessary functions in a project at optimal cost.

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 Value Engineering
Sections I & II – ITB and BDS
Value Engineering
•promotes reduction of time or substitution of materials, methods, or less
expensive alternatives, without sacrificing needed functionality, longevity, or
reliability
•normally enhances performance, reliability, quality, safety, durability,
effectiveness, or other desirable characteristics
•can be applied if stated in the SPD and agreed to by the Bank
•Is normally not applied under National Procurement Procedures
•It is most often used in construction contracts but is equally applicable to the
procurement of goods and services

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 Value Engineering
Sections I & II – ITB and BDS
Value Engineering may be applied at pre- or post-contract stage
•At a pre-contract stage
VE often gets applied through 2-Stage process, Alternative Bids or BAFO.
BAFO, if permitted requires the Borrower to engage the services of a Probity Assurance
Provider
•At post-contract stage
the mechanism for application of VE is as specified in the SPD
the Contractor prepares, at its own cost, a VE proposal and the Employer may accept
it, if it demonstrates benefits e.g. in contract price, completion time, quality, safety,
efficiency, or sustainability; and
the cost savings are typically shared between the purchaser and the contractor
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 Value Engineering
Sections I & II – ITB and BDS
Cost Driver Lever
Material Type, grade, weight, finish Change material, reduce weight & quantity
Plant and Machine hours; Power Change design; improve power efficiency; improve asset
Machinery consumption utilization, reduce maintenance
Labour Labour hours/rates Automate, change skill set, lower labour rate regions,
improve utilisation and productivity
Set Up No of production runs and set up Reduce number of runs; reduce set-up and switchover
time time
Order Handling No of purchase orders; process Blanket orders, automate process, redesign process
design
Design Complexity, materials, number of Re-engineer design, reduce number of parts, different
parts materials
Power Machine hours, number of Bigger machines, full capacity, run in non-peak hours
machines, power consumption
Packaging Pack size and materials Alter design, materials, construction
Transport Vehicle size, number of deliveries Optimize14vehicle size, back hauling, share transport
 Value Engineering
Sections I & II – ITB and BDS
Life Cycle Costs
(a) Purchase Price
(b) Total Acquisition Cost
How much it costs to acquire goods or services
Costs incurred to the point at which it can be put into use
Price + items such as design, specification, transport, storage, customs, installation, testing,
commissioning, etc.
(c) Life-Cycle Cost (Total Cost of Ownership)
Total Acquisition Cost
Plus items such as operating cost, maintenance, de-commissioning, disposal, etc.

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THANK YOU
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