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Price Evaluation on ID/IQ (Part Deux)

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I have a  question regarding a recently posted RFP for a multiple award, ID/IQ.  I believe my question is related to a WIFCON post from 2012, so I wanted to included it here: 

However, there are a few differences

1. This is a multiple award ID/IQ with a Full and Open suite and a Small Business set aside suite. (LPTA)

2. Instead of the Agency providing a sample task order or estimated quantities with the RFP as a baseline, the offeror is to provide labor rates (on/off site) for a set number of Labor Categories (provided by the Agency).  Then, the Agency is going to apply estimated labors hours for each year of contract performance to each offeror's labor rate/category based on site location. The estimated labor hours used for evaluation purposes will not be provided to the offerors until after award.

Question: Is this method of evaluation considered reasonable? The offeror doesn't know what it's total evaluated price will be until after award is made.

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The solicitation states LPTA for award of multiple contracts? Or the task orders will use LPTA procedures?

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Question: Is this method of evaluation considered reasonable? The offeror doesn't know what it's total evaluated price will be until after award is made.

Generally, yes. They are using a pricing model approach, which is permissible.

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14 hours ago, Vern Edwards said:

Generally, yes. They are using a pricing model approach, which is permissible.

Could you expand on what you mean by "generally"?  How do you get around FAR 16.504(a )(4)(ii ) which says, “A solicitation and contract for an IQ mustSpecify the total minimum and maximum quantity of supplies or services the Government will acquire under the contract”?

 

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45 minutes ago, jwomack said:

Could you expand on what you mean by "generally"?  How do you get around FAR 16.504(a )(4)(ii ) which says, “A solicitation and contract for an IQ mustSpecify the total minimum and maximum quantity of supplies or services the Government will acquire under the contract”?

 

I don't understand what you think 16.504(a)(4)(ii) has to do with the question that was asked or my answer. The question was about evaluating price in a competition for an IDIQ contract. The IDIQ contract minimum and maximum are not involved in IDIQ price evaluation. So why are you asking how I would "get around" the requirement to have them?

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I interpreted question 2 as The agency is not providing any estimated quantities as part of the solicitation.  FAR 16.504 requires min/max quantities be provided.

 

I suppose another interpretation of question 2 could be The agency will not disclose the actual number of hours that will be applied for evaluation purposes.  I understand your initial response if this is what you were addressing.

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jwomack:

Read the opening post again. There is only one question. There are two fact statements.

Now, get this straight: in IDIQ contracting, estimated quantities are not the same as maximum and minimum quantities.

The GAO has taken the position that when an agency conducts an acquisition for an IDIQ contract its solicitation has to state, in addition to minimum and maximum quantities, an estimate of the quantities to be procured, so that offerors could set their prices accordingly. This is necessary if for no other reason so that contractors could properly allocate their indirect costs. See e.g., West Coast Copy, Inc., B-254044, 93-2 CPD ¶ 283:

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A solicitation for an indefinite quantity of services must contain estimates, since without them the agency cannot compare proposals on an equal basis or ascertain which offeror submitted the lowest overall cost. See Penn, Ferrara, Adler & Eichel, 66 Comp.Gen. 242 (1987), 87–1 CPD ¶ 134. Where competing proposals for indefinite quantity contracts are evaluated on the basis of unit prices without extending those prices by estimated quantities, there is no necessary relationship between the evaluated price of a particular offeror and the actual price of performance by that offeror. See Health Servs. Internat'l, Inc.; Apex Environmental, Inc., B–247433; B–247433.2, June 5, 1992, 92–1 CPD ¶ 493; see Professional Carpet Serv., B–220913, Feb. 13, 1986, 86–1 CPD ¶ 158. In addition, without estimates, vendors lack the information necessary for pricing their services intelligently.

For IDIQ service contracts, the GAO won't let agencies evaluate price by evaluating labor rates alone. It demands that an agency develop a way to determine total cost, which would be based on rates times hours. The Court of Federal Claims disagrees. See LINC Government Services LLC v. U.S., 96 Fed. Cl. 672 (2010). They think that its okay to evaluate just labor rates. See Nash, "Postscript: Evaluating Price In An IDIQ Contract," The Nash & Cibinic Report (July 2012). See also Nash, "Evaluating Cost to the Government When Quantities Are Unknown: A Puzzlement," The Nash & Cibinic Report (February 2000). 

FAR does not provide any useful guidance. If you look at the GAO decisions, there appear to be a couple of ways of evaluating IDIQ prices based on rates times hours. One is the sample task method. The other is to develop a price model (what GAO calls "a notional estimate") based on estimated hours for all labor categories, into which the government plugs the offerors' proposed rates to come up with a total price estimate for each offeror. See e.g., DNO, Inc., B-406256, 2012 CPD § 136.

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Agencies are required to consider cost or price to the government in evaluating competitive proposals. 41 U.S.C. § 3306(c)(1)(B) (2011); see Kathpal Tech., Inc.; Computer & Hi-Tech Mgmt., Inc., B-283137.3 et al., Dec. 30, 1999, 2000 CPD ¶ 6 at 9. While it is up to the agency to decide upon some appropriate, reasonable method for proposal evaluation, the method chosen must include some reasonable basis for evaluating or comparing the relative costs of proposals, so as to establish whether one offeror's proposal would be more or less costly than another's. See Aalco Forwarding, Inc., et al., B-277241.15, Mar. 11, 1998, 98-1 CPD ¶ 87 at 11. Where estimates are not reasonably available, an agency may establish a notional estimate, consistent with the RFP requirements, to provide a common basis for comparing the relative costs of the proposals. See High-Point Schaer, B-242616, B-242616.2, May 28, 1991, 91-1 CPD ¶ 509 at 6-8.

This appears to be the method used as described in the opening post. The opening poster asked if the method is reasonable. Generally, it is, depending on whether or not the agency's model reasonably reflects the orders to come. If the model does not realistically reflect what the agency will buy, it will be subject to challenge by protest. That's what I meant by "generally."  

I have found no case in which GAO required an agency to disclose the price model (notional estimate) in the solicitation. (That doesn't mean that there isn't such a case, only that I didn't find it.) I think that prior disclosure makes sense and is the best procedure, but agencies can do as they please in the absence of a rule. If an agency discloses its price model (notional estimate) in the solicitation, then a protest about it must be filed prior to the date proposals are due in order to be timely. If not disclosed until after evaluation, then the  reasonableness of the estimate will be subject to protest even after award.

 

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The min/max are both quantities to which the government can apply proposed labor rates to.  The result would be a range.  To price services intelligently, vendors can, and should, also consider the contract’s minimum guarantee amount.  With these three elements (min qty, max qty, min guarantee), vendors can offer a price with as low or high risk as they desire. 

 

Low risk proposal:  Capture all sunk costs within a quantity equaling the contract’s minimum guarantee amount.  (Stepladder pricing?)

Higher risk proposal:  Spread all sunk costs assuming the maximum allowable will be ordered. 

 

I agree that disclosure of an estimate reflecting what is likely to be ordered would probably benefit the Government.  But I don’t think it’s required by FAR nor common sense, notwithstanding GAO’s opinion.

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jwomack:

What was all of that about?

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The min/max are both quantities to which the government can apply proposed labor rates to.  The result would be a range.

A range of what? Rates? Please explain how that works.

 

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To price services intelligently, vendors can, and should, also consider the contract’s minimum guarantee amount.

Consider it to what end? What role does the minimum quantity play in pricing? Please explain.

 

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With these three elements (min qty, max qty, min guarantee), vendors can offer a price with as low or high risk as they desire.

Three? What's the difference between the min qty and the "minimum guarantee"?

 

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Low risk proposal:  Capture all sunk costs within a quantity equaling the contract’s minimum guarantee amount.  (Stepladder pricing?) Higher risk proposal:  Spread all sunk costs assuming the maximum allowable will be ordered.

Sunk costs or fixed costs? They're not the same. Sunk costs, by definition, cannot be recovered ("captured").

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I agree that disclosure of an estimate reflecting what is likely to be ordered would probably benefit the Government.  But I don’t think it’s required by FAR nor common sense, notwithstanding GAO’s opinion.

It's not expressly required by FAR, but GAO insists that many things are implicit requirements. We can disagree, but they're the GAO and we're not, so... As for common sense, oh well.

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SOLICITATION

 CLIN 0001

Minimum quantity = 0 hours

Maximum quantity = 1,000 hours

 

CLIN 0002

Minimum quantity = 0 hours

Maximum quantity = 1,000 hours

 

TOTAL CONTRACT MINIMUM / MAXIMUM QUANTITIES (Required quantities per FAR 16.504(a)(4)(i))

Minimum quantity (aka minimum guarantee) = $2,000

Maximum quantity = (aka maximum possible contract value) = 1,000 hours

 

The information above is sufficient for vendors to devise an intelligent labor rate.  In the cited GAO decision (B-254044) the agency only provided the previous year’s quantity and did not provide any quantities that would be in the upcoming contract.  In my scenario above, quantity estimates are provided as a range (0-1000 hours at the CLIN level; $2,000 – 1000 hours at the contract level). This satisfies FAR 16.504(a) which says, “Description. An indefinite-quantity contract provides for an indefinite quantity, within stated limits, of supplies or services during a fixed period. The Government places orders for individual requirements. Quantity limits may be stated as number of units or as dollar values.

 

By “three” I was ineloquently speaking to the min/max quantities at the CLIN level and the min quantity at the contract level (min guarantee).

 

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CONTRACTOR INTELLIGENTLY PROPOSED RATES BASED ON THE ABOVE SOLICITATION 

 Considerations

Fixed cost for the contract = $1,950

CLIN 0001 variable cost per hour (excluding profit) = $40

CLIN 0001 profit per hour = $10

CLIN 0002 variable cost per hour (excluding profit) = $80

CLIN 0002 profit per hour = $20

 

Cost Proposal A

Low risk proposal.  Contractor recovers fixed costs considering only the contract’s minimum guarantee (minimum quantity).

CLIN 0001 = $2,000 for the first hour.  $50 per hour for hours 2 through 1,000.

CLIN 0002 = $2,050 for the first hour.  $100 per hour for hours 2 through 1,000.

 

Cost Proposal B

Highest risk proposal.  Contractor recovers fixed costs only if the contract’s maximum is ordered ($1,950 / 1,000 hours = $1.95 per hour).

CLIN 0001 = $51.95 per hour

CLIN 0002 = $101.95 per hour

 

Cost Proposal C

Medium risk proposal.  Contractor assumes the Government will order 25% of each CLIN’s max.  Fixed costs evenly spread out ($1,950 / 500 hours = $3.90 per hour).

CLIN 0001 = $53.90 per hour

CLIN 0002 = $103.90 per hour

 

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GOVERNMENT EVALUATION

 Proposal A

CLIN 0001 = range between $0 and $51,950.

CLIN 0002 = range between $0 and $101,950.

TOTAL CONTRACT = range between $2,000 and $101,950.

 

Proposal B

CLIN 0001 = range between $0 and $51,950.

CLIN 0002 = range between $0 and $101,950.

TOTAL CONTRACT = range between $2,000 and $101,950.

 

Proposal C

CLIN 0001 = range between $0 and $53,900.

CLIN 0002 = range between $0 and $103,900.

TOTAL CONTRACT = range between $2,000 and $103,900.

 

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WITH AN ESTIMATE OF DEFINITE QUANTITIES FOR THE INDEFINITE QUANTITY CONTRACT

 In addition to the initial scenario, the Government provides these estimated quantities:

CLIN 0001 = 400

CLIN 0002 = 250

 

Contractor Cost Proposal D

CLIN 0001 = $53 per hour

CLIN 0002 = $103 per hour

($1,950 fixed cost / 650 hours = $3 per estimated hour)

 

Government Evaluation of Proposal D

CLIN 0001 = $21,200

CLIN 0002 = $25,750

TOTAL CONTRACT = $46,950

 

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 Correct.  Fixed, not sunk.

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So you would not have a minimum quantity for the CLINs, only for the entire contract, and you call that overall minimum the "minimum guarantee." That's the basis for the distinction you appear to make. Is that right? If you had a minimum quantity for each CLIN you would not use the term "minimum guarantee." Is that right? You invented the term "minimum guarantee" for that purpose. Is that right?

So an offeror would propose a separate rate for the first hour under each CLIN that would enable it to recover its fixed costs. Is that right? Interesting. If that's right, have you ever seen a contract in which the Government agreed to that?

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3 hours ago, Vern Edwards said:

So you would not have a minimum quantity for the CLINs, only for the entire contract, and you call that overall minimum the "minimum guarantee." That's the basis for the distinction you appear to make. Is that right?

No.  In my example, zero is the minimum quantity at the CLIN level.  I think you always need a minimum and maximum at the CLIN level.  And at the contract level if the contract’s min/max are not otherwise apparent just by looking at the CLINs.  Since the sum of the CLIN minimums does not equal the contract’s overall minimum, I made the distinction.

 

3 hours ago, Vern Edwards said:

If you had a minimum quantity for each CLIN you would not use the term "minimum guarantee." Is that right?

If the sum of the CLIN quantities equaled the contract's minimum quantity, I may still refer to that sum as the contract’s “minimum guarantee”.  A separate enumeration in the contract would be unnecessary.

 

3 hours ago, Vern Edwards said:

You invented the term "minimum guarantee" for that purpose. Is that right?

I’m pretty sure I didn’t invent the term “minimum guarantee”.  FAR language or not, it’s widely used contract slang at least in my little world.   When using this phrase, I mean it as synonym for “an IDIQ contract’s minimum quantity”. 

 

3 hours ago, Vern Edwards said:

So an offeror would propose a separate rate for the first hour under each CLIN that would enable it to recover its fixed costs. Is that right?

They could.

 

3 hours ago, Vern Edwards said:

have you ever seen a contract in which the Government agreed to that?

No, but there are a lot of government contracts I’ve never seen.  Something similar which I have seen is a “contract setup fee” CLIN.

 

 

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 In my example, zero is the minimum quantity at the CLIN level.

I saw that, but you can't have a minimum quantity of "0", can you? See FAR 16.504(a)(2). Why not just have no entry for minimum quantity at the individual CLIN level? In fact, why bother with a maximum at the CLIN level? Is it a requirement of your agency's system?

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 I’m pretty sure I didn’t invent the term “minimum guarantee”.  FAR language or not, it’s widely used contract slang at least in my little world.   When using this phrase, I mean it as synonym for “an IDIQ contract’s minimum quantity”.

Actually, minimum guarantee is not slang. It's used once in FAR, at 16.505(b)(2)(i)(D) and in once in the GSAM/GSAR. (In my opinion, it's not wise to use "slang" in a contract.) I didn't mean to suggest that you invented the term. Poor choice of words on my part. I meant that you use it for a special purpose. (I'd stay with minimum quantity. Why use different terms?) Anyway, I don't like "guarantee." In fact, the government does not guarantee a minimum, since it can terminate the contract for convenience without buying the minimum or paying the amount, as long as it does so before the ordering period expires. I think there's a difference between promising to buy the minimum and guaranteeing that you'll buy the minimum.

I'm intrigued by the idea of a special fixed cost recovery rate for the first hour of each CLIN. I can't think of anything that would prohibit it, but I suspect that many COs might have an issue with it. Your explanation for it makes perfect sense. I think. (I reserve the right to change my mind after thinking more.)

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In the commercial marketplace, such as for cable TV services, it is common for a customer to pay a one-time hook-up fee and then monthly charges based on actual use.  They don't disguise the hook-up fee as the first month charge, but leave it independent.  Maybe this is what jwomack it trying to do?

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16.504(a)(2) is in reference to the contract, not each CLIN therein.

 

My agency’s “system” is blank PDF Forms and blank Word documents.  We’re a little behind the times.  This is good only in that we’re not confined to contract-writing software imperfections.

 

Why include min/max at the CLIN level if it’s already established at the contract level?  So both the contractor and government managers can adequately gauge the scope of the project.  This may not be a FAR requirement but would seem to be a wise business practice.

 

I don’t like the phrase “minimum guarantee” in contracts either.  Accordingly, I only use it when talking to others about a contract.  I find it most useful when speaking with non-contracting types, such as a program manager.

 

ji,

Yes, that’s the general concept.

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16.504(a)(2) is in reference to the contract, not each CLIN therein.

Not necessarily. If you have a contract with an indefinite quantity CLIN and a definite quantity CLIN, then you must state the IDIQ min/max at the CLIN level, even if not in the CLIN description. But I don't think you have to set a min/max at the CLIN level in an IDIQ contract with different CLINs for different purchase items. You can do it at the contract level. If you're going to do it at the contract level, then it does not make sense to me to set the min (or the max) at $0 at the CLIN level. I'd worry about it causing some unanticipated confusion. But that's just a minor difference of opinion between us.

The fixed cost recovery hourly rate is an interesting idea, even a good idea. I've never heard of it before. I wonder if anyone actually does it.

Thanks, jwomack.

 

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