The dictatorship of the lowest price
Public procurement1 has been driven by the overarching ideology of the “race to the bottom on price” for services. The post-financial crisis of 2008 influenced this macroeconomic and budgetary development unfavorably, and caused contracting authorities to increase the application of the lowest price criterion, in order to save money. Other than necessary cost savings, the simpler handling and high grade of transparency have been the main drivers for awarding contracts on the principle of the lowest price. However, considering the economic power and strength of public procurement in Europe (19% of the European GDP derives from public procurement) it goes without saying that the so-called “race to the bottom on price” has multiple significant effects on the supplier market. Experience has shown that awarding public contracts at the lowest price, contributes among others to ruinous price wars, destructive competition in the relevant industry as well as social and wage dumping.
Paradigm shift in European public procurement
The new procurement regime (directives 2014/23/EC, 2014/24/EC and 2014/25/EC) moves away from contracts based on the lowest price only, towards the most economically advantageous tender (“MEAT”), based on quality and price criteria. The aim is to provide better quality value for taxpayers, by setting out new award criteria that place more emphasis on innovation and the environmental and social aspects of the bid. Therefore contracting authorities shall be encouraged to choose award criteria that allow them to obtain high-quality works, supplies, and services that are optimally suited to their needs (instead of cutting the costs of services, without considering the impact on the quality of service provision and on the working conditions of the workforce). However, the best price quality criteria will not become mandatory in future since the MEAT criterion also covers the award on only the lowest price. According to the directives, the member states shall be in the position to decide that MEAT shall be the only criterion to be used to evaluate bids for certain contracts, when translating the directive into national law. Thereby the directive marks a further step in stopping the “race to the bottom approach” used by public authorities.
Only the best shall prevail – the Austrian approach
Up to now Austria followed the majority of the European procurement regimes by providing contracting authorities more or less free choice when it comes to the selection of the award criteria, provided that the quality standards are described with sufficient precision. Below the threshold and in the utilities sector in general, contracting authorities have been free to choose between the (lowest) price criterion, and the best price / quality ratio in making their procurement decisions. Aiming to fight wage dumping and foster the participation of small and medium sized enterprises (“SMEs”) those rules will change significantly by 2016: According to the 2016 amendment of the Austrian Federal Procurement Act, the best price / quality ratio will become mandatory for certain (enumerated) procurement procedures namely service and supply contracts as well as construction contracts exceeding EUR 1 million. Moreover – in order to avoid “fig-leaf” quality criteria2 – the price and quality criteria must be weighed in future so to ensure a realistic influence of the quality criteria on the evaluation of the most economically advantageous tender. Hence, in future the lowest price criteria will increasingly become the exception when it comes to award criteria while the best price / quality ratio is expected to become the rule (in Austria).
The other side of the coin
Considering the main driver for pushing forward the best price quality ratio, namely fostering innovation, it is clear that the establishment of certain quality criteria will stimulate innovative procurements. However, there is also a significant downside when applying the best price quality criteria, and therefore the Austrian approach has been heavily criticised by both, contracting authorities and construction industry representatives of the construction industry. Both claim that due to the high technical standardisation in the construction business, the application of further (quality) criteria is not reasonable, and causes significant additional workload and risks. In addition MEAT procurements (also considering certain quality aspects of the bids) are simply more expensive than lowest price procurements. Besides, the fact that lowest price procurements obtain lower prices by the virtue of their nature, MEAT tenders also cause significantly higher efforts and costs for both, bidders and contracting authorities for preparing the bids and the tender procedures (eg, they require the development and application of objective and transparent evaluation systems). Furthermore meat tenders are likely to be less objective and transparent when it comes to the award decision, as numbers tend to be “self-explaining”. There is also no guarantee that MEAT tenders will reduce price wars or social dumping; bidders who provide poor quality will try harder to win the tender by offering an even lower price. Lastly, there are situations (especially when it comes to the procurement of highly standardised services, supplies or works), when the lowest price due to the nature of the procurement, and the demand of the contracting authority provides for the best price quality ratio. It remains to be seen how business will respond, and what if any additional costs will be added to “pay for” the move towards procurements based on quality and price criteria.
Experience has shown that awarding public contracts at the lowest price, contributes to ruinous price wars, destructive competition in the relevant industry as well as social and wage dumping
1Public procurement means the purchasing by public sector bodies and certain utility sector bodies of contracts for goods, works or services. Public procurement law regulates such purchasing activities in order to open up the EU’s public procurement market to competition, to prevent “buy national” policies and to promote the free movement of goods and services.
2Fig leaf criteria means that in situations where the best price / quality ration is mandatory, quality will be weighted so low (eg 1% of 100%) that in fact the contract will be awarded based on the lowest price criteria.