By Jeffrey Shen, Red Team Consulting
When awarding contracts, each Federal Agency has its own methodologies for evaluating cost and price. Companies often assume that the Government favors lower priced offers, but more commonly, the Government is interested in making sure that the proposed price demonstrates a clear understanding of the contract requirements.
Take price reasonableness and cost realism. These terms make a regular appearance in solicitations, but what do they mean? Reasonableness is used to answer the question, “is the price too high” or is the Government paying too much for the contract work? Realism is used to answer the question “is the price too low” or does the contractor understand the requirements?
Understanding these evaluation terms and nuances is critical. One of the best sources to learn more about how Agencies make award decisions, and how price evaluation methodologies are used, is by reviewing protest documentation (www.gao.gov). A recent Federal Health protest describes an instance when an offeror’s price was in fact too low.
Earlier in 2017, AdvanceMed Corporation protested the award of the CMS Unified Program Integrity Contract (UPIC) IDIQ contract to Health Integrity. The solicitation was competed on a best-value trade-off basis where the five non-cost evaluation factors, when combined, were significantly more important than price. Business proposals were evaluated for price reasonableness and analyzed for cost realism to determine if the offeror’s proposed costs demonstrated an understanding of the requirements.
While AdvanceMed’s technical score was “very good” and Health Integrity was “satisfactory”, the company’s pricing was $106M, versus Health Integrity’s $85M, which was a 23.9% premium on price. CMS awarded the UPIC contract initially to Health Integrity since the non-cost factor advantage was negligible when compared to the price differential.
AdvanceMed challenged the Agency’s cost realism analysis, arguing that its evaluation failed to consider whether the awardee’s proposed costs were realistic to meet the technical requirements. GAO agreed that Health Integrity did not offer a realistic price.
In particular, Health Integrity did not account for certain administrative requirements, rolled up multiple tasks under a single labor resource, and did not price hours for some labor categories. Altogether, GAO noted that Health Integrity did not account for roughly $19.2M in potential costs! AdvancedMed clearly understood the contract work and developed a Basis of Estimate (BOE) and subsequent price that considered all of the requirements. While the cost was higher, it was realistic.
Cost realism really answers the broader question of whether companies know how to perform the work or whether they have properly estimated all the work required. Companies are often in a race to lower pricing to be competitive, but we ask companies to make sure that their solution or BOE is not too low for cost realism purposes. When it comes to solution-based contracts, an understanding of the requirements and a realistic price is more important than embedding creative (and unrealistic) strategies to lower costs. An unrealistic BOE will get you into as much trouble as unrealistically low rates.