How Low Can You Go? GAO Denies Price Realism Protest

When is a competitor’s low price simply too low to be realistic?  Maybe never, at least when it comes to challenging the low price in a GAO bid protest.

As seen in a recent GAO bid protest decision, when a fixed-price solicitation does not call for a price realism analysis, the procuring agency is not required to conduct one–and a competitor will not succeed in challenging the award on the basis of a supposedly unrealistically low price.

The GAO’s decision in Beyel Brothers, Inc., B-406640, B-406640.2 (July 18, 2012), involved a Navy solicitation for charter ship services.  The solicitation was a small business set-aside, and called for the award of a fixed-price contract.  The solicitation provided that award would be made on a lowest-price, technically-acceptable basis.

Pricing was to be evaluated on the basis of offerors’ charter hire rates and fuel consumption rates.  The solicitation stated that the reasonableness of offeror’s prices would be evaluated, but said nothing about a price realism analysis.

The Navy received two offers, one from Beyel Brothers, Inc., and the other from Northcliffe Ocean Shipping and Trading Company, Inc., or NOSAT.  After discussions, the Navy awarded the contract to NOSAT, which proposed a price nearly $3 million lower than Beyel’s.

Beyel filed a GAO bid protest.  Beyel argued in part, that NOSAT’s fuel consumption rates were too low and thus unreasonable “as a matter of law.”

The GAO denied the protest.  It stated, “Beyel’s argument reflects a lack of understanding as to the distinction between price reasonableness and realism.  The GAO explained, “[t]he purpose of a price reasonableness review in a competition for the award of a fixed-price contract is to determine whether the prices offered are too high, as opposed to too low.”

The GAO continued, “[a]rguments, such as the one raised by Beyel here, 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.  A price realism evaluation is not required where, as here, a solicitation provides for the award of a fixed-price contract and does not include a requirement for a price realism evaluation.”

The Beyel Brothers GAO bid protest decision demonstrates that when it comes to fixed-price contracts, agencies are not required to evaluate whether offerors’ pricing is too low, unless the solicitation expressly calls for such a price realism evaluation.

The decision also illustrates the oft-misunderstood difference between price reasonableness and price realism.  As Beyel found out the hard way, price reasonableness deals with the question of whether an offeror’s pricing is too high; price realism addresses whether pricing is too low.  And just because the procuring agency promises to evaluate price reasonableness does not mean that it has a corresponding duty to evaluate price realism.

2 thoughts on “How Low Can You Go? GAO Denies Price Realism Protest

  1. Right on point. And it’s a point misunderstood by many. Ron Perry, CEO of Teya Technologies and President of the National 8(a) Association, wrote on a similar topic, addressing low pricing in re: its impact on small business in the Washington Post recently. He connected it to a Government duty to fulfill obligations to small business through set-asides. And clearly, bids and proposals offered to the Government at or below cost negatively impact business overall, even if they do help the contractor maintain its own existence. But GAO decisions reflect that a contractor’s price is theirs to set, and that they can set it wherever they like – even to the point of performing at a loss – so long as they’re determined responsible. Thanks for pointing out the difference between price realism and reasonableness. See our comments and review of your recent book on our Facebook page (and don’t forget to Like us!)

    • Gary,

      Thank you for the reading and for the comment. I look forward to reading Ron Perry’s article on this topic. And thanks, too, for the book review on Facebook! I’m one of the last Facebook holdouts, but whenever I finally get dragged onto the site by family and friends, I will certainly Like you!



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