The Government has the authority to cancel a solicitation as long as it can provide a reasonable basis for doing so. If an agency cannot purchase something at a fair and reasonable price, as required by FAR (Federal Acquisition Regulations), cancelling the solicitation would be warranted.
A determination of "fair and reasonable" is a matter of agency discretion, involving the exercise of business judgment. In establishing price reasonableness, an agency may consider any number of factors, including prior contract history and the "independent government estimate" (IGE). There are bid protest cases on file where the GAO has sustained cancellations as proper when the lowest price exceeded the government estimate by 7.2 percent.
A recent bid protest case (Estrategy Inc., B-406466 and 467 dated May 4, 2012) illustrates this point. The government provided contemporaneous documentation that it prepared an in-depth analysis of the proposed price. Specifically, the contracting officer considered both the government estimate and the agency's prior contracting history, which included consideration of the price paid under an earlier contract as well as prices paid for prior contracts adjusted for inflation. As a result of this analysis, the contracting officer concluded that adequate price competition did not exist and that an award could not be made at a reasonable price.
Looking at this documentation, the GAO ruled that the Agency's determination was reasonable and the protester's assertions to the contrary were without merit.
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