Tuesday, January 10, 2012

Price Reasonableness vs Price Realism

Within the context of Government contracting, there are many terms that have very specific meanings. Sometimes, terms are used interchangeably when they have very different meanings. Such is the case of "price reasonableness" and "price realism".

Price reasonableness looks at the price to be paid for goods and services. At its root, the Government performs price reasonableness analyses to ensure that it is not paying too much. When there is full and open competition for a fixed-price contract, the purpose of price reasonableness is to determine whether the price is too high.

Price realism on the other hand looks at the risk of low-balling, buying-in, or misunderstanding the requirements. Is the offeror's price overly optimistic or impractically low? Is the offeror asking too little? In a fixed-price environment, price realism is primarily focused on whether a contractor understands the requirements. Assuming the contractor understands the requirements, it is okay for it to choose to buy-in to win the competition. (This would be different if the solicitation were for a cost-type contract. Under cost-type solicitations, the Government would be performing "cost realism" as opposed to "price realism" and "buying-in" is often rejected).

The solicitation will specify whether price reasonableness, price realism, or both will be performed. Recently, a company protested the award of a contract to a competitor who, in their opinion, offered an unrealistically low price. The appellant argued that the Government did not perform an adequate price realism analysis. GAO rejected the appeal on the bases that the solicitation did not include a requirement for a price realism evaluation. GAO stated that the appellant's argument reflected a lack of understanding as to the distinction between price reasonableness and price realsim (see GAO B-405724).

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