Buying-in is Risky but Not Prohibited by FAR

The term "buying-in" is defined in FAR 3.501-1 as "...submitting an offer below anticipated costs, expecting to 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.

Although that definition falls under a section entitled "Other Improper Business Practices", FAR does not expressly prohibit buying-in. Rather, FAR instructs contracting officers to take appropriate action to ensure buying-in losses are not subsequently recovered by the contractor through change orders or follow-on contracts subject to cost analysis.

There are two general risks to the Government associated with contractors who are buying-in. First, it is generally felt that the practice decreases competition. Second, buying-in could, and often does result in poor contract performance as contractors try to shave expenses to minimize losses.

Contracting officers are instructed to decrease the Government's risk associated with buying-in. One method is to seek a "price commitment" covering as much of the entire program concerned as is practical. For example, in a multi-year procurement, contract for the requirements for all years, not just the first year while leaving subsequent years open for pricing. To illustrate, the Air Force estimated that it needed 186 cranes. Concerned about a buy-in, notified bidders that quantities in excess of its best estimate of 186 cranes would be procured under a new competitive action. This precluded the winning bidder from the opportunity of receiving follow-on contracts at artificially higher prices.

Buying-in applies only to fixed price contracts. In the case of cost type contracts, the Government will be performing cost realism analyses because it needs realistic estimates of its potential expenditures.

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).