Bid Protest Weekly Newsletter by Bryan R. King, Attorney, General Counsel PC
Date: Wednesday, September 27, 2013, 11:42am EST
Gulf Master General Trading, LLC, B-407941.2, July 15, 2013
A decision recently released by GAO provides a good illustration of the dangers to contractors in offering unbalanced pricing in proposals submitted on government contracts. “Unbalanced pricing” exists where an offeror submits a proposal with a low total price, but with individual line item prices that are either overstated or understated.
In Gulf Master General Trading, the U.S. Air Force issued a solicitation for vehicle leasing services at Al Dhafra Air Base in the United Arab Emirates. The solicitation called for an award of a 1-year contract, with four 1-year option periods. The solicitation required offerors to submit prices for 20 different types of vehicles for each year of the contract based on estimated quantities of vehicles for each year. The estimated number of vehicles was relatively constant throughout the entire performance period, with a slight increase in the estimated numbers in the last two years of the contract.
Gulf Master submitted a proposal in which the price offered for the base year was significantly higher than in any of the four option years, with the price decreasing in each successive year. Gulf Master maintained that the base year was higher because of the required start-up costs, and the price decreased in the later years because Gulf Master was able to sell vehicles midway through performance, and use the sale proceeds to reduce the price in the final two years of the contract. Despite its unbalanced pricing offer, Gulf Master’s overall price was the lowest, and it was selected for award.
The award to Gulf Master was protested, with the protester arguing that federal regulations required the Air Force to consider the risk to the government associated with Gulf Master’s unbalanced pricing, but it failed to do so. The Air Force elected to take corrective action in response to the protest, conducting an analysis of Gulf Master’s offered pricing. The Air Force’s analysis compared Gulf Master’s offered pricing with both the independent government estimate, and the offered pricing of the other offerors in consideration, leading to a determination that Gulf Master’s offered pricing was indeed unbalanced.
The Air Force discovered that because of the unbalanced nature of Gulf Master’s offered pricing, Gulf Master would only be the lowest priced offeror if all of the option years of the contract were exercised. In fact, Gulf Master’s price only became the lowest total price in the final month of the final option year. Thus, the Air Force determined that Gulf Master’s unbalanced pricing posed a significant risk to the government, as anything short of full performance all the way through the final option year would result in the government not receiving the lowest cost. The Air Force terminated Gulf Master’s contract, and eliminated it from further consideration.
Gulf Master filed a protest of its own, challenging the Air Force’s decision. Gulf Master argued that its pricing structure was sound and logical, and the agency unreasonably eliminated it from competition. GAO disagreed with Gulf Master, noting that the agency had no obligation to consider Gulf Master’s actual costs, but only needed to consider whether Gulf Master’s offered prices were unbalanced, and if the unbalanced prices posed an unacceptable risk to the government. GAO found the agency’s analysis to be reasonable on both counts.
Generally, where a solicitation has a consistent level of service for each year, a large price differential between the base year and option periods is a strong indicator of unbalanced pricing. Here, GAO found that the Air Force reasonably determined Gulf Master’s prices were unbalanced where the base year price was approximately 60% higher than the final option year price. The Air Force was also reasonable in its determination that Gulf Master’s unbalanced pricing posed an unacceptable risk to the government, as another offer was actually the lowest priced until the last month of the final option period. As a result, GAO denied Gulf Master’s protest.
Contractors may find themselves submitting a proposal where there is a perfectly rational reason to frontload the pricing, such as where there are significant start-up costs that will not be incurred in later years. There may also be legitimate reasons why costs will decrease during the option years, whether through economies of scale or some other method of cost savings. However, contractors should be careful not to submit pricing with a drastic difference between the base and option periods. Federal agencies are required to analyze the risk to the government posed by the unbalanced pricing, and have the discretion to eliminate an offeror from competition for an unbalanced submission.