United States: Analyzing Price Realism: When A Deal Is Too Good To Be True

Ordinarily, agencies may not evaluate whether an offeror's price in a fixed-price acquisition is unrealistic (or "too low").  In Valor Healthcare, Inc., B-412960; B-412960.2, July 15, 2016, 2016 CPD ¶ ___, however, the U.S. Government Accountability Office (GAO) has reminded parties that when a solicitation calls for such a price-realism analysis, an agency's failure to do so may provide disappointed offerors with a viable protest ground.

Clarification of Terms

First, it is necessary to clarify terms that are easily and often confused.  Price reasonableness, which agencies must analyze in every procurement, concerns whether an offeror's proposed price (for either a fixed-price or flexibly-priced contract) is "too high."  See Federal Acquisition Regulation (FAR) 15.402(a).  A price-reasonableness analysis does not consider whether the offeror's proposed price or proposed costs might be too low.

Cost realism, which agencies must analyze in cost-type procurements, involves whether an offeror's proposed costs of performance are the costs most likely to be incurred, given the offeror's specific technical solution and circumstances.  FAR 15.404-1(d).  Under a cost-type contract, an offeror's proposed costs are not dispositive because, regardless of the costs proposed, the government must pay the contractor its actual and allowable costs.  So, in cost-type procurements, an agency evaluates proposals using costs adjusted to reflect what the agency determines to be the most probable costs of performance.  FAR 15.404-1(d)(2)(i).

Price realism, a term that does not appear in the FAR, is a species of cost realism that may be analyzed under fixed-price procurements.  FAR 15.404-1(d)(3).  It considers whether an offeror's proposed price is "too low" for what the offeror proposes to do, such that there is a risk the offeror does not understand the procurement's technical requirements or may not satisfactorily perform at the proposed price.  Id.  Ordinarily, because contractors bear the risk of cost overruns on fixed-price contracts, there is nothing inherently objectionable about an offeror proposing a fixed price that is unusually low—or even below cost.  See, e.g., JCMCS, B-409407, Apr. 8, 2014, 2014 CPD ¶ 125 at 2.  This rule often frustrates companies wanting to protest a fixed-price contract award on the ground a competitor "underbid" the requirements.  Indeed, agencies are prohibited from evaluating the realism of fixed-price proposals without giving offerors prior notice.  See, e.g., Emergint Techs., Inc., B-407006, Oct. 18, 2012, 2012 CPD ¶ 295 at 5.

Merits of the Protest

The agency in Valor Healthcare took the unusual but permissible step of including a price-realism component in its fixed-price solicitation.  The solicitation advised offerors that "[p]roposals unrealistically high or low in price, when compared to the Government estimate, and market conditions evidenced by other competitive proposals received, may be indicative of an inherent lack of understanding of the solicitation requirements and may result in proposal rejection without discussion."  The solicitation also required offerors to submit cost data for the various elements of their pricing.

When the agency awarded the contract, the higher-priced incumbent protested, alleging among other things that the awardee's price was too low to cover the labor costs of a workforce capable of performing at the level the awardee proposed—particularly given the awardee's proposal to use the protester's incumbent personnel.  Although the agency evaluated price reasonableness (i.e., whether proposed prices were too high), nothing in the contemporaneous documentation of the procurement demonstrated the agency ever evaluated price realism (i.e., whether proposed prices were too low), as the solicitation required.

In response to the protest, the contracting officer stated that the agency reviewed the supplied cost data and saw no reason to doubt the awardee's price realism.  Also during the course of the protest, the agency prepared pricing charts that purported to show the realism of the awardee's price.

The agency's post hoc arguments did not convince the GAO.  After noting the complete absence of contemporaneous documentation of a price-realism analysis, the GAO observed that even the post hoc arguments failed to address the awardee's labor costs, which accounted for the majority of the costs of performance and were at the heart of the protest ground.  And, although GAO is normally very deferential to agencies' cost- and price-realism analyses, here the agency apparently had conducted no analysis at all.  Because there was a reasonable possibility a proper price-realism analysis would have resulted in a different award decision, the GAO sustained the protest.


A company bidding on a fixed-price opportunity should examine the solicitation carefully for indications of whether the agency intends to analyze price realism.  Indications may be direct and unmistakable, or vague and ambiguous.  What matters is whether the agency puts offerors on notice that it will consider pricing to determine whether offerors understand technical requirements.  If the solicitation contains vague language that could be read various ways, firms should consider seeking clarification before the date set for receipt of proposals.  If price realism is to be evaluated, offerors should be sure to provide sufficient support for the realism of their pricing, especially prices that may appear lower than the agency might expect.

When a solicitation includes a price-realism component, and an offeror loses the contract to a competitor with a suspiciously low price, protest counsel can help determine if the disappointed offeror may have a viable protest ground.  Although GAO affords agencies considerable deference in analyzing realism, that deference is not unlimited, as Valor Healthcare demonstrates.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.