Price Realism: Agency Erred By Failing To Conduct Analysis

An agency erred by failing to conduct a price realism analysis for a time-and-materials contract with fixed-price fully-burdened labor rates.

In a recent bid protest decision, the GAO acknowledged that a solicitation of this type does not always require that the agency engage in a price realism analysis, but found that the terms of the particular solicitation called for such an analysis–and that the agency acted unreasonably by ignoring the solicitation’s requirement.

The GAO’s decision in Iron Vine Security, LLC, B-409015 (Jan. 22, 2014) involved a request for quotations issued by the Department of Health and Human Services for information security support.  The solicitation was issued as a small business set-aside under GSA Schedule 70, and contemplated the issuance of a time-and-materials task order, with fixed-price, fully-burdened labor rates.

The solicitation required offerors to submit a cost/price volume, to include proposed labor categories, associated labor rates, the number of hours per labor category, proposed materials and the basis for the proposed prices of those materials, and other direct costs.  The solicitation stated that the “cost/price volume of each quote will be analyzed and evaluated to determine . . . . realism and/or reasonableness” and that “[t]he proposed cost/price will also be evaluated to determine if it reflects understanding of the Government’s requirements, and the degree of risk it presents.”  The solicitation also specified that each of the elements of the cost proposal, such as labor categories, rates, and hours, would be evaluated for cost realism.

After evaluating quotes, the agency announced that award had been made to Spann & Associates, Inc., at a price of $21,190,031.  Iron Vine Security, LLC, had been rated better on the non-price factors, but had proposed a price of $30,155,945.  In its source selection decision, the agency stated that Iron Vine’s superior non-price scores did not offset the large price difference between the two proposals.

Iron Vine filed a bid protest with the GAO.  Iron Vine argued that the agency had erred by failing to conduct the price realism evaluation required by the solicitation.

The GAO wrote that “[w]here, as here, a solicitation anticipates the award of a time-and-materials contract with fixed-price, fully-burdened labor rates, there is no requirement that an agency conduct a price or cost realism analysis, in the absence of a solicitation provision requiring such an analysis.”  However, an agency may “at is discretion, provide for the use of a price realism analysis in a solicitation for the award of a fixed-price contract or a fixed-price portion of a contract, to assess the risk inherent in an offeror’s proposal.”  When a solicitation advises offerors that the agency will perform a price realism analysis “the agency’s failure to do so is unreasonable.”

In this case, the agency “concedes that it did not evaluate the realism of the vendors’ proposed labor rates,” but argued that the solicitation did not require such an analysis.  The GAO disagreed.  Based on the plain language of the solicitation’s evaluation terms, the GAO held that the agency was required to evaluate the realism of proposed labor rates.  Because the agency “deviated from the RFQ’s evaluation scheme by failing to evaluate the realism of the vendors’ proposed labor rates,” the GAO sustained Iron Vine’s protest.

As the Iron Vine case demonstrates, in the case of a fixed-price procurement, the solicitation governs the extent (if any) of the agency’s obligation to conduct a price realism evaluation.  If the solicitation calls for a price realism evaluation, the agency must follow through.

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