What is a Fair Market Price in Set-Asides?
What is a fair market price, or a fair and reasonable price? The Federal Acquisition Regulation (“FAR”) requires that in a small business set-aside, the government must have a reasonable expectation that the award price will be reasonable, i.e., award will be made at “fair market prices:”
FAR 19.502-2 Total small business set-asides.
(b)  The contracting officer shall set aside any acquisition over $150,000 for small business participation when there is a reasonable expectation that—
(1) Offers will be obtained from at least two responsible small business concerns offering the products of different small business concerns  and
(2) Award will be made at fair market prices.
Partial set-asides include the same “fair market price” requirement:
FAR 19.502-3 Partial set-asides.
(a) The contracting officer shall set aside a portion of an acquisition, except for construction, for exclusive small business participation when—
 (3) One or more small business concerns are expected to have the technical competence and productive capacity to satisfy the set-aside portion of the requirement at a fair market price…
The “fair market price” language appears in FAR 19.1405, Service-disabled veteran-owned small business set-aside procedures; FAR 19.1305, HUBZone [Historically Underutilized Business] Zone set-aside procedures; and a slightly modified version (“fair and reasonable price”) in FAR 19.505, Women Owned Small Business set-aside procedures. Under the Veterans First Contracting Program, which is subject to the VA FAR supplement, the Veteran-owned small business set aside procedures require a “reasonable expectation that “offers will be received from two or more eligible VOSB concerns; and award will be made at a fair and reasonable price”. Vet. Admin. Acq. Reg. 819.7006. See also 38 U.S.C. § 8127(d).
The important question is what is a “fair market price” or a “fair and reasonable price and how should that be determined?” The Government Accountability Office (“GAO”) recently reiterated its position on a long line of set-aside cases. See Camden Shipping Corp., B-406171, Feb. 27, 2012, 2012 CPD ¶ 76. In Camden, the GAO sustained the Navy’s decision to cancel a small business set-aside of a bridge contract because the prices offered by all of the small businesses were not “fair and reasonable.” In doing so, the GAO again explained its previous positions on these prices, which embrace several items:
The determination of whether to set-aside a particular procurement involves a business decision within the broad discretion of the contracting officer.
GAO will not sustain a protest challenging the determination absent a showing that the determination was unreasonable.
Because of the Congressional policy favoring small business, contracts may be awarded under small business set-aside procedures to small business firms at “premium prices” so long as those premiums are not unreasonable—but the determination of whether a “price premium” is unreasonable depends on the circumstances of each case.
Factors to be considered in determining reasonableness include: the independent government estimate, the procurement history for the solicited supplies or services, the current market climate (market prices), current price lists or advertisement, and/or a “courtesy bid” of an otherwise ineligible large business. FAR 13.106-3. See W. Filter Corp, B-247212, May 11, 1992, 92-1 CPD ¶ 436.
There is no “hard and fast rule” at the GAO on the allowable “price premium” that may be paid. (In the past, although repealed, there existed a Defense FAR Supplement rule that a small disadvantaged business set-aside could be made only at a price that did not “exceed the fair market price by more than 10 percent”. DFARS 219.502-2-70(a), now deleted). In fact, the GAO has considered and used a wide variety of percentages for the price premium.
For example, GAO has stated:
In this regard, we have noted that a small business bidder's price is not unreasonable merely because it is greater than the price of an ineligible large bidder, since there is a range over and above the price submitted by the large business that may be considered reasonable in a set-aside situation. The determination of whether a particular small business price premium is unreasonable depends upon the circumstances of each case. See, e.g., Advanced Constr., Inc., B-218554, May 22, 1985, 85-1 CPD ¶ 587 (contracting officer in a set-aside procurement properly found reasonable a small business bid which was more than 11 percent higher than large business courtesy bid); Browning-Ferris Indus., B-209234, Mar. 29, 1983, 83-1 CPD ¶ 323 (small business bid which was 51 percent higher than large business bid was properly found reasonable); CDI Marine Co., B-188905, Nov. 15, 1977, 77-2 CPD ¶ 367 (small business offer which was 17 percent higher than that of other qualified firms, large and small business alike, was properly found reasonable).
Hardcore Dupont Composites, L.L.C., B-278371, Jan. 20, 1998, 98-1 CPD P 28.
[The GAO] has upheld the agency's determination to cancel a small business set-aside where the lowest eligible small business price exceeded the basis for comparison by as little as 7.2 percent. Building Maint. Specialists, Inc., B–186441, Sept. 10, 1976, 76–2 CPD ¶ 233; see also L. White Constr. Co./Ansley–Sheppard–Burgess Co., B–245916, Feb. 3, 1992, 92–1 CPD ¶ 138; North Am. Signal Co., B–190972, May 19, 1978, 78–1 CPD ¶ 387; Saratoga Indus.—Recon., B–202698.2, Jan. 22, 1982, 82–1 CPD ¶ 47 (agency properly found small business price unreasonable, where it exceeded the government estimate or large business price by 15 percent, 16 percent, and 9.6 percent, respectively).
W. Filter Corp., B-247212, May 11, 1992, 92-1 CPD P 436.
A determination of price reasonableness for a small business set-aside is within the discretion of a CO, and we will not disturb such a determination unless it is clearly unreasonable. Division Laundry and Cleaners, Inc., B–311242, May 19, 2008, 2008 CPD para. 97 ; see Ashland Sales and Serv. Co./Macon Garment Inc., a Joint Venture, B–400466, Oct. 23, 2008, 2008 CPD para. 196 (HUBZone set-aside); see also Building Maint. Specialists, Inc., B–186441, Sept. 10, 1976, 76–2 CPD para. 233 (upholding contracting officer's decision to cancel solicitation where bid was only 7.2% higher than the government estimate); Hybrid Tech. Group, Inc., B–215168, Oct. 3, 1984, 84–2 CPD para. 385 (upholding contracting officer's decision that an awardee's price, which was more than 100% greater than the protester's price, was reasonable)
Glob. Servs. Corp, B-400229.2, Jan. 27, 2009
Takeaway: There is no “rule of thumb” on the price premium or percentage higher than another price that the GAO will find acceptable under a set-aside, or for the withdrawal of a set-aside. There must be a complete review of the facts and circumstances, and careful consideration of the factors set forth in the GAO decisions.
For other helpful suggestions on government contracting, visit:
Richard D. Lieberman’s FAR Consulting & Training at https://www.richarddlieberman.com/, and Mistakes in Government Contracting at https://richarddlieberman.wixsite.com/mistakes/.