Price realism and price reasonableness are evaluation analysis theories that can cause confusion among government contractors when filing a bid protest. Failure to understand the differences between price realism and price reasonableness can severely hurt your chances of winning your case. The approaches to each is strikingly different
Only a few bid protests based upon a fair and reasonable price determinations are successful. Therefore, understanding how to address flaws in the agency’s price analysis when filing a GAO bid protest.
What are the Differences? W
Cost analysis and price analysis in government contracting and federal procurement are two unique methods of projecting costs for federal projects. Price Analysis looks purely at the unit price from a bidding vendor while Cost Analysis incorporates the reasonable cost to the vendor of providing the end product to determine if the price quotes are fair and reasonable.
Price reasonableness vs price realism
Price reasonableness analysis during source selection evaluations is typically conducted to determine whether your price is too high.
Price realism analysis under the FAR is used to determine “whether your low price reflects a lack of understanding of contract requirements or risk inherent in your technical approach.”
The idea behind price realism is to prevent situations where your price for an item or service is so low that it directly questions your understanding of the contract requirements and risk of poor performance.
Bid Protest Review of Pricing Evaluations
Price Reasonableness Analysis
The FAR requires the government contracting agencies to perform and price reasonableness analysis of the apparent winner’s proposal. Once the agency determines that the contractor’s price is not too high, then it has essentially decided that the price is fair and reasonable. See FAR 15.404-1(b)(2).
The purpose of a price reasonableness evaluation in a fixed-price environment is to determine whether prices are too high, rather than too low because it is the contractor, and not the government, that bears the risk that a low price will not be adequate to meet the costs of performance.
This was the decision in a GAO bid protest. See Sterling Servs., Inc., B-291625, B-291626, Jan. 14, 2003, 2003 CPD para. 26 at 3.
- Does that mean that you can always low-ball the government and get the award? No.
- Despite your low bid, the government may articulate that it is not willing to undergo obvious risks that are clear in your proposal. See information on LPTA awards.
- A stronger technical proposal does not force the agency to award to you at a higher price. See more information about government contract pricing and rule of two contracting.
Price Realism Analysis
Courts have often ruled that when the RFP does not make any commitment to perform a price realism analysis in any particular manner[,] the methodology is left to the agency’s discretion.” See Rotech Healthcare, Inc. v. United States, 121 Fed. Cl. 387, 404 (2015) (citing Ne. Military Sales, Inc. v. United States, 100 Fed. Cl. 103, 118 (2011).
- A contractor should first assess the solicitation to see if the agency actually states how it will perform its price realism. If it does not, then arguments regarding the government’s improper analysis will more than likely fail.
- A price realism evaluation is not required or appropriate where the solicitation does not include a requirement for a price realism analysis. See SDV Solutions, Inc., B-402309 Feb. 1, 2010, 2010 CPD ¶ 48 at 4.
- The methodology employed by the agency must be reasonably adequate and provide some measure of confidence that the rates proposed are reasonable and realistic in view of other cost information reasonably available to the agency as of the time of its evaluation. See SGT, Inc., B-294722.4, July 28, 2005, 2005 CPD ¶ 151 at 7.
If you decide to challenge the agency’s price realism analysis in a GAO bid protest, it helps to understand that the contracting agency may not adjust your prices for purposes of evaluation. See FAR 15.404-1(d)(3); See also GAO Protest of Powersolv, Inc., B-402534, B-402534.2, June 1, 2010, 2010 CPD¶ 206 at 12.
The analysis of price realism evaluation involves an assessment of your low fixed price to determine whether the low price reflects a lack of understanding of contract requirements or risk inherent in your technical approach.
- If there is no fair notice in the solicitation, then you stand a chance of filing a credible pre-award GAO protest.
- 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, bidders 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.
As stated earlier, when a federal contracting agency is concerned that your low price presents a performance risk, it can perform a price realism analysis. This can have a crucial impact on the outcome of winning the project. See information about latent and patent defects.
Court’s View on Fair and Reasonable Price Determination Techniques
Courts Give Agencies Broad Discretion for FAR Price Reasonableness Analysis Determination: The depth of an agency’s FAR price analysis for a fair and reasonable price determination is within contracting officer discretion, and GAO will review its analysis for price reasonableness.
The Contracting Agency may also use various price analysis techniques and procedures to arrive at a fair and reasonable price determination. See also information about economic price adjustments.
However, a GAO protest may be sustained if the agency fails to inform you in the solicitation that such a pricing analysis will be performed. See Emergint Technologies, Inc., B-407006 (Comp. Gen. Oct. 18, 2012).
Solicitation Language: Many solicitations include a statement that too low of a price may warrant a lack of understanding of the proposal requirements.
- An agency can conduct a price realism evaluation, but only if it provides reasonable notice in the solicitation that the analysis will be part of the evaluation criteria.
- If the contracting agency does not make pricing analysis as part of the evaluation criteria in the solicitation, it is not permitted to assess your price beyond your firm price offer. If done, a bid protest could be sustained.
- In a bid protest, the GAO will review an agency’s proposal evaluation for price reasonableness and ensure it is consistent with the terms of the solicitation, applicable statutes, and regulations.
FAR Price Analysis Tips for Contractors
Your options: As a government contractor, when you make an offer on a fixed-price contract, you have the option of providing a price with very little to no profit, or even a price that would result in a loss. You may have valid reasons to do so, and such a proposal offer is not inherently improper on its face. See information on lowest price technically acceptable evaluations. Find out more about LPTA Evaluation Factors & Lowest Price Technically Acceptable Contract Bid Protest.
- Where a solicitation anticipates the award of a time-and-materials contract with fixed-price, fully-burdened labor rates, there is no requirement that an agency conducts a cost price realism analysis, in the absence of a solicitation provision requiring such an analysis.
- An agency may, at its discretion, provide for the use of a price realism analysis in a solicitation for the award of a fixed-price contract, or a fixed-price portion of a contract, to assess the risk inherent in an offeror’s proposal.
- When looking at your proposal’s FAR price analysis for purposes of a GAO protest, understand when a price realism may give the Agency an advantage when filing a bid protest.
- The key is first to see if the RFP was based upon a firm fixed price. Then, you want to see if the solicitation provided fair warning within the evaluation criteria.
Without understanding the difference between price realism and price reasonableness during proposal evaluation, your bid protest will be in jeopardy. See also litigating unbalanced pricing in bid protests.
If you believe the agency has made a mistake in its price reasonableness analysis or realism evaluations, contact our bid protest attorneys for a free initial consultation. Call 1-866-601-5518. FREE INITIAL CONSULTATION.