Unbalanced Pricing: Agency Properly Excluded Contractor, Says GAO

Unbalanced pricing can justify the exclusion of a contractor’s proposal, even if the contractor alleges that the pricing represents its actual cost structure.

As demonstrated in a recent GAO bid protest decision, an agency is justified in rejecting a proposal on the basis of unbalanced pricing when the agency reasonably concludes that the unbalanced pricing poses an unacceptable risk to the government.

The GAO’s bid protest decision in Gulf Master General Trading, LLC, B-407941.2 (Jul. 15, 2013) involved an Air Force solicitation for vehicle leasing services.  The solicitation contemplated the award of an IDIQ contract with a one-year base term and four one-year option periods.  Award was to be made on a lowest-price, technically-acceptable basis.

Offerors were to submit CLIN prices for 20 different types of vehicles for each year of the contract based on the estimated number of vehicles provided in the solicitation.  The estimated quantities remained approximately constant throughout the contract, except for a small increase between years three and four.

Gulf Master General Trading, LLC submitted a proposal.  In its evaluation, the Air Force deemed Gulf Master’s proposal technically acceptable.  Gulf Master also proposed the lowest total price across all five years.  However, Gulf Master’s prices for the base year were significantly higher than the Independent Government Estimate, and were also significantly higher than the base year prices submitted by other technically acceptable offerors.  In contrast, Gulf Master’s prices for the last two option years were significantly lower than the IGE and the prices submitted by other technically acceptable offerors.

Based on its price analysis, the Air Force concluded that Gulf Master’s prices were unbalanced.  The Air Force then analyzed the risks associated with the unbalanced pricing.  The Air Force determined that Gulf Master’s total price only became the lowest in the final month of the final option year.  However, if the contract was terminated after the base period or first option year, Gulf Master’s pricing would be substantially higher than the pricing of the incumbent.  The Air Force concluded that Gulf Master’s unbalanced pricing posed an unacceptable risk, and eliminated Gulf Master from consideration for award.

Gulf Master filed a GAO bid protest.  Gulf Master argued that it was unreasonable for the Air Force to reject its pricing because the pricing reflected its underlying cost structure, which differed from that of the incumbent.

Citing FAR 15.404-1(g), the GAO wrote that “unbalanced pricing occurs where, despite a proposal’s overall low price, individual line item prices are either understated or overstated, as indicated by the application of cost or price analysis techniques.”  Unbalanced pricing may exist where a solicitation “establishes base quantities and option quantities as separate line items, as in this case.”  Further, where “the level of service for each period is essentially the same, a large price differential between the base and option periods, or between one option period and another, is prima facie evidence of unbalancing.”

Applying these principles, the GAO wrote that “we have no basis to question the reasonableness of the agency’s conclusion that Gulf Master’s pricing was unbalanced.”  The GAO noted that Gulf Master’s pricing was significantly higher in the first two years of the contract, and significantly lower in the final two years.  Under the definition established in the FAR, the Air Force reasonably concluded that Gulf Master had proposed unbalanced pricing.

The GAO rejected Gulf Master’s contention that its proposal should not be found to contain unbalanced pricing because the pricing represented its actual costs.  The GAO wrote that Gulf Master’s argument was based on outdated GAO case law “issued when the FAR’s guidance regarding unbalanced pricing was materially different.”  However, the FAR language at issue was removed in 1997, and under the current version of the FAR, “the Agency was not required to consider the protester’s actual costs in conducting its unbalanced pricing analysis.”

Finally, the GAO concluded that “[t]he Air Force reasonably found that Gulf Master’s proposal might not actually result in the lowest cost if any of the option years were not exercised, or if the contract was terminated before the end of the final option year.”   This determination, plus the price disparity in the first two years, “supports the reasonableness of the Air Force’s conclusion that Gulf Master’s unbalanced pricing posed an unacceptable risk that it would pay unreasonably high prices for contract performance if some of the options were not exercised.”  The GAO denied Gulf Master’s protest.

The Gulf Master GAO bid protest decision is a good example of how unbalanced pricing can come back to haunt a contractor.  Even, as here, where the contractor contends that the unbalanced pricing represented its actual costs, the agency may find that the unbalanced pricing poses an unreasonable risk to the government, and exclude the proposal.

Note: The GAO is closed during the government shutdown and is not issuing new bid protest decisions.  The Gulf Master case was issued before the shutdown.  I will resume summarizing “new” GAO bid protest decisions once the GAO reopens.

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