Uncertainty in definition of ‘reasonableness’ shrouds pricing strategies – Published October 26 2012
Uncertainty in definition of ‘reasonableness’ shrouds pricing strategies
Washington Business Journal by Lee Dougherty, Attorney, General Counsel PC
Date: Friday, October 26, 2012, 1:15pm EDT – Last Modified: Friday, November 30, 2012, 1:58pm EST
As government budgets shrink and “best value” is redefined, it can be tough for contractors to form a pricing strategy that will win a contract award, let alone survive a protest. The best strategy is to research the market before picking a price.
Protesting contractors: Lifestyle Construction Services LLC, Fredericksburg, Va.
Contracting agency: Department of the Army, Corps of Engineers
Issue: Whether an agency’s determination of “reasonableness” in evaluating contractors’ pricing is acceptable
Decision:Sustained by the Government Accountability Office, Sept. 27, 2012.
Postmortem: There is no issue more unnerving right now to contractors preparing proposals than determining the price to offer the government. The GAO has done little to help contractors, or the government, when it comes to evaluating price. Recent decisions have been inconsistent, and although I believe the GAO came to the right conclusion in this case, it will ultimately add to the confusion.
In recent decisions, the GAO has found that deviations from the “independent government estimate” by as much as 50 percent with little justification is acceptable, while in others it said that relying on the IGE to determine reasonableness or realism is also acceptable.
The Army issued a request for proposals for general construction and design-build services at 14 locations, with an expectation that most of the work would be in Fort Bragg, N.C. The Army anticipated awarding task-order contracts under a set-aside for small businesses in a Historically Underutilized Business Zone, or HUBZone. Evaluations were to be conducted on the basis of experience, past performance and price.
In determining price realism (whether the price was too low) and price reasonableness (whether the price was too high), the Army calculated the median of 15 offers only for the Fort Bragg location and found that any offer more than 15 percent lower than the median was “excessively low.”
The GAO found that some of the offers used to calculate the median were determined to be unacceptable and not considered for the award, which skewed the median. The GAO was also critical of the Army for ignoring the proposed price for the other 13 locations where work was to be performed. The final area that “troubled” the GAO was the Army’s decision to compare the offers to an “unidentified contract that failed to successfully perform under a different type of contract.”
Based on the Army’s evaluation method and the numerous errors committed, the GAO came to the correct determination. I cannot say, however, that had the Army not included the offers which were ultimately excluded the GAO would have reached the same conclusion.
There is little consistency as to what is reasonable, other than what the GAO believes to be reasonable. The GAO has determined that the IGE is little more than a guide. But in this case, relying on an average of the offers was determined unreasonable because “the median was materially higher than the government estimate due to the inclusion of proposed prices that the agency, itself, determined were unacceptable.”
There is no easy answer for contractors struggling with determining how to price an offer. If you are relying solely on the solicitation for your market research, you are leaving things to chance. The best advice is to do extensive research before setting your price so that, hopefully, in deciding whether to protest, you do not need to guess what evaluation method the GAO will find reasonable.