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Guardian

Determining Price Reasonableness on a Labor-Hour Task Order

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I recently submitted a request for task order proposals (request for submissions if you prefer) for review.  We intend to purchase services via a TO off another agency's GWAC (IDIQ).  We are conducting this action under FAR subpart 16.5, not applying the procedures of subpart 15.3.  Although the purchase is for commercial item services, I completed a D&F under FAR 12.207(b)(1)(ii)(A) to award a labor-hour type action. I needed to meet the following condition, under this section:

"Establish that it is not possible at the time of placing the contract or order to accurately estimate the extent or duration of the work or to anticipate costs with any reasonable degree of confidence."

Attached to the solicitation is a price spreadsheet with specific labor categories that are mappable to the catalogues (pricelists) of several contract holders.  For each labor category, our instructions state, that the contract holder is to fill in the unit price(s) for the number of hours we specify; we, of course, seek price reductions off its GWAC.

The reviewer stated that I needed to include language in my solicitation stating that the Government would evaluate price to determine price reasonableness, citing that the guidance from the GWAC administrators was that the Order-level CO was responsible for making a price reasonableness determination.  I interpret this statement as blanket language that would apply when the ordering activity is evaluating, let's say, a labor mix for a FFP award.  In our case, we have a rather loosely written requirements statement.  I contend that for a specified number of hours for respective labor categories, the so-called labor mix is highly uncertain and speculative, as it is a labor-hour task order.  Therefore, we can only hold the contractor to best efforts, not a final result or product.  The ceiling price is the most significant protection to the Government, not unlike a limitation of costs clause in a cost-reimbursement vehicle.  The agency that awarded the GWAC made a determination of price reasonableness for the hourly wage rates associated with the labor categories (a determination made again with the renewal of each option).  Because we are buying hours in the exact quantities specified, the prices have already been determined fair and reasonable at the contract level.  What labor mix is there to evaluate?  The determination of price reasonableness, under such a scenario, would be nothing more than a confirmation that the contract holder has filled in the price spreadsheet, as posted, and that the prices submitted are at or below its contract prices.  The reviewer insisted that there is always a labor mix; this is debatable.  If, in justifying use of a labor-hour action for the acquisition of commercial items, I am required to "establish that it is not possible...to accurately estimate the extent or duration of work or to anticipate costs with any reasonable [emphasis added] degree of confidence," then what value is a labor mix?  Under a labor-hour scenario, I can chose to use the term "labor-mix," but it certainly is not the same as a labor mix associated with a FFP action, under which I may withhold payment, until the work described in the order is completed.

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See FAR 16.505(b)(1)(ii)(E):  "Consider price or cost under each order as one of the factors in the selection decision."  This means exactly what it says -- that you consider price when you make your selection decision.  It does not say you have to evaluate the prices for reasonableness.

Then, see FAR 16.505(b)(3):  "Pricing orders. If the contract did not establish the price for the supply or service, the contracting officer must establish prices for each order using the policies and methods in subpart 15.4."  This means exactly what it says -- but your contracts already establish prices, so you do not need to use 15.4 and a price reasonableness exercise for your order opportunity.  Asking for a discount on an already-established price is not establishing a new price.

So, if your parent IDIQ contracts establish prices (fully-loaded hourly rates) for labor categories, and the Government is fixing the labor mix (labor categories and hours per category) for an order, then there is no need to determine any price reasonableness for the order.  Consider price when you select the best value contractor for the order (lower is better), and make the award.  Price will be a selection factor, but you do not need to evaluate for price reasonableness.

I recommend you start quoting the FAR to make your points.  It might help convince your reviewer, and it is better to be grounded in the FAR rather than just talking principles.

BTW, FAR 12.207(b)(1)(ii)(A) isn't the correct citation for a D&F for your order.  If the multiple-award IDIQ contracts you are using allow only for the issuance of orders on a time-and-materials or labor-hour basis, then you don't need a D&F for each order (see FAR 12.207(c)(3)).  However, if the contracts allow for the issuance of orders for services on a time-and-materials, labor-hour, or fixed-price basis, and you choose T&M or LH for your order, then you will need a D&F for the order.  FAR 12.207(c)(2) is the citation for that D&F.

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Your approach of requiring all quoters to quote against the same level of effort is different from the norm.  Generally the government provides its estimate and quoters either uses that or is free to quote something different.  When the LOE differs from the estimate, they should explain that in their approach.  

Just curious, why do it that way?

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11 hours ago, ji20874 said:

BTW, FAR 12.207(b)(1)(ii)(A) isn't the correct citation for a D&F for your order.  If the multiple-award IDIQ contracts you are using allow only for the issuance of orders on a time-and-materials or labor-hour basis, then you don't need a D&F for each order (see FAR 12.207(c)(3)).  However, if the contracts allow for the issuance of orders for services on a time-and-materials, labor-hour, or fixed-price basis, and you choose T&M or LH for your order, then you will need a D&F for the order.  FAR 12.207(c)(2) is the citation for that D&F.

Point taken.  I will change my citation.  It's worth noting that 12.207(c)(2) says that the CO "shall execute the D&F required by paragraph (b)(2) of this section," under which the citation I quoted can be found:

"Establish that it is not possible at the time of placing the contract or order to accurately estimate the extent or duration of the work or to anticipate costs with any reasonable degree of confidence."

This language from the FAR supports my point, at least in part.  Yes, (c)(2) is correct in this case as I am intending to place a LH task order off an IDIQ, not award a LH contract under FAR 16.6.  Nevertheless, (C)(2) still points back to the same requirements that exist for the latter.  I agree with you that I should seek to convince the reviewer by referencing language in the FAR supporting my assertions.

9 hours ago, formerfed said:

Your approach of requiring all quoters to quote against the same level of effort is different from the norm.  Generally the government provides its estimate and quoters either uses that or is free to quote something different.  When the LOE differs from the estimate, they should explain that in their approach.  

Just curious, why do it that way?

 I presume that by "their approach," you mean technical approach.  We are not evaluating technical approach as part of our evaluation criteria.  The contracting activity and the requisitioning office mutually agreed to base the award on the contract holders' ability to demonstrate relevant experience, in addition to its price.  Our requirement is a continuing requirement in that there is no end product/result per se that the program office has defined.  I tried ardently to get them to define one.  Had they given me more, I would have very likely made this a FFP action.  Moreover, the program office did not include performance metrics (not for want of trying), e.g., perform "X" number of successful actions per week or respond to service calls in two hours' time or less. 

Second only to my role as a contracting officer, I am a business advisor.  The criteria we mutually agreed to seems the best fit for our circumstances.  Is it perfect?  Probably not; but I feel it is the best path forward given where we are.  I am not sure how a contract holder could come up with a meaningful "level of effort" based on our requirements statement.  Sometimes it's best for the Government to provide the recipe.  For example, if we have a guard post with a metal detector and an X-ray machine that needs to be manned from 6am to 6pm, six days a week (a hypothetical example) with one armed lieutenant and two subordinate armed guards, then I think we could simply state that. Might the contract holder be able to come up with a better mix to perform the requirement?  Maybe so. Deciding upon a source selection plan should be a brokering between the CO and the requiring activity.  As in our case, if it is an end of the year requirement that warrants a streamlined approach, then evaluating the same labor mix from each of the submitting contracting holders is one way to accomplish that. 

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"There is no such thing as a perfect procurement..."  [Court of Federal Claims in a recent bid protest decision]

You do the best you can.  Based on what you wrote in the original posting, I agree that you do not need a price evaluation to establish price reasonableness.

The question of whether you should do FFP or LH is a different matter.  If you are fixing the labor mix (labor categories and hours per labor category), that could be FFP.  Using your example, if you mandate one armed lieutenant (8 hours per day, Mo-Sa incl. holidays, start/end time each day can float as needed to supervise) and two subordinate armed guards (Mo-Sa, 1 guard 6am-8am and 4pm-6pm and 2 guards 8am-4pm), that can be FFP on a per-day or per month basis.  If the lieutenant employee is sick one day, the contractor sends in a substitute, and we get 8 hours that day from a qualified lieutenant.  I am not arguing that you should use FFP, but am just pointing out that it could reasonably be used in your scenario where you are fixing the labor mix.

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Guardian,

Thanks for taking the time to explain everything.  That makes sense, especially when an FY end approaching.  One more thought- how about a fixed price LOE?

edit:  ji20874 posted and I think is suggesting a similar thing

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12 hours ago, formerfed said:

Your approach of requiring all quoters to quote against the same level of effort is different from the norm.  Generally the government provides its estimate and quoters either uses that or is free to quote something different.  When the LOE differs from the estimate, they should explain that in their approach.  

Just curious, why do it that way?

When the requirement is poorly defined, offerors are just guessing at the LOE in their approach.  If its for poorly-defined labor-hour work, then offerors are both guessing about the LOE and their guess isn't binding in any meaningful way - which is a huge incentive to low-ball.  During evaluation, the CO has to deal with these theoretically low-priced offers through trade-offs or price realism.   Price realism analysis is a waste of time - we don't really know if any offeror's LOE is, in fact, realistic.  Trade-offs then ends up ironically comparing these prices as if they mean something.

Example

RFQ: Paint my house.  I don't know how many square feet it is.  No, you can't do a site survey.  No, I don't have any pictures of it. No, you can't ask me any questions. I'll pay by the hour.  I think it will take 20 hours.  You have to write me a 10 page description of how you will paint my house, including how many hours it will take you and your hourly rate.  By the way, It doesn't matter how many hours you propose, since I'll just pay you until its done.

Offeror A: I am a professional house-painter with 10 years experience.  I propose 20 hours, at $20/hr. "$400." 

Offeror B: I painted a few houses last summer.  I propose 15 hours at $20/hr. "$300" 

Contracting Officer trying to write a source selection decision that justifies why Offeror A is worth the entirely-notional 33% premium in price: I need to update my usajobs profile.

 

There are many methods to avoid this situation, but probably the lowest-effort method is fixed labor categories and hours. 

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38 minutes ago, General.Zhukov said:

When the requirement is poorly defined, offerors are just guessing at the LOE in their approach.  If its for poorly-defined labor-hour work, then offerors are both guessing about the LOE and their guess isn't binding in any meaningful way - which is a huge incentive to low-ball.  During evaluation, the CO has to deal with these theoretically low-priced offers through trade-offs or price realism.   Price realism analysis is a waste of time - we don't really know if any offeror's LOE is, in fact, realistic.  Trade-offs then ends up ironically comparing these prices as if they mean something.

Valid reasons do occasionally exist for poorly defined requirements.  But those should be rare. If the situation occurs with any regularity at an agency, it’s generally because COs aren’t doing their jobs or COs can’t because the procurement function is held in low regard.  It doesn’t take much to get needed information from program people once the situation is explained by COs.  

If a program office, with a COs help, can’t define a need, maybe they shouldn’t be contracting for the work.  How do they gauge whether work is done satisfactory, for example?  Also if you can’t read a companies proposal to determine if an estimate and approach is realistic or not, then you are just wasting government time and money.  

I know exceptions exists, but this practice shouldn’t be commonplace.

Your example isn’t a good one but if I were the CO, I would check past performance references.  That would be a big factor in selection.  I also would use a government estimate in the solicitation and ask each offeror to justify in their approach the effort proposed.  If Offeror B couldn’t explain their hours to my satisfaction, that means a performance risk and also consideration in a realism analysis. 

So your solution in this case is require A and B to propose the same number of hours?  Then Offeror B gets selected because of lower hourly rates?

 

 

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Here's a scenario where it may make sense to create an overall price based on the Government's best estimate of what the labor mix might be instead of just determining that individual labor rates are fair and reasonable:

For simplicity, assume two labor categories, Project Manager and Laborer. Proposed rates are as follows:

Offeror A: Project Manager $50/hr; Laborer $20/hr;

Offeror B: Project Manager $60/hr; Laborer $15/hr;

You can do some kind of analysis to figure out that the individual labor rates are each fair and reasonable, but even without knowing the exact labor mix (otherwise it could be FFP) you may be confident that you will use only one Project Manager and many Laborers. So despite the total of Offeror A's rates being lower ($70) than Offeror B's ($75), it would be advantageous to apply the same estimated labor mix (say 1920 hrs of PM and 19,200 hrs of laborer) to generate evaluated prices you can compare during source selection, giving Offeror A an evaluated price of $480,000 and Offeror B an evaluated price of $403,200.

An interesting question is whether you should give the offerors your labor mix/evaluation model, which gives them an opportunity to try to game it, but also encourages them to price the expected high-usage labor categories more competitively; or should you simply notify them you will use a model but not tell them what it is, to encourage them to price all labor categories as competitively as possible?

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On 8/28/2019 at 12:11 PM, formerfed said:

So your solution in this case is require A and B to propose the same number of hours?  Then Offeror B gets selected because of lower hourly rates?

Well, if it were me I wouldn't put out an RFQ like that in the first place.  But for vaguely defined requirements, I usually have non-cost/price factors be much more important.  If I think the prices used for award do not accurately represent what actual costs are likely to be, I discount them in my decision.  So in this case, I would likely select Offeror A regardless of whether the GVT or offerors pick the hours. 

 

On 8/28/2019 at 12:11 PM, formerfed said:

If a program office, with a COs help, can’t define a need, maybe they shouldn’t be contracting for the work.  How do they gauge whether work is done satisfactory, for example?

In my field of IT services I see this very frequently.  Its not due to anyone's failure to do their job.  Its often the case that neither GVT nor contractor can with much confidence estimate the particular outcomes, schedule or overall cost of an IT project.   

There is a whole contracting cottage-industry devoted to solving this problem - Agile, Digital Services, 18F, Kessel Run, DIB's very long white paper about DoD software, etc.   

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General, then you and I don’t disagree.  What the thread originally was about is specifying a LOE which all offerors must propose against. It evolved into something different.  With Agile, for example, I wouldn’t say requirements are poorly written, not known, or can’t be written.  Rather the nature of the development allows detailed requirements to get developed in a different manner and evolves as part of the development process.  You start with a higher level, functional set of objectives that detailed requirements get derived from.  Offerors pretty much propose similar LOEs based on team sizes (which may or may not include government or other contractor personnel), although I’ve seen some pretty significant variations between companies on some procurements and each had stated good reasons for that.

 

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