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No Cost Contract Award is No Problem According to GAO

In a procurement that will result in the award of a fixed-price contract, contractors have the choice to price their offers below their expected costs. This approach can provide a substantial competitive advantage when a contractor believes the tangential benefits of a contract award will exceed the excess costs of performance. But how far below expected costs can a contractor price its proposal? In its recent decision in LCPtracker, Inc.; eMars, Inc., B-410752.3 et al. (Sep. 3, 2015), the U.S. Government Accountability Office (“GAO”) reaffirmed that such tactics are valid even when the contractor agrees to perform the contract for free, as the tangential benefits of a contract award can be sufficient consideration for the contract.

At issue in LCPtracker was the Department of Housing and Urban Development’s (“HUD”) decision to award Elation Systems, Inc. (“Elation”) a no-cost contract for web-based payroll tracking services under a fixed-price solicitation. Elation’s competitors protested this award, in part based upon the contention that there was no consideration for the award, as Elation was offering to perform the contract for free.

GAO rejected this argument, noting that “[c]onsideration for a contract need not be monetary,” and that “adequate consideration exists where a contractor promises to perform certain services, the government promises to grant the contractor the right to perform the procured services, and both parties obtain benefits from the arrangement.” Here, Elation’s performance of the award would expose the company’s services to more than 6,000 users nationwide. According to the company, the visibility from such usage, along with the associated marketing cost savings, more than offset the cost of performance. As such, GAO was convinced that Elation would receive sufficient benefit from performance as to meet the consideration requirement and that there was nothing improper about HUD’s decision to award the no-cost contract.

Though a no-cost offer is an extreme example of below cost pricing, this case nevertheless should serve as a reminder that below cost and no-cost offers are acceptable tactics in fixed-price competitions, as long as the solicitation does not call for a price realism evaluation. Contractors, particularly those looking to gain entry into the government contracts market, should therefore give careful thought to whether such an approach may be appropriate for them. Likewise, contractors that are not in a position to provide no-cost or below cost proposals must consider whether their competitors may be in such a position when evaluating whether to compete for a contract and how to structure their own proposals. Otherwise, they may be left in the same position as the protesters in LCPtracker–outside looking in.

© 2018 Covington & Burling LLP

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About this Author

Patrick Stanton, litigation lawyer, Covington Burling
Associate

Patrick Stanton is an associate in the firm’s Washington, DC office and a member of the Government Contracts group.  He advises clients on a variety of contracting and procurement issues, including Federal Supply Schedule contracting compliance, domestic sourcing requirements, cost and pricing issues, and organizational conflicts of interest.

In addition to general counseling, Mr. Stanton has represented clients on bid protests before the Government Accountability Office and various state and federal agencies.  He has also worked on several internal investigations...

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