Understanding precisely how government evaluates your tender price — the formula used, the reference point, and the interaction with B-BBEE preference points — is the foundation of a rational pricing strategy. Many bidders price their government tenders based on intuition, market norm, or simply their desired margin, without understanding how the evaluation formula translates their price into evaluation points. This module demystifies the mechanics so you can price with precision.
The PPPFA Preferential Procurement Regulations prescribe two price evaluation systems: the 80/20 system for contracts with a rand value up to R50 million, and the 90/10 system for contracts above R50 million. Both systems use a formula-based approach to convert prices into points, with the lowest compliant bid receiving the maximum price points (80 or 90). The 80/20 formula is: Ps = 80 × [1 − (Pt − Pmin) / Pmin], where Ps is the price score, Pt is the price being scored, and Pmin is the lowest compliant bid price. Substituting in a simple example: if the lowest bid is R1,000,000 and your bid is R1,200,000 (20% higher), your price score is 80 × [1 − (1,200,000 − 1,000,000) / 1,000,000] = 80 × [1 − 0.2] = 80 × 0.8 = 64 price points.
The 'price envelope' concept is an important mental model for competitive pricing. Because price points are calculated relative to the lowest compliant bid — and you do not know what that will be before opening — the critical question is not 'what is my absolute price?' but rather 'how does my price relate to the likely lowest bid?'. If you can estimate the range within which competitors are likely to price (using market intelligence, benchmarking, and prior award data), you can position your price within a 'competitive envelope' that maximises your combined price and B-BBEE score. Bidding significantly above this envelope guarantees a poor price score regardless of your B-BBEE advantage.
The lowest price bias is a real phenomenon in government procurement, reflecting the formula's mathematical structure. Because the price formula is linear and the maximum price score is 80 or 90 out of 100, the weight given to price is very high. Under the 80/20 system, a bidder whose price is 10% higher than the lowest compliant bid loses approximately 8 price points. To offset this with B-BBEE preference, they would need to be a Level 1 contributor (earning 20 preference points) if the competitor is a Level 4 contributor (earning 12 preference points) — the 8-point differential is more than covered by the 8-preference-point difference. But if both bidders are Level 1, the 10% price difference translates directly into an 8-point final score disadvantage.
VAT and the price evaluation mechanism interact in ways that can create unexpected score differences. Government evaluates prices inclusive of VAT for VAT-registered entities and exclusive of VAT for non-VAT-registered entities. If your company is not VAT-registered and you quote exclusive of VAT, your apparent price will be 15% lower than a VAT-registered competitor quoting the same pre-VAT cost base, giving you a significant price point advantage. Conversely, if you incorrectly add VAT to a price that should be VAT-exclusive, or omit VAT from a price that should be inclusive, your evaluated price will be materially wrong and may result in disqualification or revaluation on unfavourable terms.
For rate-based contracts (where government sets the quantities and bidders only price the rates per unit), the lowest price assessment is based on the evaluated total, which is calculated by applying your quoted rates to the bill of quantities quantities. Strategic rate loading — pricing certain items higher and others lower based on your assessment of which quantities are likely to be exceeded during the contract — is a legitimate pricing strategy sometimes used in construction and long-term service contracts. However, abnormal rate imbalances that appear designed to manipulate the evaluation can be investigated by the procurement institution and result in bid rejection.