Introduction

In this era of sequestration and decreased defense spending, paying close attention to cost and price issues is of paramount importance to contractors submitting proposals to the federal government. Nine recent bid protest decisions from the U.S. Government Accountability Office (GAO) and U.S Court of Federal Claims (COFC) provide important guidance for contractors with respect to the nuanced rules governing an agency’s evaluation of cost/price factors.¹ The purpose of this article is to highlight five key legal principles derived from those decisions, and to provide brief commentary concerning best practices for contractors to use these principles to their advantage.

The Five Principles

1. Remember That the Agency Must Give Cost/Price at Least Some Consideration and That, If Using Notional Scenarios, the Agency Must Normalize Proposal Costs to Provide a Consistent Basis for Evaluation.

In a best-value procurement, even where the solicitation states that price is of less importance than other, non-price, factors, the agency still “must meaningfully consider cost or price to the government in making its selection decision.” Glotech, B-406761 et al., at 7 (citation omitted). This is because, to be meaningful, a best-value determination requires a cost-benefit analysis. Id. (citation omitted). “Thus, before an agency can select a higher-priced proposal that has been rated technically superior to a lower-priced but acceptable one, the decision must be supported by a rational explanation of why the higher-rated proposal is, in fact, superior, and explaining why its technical superiority warrants paying a price premium.” Id. (citation omitted).

An agency may make use of notional scenarios in its solicitation, as long as the “agency’s chosen method of evaluation” for those scenarios “include[s] some reasonable, common basis for evaluating or comparing ... relative costs.” IBM, B-407073.3 et al., at 8 (citation omitted). This normalization of proposal costs ordinarily “involves the measurement of [competing] offerors’ costs against the same baseline” to facilitate “the establishment of common estimates by the agency.” Id. (citation omitted).

The lesson here is that a superior technical evaluation alone will not win a procurement, even in the best-value context. In this era of sequestration, with the looming specter of disappointed low-priced bidders protesting unsuccessful procurements, contracting officers may find technically acceptable but lower-priced proposals preferable to their technically optimal but premium-priced competitors. A prospective offeror should keep this dynamic in mind when formulating its bidding strategy because the GAO may not be receptive to pure technical superiority arguments in a subsequent protest. That said, a prospective low-priced offeror should be mindful that the agency might be obliged to adjust the offeror’s proposed costs upward as part of its normalization of proposal costs, in the event that the agency made use of notional scenarios and such adjustment is necessary to provide for a common evaluative baseline.

2. Understand the Distinction Between Cost-Reimbursement and Fixed-Price Contracts Regarding an Agency’s Use of Realism Analysis, As Well As the Nuances Governing Such Analyses in the Fixed-Price Context.²

In the context of a cost-reimbursement contract, the agency may adjust the offeror’s proposed costs pursuant to a cost realism analysis because, irrespective of the offeror’s proposal, the government must reimburse all allowable costs that the contractor actually incurs. PAE, B-407818, at 4 (citing, inter alia, Federal Acquisition Regulation (FAR) Sections 15.305(a)(1), 15.404-1(d)). Thus, a cost realism analysis is required to determine whether an upward cost adjustment is appropriate. See id. (citing FAR Section 15.404-1(d)(1)).

By contrast, in the context of a fixed-price contract, a realism analysis is not required because the government’s cost liability is fixed regardless. Id. (citation omitted). It is the fixed-price contractor who “bears the risk of any cost escalation” and, therefore, no cost adjustment could be appropriate. See id. (citation omitted). That said, the agency may undertake a discretionary price realism analysis, but only within a narrowly circumscribed set of circumstances. Namely, the agency must provide “reasonable notice,” through a written solicitation provision, which specifically states that low pricing will be considered as reflecting on the offeror’s technical capability to perform and may be grounds for elimination from the competition. Id. at 6 (citing, inter alia, FAR Section 15.404-1(d)(3)); see also Triad Int’l, B-408374, at 11 (citations omitted) (concluding “that the agency improperly applied an unstated evaluation factor in determining that the protester’s proposed pricing was so low as to call into question its understanding of the solicitation requirements and its ability to perform”).

This discretionary price realism analysis must be limited only to the agency’s technical evaluation of the proposal, and may not encompass an adjustment to the offeror’s proposed costs. See PAE, B-407818, at 4, 6. Without a written notice provision in the solicitation, a realism analysis in the fixed-price context is outright prohibited. Id. at 6 (citations omitted). The GAO will not infer a notice provision from generalized solicitation language requiring the offeror to assure the agency it can meet the solicitation’s technical requirements. See id. at 6-7.

Once the agency elects to undertake a discretionary price realism analysis, it maintains broad discretion concerning the full nature and extent of that analysis. Cohen Fin., No. 13-37, at *42-43 (citations omitted); ABSG, B-404863.7, at 5 (citation omitted). The upshot of this is that, upon completion of its analysis, the agency may choose to select a proposal offered at below-cost prices, perhaps submitted by an offeror seeking to gain a foothold in a new market. See Cohen Fin., No. 13-37, at *40-41 (citations omitted) (“A low price ... is not necessarily an unrealistic one.”); Triad Int’l, B-408374, at 11 (citations omitted) (“[B]elow-cost prices are not inherently improper when offerors are competing for award of a fixed price contract. ...”).

The lesson here is that a disappointed fixed-price offeror cannot attack the price realism of the awardee’s proposal, or the agency’s failure to analyze it as part of the awardee’s technical evaluation, unless a written solicitation provision specifically stated that unrealistically low pricing would reflect on the offeror’s technical capability and could be grounds for elimination. Even then, a reviewing tribunal likely would defer to the agency’s discretion regarding the awardee’s sufficient technical capability. As the cases recognize, there is nothing inherently wrong with a low-priced or even below-cost offer. See Cohen Fin., No. 13-37, at *40-41 (citations omitted); Triad Int’l, B-408374, at 11 (citations omitted).

In no circumstance could the disappointed fixed-price offeror attack the agency’s failure to adjust the awardee’s proposed costs upward. In the cost-reimbursement context, however, a disappointed offeror might succeed in attacking the agency’s failure to adjust the awardee’s unrealistically low costs.

3. Remember That the Agency May Have a Contractual Duty to Conduct a Cost Realism Analysis Even When It Does Not Have a Regulatory Duty to Conduct One Under the FAR.

Where a solicitation provision puts an offeror on notice that the agency will not conduct a cost realism analysis, the agency is not bound by a post-submission regulatory duty to conduct one. See Nuclear Prod. Partners, B-407948 et al., at 12-13 (citing, as examples, FAR Sections 15.305(a)(1), 15.404(d)(2)). Instead, the offeror may challenge such a provision pre-submission as a solicitation impropriety. See id. at 13 (citing 4 C.F.R. Section 21.2(a)(2)). Nevertheless, this same principle of adherence to a solicitation’s terms imposes a post-submission contractual duty on the agency to analyze the various offerors’ proposed costs consistent with any stated evaluation criteria from the solicitation. See id. at 14 (citations omitted). Depending on the evaluation criteria, this duty may amount to a cost realism analysis in all but name.

When an agency fails to comply with a duty to conduct a cost realism analysis—whether regulatory or contractual—and this failure extends to its evaluation of all offerors’ proposals, the argument that a given protestor was not prejudiced because all protestors were treated equally will not avail. See id. at 17. This is because, without the requisite cost analysis, prejudice cannot be determined and therefore must be presumed. See id.

Here, a prospective offeror should draw three lessons. First, the offeror should take care not to forfeit any good-faith pre-submission challenge to a solicitation provision that disclaims the agency’s regulatory duties to perform a cost realism analysis. Second, whether in lieu of a regulatory challenge or in addition to one, the offeror should scrutinize the solicitation’s evaluation criteria for additional protest grounds that may affect its ability to win the contract. If the offeror believes the evaluation criteria competitively prejudice it, the offeror has the option of protesting the solicitation before the closing date. Finally, the offeror should not be daunted by an agency’s common failure to conduct a cost realism analysis that extended to all offerors. This alone will not adversely impact the standard prejudice inquiry; indeed, it will create a presumption of prejudice.

4. Provide a Sufficient, Documented Basis for Proposed Cost Savings from Innovations That Improve Labor Productivity.

When an offeror proposes cost savings through innovative processes that improve labor productivity, but the proposal does not include historical data documenting past—pre-innovation—productivity rates as a baseline for comparative purposes, the agency has a reasonable basis for adjusting the offeror’s proposed costs upward to conform to the agency’s own estimated productivity rates. See Palmetto, B-407668 et al., at 26-27.

The lesson here is simple but critical. A prospective offeror proposing cost savings through innovations that improve labor productivity should make sure to include historical productivity data in its proposal. Without such a baseline, the proposal is vulnerable to upward adjustment by the agency, as well as subsequent protests by disappointed competitors challenging the cost realism of the proposal’s labor-productivity rates.

5. Clearly Delineate Between Previously Implemented Cost Savings from Innovations and Additional Incremental Cost Savings in a Proposal.

Where proposed innovations have been partially implemented in past performances, the burden is on the offeror to demonstrate, through “an adequately written proposal,” additional incremental cost savings not already reflected in the proposal’s historical costs. See Noridian, B-401068.13, at 5 (citations omitted). If the proposal does not clearly delineate between historical cost savings and future incremental cost savings, and the agency provided the offeror with an opportunity to clarify its proposed savings during discussions, the agency has a reasonable basis for adjusting the offeror’s proposed costs upward. See id. at 5-6.

Here, the prospective offeror should again draw three lessons. First, the offeror should take care to delineate clearly between historical cost savings and future incremental savings from proposed innovations. The burden is on the offeror to provide an adequate delineation in its written proposal. Second, if the agency engages the offeror in discussions, the offeror should make sure to provide any remaining clarifications necessary to isolate the additional cost savings from innovations included in its proposal. If the agency fails to engage the offeror in discussions concerning inadequate delineation, that failure may become a basis for protest in the event that the agency subsequently adjusts proposal costs upward. Finally, the offeror must document and justify any cost approach or strategy that results in cost savings or lower labor rates. Absent such documentation, the agency may adjust the offeror’s costs upward.

Conclusion

To reiterate, the nine recent decisions discussed in this article provide the following five lessons for prospective offerors:

(1) Remember that the agency must give cost/price at least some consideration and that, if using notional scenarios, the agency must normalize proposal costs to provide a consistent basis for evaluation.

(2) Understand the distinction between cost-reimbursement and fixed-price contracts regarding an agency’s use of realism analysis, as well as the nuances governing such analyses in the fixed-price context.

(3) Remember that the agency may have a contractual duty to conduct a cost realism analysis even when it does not have a regulatory duty to conduct one under the FAR.

(4) Provide a sufficient, documented basis for proposed cost savings from innovations that improve labor productivity.

(5) Clearly delineate between previously implemented cost savings from innovations and additional incremental cost savings in a proposal.

Endnotes

1 The nine decisions, in order of discussion, are:

(1) Glotech, Inc., B-406761 et al., 2012 CPD ¶ 248 (Comp. Gen. Aug. 21, 2012) (protest sustained)

(2) IBM-U.S. Federal, B-407073.3 et al., 2013 CPD ¶ 142 (Comp. Gen. June 6, 2013) (protest sustained)

(3) ABSG Consulting, Inc., B-404863.7, 2013 CPD ¶ ___ (Comp. Gen. June 26, 2013) (protest denied)

(4) PAE Government Services, Inc., B-407818, 2013 CPD ¶ 91 (Comp. Gen. Mar. 5, 2013) (protest denied)

(5) Triad International Maintenance Corp., B-408374, 2013 CPD ¶ ___ (Comp. Gen. Sep. 5, 2013) (protest sustained)

(6) Cohen Financial Services, Inc., No. 13-37, ___ Fed. Cl. ___, 2013 U.S. Claims LEXIS 1068 (Aug. 12, 2013) (judgment on administrative record granted to government and intervenor)

(7) Nuclear Production Partners LLC, B-407948 et al., 2013 CPD ¶ 112 (Comp. Gen. Apr. 29, 2013) (protest sustained in part and denied in part)

(8) Palmetto GBA, LLC, B-407668 et al., 2013 CPD ¶ 53 (Comp. Gen. Jan. 18, 2013) (protests denied), and

(9) Noridian Administrative Services, LLC, B-401068.13, 2013 CPD ¶ 52 (Comp. Gen. Jan. 16, 2013) (protest denied).

2 In order to distinguish clearly between the cost-reimbursement and fixed-price contexts, this section of the article adopts the GAO’s convention of using the term “cost realism” to refer to the evaluation of cost-reimbursement contracts, and the term “price realism” to refer to the evaluation of fixed-price contracts. See ABSG, B-404863.7, at 3 n.3 (citation omitted). Interestingly enough, as the GAO observed in ABSG, only the term “cost realism” is actually defined in the Federal Acquisition Regulation. See id. (citation omitted).