The Court of Federal Claims just issued a significant opinion in KWR Construction Inc. v. United States, regarding an agency's rejection of a proposal on the basis that the offeror's price was unrealistically low.  The procurement was for a multiple-award construction contract and was set aside for section 8(a) small businesses.  Award was to be made on a best-value basis.

The agency awarded contracts to four companies, but eliminated KWR from the competition because its price proposal was deemed unrealistically low, and presented an unacceptable performance risk to both the government and the contractor.

The Request for Proposals (RFP) provided that to determine price realism the government would evaluate the individual line items of each offeror's price proposal for a demonstration project set out in the RFP.  It also said that "Unrealistically low or high prices may be grounds for eliminating a proposal from competition on the basis that the offeror does not understand the requirement."

The agency found (1) that KWR's total price was "unreasonably low" because it was lower than both the government estimate and the average price of the four awardees and (2) that it was unrealistic to believe KWR could accomplish the demonstration project at its proposed price.

The Court held that the agency had not determined price realism in the manner prescribed by the RFP because it did not evaluate the prices for individual line items of the demonstration project.  More importantly, the Court found that the agency's rejection of KWR amounted to a de facto negative "responsibility determination."

In reaching its conclusion, the Court relied on a number of important points:

An agency may use a price realism analysis to measure an offeror's understanding of the solicitation requirements and/or to avoid the risk of poor performance from a contractor who is forced to provide goods or services at little or no profit.  But, (a) the presence of a low profit rate does not necessarily dictate that a price is unrealistic, especially in a fixed-price contract; (b) below-cost offers, also known as 'buy-ins', are not prohibited; and (c) an agency makes a de facto responsibility determination whenever concerns about the offeror's ability to perform at its proposed price precludes the agency from doing either a comparative analysis of the proposal or a price/technical trade-off.

Because KWR was a small business, the Court held that the de facto determination that KWR lacked responsibility required the contracting officer to refer the question of KWR's responsibility to the Small Business Administration (SBA) for a possible Certificate of Competency (COC).  Per the Small Business Act, if SBA issues a COC on behalf of a small business with respect to a particular contract, the contracting officer is required to award the contract to that entity.

In light of the above, the Court overturned the agency's rejection of KWR's proposal and directed the agency to consider whether, in comparison to the awardees, KWR should also receive an award.  If, after compliance, the agency still believes KWR should not be awarded a contract, the court directed the agency to make a responsibility determination and refer the matter to SBA for a Certificate of Competency.