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Price Reasonableness vs. Price Realism

  • By GCPC GovCon Legal Team
  • October 11, 2013
  • Blog Articles
  • 0 Comments

Bid Protest Weekly Newsletter by Bryan R. King, Attorney, General Counsel PC

Date: Wednesday, October 11, 2013, 11:05am EST

Triad International Maintenance Corporation, B-408374, Sept. 5, 2013
We have discussed the issue of price realism a few times over the last several months. It is fairly common for price realism to be confused with price reasonableness. Similar sounding topics, yes, but they are treated very differently in the context of proposal evaluations. A recent decision issued by GAO nicely illustrates the distinction.

In Triad International Maintenance Corporation, the protester, Triad, challenged the Coast Guard’s award of a contract under a solicitation for inspection services of several types of aircraft. Triad challenged several aspects of the agency’s evaluation of proposals and award decision. One of the protest grounds alleged that the agency conducted an improper price realism analysis where no such analysis was required by the solicitation. The agency countered by arguing that it did not perform a price realism analysis, because it found the Triad’s price to be “fair and reasonable.” GAO disagreed with the agency’s position, and sustained the protest.

Agencies are required by the FAR to conduct a price reasonableness analysis of the apparent awardee’s proposal. As explained by GAO in the decision, the key determination in the price reasonableness analysis is whether the offered price is too high. Where the agency determines that a price is not too high, it is said to be “fair and reasonable.” GAO found that the agency’s determination that Triad’s price was fair and reasonable had no bearing on the question of whether a price realism analysis was conducted.

Where price reasonableness focuses on whether an offered price is too high, price realism addresses the opposite end of the spectrum and asks whether an offered price is too low. The idea behind price realism is to prevent situations where an offeror’s price is so low that it may prevent the successful performance of the contract. However, as pointed out by GAO in this case, government contractors making an offer on a fixed-price contract have the option of offering a price with very little to no profit, or even a price that would result in a loss. There may be business reasons why a contractor would wish to do so, and such an offer is not inherently improper.

In situations where an agency is concerned that a low offer may present a performance risk, it can perform a price realism analysis. However, as discussed by GAO, the agency must inform offerors in the solicitation that such an analysis will be performed, so that the offerors may make a business decision of whether to offer a low priced proposal. In this case, the record showed that the agency performed a price realism analysis by assessing the performance risk represented by Triad’s low offered price. Because the solicitation did not inform offerors that offers would be evaluated for price realism, GAO concluded that the agency’s evaluation of Triad’s offer was improper, and sustained the protest.

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