There are a variety of methods the Government utilizes to determine the reasonableness of prices. In the context of fixed-price contracts, the Government can perform Price Reasonableness Determinations and Price Realism Determinations. Simply stated, "reasonableness" considers whether the price is too high while "realism" considers whether the price is too low. Click here to read a previous posting on Price Reasonableness vs Price Realism. The Government can use either method or both but must also state in the solicitation its intent. If it does not list price reasonableness and/or price realism as evaluation factors, the Government cannot base its selection on the application of those factors.
To illustrate, consider the bid protest decision handed down earlier this week by the Comptroller General (see Lilly Timber Services, B-411435.2).
Lilly protested the award of a fixed-price contractor to a competitor, challenging Agriculture's conclusion that Lilly's low prices created a risk of unsuccessful performance. The solicitation lacked any evaluation criteria that reasonably would have put vendors on notice that Agriculture intended to consider "price realism" of vendor prices. GAO sustained the challenge.
The solicitation stated that award would be made to the lowest reasonable price and responsive/responsible (past performance) vendor. According to the solicitation, past performance was considered equal in weight to price. In evaluating the prices, Agriculture noted that Lilly's prices were more than 30 percent lower than the Government estimate and therefore created a risk of unsatisfactory performance.
However, the solicitation did not furnish vendors with reasonable notice that Agriculture intended to perform a price realism analysis. Rather, the solicitation provided only for the evaluation of the reasonableness of the quoted price, that is, whether the price was unreasonably high. Below-cost prices are not inherently improper when vendors are competing for award of a fixed-price contracts. Because Agriculture's award decision "clearly relied" on its assessment of risk related to the protester's low fixed-price, the GAO concluded that Agriculture failed to reasonable evaluate Lilly's quotations.