Removing a Price Realism Evaluation is a Material Change, Says GAO

Price realism—the evaluation of whether a proposed price is too low—is a method the government may use to evaluate fixed price offers to ensure that offerors are proposing pricing that reflects an understanding of the work required by the solicitation.

Prices that are unrealistically low can result in proposal elimination. This means price realism is an important consideration when preparing a bid. But what if an agency decides after proposal submission that a price realism evaluation will not be performed? In a recent decision, GAO confirmed that offerors must be given the opportunity to revise their proposals.

To set the stage for GAO’s recent decision in Computer World Services Corp., B-418287.3 (Comp. Gen. June 29, 2020), a little background is necessary. The United States Coast Guard issued a solicitation for service desk information technology services some time ago. The Solicitation anticipated awarding a fixed price task order under an offeror’s federal supply schedule contract.

Offers would be evaluated using a best-value trade-off methodology. With respect to price, the Coast Guard would evaluate both price reasonableness and price realism. Specifically, the price realism investigation would evaluate whether the proposed unburdened labor rates were unrealistically low.

Computer World submitted a proposal in response to the Coast Guard solicitation. Unfortunately, the Coast Guard’s evaluation of Computer World’s proposal was not favorable. The Coast Guard determined that Computer World had proposed both an unreasonably high price, as well as unrealistically low labor rates. Consequently, the Coast Guard awarded the contract to Intellect Solutions, LLC.

Computer World protested the evaluation to GAO. It raised a number of challenges to the Coast Guard’s evaluation, including challenges to the price realism evaluation. GAO subsequently sustained the protest.

As relevant here, GAO found that the Coast Guard had unreasonably concluded that Computer World’s price was unrealistic. GAO recommended the Coast Guard “devise methodologies for evaluating the realism of the firms’ proposed unburdened labor rates . . . that were supported by contemporaneous information showing that those methodologies accurately reflected the agency’s requirements, and provided a common and rational basis for the evaluation of quotations.” In the alternative, GAO recommended the Coast Guard revise its acquisition strategy.

The Coast Guard subsequently took corrective action. The Coast Guard explained its revisions to the price evaluation as follows:

[W]e are revising the Factor 3 evaluation criteria in Section 5 of the [solicitation] by removing the limited realism analysis from the evaluation. Thus, the only evaluation under Factor 3 will be the reasonableness evaluation of the total evaluated price. An amendment will not be issued reflecting this change; this email serves as the official notification.

The only action the Coast Guard requested offerors take was to revalidate pricing, or withdraw.

Computer World protested the corrective action. It argued that by eliminating the price realism evaluation, the Coast Guard was required to allow offerors to submit revised proposals.

In response, the Coast Guard argued that removal of the price realism evaluation was not a material change to the terms of the solicitation. According to the Coast Guard, offerors had already been responsible for ensuring their staffing approaches met the solicitation’s requirements. Thus, offerors were still bound to meet the same functional requirements, even if pricing was no longer being used for evaluation.

GAO was unpersuaded by the Coast Guard’s arguments. According to GAO, “[i]t is axiomatic that, where an agency makes a material change to the terms of a solicitation, it is required to issue an amendment to the solicitation and afford competing firms an opportunity to revise their proposals or quotations in order to provide all firms an opportunity to compete on a common basis.” Turning to the Coast Guard’s argument, GAO concluded a material change had occurred.

According to GAO, the Coast Guard was concerned with the wrong issue. As GAO explained, the pertinent question is whether offerors have been able to compete intelligently. GAO provided the following example of how the elimination of a price realism investigation undermined intelligent competition:

A change to a solicitation’s evaluation criteria to eliminate consideration of the realism of proposed hourly rates necessarily will fundamentally affect the vendors’ pricing and staffing strategy. For example, a firm could choose to submit a low, or even below-cost price for business reasons, and, such a quotation would not be subject to rejection based solely on the low or below-cost price in the absence of a price realism evaluation requirement.

Given that the removal of the price realism evaluation could materially change how offerors constructed their bids, GAO concluded it was a material change that required the Coast Guard to allow for proposal revisions. Accordingly, GAO sustained the protest.

GAO’s decision in Computer World seems to acknowledge just how competitive the federal marketplace can be. The inclusion of price realism in a solicitation impacts how offerors structure their pricing. The removal of that requirement opens up a number of competitive strategies for aggressive pricing. GAO’s decision acknowledges this reality, and requires the Coast Guard to allow offerors to make revisions accordingly.

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