Well-documented data and sufficiently supportive narratives are essential for offerors who want to successfully avoid unfavorable cost realism/price adjustments.
This series of five articles addresses aspects of cost realism as it relates to labor in fast-read content. This third article specifically addresses the pitfalls of keeping incumbent personnel and reducing labor rates.
Incumbent Rates vs. Current Rates
Careful Review of Instructions
When the government states the criteria needed for substantiation of direct labor rates in the Request for Proposal (RFP), it is always wise to follow the instructions carefully.
In Valkyrie Enterprises, LLC (B-415633.3),[i] the Navy revised the criteria for cost realism methodology to include “proposed direct labor rates supported by payroll data, contingency hire letters, Forward Pricing Rate Agreements (FPRAs), and subcontractors proposed on a labor hour basis were considered to be realistic.”
For new hires, the protestor used salary.com’s 25th percentile rate for some positions while for others, they substantiated them using an average of the salary.com 25th percentile rate and actual rates paid to several current employees in that position. The Navy upwardly adjusted new hire rates that were below the 25th percentile which created the nexus of this protest.
The GAO sustained the protest because the Navy’s revised solicitation language did not distinguish between the types of supporting data permissible for current employee rates and the type of data permissible for new hire salary rates.
Follow-On Contract Requirements Changes
When a contractor becomes an entrenched incumbent, its labor rates tend to be higher than a competitor bidding against them on the re-compete. From the incumbent’s viewpoint, their existing contract workforce proposed for the follow-on contract represents an inherent personnel strength. Therefore, the incumbent believes its labor rates should be considered the most realistic. Are they?
The solicitation’s published requirements cannot be taken for granted and must be examined to determine if those requirements are identical to the incumbent performance work statement.
In the case of Booz Allen Hamilton, Inc. (B-415218),12 its price, as an incumbent, was more than 40% higher than the awardee, and the government found no benefit that outweighed this price premium. The solicitation clearly stated that the experience requirements in the new PWS were lower than the comparable incumbent requirement. The awardee paid attention to this difference and proposed staffing (and associated salaries) at experience levels consistent with PWS’s minimum requirements.
Additionally, the evaluators found the awardee’s staffing plan was stronger than the incumbent’s plan because of the awardee’s two-deep staffing repository and global reach-back capability.
The awardee further performed and documented its price analysis of all of its subcontractor rates, comparing them to its direct labor estimates. While the awardee’s labor rates were upwardly adjusted in some cases, their attention to lower experience and education requirements compared to the incumbent contract served them well.
The incumbent salaries may represent what the government is paying today, but they may not be right in establishing competitive realistic labor rates for the new contract.
Contractor Rates and the Technical Solution
The government must assess the technical solution against the costs proposed to determine compatibility. In FAR 15.404-1(d)(2)(i), the consistency of performance and materials described and the costs in the offeror’s proposal must be evaluated. In the case of Abacus Technology Corporation (B-416390.6),[ii] the government failed to consider the effect of an incumbent’s significant cost/price reduction against its ability to perform the technical requirements outlined in its proposal successfully.
A proper cost realism evaluation prevents an offeror from improperly receiving a favorable technical evaluation rating based on its proposed approach but failing to propose costs that reflect that approach.
In this case, the incumbent proposed to retain the entire incumbent staff while simultaneously proposing reduced market-based labor rates. This incongruency was not picked up by the government. Abacus’s challenge to the dramatic reduction in labor rates against the technical solution was deemed meritorious because the incumbent’s dramatic reduction in (revised) price meant that the incumbent proposed either rates that were unrealistically low or too few staff to provide the level of services required.
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.
[i] https://www.gao.gov/assets/b-415633.3.pdf
[ii] https://www.gao.gov/assets/b-416390.6.pdf
