Government Contracts Monitor

Short Take: Evaluating Price Realism is the Exception, Not the Rule, in Firm Fixed Price Procurements

February 14, 2017

Price evaluations in federal contracts can be a tricky subject. It is easy to confuse the concepts of price reasonableness with price realism. In a fixed price procurement, an agency is only required to evaluate offers for reasonableness—whether the price is too high, and not for realism—whether the price is too low. The agency has broad discretion in its evaluation of proposals, and is considered to be in the best position to choose evaluation criteria that will allow it to best meet its needs. This is true as long as the agency’s evaluation is not contrary to law or regulation, and those criteria reasonably relate to the agency’s needs.

In a recent decision, the Government Accountability Office (GAO) reiterated this distinction, denying an offeror’s challenge of the Army’s corrective action. The protestor alleged that the procuring agency was required to conduct a price realism analysis where it knew that a competing proposal’s price is unrealistically low, because that offeror’s labor rates were well below the average of all other evaluated proposals. The protestor argued that the agency was required to consider the risk posed by such an offeror’s lower prices. The GAO’s opinion affirmed that the agency enjoys significant discretion in selecting evaluation criteria. An agency is in the best position to determine what evaluation criteria will best meet its needs, and in fact, in a fixed price procurement, an agency may not conduct a price realism analysis except in exceptional cases, and where it has informed offerors that it intends to do so.