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Posted on Monday, March 28, 2016

Don’t Hedge Your Bets on a Fixed-Price Bid

Because a firm fixed-price contract commits a contractor to paying for overruns and unexpected performance costs, a bidder might be tempted to hedge its bets when submitting a bid for a fixed-price contract. For example, a bidder might “reserve all rights” to a future equitable adjustment if some costly, unexpected event occurs.Doing so, however, can be fatal to winning the contract. A bidder trying to hedge its bets can end up submitting a “contingent offer” that disqualifies the bidder from winning the work. In one case, a bidder’s offer to provide professional radiology services at a government clinic was a disqualifying conditional offer because the bidder required “reimbursement for the full cost of adequate malpractice insurance coverage, whatever this cost may be, during the life of any contract awarded.” GAO concluded that the bidder had not submitted a firm, fixed-price offer.

A more subtle example of a disqualifying conditional offer involved a contract where, according to the solicitation, most of the work would be performed at the contractor’s site although some work would be done at the government site. The bidder’s offer was found to be a disqualifying conditional offer because its bid was based on more work being done at the lower-priced government site than the solicitation anticipated.

Whether a bid is firm or conditional depends on the precise wording a bidder uses. A recent GAO decision distinguished between a disqualifying “right to receive a price adjustment” vs. an allowable “right to request a price adjustment.” According to GAO, a bidder can properly reserve the right to negotiate an equitable adjustment or the right to ask the Government to consider a specific extra cost because the agency in turn could refuse any increase.

Hedging bets in any way, however, is risky. A reservation that seems proper to a bidder might be considered improper by GAO. A recent GAO decision concluding that a bidder’s “reservation” was proper involved this bidder statement: “It is assumed that as the Technical Landscape changes over time and the team requires new or additional skills, the pricing of the team can be renegotiated.” Does that statement sound more like a right to “receive” or a right to “request” an increase?

Moreover, although winning the protest at GAO was good news for the bidder, the win was costly. The bidder’s language needlessly gave a competitor an argument for a protest that the bidder then had to spend money to defend.

In the end, although reservations of rights might make a bidder feel better, they are risky and often unnecessary. Contractors always have the right to request an equitable adjustment for changes. The most prudent approach, therefore, is to avoid altogether using any language that could be construed as qualifying your bid or giving a competitor a protest argument. Hedging your bid with a conditional offer is risky business and could cost you the contract.

Terrence O’Connor is the Director of Government Contracts for Berenzweig Leonard, LLP, a business law firm in the D.C. region. Terry can be reached at toconnor@BerenzweigLaw.com.

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