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When the RFP allows payroll screen shots or LOI's as substantiated data, is there any remedy for evaluating low proposed rates that are 30%-50% lower than incumbent current actuals or current market data for Cost Realism Analysis?

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Are you doing a cost realism analysis (FAR 15.404-1(d)) for a competitive cost-reimbursement contract?

If YES, do what FAR 15.404-1(d) says and develop a probable cost for purposes of evaluation to determine the best value.

If NO, what are you doing?  Your one-sentence posting doesn't give anyone much to work with.

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A probable cost provides a different estimated cost that what the offeror proposed, and that probable cost is used for evaluation purposes to determine the best value.  However, if that offeror wins the competition based on its probable cost, then you award the contract with the proposed estimated cost (not the probable cost).  So in this regard, your legal is right.

But if you really think the proposed estimated cost is unrealistically low, but you still want to award to that offeror for other reasons related to the evaluation, why not open discussions and negotiate?  Or why not ask for additional supporting information to increase your confidence in the offeror's proposed costs?

You do not simply have to accept the rates as proposed.  You have choices.

By the way, have you considered that your "lowball" offeror might actually be realistic, and maybe your incumbent is too fat?

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I agree with ji. 

1 hour ago, RunDMC said:

Legal is saying we have to accept the rates as proposed because they provided Payroll SS or LOI's. 

Perform the realism analysis and develop a probable estimated cost. Discuss with the offeror as he said. You might find out that the proposed rates might be realistic. Or not. If legal is saying that you must accept and consider the rates for the probable cost, then they are wrong. The proposed rates would be used in the award price but not necessarily for comparison and basis of selection, assuming that the solicitation includes cost realism analysis 

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13 minutes ago, RunDMC said:

They are insisting the payroll data is the probable cost and satisfies realism.

They may not understand cost realism.  Have they read FAR 15.404-1(d)?

And maybe they do understand.  Have you considered that your "lowball" offeror might actually be realistic, and maybe your incumbent is too fat?

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2 hours ago, RunDMC said:

Yes, CR Analysis for Competitive cost-reimbursement contract.  Legal is saying we have to accept the rates as proposed because they provided Payroll SS or LOI's.  

In other words, the offeror has proposed rates that it is actually paying. Is that right?

If so, then the issue is not cost-realism.

Is the procurement for professional services?

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50 minutes ago, RunDMC said:

They are insisting the payroll data is the probable cost and satisfies realism.

That's not how cost realism analysis works. What the offeror gave you is cost information of some type.  That is step 1 of a 3 step process.

1) Gather cost information

2) Do cost realism analysis, which has two big parts

a) Identify understated costs/prices

b) estimate probable cost.  Defined as " the Government’s best estimate of the cost of any contract that is most likely to result from the offeror’s proposal."

3) Use results of cost realism analysis for evaluation and source selection.

 

Taking cost info from the offeror, and stating "it is the probable cost and satisfies cost realism" is either, in my opinion:

1) False.  Since the Government did not in fact generate a probable cost estimate, and did not perform the analysis.

2) True.  Which is also false.  Because if that statement is true, it means Government did generate a probable cost estimate and found the offeror's proposed cost to be exactly correct, and completely realistic.  Which, of course, isn't what happened.     

 

Take a gander at https://www.dau.edu/pdfviewer?Guidebooks/CPRG/CPRG-Volume-4.pdf Chapter 8, which goes over Cost Realism is excruciating detail.  Better yet, send it to your lawyers and have them read, no doubt for the first time.

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4 hours ago, RunDMC said:

When the RFP allows payroll screen shots or LOI's as substantiated data, is there any remedy for evaluating low proposed rates that are 30%-50% lower than incumbent current actuals or current market data for Cost Realism Analysis?

Did the offeror provide performance information on similar contracts that they are currently performing or recently performed?

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RunDMC,

Do you think the offeror's proposed rates are too low for successful performance?  YES  NO
(this is a YES or NO question -- you really should answer YES or NO)

If YES, what are you going to do about it?

If NO, award the contract.

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@General.Zhukov

If the offeror is going to do the work with people already in its employ, and if it can show what it's paying those people, and if it's cost estimate is based on those costs, then on what basis would the government say that the offeror's estimate of cost is unrealistically low? The most probable cost must reflect the likely cost to each offeror based on its own method of performance. The government cannot apply an across the board estimate of its own to all offerors.

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6 hours ago, RunDMC said:

They provided past performance.

Why not compare the proposed rates to the rates they pay on similar contracts? I think there would be a higher correlation between those data and the actual cost of performance than proposed rates and the actual cost of performance. If your task is to determine the probable cost, you're ignoring a significant piece of the puzzle.

In competitive cost-reimbursement service contracting, it's not uncommon for an offeror to attempt to get a cost advantage by proposing the use of lower-paid personnel without an intention of actually using those proposed personnel during performance. The Government typically determines what the proposed individual would probably get paid if they were to work on the proposed contract, but they don't consider the probability of the lower-paid personnel actually working on the contract. They assume the proposed personnel will actually work on the contract and conclude that the offeror is a cheaper alternative. Savvy offerors know this.

Some may say this is a dishonest practice by offerors. An economist would probably say it's a rational response to incentives.

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I would look at their personnel retention.  We don't look at compensation plans because we Stand for the Rights of the Workers of the World in their Ongoing Struggle Against their Capitalist Running Dogs Oppressors, we do it because we don't want people walking off the contract.  The point is not to judge what's "fair".  Not sure about you, but "compensation specialist" is not in my PD.

Who knows; maybe these guys offer 100% telework and people are willing to work for less.

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22 hours ago, RunDMC said:

Yes, CR Analysis for Competitive cost-reimbursement contract.  Legal is saying we have to accept the rates as proposed because they provided Payroll SS or LOI's.  

Is this a contract for new effort or a follow on contract? If there is an existing contract, is there a clause requirement to offer first rights of refusal to current employees? Of course,  nothing prevents a contractor from offering lower compensation to the current work force. If they decline to accept, then it can backfill with the proposed employees and compensation plan. . 

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20 hours ago, Vern Edwards said:

The most probable cost must reflect the likely cost to each offeror based on its own method of performance.

Well, this isn't my area of expertise, so I definitely could be wrong about this.

I think the GVT must determine the probable cost.  GVT cannot take the proposal at face-value, right?   GVT may find that the proposal is, in fact, the most probable cost. But that is a result of mandatory cost realism analysis. 

In the case of an obviously low-ball proposal, GVT would certainly not agree with whatever the offeror states, and would find that the probable cost is higher (or has offeror has elevated risk, or both).

Right?

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@General.Zhukov Here are the rules.

FAR 15.404-1(d)(1) - (2):

Quote

 

 (d) Cost realism analysis.

(1) Cost realism analysis is the process of independently reviewing and evaluating specific elements of each offeror’s proposed cost estimate 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 technical proposal.

(2) Cost realism analyses shall be performed on cost-reimbursement contracts to determine the probable cost of performance for each offeror.

           (i) The probable cost may differ from the proposed cost and should reflect the Government’s best estimate of the cost of any contract that is most likely to result from the offeror’s proposal. The probable cost shall be used for purposes of evaluation to determine the best value.

           (ii) The probable cost is determined by adjusting each offeror’s proposed cost, and fee when appropriate, to reflect any additions or reductions in cost elements to realistic levels based on the results of the cost realism analysis.

 

From ASRC Federal System Solutions, LLC, GAO B-420233, April 12, 2022:

Quote

     When an agency evaluates a proposal for the award of a cost-reimbursable 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. See FAR 15.305(a)(1), 15.404–1(d); Palmetto GBA, LLC, B–298962, B–298962.2, Jan. 16, 2007, 2007 CPD ¶25 at 7. Consequently, the agency must perform a cost realism analysis to determine the extent to which an offeror's proposed costs are realistic for the work to be performed. FAR 15.404–1(d)(1). An agency is not required to conduct an in-depth cost analysis, or to verify each and every item in assessing cost realism; rather, the evaluation requires the exercise of informed judgment by the contracting agency. FAR 15.404–1(c); Cascade Gen., Inc., B–283872, Jan. 18, 2000, 2000 CPD ¶14 at 8. Our review of an agency's cost realism evaluation is limited to determining whether the cost analysis is reasonably based and not arbitrary. Jacobs COGEMA, LLC, B–290125.2, B–290125.3, Dec. 18, 2002, 2003 CPD ¶16 at 26.

From IAP Worldwide Services, Inc., U.S. Court of Federal Claims, March 20, 2022:

Quote

 

There are two main purposes of a cost realism analysis: (1) “to prevent offerors from gaining an advantage over competitors by proposing an unrealistically low estimated cost”; and (2) “to determine whether offerors understand the contract requirements.” VS2, LLC v. United States, 155 Fed. Cl. 738, 759 (2021) (emphasis omitted) (first quoting Ralph C. Nash & John Cibinic, Cost Realism Analysis in Negotiated Fixed Price Contracts: Confusion at the GAO or a New Limitation on Buy-Ins?, 4 Nash & Cibinic Rep. ¶ 61 (1990); and then quoting Ralph C. Nash & John Cibinic, Cost Realism Analysis in Cost Reimbursement Contracts: What are the Rules of the Game?, 5 Nash & Cibinic Rep. ¶ 40 (1991)). “Agencies tasked with performing such an analysis must make appropriate probable cost adjustments such that an offeror's proposed cost best reflects the estimated cost of performance.” Synergy Sols., Inc. v. United States, 133 Fed. Cl. 716, 749 (2017) (citing FAR 15.404–1(d)(2)(i)). Put simply, a cost realism analysis “addresses whether a cost estimate is too low.” First Enter. v. United States, 61 Fed. Cl. 109, 123 (2004).

The Federal Circuit has instructed that “agencies enjoy wide latitude in conducting the cost realism analysis.” Agile Def., Inc. v. United States, 959 F.3d 1379, 1385–86 (Fed. Cir. 2020); see also A-T Sols., Inc. v. United States, 122 Fed. Cl. 170, 180 (2015) (“As cost realism determinations are within an agency's ‘sound discretion and expertise,’ the Court will not overturn a cost realism determination unless the plaintiff demonstrates the absence of a rational basis for the agency's decision.” (quoting CTA Inc. v. United States, 44 Fed. Cl. 684, 693 (1999))). Although the FAR “provides examples of cost analysis techniques,” it “does not mandate the use of any specific methodology.” Agile Def., 959 F.3d at 1386 (citing FAR 15.404-1(c)). Rather, the FAR provides that “[t]he [g]overnment may use various cost analysis techniques and procedures to ensure a fair and reasonable price, given the circumstances of the acquisition.” FAR 15.404-1(c)(2). Thus, “[w]hile an agency's cost realism analysis need not have been performed with ‘impeccable rigor’ to be rational, the analysis must reflect that the agency considered the information available and did not make ‘irrational assumptions or critical miscalculations.’ ” Westech Int'l, Inc. v. United States, 79 Fed. Cl. 272, 286 (2007) (quoting OMV Med., Inc. v. United States, 219 F.3d 1337, 1344 (Fed. Cir. 2000)).

 

 

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Interesting discussion.   

From my experience (both Govt. KO and Industry), the use of payroll information to validate the realism of a proposed direct labor rate is typically highly flawed and can give the Govt. the false impression that what they are evaluating is truly realistic for the work to be performed.  While I’ve seen most Govt. KOs view a payroll stub as the “gold standard,” and most Govt. attorneys and GAO generally rule it an acceptable practice, it is ripe for manipulation by a savvy offeror who can present a realistic proposal, backed up with payroll stubs, with no real intention of delivering the specific staff that are identified in the supporting payroll documentation.   What will generally result is large post-award rate variance immediately upon award with some explanation from the contractor that the higher execution rates are necessary to obtain and retain the level of qualified staff required by the Government, etc.  

So why is this happening?   Well from an industry perspective, cost realism decisions are often opaque, applied inconsistently, and are often highly subjective.  All of this uncertainty leaves industry to guess which data sources will be used and whether the government will discard their own independent cost estimates in favor of promises by offerors to deliver/hire staff at low salaries.  This perception strongly incentivizes vendors to continue proposing labor rates well below what they know is realistic, especially in cost reimbursement environments where the penalty for doing so is low. What’s more is that when a offeror does bid labor prices it knows are well below market rates and those prices are not flagged by the Govt. as unrealistic, that, too, reinforces the perception that cost realism analysis is ineffective or overlooked.  

Interested to hear folks thoughts on this and ideas on how the problem could be fixed?   

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17 minutes ago, FARtman said:

Interesting discussion.   

From my experience (both Govt. KO and Industry), the use of payroll information to validate the realism of a proposed direct labor rate is typically highly flawed and can give the Govt. the false impression that what they are evaluating is truly realistic for the work to be performed.  While I’ve seen most Govt. KOs view a payroll stub as the “gold standard,” and most Govt. attorneys and GAO generally rule it an acceptable practice, it is ripe for manipulation by a savvy offeror who can present a realistic proposal, backed up with payroll stubs, with no real intention of delivering the specific staff that are identified in the supporting payroll documentation.   What will generally result is large post-award rate variance immediately upon award with some explanation from the contractor that the higher execution rates are necessary to obtain and retain the level of qualified staff required by the Government, etc.  

So why is this happening?   Well from an industry perspective, cost realism decisions are often opaque, applied inconsistently, and are often highly subjective.  All of this uncertainty leaves industry to guess which data sources will be used and whether the government will discard their own independent cost estimates in favor of promises by offerors to deliver/hire staff at low salaries.  This perception strongly incentivizes vendors to continue proposing labor rates well below what they know is realistic, especially in cost reimbursement environments where the penalty for doing so is low. What’s more is that when a offeror does bid labor prices it knows are well below market rates and those prices are not flagged by the Govt. as unrealistic, that, too, reinforces the perception that cost realism analysis is ineffective or overlooked.  

Interested to hear folks thoughts on this and ideas on how the problem could be fixed?   

Thank you and thank you all!  I totally agree. The problem is legal does not agree and will not sign off on our methodologies other than accepting Payroll data as probable cost.

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When you do your source selection briefing and other documentation, make sure to include the apparently true statement that the legal office decided that the probable cost was the same as the proposed cost, and that the legal office (not the contracting officer) did the cost realism analysis.  Or, say that the contracting officer disagrees with the probable cost, but is presenting the probable cost as the same as the proposed cost because the legal office said to do so.

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45 minutes ago, FARtman said:

the use of payroll information to validate the realism of a proposed direct labor rate is typically highly flawed and can give the Govt. the false impression that what they are evaluating is truly realistic for the work to be performed.

This conflates two separate concepts - whether the cost proposed for the labor proposed is realistic and whether the labor proposed is realistic for the work to be performed.  In regard to the former, payroll data can form a good baseline for realism, but need not necessarily be dispositive.  For example, if the contractor's workforce is covered by a CBA, the CBA may provide for future wage increases that would need to be considered in a cost realism analysis.  This analysis does not answer the question of whether the labor proposed (for example labor categories and hours) is realistic for the work proposed.

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2 hours ago, FARtman said:

Interested to hear folks thoughts on this and ideas on how the problem could be fixed?   

The solution is simple.

First, what's the problem? The problem is getting offerors to propose realistic estimated costs.

What is the source of the problem?

Competitive pricing of cost-reimbursement contracts, which motivates offerors to low-ball estimated cost.

Solution?

Base source selections for cost-reimbursement contracts on offeror capability, without consideration of costs. Then negotiate estimated costs and fees one-on-one with the selectee. In other words, use the architect-engineer capability-based selection process to award cost-reimbursement contracts.

Problem solved. Now go tell the idiots on Capitol Hill that their notion of "full and open competition" is 19th Century thinking.

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Vern - I wholeheartedly agree.   The solution is rather quite simple, and I'd offer much of this could be implemented without any major changes to the FAR, etc.  It seems to me that the biggest challenge is breaking through some of the strongly engrained beliefs, perceptions, and fallacies that tend to drive both Govt. and Industry behaviors.  Apart from breaking through those, what you have laid out would go a long way to solving the problem of why unrealistically low bidding persists in Govt. contracting.   

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