Price Realism and Fixed-Price Contracts: The Solicitation Controls

If price realism is evaluated by a procuring agency under a solicitation for a fixed-price contract, the solicitation must inform offerors that price realism will be considered, says the GAO in a recent bid protest decision.

In GAO Protest of Emergint Technologies, Inc., B-407006 (Oct. 18, 2012), the GAO sustained a bid protest because the procuring agency in question failed to inform offerors that price realism would be evaluated–and seemed to fundamentally misunderstand the concept of a price realism evaluation.

The Emergint Technologies GAO bid protest decision involved a Department of Health and Human Services task order solicitation for information support services.  The solicitation described the agency’s projection of the initial mix of labor categories necessary to provide the services, and asked offerors to provide fully-loaded labor rates for their proposed labor categories.

The solicitation encouraged offerors to discount the labor rates set forth in the underlying multiple-award contract, and stated that “a price analysis of the proposal may be conducted to determine the reasonableness of the offeror’s price proposal.”  No additional guidance regarding the price evaluation was provided.

Emergint Technologies, Inc. submitted a proposal.  After reviewing Emergint’s proposal, HHS stated that it had “concerns” that certain labor rates Emergint had proposed “have been discounted to the point that [Emergint] may have difficulty retaining incumbents or being able to successfully recruit highly qualified staff for those positions according to the skill sets required in the PWS.”  HHS also noted that Emergint’s total evaluated price was “significantly lower” than the government estimate.

HHS made award to a competitor, DB Consulting Group, at a higher price.  The final best value evaluation described Emergint’s price as a disadvantage, stating that the pricing “indicat[ed] a lack of understanding of the specialized requirements of the PWS.”

Emergint filed a GAO bid protest, arguing, in part, that the agency’s evaluation of Emergint’s pricing was flawed.  In response to Emergint’s contentions, the HHS argued that it did not conduct a price realism analysis because it “did not adjust offerors’ prices to determine the probable cost of their proposals.”

The GAO rejected the HHS’s position, stating “[t]he agency’s defense reflects a fundamental misunderstanding of what a price realism analysis entails.”  The GAO explained, “[a] price realism evaluation does not contemplate adjusting offerors’ prices.”  Rather, “a price realism evaluation involves an assessment of an offeror’s low fixed price to determine whether the low price reflects a lack of understanding of contract requirements or risk inherent in its approach–precisely what the agency did here.”

The GAO stated that agencies may evaluate price realism in the context of a fixed-price contract.  However, “[b]ecause below cost prices are not inherently improper, when offerors are competing for award of a fixed-price contract . . .  they must be given reasonable notice that their business decision to submit a low-priced proposal can be considered in assessing their understanding or the risk associated with their proposal.”

Because the solicitation “did not furnish offerors with reasonable notice that the agency intended to perform a price realism analysis,” it was improper for the HHS to evaluate Emergint’s proposal for price realism.  The GAO sustained Emergint’s bid protest.

The Emergint Technologies GAO bid protest illustrates that in the context of a fixed-price contract, a procuring agency must inform offerors if it intends to evaluate price realism.  If not, even a below-cost offer should not be deemed a reflection of the contractor’s lack of understanding of the contract’s requirements.

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