GAO: If Price Realism Will Be Evaluated, Offerors Must Be Notified

Agencies must notify offerors when price realism will be evaluated under a fixed price solicitation.

Recently, the GAO sustained a protest where a procuring agency rejected an offeror’s proposal because the offeror’s quoted prices were significantly lower than the government’s estimate–even though the solicitation did not notify offerors that price realism would be evaluated.

Lilly Timber Services, B-411435.2 (Aug. 5, 2015) involved a Department of Agriculture RFQ for tree planning services at a number of locations throughout Illinois. Bidders were invited to submit quotations for any combination of project sites. Quotations were to be evaluated on price reasonableness and past performance.  The solicitation contemplated the award of up to six fix-priced contracts.

Lilly Timber Services submitted proposals for a number of locations contemplated by the RFQ, including the three at issue in its protest.

In its evaluation, the agency categorized price proposals based on their proximity to the government’s price estimates. Proposals within 15 percent of the estimate were evaluated as reasonable, whereas proposals between 16 and 30 percent of the estimate were deemed risky, and those proposals that exceeded 31 percent of the estimate were rated as unreasonable. The agency did not consider whether the price differences were the result of the quotations being higher or lower than the government estimate; offers below the agency’s estimates were treated the same as those that exceeded the estimates.

Applying these criteria, the agency evaluated Lilly Timber’s three proposals as being either risky or unreasonable because Lilly Timber’s proposed pricing was lower than the government’s estimates. The agency awarded the contracts to other competitors, whose higher prices were “closer to the Government’s estimate.”

Lilly Timber filed a GAO bid protest.  Lilly Timber argued that the agency had improperly engaged in a price realism analysis without informing offerors that it intended to conduct such an analysis.

The GAO wrote that where a solicitation contemplates the award of a fixed price contract, “[a]lthough not required,” an agency may conduct a price realism analysis “for the purpose of assessing whether a vendor’s low price reflects a lack of understanding of the contract requirements, or risk inherent in a vendor’s approach.”  However, an agency “may not conduct a price realism analysis without first advising vendors that the agency intends to do so.”

In this case, the solicitation “did not furnish vendors with reasonable notice that the agency intended to perform a price realism analysis.”  Instead, the solicitation merely called for an evaluation of price reasonableness, “that is, whether the price was unreasonably high.”  The GAO continued:

Because below-cost prices are not inherently improper when vendors are competing for award of a fixed-price contract, firms must be given reasonable notice that a business decision to submit a low-price quotation may be considered as reflecting on their understanding of the contract requirements or the risk associated with their approach.  Since the RFQ did not contain a provision indicating that the agency would conduct a price realism analysis, and because the agency’s award decision clearly relied on the agency’s assessment of risk related to the protester’s low fixed-price, we conclude that the agency failed to reasonably evaluate Lilly Timber’s quotations.

The GAO sustained Lilly Timber’s protest.

As Lilly Timber demonstrates, an agency is entitled to consider, in the context of a fixed price solicitation, whether an offeror’s proposed price is “too low,” but only if the agency advises offerors that price realism will be evaluated.  Where, as in this case, the solicitation does not state that such an evaluation will be conducted, it is improper for the agency to exclude or downgrade an offeror based on price realism concerns.

Ian Patterson, a law clerk with Koprince Law LLC, was the primary author of this post.

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