Reasonableness isn't realism

Coming of age in the late '90s meant that science-fiction disaster films gave me conflicting messages about the government's sensitivity to price. In 1996's Independence Day, hyping the myth of the $600 hammer, we learned that the government is totally price insensitive:

President Thomas Whitmore: I don't understand, where does all this come from? How do you get funding for something like this?

Julius Levinson: You don't actually think they spend $20,000 on a hammer, $30,000 on a toilet seat do you?

Then, in 1998, Steve Buscemi in Armageddon riffed on a quote most commonly ascribed to John Glenn and taught us that, maybe the only the thing the government really cares about is low prices:

You know we’re sitting on four million pounds of fuel, one nuclear weapon and a thing that has 270,000 moving parts built by the lowest bidder. Makes you feel good, doesn’t it?

Today, I can interpret both of those quotes as evidence that the government uses different methods for evaluating proposals, saying things like "best value" or "lowest-price technically acceptable". But the cultural belief is that sometimes the government is willing to pay ridiculous sums of money and sometimes the government is willing to risk it all just to save a buck.

In practice, the government tries to manage through these extremes through the use of "price reasonableness" and "price realism".[1] While reasonableness and realism might sound the same to normies who don't spend their time thinking about government contracts, reasonableness and realism actually operate at the opposite ends of the spectrum.

Price reasonableness is the counterweight to Independence Day: if a vendor proposes a $20,000 hammer, the government is supposed to evaluate that price and say "that's unreasonable!"

Price realism is the counterweight to Armageddon: if a vendor is willing to bid so low as to put civilization as we know it in jeopardy just to win a contract (presumably to hit quarterly numbers), the government is supposed to evaluate that price and say "that's unrealistic!"[2]

In general, the government will always evaluate whether a price is reasonable. And one of the most common ways that the government can determine a that price is reasonable is if there is "adequate price competition." If two companies independently make offers with prices that are pretty close to each other, the government can usually conclude that the prices are reasonable.[3]

But does this work in the other direction? In other words, if there is adequate price competition, can the government conclude that a price is realistic?

That question, among other issues, was at issue in last week's decision from the Court of Federal Claims in DigiFlight, Inc. v. United States. [Content warning for government lawyers: there are some serious ouchie benchslaps in the opinion. Content warning for everyone else who chooses to read the opinion: grab some popcorn.]

The background of DigiFlight is that the Army issued a task order against a GSA Blanket Purchase Agreement for "Programmatic support for the United States Army Aviation and Missile Command" and got back three quotes. The government evaluated all three quotes, found all companies to be technically acceptable or better, and made an award to The Tolliver Group.

Although the actual prices are redacted, we can surmise from the facts that DigiFlight came in as the high bidder, while Tolliver and the third company came in with lower bids. Tolliver won the contract, and DigiFlight protested in the COFC that Tolliver's prices were unrealistically low. And here we are.[4]

In its award decision, even though the government evaluators acknowledged that Tolliver's price came in "well below" the government's independent cost estimate, they wrote "found that multiple companies offering low composite rates suggested there was no evidence of an attempt to offer unrealistically low prices as a strategy to receive the award."

And, well, the court was having none of it:

Although the Court is not in a position to determine whether the prices quoted by Tolliver and [REDACTED] were, in fact, unrealistically low, there is no doubt that the agency’s conclusion that they were realistic was predicated on an irrational assumption. The conclusion that it would be “inconceivable” that both Tolliver and would underbid a contract lacks any rational basis. Surely, it is conceivable that two companies—competing for award—would have similar motivations for lowering the price of their quotations, even to the point of offering unrealistically low prices. Why is it that one company would bid an unrealistically low price (hence the whole reason for a price realism analysis), but two offerors would not? Is it not possible that two offerors could have underestimated the work required, not understood the requirements, or for some reason saw some value in this contract that made it worth underbidding? There may be some explanation for the agency’s conclusion that no two offerors would underbid a contract—the Court cannot conceive of one—but to any extent there is, such an explanation is not found in the administrative record. And, without any explanation in the administrative record as to why this seemingly irrational conclusion is, in fact, rational in this case, the Court cannot find that this conclusion is reasonable. This conclusion, therefore, does not support a finding that the agency conducted a rational price realism analysis as was required by the RFQ.

Bottom line: no, you can't just rely on price competition for price realism.[5]

The court is giving some good life advice here! If someone offers you a deal that seems too good to be true, you are right to be skeptical. And just because two people offer you similar terms, you shouldn't be relieved of your skepticism.

And if you're Steve Buscemi in Armageddon, this should bring you some comfort. Just because a low-bidder has company in scraping the bottom of the price barrel doesn't mean that they should get the bid.

It may be Independence Day reasonable to let multiple bidders screw themselves and be totally underwater on a proposal, but that doesn't make their quotes Armageddon realistic. Reasonableness is not realism, and two low bidders don't make a right. Fade to black and roll credits.

[1] Technically, there's a difference between "costs" and "prices" and the FAR uses both terms. But I'm going to lump them together. Breathe, you'll be fine.

[2] Actually, the government doesn't really care if a vendor is willing to bid too low. The government uses price realism to make sure that a vendor understands what the government wants. If the government says "I want a Ferrari" and a vendor says "cool, I'll sell you a brand-new Ferrari for $10,000", the government uses price realism to double check the math. But if the vendor looks at the government square in the eye and says "Yes, I know that a brand new Ferrari is extremely expensive, many many multiples above $10,000. But I have sooo many Ferraris and I will take the loss here, but please buy my Ferrari", the government could — though I am certainly not offering legal advice here — look at the vendor, look square into the camera, shrug, (document the hell out of it for the file), and move past the price-realism concerns. There might be other issues in play, likely criminal, regarding why someone would do this, but price realism wouldn't be the blocker.

[3] It's sort of a shortcut, though. If one bidder offers to sell you a Ford F-150, which has a starting MSRP of $33,695, to the tune of $350,000 and a second bidder offers to sell you one for $360,000, you might want to double check your requirements.

[4] Before getting to the question of whether adequate price competition satisfies a price realism analysis, you might wonder why the government even bothered with a price-realism analysis here? After all, even though the government will always look to price reasonableness, it doesn't need to do a price-realism analysis for commercial firm-fixed price acquisitions.

But if the government says it's going to do a price-realism analysis, it has to do one. And, in this case, the solicitation used the magic words "[t]he government will assess the price quotation to ensure the proposed pricing is realistic for the work to be performed, reflects a clear understanding of the requirements, and is consistent with the various elements of the other parts of the quotation." So, the government decided to make life harder for itself. Fine, good.

[5] There are, I guess, nuances here around whether the government could accomplish that goal by writing language into the solicitation around price competition. And the court also distinguishes between relying on price competition per se versus relying on price competition along with other factors. But the point is that, by itself, price competition ain't gonna cut it for price realism.

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