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Government Contracts Monitor

How Low Can You Go? Doing the Limbo on Price

August 18, 2015

By: Lindsay Simmons

Last week the Government Accountability Office (GAO) sustained a protest where the solicitation called for award of a fixed-price contract, the protester’s quotes were very low, and the agency concluded that protester’s low prices created a risk of unsuccessful performance.  According to GAO this was a “no-no” since there was nothing in the evaluation criteria that put bidders on notice that the agency intended to consider price realism.  Lilly Timber Services B-411435.2.

The solicitation invited vendors to submit quotes for a number of projects and provided that the awards would be made to the “lowest reasonable price and responsive/responsible (past performance) [vendor].” According to the solicitation, past performance was considered equal in weight to price.

The agency received multiple quotations for its projects, including quotations from Lilly Timber.  Lilly did not receive an award and its initial protest followed.  Based on the initial protest, the agency decided to take corrective action and conduct a reevaluation of the quotes and accordingly the GAO dismissed the initial protest as moot.

As part of its reevaluation, the Contracting Officer assigned each vendor a rating of reasonable, risky, or unreasonably (low or high) based upon how far its price deviated from the agency’s price estimate. Lilly’s price was rated “risky” for one project because it was 30 percent below the government estimate and deemed unreasonably low for others. The CO concluded that Lilly’s prices “created a risk of unsatisfactory performance.”  This protest followed.

As GAO stated, “before awarding a fixed-price contract, an agency is required to determine that the price offered is fair and reasonable.”  And, although not required, an agency may also include a price realism analysis to assess whether a vendor’s low price reflects a lack of understanding of the contract requirements, or risk inherent in a vendor’s approach. But if the latter is to be considered, the solicitation must contain the “evaluation criteria pertaining to realism or understanding”.  In short, an agency cannot conduct a price realism analysis without advising vendors it intends to do so. Here the solicitation here did not place vendors on notice that the agency intended to perform a price realism analysis – it only provided for the evaluation of the “reasonableness” of the quoted price, that is, whether the price was unreasonably high.

Below-cost prices are not inherently improper in competitions for award of a fixed-price contract.  As a result, firms must be informed if an agency wishes to consider a low-priced quotation as reflecting on their understanding of the contract requirements or the risk associated with their approach. If the solicitation does say the agency will conduct a price realism analysis, its award decision cannot include an assessment of risk related to a firm’s low fixed-price.

Lindsay Simmons is responsible for the contents of this article.

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