The difference between price reasonableness and price realism – Published November 2, 2012
The difference between price reasonableness and price realism
Washington Business Journal by Lee Dougherty, Attorney, General Counsel PC
Date: Friday, November 2, 2012, 12:40pm EDT – Last Modified: Friday, November 30, 2012, 1:56pm EST
When looking at a fixed-price contract proposal there can’t be a price realism analysis unless the government asked for it in the original solicitation. If a contractor is later denied a fixed-price contract based on the fact that their proposed price was too low, they should look closely at the solicitation. Chances are the agency officials responsible for the evaluation do not understand the difference between price realism and price reasonableness.
In last week’s Battle Lines I wrote about the GAO’s most recent decision regarding an agency’s determination of reasonableness in evaluating a proposed price. This week the GAO sustained a protest filed in response to an award of a task order to Silver Spring-based DB Consulting Inc. for information services support for CDC’s National Center for Chronic Disease Prevention and Health Promotion in Atlanta, based on allegations that the CDC had unreasonably evaluated Emergint’s proposal and had conducted a price realism evaluation which was not part of the evaluation criteria.
The CDC issued a request for task order proposals (RFTOP) that informed potential offerors that it intended to award a fixed-price time-and-materials task order. According to the RFTOP technical factors were more important than price and award would be made to the offeror whose proposal was considered most advantageous to the government. According to the RFTOP the proposed price could be evaluated, “to determine the reasonableness of the offeror’s price proposal.” Three offers were received by the CDC and an evaluation panel assigned each of the three an overall score. In its consensus report the evaluation panel was critical of Emergint’s price because it was lower than the government estimate and the panel believed that Emergint “may have difficulty retaining incumbents or being able to successfully recruit highly qualified staff.”
Although it seems simple, many acquisition professionals do not understand the difference between price reasonableness and price realism . A price reasonableness analysis, which the RFTOP informed offerors could be performed in this case, is conducted to determine whether a proposed price is too high. The purpose of a price realism analysis is the opposite and its purpose is to determine “whether the low price reflects a lack of understanding of contract requirements or risk inherent in its approach.” Because of its lack of understanding of what constitutes a price realism analysis, the CDC argued unsuccessfully that it had not conducted one because it had not adjusted the offeror’s price. In a fixed price contract the risk of performance falls to the offeror and “below cost prices are not inherently improper.” 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. In this case the CDC failed to make price realism part of the evaluation criteria and therefore was not permitted to look beyond the fixed price offer. As a result of this and other argued protest grounds the GAO sustained the protest in favor of Emergint.
The difference between when a price realism analysis can be performed can be confusing. When looking at a fixed-price proposal there cannot be a price realism analysis unless the government included it in the evaluation criteria published in the solicitation. If a contractor is denied a fixed-price contract based on the fact that their proposed price was too low, they should look closely at the solicitation to determine whether there was notice that a price realism evaluation would be performed. Chances are the agency officials responsible for the evaluation do not understand the difference between price realism and price reasonableness.