Price Realism Bid Protests: When Can You Argue that the Awardee’s Price is Too Low?

It is not uncommon for a disappointed offeror in a fixed-price procurement to be astonished at how low the awardee’s proposal price ends up being. This astonishment can lead to the desire to file a bid protest based on the argument that the awardee’s price is unreasonably low. Unfortunately, in many of the instances this protest argument is simply not viable because the solicitation did not require (nor allow) the government to conduct a “price realism” analysis. Just this month, GAO dismissed such a protest, because the solicitation did not contain a price realism clause. Why is this argument raised so often in the absence of a “price realism” clause? Because both contractors and the government are commonly confused by the distinction between price reasonableness and price realism.

Price Reasonableness vs. Price Realism

It seems like every few months, GAO or the Court of Federal Claims is issuing a decision wherein it needs to explain the distinction between price reasonableness and price realism because the protester has argued the awardee’s price is “unreasonably low.” GAO recently reiterated this distinction in Mountaineers Fire Crew, Inc.; ASP Fire, LLC; Diamond Rd. Maint. Inc. (d/b/a Diamond Fire), B-413520.5 et al., Feb. 27, 2017

[The protester] argues that the [agency] did not reasonably evaluate whether [the awardee]’s proposed labor rates were “unreasonably low.” Although the protester uses the term “unreasonably” low, the protester essentially argues that the agency failed to evaluate whether the awardee’s proposed labor rates were unrealistically low, that is, were so low as to pose performance risk. As our Office has explained, price reasonableness and price realism are distinct concepts. The purpose of a price reasonableness review is to determine whether the prices offered are too high, as opposed to too low.  Conversely, a price realism review is to determine whether prices are too low, such that there may be a risk of poor performance.

The confusion between reasonableness and realism is not limited to contractors. There are many contracting officers and contract specialists working for the government that don’t get the difference between price realism and reasonableness. As a result, we see some very confusing price evaluation clauses where the government intends to include a price realism clause, but fails to do so because of confusion over terminology (or vice versa). This means contractors who are trying to determine whether price realism is required often have to look beyond the plain language of the solicitation, and look to see whether the language in the solicitation meets GAO’s test for when price realism is required.

When is Price Realism Analysis Required/Permitted

Unlike price reasonableness, a price realism analysis is not required in a fixed-price procurement. While it is within an agency’s discretion to provide for a price realism analysis in awarding a fixed-price contract to assess understanding or risk, offerors competing for such an award must be given reasonable notice that a business decision to submit low pricing will be considered as reflecting on their understanding or the risk associated with their proposals. In other words, they must be fairly warned that a price realism analysis will be performed. If not fairly warned, than no price realism analysis can be performed (i.e., a protest arguing that the awardee’s price is too low is not viable). If the warning is included in the solicitation, than the agency is permitted and required to perform a price realism analysis (i.e., a protest arguing that the awardee’s price is too low may be viable).

What complicates things even more is that GAO has long held that offerors can be fairly warned that a price realism analysis will be performed even if the term “price realism” never appears in the solicitation. In cases where the solicitation does not explicitly call for a “price realism” analysis, GAO has formulated a test to determine whether the solicitation permits/requires the agency to perform a price realism analysis.

Most recently, GAO expressed the test as: “in circumstances where price realism is not explicitly called for in the RFP, offerors must be reasonably informed that negative consequences may result [from proposing a price that is too low], e.g., that the agency could reject a proposal as unacceptable or assess technical risk to the offerors’ proposal.

However, just last year GAO expressed the test slightly differently: “we will only conclude that a solicitation contemplates a price realism evaluation where the RFP expressly states that the agency will review prices to determine whether they are so low that they reflect a lack of technical understanding, and the RFP states that a proposal can be rejected for offering low prices.”

While providing different iterations of the test does add to the confusion, the good news is that these are effectively the same test.

Bottom Line

In a fixed-price procurement, a bid protest challenging the awardee’s price as too low is only viable if a price realism analysis is required, and such an analysis is only required if explicitly called for in the solicitation or if the solicitation reasonably informs offerors that negative consequences may result from proposing a price that is too low.

Image courtesy of flickr (licensed) by Taro the Shiba Inu