What’s Price Realism Got to Do with It?

September 1, 2021 | By Maria L. Panichelli

Price realism. Price reasonableness. You have likely heard the terms. But do you know what price realism is, and how it differs from price reasonableness? And, perhaps most importantly, do you know when a price realism analysis is and is not required?

A recent GAO case, Dust Busters Plus, LLC, B-419853.7, serves as a good reminder.  In that case, the protestor challenged the award, to a number of competitors, of blanket purchase agreements (BPA) for wildland firefighter services, under a request for quotations (“the Solicitation”), issued by the Department of Agriculture, Forest Service (“the Agency”).  The Solicitation advised that awards would be made on a best-value tradeoff basis considering two factors. The first factor, quote acceptability, would be evaluated on a pass/fail (i.e., “go” or “no-go”) basis, weighing three subfactors, namely (a) assent to terms of the solicitation; (b) key personnel; and (c) past performance.  The second factor was price; Quoted prices would be evaluated to determine whether they were fair and reasonable.

Dust Busters did not receive an award for multiple reasons, including that the Agency found their pricing to be unreasonable.  After finding out they had not received an award, Dust Busters protested, arguing, among other things, that the Agency erred by failing to conduct a price realism analysis.   

Before reviewing the GAO’s response to Dust Busters’ arguments, let’s do a real quick review of price realism and price reasonableness.  First, let’s look at the differences between price realism and price reasonableness: Price reasonableness focuses on whether a contractor’s offered prices are too high; price realism, on the other hand, focuses on whether contractor’s offered prices are too low.  (The idea is that too low a price might be an indication that the contractor did not truly understand the requirements of the contract, or plans on doing things in a cheap, cut-rate manner.  Or maybe, the contractor plans to make up the difference by seeking multiple modifications to the contract.  In any case, too low a price could potentially pose a risk to the government.)  Second, let’s review when price realism analyses are required.  Perhaps counterintuitively, price realism analyses are not the default rule.  Agencies are not always required to perform these types of analyses – and, as a general rule may not perform a cost realism in a fixed-price acquisition.  In fact, agencies are permitted to engage in price realism analyses on firm-fixed-price contracts only if the solicitation specifically advises offerors that such an analysis will be performed.

True to these general principles, the GAO in Dust Busters found that the Agency had not erred when it failed to conduct a price realism analysis. Citing FAR 15.402(a), GAO reiterated that, as a general rule, when awarding a fixed-price contract, an agency is required to determine whether the offered prices are fair and reasonable, but not whether prices are “realistic.”  As for price realism, the GAO explained:

“While an agency may conduct a price realism analysis in awarding a fixed-price contract for the limited purpose of assessing whether an offeror’s low price reflects a poor technical understanding of the heightened risk of unsuccessful performance, offerors must be advised that the agency will conduct such an analysis.  Absent an express price realism provision, we will conclude that a solicitation contemplates a price realism evaluation only where it expressly states that the agency will review prices to determine whether they reflect poor technical competence, and where the solicitation states that an offeror’s submission may be rejected on the basis of low prices.  Without a solicitation provision providing for a price realism evaluation, an agency is neither required nor permitted to conduct such an evaluation when awarding a fixed-price contract.”  (emphasis added).

Though the RFQ had “advised that prices would be evaluated to determine technical competency,” the GAO noted that “the [S]olicitation did not explicitly state that the agency would conduct a price realism evaluation or articulate that a vendor’s quotation could be rejected on the basis of quoting low prices.”  Because the Solicitation did not contain an express price realism provision and did not otherwise provide for a price realism analysis, the GAO concluded that the Agency did not have to engage (and arguably could not have engaged) in a price realism analysis.

When filing a protest, it is always important to explore all potential pricing arguments, including price reasonableness and price realism.  But it is equally important to understand the limitations on price realism arguments.  If you have questions about price realism, price reasonableness, or bid protests in general, please contact Obermayer’s government contracting team.


The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.

About the Authors

Maria L. Panichelli

Partner

Maria is a partner and the Chair of the Government Contracting department.   She focuses her practice exclusively on federal government contracting and procurement, guiding her clients throughout the entire lifecycle of their...

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