Why the second-lowest bid often wins a tender

Six bids arrive. The lowest is eighteen per cent under the next one, and the panel spends its meeting not on whether the price is good but on what the bidder has failed to see. The contract goes to the second-lowest, and the file records value for money.

What everyone sees

A tender is understood as a mechanism for finding the lowest price for a specified scope. It also selects, from among all bidders, the one whose estimate of cost was most optimistic — and optimism is distributed across bidders, so the winner is drawn from the tail of the distribution rather than from its centre.

What is actually happening

Capen, Clapp and Campbell described this as the winner’s curse in competitive bidding: where bidders estimate an uncertain value with error, the winning bid comes disproportionately from whoever erred most in the optimistic direction, so the winner systematically overpays or, in procurement, systematically underprices. Bajari, McMillan and Tadelis examined procurement choices between auctions and negotiations and found buyers favouring negotiation where project complexity made specification incomplete, precisely because low bids on incompletely specified work generate change orders, disputes and non-performance. The second-lowest bid is not chosen for being second. It is chosen because the lowest one carries information about the bidder’s understanding of the scope.

Why it stays hidden

The reasoning hides because it cannot be stated in the evaluation criteria. No tender document says the lowest bid will be treated as suspect, since that would invite challenge and undermine the process. So the rejection is written up as a concern about capacity, delivery risk or methodology — all of which are genuine and all of which are downstream of the number.