Price Reasonableness vs. Price Realism: The GAO Explains The Difference

Price reasonableness and price realism are both benchmarks against which a procuring agency may evaluate an offeror’s price, but price reasonableness and price realism–though they are often confused for one another–are not the same thing.

As the GAO explained in a recent bid protest decision, one of the terms involves consideration of whether an offeror’s price is too low, whereas the other evaluates whether the price is too high.  The distinction is particularly important for fixed-price procurements, in which the question of whether pricing is too low is not one the procuring agency is always required to ask.

The GAO’s bid protest decision in Contract Services, Inc., B-407894, B-407894.2 (Apr. 3, 2013) involved an Army SDVOSB set-aside solicitation for administrative and facilities support services.  The solicitation called for award of a fixed-price contract and stated that offerors’ proposed prices would be evaluated for reasonableness and balance.

After evaluating competitive proposals, the Army issued the award to ALOG Corporation at a price of $15,432,182.  Contract Services, Inc., which had proposed a price of $18,214,198, filed a GAO bid protest challenging the award.

CSI argued, in part, that the Army had failed to properly evaluate the reasonableness of ALOG’s pricing.  CSI pointed out that ALOG’s price was 28% lower than the Independent Government Estimate of $21,267,900.

The GAO rejected CSI’s argument, stating that “CSI’s objection does not provide a valid basis to question the agency’s price reasonableness evaluation.”  The GAO continued:

“Although CSI acknowledges that a price realism analysis was not required, its arguments reflect a lack of understanding as to the distinction between price realism and reasonableness.  Here, the RFP states that the agency will only evaluate prices for reasonableness and balance.  The purpose of such a price reasonableness review is to determine whether the prices offered are too high, as opposed to too low.  Arguments that an agency did not perform an appropriate analysis to determine whether prices are too low, such that there may be a risk of poor performance, concern price realism.”  The GAO denied CSI’s bid protest.

As the Contract Services, Inc. GAO bid protest demonstrates, an important distinction exists between price reasonableness and price realism.  Because not all fixed-price solicitations require a price realism evaluation (the idea being that if the winning contractor proposes a too-low price, it is the contractor’s problem), it is important to carefully check the solicitation before proceeding with a price realism challenge.

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