When submitting government proposals, price reasonableness under the Federal Acquisition Regulation (“FAR”) is a highly contested issue. You have to avoid costly mistakes by assuming that the lowest price should get the award. The contracting agency has specific guidelines for evaluating pricing proposals. You should know the basics before submitting your pricing proposal.
FAR 15.404 1 provides guidance for evaluating your proposals for pricing. The clauses states that:
“[t]he contracting officer is responsible for assessing the reasonableness of the offered prices,” The FAR specifies the techniques that the contracting officer may use to “ensure that the final agreed-to price is fair and reasonable. FAR 15.404-1 (a)(2) states that an agency must perform a price analysis when “certified cost or pricing data are not required.”
The FAR also permits the agency broad discretion to conduct that analysis in an appropriate manner. See FAR 15.404-1 (b)(2). The Court of Federal Claims looked at this issue in Overstreet Elec. Co. v.United States, 47 Fed. Cl. 728, 733 n. 8 (2000) (noting that “the Government has discretion in choosing which of several acceptable price analysis methods to employ”).
When evaluating your pricing proposal, the Government may use various price analysis techniques and procedures to make sure that your price is fair and reasonable. See also information about government pricing for defense contracts.
Examples of price evaluation methods include, but are not limited to, the following:
- Comparison of proposed prices received in response to the solicitation. Typically, adequate price competition establishes a fair and reasonable price (see FAR 15.403–1(c)(1)).
- Comparison of the proposed prices to historical prices paid, whether by the Government or other than the Government, for the same or similar items. This method may be used for commercial items including those “of a type” or requiring minor modifications.
Technically Acceptable Proposals Have Some Bearing on Price Reasonableness FAR 15.404 1
When looking at price reasonableness under FAR 14.404-1 contracting agencies have broad discretion. A substantially low price can bring in the question of whether you understood the solicitation requirements. Looking at the pricing for each CLIN can be an indicator under the unbalanced pricing analysis. See information about the economic price adjustment clause.
Government contracting agencies would typically determine reasonableness based on an analysis and comparison of each bidder’s total evaluated price to the mean of all the suggested prices.
The FAR 15.404 1 permits government discretion in its choice of method to determine cost reasonableness. Specifically, FAR 15.404-1 (b)(2) (ii) gives the government the option to use a “[c]omparison of the proposed prices to historical prices paid, whether by the Government or other than the Government, for the same or similar items”.
When challenging an awardee’s low prices, you first have to look seriously at the expressed solicitation criteria. Merely asserting that your competition’s price is too low would not get you points within a GAO bid protest. See more information about government contract pricing.
Incumbents tend to have stronger arguments under FAR 15.404-1 because if the agency chooses to look at similar prices paid for similar services, in retrospect, the agency should not simply disregard those relevant details and only go to the lower-priced bidder. If the solicitation requires a comparison of prices paid for similar services, the Agency’s decision should, at least, show some level of consideration.
- The reality is that GAO protest decisions on proposal price evaluations vary.
- You must make arguments based upon the expressed language of the solicitation.
Be Aware of Firm Fixed Price Reasonableness Evaluations
For service contracts and construction type government procurements, bidders often make the costly mistake in a bid protest by only arguing that the awardee’s price was too low.
The problem often is that you have to realize that in firm-fixed-price contracts, the risk of performing at a low-profit margin is on the contractor. However, if the proposal states that the government WILL look at low prices to see if there is a clear understanding of the PWS requirements, then there is an argument to be made.
However, if the agency has made a conclusive determination that your competition’s technical proposal is strong, then you should not consider challenging the awardee’s low price and claim that the agency’s proposal evaluation analysis is flawed. You would have to, at least, challenge the awardee’s technical proposal.
Although an agency is required to decide that offered prices are fair and reasonable before awarding a fixed-price contract, FAR 15.402 (a), the purpose of a FAR Part 15 price reasonableness evaluation in a fixed-price environment is to decide whether prices are too high, as opposed to too low. It is the contractor and not the government that bears the risk that an offeror’s low price will not be adequate to meet the costs of performance.
Arguments that an agency did not do a proper analysis to decide whether prices are too low, such that there may be a risk of poor performance, concern price realism. SDV Solutions, Inc., B-402309, Feb. 1, 2010, 2010 CPD para. 48 at 4.