Price Realism Evaluation: Only If Solicitation Says So

An agency awarding a fixed-price contract can only evaluate offerors’ proposals for price realism–that is, determine whether offerors’ proposed pricing is so low as to be unrealistic–if the solicitation calls for a price realism evaluation.

In a recent bid protest decision, the GAO confirmed that when a fixed-price solicitation does not advise offerors that a price realism evaluation will be conducted, the agency is not permitted to reject an offeror’s proposal because of unrealistically low pricing.

The GAO’s decision in ERIMAX, Inc., B-410682 (Jan. 22, 2015) involved a NOAA RFQ seeking the establishment of a BPA for acquisition and grant management services.  The RFQ called for vendors to submit fully-burdened hourly labor rates for labor categories provided by the agency.  Once labor rates were entered, the agency’s spreadsheet would automatically calculate total prices using the rates provided by the vendors.  The RFQ stated that proposed prices would be evaluated to determine whether they were fair and reasonable.

After evaluating competitive quotations, NOAA awarded the contract to Veterans Management Services, Inc.  ERIMAX, Inc., an unsuccessful competitor, subsequently filed a GAO bid protest.  ERIMAX argued, in part, that VMSI’s quotation should have been rejected for unrealistically low labor rates.

The GAO wrote that “[a]s a general rule–that applies to issuing BPAs as well as awarding contracts– when awarding a fixed-price contract, an agency is only required to determine whether the offered prices are reasonable.”  Further, while an agency “may conduct a price realism analysis in awarding a fixed-price contract for the limited purposes of assessing whether an offeror’s low price reflects a lack of technical understanding or risk, offerors must be advised that the agency will conduct such an analysis.”  In the absence of a solicitation provision calling for a price realism evaluation, “agencies are neither required, nor permitted, to conduct one in awarding a fixed-price contract.”

In this case, the GAO found, the NOAA RFQ “did not contemplate a price realism evaluation.”  The GAO explained that the RFQ “did not contain an express provision for price realism analysis, nor did it advise vendors that their quotations could be rejected on the basis of low prices.”  Accordingly, “a price realism analysis was neither required nor permitted.”  The GAO denied ERIMAX’s protest.

When it comes to fixed-price contracts, offerors are sometimes upset by what they perceive as below-cost proposals by their competitors.  But as the ERIMAX case demonstrates, in the absence of a solicitation provision calling for a price realism analysis, the procuring agency ordinarily is not permitted to reject a fixed price proposal on the basis of low prices–even unrealistically low prices.

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