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 second article specifically focuses on cost realism and substantiating labor rates in pricing.
Labor Rates
Sources Used for Substantiating Direct Labor Rates
Based on our experience, the government’s general order of preference for substantiating both the reasonableness and realism of direct labor rates is as follows: Forward Pricing Rate Agreement (FPRA), Forward Pricing Rate Recommendation (FPRR), payroll stubs (showing actual pay rates), letters of acceptance/commitment (including the accepted salary and title in the letter), and third-party data (i.e., salary survey, Bureau of Labor Statistics (BLS), Office of Personnel Management (OPM) General Services (GS)-Pay Schedules, and general internet search).
FPRA/FPRR
FAR 2.101 defines an FPRA as a written agreement negotiated between a contractor and the government to make certain rates available during a specified period for use in pricing contracts or modifications. These rates represent reasonable projections of specific costs that are not easily estimated for, identified with, or generated by a specific contract, contract end item, or task. An FPRR is similar except that the government unilaterally sets rates when pricing negotiations are not finalized or agreed upon by the contractor.
When proposed direct rates are consistent with an offeror’s FPRA/FPRR and otherwise in compliance with the terms of the solicitation, they are seldom deemed unrealistic.
As an example, in QinetiQ (B-421698),[1] the protestor argued the winner’s proposed direct labor rates (that were based on the winner’s FPRR) were unrealistic. The protestor argued that the FPRR represented a national average and did not reflect (higher and more realistic) labor rates based on performing the requirement at Fort Belvoir, Virginia. In their denial of the protest, the GAO noted that FPRAs and FPRRs apply to a contractor or business unit and are not confined to a particular geographic locale, and there was nothing in the winner’s FPRR that specified labor rates by locale.
Payroll Data
Direct labor rates that are based on actual payroll data (as substantiated with paystubs) are regarded as a sufficient basis to demonstrate realism. That is because a pay stub demonstrates that the staff proposed to work on the contract have already accepted the specified pay level to fulfill the roles and responsibilities of that position on the contract.
However, this is not an entirely bullet-proof basis.
In Delphinus (B-421574),[2] the government did not accept the protestor’s payroll records as adequate substantiation of realism because the job titles in the payroll data did not appear to align with the labor categories specified in the solicitation. Consequently, the government evaluators upwardly adjusted the proposed direct labor rates.
Offerors should also be mindful of the place of performance.
In KOAM Engineering Systems (B-420157.2),[3] despite using payroll stubs, the Navy applied upward adjustments to the protestor’s labor rates for staff who were not located in the contract place of performance. Payroll data that has not been appropriately escalated may also incur unfavorable probable cost adjustments. In ICI (B-418255.5),[4] the protestor’s proposal did not explain why paystubs dated December were not escalated into the contract base year given the contract would start in the next calendar year.
Accordingly, the Navy upwardly adjusted proposed labor rates to include the missing escalation for the base year of the contract.
Letters of Acceptance/Offer Letters
Many offerors will include letters of acceptance (LOA) as proof that proposed salaries are realistic since the candidate attests to their acceptance of an employment offer to fill a contract position. Government evaluators will challenge this basis as unrealistic if the LOAs lack credible details including the contract labor category, stated salary, and signature of the candidate’s acceptance and willingness to work on the contract at the specified pay.
This method appears dependable as we did not find recent GAO cases where the government evaluators challenged this source. However, these acceptance letters must be provided in the proposal to avoid unfavorable probable cost adjustments.
In Tridentis (B-417096),[5] the protestor asserted its direct labor rates for to-be-determined (TBD) hires were based on letters of acceptance. However, the Navy found no such documentation in the offeror’s proposal to substantiate that claim. Accordingly, the Navy found these proposed rates unrealistic and applied an unfavorable probable cost adjustment.
Similarly, offerors that claim, without proof, that employees are willing to accept lower salaries risk the potential for unfavorable probable cost adjustments.
In TWD & Associates (B-416834),[6] the protestor claimed that employees accepted certain additional benefits in exchange for proposed salaries that were lower than current pay. The Navy could not find any documentation of these benefits nor any proof that any of the protestor’s employees had agreed to and accepted lower pay. Consequently, the Navy upwardly adjusted proposed salary rates to reflect the employees’ actual pay.
Third-Party Data
When proposing personnel that represent unnamed staff to be hired upon award of the contract, offerors often use third-party data such as salary surveys, job search sites, and public domain data such as the BLS. These sources are less convincing than forward pricing agreements or payroll data because the actual salary necessary to recruit and retain a prospective hire could be more than the proposed salary.
In Booz Allen/Altimira (B-415218),[7] the Army upwardly adjusted one of the protestor’s labor rates because its underlying salary survey data was not appropriately comparable. For Washington, DC-based labor categories, the protestor used salary survey data representing the mid-Atlantic region. However, that data represented aggregated data from several states including West Virginia and South Carolina, which the Army found was not appropriate for substantiating Washington, DC salary rates.
The Army also noted that the protestor did not use survey labor categories that aligned with Performance Work Statement (PWS) requirements. The case cited an example where the protester pulled salaries for a Business Intelligence Specialist II and Market Research Analyst II positions from www.salary.com. The survey labor categories used reflected only two to four years of experience, while the PWS required a bachelor’s degree and/or four years of intelligence analyst experience, at a minimum.
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.
ENDNOTES
[1] https://www.gao.gov/assets/830/828299.pdf
[2] https://www.gao.gov/assets/830/827359.pdf
[3] https://www.gao.gov/assets/730/721692.pdf
[4] https://www.gao.gov/assets/b-418255.5.pdf
[5] https://www.gao.gov/assets/b-417096%2Cb-417096.2%2Cb-417096.3%2Cb-417096.4.pdf
[6] https://www.gao.gov/assets/b-416834%2Cb-416834.2%2Cb-416834.3.pdf
[7] https://www.gao.gov/assets/b-415218%2Cb-415218.2%2Cb-415218.3%2Cb-415218.4%2Cb-415218.5.pdf
