Price Realism as the Basis for a Protest
Understanding Price Realism
The term “price realism” is used to describe the analysis the government engages in to determine whether an offeror’s price is “too low.” Even in cases where the standard is “Lowest Price Technically Acceptable,” (LPTA) or Fixed Price, an extremely low price raises concerns. Perhaps the offeror didn’t understand the requirements of the contract. Or perhaps the technical approach includes cutting too many corners. In either event, the concern is the risk of poor performance.
Understanding the Difference between Price Realism and Price Reasonableness
Price realism is not to be confused with price reasonableness. A price reasonable analysis does not focus on whether the price is too low, as price realism analysis does, but rather on whether the price is too high. A price reasonableness analysis is performed during source selection after an apparent winner is determined. An evaluation is performed and if the agency determines the price is not too high, the proposal is considered fair and reasonable. This evaluation addresses different concerns than the price realism analysis.
How Agencies Perform a Price Realism Analysis
As a first step, offerors should review the request for proposals (RFP). Sometimes, the solicitation details how they will perform their price realism analysis. When no method is described, agencies are free to perform the analysis using their discretion as to method. However, the method selected must be reasonably adequate for the task. Further, the method should provide a measure of confidence in the conclusion rates are reasonable and realistic (or not), taking into consideration other cost information the agency has available to it.
When Agencies Perform a Price Realism Analysis
Agencies are not required to perform a price realism analysis before awarding contracts. In fact, agencies are only permitted to engage in price realism when offerors competing for the award have been given reasonable notice that a price realism analysis will be performed. If this is not outlined in the RFP, the analysis can’t be performed.
Arguing a Lack of Price Realism as a Basis for Protest
It is important to know that agencies cannot perform price realism analysis without notice. This is critical when determining whether to protest the award of a contract to another bidder. Even if the other bidder’s price is unrealistically low, an argument protesting the unreasonably low price of the awardee’s proposal will be unsuccessful if the RFP didn’t allow for a price realism analysis. There may be legitimate business reasons why an offeror may submit a proposal with a narrow profit margin, no profit margin, or even a loss, in some circumstances.
However, just because an RFP failed to use the words “price realism,” this does not necessarily mean offerors weren’t “on notice” of the potential for a price realism analysis. Because agencies have a history of confusing price realism and price reasonableness, the GAO has articulated a standard for when offerors might be considered “on notice” the agency intends to engage in price realism. Where the RFP informs offerors an agency will review prices with an eye towards one of the following, offerors are considered “on notice”:
- to determine whether the price is too low;
- where prices are so low that it reflects a lack of technical understanding;
- that the agency may reject a proposal due to unacceptable technical risks; or
- the proposal may be rejected for offering low prices.
Where a fixed price procurement results in a lowball bid, this may only be the basis for a protest if either the RFP specifically informed offerors a price realism analysis was required, or the RFP reasonably informed the offerors a too low price may have negative consequences to an offeror.