In conducting a cost realism evaluation, an agency was entitled to use an offeror’s historic approved indirect rates and current incumbent direct labor rates to upwardly adjust the offeror’s evaluated cost, in a case where the offeror’s proposed rates were significantly lower.

The GAO recently held that an agency did not err by adjusting a protester’s rates to better align with the protester’s historic indirect rates and current direct rates, where the agency was unable to determine that the protester’s significantly lower proposed rates were realistic.

In AM Pierce & Associates Inc., B-413128 et al. (Aug. 22, 2016), GAO considered a protest by a disappointed offeror challenging the Navy’s evaluation under a solicitation seeking program management support services for the H-60 Helicopter Program Office. The solicitation was completely set-aside for EDWOSBs. The resulting contract was to be awarded on a cost-plus-fixed-fee basis, under a best-value evaluation.

The solicitation said that offerors’ proposed costs would be evaluated for realism, to determine whether the overall costs were realistic for the work to be performed, reflective of the offeror’s understanding of the requirements, and/or consistent with the technical proposal. To facilitate the evaluation, the RFP required offerors to substantiate their proposed direct and indirect labor rates through payroll verification, contingent offer letters, DCAA rate verification or approval letters, or other detailed justification methods. The cost realism analysis would then involve a calculation of each offeror’s evaluated costs, to reflect the estimated most probable costs. This determination would include an evaluation of the offeror’s cost information—including its substantiated labor rates.

Under the technical proposal, offerors were required to complete a “workforce qualifications spreadsheet” for each employee—including contingent or prospective hires—for the base year. The offerors were further required to demonstrate that this information exceeded the personnel labor category requirements outlined in the solicitation. Then, in the cost proposal, offerors were required to provide the proposed rates for employees based on labor categories.

AM Pierce & Associates, Inc. and Island Creek Associates, LLC were two of the six offerors. AM Pierce’s proposal scored higher under several technical subfactors, and its proposed cost was about $2.5 million less expensive than Island Creek’s. But after evaluating cost proposals, the Navy made significant upward revisions to AM Pierce’s proposed costs. Following these revisions, Island Creek’s evaluated cost was about $300,000 less than AM Pierce’s.

The upward adjustment to AM Pierce’s proposed cost resulted from two aspects of its cost proposal.

First, in its cost proposal, AM Pierce offered lower indirect rates than its historical rates, claiming the reduction was based, in part, on a change to its accounting system. Evaluating its proposal, the Navy instead considered AM Pierce’s historical rates, as approved by DCAA.

Second, AM Pierce’s direct rates were adjusted upwards for proposed personnel after the Navy found the proposed rates to be “drastically inconsistent with the rates verified by current and contingent employees.” To determine the most probable cost, the Navy used verified rates for proposed employees in each labor category for the base year and, for option years, used the median of all verified rates for each labor category in which hours would be reduced in option years.

After conducting a best value tradeoff, the Navy awarded the contract to Island Creek.

AM Pierce protested the award. AM Pierce argued that the Navy had erred by upwardly adjusting AM Pierce’s indirect and direct rates.

GAO explained that “[w]hen an agency evaluates a proposal for the award of a cost reimbursement contract, an offeror’s proposed estimated costs are not dispositive because, regardless of the costs proposed, the government is bound to pay the contractor its actual and allowable costs.” Therefore, “an agency must perform a cost realism analysis to determine whether the estimated proposed cost elements are realistic for the work to be performed, reflect a clear understanding of the requirements, and are consistent with the unique methods of performance and materials described in the offeror’s proposal.” An offeror’s proposed costs “should be adjusted, when appropriate, based on the results of the cost realism analysis.”

GAO first addressed the Navy’s evaluation of AM Pierce’s proposed indirect costs. Although AM Pierce argued that a change in its accounting practices justified the lower indirect rates, “DCAA did not approve AMP’s provisional billing rates for 2016, which reflected changes to AMP’s accounting practices, until April 11, 2016, after the agency had completed its cost evaluation.” GAO wrote that “it appears that the agency considered the most realistic and verifiable information available when calculating AMP’s most probable cost,” and denied this aspect of AM Pierce’s protest.

GAO then turned to the evaluation of AM Pierce’s direct labor rates. Noting that the Navy had based its evaluation on AM Piece’s actual current labor rates, GAO wrote that AM Pierce’s argument was little more than an assertion that “the agency should ignore the rates currently being paid to proposed employees in calculating the most probable cost in the base and option years.” Though it is true that current employees might leave and be replaced at lower rates, “the possibility of changes to personnel does not negate the fact that the actual rates currently being paid to personnel proposed by AMP are the most realistic rates available.” The GAO denied this aspect of AM Pierce’s protest, as well.

Cost realism evaluations can be complicated. But AM Pierce underscores two important points: first, that an agency can use historic verified indirect rates instead of unsubstantiated rates proposed by an offeror; second, an agency can upwardly adjust the direct labor rates proposed by an offeror for incumbent employees based on the actual costs for those employees.

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