iStock_000019708886LargeEditor’s note: This is the third post in a series focused on protest allegations related to cost and price analyses. The first post explained the basic principles on price and cost realism. The second post focused on the adjustments an agency can make during a cost realism analysis. Planned future posts will discuss the role of an offeror’s technical approach in a price/cost realism analysis, price reasonableness, and recent protest decisions involving cost/price analysis issues. 

Like any buyer, the Government wants to pay reasonable prices for the goods and services that it acquires. Agencies often perform a price analysis as part of that effort. The FAR (15.404-1(b)(1)) explains that “Price analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit,” and it provides examples of techniques that can be used to ensure a fair and reasonable price. When a disappointed offeror challenges an agency’s price analysis in a bid protest, the Court or GAO will examine whether the analysis was consistent with the solicitation. The depth of an agency’s analysis is usually within the agency’s discretion, but an agency cannot base its analysis on irrational assumptions or critical miscalculations. This post focuses on protest issues that arise with respect to the two most common price analysis techniques.

To perform a proposal analysis regarding prices, FAR 15.404-1(b)(1) provides seven potential approaches:

  • Comparing proposed prices received in response to the solicitation,
  • Comparing proposed prices to the historical prices paid,
  • Using parametric estimating methods/rough yardsticks (e.g., dollars per pound),
  • Comparison with competitive publishes prices,
  • Comparison to an independent Government estimate (IGE),
  • Comparison of proposed prices to prices obtained through market research, and
  • Analysis of data other than certified cost or pricing data (as defined at 2.101) provided by the offeror.

Although these techniques appear to be straightforward, the comparisons an agency makes as part of a price analysis are often challenged by disappointed offerors who file bid protests. Two of the methodologies that are most often challenged involve (i) comparison of proposed prices to an IGE and (ii) comparison of offerors’ proposed prices to each other.

Independent Government Estimate As a Benchmark

In Afghan American Amery Services Corp. v. United States, the agency compared each offeror’s proposed price to the prices proposed by the other offerors and an IGE. The IGE was based on a prior acquisition of similar items, but did not include data for the security element of the procurement. The protester argued that the IGE was flawed and, thus, that the agency’s realism determination was unreasonable. The Government acknowledged that the IGE was understated but contended that it was not worried about the risk of poor performance because it would be selecting multiple awardees. The Court of Federal Claims rejected this argument, opining that it was illogical to claim that the agency was not concerned with poor performance due to underbidding when that is exactly what a price analysis is intended to address:

The agency failed to evaluate whether the offerors could perform at their proposed prices and justifies that decision by making an apples-to-oranges comparison of the proposed prices to an average rate it had paid for prior work—without adjusting for the fact that the average excluded an entire category of work the . . . offerors proposed to perform. The agency then awarded contracts to two offerors whose total proposed price was even lower than the average the Government knew was already significantly and materially understated. The agency did not meaningfully conduct the price realism analysis it committed itself to in the solicitation, and it could not simply choose to ignore that requirement.

The CFC sustained the protest.

Other protesters have been less successful in challenges to agencies’ use of IGEs. For instance, in Biospherics, inc., as part of its price analysis of initial proposals, the agency compared each offeror’s base period unit pricing to the IGE to identify pricing that was substantially higher or lower than the IGE. The agency deemed a price “significantly low” if was 50% or more less than the IGE and “significantly high” if it was 200% or more higher than the IGE. The agency did not engage in discussions with the protester about its pricing because its base year price was nine percent lower than the IGE, and the year-to-year variance was within the agency’s parameter. However, the agency engaged in discussions with the awardee because its proposed price was significantly below the IGE, and there was a substantial difference between its base year and first option year prices. The agency informed the awardee that its prices were significantly low, and in its final proposal revision, the awardee proposed prices that were within the agency’s parameters. Its proposal was selected for award.

At GAO, the protester argued (1) that the agency’s use of a percentage range to conduct its price analysis was improper and (2) that the IGE was an arbitrary and improper basis for comparison. GAO disagreed, stating that it was not unreasonable to use a percentage range to conduct its price analysis. GAO also rejected the challenge to the IGE, finding that it was based on the prices paid under the existing contract and data substantiated through the Government’s observation of the plant, equipment, and labor mix. GAO pointed out that the fact that the protester’s proposed price did not differ substantially from the IGE supported its finding that the IGE was not arbitrary. Accordingly, GAO denied the protest.    

Median Calculated from Offerors’ Proposals As a Benchmark

The solicitation at issue in Lifecycle Construction Services, LLC required offerors to submit overhead rates and a coefficient for each of the 14 locations where work would be performed. (When a task order was eventually placed, the coefficient would be multiplied by the estimated cost for each element of work, which would be multiplied by the quantity; the contractor’s profit and overhead would be added, yielding the total price for the task order.) As part of the price analysis, the agency calculated the median of 15 offerors’ coefficients for one location—including the coefficients of 4 offerors whose proposals were deemed unacceptable because the proposed prices were unreasonably high. Notably, the median coefficient was materially higher than the IGE. The agency rejected the protester’s proposal because it was more than 15% below the median, which the agency determined indicated a lack of understanding of the requirement.

The protester challenged the rejection of its proposal, arguing that it was unreasonable to compare its coefficient to a median that included coefficients that had been rejected as unreasonably high. GAO accepted that argument and sustained the protest. GAO further stated that even if the median had been a valid benchmark, the agency’s analysis was unreasonable because it only considered the proposed coefficients for 2 of the 14 locations—and nothing in the solicitation indicated that the other 12 locations would not be meaningfully considered.

It should be noted that Lifecycle Construction does not provide a hard-and-fast rule regarding inclusion of prices from rejected offerors in a price analysis. In Kilda Group, LLC, the agency compared the offerors’ proposed prices to a median that included the proposed prices from two proposals that were rejected as technically unacceptable, in part because the offerors did not have an acceptable understanding of the agency’s needs. The protester, citing Lifecycle Construction, argued that the awardee’s proposed price was unreasonable, and the agency would have reached that conclusion if it had done a valid price analysis. GAO disagreed, reasoning that including the price of the two unacceptable offerors had a slight impact on the median (excluding the firm’s prices increased the median by approximately five percent). Thus, GAO determined that although the agency should not have included the excluded offerors’ prices in the median, the protester was not prejudiced by the error.

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In times of increasing fiscal constraints, the Government is likely to place a greater emphasis on price. Price analysis is one tool agencies can use to ensure the Government pays fair, reasonable, and low prices. Contractor should be aware of the rules governing price analyses and arguments that can be made to challenge the reasonableness of an agency’s attempt to get the best price.