Low Tenders
The Azerbaijan Experience
Hijran Valehov
Deputy Chairman, Azeryolservis ASC
Azeryolservis ASC
• Azeryolservis manages the Azerbaijan 17,520 km road network
• Part of Ministry of Transport
• 13 billion USD of rehabilitation, new roads and maintenance planned
for the next 10 years
• Financing from State Budget, IFIs and commercial banks
• Contractors from Azerbaijan, Turkey, EU and Asia.
Objectives for Road Construction
• Quality is essential
• Time is important
• Cost is the least critical constraint
• Increased competition and competitiveness
• Profitable contractors
• Realist rates
• Unrealistically low prices do not benefit Azeryolservis in the long-term
Problems
Consequence of contractors minimizing costs and maximizing payments
• Delays: very common
• Claims and Disputes: increasing
• Poor quality material and work
• Increased risk of contract failure
Low rates increase contract problems
Low and Abnormally Low Tenders
Procurement Rules – lowest bid wins
Average winning bid is 78% of the average bid price
Winning bids significantly less than detailed cost estimates
Some bids (4 from 16 international tenders) are “abnormally” low using
typical guidance criteria:
• 25% below average
• 15% below second ranked bidder
PROBLEM IS LOW BIDS, NOT JUST “ABNORMALLY” LOW BIDS
Case Study 1
A Major Italian Contractor building 48 km of new motorway
• Low Bid – but not abnormally low by usual definitions
• About 15% less than average of other bidders
• Failed to source materials and subcontractors at rates which ensured a
profit
• Progressed at less than half the necessary rate for 2 years
• Contracts terminated
• Unprofitable rates given as a reason for failure
Outcome - Retender and long delays to the project
Case Study 2
An Italian Contractor building 37 km city bypass
• Abnormally Low Bid – 74% of average
• Subcontracted most of the works
• Failed to pay subcontractor due to financial problems in Italy
• Works failed to progress
• Direct payments made by Azeryolservis to Sub-contractors (agreed with
ADB, and contractor)
Outcome – Delays but project completed
Case Study 3
A Chinese firm bidding for 16 km of new motorway
• Abnormally Low Bid – 71% of average and >15% lower than next lowest
• Bid was 67% of Engineer's estimate
• Showed a Time for Completion longer than stated the bidding
documents.
• Bid rejected by Tender Commission
• Bank did not accept evaluation
• Outcome – Tender cancelled. Delays due to retendering
Reasons for low bids
• Competitive market conditions
• Shortage / cost of quality materials not foreseen during bidding
• Expectation of compromise with Employer
• Skill shortages in the supervision and management of contracts
Azerbaijan National Procedures
State Procurement Guidelines of the Azerbaijan Republic
•Low tenders may be rejected
• Clause 2.7.4: “In case of a large difference between the price of any
tender proposal and estimated cost of relevant goods (services and
works) the Client has a right to reject the proposal. This decision should
be confirmed by relevant Executive Agency.”
AYS Action to Address Low Bids
• Warning bidders of material constraints (e.g. bitumen)
• Reducing incentives for delay (cost adjustment, delay damages)
• Improving contract supervision and management
• Improving designs to reduce variations and opportunities for claims
• Careful analysis of bids at evaluation stage (action limited to
clarification – impossible to reject)
• Increasing Performance Security ? (no evidence of any effect)
Other Ideas to Address Low Bids
Azeryolservis and Financing Institutions
• Rigorous Shortlisting –proven capacity and resources in country
• Reject contractors with poor performance for Azeryolservis ASC
• No cost adjustment (indexing) for changes in cost
• Include rate breakdowns in bids and reject bids with unrealistic rates
• Clear guidance and procedures for dealing with insufficient tenders
• Harmonization of rules and application between financing institutions
• Consider other procurement and selection methods rather than lowest
ICB – e.g. Limited International Bidding.
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