(Deleted sections)

NHIC contends that there is no basis to conclude that any of the proposed “efficiency drivers” would result in cost savings, since the agency failed to quantify any of the asserted cost savings. However, an adequate cost realism analysis does not require an in‑depth verification of each and every item; an agency may reasonably rely on statements in an offeror's proposal which demonstrate the realism of its proposed costs, without independently verifying each item of proposed costs. Pacific Architects and Eng'rs, Inc., B‑274405.2, B-274405.3, Dec. 18, 1996, 97‑1 CPD para. 42 at 7; Ferguson-Williams, Inc.; Hawk Mgmt. Servs., Inc., B-232334, B‑232334.2, Dec. 28, 1988, 88-2 CPD para. 630 at 6. Here, Palmetto’s proposal explained that its “labor estimating approach” was based on [REDACTED]. Palmetto’s proposal identified [REDACTED]. Agency Hearing exh. A, Palmetto's Initial Proposal, at 26-61. As the contracting officer explained, Palmetto “did a really good job of laying out ‘this is what we’ve been doing, this is what we're going to do for you now, and this is the impact.'”Tr. at 91, 174. The SMEs and TEP members considered this information contained in Palmetto's proposal, looked to see whether the approach was feasible, and based on their own experience, could find no basis to upwardly adjust Palmetto's proposed costs. Tr. at 453, 483, 492-93, 522‑23. NHIC has not shown that the agency's evaluation was unreasonable.

(sections deleted)

In sum, NHIC has not shown the agency's "bottom up" cost realism evaluation to be unreasonable. As discussed above, the agency followed a process that is consistent with the FAR, in that the agency“independently review[ed] and evaluat[ed] 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.” FAR sect. 15.404-1(d)(1). Moreover, except for its arguments that historical data should have been the basis for the cost realism analysis, which we have rejected, NHIC has not demonstrated, or even attempted to quantify, that cost realism adjustments in the challenged areas would have eliminated the $92 million cost differential and resulted in NHIC's most probable cost being lower than Palmetto’s; thus, NHIC has not shown that its proposal, which was technically equal to Palmetto's, had a substantial chance for award.  (NHIC Corporation, B-310801; B-310801.2, February 12, 2008) (pdf)

The protester first argues that the EPA made improper “realism” adjustments to certain fixed-price elements of IBM’s proposal, and failed to equally or reasonably evaluate CGI’s proposal. As discussed above, the agency stated that it would perform both a cost realism and price realism analysis, as well as assess the “total cost of ownership” associated with offerors’ proposals. In the discussion that follows, we address the adjustments that were made to IBM’s proposal for SCORPIOS replacement, Tier 3 hosting requirements, EPA implementation efforts, and IFMS retirement costs. We conclude with a discussion of EPA’s evaluation of certain elements of CGI’s costs.

A cost realism analysis is required when an agency evaluates proposals for the award of a cost-reimbursement contract. Under such a contract, an offeror’s proposed costs are not considered controlling because, regardless of the costs proposed, the government is bound to pay the contractor its actual and allowable costs. Federal Acquisition Regulation (FAR) sections 15.305(a)(1), 15.404-1(d). Consequently, an agency must perform a cost realism analysis to determine the extent to which an offeror’s proposed costs represent what the contract should cost, assuming reasonable economy and efficiency. FAR sect. 15.404-1(d)(2); Hanford Envtl. Health Found., B-292858.2, B-292858.5, Apr. 7, 2004, 2004 CPD para. 164 at 8-9. Although there is no requirement that an agency perform a cost realism analysis when offerors propose to perform work on a T&M basis with fixed-price labor rates, agencies may, as here, provide for such an evaluation in a solicitation. Resource Consultants, Inc., B-290163, B-290163.2, June 7, 2002, 2002 CPD para. 94 at n.1. Cost realism may involve adjustments to proposed costs to calculate the most probable cost to the government of the offeror’s proposed approach.  In contrast, where an RFP contemplates the award of a fixed-price contract, or fixed-price portion of a contract, an agency may also provide in the solicitation for the use of a price realism analysis for the limited purpose of measuring an offeror’s understanding of the requirements or to assess the risk inherent in an offeror’s proposal. Puglia Eng’g of California, Inc., B-297413 et al., Jan. 20, 2006, 2006 CPD para. 33 at 6-7. Although the FAR does not use the term “price realism,” it provides that cost realism analysis may be used to evaluate fixed-price proposals as follows:

Cost realism analyses may also be used on competitive fixed-price incentive contracts or, in exceptional cases, on other competitive fixed-price-type contracts when new requirements may not be fully understood by competing offerors, there are quality concerns, or past experience indicates that contractors’ proposed costs have resulted in quality or service shortfalls. Results of the analysis may be used in performance risk assessments and responsibility determinations. However, proposals shall be evaluated using the criteria in the solicitation, and the offered prices shall not be adjusted as a result of the analysis.
FAR sect. 15.404-1(d)(3).  Thus, as the FAR explains, a price realism analysis may affect the technical evaluation, but cannot result in an adjustment of an offeror’s proposed fixed prices. Id.; see also Puglia Eng’g of California, Inc., supra; Verestar Gov’t Servs. Group, B-291854, B-291854.2, Apr. 3, 2003, 2003 CPD para. 68 at 6 n.3; Marquette Med. Sys., Inc., B-277827.5, B-277827.7, Apr. 29, 1999, 99-1 CPD para. 90 at 6. Specifically, an agency cannot make upward price adjustments for cost elements that the agency thinks may be priced too low. All Phase Environmental, Inc., B-292919.2 et al., Feb. 4, 2004, 2004 CPD para. 62 at 8. (IBM Corporation, B-299504; B-299504.2, June 4, 2007) (pdf)

Fedcar also asserts that the agency’s price evaluation was unreasonable because the agency inserted incorrect numbers into the price evaluation spreadsheet, which resulted in an error in favor of Duke’s present value ANSI/BOMA office area per square foot price. In its report, the agency admits that it erred in calculating the present value of the rent being offered by Duke, and that, instead of a price difference of [DELETED] per ANSI/BOMA square foot, the actual price advantage of the rent offered by Fedcar was [DELETED] per ANSI/BOMA square foot. Supplemental AR (Feb. 25, 2008) at 5; AR, Tab 40, Net Present Value Recalculation. The agency further admits that this error results in a net present value difference of [DELETED] per year, or [DELETED] over the 15-year life of the lease. Supplemental AR (Feb. 25, 2008), at 6. However, the agency dismisses this mistake as inconsequential and asserts that Fedcar is not prejudiced by the error because the solicitation stated that “the technical evaluation factors, when combined, are significantly more important than price.” Id.

We disagree. As indicated above, the record shows the technical evaluation of the two proposals was relatively close with Duke’s technical proposal having only a [DELETED]-point advantage (out of 100 points) over Fedcar’s proposal. AR, Tab 35, Price Negotiation Memorandum (Dec. 17, 2007), at 3. While it is true that the technical evaluation factors were said to be significantly more important than price, the SFO also stated, “[a]s proposals become more equal in their technical merit, the evaluation of price becomes more important.” SFO, as amended, at 32. With an initial price differential of only [DELETED] per square foot, the source selection authority (SSA) could reasonably place greater emphasis on technical merit in selecting Duke. Now, however, since the actual price differential ([DELETED] per square foot) between the offers is significantly (more than [DELETED] times) greater, if the award decision were to be based on this revised price difference, price under the SFO’s evaluation scheme could reasonably become more important and change the award decision. While the agency argues that the outcome of the SSA’s cost/technical tradeoff would be the same regardless of the re-calculated price, our Office affords little weight to an agency’s post-protest arguments that are based on judgments the agency asserts it would have made because such judgments made in the heat of litigation and based on facts that were not previously considered that are materially different from those on which the agency relied in making the original decision may not represent the fair and considered judgment of the >agency. Global, A 1st Flagship Co., B-297235.2, Dec. 27, 2005, 2006 CPD para. 14 at 8. Under the circumstances, we give little weight to the agency’s assertion that the outcome would have been the same, given that Fedcar now has a significantly greater price advantage than found by the agency when it made its source selection decision. Where a source selection authority bases his or her source selection decision on figures that do not reasonably represent the differences in costs to be incurred under competing proposals, the source selection is not reasonably based. See Gemmo Impianti SpA, B-290427, Aug. 9, 2002, 2002 CPD para. 146 at 5-6. Thus, Fedcar was prejudiced by the agency’s error in calculating the price difference between the offers.  (Fedcar Company, Ltd., B-310980; B-310980.2; B-310980.3,March 25, 2008)  (pdf)

CHS asserts that the agency failed to properly evaluate LHI’s price for reasonableness. Specifically, CHS notes that more than 100 of LHI’s individual medical procedure prices exceeded the agency’s independent government cost estimates (IGCE), and that LHI’s overall price exceeds the agency’s average IGCE. Where, as here, a solicitation provides for award of a fixed-price contract--under which the government’s liability is fixed and the contractor bears the risk and responsibility for the actual costs of performance--the agency need only evaluate an offeror’s price for fairness and reasonableness. Federal Acquisition Regulation (FAR) sections 15.402(a), 15.404-1(a); SAMS El Segundo, LLC, B-291620.3, Feb. 25, 2003, 2003 CPD para. 48 at 8. Agencies may use various price analysis techniques and procedures to ensure a fair and reasonable price, including the comparison of proposed prices received in response to the solicitation and comparison with an IGCE. FAR sect. 15.404-1(b)(2)(i), (v). Agencies may rely upon adequate price competition alone to assess price reasonableness. MVM, Inc., B-290726 et al., Sept. 23, 2002, 2002 CPD para. 167 at 6. A price reasonableness determination is a matter of administrative discretion involving the exercise of business judgment by the contracting officer that we will question only where it is unreasonable. The Right One Co., B-290751.8, Dec. 9, 2002, 2002 CPD para. 214 at 5. The price reasonableness evaluation here, based on adequate price competition and a comparison of prices with the agency IGCEs, complied with the RFP’s requirements and was unobjectionable. The RFP provided that price was to be evaluated for completeness and reasonableness and to ensure that the offeror understood the scope of work. RFP at 97. In evaluating offerors’ prices, the agency compared each offeror’s individual line item prices to those of the other offerors and to the agency’s IGCEs, which represented both the low and high range of estimated costs for each medical and dental procedure. LHI’s initial overall price was approximately 19 percent higher than the average IGCE, and CHS’s approximately 2 percent higher, and the agency found that both prices were reasonable based on adequate price competition and its conclusion that the prices were within a reasonable range of the average IGCE. AR, Tab 17, at 3. In discussions, the agency requested both offerors to review their work scope and pricing for certain individual procedures whose prices were lower than the low range IGCE or higher than the high range IGCE. Both offerors changed some, but not all, identified prices, and also reduced their overall prices, resulting in LHI’s price being 11.05 percent higher than the average IGCE, and CHS’s 0.10 percent higher. AR, Tab 32, at 3‑4, 8. The agency again found that there was adequate price competition, and that both offerors’ overall prices were within a reasonable range of the average IGCE. While CHS asserts that LHI’s price was too far above the average IGCE to be considered reasonable, as noted by the agency, LHI’s price was lower than the agency’s high range IGCE. Given this fact, we find no basis to object to the agency’s price evaluation. CHS’s disagreement with the agency’s judgment does not make the evaluation unreasonable. Hughes Georgia, Inc., B-272526, Oct. 21, 1996, 96-2 CPD para. 151 at 7.  (Comprehensive Health Services, Inc., B-310553, December 27, 2007) (pdf)

ITT further contends that NASA’s cost realism evaluation was flawed because it failed to properly consider Defense Contract Audit Agency (DCAA) audit results identifying irregularities with BATC’s compliance with cost accounting standards (CAS)--specifically, CAS 420--concerning, as relevant here, BATC’s allocation of its costs for independent research and development. As a consequence, ITT contends that NASA’s “most probable cost” estimate for BATC was not reasonably supported. Specifically, ITT highlights the fact that DCAA qualified its audit results for BATC based on the fact that BATC was “noncompliant” with CAS 420, which had been reported in prior audits, indicated that the cost impacts had not been determined, and stated that these issues “may have a significant effect on the final cost allocations for CAS covered Government contracts.” AR, Tab 50, DCAA Audit for BATC, 08221. In addition, DCAA explained that the Divisional Administrative Contracting Officer (DACO) of the Defense Contract Management Agency for BATC would separately negotiate the cost impact of the noncompliance. Id. The record shows that NASA further questioned DCAA on this issue, asking whether it could provide some indication of the magnitude of the cost impact. DCAA responded that it could not provide such an estimate, simply noting that the matter would be addressed by the DACO. NASA did not pursue the matter with BATC during discussions and did not make any adjustments to BATC’s costs as result of the DCAA qualification. In a hearing held by our Office, however, the DACO for BATC, who is responsible for, among other things, cost allowability issues and interacting with DCAA regarding its contractor audit reports with respect to BATC’s contracts, provided testimony regarding this issue. The DACO explained that BATC’s noncompliance relates to a 2001 audit finding, which has not yet been resolved, that any cost impact would be limited to fiscal year 2000 incurred costs, and that any cost adjustment would be limited to a decrease in costs to the government--BATC’s noncompliance would not result in increased costs to the government. Hearing Transcript (Hearing Tr.) at 173. Moreover, the DACO indicated that even if the noncompliance identified in the 2001 audit were a continuing issue, such that it implicated BATC’s 2007 contracts (something which the DACO indicated has not been identified by DCAA), such noncompliance by BATC again would not result in any increased costs to the government, thus negating any concern that BATC’s costs under the OLI contract would increase as a consequence of the outstanding CAS issue. Id. While ITT contends that the issue was raised by DCAA and that the DACO cannot speak for DCAA, the record reflects that DCAA expressly indicated that the matter would be addressed by the DACO and ITT has not explained why the DACO’s testimony should be regarded as unreliable or otherwise unreasonable. As a consequence, on this record, ITT’s challenge does not provide a basis for our Office to sustain its protest with regard to this issue. (ITT Industries Space Systems, LLC, B-309964; B-309964.2, November 9, 2007) (pdf)

GDIT maintains that there were a number of inconsistencies in RTSC’s price proposal, with the labor rates included in the B.4 table being higher than the rates included in the B.2 table. The protester identifies two areas where these inconsistencies appear. First, RTSC’s FPR eliminated a [deleted] percent escalation rate that it previously had applied to its direct labor rates for its [deleted] employees. Although the firm submitted a revised B.2 table with its FPR that reflected the elimination of this [deleted] percent escalation rate, it did not submit a revised B.4 table. Second, the protester has identified some 40 additional labor categories where RTSC’s rates in its B.4 table are higher than the rates included in the firm’s B.2 table. According to the protester, the agency’s failure to include the higher of these inconsistent prices in RTSC’s evaluated price--as expressly provided for in the RFP--resulted in an understatement of RTSC’s total evaluated price of approximately $97 million. The agency responds that, with respect to the [deleted] labor rates, it reasonably relied on language appearing in the May 7 cover letter accompanying RTSC’s FPR to conclude that the firm had reduced its pricing in both the B.2 and B.4 tables, notwithstanding any apparent inconsistencies between the prices in tables B.2 and B.4. This letter provided, in pertinent part: “Our proposed burdened labor rates for the categories and locations attached to this letter are hereby updated accordingly for both Section B.2 and B.4. These rates represent a total reduction of $[deleted] in our evaluated B.2 price.” AR exh. 75, Cover Letter. The agency maintains that this language was sufficient to obligate RTSC to provide rates without the [deleted] percent escalation. The agency maintains, moreover, that, even if this language was inadequate to obligate RTSC, this is a minor clerical error that can be corrected after award. With respect to the other 40 inconsistent labor rates, the agency states that it relied on similar language appearing in the firm’s proposal providing that: “Raytheon assures that the rates proposed in Section B.2 ‘T&M Evaluation Worksheets’ are consistent with B.4 ‘Loaded Labor Rates Matrix,’” and further providing that “[e]ach site referenced in the B.2 tables has been mapped into the corresponding B.4 Appendix B Locations on the tabs of the B.4 workbooks.” AR exh. 60, Volume 5_Book 2_CP_rev2.doc, at 76. The agency asserts that this was sufficient to indicate that RTSC intended to be bound by the lower rates appearing in the B.2 table.

We find that the agency improperly failed to include an additional $97 million (consistent with GDIT’s calculation) in RTSC’s evaluated price. The RFP was unequivocal regarding how the agency was to evaluate proposals in the event of an inconsistency between the B.2 and B.4 tables:

Section B.2 ‘Time and Materials Evaluation Worksheets’ will be evaluated to ensure that the rates proposed are consistent with the B.4 ‘Loaded Labor Rates Matrix’ . . . . Inconsistencies between B.2 and B.4 rates, or between B.3 and B.5/B.6 FFP, will result in the Government using the higher of the inconsistent rates/prices for the Total Evaluated Price.

RFP at M-3. It is undisputed that RTSC’s B.2 table included revised prices that were inconsistent with the higher prices in its B.4 table. Under the above-quoted language, in this situation, the agency was to include the higher prices in the evaluation. The agency, in relying upon the information in RTSC’s cover letter, disregarded this express RFP provision in arriving at RTSC’s total evaluated price. The agency’s reliance on the language in the May 7 cover letter, in lieu of the approach plainly set forth in the RFP, was misplaced. Not only was such reliance inconsistent with the plain language of the RFP but, in any case, the cover letter language rendered RTSC’s proposal, at best, ambiguous. In this regard, although RTSC purported to revise both its B.2 and B.4 tables by the terms of the cover letter, as noted, it submitted only a revised B.2 table and stated that its proposed change “represents a total reduction of $[deleted] in our evaluated B.2 price.” AR exh. 75. Other portions of RTSC’s proposal--including its B.4 table--remained unchanged by the May 7 revision, including the narrative replacement pages to its proposal that RTSC had previously submitted in connection with its earlier offer of the [deleted] percent escalation for its [deleted] employees. AR exh. 42d, Vol. 5, book 2 change pages, at 157-57f. Thus, RTSC’s B.4 table and narrative proposal continued to offer the [deleted] percent annual escalation to its [deleted] employees’ compensation, notwithstanding the language of its cover letter.  Agencies are required to evaluate proposals in a manner consistent with the solicitation. Clean Harbors Env’t Servs., Inc., B-296176.2, Dec. 9, 2005, 2005 CPD para. 222 at 3. The RFP here expressly provided that the agency would evaluate inconsistent pricing in a very specific manner, and the agency failed to evaluate RTSC’s proposal consistent with the RFP ground rules. (General Dynamics Information Technology, B-299873, September 19, 2007) (pdf)

An agency may not reasonably award a cost‑reimbursement contract to an offeror whose cost proposal evidenced a different technical approach than that presented in the technical proposal, without resolving the inconsistency. See TRW, Inc., B‑254045.2, Jan. 10, 1994, 94-1 CPD para. 18 at 8-9. Here, the agency failed to resolve the inconsistency presented in MTJV’s cost and technical proposals. In any case, we find no reasonable basis in the record for the Navy’s “assumption” that Tecnico’s rates were “representative of prevailing Mayport area labor rates.” As noted by the protester, Tecnico’s burdened labor rate of $[Deleted] was significantly lower than all but one of the other offerors’ and their subcontractors’ burdened labor rates. In fact, we calculate the average burdened labor rate for offerors and their subcontractors to be $[Deleted].[6] More specifically, Tecnico’s burdened labor rate was significantly lower than the rates proposed by Earl ($[Deleted]), Atlantic Marine ($[Deleted]), and QED ($[Deleted]), which were the firms specifically identified by MTJV for possible performance of [Deleted] percent of the contract work. Although the Navy provided the declaration of the CAP chairperson, who generally states that he found that Tecnico’s rate was comparable to rates of other contractors working in the Mayport area, see Navy’s Response to Earl’s Comments, attach. D, Declaration of CAP Chair, at 2, this declaration does not explain with any specificity how he determined this, nor does the Navy otherwise address or rebut the protester’s arguments concerning Tecnico’s lower rate compared to the offerors’ rates in this competition. We also note that allowing MTJV to propose subcontracting a significant amount of the contract to unnamed subcontractors appears to also be inconsistent with the RFP’s requirements to identify and provide cost proposals for significant subcontractors, which the RFP defined, in part, to be contractors that were providing effort consisting of 5 percent of total direct dollars. See RFP sect. L, at 154, 159. With respect to the Navy’s contention that Earl similarly proposed to perform [Deleted] percent of the contract with subcontractors other than those it proposed in its cost proposal, we fail to see how, even if this were true, this demonstrates that the agency’s cost realism evaluation was reasonable. In any event, as noted above, MTJV stated in its technical proposal that it would allocate [Deleted] percent of its productive hours assigned to Tecnico at that firm’s low labor rate to other “miscellaneous specialty contractors,” which all appear to have higher labor rates than Tecnico’s. Earl, on the other hand, stated in its technical proposal that [Deleted] percent of the contract work would be performed by its identified team of subcontractors (whose labor rates were considered in the agency’s cost realism analysis), and that Earl would “accomplish the remaining work with the assistance of our Surge/Specialty Subcontractors” (all of which were also specifically identified in Earl’s proposal). See AR, Tab 5, Earl Technical Proposal, at 25-26. There is no evidence in the record, nor has the agency provided any argument, that indicates that any of the surge/specialty subcontractors identified by Earl in its proposal have higher rates than Earl. In any event, unlike MTJV’s unequivocal statement that work allotted to Tecnico would be performed by others, Earl stated it would perform [Deleted] percent of the contract work, albeit with the assistance of the identified surge/specialty subcontractors.  (Earl Industries, LLC, B-309996; B-309996.4, November 5, 2007) (pdf)

Navarro challenges the adequacy of the agency’s price realism analysis. In this regard, section M of the RFP stated that proposals “will be evaluated to determine if the proposed costs are realistic and consistent with the Technical Proposal with regard to the nature, scope, and duration of the work to be performed. Inconsistencies between the Cost/Price Proposal and other portions of the proposal could raise concerns regarding the offeror’s understanding of the requirements and ability to perform the work for the proposed price.” RFP at 92.  Where a fixed-price contract--including a fixed-rate contract such as this one--is to be awarded, an agency may provide for the use of a price realism analysis in a solicitation for such purposes as measuring an offeror’s understanding of the solicitation’s requirements and for assessing the risk inherent in an offeror’s proposal. Star Mountain, Inc., B-285883, Oct. 25, 2000, 2000 CPD para.189 at 4. The Federal Acquisition Regulation (FAR) identifies a number of price analysis techniques that may be used to determine whether prices are reasonable and realistic, including comparison of the prices received with each other and with the independent government estimate, and analysis of pricing information provided by the offeror. FAR sect. 14.404-1(b)(2). The nature and extent of a realism analysis ultimately are matters within the agency’s discretion, unless the agency commits itself to a particular methodology in the solicitation. Id.  DOE’s realism analysis consisted of comparing the proposed rates for the specified labor categories to both the government estimate and the other proposed prices, and the use of statistical analysis techniques to analyze the information. Technical Evaluation Report (TER) at 37-46 and attach. 4. As a result of its analysis, the agency concluded that all offerors’ total prices were realistic, including Stoller’s, which was approximately 11.6 percent lower than the government estimate. AR at 25, 28. In this regard, the agency found that some of Stoller’s and other offerors’ labor rates were lower than the government estimate and that some were higher, but concluded that, overall, all offerors’ proposed rates were consistent with the estimate. AR at 25. In addition, DOE verified that each offeror’s prices reflected the estimated number of labor hours for each labor category specified in the RFP. We find nothing objectionable in the agency’s evaluation methodology.  Navarro complains that the realism analysis was flawed because it was based on a government estimate that was not prepared until after the proposals were received. However, there is nothing per se improper in an agency’s reliance on a government estimate revised after offers are received where it determines that the original estimate is erroneous. McCarthy Mfg. Co., B-186550, Feb. 17, 1977, 77‑1 CPD para. 116 at 3-4. DOE explains that it reduced the government estimate after proposals were received to correct errors and to account for inapplicable and likely inaccurate assumptions. For example, among other things, DOE reduced the overhead rate assumption from 100 percent to 50 percent because the lower rate was consistent with similar contracts performed on government property. The agency also reduced the profit rate to correspond to the rates offerors actually proposed. AR at 29-30. Navarro does not challenge any specific changes made by the agency, and does not assert--and we find no reason to conclude--that the estimate itself is unreasonable. Accordingly, we find no basis for questioning the agency’s use of the revised estimate. (Navarro Research and Engineering, Inc., B-299981; B-299981.3, September 28, 2007) (pdf)

Protest is sustained where (1) solicitation for combat search and rescue aircraft provided that cost/price would be calculated on the basis of Most Probable Life Cycle Cost, including both contract and operations and support (O&S) costs, (2) solicitation requested detailed information quantifying required maintenance for proposed aircraft, and (3) agency nevertheless normalized cost of maintenance when calculating O&S costs, thereby ignoring potentially lower cost of asserted low maintenance helicopters; once offerors are informed of criteria against which proposals will be evaluated and award made, agency must adhere to those criteria. (Sikorsky Aircraft Company; Lockheed Martin Systems Integration‑Owego, B-299145; B-299145.2; B-299145.3, February 26, 2007) (pdf)

The FAR provides a number of price analysis techniques that may be used to determine whether prices are fair and reasonable, including comparison of the prices received with each other; comparison of previously proposed prices for the same or similar items; and comparison with the independent government estimate. FAR sect. 15.404-1(b)(2). A price reasonableness determination is a matter of administrative discretion involving the exercise of business judgment by the contracting officer that we will question only where it is unreasonable. The Right One Co., B-290751.8, Dec. 9, 2002, 2002 CPD para. 214 at 5. Our review of the record here provides no basis to question the reasonableness of the contracting officer’s determination.  Section M of the RFP, quoted above, clearly stated that an offeror’s evaluated price would be calculated by multiplying each of the priced line items by the estimated quantities and by adding all of the extended prices to arrive at the lowest total evaluated price for the varied quantities. RFP amend. 2, adden., attach. 1, Price Evaluation. Further, section M did not require the use of price realism analysis to measure the offerors’ understanding of the government’s requirements or to assess the risk inherent in an offeror’s proposal. PHP Healthcare Corp., B-251933, May 13, 1993, 93-1 CPD para. 381 at 5. Rather, as described above, the record shows that the contracting officer agency conducted a price reasonableness evaluation based upon adequate price competition, which reflected approximately a 4 percent differential between the proposals of USDC and USTI, along with comparison of the proposed prices to the government estimate. Although USDC’s essential complaint is that the contracting officer’s analysis should have been more exhaustive, our review confirms that the price evaluation conducted by the agency was reasonable and fully consistent with the provisions of the RFP.  USDC asserts that the contracting officer should have obtained and analyzed additional information in evaluating offerors’ proposed prices. In support of its position, USDC points to language in section L of the RFP which states that information other than costs and pricing data may be required to support price reasonableness. As discussed above, in this case, section M of the RFP did not require that additional information would be evaluated as part of the agency’s price evaluation. Absent an RFP provision in a solicitation for a fixed-price contract requiring a price realism analysis, no such analysis is required. Dismas Charities, Inc., B-289575.2; B-289575.3, Feb. 20, 2004, 2004 CPD para. 66 at 4.  (U.S. Dynamics Corporation, B-298889, December 19, 2006)  (pdf)
 

The RFP provided possible methods for evaluating price reasonableness: information submitted with the offeror’s proposal, the comparison of other competitive offers, the independent government cost estimate (IGCE), or on any other reasonable basis. RFP amend. 3, sect. M, at 35. Of these options, the agency chose to evaluate price reasonableness by comparing price proposals to each other as well as to the IGCE. The agency has adequately documented its price analysis and reasonably determined, based on a comparison of price proposals and comparison of the prices to the IGCE, that the awardees’ prices were fair and reasonable. Agency Report, Tab 25, Cost/Price Analysis Report, at 1. While the protester alleges the agency should have conducted a more in-depth analysis of the price proposals, the depth of an agency’s price analysis is a matter within the sound exercise of the agency’s discretion; we find no legal requirement here for the agency to have done a more in-depth analysis than was undertaken here. See Redcon, Inc., B‑285828, B‑285828.2, Oct. 11, 2000, 2000 CPD para. 188 at 9. Given that Indtai’s price is significantly higher than the awardees’ prices, many of the protester’s contentions concern the agency’s alleged failure to perform sufficient analysis to determine whether the awardees’ prices were too low or consider the performance risk of these assertedly low prices. However, the purpose of a price reasonableness analysis is to determine whether the prices offered are higher--as opposed to lower--than warranted. See Dismas Charities, Inc., B‑289575.2, B-289575.3, Feb. 20, 2004, 2004 CPD para. 66 at 4; Sterling Servs. Inc., B-291625, B-291626, Jan. 14, 2003, 2003 CPD para. 26 at 3. In contrast, arguments that the agency did not perform an appropriate analysis to determine whether prices are too low such that there may be a risk of poor performance concern price realism not price reasonableness; price realism is not required to be evaluated by the agency unless the solicitation provides for such an analysis. Dismas Charities, Inc., supra. Here, the solicitation did not provide for a cost realism analysis and the agency therefore did not have to perform such an analysis.  (Indtai Inc., B-298432.3, January 17, 2007) (pdf)

CAS 401--which is applicable to ACC--requires a contractor’s practices in estimating costs for a proposal to be consistent with cost accounting practices used by the contractor in accumulating and reporting costs. 48 C.F.R. sect. 9904.401-20 (2005). This requirement is imposed because “[c]onsistency in the application of cost accounting practices is necessary to enhance the likelihood that comparable transactions are treated alike,” so that, among other things, there is “financial control over costs during contract performance.” Id. More significantly, CAS 402--also applicable to ACC--states:

All costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives. No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective. Further, no final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included in any indirect cost pool to be allocated to that or any other final cost objective.

48 C.F.R. sect. 9904.402-40. Because of these requirements, ACC was and will be required to account for its costs in a manner consistent with its established accounting practices during the course of this contract performance. General Research Corp., B-241569, Feb. 19, 1991, 91-1 CPD para. 183 at 9; CACI, Inc.--Fed., B‑216516, 84-2 CPD para. 542 at 10‑13. Consequently, in determining ACC’s evaluated probable cost for performing this contract, the agency could not reclassify costs that ACC treats as indirect costs in its accounting system as direct costs. See General Research Corp., supra; CACI, Inc.--Fed., supra. The agency argues that this adjustment was necessary in order to allow for a more “equitable” comparison of the cost proposals. In effect, the agency here has selectively “normalized” the cost elements included in the offerors’ indirect cost pools. Normalization is a technique sometimes used within the cost evaluation/adjustment process that involves measuring offerors against the same cost standard or baseline where there are no logical differences in approach or in situations where insufficient information is provided in the proposals. General Research Corp., supra. Such a normalization process was improper here because ACC’s proposal necessarily accounted for PMO costs as part of its indirect costs, which were required to be accounted for in a like manner under this contract.[4] Therefore, the agency’s “normalization” of PMO costs among the offerors with different accounting systems necessarily resulted in an unreasonable estimate of the offerors’ proposed costs for performing this contract. General Research Corp., supra, at 5-6, 9. Moreover, the agency has never explained why deleting PMO costs from proposed indirect costs will result in a more equitable comparison of proposals. There is no evidence in the record that the shifting of costs from indirect to direct can result in a number that represents the probable costs of a particular proposal in performing the contract, because there is no indication that the cost model’s plug number represents the direct cost approach that will be taken by each contractor.  The agency asserts that because an RFP amendment advised offerors, in response to an offeror’s question, that a “standing PMO” would not be funded, offerors were on notice that PMO costs were “within the scope of direct costs fixed by the Navy.” Agency Brief (Oct. 20, 2006) at 2; see RFP amend. 3, attach. 1, Q&A 44. The agency posits that its cost evaluation adjustment to account for ACC’s different treatment of PMO costs was therefore appropriate in order to allow for an “equitable” comparison of the proposals. This argument is meritless for a variety of reasons. First, the statement that the agency would not fund a “standing PMO” does not suggest that PMO costs were included as direct costs; if anything, it suggests the opposite. Also, as noted above, the agency does not explain how this statement would allow ACC to vary from its established accounting practices with regard to PMO costs. Finally, there is no evidence that any PMO costs were included in the “plug” numbers for direct costs. The agency argues that KBR was not prejudiced because it was also the beneficiary of a downward cost adjustment in its indirect costs. However, as noted above, the adjustment to KBR’s probable costs was to properly account for an apparent overstatement in several of its indirect rates, which is an entirely different proposition than reclassifying costs that had been properly included in indirect cost pools to direct costs. Finally, as noted by the protester, several of ACC’s indirect cost rates are significantly less than those proposed by the other offerors, which KBR suggests evidences that costs which other offerors charged as indirect costs may be charged as direct costs by ACC. KBR contends that given the multiple accounting variances amongst the offerors, the agency’s “singling out” of ACC’s PMO costs to adjust from indirect costs to direct costs was unreasonable and represented unequal treatment. The agency has offered no substantive response to this KBR contention, which, based on this record, appears to have merit. In sum, the agency’s adjustment to ACC’s proposal was unreasonable and prejudiced KBR because it resulted in ACC being evaluated as having a lower cost than KBR, such that no cost/technical tradeoff was performed. (Kellogg Brown & Root Services, Inc., B-298694; B-298694.2; B-298694.3, November 16, 2006) (pdf)

Multimax, BAE and Pragmatics assert that the Army’s evaluation of proposed labor rates was unreasonable. In this regard, the Army reports that it employed a two‑step approach to evaluating labor rates for purposes of determining price reasonableness, detecting unbalanced pricing, and identifying labor rates to question during discussions: first, it compared an offeror’s rate for a labor category to the IGCE rate for that category, and then it compared the rate to the mean of all offerors’ evaluated rates for each labor category using a two‑standard‑deviation measure. The agency’s price evaluator explained the second step as follows:

Next, the Price evaluation team calculated the mean of all offerors’ evaluated labor rates for each labor category. The mean evaluated labor rates were then used to calculate the standard deviation from the mean. In order to determine the most appropriate measure of comparison, the following were calculated: mean plus and minus one standard deviation, mean plus and minus two standard deviations, and mean plus and minus three standard deviations. A comparison was made, using the three separate standard deviations, to determine which offerors’ average labor rates for each labor category fall outside the range of each standard deviation. The majority of the offerors’ average labor rates fell outside the range of one standard deviation and no offeror’s average labor rates fell outside the range of three standard deviations. Therefore, it was determined that two standard deviations was the most appropriate measure of comparison to use for the reasonableness assessment.

Memorandum of Agency Price Evaluator to Source Selection Evaluation Board (SSEB) Chairperson, Nov. 29, 2005, at 2-3; Agency Comments, Sept. 21, 2006, at 3.

Under this two-step approach, the agency would issue an IFN¹ to an offeror questioning a proposed labor rate as significantly overstated (or understated) only if the rate both exceeded (or was lower than) the IGCE rate, and was more than two standard deviations greater (or less) than the mean rate of all offerors for that category. According to the contracting officer (who was responsible for conducting discussions and determining overall price reasonableness), the two-step evaluation was used to identify “extraordinary outlier rates,” that is, “rates that were significantly overstated or understated and which might pose a risk to the Government of paying an unreasonable amount during performance. . . . Rates that did not meet [both] tests were not considered outliers and were not questioned.” Second Declaration of Contracting Officer at 1; see Agency Comments, Sept. 8, 2006, 3-8, 16; Agency Comments, Sept. 21, 2006, at 3; Declaration of Agency Price Evaluator, Aug. 18, 2006, at 1.  The two-standard-deviation formula resulted in an extremely wide range of acceptable rates for the labor categories. The upper end of the range was significantly above the IGCE for some of the labor categories, and in some instances was nearly, or more than, twice the IGCE (such as $[REDACTED] versus the $[REDACTED] IGCE rate for Application System Analyst-Senior, $[REDACTED] versus the $[REDACTED] IGCE rate for Software Engineer-Senior, and $[REDACTED] versus the $[REDACTED] IGCE rate for Information Security Specialist-Senior). Likewise, the lower end, in some instances, was below the federal minimum wage or was even a negative number (such as $[REDACTED] for Project Administrator, $[REDACTED] for Information Security Specialist-Senior, and $[REDACTED] for Information Security Specialist‑Associate). There is no indication that the agency ever reviewed the results of the formula to assure that the prices at the extreme end of the ranges reflected reasonable pricing; rather, the agency mechanistically applied the formula and accepted the results without further analysis. We conclude that the agency’s methodology did not provide a valid means for identifying “outlier” (questionable) rates, and this aspect of the evaluation therefore was unreasonable. See generally Metro Mach. Corp., B‑297879.2, May 3, 2006, 2006 CPD para. 80 at 9‑10 (mechanical application of an agency’s own estimates for labor hours or costs to determine evaluated costs, without the exercise of informed judgment by the contracting agency in independently analyzing the offeror’s proposed costs based upon its particular approach and circumstances, was unreasonable); The Jonathan Corp.; Metro Machine Corp., B-251698.3, B-251698.4, May 17, 1993, 93-2 CPD para. 174 at 11-13; United Int’l Eng’g, Inc. et al., B-245448.3 et al., Jan. 29, 1992, 92-1 CPD para. 122 at 11. We therefore sustain the protests of Multimax, BAE and Pragmatics on the basis that the Army failed to reasonably evaluate proposed labor rates.  (Multimax, Inc.; NCI Information Systems, Inc.; BAE Systems, B-298249.6, B-298249.7, B-298249.8, B-298249.9, B-298249.10,October 24, 2006) (pdf)
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¹ Items for Negotiation (IFN)

EHMC challenges the agency’s determination that its price was unreasonably high, noting that its price was lower than both the prices VA has paid for the same services under a previous contract, and the cost guidelines utilized by the Medicare program for home oxygen services. The agency formulated the government estimate based primarily on the prices it was currently paying under the 6‑month contract extension negotiated in October, but increased the price for CLIN 1--for oxygen concentrators, which formed the largest single segment of the contract--from $60 (the extension price) to $90. Even with this 50-percent increase in the CLIN 1 price, as noted, EHMC’s price exceeded the estimate by 39 percent. Notwithstanding that there may have existed other price measures that would have been more favorable to EHMC, comparison of prices to a government estimate is a legitimate means of determining price reasonableness. See Bahan Dennis, Inc., B‑249496.3, Mar. 3, 1994, 94-1 CPD para. 184 at 3 (cancellation based solely on comparison to the government estimate was reasonable). This is particularly the case here, since the estimate was largely based on prices currently being paid under an existing contract.  EHMC asserts that the estimate was too low and did not constitute a proper basis for determining price reasonableness. Specifically, EHMC argues that, since the prior contract was awarded to MCS on January 1, 2001, and since the prices in that contract remained constant throughout the base year and 4 option years, those prices--which were reflected in the 6-month extension and, thus, the estimate--were not an accurate reflection of the current cost of oxygen equipment and services. We disagree. While EHMC is correct that the prices in the 6‑month extension were similar to those under the preceding contract, this fact in no way diminishes their validity for purposes of determining price reasonableness. Since the prices in the 6-month extension were negotiated in October 2005, and MCS was actually performing the work at the negotiated price when the RFP was issued, we see no reason why the agency could not accept those prices as representative of the current market price. The protester has not shown that the agency failed to consider market conditions or other extenuating circumstances that rendered the negotiated price an invalid basis for comparison. Moreover, the agency did not merely rely on the extension prices; rather, as noted above, it increased the estimate for CLIN 1, the largest segment of the work under the RFP, 50 percent above the fourth option year price under MCS’s contract. Regarding CLIN 1, although MCS was performing at a unit price of $60 (and, as noted, had been performing at that price during the fourth option year of its contract), the contracting officer (CO) explains that the 50 percent upward adjustment was based on his discussions with another contracting official who had contacted other VA medical centers to obtain prices. CO’s Statement, Sept. 21, 2006, at 2. The $90 unit price also closely reflected offerors’ prices under the same CLIN for the 2001-05 contract‑-offerors there proposed level 5-year pricing (except for MCS’s reduced fourth year option price) of $90, $93, and $95. Protester’s Comments, Sept. 26, 2006, exh. 1. Thus, while the $90 unit price was similar to prices from proposals that were submitted in 2000, those proposals essentially reflected the offerors’ views that prices would not increase significantly through 2005. Against this backdrop, given MCS’s willingness, as of January 2006, to perform CLIN 1 at a substantially lower price, the agency certainly had ample reason to believe that $90 did not understate the current market price. The protester also argues that the estimate was flawed in that it did not provide for inflation over the life of the contract. However, while the estimate apparently was based on level pricing ($719,000) for the base and 4 option years, as already discussed, under the prior contract each of the offerors proposed level pricing over the 5 contract years. Id. Furthermore, while the protester maintains that some significant inflation factor should be applied to each contract year, we note that the protester itself only proposed to increase prices in 2 of the 4 option years. The protester also has failed to provide any evidence establishing that cost increases for home oxygen services and supplies are, or should be, expected to occur over the contract term. We therefore are not persuaded that inflation should have been factored into the government estimate.  (Eagle Home Medical Corporation, B-298478, October 13, 2006) (pdf)

UMS and AKSM again were the only two firms to submit proposals. Regarding prices for the YAG laser system, UMS’s proposal listed, in the appropriate blanks to the right of the item description, a unit price of $1,325 for the system and a total price of $15,900 (the price for 12 units) for the base year. In addition to the blanks next to the item description, the pricing sheet also contained another blank under the description, in which offerors were again to fill in the unit price for each item. Here, UMS did not write $1,325 for the laser system, but instead wrote [deleted] (emphasis in original), and then added [deleted] additional lines containing prices for [deleted] different size fibers (ranging from [deleted] to [deleted]). UMS repeated this pricing scheme for the YAG laser system for each of the option years, changing only the total prices to reflect the different number of units in the option years (25 units for each year). In contrast, AKSM’s proposal listed a unit price of $900 for the YAG laser system in both the blank next to the description and the blank below the description. Regarding prices for the standby charges, UMS’s proposal listed, in the appropriate blanks to the right of the item description, a unit price of $250 for standby charges, and a total price of $1,250 (the price for 5 units) for the base year. In the blank under the item description, UMS again listed $250, but included the phrase [deleted] (emphasis in original) after the unit price. Again, UMS repeated this pricing for each of the option years, changing only the total prices to reflect the changed number of units (10 units for each year). In contrast, AKSM’s proposal listed standby charges of $475 in both blanks. Finally, for the ESWL, UMS listed a unit price of $875 in the blank next to the item description and the blank below the item description. AKSM listed a price of $1,400 in both places. UMS primarily alleges that VA performed an improper price evaluation. Specifically, whereas VA based UMS’s total evaluated price on a unit price of $1,325 for the YAG laser system, UMS alleges that this was not its lowest possible price; rather, its lowest price was the price listed under the item description--[deleted] for the least expensive fiber, for a total unit price of $1,200. Since this price would have left UMS as the low offeror, it concludes that the agency’s price evaluation was materially flawed.

The price evaluation here was reasonable. Regarding the laser system, it was proper for the agency to use $1,325 as the item price for evaluation purposes, given that $1,325 was the unit price that UMS provided in the space to the right of the item description, and that it was the only firm, fixed unit price offered. In any case, even if UMS were correct that its range pricing should have been used in the evaluation, $1,200 would not be the proper evaluated unit price. In this regard, where an offeror provides a range of prices where a single firm, fixed price is required, the evaluation must be based on the highest, not the lowest, price in the range, since this could be the ultimate cost to the government if award were made to that firm. See Tri-State Gov’t Servs., Inc., B‑277315.2, Oct. 15, 1997, 97-2 CPD para. 143 at 4-5. The highest unit price in UMS’s proposed price range was [deleted] ([deleted] for the fiber). Accordingly, this price, not $1,200, would be the appropriate price for the agency to use if it were to evaluate UMS’s range pricing. (United Medical Systems-DE, Inc., B-298438, September 27, 2006) (pdf)

In our view, the record here lacks any persuasive evidence that the agency examined the completeness of the offerors’ price proposals as called for by the RFP. We note that the solicitation here did not merely use the term “completeness” in setting out the parameters of the price evaluation, but explained, in detail, that the agency planned to evaluate completeness, and identified the kind of back-up pricing data that offerors needed to produce for the agency’s evaluation; the agency’s failure to conduct this review was clearly contrary to the solicitation’s requirements. See OMNIPLEX World Servs. Corp., B‑291105, Nov. 6, 2002, 2002 CPD para. 199 at 10. (Advanced Systems Development, Inc., B-298411; B-298411.2, September 19, 2006) (pdf)

Where, as here, an RFP contemplates the award of a fixed-price contract, an agency may provide for the use of a price realism analysis for the limited purpose of measuring an offeror’s understanding of the requirements or to assess the risk inherent in an offeror’s proposal. Rodgers Travel, Inc., B-291785, Mar. 12, 2003, 2003 CPD para. 60 at 4; Star Mountain, Inc., B-285883, Oct. 25, 2000, 2000 CPD para. 189 at 2. The nature and extent of the agency’s price analyses are matters within the sound exercise of the agency’s discretion, and our review of such an evaluation is limited to determining whether it was reasonable and consistent with the provisions of the solicitation. Id. Among the price analysis techniques that may be used is an analysis based on previous proposed prices or contract prices. Federal Acquisition Regulation (FAR) sect. 15.404-1(b)(2). We agree with the protester that the contract specialist’s “adjustments” to the fixed prices proposed were problematic. A price realism analysis, if conducted, may affect the technical evaluation; it cannot properly lead to adjustment of proposed fixed prices. See Verestar Gov’t Servs. Group, B‑291854, B-291854.2, Apr. 3, 2003, 2003 CPD para. 68 at 6 n.3. If the selection decision had been based on those “adjusted” or “factored” prices, the procurement might have been fatally flawed. The tradeoff analysis in the PNM, however, was explicitly based on the unadjusted proposed prices, and the source selection decision, as quoted above, explicitly found that “the advantages of having Todd perform [the work] is worth the additional financial outlay (regardless of whether that amount is based upon the original proposed values or adjusted values).” Accordingly, any flaws in the conduct of the price realism analysis did not prejudice PECI. Competitive prejudice is an essential element of a viable protest and where no prejudice is shown, or is otherwise not evident from the record, our Office will not sustain a protest, even if a deficiency in the procurement is found. Orion Int’l Tech., Inc., B-293256, Feb. 18, 2004, 2004 CPD para. 118 at 3. (Puglia Engineering of California, Inc., B-297413; B-297413.2; B-297413.3, January 20, 2006) (pdf)

One example of how the agency’s limited review may have led to acceptance of a questionable contingency cost was SCA’s allowance for the possibility that if sodium pools were encountered during the removal of residual sodium, a strong sodium/hydrated sodium hydroxide reaction would occur. SCA listed the “owner” of this risk as SCA and Framatone ANP, a proposed subcontractor that would be involved in removing residual sodium. Although SCA rated the probability of this occurring as very low, that is, 0 to 20 percent, it recognized that the cost overrun that would result in the event that it occurred would total between $7,140,000 and $16,660,000, and the probable schedule impact would be between 7.3 and 18.2 weeks of delay. Nevertheless, presumably as the anticipated result of its proposed mitigation approach, SCA allocated no contingency allowance either in terms of dollars or weeks of delay. SCA Revised Proposal, fig. C-21, C-23, C-24. That this result may not fully reflect the likely risks is supported by the testimony of the FFTF project director (who was not involved in evaluating SCA’s contingency allowance in this regard, but was the agency’s leading technical expert on sodium removal at the hearing), who answered in the affirmative when asked whether he would be surprised to learn that the risk analysis in this regard resulted in zero risk (and thus had no effect on the contingency allowance0. Tr. 919‑20. While it appears that the agency concluded that SCA’s method for calculating contingency was sound, it is clear from the limitations acknowledged by the agency that it was unable to conclude that SCA’s significantly lower contingency allowance, and the resulting difference in evaluated cost, reasonably represented the difference between the costs that actually would be incurred under SCA’s and FRC’s proposals. The evaluation in this area therefore was unreasonable. (EPW Closure Services, LLC; FFTF Restoration Co., LLC, B-294910; B-294910.2; B-294910.3; B-294910.4; B-294910.5; B-294910.6; B-294910.7, January 12, 2005) (pdf)

The agency performed its price analysis by first establishing a “minimum objective” price, a “target objective” price, and a “maximum objective” price, for each of the 355 Lot I CLINs and 194 Lot II CLINs. AR, Tab 13, Pre-Negotiation Briefing Memorandum, at 5-6, attach. A. The “minimum objective” price equated to the determined “Fair Market Price less 5 % to allow for negotiation flexibility.” Id. at 5. The agency’s “target objective” prices were “based on the previous procurement prices” adjusted by a set percentage for inflation and a “learning curve adjustment for quantity,” and the agency’s “maximum objective” prices equated to the determined fair market price “with 5% added to allow for unknown market conditions.” Id. The agency then identified those CLINs in the offerors’ proposals where the total prices proposed (unit price multiplied by the estimated quantity) were at least $7,000 less than the agency’s minimum objective prices, 50 percent or more below the agency’s maximum objective prices, and/or “out of line” with the other offerors’ proposed prices. AR, Tab 13, Pre-Negotiation Briefing Memorandum, at 5. The agency provided each offeror with a pricing matrix identifying those CLINs where the prices proposed met the above criteria, and, as mentioned previously, requested that the offeror “verify that these prices are correct for price realism.” AR, Tab 14, Negotiation Letters to EHC and Grauch (Sept. 1, 2004). The agency received proposal revisions from the offerors, and with regard to Grauch, “was satisfied with the price realism of [its] proposal[].” AR at 13. EHC challenges the depth of DLA’s price analysis, arguing that “there is no discussion in any of [the agency’s] final evaluation documents regarding the cost realism of Grauch’s offer.” Protester’s Comments at 12. The protester concludes that the agency “did nothing to investigate Grauch’s significantly lower prices or to confirm that Grauch could deliver the requested items at these prices,” and therefore “failed to conduct a proper price realism analysis.” Protester’s Supplemental Comments at 10. The protester notes that Grauch’s proposed prices after negotiations were “still 32% below [the agency’s] Minimum Objective for Lot I and 35% below [the agency’s] Minimum Objective for Lot II.”[4] Id. We find from our review of the contemporaneous record that the agency had concerns with the low prices proposed by the offerors for certain CLINs in Lots I and II, and that it handled these concerns in a reasonable manner. That is, the agency’s price negotiation memorandum shows that the agency was aware and accurately calculated the number of CLINs on which Grauch’s and EHC’s proposed prices fell within the agency’s criteria for requiring verification for price realism purposes, that the agency brought these CLINs to the offerors’ attention during negotiations, and was satisfied with the responses it received. There is no requirement that the agency conduct a “cost realism” analysis in evaluating proposals for a fixed-price contract as asserted by the protester, nor is an agency required to “investigate” in the context of a price realism analysis whether Grauch can deliver the items for the prices proposed as required by the resultant contract.[5] See Citywide Managing Servs. of Port Washington, Inc., supra, at 6. (Electronic Hardware Corporation, B-295345, January 28, 2005) (pdf)

Although agencies are required to perform some sort of price or cost analysis on negotiated contracts to ensure that proposed prices are fair and reasonable, where, as here, the award of a fixed-price contract is contemplated, a proposal’s price realism is not ordinarily considered, since a fixed-price contract places the risk and responsibility for contract costs and resulting profit or loss on the contractor. However, an agency may provide in the solicitation for a price realism analysis for such purposes as measuring an offeror’s understanding of the solicitation requirements, or to avoid the risk of poor performance from a contractor who is forced to provide goods or services at little or no profit. The depth of an agency’s price realism analysis is a matter within the sound exercise of the agency’s discretion. Citywide Managing Servs. of Port Washington, Inc., B-281287.12, B‑281287.13, Nov. 15, 2000, 2001 CPD para. 6 at 4-5. In reviewing protests challenging price realism evaluations, our focus is whether the agency acted reasonably and in a way consistent with the terms of the solicitation. The protester first argues that under the solicitation its proposal cannot be rejected as unacceptable because its price was considered unrealistically low. However, as indicated, the solicitation expressly provided that "[p]roposals will be evaluated to determine whether offered prices are realistic,” and specifically informed offerors that the analysis would include the distinct queries of whether the prices were realistic “in relation to the work to be performed, reflect a clear understanding of the requirements, and are consistent with other portions of the offeror’s proposal.” RFP at 16. Accordingly, this is not an instance, such as pointed to by the protester in Possehn Consulting, B-278759, Jan. 9, 1998, 98-1 CPD para. 10, where the rejection of a proposal because its pricing was found to be unrealistic was determined to be a matter of responsibility due to the solicitation’s lack of any evaluation factor or criterion related to price realism. See also CSE Constr., B-291268.2, Dec. 16, 2002, 2002 CPD para. 207 at 4-5 (where there is no relevant evaluation criterion pertaining to price realism or understanding, a determination that an offeror’s price on a fixed-price contract is too low generally concerns the offeror’s responsibility). In our view, given the RFP’s specific provision regarding the performance of a price realism analysis, as well as the remainder of the RFP’s terms, the agency could reject a proposal that lacked price realism, or consider a proposal’s lack of price realism in its source selection.  We have found that the risk of poor performance when a contractor is forced to provide services at little or no profit under a fixed-price contract is a legitimate concern that can be considered under a price realism evaluation. Ameriko, Inc., B‑277068, Aug. 29, 1997, 97-2 CPD para. 76 at 3; GEC-Maconi Electronic Sys. Corp., B‑276186, B-276186.2, May 21, 1997, 97-2 CPD para. 23 at 5. Here, the agency reasonably found IOS’s price to be unrealistic, and because of this, determined that there was a significant risk that IOS’s performance under the contract may be so unprofitable that the performance of this contract--which is considered extremely important to DeCA--would be adversely affected. Under the circumstances, we find the agency had a reasonable basis to reject IOS’s proposal. (International Outsourcing Services, B-295959, LLC, May 25, 2005) (pdf)

Agencies must consider cost to the government in evaluating proposals, 41 U.S.C. sect. 253a(b)(1)(A), (c)(1)(B) (2000), and while it is up to the agency to decide upon some appropriate and reasonable method for the evaluation of offerors’ prices, an agency may not use an evaluation method that produces a misleading result. See Bristol-Myers Squibb Co., B-294944.2, Jan. 18, 2005, 2005 CPD para. 16 at 4; AirTrak Travel et al., B-292101 et al., June 30, 2003, 2003 CPD para. 117 at 22. The method chosen must also 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. Id.; see FAR sect. 15.405(b)(“the contracting officer’s primary concern is the overall price the government will actually pay”). For example, in Health Servs. Int’l, Inc.; Apex Envtl., Inc., B-247433, B-247433.2, June 5, 1992, 92-1 CPD para. 493, the solicitation contemplated the award of a fixed-price, indefinite-quantity contract and offerors’ proposals were required to include hourly rates for six categories of labor. We sustained a protest challenging the agency’s price evaluation because it was based solely upon offerors’ average hourly labor rates, without consideration of the estimated quantities of each labor category the agency expected to order, and thereby failed to establish whether one offeror’s proposal was in fact more or less costly than another’s.  Based on our review of the record here, we conclude that the Forest Service’s price evaluation, including the determination that Port-A-Pit’s prices were not fair and reasonable, was fundamentally flawed because it did not reflect the actual cost to the government of the offerors’ competing proposals. In performing the evaluation of offerors’ prices, the contracting officer did not utilize any quantity estimates for the meals, mileage, and handwashing unit items, but instead limited her evaluation to offerors’ unit prices. The contracting officer determined that while Port-A-Pit’s unit prices for meals and handwashing units were not objectionable, its unit price for mileage was not fair and reasonable, in comparison to both the government estimate and the average price of other offerors. AR, Tab 15, TEB Best Value Analysis Report, at 1, 4-5. Based on the contracting officer’s determination that Port-A-Pit’s price for mileage was not fair and reasonable, the Forest Service found Port-A-Pit ineligible for contract award. Id. at 6; Contracting Officer’s Statement, July 18, 2005, at 11 (“I made the determination based on price analysis that [Port-A-Pit’s] mileage price was not fair and reasonable and could not form the basis for award”). The record reflects that mileage is by no means the largest component of cost to the government. Rather, the parties agree that meals are the primary cost for the services to be provided under the contract.[10] Protest, June 21, 2005, at 8, exh. 1; AR, Tab 15, TEB Best Value Analysis Report, at 1. For example, the record indicates that under a predecessor contract, Port-A-Pit provided a total of [DELETED] meals and drove a total of [DELETED] miles in response to a fire in Ash, Arizona.[11] Protest, June 21, 2005, exh. 1, at 1. Using the unit prices proposed by Port-A-Pit here, meal costs would have been approximately $39,644, while mileage costs, in comparison, would have been approximately $17,100. Similarly, the record indicates that with regard to a fire in Jimtown, Montana, meal costs to the government would have been approximately $69,285 while mileage costs would have been approximately $35,600.[13] In light of the substantial difference in the relative costs for meals and mileage, the agency’s price evaluation, to the extent that it considered only offerors’ unit prices, failed to reflect the likely actual cost to the government of the offerors’ approaches. (R&G Food Service, Inc., d/b/a Port-A-Pit Catering, B-296435.4; B-296435.9, September 15, 2005) (pdf)

In sum, we conclude that, in light of DCAA’s inability to develop evaluated direct labor rates based on SGT’s cost proposal and staffing approach, the agency’s experience with SES’s costs under the incumbent proposal as detailed in the September 2003 DCAA audit, and in the absence of other data in SGT’s proposal that would address the agency’s concerns, the agency’s cost realism analysis was reasonable. The adjustments to both the SCA-exempt and non-exempt rates and the use of the September 2003 audited rates as the most recently evaluated rates were reasonable in light of the information available to the agency. This aspect of the protest is denied. (SGT, Inc., B-294722.4, July 28, 2005) (pdf)

We find that GSA's pricing analysis was unreasonable because the comparison of offerors' "discount rates" did not reflect the actual proposed prices or cost to the government for these services. While Maximus's warehouse price may have included additional services not offered by Liquidity, the fact remains that the price to the government for Maximus's warehouse space will be higher than the price for an equivalent amount of Liquidity warehouse space, and the price evaluation did not reflect this difference in cost to the government. (In this regard, the agency did not find that the additional warehouse services allegedly offered by Maximus would result in quantifiable savings in costs that the government would otherwise incur.) Furthermore, we find that the agency's rationale for reducing Liquidity's price advantage for warehouse services is unsupported by the contemporaneous record. While the agency explains that the reduction in discount rate from [redacted] percent to [redacted] percent was due to differences in proposal approaches, the contemporaneous record does not demonstrate that the agency evaluated the asserted differences in warehousing services. Indeed, the agency's current assertion that it did so is inconsistent with the remainder of its pricing analysis, which did not take into account any differences in offerors' proposal approaches under any of the other service areas considered in the price evaluation. For example, Liquidity's price proposal states that many of its warehousing services are included with its value-added-services pricing, yet GSA did not make any adjustments to the value-added-services pricing to take into account this proposal difference, as it did with warehousing. In fact, we note that the agency asserts, in response to other protest challenges to the price evaluation, that differences in proposal approaches were to be evaluated only under the technical approach factor, and not the price factor. See , e.g. , Agency Report, July 2, 2004, at 3. We also find that GSA erred in calculating its discount rate for transportation services. Although it may have been reasonable to assume that most of the transportation provided would be short hauls at less-than-full truckloads, there is no basis for excluding all of the long distances from consideration, as if no long haul services would be used. The agency does not claim that no long haul services would be used, the RFP does not specify that long hauls would not be required or considered in the evaluation, and, consistent with the RFP, both offerors proposed prices for both long and short hauls. On these facts, we find that the agency must consider in its price evaluation all of the costs of long haul transportation that it reasonably expects to use during contract performance, and, moreover, should disclose to offerors the basis for its evaluation of these costs prior to proposal submission. (Liquidity Services, Inc., B-294053, August 18, 2004) (pdf)

This problem with the way the IGSE was developed is significant because the IGSE was used in what appears to be a mechanical way in the cost realism evaluation. A reasonably derived estimate of labor hours and material costs can provide an objective standard against which the realism of proposed costs can be measured. IT Facility Servs.-Joint Venture, B-285841, Oct. 17, 2000, 2000 CPD paragraph 177 at 6-7; Theta Eng'g, Inc., B-271065, B-271065.2, June 12, 1996, 96-2 CPD paragraph 76 at 6. However, an agency may not mechanically apply that estimate to determine the most probable costs associated with proposals, without regard to the individual proposal's technical approach. The Jonathan Corp.; Metro Mach. Corp. , B-251698.3, B-251698.4, May 17, 1993, 93-2 CPD paragraph 174 at 11; Kinton, Inc. , B-228260.2, Feb. 5, 1988, 88-1 CPD paragraph 112 at 4. This is so because in some instances an estimate has limited applicability to a particular proposal due to, for example, the skill of the labor force or innovative work methods proposed. In those cases, any rigid reliance on the government estimate could have the effect of arbitrarily and unfairly penalizing (or rewarding) one firm and depriving the government of the benefit available from the different approaches of the various offerors. Accordingly, in order to undertake a proper cost realism evaluation, the agency must independently analyze the realism of an offeror's proposed costs based upon its particular approach, personnel, and other circumstances. The Jonathan Corp.; Metro Mach. Corp. , supra . Here, the record does not indicate that the agency engaged in an absolutely rigid application of the IGSE to the offerors' proposals. There do appear to be instances where the agency accepted proposed staffing for a particular function or labor category that was less than that reflected in the IGSE, and in other instances, the agency made adjustments to an offeror's proposed staffing that put the probable staffing associated with the proposal at a level between that set forth in the proposal and that provided by the agency in its IGSE. Nevertheless, the record also reflects that in the vast majority of instances where an offeror proposed a staffing level that differed from the IGSE, the staffing level was adjusted during the cost evaluation to the IGSE staffing level, with the primary documented reason by the agency being that the proposal did not provide "sufficient rationale" for the proposed staffing, with little further elaboration. See AR, Tab 43, Honeywell Cost Realism Rationale; at 2; Tab 47, Wyle Cost Realism Rationale, at 2; Tab 49, Sverdrup Cost Realism Rationale, at 2. As the protesters point out, the consistency of the agency's approach in this regard is readily apparent when the offerors' varying proposed staffing levels are compared to their staffing levels as adjusted by the agency and the IGSE. That is, although the agency found "that there was a wide range of disparate approaches from the offerors," with the five offerors proposing staffing levels that varied considerably ( i.e. , 198, 241, 248, 260, and 287 FTEs), the SEB adjusted the staffing levels proposed by all five offerors to within 4 FTEs of the IGSE of 293. Agency's Post-Hearing Comments at 10; exh. B, Cost Proposal Evaluation Results (July 22, 2003). This, along with the sparse evaluation documentation, suggests that the IGSE was used in a mechanical way in the cost realism evaluation, notwithstanding the encouragement in the RFP for proposing innovative approaches. That the agency used the IGSE in the cost realism evaluation in a mechanical way is supported by other evidence in the record. For example, before this issue became the gravamen of the protests, the agency stated in its initial report on the protests that "[u]niformly, NASA base lined [the offerors'] FTEs against the government staffing estimate." AR at 22, 25. Moreover, given the testimony of the SEB member that the Marshall estimate was essentially inflexible and any proposed staffing plan that did not comport precisely with the Marshall estimate would be "[c]ompletely unacceptable," the fact that variances from the estimate were not tolerated was understandable. [9] Tr. at 78, 80-81, 100, 107. Of most significance in showing that the IGSE was used in a mechanical way is the fact that Honeywell's proposed staffing was characterized as "appropriate" during the evaluation of its proposal under the technical performance subfactor, but was then adjusted upwards by 43 FTEs to within 2 FTEs of the IGSE during the cost realism evaluation. In sum, we find the agency's cost realism evaluation unreasonable. (Honeywell Technology Solutions, Inc.; Wyle Laboratories, Inc., B-292354; B-292388, September 2, 2003) (pdf)

The realism analysis here was unobjectionable. The Army evaluated Sunny Point's proposal and determined that the proposed labor mix and hours were consistent with its technical proposal and acceptable to perform the contract. SSD at 3. The Army also reviewed Sunny Point's price proposal and found that it was complete and adequate, Price Analysis Worksheet at 1, and also determined that it complied with the Service Contract Act wage determination with respect to both rates and fringe benefits. Price Analysis Report at 1. The Army noted that Sunny Point's price was lower than the government estimate, but attributed this to the fact that Sunny Point proposed a labor mix and staffing level different--but acceptable to perform--than that on which the government estimate had been based. SSD at 3. The agency also concluded that the government estimate was overstated. Id. Given this analysis, we have no basis to question the Army's realism evaluation.  (Satellite Services, Inc., B-295866; B-295866.2, April 20, 2005) (pdf)

In contrast, where, as here, with regard to a BPA contemplating fixed-price or fixedrate task orders to be issued against the vendors' GSA FSS contracts, the "realism" of vendor's proposed pricing is not ordinarily considered because the fixed-price contracting vehicle places the risk and responsibility for contract costs and ensuing profit or loss on the contractor. See Camber Corp. , B-293930; B293930.2, July 7, 2004, 2004 CPD 144 at4; OMNIPLEX World Servs. Corp. ; B291105, Nov. 6, 2002, 2002 CPD 199 at 9. However, because there is a risk of poor performance in certain circumstances, such as where a contractor fails to obtain and keep qualified personnel, an agency may, in its discretion, provide for a price realism analysis in a solicitation that contemplates the issuance of a BPA against the vendors' GSA FSS contracts. OMNIPLEX World Servs. Corp. , supra . Here, the methodology used by the agency in evaluating quotations under the pricing structure criterion was consistent with that provided in part 15 of the FAR for the performance of price realism analyses--the comparison of proposed prices, in the form of loaded labor rates, with prior contract prices for the same or similar services and with an independent government cost estimate. See Acepex Mgmt. Corp. , supra , at8; FAR 15.404-1(b). As noted, the agency's conclusion that S3's quotation warranted a "moderate risk" rating under the pricing structure criterion is not only consistent with the RFP evaluation scheme but is reasonably supported by the record. As indicated, the agency's evaluation of quotations under the pricing structure criterion was relatively detailed, and included an analysis of the labor rate quoted for each of the labor categories set forth in S3's quotation. S3's quoted rates in some instances were substantially lower, and overall were slightly lower, than the agency's calculated historical rates for the same positions, and as such, we believe that the agency reasonably determined that there was "some doubt that [S3's] pricing structure will support the [agency's] requirements with highly qualified personnel." AR, Tab I, Source Selection Report, at16. S3 has not showed that the loaded rates reflected in the historical averages were erroneous, unreasonable or unrealistic or that the comparison of S3's loaded rates to the historical averages was flawed. (Systems, Studies, and Simulation, Inc., B-295579, March 28, 2005) (pdf)

The evaluated prices as reported to the SSA improperly failed to reflect a common number of sites to be serviced. Treasury reports that the solicitation attachment listing 1,042 Treasury sites for which service was required included a number of errors. Second Agency Report at20. As a result, and as recognized in Treasury's price evaluation reports, offerors' MDOs were based on different total numbers of sites to be served, as well as different numbers of high bandwidth Category 1, lesser bandwidth Category 2, and least bandwidth Category 3 sites, as follows: