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.