PRICE REALISM: WHAT, WHEN AND HOW?

What is price realism, when should it be used and how?  The Government Accountability Office (GAO) recently has sustained a protest involving an improper price realism analysis and in the process reminded us what price realism is and how it is to be employed.  We add the "when".

The protester argued that the agency's evaluation of its proposal and best value tradeoff determination was unreasonable because the evaluators performed a realism analysis of proposed pricing, finding the protester's price to be so low as to call into question its understanding of the solicitation requirements and its ability to perform successfully.  GAO agreed because price realism was not included in the evaluation factors.

The agency argued it did not conduct a price realism analysis because it did not adjust prices to determine probable cost.  GAO says poppycock. The agency misunderstands price realism as it does not involved adjusting prices.  The agency cannot adjust prices for evaluation of award of a fixed price contract.  Rather, of course, a price realism evaluation involves an assessment of an offeror's low fixed price to see whether the low price reflects a lack of understanding of contract requirements or performance risk.  The agency did that.  So what's the problem?

The problem in the protest was that bidders must be given reasonable notice that a business decision to submit low pricing will be considered as reflecting on their understanding of the requirements or the risk associated with their proposals.  (If there are no evaluation criteria on price realism, a low ball price reflects instead on the contractor's ability and capacity to perform, a matter of responsibility.)

In this case, the evaluation factors only referred to "reasonableness" of the pricing which goes to whether it is too high.  "Because below cost prices are not inherently improper, when offerors are competing for award of a fixed-price contract . . . they must be given reasonable notice that their business decision to submit a low-priced proposal can be considered in assessing their understanding or the risk associated with their proposal."  Thus, consideration of price realism must be announced in the evaluation factors.  

Now to the "when".  We believe that price realism should be included in all lowest price, technically acceptable (LPTA) procurements.  There, perhaps more than anywhere else, the government risks awarding to contractors who may not know what they are doing or don't understand the risks.

bill@spriggslawgroup.com          www. spriggslawgroup.com