GAO: Competition Alone Doesn’t Mean Prices are Reasonable

When the federal government awards a contract, the government must ensure that the price it pays is “fair and reasonable.”  In other words, the government cannot pay a price that is too high.

If a contract is awarded on the basis of competitive proposals, an agency may be able to establish price reasonableness by comparing the prices proposed by competing offerors.  But as demonstrated in a recent GAO bid protest decision, competition alone doesn’t mean that the prices received are reasonable–the government still must compare offerors’ prices to determine reasonableness.

The GAO’s decision in Technatomy Corporation, B-414672.5 (Oct. 10, 2018) involved DISA’s solicitation for the Systems, Engineering, Technology and Innovation multiple-award contract.  The SETI contract provides a streamlined process for ordering engineering and technical support services and products globally.  The solicitation allowed for two pools of offerors: an unrestricted pool and a pool set-aside for small businesses.

The solicitation stated that award would be made on a best value tradeoff basis, considering price and four non-price factors.  With respect to price, offerors were required to provide direct labor rates, indirect rates, and profit/fee into a spreadsheet provided by DISA with an estimate of the labor hours for each category.  The solicitation stated that DISA would review the fully burdened fixed price labor rates for price reasonableness, using one of the evaluation techniques set forth in FAR 15.404.

After evaluating competitive proposals, DISA made award to 14 offerors under the unrestricted pool.  The total prices of the awardees ranged from a low of approximately $123 million to a high of nearly $270 million.  Technatomy Corporation, which proposed a price of approximately $160 million, was not selected.

Technatomy filed a GAO bid protest challenging several aspects of DISA’s evaluation.  Among Technatomy’s challenges, it alleged that DISA failed to rationally determine whether the awardees’ prices were fair and reasonable.

The GAO wrote that “[i]t is a fundamental principle of federal procurement law that procuring agencies must condition the award of a contract upon a finding that a contract contains ‘fair and reasonable prices.'”  The purpose of a price reasonableness analysis “is to prevent the government from paying too high a price for a contract.”  An agency “may use various price analysis techniques and procedures to ensure a fair and reasonable price, including the comparison of proposed prices to each other, to prices found reasonable on previous purchases, or to an independent government estimate.”

In this case, DISA’s entire price reasonableness evaluation consisted of two sentences:

Price reasonableness is ordinarily established by adequate competition (FAR 15.404-1(b)(2)(i)).  As this effort has had 35 Offerors provide proposals, it is implicit that price reasonableness has been determined at the macro level.

But, although DISA received 35 competitive proposals, GAO found that the agency didn’t compare offerors’ prices.  The Price Evaluation Board, GAO wrote, “did not compare offerors’ total proposed prices or their fully burdened fixed-price labor rates.”  Likewise, “the contracting officer did not compare prices at any level.”  Instead, the contracting officer stated that “the presumption is that all proposed prices are fair and reasonable if there is adequate competition.”

The GAO found that this approach was improper.  “The mere receipt of multiple proposals is inadequate to assure that prices proposed are fair and reasonable,” GAO wrote.  In other words, “the presence of competition alone does not render prices per se reasonable.  To conclude that prices are fair and reasonable without the comparison of prices to one another is illogical and inconsistent with the requirements of FAR 15.404-1(b)(2)(i).”

The GAO sustained this portion of Technatomy’s protest.

In my experience, DISA’s misconception about price reasonableness is rather common.  I’ve often heard statements to the effect of “well, there were multiple proposals received, so prices are reasonable.”  But as the GAO’s decision in Technatomy Corporation shows, the mere receipt of multiple proposals doesn’t automatically mean that the prices proposed are reasonable.  If an agency intends to use the “adequate competition” method of establishing price reasonableness, the agency must actually compare the competitive prices it receives.