UNBALANCED BIDS AND INTERESTED PARTY

[Rodolfo]

Would you be kind to help me to understand if I am in the right path????

An agency issued on 30 December 2010 a Request for Quotation (RFQ) for maintenance of Electric Substations for a base year and two option years. On 7 February 2011 during a meeting had with the agency to find if the contract had been already awarded or not, the Contracting Officer handed to us a letter by which he informed us that award had been made to firm XXXX and that the total amount of award was of Euro 134.735,00.

Since the FAR provision 52.212-2 -- Evaluation -- Commercial Items incorporated in the full text under the RFQ states (VERBATIM) ?The Government will evaluate offers for award purposes by adding the total price for all options to the total price for the basic requirement. The Government may determine that an offer is unacceptable if the option prices are significantly unbalanced [EMPHASIS ADDED]. Evaluation of options shall not obligate the Government to exercise the option(s)? and the RFQ contained the FAR clause 52.217-9 ? ?Option to Extend the Term of the Contract?, we arrived at the conclusion that the total amount of award indicated in the aforementioned letter was erroneous in that it was inclusive also of the prices of the two option year periods. Thus, we requested in writing the unit prices of each line item of the basic year and of each option as well as the total price of the basic year and of each option year period.

On 8 February 2011, the Agency provided the requested information.

An analysis of the prices provided indicates that the price of the Base Year (Euro 54.760,00) is 33% over the first option year and 41% over the second option year (see below).

BASE YEAR: Euro 54,760,00

1ST OPTION YEAR: Euro 41,240,00

2ND OPTION YEAR: Euro 38.735,00

GRAND TOTAL: Euro 134.735,00

The crucial question in this case is whether the pricing of each year is reasonable related to the actual costs that the successful offeror will incur in each year. In other words, each year should carry its proportionate share of cost plus reasonable profit. Instead, this offer was based on overpricing the base year and under pricing the option prices perhaps to shift risk of options not being exercised by the Government, or to secure advance payment. However, federal law requires that Contractor must bear the risk that options are not exercised and prohibits advance payment.

Sometimes offerors unbalance offers by overpricing the base year to obtain Government financing of equipment requirement; however, to perform this service there is not a requirement to purchase any equipment that is suitable for use only in this contract to justify a base year price 33% over first option year and 41% over second option year.

This is a recurring service expected to cost roughly the same from year to year (same quantities, same tasks to be performed, same difficulties, same efforts, etc.). A comparison with historical prices paid by the Government for the same type of service indicates the non-existence of base/option year excessive price differentials except for small increases due to the cost of inflation. Below we provide the prices for the previous years (noting that prices are lower because the quantity of the electrical substations to be serviced was inferior):

BASE YEAR - 14 SEP 2007 - 13 SEP 2008 Euro 49.199,00

1st OPTION YEAR - 14 SEP 2008 - 13 SEP 2009 Euro 50.257,00

2nd OPTION YEAR - 14 SEP 2009 - 13 SEP 2010 Euro 54.008,00

Information in our possession indicates that also the Independent Government Estimate (IGE) did not provide base/option year excessive price differentials. Although at present we do not have the ranking of the other four offerors, we have reason to believe that also their prices do not provide base/option year excessive price differentials. In other words, we strongly believe that the successful offeror?s base/option year prices do not fall within the range of the IGE and other quotes.

Under the awarded contract, during the base year the Government will pay a good chunk of the costs that the successful offeror will incur during the option year periods, and will not get the benefit of the low offer until halfway through the first option period (if the option is exercised). Even great confidence that options will be exercised will not dispel the doubt created by excessive differentials.

We have arrived at the conclusion that Government should have determined that the offer was unacceptable since the option prices are significantly unbalanced (IAW FAR provision 52.212-2 -- Evaluation -- Commercial Items incorporated in full text under the RFQ). We claim that when an offer is grossly unbalanced mathematically it should be viewed as materially unbalanced since acceptance of the offer would be tantamount to allowing an advance payment. The successful offeror has mathematically unbalanced its quotes by front loading costs and profit that should have been allocated over both the base and the option periods. The effect of this is the interest free use of money, with obvious benefits for contract financing. The successful offeror will, in effect, receive advance payment for later contract work (if options are exercised) and advance payments continue to be illegal (IAW 31 U.S.C. 3324 formerly 31 U.S.C. 529), although the rules have been liberalized somewhat.

Furthermore, in this case a materially unbalanced quote exists in the light of the possibility that options will not be exercised. We also note that our price for the base year is lower than the price of the successful offeror contrary to what we were verbally told during the meeting of February 7, 2011.

Since our written request dated 14 February 2011 to resolve our concerns at Contracting Officer level through an open and frank discussion was not taken into consideration, we filed a protest to the GAO

After the protest has been filed, the agency has provided us with the Contracting Officer?s Statement and with the price abstract. However, the price abstract only shows the grand total price (Base plus two Year Options) of the successful offeror, the grand total price (Base plus two Year Options) of the second lower offeror, and the grand total price (Base plus two Year Options) of our quotation. We were not provided with the unit prices of each line item of the basic year and of each option as well as the total price of the basic year and of each option year period of the other quoters and of the IGE. These prices were covered up.

In the document, the Contracting Officer states that 6 offers were received and evaluated them by adding the total price of all options to the basic requirement, therefore a Grand Total of all three years. A comparison of the final prices revealed that the lowest offer Grand Total price for Base plus Two Year Options was ?134, 735. 00 proposed by XXXX. The second lowest Grand Total price for Base plus two Year Options was ?146, 198.76 proposed by another offeror. The third lowest Grand Total price for Base plus two Year Options was ?156,327.00 proposed by the protestor. Based on price competition the Contracting Officer concluded that reasonable competition existed and that the acceptance of the most favorable offer XXXX (Grand Total ?134,735.00), resulted in fair and reasonable price for the Government.

Since there is not a doubt that the offer is unbalanced, we find the Contracting Officer?s statement (VERBATIM) ?the acceptance of the most favorable offer XXXX (Grand Total ?134,735.00), resulted in fair and reasonable price for the Government? not in compliance with the new regulations. While the new regulation continues to define an unbalanced price as one where one or more contract line items is significantly overstated or understated, the critical issue of unbalanced offers is now an assessment of risk. Therefore, the Contracting Officer, before to accept the unbalanced offer, had to consider the risks which would result in accepting it and had to make a determination whether award "will result in paying unreasonably high prices for contract performance or not?. Thus, the Contracting Officer should have reviewed it as a matter of risk and not simply accept it because most favorable to the Government. If the risk were acceptable, then offer could be accepted. We find that the Contracting Officer? s Statement is missing of a mandatory determination that the pricing does not pose an unacceptable level of risk, and the prices the agency is likely to pay under the contract are not unreasonably high. WHAT IS YOUR OPINION ON THIS STATEMENT?

The agency maintains that (VERBATIM) only "interested party" may protest a federal procurement. An interested party is an actual or prospective bidder or offeror whose direct economic interest would be affected by the award of a contract or by failure to award a contract. A bidder or offeror must be "next-in-line" for award to be an interested party. Protester's price of ?156,327.00 was the third-lowest offer in a procurement evaluated solely on price. The offeror whose price is ?146,198.76 is next-in-line and would be an interested party whose direct economic interests have been affected by the award of the contract to the awardee. Therefore, Protester's assertion that "its direct economic interests have been affected by the Government (sic) acceptance of the unbalanced offer" is incorrect and fails to consider the determinative fact that Protester is third-in-line for award. Assuming arguendo that awardee's prices are impermissibly unbalanced, Protester would not have a substantial chance of receiving the award as the third-in-line offeror in a procurement evaluated exclusively on price. Protester is not an interested party, and this protest should be dismissed accordingly.

Our firms knows the rule of the "Interested Party". In challenges of the evaluation of proposals and the awards of contracts, this generally means and offeror that would potentially be in line for award if the protest were sustained. The agency does not confute our theory of the unbalanced offer, but as the only matter argues that we are not an interested party to protest the award because we would not be in line for award if our protest were to be sustained. The agency points out that there is one proposal with a total price lower than ours that would be considered for award ahead of us. (Just for the benefit of whom is reading this, we have found out that we were the third lower quoter only after having received the price abstract and our written request dated 14 February 2011 to resolve our concerns at Contracting Officer level through an open and frank discussion was not taken into consideration). Here, while there is a quotation lower in price than ours, the agency has not considered that a quotation is not an offer and, consequently, cannot be accepted by the Government to form a binding contract. ?Offer? means a response to a solicitation that, if accepted, would bind the offeror to perform the resultant contract. Responses to requests for proposals (negotiation) are offers called ?proposals?; however, responses to requests for quotations (simplified acquisition) are ?quotations,? not offers. Thus, the existing record does not establish that there would be an offeror in line for award ahead of us were our protest to be sustained. Absent such a showing, we consider ourselves to have a reasonable possibility of award, and thus to qualify as an interested party here. WHAT IS YOUR OPINION ON THIS STATEMENT?

I would like to say thank you on advance to everyone who will respond to my concerns.

Rodolfo from Italy

[Jacques]

Rodolfo,

Notwithstanding that the low priced offer is (what would previously be called) mathematically unbalanced, I think you have an uphill battle. Without access to the unredacted agency record, I don't see how you'll be able to prevail, and given that you're not next in line for award, I don't know how you'll be able to survive an agency dismissal request. Obviously, you need to consider carefully whether you want to incur the expense of hiring outside counsel.

If I'm understanding your scenario, you have three CLINs, each representing a lump sum price for maintenance services, which the first CLIN representing the base period, and the remaining CLINs representing subsequent option periods. Unless I missed it, you didn't state what the evaluation scheme is; but I assume award was to be made to the low priced technically acceptable offer. Your offer was third lowest.

Your post doesn't make it clear whether your price for the first year, or your combined price for the first and second year, is lower than the apparent successful offeror. If it isn't, then you're not in a position to complain that the low offer is significantly unbalanced.

Determining whether the apparent successful offeror's prices are significantly unbalanced requires looking at all the offers received along with the government estimate. However, if you are representing yourself, the agency will not release pricing information about other offerors. If you hire outside counsel, he would have such information (assuming the protest survived to the agency record); but it would obviously be subject to a protective order, and you would not be able to see it.

Likewise, since your offer is not obviously next in line for award, then your only hope of establishing that you are an interested party would be to find some fault with the government's evaluation of the next offer in line or some error in the evaluation of your offer that, when corrected, would make your's next in line. I don't know what basis you have in the absence of an agency record to assert that, and none is obvious from what you've posted. The need to be an interested party applies under RFQs. See, for instance, Nortex Corp., B-224930, Jan. 6, 1987, 87-1 CPD para 12; Harrington, Moran, Barksdale, Inc., B-401934.2, B-401934.3, Sept. 10, 2010, 2010 CPD para 231; 31 USC 3551(2); 4 CFR 21.0(a)(1).

Assuming the protest survives the request for dismissal, I don't think you have the facts (yet?) to argue the CO ignored any requirement under FAR 52.212-2(. However, if the low priced offer actually was significantly unbalanced, and none of the agency's contemporaneous documentation acknowledged as much, then you may have a leg to stand on. Have you received a copy of the redacted award decision? Does it appear the risk of unbalanced pricing may have been addressed? If not, the question, to my mind, becomes, "What is the CO's obligations to document his risk assessment under FAR 52.212-2( if he finds the risk to be reasonable?" Will the GAO assume the lack of simultaneous documentation amounts to a failure to consider the risk? On the one hand, see FAR 13.106-3( & 13.106-3((3)(ii) (encouraging keeping documentation to a minimum, and calling for information supporting the award decision "if other than price-related factors were considered in selecting the supplier."). On the other hand, consider Resource Dimensions, LLC, B-404536, Feb. 24, 2011:

Moreover, even for procurements under simplified acquisition procedures, it is a fundamental principle of government accountability that an agency be able to produce a sufficient record to allow for a meaningful review where its procurement actions are challenged. See e-LYNXX Corp., B?292761, Dec. 3, 2003, 2003 CPD para. 219 at 8; Checchi and Co. Consulting, Inc., B?285777, Oct. 10, 2001, 2001 CPD para. 132 at 6. In this regard, where an agency fails to adequately document its actions, it bears the risk that there may not be adequate supporting rationale in the record for us to conclude that the agency had a reasonable basis for the source selection decision. Southwest Marine, Inc.; American Sys. Eng'g Corp., B?265865.3, B?265865.4, Jan. 23, 1996, 96?1 CPD para. 56 at 10. Nevertheless, in reviewing an agency's procurement actions, we do not limit our review to contemporaneous evidence, but consider, as appropriate, hearing testimony and the parties' arguments. Id.

What appears to you to be a post-hoc rationalization of why award to the low priced offer would not pose an unreasonable risk may be permitted.

(By the way, I wouldn't rely on the advance payment argument. While the Part 14 provisions reference advance payment, as noted in Industrial Builders, Inc., B-283749, Dec. 29, 1999, 99-2 CPD para 114, "While the agency here analyzed the unbalancing in terms of an 'advance payment,' that term does not appear in the discussion of unbalanced pricing in the revised Part 15... [or, for our purposes, Parts 12 or 13]. We believe, however, that the agency's analysis remains valid when couched in terms of the risk that IBI's pricing poses to the government.")

Hope this helps.

[Jacques]

After FAC 97-02, I couldn't find any sustained protests where a protester claimed the government should have found the apparent successful offer significantly unbalanced (though I may have missed it, so no guarantees). I couldn't find a single decision related to unbalanced pricing involving a commercial item RFQ.

I can't rule out that the GAO would read the language in FAR 15.212-2( as permissive, where it says, "The Government may determine that an offer is unacceptable if the option prices are significantly unbalanced." (emphasis added). It does not say the Government shall. If I had to guess, I suspect the GAO would impose an obligation on the agency to document its risk analysis where the unexplained risk appeared great on the surface.

Here, though, no one has to argue the analysis is not required. It looks like the low priced offer is only significantly unbalanced (relative to your offer) in the first year (assuming your total price is distributed equally across the CLINs). If, even after the fact, the CO can show that exercise of the second option is likely, then it would seem like the risk is acceptable.

This appears to be one of those protest grounds where the likelihood of the protest changing the result of the evaluation is very small. What would prevent the agency from simply taking corrective action in the form of assessing the risk posed by the unbalanced pricing? I would guess the agency would find the risk reasonable. All the protest did was force the government to document its decision. If the agency is prompt in taking corrective action, the protester is no better off for protesting.

[Rodolfo]

Mr. Jacques, thank you very much for your help. You really helped us. There is no doubt that this is a lost battle. Our firm knows the rule of the "Interested Party" very well. In challenges of the evaluation of proposals and the awards of contracts, this generally means an offeror that would potentially be in line for the award if the protest were sustained. The agency does not confute our theory of the unbalanced offer, but its confuting argument is that we are not an interested party to protest the award because we would not be in line for award anyway if our protest were to be sustained. The agency points out that there is one proposal with a total price lower than ours that would be considered for award ahead of us.

However, we have found out that we were the third lowest offeror only after having received the redacted version of the Agency's request to summarily dismiss our protest. For this reason, we would like to point out that both the Government and our company could have saved money and time if the Agency would have taken into consideration to meet with us, as per our written request to resolve our concerns at Contracting Officer level through an open and frank discussion.

We have reason to believe that also the second lowest offeror, who is an interested party, could not have known that it could have filed a protest claiming that the awardee submitted an unbalanced offer in that the unsuccessful letter issued by the Agency states only that the contract has been awarded to Firm XXXXX for the total award amount of Euro 134.735,00. We believe, for the transparency of the all procurement process, that it would have been better to state that an award had been made for the basic year (Euro 54.760,00) and that the Government had accepted the offer for option year one with the amount of Euro 41.240,00 and option year two with the amount of Euro 38,735.00. This would have allowed an interested party, thus the second lowest offeror, to consider filing a protest due to the unbalanced offer.

Notwithstanding the GAO will find us a non Interested Party, we disagree with the Contracting Officer?s Statement dated 3 March 2011 and we would like, in order to avoid further confusion in the future, that GAO provides its comments.

In reading the redacted Contracting Officer Statement we find out that he/she evaluated the offers for award purposes by adding the total price for all options to the total price of the basic requirements, therefore the Grand Total of all three years. The Contracting Officer concluded that the acceptance of the most favorable offer XXXXXX (grand total Euro 134.735,00) resulted in a fair and reasonable price for the Government totally ignoring the requirement under FAR 52.212-2( which was incorporated into the RFQ. This means that the Agency, independently if the prices are balanced or unbalanced, makes an award to the offeror who proposes the lowest price.

Supposed the lowest offeror had proposed Euro 74.760, Euro 31.240, and Euro 28.735, it would have got the award because, according to the Contracting Officer, its total price was the lowest.

We maintain that all offers with separately priced line items or subline items shall be analyzed to determine if the prices are unbalanced. If cost or price analysis techniques indicate that an offer is unbalanced, the Contracting Officer shall:

(i) Consider the risks to the Government associated with the unbalanced pricing in determining the competitive range and in making the source selection decision; and

(ii) Consider whether award of the contract will result in paying unreasonably high prices for contract performance.

The low priced offer is significantly unbalanced, and the redacted award decision does not address at all the risk of unbalanced pricing.

Here is the Contracting Officers statement (VERBATIM):

1. The Request For Quotation was evaluated IAW FAR Provision 52.212-2 "EVALUATION- COMMERCIAL ITEMS (JAN 1999)" paragraph (a) "The Government will award a contract resulting from this solicitation to the responsible offeror whose offer conforming to the solicitation will be most advantageous to the Government, price only considered". Furthermore in paragraph ( Options. "The Government will evaluate offers for award purposes by adding the total price for all options to the total price for the basic requirement". Therefore the Contracting Officer considered price only, and evaluated by adding the total price of all options to the basic requirement, therefore a Grand Total of all three years.

2. A comparison of the final prices revealed that the lowest offer Grand Total price for Base plus Two Year Options was ?134,735. 00 proposed by XXXXX. The second lowest Grand Total price for Base plus two Year Options was ?146,198.76 proposed by another offeror. The third lowest Grand Total price for Base plus two Year Options was ?156,327.00 proposed by the protestor.

Based on price competition the Contracting Officer concluded that reasonable competition existed and that the acceptance of the most favorable offer XXXXX (Grand Total ?134,735.00), resulted in fair and reasonable price for the Government.

AS YOU SEE NO MENTION TO THE UNBALANCED OFFER.

By the way, our price for the basic year was lower than the price proposed by the awardee.

In any case, thank you very much for having provided your comments. A lost battle, but a learned lesson.

Thanks from Italy.

[FAR Fetched]

This is a recurring service expected to cost roughly the same from year to year (same quantities, same tasks to be performed, same difficulties, same efforts, etc.). A comparison with historical prices paid by the Government for the same type of service indicates the non-existence of base/option year excessive price differentials except for small increases due to the cost of inflation. Below we provide the prices for the previous years (noting that prices are lower because the quantity of the electrical substations to be serviced was inferior):

BASE YEAR - 14 SEP 2007 - 13 SEP 2008 Euro 49.199,00

1st OPTION YEAR - 14 SEP 2008 - 13 SEP 2009 Euro 50.257,00

2nd OPTION YEAR - 14 SEP 2009 - 13 SEP 2010 Euro 54.008,00

You keep going back to the offer was Unbalanced, based on what? If the winning contractor provided sufficient data to justify costs during the Base Year, while developing efficiencies and cost saving during the Option Years, why is that unbalanced? Especially since the Base Year was close to the final year of the last contract (2009).

Supposed the lowest offeror had proposed Euro 74.760, Euro 31.240, and Euro 28.735, it would have got the award because, according to the Contracting Officer, its total price was the lowest.

As for the quote (above), I highly doubt this proposal would have won because the Base Year was so far out of line with historical prices paid by the Government.