When Is a Low Price a Problem? Understanding Realism.

September 12, 2017

By Michelle E. Litteken

Contractors are often confused after receiving a debriefing during which the Government states the contractor’s proposed price was too low. The disappointed offeror wonders, why would the Government want to pay a higher price? On the other hand, a disappointed offeror may learn that the awardee proposed a substantially lower price and want to use that low price as a protest ground in a bid protest. This type of protest can only be brought if the agency was required to consider whether an offeror’s proposed cost or price was realistic. In these situations, it is important to understand when an agency may conduct a realism analysis because price and cost realism analyses assess whether an offeror’s price is too low. 

An agency considers whether an offeror’s proposed price is too low as part of a realism analysis. Although one might think a solicitation provision calling for an evaluation of reasonableness would address low pricing, price reasonableness focuses on whether the proposed price is too high. Realism addresses low pricing, and there are two types of realism analyses:  cost realism and price realism. The type of realism analysis to be used depends on the type of contract being procured. 
 
Cost realism analyses are governed by FAR 15.404-1(d) and are required for cost-reimbursement contracts. To determine whether an offeror’s proposed costs are realistic, the Government will often compare the costs an offeror proposes to an Independent Government Cost Estimate, costs of contracts for similar goods or services, and/or costs proposed by other offerors. A cost realism analysis is intended to determine the probable cost of performance. As part of this analysis, the agency may adjust an offeror’s proposed cost elements to reflect the anticipated cost of performance. By way of example, an agency may increase the rate proposed for a given position if the agency determines a contractor would be unlikely to retain and recruit qualified personnel at the rates proposed. An agency can also make downward cost adjustments. Additionally, the agency is required to consider whether an offeror’s proposed technical approach is consistent with its cost proposal. For example, if an offeror proposes to retain the incumbent personnel, the agency should consider whether the compensation proposed is consistent with the compensation the incumbent personnel are currently receiving. 
 
A disappointed offeror may be able to raise several protest grounds if it believes an agency’s cost realism analysis was unreasonable. If the awardee proposed a substantially lower price, a protester could argue that the agency failed to conduct a realism analysis and failed to make the necessary probable costs adjustments. Likewise, the protester could argue that the awardee’s proposed pricing was unrealistic, demonstrated a lack of understanding of the requirements, and should have been rejected or downgraded. Alternatively, if a disappointed offeror learns that the Government made probable cost adjustments to its proposal that it believes were inappropriate, those adjustments could be challenged in a bid protest. An offeror could also challenge the agency’s determination that the cost elements it proposed were unrealistic. 
 
The other type of realism analysis is a price realism analysis. A price realism analysis may be performed when a solicitation contemplates a firm fixed price contract if the solicitation puts offerors on notice that the agency will be conducting a realism analysis. In many cases, the solicitation will expressly state that the agency is going to evaluate proposed prices for realism. However, other less obvious language in the solicitation may call for a realism analysis. For example, the solicitation may state that the agency reserves the right to reject a proposal if the price proposed is unrealistically low. Or, the solicitation may state that the agency will evaluate the offeror’s understanding of the work required. These provisions would permit the agency to conduct a realism analysis. In a price realism analysis, the agency considers whether the proposed price is realistic for the work to be performed. This analysis includes assessing whether the contractor is proposing a price so low that the contractor’s ability to successfully perform the contract is in doubt. An agency will often compare the offerors’ proposed pricing to an Independent Government Estimate, the prices proposed by other offerors, and/or historical pricing. 
 
As is the case with procurements involving a cost realism analysis, aspects of a price realism analysis may give rise to protest grounds. As an initial matter, if a solicitation for a firm fixed price contract does not contemplate a realism analysis, and the agency downgraded or rejected a proposal because of low pricing, that could be challenged. At the same time, if the solicitation does not call for a realism analysis, then a bid protest challenging the agency’s acceptance of a low price is unlikely to succeed – and it may even be dismissed. If the solicitation contemplates a price realism analysis, and the agency selects a substantially lower-priced offeror for award, a disappointed offeror may challenge the agency’s award decision by arguing the agency failed to conduct a reasonable realism analysis – or the analysis it conducted was unreasonable. 
 
Understanding price and cost realism is important for any government contractor. As discussed above, cost realism and price realism may provide for compelling protest grounds. Indeed, in 2016, unreasonable cost or price evaluation was one of the most prevalent reasons for sustained protests at the Government Accountability Office. And, contractors may want to consider whether a solicitation calls for realism when preparing their proposals. If a solicitation calls for a realism analysis, proposing very low pricing could jeopardize an offeror’s award prospects. At the same time, if a realism analysis is not contemplated, an agency generally cannot downgrade an offeror for submitting low pricing. 
 
If you have questions about price or cost realism analyses, contact PilieroMazza’s government contracts group.

About the author: Michelle Litteken is an associate with PilieroMazza in the Government Contracting and Litigation law groups. She may be reached at mlitteken@pilieromazza.com.
 
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