Ordinarily, agencies may not evaluate whether an offeror's price in a fixed-price acquisition is unrealistic (or "too low"). In Valor Healthcare, Inc., B-412960; B-412960.2, July 15, 2016, 2016 CPD ¶ ___, however, the U.S. Government Accountability Office (GAO) has reminded parties that when a solicitation calls for such a price-realism analysis, an agency's failure to do so may provide disappointed offerors with a viable protest ground.
Clarification of Terms
First, it is necessary to clarify terms that are easily and often confused. Price reasonableness, which agencies must analyze in every procurement, concerns whether an offeror's proposed price (for either a fixed-price or flexibly-priced contract) is "too high." See Federal Acquisition Regulation (FAR) 15.402(a). A price-reasonableness analysis does not consider whether the offeror's proposed price or proposed costs might be too low.
Cost realism, which agencies must analyze in cost-type procurements, involves whether an offeror's proposed costs of performance are the costs most likely to be incurred, given the offeror's specific technical solution and circumstances. FAR 15.404-1(d). Under a cost-type contract, an offeror's proposed costs are not dispositive because, regardless of the costs proposed, the government must pay the contractor its actual and allowable costs. So, in cost-type procurements, an agency evaluates proposals using costs adjusted to reflect what the agency determines to be the most probable costs of performance. FAR 15.404-1(d)(2)(i).
Price realism, a term that does not appear in the FAR, is a species of cost realism that may be analyzed under fixed-price procurements. FAR 15.404-1(d)(3). It considers whether an offeror's proposed price is "too low" for what the offeror proposes to do, such that there is a risk the offeror does not understand the procurement's technical requirements or may not satisfactorily perform at the proposed price. Id. Ordinarily, because contractors bear the risk of cost overruns on fixed-price contracts, there is nothing inherently objectionable about an offeror proposing a fixed price that is unusually low—or even below cost. See, e.g., JCMCS, B-409407, Apr. 8, 2014, 2014 CPD ¶ 125 at 2. This rule often frustrates companies wanting to protest a fixed-price contract award on the ground a competitor "underbid" the requirements. Indeed, agencies are prohibited from evaluating the realism of fixed-price proposals without giving offerors prior notice. See, e.g., Emergint Techs., Inc., B-407006, Oct. 18, 2012, 2012 CPD ¶ 295 at 5.
Merits of the Protest
The agency in Valor Healthcare took the unusual but permissible step of including a price-realism component in its fixed-price solicitation. The solicitation advised offerors that "[p]roposals unrealistically high or low in price, when compared to the Government estimate, and market conditions evidenced by other competitive proposals received, may be indicative of an inherent lack of understanding of the solicitation requirements and may result in proposal rejection without discussion." The solicitation also required offerors to submit cost data for the various elements of their pricing.
When the agency awarded the contract, the higher-priced incumbent protested, alleging among other things that the awardee's price was too low to cover the labor costs of a workforce capable of performing at the level the awardee proposed—particularly given the awardee's proposal to use the protester's incumbent personnel. Although the agency evaluated price reasonableness (i.e., whether proposed prices were too high), nothing in the contemporaneous documentation of the procurement demonstrated the agency ever evaluated price realism (i.e., whether proposed prices were too low), as the solicitation required.
In response to the protest, the contracting officer stated that the agency reviewed the supplied cost data and saw no reason to doubt the awardee's price realism. Also during the course of the protest, the agency prepared pricing charts that purported to show the realism of the awardee's price.
The agency's post hoc arguments did not convince the GAO. After noting the complete absence of contemporaneous documentation of a price-realism analysis, the GAO observed that even the post hoc arguments failed to address the awardee's labor costs, which accounted for the majority of the costs of performance and were at the heart of the protest ground. And, although GAO is normally very deferential to agencies' cost- and price-realism analyses, here the agency apparently had conducted no analysis at all. Because there was a reasonable possibility a proper price-realism analysis would have resulted in a different award decision, the GAO sustained the protest.
Takeaways
A company bidding on a fixed-price opportunity should examine the solicitation carefully for indications of whether the agency intends to analyze price realism. Indications may be direct and unmistakable, or vague and ambiguous. What matters is whether the agency puts offerors on notice that it will consider pricing to determine whether offerors understand technical requirements. If the solicitation contains vague language that could be read various ways, firms should consider seeking clarification before the date set for receipt of proposals. If price realism is to be evaluated, offerors should be sure to provide sufficient support for the realism of their pricing, especially prices that may appear lower than the agency might expect.
When a solicitation includes a price-realism component, and an offeror loses the contract to a competitor with a suspiciously low price, protest counsel can help determine if the disappointed offeror may have a viable protest ground. Although GAO affords agencies considerable deference in analyzing realism, that deference is not unlimited, as Valor Healthcare demonstrates.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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