Best Value Means Low Price

A recent protest decision by Planned Systems International Inc., of Columbia, Maryland, illustrates the reality of the federal budget: price is the most important factor is source selection decisions.

Lee Dougherty, and attorney at General Councel, nailed it:

…In a footnote the GAO also mentioned that PSI showed a lack of understanding between price reasonableness and price realism. This is common among protestors. Price reasonableness, which was the method used here by the Air Force, determines whether prices are too high while price realism determines whether prices are too low.

Government contractors are reminded every day that budgets are shrinking and dollars spent must go further than in the past. PSI may have proposed the lowest price it was capable of proposing, but 12 other companies found a way to bid at least 19 percent less…

It is a tremendously difficult business environment, especially for small businesses. The path to success is normally differentiation, where companies can demonstrate their value to a firm or engagement.

Differentiation normally comes with a subsequent price premium, but those days are long gone. It is also a reality of how this environment has manifested that requirements have normally not been curtailed, as projects do not get scaled back for the corresponding estimated prices.

The government wants it all, but does not want to pay for it. Furthermore, the use of performance based contracting to alleviate some of these pricing pressures has not been used effectively.

Firms will need to tighten belts ever further, as cutting the margins to the bone is the only way firms can expect to win business. Therefore, “buying in” has been effectively mandated, as low price rules, and performance will be questionable to perform at rock-bottom prices.

It seems to be turning into a “careful what your wish for” environment for small businesses, as million dollar performance is expected for pennies. Something has to give.

Leave a Comment


Leave a Reply

Sonja Newcombe

I agree as long as safety isn’t for sell . Who will ensure contractors aren’t compromising the value of the product. We need to get back to high standards for our dollars.

Chris Cairns

Yup, you get what you pay for. If the government was actually held responsible for the disastrous contract results that typically follow, then they’d quickly chuck the default TALP strategy.

Tracey Harriot

I think this is true, but only to a point. We always include language along the lines of “…as Factor X and Factor Y scores converge, Price will become more important.” Pretty basic, but it allows us to group similarly rated proposals together and select the lowest price. If they are all rated excellent/excellent, then I would have a hard time providing justification that a higher priced proposal is truly the best value. Now, with that being said, I have definitely recommended a higher priced proposal for award if the solution was superior enough to justify the difference in price. That’s what best value is supposed to be about, no?

There is always the caveat, of course, that the Program Office cannot afford the better solution, which really ties into the article above, but I’ve been lucky to have worked in environments that were not willing to settle for an ok solution when a great solution was out there. We’ve always found a way to make it work, but who knows if we’ll be able to continue with that…

Jaime Gracia

Tracy – The language you state “…as Factor X and Factor Y scores converge, Price will become more important,” seems troubling. If you are getting evaluations where they are all being scored excellent, then you by default created a LPTA evaluation. I would argue that something is wrong with the evaluation criteria, or more importantly, the requirements have not been developed in a way to allow for differentiation to prevent so close of a score.

Without differentiation, the tradeoff process is moot. Market research is the fundamental key activity to improve these activities, which includes comprehensive analysis of abilities, technological competency and proficiency, and the use of RFIs and one-on-ones to explain to industry the requirement.

Perhaps most importantly, the use of performance based contracting is a pivotal strategy to also help improve this situation. The use of Statement Of Objectives (SOO) and solid evaluation criteria will allow for innovation, and help prevent cost as the ultimate factor.

Of course price is another factor and will always be important, but it should not be THE factor.

Eric Koch

Good post Jaime and very true. I was in a discussion with my best friend last night on price as he works for a large contractor on pricing contracts and reiterated exactly what you said on this. In fact, when he feels he has gone his lowest is when his boss will tell him that they need to go 20% lower!

Unfortunately, its going to be the small and medium sized businesses that get hit the hardest in this market, even though they have so much to offer in terms of better value.

Jaime Gracia

Not sure how contractors are going to perform with margins cut the bone or at cost. Layoffs are really the only answer, in addition to marginal performance since the work can not be done at these ridiculously low prices.