As part of federal contracting, the total price of each award is disclosed. This is of course a great way to promote trust and transparency in federal contracting and in the handling of taxpayer dollars. But it also leads to other contractors scrutinizing an awardee’s price and thinking one of two things: (1) “That price is too low to do this work”; or (2) “that price is too high for this work.” Naturally contractors will consider protesting on one of those pricing intuitions, but often mix up how to properly frame or phrase that pricing concern. Thus, they find themselves at the crossroad of “price realism” vs. “price reasonableness.” This installment of our Back to Basics series will help you learn which is which and why that matters.
As an initial note, despite that first paragraph, price realism and reasonableness don’t only arise in the context of an award, they are also discussed in most solicitations’ price evaluation scheme. An agency will often state in their solicitation something along the lines of “an offerors price will be evaluated for [realism or reasonableness, or both].” What that means is the agency will see if a price is too high or too low based on which method is chosen. So, which is which?
Price realism is the evaluation of whether a proposed price is realistic for the work to be performed. This basically means the agency will determine if the price is too low to realistically meet the goals of the solicitation. FAR 15.404-1 provides a good definition of “cost realism” (it says “cost” but in application, it also refers to price) as: “. . . the process of independently reviewing and evaluating specific elements of each offeror’s proposed cost estimate to determine whether the estimated proposed cost elements are realistic for the work to be performed; reflect a clear understanding of the requirements; and are consistent with the unique methods of performance and materials described in the offeror’s technical proposal.”
In contrast, price reasonableness is the evaluation of whether a proposed price is reasonable for the work to be performed. This basically means the agency will determine if the price is too high for the work of the solicitation. FAR 15.404-1 states that reason for this analysis is to “ensure that the final agreed-to price is fair and reasonable.” The FAR says an agency can “use various price analysis techniques and procedures to ensure a fair and reasonable price.” So, agencies have some leeway to determine how to best figure out if a price is too high, but some examples provided by the FAR are: “Comparison of proposed prices received in response to the solicitation”; “Comparison of the proposed prices to historical prices paid”; certain estimating methods to find inconsistencies; “Comparison with competitive published price lists”; “Comparison of proposed prices with independent Government cost estimates”; “Comparison of proposed prices with prices obtained through market research for the same or similar items”; and “Analysis of data other than certified cost or pricing data” provided by offerors.
The FAR in multiple places discusses different cost and price analyses involving realism and reasonableness, but those FAR clauses cited above give general ideas on both concepts and how they are implemented by agencies. GAO has also provided some additional clarity on this topic in the past.
In a 2013 GAO case, Contract Services, Inc., B-407894 (Apr. 3, 2013) (we blogged about that case back then here) GAO laid out the difference between price realism and reasonableness quite clearly: “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.”
Now what can you do with this information? Ensure you are ready for evaluation of your price in a competition, and be ready for any possible protest grounds related to price after award. If the solicitation does not mention price realism or say the agency will evaluate for whether prices are too low, it can be very difficult to later make that argument as part of a bid protest after award.
The Solicitation (and the incorporated FAR) should lay out which version of price evaluation the agency will conduct. Naturally, the determination of if a price is realistic or reasonable generally falls on the discretion of the agency, but that discretion is not unlimited. If an agency fails to adhere to that evaluation (such as applying the wrong standard or missing it completely), or someone feels the evaluation was flawed in its calculations, you could possibly protest that award decision. For example:
In a 2018 GAO case, Shearwater Mission Support, LLC, B-416717 (Nov. 20, 2018) (we of course blogged about it here) the agency said the prices would be evaluated to determine if they were “fair and reasonable” indicating a price reasonableness evaluation would occur. But through the course of the evaluation and procurement, the agency basically conducted a price realism analysis instead, which lead to the GAO sustaining a protest on that basis.
In another GAO case, Criterion Corporation, B-422309 (Apr 16, 2024) (you guessed it, we blogged on this one too here), while the agency did a price realism analysis, it was not a proper one under the solicitation’s terms, and thus was flawed, leading to GAO sustaining the protest.
So, if an agency doesn’t do the price evaluation it states it will in the solicitation, or conducts it incorrectly, that could be grounds for protest. Also, prior to a bid being submitted, if a contractor is not clear on whether the solicitation is using price realism or reasonableness (or what those mean), a bid may be doomed from the start. When in doubt, remember price realism looks to see if the price is too low to be true (i.e., realistic), and price reasonableness looks to see if the price is too high for what is being provided (i.e., whether it is fair and reasonable). Hopefully this back to basics helps dispel some of the confusion around these price evaluation techniques, but if you find yourself in a position with questions or a possible protest about price realism or reasonableness, be sure to reach out to a federal contracting lawyer such as ourselves, for help.
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