Joseph J. Petrillo

As federal contracting becomes increasingly simplified, I find it necessary to revisit some of the old, tried-and-true concepts to see if they are still valid. One of these is the concept of unbalanced bidding.

I'm not talking about bidders who are crazy. Unbalanced bidding can potentially occur whenever the government is ordering more than one separately priced item. Even though the total price appears reasonable, individual unit prices can be overstated, understated or both.

Here's an example. The government puts out a request for proposals for 3,000 PCs and 3,000 printers. A bidder notices the PCs will be networked, so it's unlikely the agency will actually buy 3,000 printers. It bids them low and the PCs high, resulting in a bid that's lowest in total. But the government ends up buying all the PCs but only 1,000 printers, so the bidder was in effect paid too much'on an unbalanced bid.

Where the items actually ordered by the government can vary from the estimates used for price evaluation, skewed unit prices can make an apparently good deal turn sour. Even when the government's ordering patterns copy the evaluation model, front-loaded pricing can give the contractor the equivalent of an illegal interest-free loan at public expense.

As the government became aware of this problem, the contracting community erected protections against it. For many years, the rule was that a bid or offer could be rejected only if it was both mathematically and materially unbalanced. Mathematical unbalancing means that some prices appear to be overstated or understated. This was determined by comparison with government estimates or the prices of other competitors and, where available, information about costs.

Material unbalancing often stemmed from a calculation of the chance that the bid would not remain low if conditions varied from the evaluation model.

Pricing teams

Questions of unbalanced bidding were resolved by government price analysis teams. When a dispute arose, the protest would head to the General Accounting Office for resolution. A body of case law arose, not all of it uniform.

Then, in 1994, a GAO lawyer wrote a seminal article on unbalanced bids for the American Bar Association's journal on public contract law. Dan Gordon criticized the inconsistencies in the case law and argued for a new rule. Rather than analyze bids as mathematically and materially unbalanced, he proposed that the government review unbalanced bids as a matter of risk.

When the government rewrote Part 15 of the Federal Acquisition Regulation, it adopted Gordon's proposal. (He now runs GAO's bid protest function.) The old concepts of material and mathematical unbalancing are gone. The critical issue is now an assessment of performance risk. This is the risk that the contractor won't perform the contract properly. Also evaluated is whether the government will pay unreasonably high prices.

For better or worse, the FAR authors watered down Gordon's proposed test of unreasonable risk. The rules refer merely to unacceptable risk.

Also gone is any mention of advance payments. These payments continue to be illegal, however, except under certain circumstances. GAO decisions under the new FAR have been less than crystal clear about whether, and when, an unbalanced bid becomes an illegal advance payment.

Indeed, GAO bid protest decisions under the new FAR language show an interesting trend. In about eight decided cases, not a single protester has prevailed. These cases are resolved on their individual facts, and it may be that none has presented a compelling case for rejecting an unbalanced bid.

I believe another factor is at work here. The new unacceptable risk test seems more subjective than the old rules. Risk alone isn't determinative. It must go beyond what the decision-maker considers acceptable. So winning a bid protest on this issue seems to be less a matter of numerical analysis and more an issue of overcoming the contracting officer's discretion. If that's the case, expect GAO to sustain few protests on this issue.

The more important question then becomes whether the new test adequately protects the taxpayer and the Treasury. GAO rulings show less interest in this question than in protecting the prerogatives of contracting officials.

Joseph J. Petrillo is an attorney with the Washington law firm of Petrillo & Powell.
E-mail him at jp@petrillopowell.com.

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