Two recent bid protest decisions from the Government Accountability Office (GAO) provide a helpful reminder that a “price realism” analysis is never considered to be part and parcel with the Government’s standard price evaluation in a federal procurement, nor synonymous with a “price reasonableness” determination. A price realism review is only required when called for in the procurement solicitation. Moreover, federal agencies lack the discretion to conduct a price realism assessment when the solicitation does not advice prospective contractors of that intention. 

In SDV Solutions, Inc., B-402309 (Feb. 3, 2010), GAO denied a bid protest which alleged that the contract awardee’s price in a fixed-price procurement for computer support services was unreasonably low. GAO identified that the solicitation in question stated that the agency would conduct a “price reasonableness” review, rather than a “price realism” review. And, in what has become a frequent refrain in its protest decisions, GAO explained that “the purpose of a price reasonableness review in a competition for award of a fixed-price contract is to determine whether the prices offered are too high, as opposed to too low.” Id. at 4. Based on this, GAO found:

Arguments . . . that an agency did not perform an appropriate analysis to determine whether prices are too low such that there may be a risk of poor performance concern price realism; a price realism evaluation [was] not required here, where the solicitation provides for the award of a fixed-price contract and does not include a requirement for price realism.

Id.

While the rejection of protest grounds like the pricing argument raised in SDV Solutions are fairly routine, GAO’s decision in Milani Construction, LLC, B-401942 (Dec. 22, 2009), is an important reminder that the law in the area of price realism is a two-way street. For the first time in nearly five years, GAO addressed a situation in which a federal agency had conducted a price realism review as part of its price evaluation when the underlying solicitation did not inform offerors that price realism would be a consideration. Specifically, Milani Construction had submitted a bid that was substantially below that of the other offerors in the procurement. Rather than treating this as a plus factor in the award decision, the agency evaluators deemed Milani’s bargain price evidence that it failed to fully comprehend the complexity of the work required. As a result, the agency considered Milani’s price to be a negative in the source selection process, and Milani’s proposal was passed over for a higher priced offering. 

In its protest, Milani characterized this risk finding as the byproduct of a “price realism” analysis and argued that such a finding was improper when the solicitation did not inform prospective offerors that price realism would be considered. GAO agreed with Milani and sustained the protest. First, GAO noted that “the submission of even a ‘below-cost’ price is not by itself improper” in fixed-price procurements, since the risk of cost overruns are borne by the contractor, rather than the government. Id.at 5. Then, GAO concluded that, before a price realism analysis may take place, “offerors competing for award of a fixed-price contract must be given reasonable notice that a business decision to submit a low-priced proposal will be considered as reflecting on their understanding [of technical requirements] or the risk associated with their proposal.” Id.at 5-6. GAO determined that, upon failing to provide the necessary notice in the solicitation, the agency was not permitted to conduct a discretionary realism review of Milani’s bid.  

In recent, high profile bid protests such as General Dynamics One Source, LLC, B-400340.5 (Jan. 10, 2010), and Health Net Federal Services, B-401652.3 (Nov. 4, 2009), GAO has taken a clearer stance on the minimum requirements for a passable price realism analysis in fixed-price procurements and sustained protests when the agency’s analysis fails to pass muster. Against that backdrop, the decisions in SDV Solutions and Milani Construction provide an important reminder that the threshold question of whether the solicitation explicitly permits a realism analysis must be answered in the affirmative before GAO will consider the substantive arguments of either party regarding the propriety of the agency’s realism review (or lack thereof).