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Hiring Incumbent Employees At Low Labor Rates–What Could Go Wrong?

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Koprince Law LLC

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A company bidding to replace an incumbent service contractor cannot presume incumbent workers will take major pay cuts without setting itself up for a potentially successful protest.

FAR 22.12 generally requires successor service contractors to give a right of first refusal to qualified employees under the previous contract. And even when these nondisplacement rules don’t apply, many offerors’ proposals tout their efforts to retain incumbent employees. But asking incumbent employees to take significant pay cuts–and expecting them to accept–is unreasonable and can torpedo a proposal. Case in point: GAO sustained a protest recently against an awardee who had proposed high retention rate of incumbent workers, but lower pay for those positions.

The GAO decision, A-P-T Research, Inc., B-413731.2 (Apr. 3, 2017) involved a NASA solicitation seeking a contractor to provide safety and mission assurance support services. A-P-T Research, Inc. was the incumbent contractor.

The solicitation envisioned awarding a single cost-plus-fixed-fee contract to the offeror judged the best value to the government. It asked offerors to propose costs related to five safety and mission assurance engineer labor categories, three specialist labor categories, and an analyst labor category. One of the evaluation factors asked offerors to specify an incumbent capture rate and to justify the methods used to achieve it. The same factor included an assessment of the employee compensation plan. The cost factor indicated that the government would perform a realism analysis.

Alphaport, Inc. submitted a proposal. Alphaport proposed to retain a large percentage of the incumbent workforce (the precise percentage was redacted from GAO’s public decision). Alphaport’s proposed direct labor rates were considerably lower than APT’s. In its final evaluation, NASA found that Alphaport’s most probable cost was $48.1 million, versus $57.0 million for APT.

NASA compared Alphaport’s proposed direct labor rates to date from salary.com and the Economic Research Institute. NASA determined that the rates were “within an average range (in some cases slightly below average)”. Although it initially expressed doubts about Alphaport’s ability to retain incumbent staff, NASA was satisfied with Alphaport’s explanation in discussions, and did not assign Alphaport a weakness for its total compensation plan.

NASA picked Alphaport for award on December 23, 2016, in part because of its lower-evaluated cost. APT filed a bid protest challenging, among other things, the evaluation of Alphaport’s compensation from both a technical factor standpoint and a matter of cost realism.

GAO agreed, finding that “the record contains no meaningful explanation of how the agency concluded that Alphaport would be able to retain . . . the incumbent employees at the compensation offered.” GAO continued:

Our review of the contemporaneous record here reveals only conclusory and general statements that the agency’s earlier concerns about the realism of Alphaport’s compensation were addressed during discussions.  Specifically, there is no explanation of how the agency has reconciled its earlier concerns about the apparent inconsistency between Alphaport’s claims that it would retain a high percentage of incumbent personnel, despite the significant decreases it had proposed in compensation.  The record does not, for example, suggest that NASA had identified specific reasons that SMA engineers would agree to lower-than-average compensation levels, such as the work being perceived as relatively simple, an abundance of eligible candidates in the market keeping compensation levels low, or counterbalancing fringe benefits.

GAO sustained the protest.

GAO’s decision in A-P-T Research is in keeping with a similar decision last year, in which GAO held that an offeror’s proposal to retain incumbent workers while asking them to take a pay cut was an obvious price realism concern. As both cases indicate, expecting professionals to stick around when their salaries are slashed, at least without a good explanation as to why the employees would accept those cuts, seems naive–and calls into question whether the offeror can deliver what was promised in the proposal.


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