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. This fourth article specifically focuses on labor escalation.
Part 2: Labor Escalation
As part of a cost realism review, the government will often adjust an offeror’s bid costs because the proposed labor escalation rates are unrealistic.
Acceptable Escalation Resources
Acceptable and well-received government escalation resources (in the order of preference by the government agencies) are forward pricing rate agreements (FPRA), forward pricing rate recommendation (FPRR), a Defense Contract Audit Agency (DCAA) audit, Global Insight, company-specific actual historical escalation data, and sometimes BLS employment cost index data when used in combination with other data.[1],[2]
Forward Pricing Agreement/Recommendation
Choosing to use FPRA/FPRR rates will avoid upward adjustment by the government since these agreements span multiple contractor fiscal years and therefore also reflect the government’s inherent agreement with forward escalation that is built into the direct labor rates.
In ICF Incorporated (B-419049.3),[3] the protestor complained that the winner’s lower price was unrealistically low to either hire the incumbent workforce or to bring in new people with the skills, experience, certifications, and security clearances that the solicitation required.
The GAO found the government’s realism determination reasonable. The awardee used rates based on its FPRR approved by DCMA. This included the government’s agreement with the proposed escalation that was documented in the winner’s FPRR.
DCAA Audit Findings
Sometimes, the Government requests an audit of a proposal during the cost evaluation stage. While they most often may request that the audit be accomplished by DCAA, it can also be fulfilled by an outside third party. When DCAA performs a pre-contract audit, their findings will include an inspection of labor rates to include payroll data if available, labor escalation basis, and sources of labor escalation. DCAA findings, while not available during the proposal preparation stages, are available to the contracting officer after the audit and may form the basis of a probable cost adjustment if the Contracting Officer determines that proposed escalation rates are unrealistic. (Note, these audit results may be obtained by the contractor for future use and discernment.)
In the case of AmerInd, Inc.(B-248324),[4] both the protestor and the winner dropped proposed labor escalation from their contract option period labor costs in their Best and Final Offer submissions. DCAA recommended against abandoning the use of an escalation factor to evaluate these costs and the Navy subsequently applied an escalation of 3 percent to both offeror’s option period labor costs which the GAO upheld.
Company-Specific Actual Data
When providing company historical data, it is wise to fully support and include documented proof of the rate proposed including historical salary data and true escalation information. It must be convincing evidence. Note that including company history with employees who have been promoted does not support true escalation.
In the case of Morgan Business Consulting, LLC (B-418165.6),[5] the proposed escalation rates were not adequately substantiated, and its defense of lower rates was justified by stating that senior personnel would leave the program and be replaced by junior resources. It failed to support and explain how turnover, or experience, justified the lower escalation rates.
In the case of Sayres & Associates Corporation (B-418374),20 a protest that was sustained, the Navy unreasonably rejected Sayres’ proposed escalation rate that was supported by detailed historical data consisting of salaries of each staff and their respective five years of salary increases from 2014 through 2018. Relevant here, concerning the escalation rate of proposed wages, the RFP provided that for escalation “Offerors are encouraged to propose a reasonable and realistic escalation factor consistent with company practices and estimated future increases in wages. Each offeror shall provide a rationale or historical information to substantiate the proposed escalation rate(s).”
Further, the RFP stated that “in the absence of historical rates supporting the offeror’s proposed escalation rate, the Government will use current market data to evaluate the offeror’s proposed escalation.”
Global Insight – A Preferred Government Third-Party Source?
Global Insight is a third-party economic forecasting firm. While some contractors base their escalation on considerations posed by the country’s current economic climate, budgetary constraints, and recent world events, many do not research or document their sources for the escalation factor used.
In our view, the government relies heavily on Global Insight for a comparative baseline of future escalation rates. The government says that IHS Global Insight is the “world’s leading company for economic and financial analysis and forecasting” and that its figures are frequently used by the Defense Contract Management Agency and the Defense Contract Audit Agency as a forecasting tool to determine direct labor escalation.16
In its evaluations, the government frequently compares contractors’ escalation rates to IHS Global Insight (Global Insight) as its primary source for employment cost index when a contractor does not have agreement-based rates approved by an audit agency. Accordingly, if contractors are certain the Government will use this source, contractors may want to consider using IHS Global Insight for themselves on either a subscription or a per-case basis. This could be especially critical depending on the magnitude of the award the contractor is pursuing.
In the same ICF case noted above, the protestor also objected to the government’s upward escalation adjustment by applying Global Insight rates instead of its bid escalation rates. As noted above, the protestor failed to explain the basis for the proposed escalation rate aside from the supported assumptions. In other words, when a contractor does not substantiate the proposed escalation rate with documented data, that rate is likely to be adjusted.
In cases where a firm is small and may not have the resources readily available to spend on such a service, we think it is wise to ask the government whether it will rely on Global Insight to evaluate escalation and request that the government share the results of the survey or at least publish an expected minimum realistic escalation rate. Otherwise, the bidding entity would be wise to seek and analyze data from several sources and then fully document their rationale underlying projected escalation.
Other Third-Party Sources
Reliance on Bureau of Labor Statistics (BLS) employment cost index data alone, without backup for the company’s actual historical escalation data, will not support a well-founded projection. Sometimes, the solicitation provides examples of sources that could be used to derive the escalation rates including forward pricing rate agreements or recommendations and historical information as well as a suggested minimum rate. Each contractor must answer what its sources are and why they are used so that the government can verify the validity of the proposed escalation rate.
Relevant information provided by every offeror carries a big weight when the government evaluates escalation. In all instances, the government is looking for adequate justification and documentation as to why the escalation rates are realistic as well as a reflection of current and future trends in the industry for cost realism. When that data is not provided, offerors can expect to see upward adjustments to their escalation rates.
What should a contractor do? When the budget allows, obtain IHS Global Insights data relevant to the data and outgoing years or use FPRA/FPRR data, recent DCAA audit information, BLS employment cost index data along with company actual historical data that is substantiated with verifiable year-to-year data.
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.
ENDNOTES
[1] See Chapter 10, of DoD’s INFLATION AND ESCALATION BEST PRACTICES FOR COST ANALYSIS: ANALYST HANDBOOK (https://www.cape.osd.mil/files/Escalation%20Handbook__20170118.pdf)
[2] “DCAA and DCMA tend to use IHS Global Insights as the source for escalation factors”, DEPARTMENT OF DEFENSE CONTRACTING OFFICER’S REPRESENTATIVES GUIDEBOOK OCTOBER 2022
(https://www.acq.osd.mil/dpap/policy/policyvault/USA001435-22-DPC.pdf)
[3] https://www.gao.gov/assets/b-419049.3.pdf
[4] https://www.gao.gov/products/b-248324
[5] https://www.gao.gov/assets/b-418165.6.pdf
20 https://www.gao.gov/assets/b-418374.pdf
