Well-documented data and sufficiently supportive narratives are essential for offerors who want to successfully avoid unfavorable cost realism/price adjustments.
BY MICHAEL GALLO AND MARSHA LINDQUIST, CPP APMP, APMP FELLOW, NCMA FELLOW
This series of five articles addresses aspects of cost realism as it relates to labor in fast-read content. In this fifth article, we summarize our findings from the previous four articles and wrap it all together.
Part 3 – Our Findings Summarized
Ironically, an offeror might submit a best-valued proposal for a cost-type contract that has fair and reasonable pricing and is otherwise eligible for an award. However, if the offeror’s pricing was too aggressively low, the government might, through cost realism analysis, deem the price unrealistic and upwardly adjust that offeror’s price to a point where it no longer represents the best value. Consequently, that offeror is not selected for contract award because the FAR requires cost-type contracts to be awarded using probable cost – not proposed cost in the best value tradeoff.
What we observed in these GAO cases is that well-documented data and sufficiently supportive narratives were always essential for offerors that successfully avoided (or limited) unfavorable cost realism cost/price adjustments.
| Cost Realism Risk | Risk Mitigation Steps |
| Payroll data is not accepted as realistic. | Present clear and logical mapping of HR job titles to contract labor categories.
Where applicable, adjust rates to address employee versus contract work locale or provide explanatory notes.
Ensure that actual employee payroll data are linked to the actual employees proposed. Also showing LCAT descriptions with actual employee descriptions is best. |
| Contingent hire rates are considered unrealistic. | Provide signed letters of acceptance in the proposal and ensure that each letter includes the new hire’s name, contract job title, accepted salary rate, and date of availability. |
| Labor rates based on 3rd party salary data are considered unrealistic | Provide a clear and logical mapping (based on comparison of job descriptions, not title alone) of survey labor category to contract labor category.
Apply appropriate salary survey filters for locale, industry/sector, experience levels, and specialized certifications.
Ensure the survey labor categories are appropriate to the kinds of tasks identified in the SOW or PWS. Provide the survey labor category descriptions. Be sure to include the survey descriptions with the proposal. |
| Incorrect interpretation of staff skills and experience required (incumbent) | Carefully review the SOW/PWS and solicitation instructions.
Ensure a careful alignment of incumbent labor categories to actual requirements. Ensure all incumbent LCAT descriptions match the PWS requirements. If not, then examine incumbent descriptions and adjust the proposed personnel to match the PWS! |
| Labor rates are not aligned with the technical approach. | Conduct a critical and simultaneous review of technical and price proposals before finalizing the price. |
| Blended escalation unrealistic | Ensure that any changes to the staffing experience mixture are clearly explained and aligned with the technical approach. |
| Escalation based on company historical data is unrealistic | Ensure detailed data is provided, preferably at the employee level of detail, and over multiple years.
Ensure job promotions do not skew the historical data. |
Where adjustments to an offeror’s price proposal did occur, we see common themes and issues that led evaluators to apply those adjustments. First, an offeror’s outright omission of required substantiating data and explanatory narrative represents a failure to comply with the solicitation’s instructions to provide such information. Where such information is not provided, evaluators will undoubtedly adjust unrealistic rates upwards to the government’s minimum benchmark rate.
Second, offerors are not adequately harvesting, analyzing, and documenting sufficient historical data leading to a lack of credible data to back up an offeror’s (aggressively low) escalation rate.
Third, offerors are not applying enough follow-through effort to ensure logical consistency in their proposed labor rates such as when offerors failed to properly demonstrate how labor categories from salary surveys aligned with the position requirements described in the SOW/PWS.
To us, a primary thread drives these issues – the offeror’s failure to adequately budget the proposal pricing effort to give pricing staff adequate time to plan, develop, and review pricing. Additionally, strong coordination between the cost and technical teams is critical to ensure offerors submit a realistic technical solution that is consistent with the proposed costs.
It takes time to assemble the supporting pricing data and make important decisions about the costs involved in every bid. Some pricing activities, such as data collection and analyses, are difficult to complete in a compressed proposal response cycle. So, starting key cost proposal development activities much earlier in the capture process is critically important.
Michael Gallo is the Partner and Principal Consultant at Federal Pricing Group, LLC – a boutique consulting firm providing specialized advisory services and subject matter expertise in government contracts pricing. Gallo advises federal government contractors on pricing strategy, pricing models, and pricing reviews/post-mortems. He also provides cost/price evaluation consulting support services to federal agencies. Gallo has developed his unique perspectives, deep pricing insights, and expertise from his more than 30-year career covering all sides of government contracts pricing, in roles as a government cost analyst, GovCon project manager, CFO, Division VP, and federal government consultant.
Marsha Lindquist, CPP, APMP Fellow, NCMA Fellow is the Managing Partner of Granite Leadership Strategies Inc. and an experienced pricing strategist & contracts professional. In her groundbreaking #1 Amazon best-selling book, Secrets of Strategic Pricing for Government Contractors, Lindquist delivers the wisdom of strategic pricing for Federal proposals. She has built a tradition of quality pricing and contracts consulting for Government contractors for over 30 years. Linquist has wide-ranging experience with Government contracting firms, mostly scientific & high-technology companies, and is adept in persuasive pricing that wins and authoring customer-focused winning pricing strategies. Clients describe her as tenacious and a true pro. Lindquist has achieved the distinguished titles of NCMA Fellow, APMP Fellow & APMP Professional (CPP) as well as Future of Pricing Honoree by ProPricer.
