Price Realism Analysis: An Examination of an Area Ripe for Reform

Alexis J. Bernstein

B.A., June 2001, Washington & Lee University

J.D., May 2005, Rutgers University School of Law

A Thesis submitted to

The Faculty of

The George Washington University Law School

in partial satisfaction of the requirements

for the degree of Master of Laws

January 31, 2012

Thesis directed by

Professor Christopher R. Yukins

Professor of Government Contracts Law

Acknowledgements

The author wishes to thank Professor Christopher Yukins and Ms. Marcia

Bachman for their mentorship and guidance through this process.

iii

Disclaimer

Alexis Bernstein is an attorney for the U.S. Air Force. This paper was submitted

in partial satisfaction of the requirements for the degree of Master of Laws in

Government Procurement at The George Washington University Law School. The views

expressed in this paper are solely those of the author and do not reflect the official policy

or position of the United States Air Force, Department of Defense, or U.S. Government.

Abstract

Price Realism Analysis: Examination of an Area Ripe for Reform

The purpose of this thesis is to explore the confusion and misapplication of price

realism analysis in evaluations of firm-fixed price contracts and to make

recommendations to generate a more straightforward process. It undertakes an

examination of the relevant regulations, case law, scholarly articles, and approach to

realism analysis taken by the international procurement community in order to

demonstrate that revisions to the current regulations are long overdue. The overarching

message is that FAR Part 15 needs to be revised to clarify the purpose and process for

performing a price realism analysis. Simple revisions to the FAR, including placing cost

realism and price realism analysis in two different sections and explaining how price

realism is different than price reasonableness, would clear up a great deal of confusion

and would result in fewer sustained protests in this area. Furthermore, these revisions

would provide the government with a valuable tool to ensure that only offerors who can

perform for the price proposed are awarded firm-fixed price contracts. Price realism

analysis enables the government to eliminate performance problems associated with

offerors that cannot comply with the representations made in their proposals due to

underbids.

Table of Contents

I. INTRODUCTION ................................................................................................................... 1

II. ORIGINS OF REALISM ANALYSIS .................................................................................... 2

A. HOW TREATMENT OF REALISM ANALYSIS IN THE REGULATIONS HAS

EVOLVED ................................................................................................................................... 3

B. THE CURRENT REGULATIONS ON COST REALISM ................................................. 4

C. WHAT IS PRICE REALISM ANALYSIS? ........................................................................ 6

D. EFFORTS TO IMPROVE THE REGULATIONS ............................................................. 9

III. JUDICIAL AND ADMINISTRATIVE TREATMENT OF REALISM ANALYSIS: THE

KC-135 PDM LINE OF CASES ................................................................................................... 13

A. THE KC-135 PDM SOLICITATION................................................................................ 14

B. EVALUATION AND AWARD ........................................................................................ 16

C. GAO DECISION I ............................................................................................................. 18

D. GAO DECISION II ............................................................................................................ 21

E. THE COURT OF FEDERAL CLAIMS DECISION......................................................... 22

F. THE FINAL WORD – DECISION FROM THE U.S. COURT OF APPEALS FOR THE

FEDERAL CIRCUIT................................................................................................................. 25

IV. GAO AND COFC DECISIONS ON PRICE REALISM .................................................. 26

A. REALISM v. REASONABLENESS ................................................................................. 26

B. WHEN THE AGENCY DOESN‟T UNDERSTAND ITS OWN SOLICITATION ......... 30

C. MOST PROBABLE COST AND FIXED PRICE EFFORTS ........................................... 33

D. INADEQUATE PRICE REALISM ANALYSIS .............................................................. 34

E. WHEN THE AGENCY GETS IT RIGHT ........................................................................ 37

F. COST REALISM DECISIONS ......................................................................................... 42

V. DO WE NEED PRICE REALISM? ...................................................................................... 47

A. THE BEST WAY TO EVALUATE REALISM ............................................................... 48

VI. COMPARATIVE ASSESSMENT OF REALISM ANALYSIS ....................................... 49

VII. RECOMMENDATION ..................................................................................................... 54

I. INTRODUCTION

A long-standing source of confusion in the area of proposal evaluation is how to

perform a cost realism analysis on a fixed-price effort, or, as the GAO and courts refer to

it, a price realism analysis. In theory, fixed-price contracts place much less burden on

contract officials than cost-type contracts. When offerors submit price proposals for

fixed-price efforts, the proposed prices are not subject to adjustment, and the agency does

not have to perform an analysis of the individual cost elements of a fixed-price proposal.

Accordingly, it would seem that protests in the area of price evaluation would be few and

far between, but because the acquisition regulations are so ambiguous in the area of

realism analysis on fixed-price efforts, contracting officials frequently trip over this area

of the price evaluation. This confusion has resulted in a relatively high number of

sustained protests.

Price realism analysis, while confusing in the form currently presented in the

regulations, can be a valuable tool when used correctly. While fixed-price contracts shift

risk and responsibility for all potential loss to the contractor instead of the government,

there is still risk to the government that a contractor that bids too low will not be able to

successfully complete the contract. The results of a price realism analysis are useful in

that they illustrate whether an offeror grasps the magnitude of the effort that will be

required of it during performance. If it is clear from the results of the evaluation that the

offeror does not fully understand the requirements, the government can eliminate it from

the competition and make award to an offeror that will be able to perform without the risk

of failing financially.

This thesis offers recommendations for improving the regulations that address

how to perform a price realism analysis. Section II outlines the roots and evolution of

realism analysis on fixed-price efforts. Section III explores a recent line of cases from

the GAO, the Court of Federal Claims, and the Court of Appeals for the Federal Circuit

on price realism analysis. Section IV discusses some of the most frequent issues

encountered in price realism protests and also explores some decisions in the area of cost

realism analysis. Section V explores whether price realism analysis is even necessary

and the form that a realism analysis should take. Section VI presents a comparative

analysis of how the international procurement community addresses unrealistically low

prices. Finally, Section VII presents recommendations for improving the regulations to

make performance of price realism analysis understandable to contracting officials. The

thesis concludes that serious revisions are necessary to isolate price realism analysis from

cost analysis. This should result in a reduced number of sustained protests in this area.

II. ORIGINS OF REALISM ANALYSIS

The roots of realism analysis can be found in the mistake rules relating to sealed

bidding. Under the FAR rules for sealed bidding competitions, the contracting officer

must examine submitted bids for apparent mistakes before awarding the contract.

The

contracting officer is permitted to correct obvious mistakes, such as misplaced decimal

points and mathematical errors, after verifying with the contractor that the error was

unintentional.

But, for mistakes that are not clerical in nature, a complex set of rules has

evolved to balance the government‟s desire to award to a low-cost bidder against the

FAR 14.407-1.

FAR 14.407-2(a).

danger involved in awarding to an offeror that cannot perform at the proposed price.

The policy behind these rules for sealed bidding is straightforward: if a contractor bids

too low out of a lack of understanding of the requirements or a lack of experience, it

would not be in the government‟s interest to take advantage of the low price because

inevitably, the contractor will falter during performance and the government will have

expended funds on a requirement that will have to be fulfilled through other means.

A. HOW TREATMENT OF REALISM ANALYSIS IN THE REGULATIONS

HAS EVOLVED

The FAR‟s discussion of cost realism has never been especially instructive,

despite decades of calls for rewrite to make the treatment of cost realism more easily

understood.

While early versions of the regulations did not provide specific guidance on

performing realism analysis, they did succinctly and accurately state the purpose for

performing a realism analysis: early versions of the regulations simply stated that for

cost-reimbursement contracts, the cost proposal should not be controlling since this

would encourage “submission of unrealistically low estimates and increase the likelihood

FAR Subpart 14.407-3 contains a complex set of instructions for dealing with bids that

contain a mistake.

Ralph C. Nash, Jr. & John Cibinic, Jr., Cost Realism Analysis in Negotiated Fixed Price

Contracts: Confusion at the GAO or a New Limitation on Buy-Ins? 4 NASH & CIBINIC

REP. ¶ 61 (Oct. 1990). John Cibinic called for a rewrite of the regulations governing cost

realism analysis:

We also believe that the regulations dealing with cost realism analysis are in need

of major work. They should require that all fixed price contracts be subject to

cost realism analysis. Award of a contract at an unrealistically low price should

only be made with a knowledge of the risks involved. In addition, the regulations

should make clear the differing purposes of cost realism analyses for cost

reimbursement and fixed price contracts. Id.

of cost overruns.”

The need for further guidance was obvious – confusion over how to

perform a proper realism analysis resulted in a significant number of sustained protests,

both on firm-fixed price and cost-reimbursement contracts.

B. THE CURRENT REGULATIONS ON COST REALISM

The current version of the FAR addresses cost realism analysis under FAR

15.404-1, Proposal analysis techniques. Cost realism analysis must be performed on all

cost-reimbursement contracts.

It is defined as “the process of independently reviewing

and evaluating specific elements of each offeror‟s proposed cost estimate to determine

whether the estimated proposed cost elements are realistic for the work to be performed;

reflect a clear understanding of the requirements; and are consistent with the unique

methods of performance and materials described in the offeror‟s technical proposal.”

48 C.F.R. 15.605(d) (1990). This explanation was deleted during the FAR Part 15

Rewrite because the FAR Council wanted to broaden the definition of cost realism.

Jerome S. Gabig, Jr., FAR Part 15 Rewrite – A Lost Opportunity to Reduce the Confusion

Involving Cost Realism, 12 NASH & CIBINIC REP. ¶ 16 (Mar. 1998).

Gabig, supra note 5, citing Richard D. Lieberman, “Winning Bid Protests at the General

Accounting Office: A Statistical Analysis,” 58 Fed. Cont. Rep. (BNA) 606 (Nov. 23,

1992):

For example, a study of Comptroller General decisions indicates that a protest

which alleges that an agency has not correctly performed a cost realism analysis

had a 345% better chance of being sustained than a protest which alleges that an

agency did not engage in meaningful discussions.

Id.

FAR 15.404-1(d)(2).

FAR 15.404-1(d)(1). “Cost realism analysis is undertaken to determine whether the

estimated proposed cost elements are realistic for the work to be performed, reflect a

clear understanding of the requirements, and are consistent with the offeror‟s technical

proposal.” Karen L. Manos, GOVERNMENT CONTRACT COSTS & PRICING §

84:22 (2011).

The FAR dictates that cost realism analysis “shall be performed on cost-reimbursement

contracts to determine the probable cost of performance for each offeror.”

This means

that agencies are required to develop a most probable cost of performance for each

offeror proposing on a cost-reimbursement effort; development of the most probable cost

is not discretionary.

The purpose of developing a most probable cost is to identify those offerors that

provide unrealistically low cost estimates since actual, allowable costs under a cost-

reimbursement contract will be reimbursed by the government.

This bidding technique

would provide those offerors with an unfair advantage, so by developing a most probable

cost for each offeror, the government is able to adjust offerors‟ costs accordingly and

provide for a level playing field.

The most probable cost is developed by adjusting the

offeror‟s proposed price in accordance with the findings of the realism analysis.

The

most probable cost must be developed based on an evaluation of the elements of the price

proposal in conjunction with an evaluation of the offeror‟s proposed approach from its

technical evaluation. The agency then adjusts the offeror‟s proposed price based on what

it considers to be the true costs of performance. This adjusted price serves as the

evaluated price for the competition.

FAR 15.404-1(d)(2).

In cost-reimbursement contracts, estimated costs of performance are not definitive

since “advance estimates of cost may not provide valid indicators of final actual costs.”

Prospere S. Virden, Jr. and James P. Gallatin, Jr., Buying-In, 84-3 BRIEFING PAPERS

1, 4 (March 1984).

See Nash & Cibinic, supra note 4.

FAR 15.404-1(d)(2)(ii).

C. WHAT IS PRICE REALISM ANALYSIS?

Interestingly, “cost realism” analysis for fixed price efforts is addressed in the

same subsection of the FAR as cost realism analysis, even though the two analyses bear

little resemblance to one another. To eliminate some of the confusion surrounding cost

realism analysis for fixed price efforts, commentators began referring to this type of

analysis as “price realism”; however, this term does not exist in the FAR.

The FAR

limits application of price realism analysis to competitive fixed-price incentive contracts

and other competitive fixed-price-type contracts when “new requirements may not be

fully understood by competing offerors, there are quality concerns, or past experience

indicates that contractors proposed costs have resulted in quality or service shortfalls.”

The only guidance provided by the FAR on how to use the results of the price realism

analysis is that “[r]esults of the analysis may be used in performance risk assessments and

responsibility determinations.”

Unlike cost-reimbursement efforts, where an offeror may underbid on purpose to

win the contract and plans to recoup any additional funds expended, for fixed-price

efforts, underbids are (at least in theory) confined to two circumstances: buy-in,

when

Ralph C. Nash, Jr. & John Cibinic, Jr., Price Realism Analysis: A Tricky Issue, 12

NASH & CIBINIC REP. ¶ 40 (July 1998).

FAR 15.404-1(d)(3).

Id.

See FAR Subpart 3.5. Buy-in is legal and is already addressed in the FAR. FAR

Subpart 3.5 defines “buying-in” as “submitting an offer below anticipated costs,

expecting to – (1) increase the contract amount after award (e.g., through unnecessary or

excessively priced change orders); or (2) receive follow-on contracts at artificially high

prices to recover losses incurred on the buy-in contract.” FAR 3.501-2 provides

the offeror bids low on purpose for various reasons, such as intentionally taking a loss to

gain a foot-hold in the market or attempting to recover losses during performance through

change orders, and through mistake, where the offeror bids low because it does not

understand the technical requirements.

Development of the most probable cost is the

touchstone of a cost realism analysis, but for a realism analysis on a fixed price effort, no

most probable cost is developed.

In fact, the FAR explicitly prohibits adjusting offered

fixed prices as a result of the realism analysis.

Rather, the agency uses the realism

analysis as a subset of other source selection criteria in the solicitation to address quality

concerns and to determine whether the offeror understands the requirements.

The

offeror‟s technical rating is then downgraded if the agency determines that the proposed

price is unrealistic.

Examples of ways in which price realism analysis are used include evaluating

whether an offeror has proposed inadequate staffing, has proposed rates that will enable

guidelines for contracting officers to safeguard against buy-ins, including using multiyear

contracting and priced options for additional quantities.

See Nash & Cibinic, supra note 4.

FAR 15.404-1(d)(3).

Id. “Results of the analysis may be used in performance risk assessments and

responsibility determinations. However, proposals shall be evaluated using the criteria in

the solicitation, and the offered prices shall not be adjusted as a result of the analysis.”

Id.

See CSE Construction, B-291268.2, December 16, 2002, 2002 CPD ¶ 207, at 4 (citing

WorldTravelServices, B-284155.3, Mar. 26, 2001, 2001 CPD ¶ 68, at 3).

Agencies may not downgrade or adjust a fixed-price proposal “simply by virtue of its

low price.” Marshall J. Doke, Jr., Miki Shager, 2000 Procurement Review, 01-02

BRIEFING PAPERS 1, 6 (January 2001).

the contractor to attract and retain employees, or has submitted a price proposal that is

inconsistent with its technical proposal.

The form that price realism analysis can take

varies according to the particular acquisition, but generally it involves evaluating whether

the technical approach matches the price proposal, comparing the proposed price to the

independent government cost estimate, comparing the offeror‟s proposed prices to actual

costs on previous contracts, and/or reviewing individual direct and indirect costs to

determine whether the offeror can provide the supply or service for the price proposed.

Cost realism analysis is performed as an element of the overall cost evaluation: the most

probable cost is calculated to demonstrate which offeror represents the best value to the

government.

Price realism analysis should take place as part of the responsibility

determination or as part of the technical or risk evaluation.

As part of a technical

evaluation, it is generally included as part of an “understanding of the requirement”

evaluation factor or as a performance risk factor.

If is not incorporated as part of the

See Ralph C. Nash, Jr. & John Cibinic, Jr., An Excellent Procurement, 14 NASH &

CIBINIC REP. ¶ 42 (Aug. 2000).

See CRAssociates, Inc. v. U.S., 95 Fed.Cl. 357 (Oct. 20, 2010) at 379. For a price

realism assessment, “A CO normally will first analyze an offeror‟s price by comparing it

with the same type of information used in determining price reasonableness, i.e., other

prices received or the independent government cost estimate (“IGCE”).” H. Jack

Shearer, How Could it Hurt to Ask? The Ability to Clarify Cost/Price Proposals Without

Engaging in Discussions, 39 Pub. Cont. L.J. 583, 592 (Spring 2010).

See Gabig, supra note 5.

See Ralph C. Nash, Jr. & John Cibinic, Jr. Postscript IV: Price Realism Analysis, 23

NASH & CIBINIC REP. ¶ 20 (Apr. 2009).

Ralph C. Nash, Jr. & John Cibinic, Jr., Postscript: Price Realism Analysis, 16 NASH &

CIBINIC REP. ¶ 9 (Feb. 2002).

technical or risk evaluation, price realism should be evaluated as part of the overall

responsibility determination.

D. EFFORTS TO IMPROVE THE REGULATIONS

The FAR Council has attempted to redefine cost realism analysis, but these efforts

have only resulted in further confusion. The bare-bones explanation of the purpose of

realism analysis at FAR Subpart 15.6 remained the only reference to realism analysis in

the regulations until 1997, when the realism discussion was expanded and moved to FAR

15.404, Proposal Analysis. This change came as a result of the FAR Part 15 Rewrite,

when the FAR Council attempted to add guidance on realism analysis to the FAR.

Professors Ralph Nash and John Cibinic characterized the FAR Part 15 Rewrite as

a squandered opportunity to clear up the confusion over realism.

The American Bar

Association (ABA) Section of Public Contract Law (Section) submitted a letter to the

FAR Secretariat on July 14, 1997 calling for several changes to the newest version of

See Milani Construction Co., B-401942, December 22, 2009, 2010 CPD ¶ 87 at 4-5.

Gabig, supra note 5. The FAR Part 15 rewrite, which took effect on October 10, 1997,

became mandatory for all solicitations on January 1, 1998 and was undertaken by the

FAR Council in order to “infuse innovative techniques into the source selection process,

simply the process, and facilitate the acquisition of best value.” 62 Fed. Reg. 51,224

(Sept. 30, 1997).

Nash & Cibinic, supra note 4.

The “major work” suggested by John in 1990 was drafted by the Public Contract

Law Section of the American Bar Association and submitted as part of its

comments to the May 14, 1997 version of the FAR Part 15 Rewrite. Just as John

was ignored in 1990, so too the much needed „major work‟ was ignored by the ad

hoc interagency committee in promulgating the final FAR Part 15 Rewrite.

Id. Nash and Cibinic also point to the FAR‟s failure to differentiate between price and

cost realism as a major defect. Id.

FAR 15.

The Section applauded the FAR Council for its decision to add meaningful

discussion of cost realism to the FAR, but criticized the omission of the statement of why

cost realism should be performed on cost-reimbursement-type contracts.

The Section

also noted the Council‟s failure to differentiate between cost realism and price realism.

As the Section pointed out, cost realism and price realism are “fundamentally different”

since the contractor, not the government, bears the consequences of a cost overrun on a

firm-fixed price contract.

The Section recommended adding the following definition of

price realism analysis: “Price realism analysis is a means by which the government

protects itself from the risk of poor performance where an offeror would incur a financial

loss to properly perform the contract because its proposed price is unreasonably low.”

The Section suggested making cost realism analysis a subset of cost analysis

and

Letter from the Section of Public Contract Law of the American Bar Association to the

General Services Administration FAR Secretariat (July 14, 1997) (on file with author)

[hereinafter “ABA Section letter”].

Id.

ABA Section Letter at 4. The Section suggested adding the following language to

address cost realism analysis to FAR 15.504-1(c):

(3) Cost realism analysis.

(i) Cost realism analysis is a process of independently reviewing and evaluating

specific elements of an offeror‟s cost proposal to ascertain whether the offeror

submitted unrealistically low estimates.

(ii) In awarding a cost-reimbursement contract, the cost proposal should not be

controlling, since advance estimates of cost may not be valid indicators of final

actual costs. There is no requirement that cost-reimbursement contracts be

awarded on the basis of lowest proposed cost, lowest proposed fee, or lowest total

proposed cost plus fee. The award of cost-reimbursement contracts primarily on

making price realism analysis a subset of price analysis.

The Section also suggested

adding the following language to the clause at FAR 52.215-1(f)(9): “If a price realism

the basis of estimated costs may encourage the submission of unrealistically low

estimates and increase the likelihood of cost overruns.

(iii) Cost realism analyses shall be performed on competitive cost-reimbursement

contracts to determine the probable costs of performance for each offeror. Cost

realism analyses may be performed on non-competitive cost-reimbursement

contracts.

(iv) A probable cost should reflect the Government‟s best estimate of the cost to

the Government that is most likely to result from an offeror‟s proposal. Where the

probable cost differs from the offeror‟s proposed cost, the probable cost shall be

considered in making the source selection decision.

(v) Although not part of the cost realism analysis, nothing in this subpart prohibits

technical evaluators, from reviewing an offeror‟s allocation of financial resources

in its cost proposal, to gain insight into whether the offeror understands the

complexity and magnitude of the requirements. Id.

ABA Section Letter at 4-5. The Section suggested adding the following language to

address price realism analysis to FAR 15.504-1(b):

3) Price realism analysis.

(i) Price realism analysis is a process of independently reviewing and evaluating

specific elements of an offeror‟s price proposal to ascertain whether the offeror

submitted unrealistically low prices for the work to be performed. If necessary,

cost analysis may be used on specific elements of a price proposal.

(ii) Price realism analysis should be performed on any fixed price contract in

which the contracting officer perceives a risk of poor performance if the offeror

were to incur a financial loss to properly perform the contract, because the

offeror‟s proposed price is unrealistically low.

(iii) Where the probable price is significantly higher than the proposed price, the

contracting officer should seek to ascertain whether the offeror is buying in. See

FAR Subpart 3.5.

(iv) Regardless of whether the offeror is buying in, the source selection

authority may consider the results of the price realism analysis in making

the source selection decision.

(v) Although not part of the price realism analysis, nothing in this subpart

prohibits technical evaluators from reviewing the offeror‟s allocation of

financial resources in its price proposal, to gain insight into whether the

offeror understands the complexity and magnitude of the requirements.

Id.

analysis is performed, price realism may be considered by the source selection authority

in evaluating performance or schedule risk.”

Ultimately the Section‟s suggested revisions were not incorporated, and the

committee drafting the FAR Part 15 rewrite opted to include the broad statements on

realism that are in the current version of the FAR. The committee also ignored the

Section‟s suggestion to put cost realism and price realism under different subparts in

order to clear up the confusion between the two types of analyses. The Part 15 rewrite

could have cleared up the confusion over realism analysis, but unfortunately it was a

missed opportunity.

Agency-specific FAR supplements and guides also fail to provide useful

information to contracting officers. The most comprehensive guidance comes in the form

of the Department of Defense five-volume set of reference guides for use by acquisition

personnel and price evaluators developed by the Federal Procurement Institute in

conjunction with the Air Force Institute of Technology; however, the Guides fall short of

providing useful direction when it comes to price realism.

Cost and price realism

analysis are covered in Chapter 8 of the Advanced Issues in Contract Pricing volume,

entitled “Conducting Cost Realism Analyses.” The guide goes into great detail on when

cost realism analysis is appropriate, the process of performing cost realism analysis, what

is necessary to perform cost realism analysis, the role of various personnel in performing

Id.

FAR 15.404-1(a)(7). The five guides are: Price Analysis, Quantitative Techniques for

Contract Pricing, Cost Analysis, Advanced Issues in Contract Pricing, and Federal

Contract Negotiation Techniques. The guides are available at

http://www.acq.osd.mil/dpap/cpf/contract_pricing_reference_guides.html.

cost realism analysis, and determining whether development of a most probable cost is

necessary.

The Guide also lists various questions that personnel performing cost

realism analysis should ask.

The Guide includes a lengthy section on considering the

effect of uncompensated overtime on cost realism.

When it comes to price realism

analysis, however, the Guide merely restates the guidance in the FAR and provides a few

examples of GAO decisions.

III. JUDICIAL AND ADMINISTRATIVE TREATMENT OF REALISM

ANALYSIS: THE KC-135 PDM LINE OF CASES

Because the guidance available to contracting officers on how to perform a price

realism analysis is sparse at best, the courts and the GAO have struggled with consistent

application of the rules. While in most cases the agency has a fair amount of discretion to

determine the form of its realism analysis, occasionally the courts and the GAO issue

decisions questioning the nature and extent of the evaluation. This has resulted in a body

of case law on the topic that only muddles an already enigmatic area of proposal

evaluation. This confusion is especially apparent in the line of cases issued by the GAO,

the Court of Federal Claims, and the U.S. Court of Appeals for the Federal Circuit in

2007-2009 on the contract to perform maintenance of the Air Force‟s KC-135 aircraft. In

this line of decisions, the GAO initially ruled against the agency, finding that the agency

Id. at 7-8.

Id. at 8-9.

Id. at 11-12.

The Guide lists situations in which the agency may want to use price realism analysis,

such as to assess performance risk, technical understanding, and responsibility. The rest

of the guidance on price realism is limited to examples from GAO case law.

failed to adequately document its decision that a price cut by the awardee during

discussions was reasonable. The GAO reversed its decision and found for the agency

following corrective action. The Court of Federal Claims then reversed the GAO

decision and found that the agency‟s price realism analysis was arbitrary and capricious.

Finally, the Federal Circuit reversed the Court of Federal Claims and concluded that the

agency‟s findings were justified. This judicial disorientation captures the lack of

understanding of price realism analysis.

A. THE KC-135 PDM SOLICITATION

The solicitation to provide programmed depot maintenance (PDM) of the Air

Force‟s fleet of KC-135 aircraft on a firm-fixed price basis was first issued in August

2005. The KC-135 PDM solicitation provided for a competitive, best value source

selection and stated that the government sought to award to the offeror which would give

the Air Force the greatest confidence that it could meet the requirements affordably.

The evaluation process was described as an “integrated assessment of the evaluation

factors and subfactors.”

Offerors were advised that the Source Selection Authority

(SSA) could make award to a higher rated, higher priced offeror where the decision was

consistent with the evaluation factors and SSA reasonably determined that “the technical

superiority and/or overall business approach, and/or superior past performance, of the

higher priced offeror outweighs the cost difference.”

Offerors were instructed to

submit a Mission Capability and Proposal Risk volume, a Cost/Price volume, and a Past

C/KC-135 RFP at 80 (on file with the author).

Id. at 81.

Id. at 80.

Performance volume.

The Mission Capability subfactors were Depot Maintenance,

Supply Chain Management, Transition, Program Management, and Small Business. The

solicitation advised that mission capability, proposal risk, and past performance were of

equal importance, and when combined were significantly more important than

cost/price.

Section L instructed offerors to submit information other than cost or pricing data

in accordance with FAR 15.403-5 to support price reasonableness and cost realism, and

advised that offerors might be required to submit cost or pricing data if the Contracting

Officer lacked sufficient information to make a reasonableness determination.

Section

M provided that the government could reject any proposal that was “evaluated to be

unrealistic in terms of program commitments, including contract terms and conditions, or

unrealistically high or low cost/price when compared to government estimates, such that

the proposal is deemed to reflect an inherent lack of competence or failure to comprehend

the complexity of risks of the program.”

Section M outlined the procedures for

evaluation of the Cost/Price factor and outlined the CLIN structure for the base and four

option years.

Offerors were instructed to provide a firm-fixed price amount for a base

Id. at 63.

Id. at 79. The solicitation provided for ratings of Blue/Exceptional, Green/Acceptable,

Yellow/Marginal, and Red/Unacceptable. Id. at 80.

Id. at 64.

Id. at 81.

Id. at 86-88.

period of four years and one month, plus five one-year option periods.

Offerors were to

price the Best Estimated Quantity (BEQ) of KC-135 aircraft to be provided by the

government and to price an Over and Above (O+A) Labor CLIN.

For the O&A CLIN,

the government provided an estimated quantity of hours and estimated O&A parts and

materials and instructed offerors to provide fixed hourly rates.

Section M again

cautioned offerors that “[u]nrealistically low proposed prices, initially or subsequently,

may be grounds for eliminating a proposal from competition either on the basis that the

Offeror does not understand the requirement or the Offeror has made unrealistic [sic]

proposal.”

B. EVALUATION AND AWARD

The Boeing Company (“Boeing”) and Pemco Aeroplex, Inc. (“Pemco”) were

incumbent contractors on the KC-135 PDM contract; Boeing was the prime contractor

and Pemco performed maintenance as a subcontractor to Boeing.

When proposals were

Id. at 84.

Id. at 78.

Prior to commencing any O&A work, the contractor was required to seek the

government‟s approval. The government and the contractor would then negotiate an

appropriate amount for the O&A work. Addendum 1 to the solicitation provided that

“[t]he Contractor shall promptly submit to the ACO [Administrative Contracting Officer]

a Work Request for O&A work. The Government and the Contractor will then negotiate

a settlement for the O&A work. Contract modifications will be executed to definitize all

O&A work.” RFP Addendum 1 at 1. With regard to determining a settlement amount

for O&A work, Addendum 1 instructed that “the price negotiated by the ACO shall be

based on „hands on‟ labor hours multiplied by the contract hourly rate. The number of

„hands on‟ labor hours required, shall be negotiated by the Contractor and ACO.” Id. at

Id. at 88.

Pemco Aeroplex, Inc., B-310372, December 27, 2007, 2008 CPD ¶ 2, at 2.

submitted in October of 2005, Pemco and Boeing proposed to perform this contract under

the same arrangement as the previous contract.

In May 2006, however, the Air Force

amended the solicitation, reducing the estimated number of aircraft due to increases in the

number of KC-135 aircraft that would be maintained by an organic workforce at Tinker

Air Force Base.

Based upon the reduced best-estimated quantity (BEQ) of KC-135

aircraft maintained under the new contract, Boeing severed its relationship with Pemco.

Pemco filed an agency-level protest on the grounds that the solicitation should be

reopened following the amendment.

In response to this protest the Air Force reopened

the solicitation to allow for new proposals, and extended the due date for receipt of

proposals to June 22, 2007.

Pemco, Boeing, and Lockheed Martin all submitted

proposals.

Following discussions and submission of final proposal revisions (FPRs), the SSA

made his award decision and the Air Force awarded the contract on September 10,

Id.

Alabama Aircraft Industries, Inc.-Birmingham v. U.S., 83 Fed.Cl. 666 at 671 (Oct. 7,

2008). The Air Force issued an amendment to the solicitation on May 31, 2006 reducing

the BEQ of KC-135 tankers to six aircraft in the first year and 25 in the remaining years

of the contract. In June of 2006, the Air Force issued another solicitation amendment

reducing the BEQ from 60 aircraft to 48. Id.

Id.

2007.

The SSA concluded that while Pemco‟s proposal was superior with regard to

Past Performance, Boeing‟s superior Mission Capability rating and overall lower total

evaluated price (TEP) outweighed the benefits of Pemco‟s higher Past Performance

rating.

C. GAO DECISION I

Pemco protested the award at the Government Accountability Office (GAO) on

the grounds that the Air Force performed a flawed past performance evaluation,

performed a flawed mission capability evaluation, and performed a flawed price realism

analysis.

The GAO denied all of Pemco‟s protest grounds except its allegation that the

Air Force performed a flawed price realism analysis in a decision issued on December

27, 2007.

Specifically, Pemco alleged that the Air Force failed to assess a price drop that

appeared in Boeing‟s FPR.

The drop in price was greater than the difference between

the two offerors‟ total evaluated prices and resulted in Boeing displacing Pemco as the

lowest-priced offeror.

A key concept of each offeror‟s proposal involved application of

“lean” programs to the PDM process to reflect efficiencies learned through repetition of

Id. at 675.

B-310372 at 4.

Id. at 1.

Id.

Id. at 8.

Id.

the work as performance continued, and both offerors utilized a learning curve that

factored into Boeing‟s price drop at FPR.

During discussions, Boeing attributed its drop in price in its FPR to

implementation of a lean program termed “Lean Cellular Maintenance System.”

This

drop in price was not attributable to any changes to Boeing‟s technical approach.

Boeing simply explained its decision as a business decision to assume the risk associated

with the change.

In reaching its decision that the Air Force failed to account for the increased risk

presented by Boeing‟s reduction in the level of labor hours, the GAO relied upon a

document entitled “Talking Paper on C/KC-135 PDM Recompetition Source Selection,”

which stated that the Air Force expected increases in the volume of work required under

the PDM aircraft due to the fact that the KC-135 fleet is aging.

GAO interpreted this

document, which was prepared for the Source Selection Evaluation Team (SSET) chair

and KC-135 System Program Director but was not disclosed to offerors, as evidence that

The Court of Federal Claims explained the Lean program as an attempt to “streamline

the KC-135 PDM process and to eliminate wasteful and unnecessary steps, thus

increasing the program‟s efficiencies.” 83 Fed.Cl. at 672.

Id. The GAO decisions are more heavily redacted than the Court of Federal Claims

decision in terms of how Boeing was able to lower its proposed price at FPR. The Court

of Federal Claims decision goes into detail on Boeing‟s reduction in labor hours and its

application of the learning curve, although all of the KC-135 PDM decisions are redacted

as to the specifics of what Boeing‟s learning curve looked like.

B-310372 at 8.

Id.

83 Fed.Cl. at 671.

the Air Force performed a defective realism analysis of Boeing‟s proposal.

The GAO

found that the absence of any acknowledgement by the Air Force that allowing Boeing to

reduce expended labor hours through the contract, despite the fact that the aging aircraft

actually would demand expenditure of more labor hours, represented a fatal flaw to the

source selection decision.

As GAO stated, the lack of meaningful documentation

addressing the “unexplained changes in Boeing‟s assumptions between submission of its

initial proposal and its subsequent proposal revisions” made it impossible for the GAO to

determine if the agency was reasonable in its assessment that Boeing‟s proposal was

realistic.

As part of its recommendation to the agency, the GAO suggested that the Air

Force perform and document a realism assessment of the impacts of Boeing‟s changes at

FPR and then make a new source selection decision.

The Air Force undertook

corrective action in the form of comparing the effort proposed by Boeing to the effort

performed by the Air Force‟s organic workforce performing similar work at Tinker Air

Force Base, and analyzing Boeing‟s ability to capture efficiencies on other aircraft

programs.

As a result of this evaluation, the Air Force concluded that Boeing‟s changes

B-310372 at 9.

Id.

Id. at 12.

Pemco Aeroplex, Inc., B-310372.3, June 13, 2008, 2008 CPD ¶ 126, at 3.

at FPR were reasonable.

The SSA made a new decision and again found that Boeing‟s

proposal represented the best value to the government.

D. GAO DECISION II

In its protest of the Air Force‟s second award decision, Pemco alleged that the Air

Force was required to reopen discussions with offerors and that the Air Force‟s second

price realism analysis was also flawed.

The GAO denied the discussions argument on

the basis that it was reasonable for the Air Force to undertake corrective action in the

form of re-documenting its evaluation since the first protest was upheld on the grounds of

an “informational deficiency in the agency‟s evaluation record.”

With regard to Pemco‟s flawed price realism argument, the GAO rejected

Pemco‟s argument that the Air Force ignored relevant information in finding Boeing‟s

proposal realistic, such as Pemco‟s proposal, Boeing‟s initial proposal, and the internal

government estimate (IGE).

The GAO concluded that the analyses the Air Force

undertook as part of corrective action were consistent with the solicitation.

The GAO

Id.

Id. at 4.

Id.

Id. at 5.

The GAO held:

Although Pemco raises the full range of possibilities – that is, that the agency

should not have considered certain information, that he agency should have

considered certain other information, that the agency should have performed

alternative analyses, and/or that the price realism and risk assessments should

have been dispositively resolved by comparison to various benchmarks including

cited the principle that agencies have tremendous leeway in performing price realism and

risk analyses to support its ruling in favor of the Air Force.

E. THE COURT OF FEDERAL CLAIMS DECISION

Following the GAO‟s denial of its second protest, Pemco (now Alabama Aircraft

Industries, Inc. (“AAII”))

filed a complaint in the Court of Federal Claims on June 27,

2008.

Judge Charles Lettow, the Court of Federal Claims judge who heard the case,

found that AAII had standing to challenge the Air Force‟s award of the KC-135 PDM

contract even though Pemco had undergone a corporate restructuring.

AAII‟s

challenges to the Boeing award involved the existence of an organizational conflict of

interest, a flawed past performance evaluation, and a flawed price realism analysis.

Judge Lettow dismissed AAII‟s challenges based on the organizational conflict of

interest

and the flawed past performance evaluation.

The Court of Federal Claims

Pemco‟s own proposal – its protest fails to demonstrate that any of the agency‟s

actions, inactions, or analyses are inconsistent with, or contrary to, the terms of

the solicitation or applicable statute or regulation. Id. at 6.

Id.

866 Fed. Cl. at 669. Pemco Aeroplex Inc.‟s parent company, Pemco Aviation,

undertook a corporate restructuring while the KC-135 PDM source selection was

underway that involved selling Pemco Aeroplex‟s sister corporation, Pemco World Air.

The purchaser of Pemco World Air acquired the exclusive right to the Pemco name and

the names of Pemco Aeroplex and Pemco Aviation were changed to Alabama Aircraft

Industries, Inc. – Birmingham and Alabama Aircraft, respectively. Id.

Id. at 679.

Id. at 685.

Id. at 669.

Id. at 685.

agreed with AAII‟s challenge of the price realism analysis.

At the Court of Federal

Claims, AAII again focused its argument on the Air Force‟s evaluation of Boeing‟s

application of its learning curve and the corresponding drop in its overall price.

AAII

again argued that this was inconsistent with the Air Force‟s awareness of the aging KC-

135 fleet and the Court of Federal Claims concurred.

Judge Lettow began his discussion with an overview of price realism analysis.

Judge Lettow acknowledged that the agency has tremendous leeway in deciding the form

its price realism analysis will take, but placed undue emphasis on the state of the aging

KC-135 fleet and the fact that Boeing‟s application of the learning curve caused its price

Id. at 690.

Id. at 700.

Id. at 695.

Id. at 696.

FAR lacks an explicit directive to contracting agencies mandating the use of any

particular analytical tool in evaluating the reasonableness and realism of an

offeror‟s price. See 48 C.F.R. § 15.404-1(b)-(e). In these circumstances, courts

have according contracting agencies considerable leeway in evaluating price. See,

e.g., Honeywell, Inc. v. United States, 870 F.2d 644, 648 (Fed.Cir.1989);

International Outsourcing Servs. v. United States, 69 Fed.Cl. 40, 48 (2005)

(stating that „the nature and extent of an agency's price realism analysis are

matters within the agency's discretion‟) (citation omitted). However, that

discretion can be abused. An agency's price-realism analysis lacks a rational basis

if the contracting agency, for example, made „irrational assumptions or critical

miscalculations.‟ OMV Med., Inc. v. United States, 219 F.3d 1337, 1344

(Fed.Cir.2000).

Id.

to drop below that of AAII.

The Court of Federal Claims faulted the Air Force for

failing to conduct any new studies or to seek out new information in undertaking

corrective action.

The Court of Federal Claims decision cited to the external Air Force

talking paper as evidence that the Air Force should have accounted for the aging fleet in

evaluating Boeing‟s proposal, and rejected the Air Force‟s argument that Addendum 1 to

the solicitation put offerors on notice that any changes to the contract in the out years

would be negotiated as issues arose.

Rather, the Court of Federal Claims found that the

offerors did not understand that Addendum 1 meant that the issue of aging aircraft was

“effectively taken off the table.”

According to Judge Lettow, the O&A provisions were

inadequate to address aging aircraft because “standard” PDM work increases would not

be covered by O&A negotiations but would continue to fall under the basic PDM effort

unless the tasks required 200 or more man hours to complete.

100

Consequently, the Court

of Federal Claims found that the Air Force‟s price realism analysis was “arbitrary and

Id. at 697-98.

Id. at 698.

Id. at 699. The Court of Federal Claims characterized this arrangement as follows:

In effect, rather than awarding a firm fixed-price contract as the RFP envisioned,

the Air Force‟s subsequent statements indicate that this „fixed price‟ contract was

subject to continued contractual renegotiations because of aging aircraft and was

at best a firm fixed-price contract only for the first year.

Id.

100

Id. at 700.

capricious” within the meaning of 5 U.S.C. 706(2)(A).

101

“Failing in the first instance to

deal explicitly with the aging-fleet issue in the RFP, as amended, and then seeking to

sidestep the aging-fleet issue in the price-realism analysis of Boeing‟s prevailing offer in

this very close competition, renders the Air Force‟s award to Boeing unsustainable.”

102

F. THE FINAL WORD – DECISION FROM THE U.S. COURT OF

APPEALS FOR THE FEDERAL CIRCUIT

The Federal Circuit issued its decision on the Air Force‟s appeal on November 17,

2009.

103

In a short decision, the Federal Circuit agreed with all aspects of the Court of

Federal Claims decision except on the issue of price realism analysis.

104

Where the Court

of Federal Claims found that the Air Force failed to notify offerors that the issue of aging

aircraft should not be a consideration, the Federal Circuit determined that the Air Force

adequately addressed the issue through the work structure offerors were instructed to use

in their proposals.

105

The Federal Circuit found that the Court of Federal Claims decision

went beyond the scope of what the lower court was permitted to consider, and substituted

the lower court‟s judgment for that of the agency when it attempted to inject the issue of

aging aircraft into the solicitation.

106

The Federal Circuit endorsed the agency‟s method

101

Id.

102

Id.

103

Alabama Aircraft Industries, Inc.-Birmingham v. United States, 586 F.3d 1372 (Fed.

Cir. 2009).

104

Id. at 1375.

105

Id.

106

Id. at 1376.

of addressing the aging aircraft issue through the three-tiered work package and found

that this made sense given the unpredictable impact the aging KC-135 fleet would have

on the PDM contract.

107

This line of decisions demonstrates that there is a state of confusion surrounding

price realism analysis. Both the GAO and Court of Federal Claims exhibited confusion

over where to draw the line to assess when the government has overstepped the discretion

involved in making a realism analysis. These cases also demonstrate a further danger

attributable to the lack of realism guidance in the FAR: the ambiguities in the process

provide the opportunity for an overzealous judicial body to step in and shape a

procurement when it feels an injustice has been perpetrated against an offeror. Because

realism analysis is so ill-defined, courts can take the liberty of injecting their own

interpretation of what a realism analysis should look like.

IV. GAO AND COFC DECISIONS ON PRICE REALISM

Confusion over price realism analysis is rampant throughout GAO and Court of

Federal Claims decisions. The following cases demonstrate that this confusion is

widespread throughout both the government and industry.

A. REALISM v. REASONABLENESS

Because of the way in which the FAR is currently drafted, contracting officers

continually confuse price realism analysis with price reasonableness analysis. A price

reasonableness determination is required for all acquisitions so that the contracting

107

Id. “As explained, the agency considered the aging aircraft issue, but because the

impact on future requirements was unknown, it decided the best approach was to provide

all offerors with the three-tier work package on which to base their proposals. This was a

determination well within the agency‟s discretion.” Id.

officer can determine that the final price is fair and reasonable.

108

Reasonableness refers

to whether a price is unreasonably high. Typically, adequate competition (which is

defined in the FAR as “two or more responsible offerors, competing independently,

submitting priced offers that satisfy the government‟s expressed requirement”

109

) ensures

that prices are reasonable, but the contracting officer may use other price analysis

methods and techniques to ensure price reasonableness if it cannot be ascertained through

adequate competition.

110

Several GAO decisions have addressed price reasonableness versus price realism.

In CSE Construction,

111

the U.S. Army Corps of Engineers issued a solicitation for the

design and construction of firing ranges. The solicitation asked offerors to propose prices

for eight fixed-price CLINs and stated that price “will not be point scored but will be

subjectively evaluated for reasonableness over the life of the contract.”

112

CSE

Construction submitted the lowest price, which was nearly $2 million less than the next

lowest-priced offeror.

113

The price evaluators concluded that CSE‟s price was low and

reflected a lack of understanding of the requirements, and the SSA awarded the contract

to the next-lowest priced offeror.

114

CSE filed a protest, alleging that the agency‟s

108

FAR 15.404-1(a).

109

FAR 15.403-1(c)(1).

110

Id.

111

CSE Construction, supra note 21.

112

Id. at 2.

113

Id. at 3.

114

Id.

determination that its price was too low violated the terms of the solicitation, which did

not provide for performance of a realism analysis.

115

The GAO agreed with the protester,

finding that “[t]he price evaluation factor provided only for the evaluation of the

„reasonableness‟ of the proposed price (that is, whether the price was unreasonably high)

and for whether the price proposal was unbalanced, which is not contended here.”

116

The

GAO also found that the solicitation did not afford the agency the right to evaluate any

cost or pricing information to determine whether an offeror understood the contract

requirements.

117

Moreover, even if the agency had correctly evaluated CSE‟s low price

as part of a responsibility determination, it would have been required to refer the matter

to the Small Business Administration (SBA).

118

The GAO concluded that the SSA

should have considered CSE‟s significantly lower price as an advantage, not a

disadvantage.

119

CSE Construction was decided in 2002; agencies are still making the very same

mistakes regarding realism versus reasonableness. A GAO decision issued in December

115

Id.

116

Id. at 4.

117

Id. (“Moreover, the RFP did not request cost or pricing information or any other

information that would allow the agency to determine that a low proposed price reflected

a lack of understanding of the contract requirements.”).

118

Id.

119

Id. (“We think that if CSE‟s price advantage had been properly weighed in the

agency‟s price/technical tradeoff analysis, it would have had a reasonable possibility of

being selected for award.”).

2009, Milani Construction, LLC,

120

exhibits the same confusion over price

reasonableness versus price realism. In this decision, the National Park Service issued an

RFP for rehabilitation of a park in Washington, D.C.

121

The solicitation contemplated

award of a firm-fixed-price contract and provided that the agency would evaluate the nine

CLINs for reasonableness and balance, but did not address whether a price realism

analysis would be performed.

122

The agency received two proposals, and Milani

Construction proposed a price 9.8% lower than the price proposed by the awardee.

123

The agency found that Milani‟s lower price was unreasonably low when compared to the

awardee‟s prices and the government estimate and demonstrated that Milani might not

understand the contract requirements.

124

As a result, the agency decided to award to the

other offeror, Corinthian Construction. Milani protested on the basis that the agency

introduced an unspecified evaluation criterion when it performed its price realism

analysis, and the GAO agreed.

125

The GAO found that the agency confused price

120

Milani Constr. Co., supra note 28.

121

Id. at 1.

122

Id. at 2.

123

Id. at 3.

124

Id. at 5.

125

Id. The agency argued that a general statement regarding assessing risk sufficed to put

offerors on notice that a realism analysis would be performed. GAO dismissed this

argument:

While the agency contends that the price realism analysis was proper in light of

certain language in the RFP… we disagree. In our view, the solicitation

provisions to which the agency refers did not provide offerors with adequate

notice that NPS intended to perform a price realism analysis, especially since the

price evaluation factor – under which such notice would logically appear – did not

reasonableness analysis, which focuses on “whether the offered prices are higher than

warranted,” and price realism analysis, which assesses whether “an offeror‟s low price

reflects on its understanding of the contract requirements or the risk inherent in an

offeror‟s approach.”

126

Because the agency failed to state an evaluation criterion

assessing realism, the finding that Milani‟s price was too low should have been part of a

responsibility determination rather than a price reasonableness determination.

127

It is apparent from this line of cases that the FAR needs to address what

constitutes a price realism analysis and what constitutes a price reasonableness

determination in more detail than is currently provided. As it stands, the regulation is

silent on the issue, leading contracting professionals to issue solicitations that do not

reflect the evaluations that they intend to perform.

B. WHEN THE AGENCY DOESN‟T UNDERSTAND ITS OWN SOLICITATION

Another pervasive problem with realism analysis arises when agencies fail to

perform a price realism analysis although the solicitation provides that one will be

performed. GAO decisions in this area demonstrate that contracting professionals

oftentimes insert language indicating that a realism analysis will be performed without

in any way suggest that a price realism analysis would be performed and offerors

were not required to submit any cost or pricing information that could be used in

such an analysis.

Id.

126

Id. at 4.

127

Id. at 5. The GAO found that since “submission of even a „below-cost‟ price is not by

itself improper,” an agency must put offerors on notice that the Government will be

assessing whether a low price indicates a lack of understanding of the requirements. In

this case, the solicitation did not provide offerors with that notice. Id. at 6.

understanding what inclusion of this language actually entails. For instance, in

OMNIPLEX World Services Corporation,

128

issued in November of 2002, the

Immigration and Naturalization Services (INS) issued a solicitation for a Blanket

Purchase Agreement (BPA) to provide an electronic reporting system to track foreigners

in the U.S. obtaining an education that indicated that the agency would reject proposals

that were not realistic in terms of technical commitment or price.

129

The agency made

award to B&W and OMNIPLEX protested on several grounds, including that the

awardee‟s price proposal failed to provide price information, namely labor categories,

hours, and base rates, that the agency needed to evaluate its proposal in accordance with

the solicitation terms.

130

The agency argued that although the solicitation required

submission of this information, it was not necessary to evaluate since this was a fixed-

price effort and the awardee‟s rate fell into the mid-range of all the proposals

submitted.

131

The GAO found that the agency did perform a price reasonableness analysis but

failed to perform a price realism analysis.

132

The contracting officer stated that she

“conducted a „price analysis in lieu of a price realism evaluation‟”; however, since price

reasonableness analysis and price realism analysis are “not interchangeable,” and the

solicitation clearly stated that the agency would perform a realism analysis, the GAO

128

OMNIPLEX World Servs. Corp., B-291105, November 6, 2002, 2002 CPD ¶ 199.

129

Id. at 2.

130

Id. at 8.

131

Id.

132

Id. at 9.

found that the protester was prejudiced by the agency‟s failure to conduct its evaluation

in accordance with the solicitation.

133

The GAO recommended that the agency either

reevaluate and perform a price realism analysis or amend the solicitation to remove the

requirement to evaluate realism if it intended only to perform a price reasonableness

analysis.

134

In procurement after procurement, contracting officers insert language requiring a

price realism analysis without understanding the implications or the mechanics of

performing such an analysis. For instance, in Al Qabandi, the Army issued a solicitation

to provide laundry services in Kuwait and stated that “„unrealistically low prices may be

grounds for eliminating a proposal from competition.‟”

135

The Army subsequently

awarded to the lowest-priced, technically acceptable offeror, and Al Qabandi protested on

the basis that the award price was unrealistic, among other grounds.

136

In response to this

argument, the Army argued that there was no requirement in the solicitation to perform a

price realism analysis, but undertook corrective action and affirmed award to the original

awardee.

137

Al Qabandi then asked the GAO for protest costs.

138

The Army argued that

133

Id. The GAO stated that if OMNIPLEX had known that the agency did not intend to

evaluate price realism to ascertain whether proposed rates were too low, it might have

altered its proposal accordingly, thereby making its proposal more competitive for award.

Id.

134

Id.

135

Al Qabandi United Company, B-310600, B-310600.4, June 5, 2008, 2008 CPD ¶ 112.

136

Id. at 2.

137

Id.

138

Id.

Al Qabandi‟s protest was not meritorious, but the GAO found that Al Qabandi‟s

challenge to the agency‟s failure to perform a price realism analysis was valid because

the agency failed to take into account that the solicitation did, in fact, require a price

realism analysis.

139

GAO stated that since the solicitation required a price realism

analysis, the agency should have taken into account that the awardee‟s price failed to

factor in the increased cost of commencing performance in a short timeframe.

140

C. MOST PROBABLE COST AND FIXED PRICE EFFORTS

The only portion of the FAR that is clear regarding price realism analysis is the

mandate that no most probable cost adjustment be made for fixed-price efforts; however,

agencies still manage to misapply even this FAR provision. In IBM Corporation, the

protester alleged that the Environmental Protection Agency improperly made adjustments

to offerors‟ proposed costs as part of “cost realism” and “total cost of ownership”

analyses.

141

The solicitation, which was for a software solution for the agency‟s financial

management system, called for offerors to propose whether the contract type would be

fixed-price, labor hour, or time-and-material (T&M) for each area of work under the

contract.

142

IBM proposed to perform most of the work on a fixed-price basis and a small

139

Id. at 3.

140

Id. The Army argued that Al Qabandi‟s initial protest lacked specificity, but the GAO

rejected this argument. “In our view, however, the allegation was sufficiently specific

that a reasonable investigation into the assertion would have led the agency to conclude

that, contrary to the agency‟s initial position, the solicitation in fact required a price

realism analysis, and that it improperly failed to perform such an analysis.” Id.

141

IBM Corp., B-299504, June 4, 2007, 2008 CPD ¶ 64.

142

Id. at 2.

portion of the work on a T&M basis.

143

During its evaluation, the agency made four

upward adjustments to IBM‟s price proposal based on concerns about IBM not capturing

all its costs, seeking reimbursement for those costs, and requiring additional agency

resources to implement its proposed technical solution.

144

The contracting officer

recommended award to CGI over IBM due to the price savings represented by CGI‟s

proposal.

145

During adjudication of the protest, the contracting officer stated that she could not

determine whether the agency would have to reimburse IBM to replace a legacy system,

so the cost adjustment was necessary. The GAO disagreed with her assessment and

found that IBM‟s proposal was unambiguous regarding inclusion of the price of

replacement in its proposal.

146

Since IBM‟s proposal was fixed-price, it was improper for

the agency to make upward adjustments to its price proposal.

147

D. INADEQUATE PRICE REALISM ANALYSIS

When an agency includes price realism analysis as part of its evaluation, it has to

be sure that the form and extent of its realism analysis are well-documented and rational.

143

Id. at 3.

144

Id. The EPA felt that upward adjustments to IBM‟s proposal were required because

IBM had not included any costs for anticipated future releases of its proposed software

solution, would require additional EPA personnel during implementation of IBM‟s

solution, and would require additional operations and maintenance costs once

implemented. Id. at 5.

145

Id. at 7.

146

Id. at 9.

147

Id. at 10. “As the FAR and our cases make clear, an agency may account for concerns

regarding an offerors‟ understanding of a requirement in the form of a performance risk

evaluation, but may not adjust a fixed-price for purposes of evaluation.” Id.

Although the GAO frequently defers to the results of the agency‟s realism analysis,

occasionally a protester can successfully argue that the results of the agency‟s realism

analysis are unfounded. In General Dynamics, LLC., General Dynamics and Unisys

Corporation protested the Transportation Security Administration‟s award of a fixed-

price task order for computer support services to CSC.

148

The protesters‟ first argument

regarding realism was that CSC proposed inadequate staffing to meet contract

requirements and proposed a staffing plan that was inconsistent with its technical

proposal.

149

CSC proposed to cut staffing in the option years, but the GAO found that

there was nothing in either CSC‟s proposal or the agency‟s evaluation which addressed

the staffing cuts.

150

The agency attempted to explain the lack of documentation as the

result of the agency evaluating only the base year, but under the solicitation the agency

was required to evaluate the base and all option years.

151

The agency also argued that

CSC built efficiencies into its proposal, but the GAO found that this explanation failed to

account for the discrepancies between the staffing plan and the technical proposal, and

148

General Dynamics One Source, LLC; Unisys Corporation, B-400340.5, B-400340.6,

January 20, 2010, 2010 CPD ¶ 45. The RFP provided that:

The Government will also evaluate the offeror‟s Total Evaluated Price to

determine fairness and reasonableness, as well as realism. The Government will

assess how well the Total Evaluated Price realistically reflects an understanding

of the solicitation requirements as well as a consistency with the approach

proposed by the Offeror in the Volumes I-IV proposals. Id. at 6.

149

Id.

150

Id. at 8.

151

Id. at 9.

could not find any evidence that the agency considered the discrepancy in conducting its

realism analysis.

152

The protesters‟ second argument was that CSC‟s labor rates were so low that

there would be no way for CSC to comply with its proposed approach of hiring

incumbent personnel.

153

The agency argued that since offerors proposed fully burdened

hourly rates, not wage rates, a comparison of rates alone did not show that CSC‟s rates

were actually lower than the other offerors. The agency also argued that it considered

CSC‟s low rates for several labor categories, but found that because CSC had the highest

wages among offerors for several key positions, CSC would be able to retain incumbent

key personnel, and its rates for the remaining labor categories were “competitive.”

154

The GAO sided with the protesters on this issue, finding no support for the agency‟s

argument that comparison among offerors‟ rates was meaningless.

155

The GAO also

152

GAO held:

While we find no basis for questioning the PET evaluator‟s statement that CSC

was able to achieve certain efficiencies with its proposed staffing approach (and

correspondingly reduce its overall staffing profile), this statement – as with the

two statements by the PET chairman – does not address the fact that the staffing

proposed in CSC‟s price proposal decreased significantly – by [deleted] FTE – in

the option years of the contract and was inconsistent with the staffing in CSC‟s

technical/management proposal.

Id. at 10.

153

Id.

154

Id. at 11.

155

Id. In response to this argument, the GAO stated that “[m]ore specifically, the agency

has not shown that it ever determined that there really was no substantial difference in the

wage rate component of the burdened rates, and that the apparent difference was

explained, for instance, by a substantial disparity in the two firms‟ indirect rates.” Id.

focused on the inconsistency in the agency‟s argument: on the one hand, the agency

argued that evaluation of CSC‟s fully burdened rates was meaningless, but on the other,

the agency stated that the higher rates for key personnel demonstrated that CSC‟s

proposal was realistic.

156

Furthermore, the agency‟s own documentation did not support

arguments made during litigation: one of the members of the Source Selection Advisory

Committee (SSAC) expressed concern that CSC would be unable to hire the incumbent

workforce at its proposed rates.

157

The agency dismissed this concern as “overstated”

because the position in question was a relatively minor part of the overall effort.

158

The

GAO found that the agency did not properly address the SSAC member‟s concerns, and

stated that the fact that only one individual raised concerns about low rates did not

“provide a reasonable basis for the agency to conclude that the impact of low wage rates

would be limited to the director‟s area of responsibility.”

159

E. WHEN THE AGENCY GETS IT RIGHT

Aegis Defence Services, Ltd.

160

illustrates a price realism analysis performed

correctly. This case involved a contract issued by the Department of Defense to provide

personal security detail services in Iraq. DoD contemplated award of a firm-fixed price

156

Id. (“If, as the agency suggest, the firms‟ proposed labor rates provided no

meaningful insight into wages actually to be paid, then it was unreasonable for the

agency to rely on those same proposed rates to support a favorable evaluation of CSC‟s

ability to recruit, hire and retain certain key personnel.”)

157

Id.

158

Id. at 12.

159

Id.

160

Aegis Def. Servs., Ltd., B-403226, B-403226.2, B-403226.3, October 1, 2010, 2010

CPD ¶ 238.

contract and provided in the solicitation that price proposals would be evaluated for

reasonableness and affordability. The solicitation stated that the agency “„may reject a

proposal that is evaluated to [have an] unrealistically high or low price when compared to

contracting officials estimates, such that the proposal is deemed to reflect an inherent lack

of competence or failure to comprehend the complexity, scope or risks of the

program.‟”

161

The agency received three technically acceptable proposals: Aegis‟ total

price was $8,754,411, while the other two offerors came in at $5,678,082.44 and

$15,940,217.35.

162

The contracting officer performed his realism analysis by comparing

the prices of the three offerors CLIN by CLIN and by comparing the proposed prices to

the incumbent contract to provide these same security services.

163

The agency found that

the lowest-priced offeror, TigerSwan, was able to come in at a much lower proposed

price than the other two offerors by staffing with third-country nationals, as opposed to

expatriates, and by slashing its profit.

164

Based upon this information in conjunction with

TigerSwan‟s technically acceptable approach, the contracting officer found that

TigerSwan‟s pricing was realistic, and the SSA decided to make award to TigerSwan.

165

In its protest, Aegis challenged the agency‟s finding that TigerSwan‟s much-

lower price was realistic because the comparison to the incumbent contract was

161

Id. at 2.

162

Id.

163

Id.

164

Id. at 3.

165

Id.

invalid.

166

The GAO upheld the agency‟s evaluation, finding that the comparison to the

incumbent contract provided a valid basis to perform a realism analysis.

167

Aegis argued

that the agency failed to account for differences between the incumbent contract and this

contract, but the GAO found that the agency compensated for any differences in its

analysis by breaking down the CLINs on the incumbent contract into the average per

person/per month price and was therefore able to perform an accurate comparison of

TigerSwan‟s prices.

168

On the basis of this comparison, the contracting officer was able

to reach the valid conclusion that TigerSwan‟s average monthly pricing was in line with

the incumbent contractor‟s average monthly pricing, and was therefore realistic, despite a

small calculation error made by the agency.

169

In another decision where the agency properly performed a price realism analysis,

G4S Government Services, the Bureau of Immigration and Customs Enforcement (ICE)

issued a solicitation for a requirements contract with fixed unit prices to support ICE‟s

alien reporting program.

170

The SSA opted to make award to the higher technically-

rated, lower-priced offeror, BI.

171

G4S protested on the grounds that the agency

performed a flawed price realism analysis based on how much lower the awardee‟s price

166

Id. at 5.

167

Id. at 6.

168

Id.

169

Id. at 7.

170

G4S Gov. Servs., B-401694, B-401694.2, November 4, 2009, 2009 CPD ¶ 236.

171

Id. at 3.

was than the IGCE and the prices submitted by the other offerors.

172

The GAO found

that the agency‟s realism evaluation was reasonable based on the fact that the agency

performed an in-depth analysis of BI‟s price proposal that included “an analysis of BI‟s

staffing ratios, BI‟s use of different staffing ratios for different types of cases, and the

comparison of BI‟s staffing ratios to the current program staffing ratios, as well as the

comparison of BI‟s unit, CLIN, and overall prices to other offerors.”

173

The GAO found

that based on the thoroughness of the agency‟s evaluation, the protester failed to

demonstrate that the agency‟s evaluation was inadequate or inconsistent with the

solicitation.

174

In an interesting decision where neither the agency nor the offerors understood

whether the solicitation required performance of a price realism analysis, FlightSafety

Services Corporation, the GAO found that the Air Force performed an adequate price

realism analysis when the agency thoroughly investigated the awardee‟s low price

through discussions, even though the agency argued that no realism analysis was

required.

175

The solicitation, which contemplated the award of a fixed-price contract to

provide services in support of the KC-135 Aircrew Training System (ATS), stated that

the government “may reject any proposal evaluated to be unreasonable in terms of

172

Id.

173

Id. at 5.

174

Id. The GAO found that the protester‟s arguments merely amounted to disagreement

with the agency‟s conclusions, and stated that the agency has a great amount of discretion

in determining the form and extent of its price realism analysis. Id.

175

FlightSafety Servs. Corp., B-403831, B-403831.2, December 9, 2010, 2010 CPD ¶

294.

program commitments, including contract terms and conditions, or unreasonably high or

low in cost when compared to government estimates, such that the proposal is deemed to

reflect an inherent lack of competence or failure to comprehend the complexity and risks

of the program.”

176

The awardee, CAE-USA, proposed a total price of $203,014,523,

while the protester, FlightSafety Services Corporation (FlightSafety), proposed

$308,826,384.

177

FlightSafety argued that the language in the solicitation required the

Air Force to perform a realism analysis and to reject CAE-USA‟s proposal as

unrealistic.

178

Ironically, the GAO found that the Air Force performed a sufficient

realism analysis where the Air Force argued that the solicitation did not require

performance of an actual price realism analysis, but only required that the agency

evaluate reasonableness.

179

The GAO found that while the solicitation did not call for

performance of a realism analysis per se, “it effectively provided for such an evaluation

where it established that the Air Force could reject a proposal if the offeror‟s low price

indicated a lack of understanding.”

180

The GAO found that this language indicated that

realism would be assessed.

181

While the Air Force maintained that no realism analysis

176

Id. (citing RFP at 243).

177

Id. at 4.

178

Id.

179

Id.

180

Id. at 5.

181

Id. (“As explained above, analyzing whether an offeror‟s fixed price is so low that it

reflects a lack of understanding of solicitation requirements is the crux of a price realism

evaluation, and by informing offerors that their proposals would be evaluated in this

regard, the RFP established that the Air Force would, in essence, assess offerors‟ prices

for realism.”).

was required, by thoroughly investigating CAE-USA‟s low price throughout the

evaluation process and obtaining written confirmation from CAE-USA that the company

would not operate at a loss, the agency did, in fact, perform a realism analysis.

182

FlightSafety argued that the Air Force did not go far enough in probing CAE-USA‟s low

price, but the GAO found that since the form and nature of price realism analysis are

squarely left to the judgment of the agency, the Air Force went far enough in confirming

that CAE-USA could perform at its proposed price.

183

F. COST REALISM DECISIONS

While this thesis has focused on confusion in the area of price realism analysis, it

is also informative to examine where agencies encounter difficulties performing cost

realism analyses.

184

The GAO and court cases in the area of cost realism analysis do not

exhibit the same level of confusion as the price realism decisions, but rather are generally

limited to agency confusion over making appropriate adjustments to the most probable

182

Id. at 6.

183

The GAO went on to conclude that a “more probing inquiry was simply not

contemplated by the RFP, or otherwise required, given that the RFP did not provide for

the submission of the underlying cost information for CLINs 0003 and 0004.” Id. at 8.

The GAO wrote:

The record shows that the Air Force recognized that 1) CAE-USA‟s price was

low as compared with the prices submitted by the other offerors; 2) the issue was

raised with CAE-USA in discussions; 3) CAE-USA expressly confirmed its

understanding of the requirements, an understanding supported by CAE-USA‟s

experience performing similar requirements; and 4) CAE-USA explained that it

was aggressively pursuing the contract and therefore intended for its price to be

low since it viewed the contract as an important aspect of its corporate strategy.

184

See, e.g., I.M. Systems Group, B-404583, B-404583.2, B-404583.3, February 25, 2011,

2011 CPD ¶ 64 (agency performed a flawed cost realism analysis when it compared

proposed sample task prices to the Government cost estimate without assessing the

realism of the proposed rates).

cost.

185

The GAO‟s examination of an agency‟s cost realism analysis is limited to a

review of whether the cost realism analysis was reasonable and not arbitrary.

186

Magellan Health Services

187

involved a protest of Health and Human Services‟

(HHS) award of a cost-plus-fixed-fee contract to provide employee assistance program

services. The solicitation called for a cost-type contract and stated that the agency would

perform a cost realism analysis to evaluate whether the proposed costs represent what the

agency will pay for performance.

188

The protester alleged that the agency did not

perform a proper realism analysis on the awardee, Ceridian‟s, proposal because the

awardee proposed direct labor rates that were lower than the rates paid to the incumbent

workforce and the contracting officer did not adjust the awardee‟s price accordingly,

despite the evaluators‟ comments that the awardee‟s rates were too low to ensure

successful performance.

189

The GAO found that the agency‟s cost realism analysis was

unreasonable because the contracting officer based the award decision on Ceridian‟s

185

See, e.g., Earl Industries, LLC, B-309996, November 5, 2007, 2007 CPD ¶ 203

(agency performed a flawed cost realism analysis when it failed to adjust an offeror‟s

proposed cost to reflect prevailing area labor rates).

186

Marine Hydraulics.

187

Magellan Health Services, B-298912, January 5, 2007, 2007 CPD ¶ 81.

188

Id. at 5.

189

Id. at 8.

While expressly accepting the cost analyst‟s finding that Ceridian‟s FPR had

failed to propose the government-estimated levels of effort for the field consultant

and field counselor labor categories as part of its direct labor costs, … the

contracting officer did not consider the corresponding cost adjustment to

Ceridian‟s proposal, or address the concerns expressed by the TEP business

review that Ceridian‟s direct labor rates for the two key field labor categories

needed to be “significantly increased.” Id. at 9.

proposed cost without making upward adjustments to account for the low direct cost

rates.

190

The GAO concluded that this improper analysis would have enabled the

awardee to win the contract because of its lower costs, but then to recover the higher rates

during performance when it was reimbursed for actual costs.

191

The GAO will not uphold an agency‟s cost realism analysis if it is evident that the

agency did not consider all available information in performing its evaluation. In The

Futures Group International,

192

the United States Agency for International Development

(USAID) awarded a cost-type contract for reproductive health services in developing

countries to Deloitte Touche Tohmatsu (Deloitte).

193

The agency received two proposals

and did not make any most probable cost adjustments to either proposal.

194

Futures

protested, arguing that it was unreasonable for USAID to accept Deloitte‟s general and

190

GAO stated:

The agency‟s argument here reflects a fundamental misunderstanding of what is

required as part of a cost realism analysis. A cost realism evaluation implements

an agency‟s obligation to guard against unsupported claims of cost savings by

determining whether the costs as proposed represent what the government

realistically expects to pay for the proposed effort, based on the information

reasonably available to the agency at the time of its evaluation. See Metro Mach.

Corp., B-297879.2, May 3, 2006, 2006 CPD ¶ 80 at 9. HHS was fully aware of

the incumbent employees‟ existing salaries, and that Ceridian‟s proposed pay

rates were substantially less than the existing salaries (as well as the agency‟s own

IGCE).

Id. at 10.

191

Id. at 12.

192

Futures Group Int’l., B-281274.2, March 3, 1999, 2000 CPD ¶ 147.

193

Id. at 1.

194

Id. at 2. The agency found that the costs presented in the offerors‟ BAFOs were

reasonable and realistic. Id.

administrative (G&A) rates because they were significantly lower than Deloitte‟s rates on

previous contracts.

195

According to the protester, if Deloitte had proposed the higher

historic rates, it would have raised Deloitte‟s costs by $14 million, making Futures‟

proposed costs lower than Deloitte‟s.

196

Even though the agency acknowledged in the

evaluation record that it had concerns about Deloitte‟s lower G&A rates, it made no

adjustments to the most probable cost.

197

The GAO found that in light of the

contemporaneous record and the lack of explanation in Deloitte‟s proposal, the agency

had no justification for accepting the lower rates in Deloitte‟s proposal. Most probable

cost adjustments therefore should have been made.

198

If this effort had been fixed-price,

the agency‟s evaluation might have been adequate since the agency did acknowledge the

risk associated with Deloitte‟s proposal. However, since this was a cost-type effort, the

agency was required to adjust Deloitte‟s proposed cost accordingly.

In another decision where the agency failed to factor in all available information,

Marine Hydraulics International, Inc.,

199

the Navy awarded a cost plus award and

incentive fee contract for ship maintenance and repairs.

200

Because the work was

195

Id. The agency did not have Deloitte‟s negotiated indirect cost rate agreement on file

so it contacted another office within the agency and obtained Deloitte‟s incurred cost

submission from 1997. Id.

196

Id.

197

Id. at 3.

198

Id. (“Deloitte‟s cost proposal does not support its proposed indirect rates or justify

rates substantially lower than its historic rates, nor does it claim that the firm‟s proposed

rates were lower because they were based on the receipt of this contract.”)

199

Marine Hydraulics Int’l., Inc., B-403386, November 3, 2010, 2010 CPD ¶ 255.

200

Id. at 1.

unpredictable, the Navy included a notional work package and estimated labor hours for

offerors to use in preparing their cost proposals.

201

Marine Hydraulics (MH) protested

the Navy‟s decision to award to Earl Industries on the basis of an unreasonable cost

analysis of its proposal.

202

MH argued that the Navy improperly calculated its most

probable cost as higher than it should have been.

203

The Navy upwardly adjusted MH‟s

cost proposal on the basis that MH had historically charged security guard services as an

indirect, as opposed to a direct, cost.

204

The GAO sided with the protester, and found that

the agency unreasonably added the cost of security guard services to MH‟s proposed cost

because the protester‟s explanation for why it would charge security guard services as a

direct cost was reasonable.

205

The GAO also found that the agency should not have

adjusted upward MH‟s price in the area of fire watch services because the agency

improperly factored in work categories that should not have been considered fire watch

services.

206

201

Id.

202

Id. at 2.

203

Id. at 3.

204

Id.

205

Id. (“While MH‟s practice under prior similar contracts might have been relevant, the

FPR essentially explained why MH‟s prior practice was not relevant. The agency never

determined that this explanation was unpersuasive or unrealistic in any way, and even

now has not established that there was reason to question the basis for MH‟s indirect cost

approach.”).

206

Id. at 4.

In general, agencies understand how to perform cost realism analyses; sustained

protests in this area result mostly from failing to make adjustments to the most probable

cost or going too far in adjusting an offeror‟s proposed costs either upward or downward.

The regulations are clear on when an agency must perform a cost realism analysis, but as

the ABA Section pointed out, would benefit from reinsertion of the simple,

straightforward explanation of why cost realism analysis is necessary.

207

If contracting

officers could see the “big picture” stated in the beginning of the subpart on cost realism

analysis, it would make execution of the cost realism analysis a more straightforward

process with less opportunity for agency missteps.

V. DO WE NEED PRICE REALISM?

Price realism analysis is undeniably confusing. Is it a necessary element of price

evaluation, or could it, for example, be subsumed within a responsibility determination?

Opponents of price realism argue that if offerors want to bid low on fixed-price efforts, it

is at their own risk and the government should be able to take advantage of low prices

when it has the opportunity. They argue that there are other ways to exclude offerors that

bid too low without utilizing price realism – for example, offerors that are priced too low

can be weeded out through responsibility determinations. Furthermore, bidding low is

not forbidden – offerors are free to “buy-in,” and in some cases buy-in can work to the

government‟s advantage. However, given the tremendous amount of risk to both the

government and to offerors when offerors are awarded contracts at prices at which they

cannot perform, price realism can be a useful tool when properly utilized, and should be

207

ABA Section Letter, supra note 31, at 2. The ABA suggested reinserting the

statement that “[t]he award of cost-reimbursement contracts primarily on the basis of

estimated costs may encourage the submission of unrealistically low estimates and

increase the likelihood of cost overruns.”

available for use by contracting officers in appropriate circumstances. In fixed-price

procurements, the government cannot evaluate individual cost elements as it does in cost-

reimbursement-type efforts, but price realism analysis provides the government with a

tool to resolve doubts that arise with fixed-price bids. It opens the door for the

government to take a deeper look into proposed prices than it otherwise would be

permitted to do. If the FAR is revised to provide useful directions on when and how

price realism should be employed, both the government and industry will reap the

benefits of the added performance protection realism analysis provides.

A. THE BEST WAY TO EVALUATE REALISM

As pointed out by Professors Nash and Cibinic, as well as the GAO, the most

logical means to evaluate price realism is to include it as part of the technical or risk

evaluation or as part of the responsibility determination.

208

While there is no mandate in

the regulations that price realism be performed as a component of another type of

evaluation and not as a stand-alone element of the price evaluation,

209

recommending that

contracting officers include it as part of the technical, risk, or responsibility determination

would clear up a great deal of confusion without compromising the nature or form of the

realism analysis. As part of the technical, risk, responsibility, or price evaluation, the

result of the price realism analysis would remain the same: the agency would be able to

determine if an offeror was bidding so low that it would be unable to perform

successfully.

208

Nash & Cibinic, supra note 14; Milani Constr., supra note 28, at 4.

209

The current FAR simply states that results of a realism analysis “may be used in

performance risk assessments and responsibility determinations.” FAR 15.404(d)(3).

VI. COMPARATIVE ASSESSMENT OF REALISM ANALYSIS

The international approach to price realism analysis focuses on the threat that

below-cost bids present to successful contract performance, and grants contracting

officials more latitude in assessing and rejecting low bids than the U.S. system. This is

evident in both the United Nations Commission on International Trade Law

(UNCITRAL)

210

Model Law on Procurement of Goods, Construction and Services, and

in the European Union Procurement Directives.

211

The UNCITRAL model laws are legislative texts that UNCITRAL recommends

to the member states to incorporate into national law.

212

States have flexibility and may

alter the Model Law to best suit each country‟s needs, but UNCITRAL encourages as

few changes as possible to maintain uniformity in application.

213

Although the Model

Law on Procurement of Goods, Construction and Services was only introduced in 1994,

in 2004 an update was commenced to “bring the Model Law into the electronic age.”

214

210

UNCITRAL was established in 1966 by the United Nations General Assembly to

“further the progressive harmonization and modernization of the law of international

trade by preparing and promoting the use and adoption of legislative and non-legislative

instruments in a number of key areas of commercial law,” including procurement of

goods. The UNCITRAL Guide: Basic facts about the United Nations Committee on

International Trade, available online at

http://www.uncitral.org/pdf/english/texts/general/06-50941_Ebook.pdf.

211

Don Wallace, Jr., UNCITRAL: Reform of the Model Procurement Law, 35 Pub. Cont.

L.J. 485 (Spring 2006). The Model Law on Procurement of Goods, Construction and

Services was adopted by UNCITRAL and endorsed by the UN General Assembly in

1994. The updated Model Law was adopted on July 1, 2011.

212

UNCITRAL Guide, supra note 206, at 14.

213

Id.

214

Wallace, supra note 211, at 487.

The update focused on a number of areas, including electronic reverse auctions and

abnormally low bidding, or what the U.S. system refers to as unrealistic bids.

215

The

reforms to the UNCITRAL model laws can instruct U.S. procurement reform as it relates

to realism analysis.

216

Prior to the reforms, the UNCITRAL Model Law was largely silent on the issue

of abnormally low tenders. The revised UNCITRAL approach, following a European

lead, encourages contracting officers to investigate low bids and to reject any bids that

appear too low for the firm to successfully perform the contract.

217

The concerns relating

215

Christopher R. Yukins, A Case Study in Comparative Procurement Law: Assessing

UNCITRAL’S Lessons for U.S. Procurement, 35 Pub. Cont. L.J. 457, 458 (Spring 2006).

216

As Professor Christopher Yukins stated in A Case Study in Comparative Procurement

Law: Assessing UNCITRAL’S Lessons for U.S. Procurement, supra note 215 at 458,

“What is striking about the UNCITRAL reform effort is not that U.S. procurement law

has much to contribute to the working group (that is hardly surprising, given many

decades of experience in the U.S. procurement system) but instead that the UNCITRAL

debate has so much to offer U.S. procurement reform.” Id.

217

The most recent version of the Model Law on abnormally low tenders reads as

follows:

Article 20. Rejection of abnormally low submissions.

(1) The procuring entity may reject a submission if the procuring entity has

determined that the price in combination with other constituent elements of

the submission, is abnormally low in relation to the subject matter of the

procurement and raises concerns with the procuring entity as to the ability of

the supplier or contractor that presented the submission to perform the

procurement contract, provided that the procuring entity has taken the

following actions:

(a) The procuring entity has requested in writing from the supplier or contractor

details of the submission that gives rise to concerns as to the ability of the

supplier or contractor to perform the procurement contract;

(b) The procuring entity has taken account of any information provided by

the supplier or contractor following this request and the information

included in the submission, but continues, on the basis of all such

information, to hold concerns.

to low bids originate in the new rules on electronic reverse auctions and concerns that

electronic bidding may lead to “„auction fever‟ and ill-considered low bids.”

218

The

working group concluded that because of the performance dangers involved with low

bids, contracting officials should be encouraged to explore bids that appear too low even

though this increases the risk of discrimination against offerors.

219

The UNCITRAL

model promotes broader probing of unrealistic prices than the U.S. system because

developing nations lack many of the safeguards that are available in the U.S., such as

“fear of default termination, sophisticated systems for assessing vendors‟ financial

strength, performance security provided by a third party, or a bankruptcy system that

fosters project completion.”

220

This necessitates the additional flexibility to reject low

bids. Unlike the U.S. regulations, the UNCITRAL Model Law gives specific direction as

to the actions that the contracting official should take in the face of a low bid. The Model

(2) The decision of the procuring entity to reject a submission in accordance with

this article, the reasons for that decision, and all communications with the

supplier or contractor under this article shall be included in the record of the

procurement proceedings. The decision of the procuring entity and the

reasons therefor shall be promptly communicated to the supplier or contractor

concerned.

UNCITRAL Model Law on Public Procurement, available online at

http://www.uncitral.org/pdf/english/texts/procurem/ml-procurement-

2011/ML_Public_Procurement_A_66_17_E.pdf.

218

Wallace, supra note 211, at 489.

219

Yukins, supra note 216, at 480:

The proposed changes would vest contracting officials with substantial discretion

to exclude bids that seemed unrealistically low. … Because of this potential

discriminatory impact, the UNCITRAL working group members noted that it is

important to stress that the “price realism” review process must be transparent and

meant to enhance, not reduce, competition.

220

Id. at 482.

Law still grants the official a tremendous amount of discretion to addressing an

“abnormally low” price if the official continues to espouse concerns over the low bid

after investigation.

The European Union Directives, like the UNCITRAL Model Law, serve to

provide a framework for member states to enact their own version of the rules while

allowing a certain amount flexibility for member states to introduce variations to account

for particularities relative to that country‟s procurement system.

221

The Directives were

first drafted in the 1970s and cover three areas: services, goods, and construction

works.

222

The European Commission keeps a “scoreboard” of the level of

implementation for each member state, so the member states are incentivized to

implement the directives within a set timeframe.

223

The European Union Directives are governed by many of the basic principles that

guide the U.S. system, such as “open competition, equity, and transparency.”

224

In terms

of realism analysis, the Directives, like the UNCITRAL Model Law, grant contracting

officers the discretion to reject abnormally low bids but do not mandate their rejection.

225

221

Jean-Jacques Verdeaux, Public Procurement in the European Union and in the United

States: A Comparative Study, 32 Pub. Cont. L.J. 713, 721 (Summer 2003). Unlike the

Federal Acquisition Regulation, the purpose of the directives in the European context is

“drafting lines for national legislators and not a roadmap for procurement officers.” Id. at

723.

222

Id.

223

Id. at 725. The European Commission can bring an action against a member state that

does not implement a directive within the set timeframe. Id.

224

Id.

225

Council Directive 2004/EC/18, art. 55. The Directive reads as follows:

Contracting officials are, however, required to investigate unusually low prices.

226

If a

contracting official decides to reject a bid as too low because there are no supporting

circumstances justifying the abnormally low price, he must inform the European

1. If, for a given contract, tenders appear to be abnormally low in relation to the

goods, works or services, the contracting authority shall, before it may reject

those tenders, request in writing the details of the constituent elements of the

tender which it considers relevant. Those details may relate in particular to:

(a) the economics of the construction method, the manufacturing process or the

services provided;

(b) the technical solutions chosen and/or any exceptionally favourable conditions

available to the tenderer for the execution of the work, for the supply of the goods

or services;

(d) compliance with the provisions relating to employment protection and

working conditions in force at the place where the work, service or supply is to be

performed;

(e) the possibility of the tenderer obtaining State aid.

2. The contracting authority shall verify those constituent elements by consulting

the tenderer, taking account of the evidence supplied.

3. Where a contracting authority establishes that a tender is abnormally low

because the tenderer has obtained State aid, the tender can be rejected on that

ground alone only after consultation with the tenderer where the latter is unable to

prove, within a sufficient time limit fixed by the contracting authority, that the aid

in question was granted legally. Where the contracting authority rejects a tender

in these circumstances, it shall inform the Commission of that fact.

Id.

226

Id. Italian law requires the automatic exclusion of abnormally low tenders based upon

mathematical criterion. Totis Kotsonis, Italian Law on the Automatic Exclusion of

Abnormally Low Tenders: SECAP SpA v. Commune di Torino, Pub. Procurement L.R.

NA268, 269 (2008). There have been several cases attempting to reconcile Italian law

and the E.C. requirement to investigate abnormally low tenders. Martin Dischendorfer,

Abnormally Low Bids Under the E.C. Procurement Directives: A Note on Joined Cases

C-285/99 and 286/99, Pub. Procurement L.R. NA30-32, 30 (2002). In Impresa

Lombardini SpA – Impresa Generale di Construzioni v. ANAS – Este nazionale per le

Strade, the court found that if the contracting official utilizes mathematical methods to

identify abnormally low tenders, rather than exclude them, this does not violate E.C. law.

Id. at 31.

Commission of his only if the tender is abnormally low because the tenderer has obtained

State aid.

227

Although the United States has the safeguards described above to protect against

performance failure that many countries lack, the U.S. procurement system could benefit

from the precautions implemented abroad because ideally abnormally low bids should be

identified before any performance lapse can take place. The international procurement

community grasps the serious ramifications of signing up to a low offer; the United States

should be equally concerned and take similar precautions in order to avoid performance

problems.

VII. RECOMMENDATION

FAR Part 15 needs to be rewritten to elucidate the purpose and mechanisms for a

price realism analysis. As demonstrated by the GAO and court cases discussed above,

many contracting officers “cut and paste” realism analysis language from past

solicitations without understanding the consequences of including that language, or fail to

provide for a realism analysis in efforts where one should be performed or where they

intend to perform a realism analysis. Many contracting officers do not understand the

difference between price realism and price reasonableness.

The FAR can be revised to provide practical tools to contracting officers and price

evaluators without compromising the broad application of realism analysis that the

committee that oversaw the FAR Part 15 rewrite sought to preserve. Implementation of

the ABA Public Contract Law Section‟s suggestion that cost realism and price realism

should appear under separate sections would go a long way towards clearing up the

227

Id.

confusion that presently exists. FAR 15.404-1 should be divided into three subparts: a

subpart outlining the general objectives of price and cost analysis, a subpart on price

analysis, and a subpart on cost analysis. Price realism analysis should appear under the

price analysis subpart, and the FAR should be revised to include the term “price realism”

rather than referring to cost realism analyses on competitive fixed-price incentive

contracts or competitive fixed-price type contracts. The price realism definition

suggested by the Section – “Price realism analysis is a means by which the government

protects itself from the risk of poor performance where an offeror would incur a financial

loss to properly perform the contract because its proposed price is unreasonably low” –

should be revised to take out the reference to “unreasonably low” prices because it adds

to the confusion regarding reasonableness versus realism. A more logical definition

would be along the lines of: “Price realism analysis is a means by which the government

protects itself from the risk of poor performance on a fixed-price effort where a vendor

bids too low, or offers too low a price, to successfully meet contract requirements at the

proposed price.”

The current FAR language is adequate in terms of conveying to contracting

officers when a price realism analysis is appropriate. The language regarding

“exceptional cases” should remain to stress that price realism analysis is appropriate for

only a small number of procurements, when “new requirements may not be fully

understood by competing offerors, there are quality concerns, or past experience indicates

that contractors proposed costs have resulted in quality or service shortfalls.”

228

FAR 15.404(d)(3).

In terms of guidance on how to perform a price realism analysis, the FAR should

advise contracting officers up front that the best way to evaluate price realism is to

include it as part of the technical or risk evaluation or as part of the responsibility

determination, and should state that no most probable cost analysis may be developed for

a price realism assessment. An example of the type of language that could be used is as

follows:

For price realism analysis, unlike cost realism analysis, no most probable cost

shall be developed. The results of a price realism analysis shall be incorporated

into a technical evaluation as part of an „understanding the requirement‟ factor, as

part of the risk assessment, or as part of the responsibility determination. The

solicitation shall state that if an offeror proposes a price that is too low, this will

be reflected in either the results of the technical evaluation or the responsibility

determination.

Guidance along these lines would not compromise the discretion afforded to

contracting officers by the regulations, the GAO, and the courts; it would only make it

easier for contracting officers to understand when price realism is appropriate, how to

incorporate it into a solicitation, and how use the results of the realism analysis in an

evaluation.