GAO: Agency Conducted Price Realism Analysis and Misled Protester

Unless a solicitation for a fixed-price contract provides that the agency can conduct a price realism analysis, it can’t. Even so, agencies sometimes perform this analysis without alerting prospective offerors of the possibility.

If they do, however, the ground is fertile for a protest.

This issue recently arose in Shearwater Mission Support, LLC, B-416717 (Nov. 20, 2018). There, the Navy issued a solicitation for base operating support services at the Naval Air Facility in El Centro, California. The solicitation contemplated the award of a fixed-price contract.

The solicitation provided that offers would be evaluated on a best-value tradeoff basis, considering price and various non-price factors. With respect to price, the solicitation instructed offerors to propose prices for various Exhibit Line Item Numbers, each of which corresponded to services the contractor would provide. The solicitation stated that each offeror’s total price would be evaluated “to ensure a fair and reasonable price,” but did not state that the agency would perform a price realism evaluation. 

After receiving initial proposals, the agency engaged in discussions with offerors. During these discussions, the agency informed Shearwater that some of its prices appeared to be unreasonably low and that others appeared to be unreasonably high. As a result, Shearwater increased its prices that the agency found were too low and decreased those it found too high. 

After offerors submitted final proposal revisions (FPR), the agency again informed Shearwater that some of its prices were too low and others were too high. Thus, Shearwater submitted a second FPR which again raised some prices and lowered others.

Ultimately, the agency found that Shearwater’s proposal was “essentially equal for all technical factors” with the awardee’s proposal. But the awardee’s proposal price was lower, making the awardee’s proposal the best value for the agency.

At GAO, Shearwater argued that the agency had conducted an improper price realism analysis, which led the agency to question Shearwater’s prices as too low. And in response to its discussions with the agency, Shearwater noted that it raised certain prices that ultimately made its proposal price higher than the awardee’s.

The agency, on the other hand, argued that the solicitation did not allow for price realism analysis, and that it didn’t conduct one.

But GAO found otherwise and noted that the agency was apparently confused between a price realism analysis (i.e., an offeror’s prices are too low) and a price reasonableness analysis (i.e., an offeror’s prices are too high).

The contemporaneous price evaluation record thus shows that the agency found that Shearwater’s proposed prices for certain annexes were “unreasonably low” because the agency was concerned that the low prices were “unrealistic” and “may increase performance risk” or indicate an “inherent lack of understanding of the RFP requirements.” These are the hallmarks of a price realism evaluation.  Indeed, our Office has repeatedly found that analysis of whether prices are unrealistically low, such that they might indicate a lack of understanding of the technical requirements and could result in rejection of the proposal–as the SSEB report states was done here–constitutes a price realism evaluation.

In contrast . . . a price reasonableness evaluation looks at whether the price is too high, not too low. . . . Under the terms of the RFP, Shearwater’s low prices therefore should not have raised any reasonableness concerns. . . . Thus, the agency erred in conducting a price realism analysis and concluding that Shearwater’s proposed prices for certain annexes were “unreasonably low.”

GAO also found that the agency had misled Shearwater in discussions by virtue of its price realism analysis and that its misleading discussions caused prejudice:

Given the offerors’ equal ratings on the five non-price factors, and the source selection authority’s conclusion that the identically rated proposals were, in fact, technically equal, a lower price could have put Shearwater in line for award.  Because the record shows that Shearwater’s pricing was increased in direct response to the agency’s discussion questions–which were based on the improper price realism analysis–we conclude that Shearwater was misled, to its competitive prejudice.  We therefore sustain Shearwater’s protest.

For fixed-price contracts, an agency will generally always perform—to some degree—a price reasonableness analysis. But, to perform a price realism analysis, an agency must forewarn prospective offerors in the solicitation. So, if an agency performs an unexpected price realism analysis on your proposal, and it causes you prejudice, you’ll likely have a receptive audience at GAO.