Kamikaze Bidding: A Risky Strategy

The word “kamikaze” (神風) literally means “divine wind” in Japanese, referring to a typhoon that dispersed a Mongol fleet attempting to invade Japan in 1281. The word “kamikaze” has also come to be used more generally to describe any act of reckless disregard for safety or personal welfare, or to refer to a suicide attack in general.

But this word get popularity during World War II. In the final years of World War II, the Japanese military, facing a desperate situation, adopted the kamikaze tactic, using pilots to carry out suicide attacks on Allied ships.

Kamikaze Bidding

In the world of open bidding procurement, the term “kamikaze bidding” refers to an aggressive, high-risk strategy where a supplier deliberately submits an extremely low bid – often below cost – to secure a contract. This practice can lead to short-term gains but often results in financial instability, poor contract execution, and long-term consequences for both the bidder and the procurement system.

In procurement, kamikaze bidding follows a similar concept: a supplier knowingly underbids, risking financial losses to win a contract. This may happen due to:

• Desperation: Suppliers facing financial distress may bid aggressively to maintain cash flow.
• Market Entry Strategy: New or small suppliers may use this tactic to enter the market and gain visibility.
• Eliminating Competition: Large firms may bid unreasonably low to push out smaller competitors.
• Hope for Change Orders: Some bidders anticipate contract modifications, price adjustments, or scope expansion that could later make the project profitable.

Examples of Kamikaze Bidding

Bangladesh Public Works Project: A local contractor won a government infrastructure project by bidding 30% lower than the estimated cost. However, midway through execution, financial struggles led to delays, forcing the procuring entity to rebid the project.

IT System Procurement: A software company bid drastically low for an e-Government system contract. Later, they struggled with delivery due to high operational costs, leading to contract termination and blacklisting.

Construction Tenders in South Asia: In several mega projects, bidders have underquoted prices to win contracts but later failed to complete projects, leading to legal disputes and re-tendering.

Impact of Kamikaze Bidding

For Suppliers: Can lead to financial distress, reputational damage, and possible blacklisting.

For Procuring Entities: Risk of project delays, quality issues, and contract failures.

For Market Competition: Distorts fair competition and discourages sustainable pricing strategies.

Preventing Kamikaze Bidding in Public Procurement

1.  Strengthening Bid Evaluation Mechanisms

• Bid Evaluation Mechanisms: Set a reasonable lower limit to prevent bids that are unreasonably low compared to the estimated cost.
• Conduct Detailed Cost Analysis: Evaluate whether the quoted price is realistic based on market rates, material costs, and project requirements.
• Use a Balanced Technical & Financial Scoring System: Avoid awarding contracts solely based on the lowest price by incorporating quality, experience, and financial stability in the evaluation criteria.

2.  Enhancing Due Diligence on Bidders

• Financial Capacity Assessment: Require bidders to submit audited financial statements, liquidity ratios, and cash flow projections.
• Past Performance Review: Check bidders’ history of project completion, contract execution, and any previous terminations.
• Bidder Integrity Verification: Cross-check with blacklists, previous litigation cases, or contract failure records.

3.  Implementing Strong Contractual Safeguards

• Performance Security & Advance Payment Guarantees: Require substantial bid securities and performance guarantees to discourage irresponsible bidding.
• Penalties for Non-Performance: Impose strict penalties for delays, quality failures, or contract abandonment.
• Milestone-Based Payments: Link payments to project milestones instead of lump-sum advances, ensuring financial commitment.

4.  Encouraging Sustainable Competition

• Market Awareness & Supplier Training: Conduct training sessions to educate suppliers on sustainable pricing and bidding strategies.
• Supplier Prequalification System: Implement a prequalification process to ensure only financially stable and technically competent bidders participate.
• Lot-Based Procurement: Divide large contracts into smaller lots to allow fair participation and reduce the risk of price manipulation by dominant players.

5.  Strengthening Regulatory Oversight

• Introducing Anti-Dumping Regulations in Procurement: Implement rules to prevent abnormally low bidding that disrupts market competition.
• Enhanced Monitoring by Procurement Authorities: Procurement oversight bodies should monitor and flag unusually low bids for further scrutiny.
• Collaboration with Industry Associations: Work with supplier associations and regulatory bodies to create fair competition guidelines.

Final Thoughts

Kamikaze bidding distorts procurement efficiency and often leads to failed contracts. By implementing strong bid evaluation criteria, financial due diligence, and regulatory oversight, procuring entities can mitigate risks and promote fair, competitive, and sustainable procurement practices.

While aggressive pricing can be a competitive advantage, kamikaze bidding in procurement is a dangerous gamble that can backfire. Procuring entities must adopt robust evaluation measures, and suppliers should focus on long-term sustainability instead of short-term wins.