Link: GAO Opinion
Agency: Department of the Army
Disposition: Protest denied.
Keywords: Cost Evaluation on a Cost-plus proposal
General Counsel P.C. Highlight: When an agency evaluates a proposal for the award of a cost-reimbursement contract, an offeror’s proposed estimated costs are not dispositive because, regardless of the costs proposed, the government is bound to pay the contractor its actual and allowable costs. The agency is allowed as part of the evaluation to make adjustments in the proposed estimated costs.
ERC, Inc. protests the award of a contract under a request for proposals (RFP), issued by the Department of the Army, for support services for the Redstone Test Center’s Environmental and Component Test Directorate.
The Army issued the RFP as a competitive small business set-aside. The RFP provided for award of a cost-plus-fixed-fee indefinite-delivery/indefinite-quantity (ID/IQ) contract for a 12-month ordering period with four successive 12-month ordering periods. The RFP provided that award of the contract would be made on a best value basis, considering the following factors: business management and technical; past performance; and cost. The RFP instructed offerors that the cost analysis would be accomplished by evaluating each proposal’s most probable cost (MPC) to the government. The RFP defined MPC as the government’s “estimation of the cost of completing the contract using the offerors[‘] proposed approach.” The RFP stated that offerors’ proposed rates, factors, and expenses would be examined by the Defense Contract Audit Agency (DCAA) or any other means determined appropriate by the government. The evaluation was to include a cost realism analysis utilizing comparisons to the historical composite rate adjusted for anticipated future changes and/or similar rates under comparable government contracts performed in local area. The government was to consider failure to provide comparable rates as an indicator of risk associated with the contractors understanding of the requirements of the Performance Work Statement. The RFP further stated that the agency would rely upon local market wage rates and labor rates of similar government contracts in developing the MPC and in making trade-offs in determining the best value proposal.
With respect to the cost evaluation, DCAA and the agency’s price analyst evaluated the offerors’ proposed direct and indirect labor rates, attrition and escalation factors, and other costs. The price analyst relied heavily on DCAA’s findings when making MPC adjustments, and also compared offerors’ proposed composite labor rates with the composite rates furnished in the RFP. The SSA ultimately selected another offeror’s lower-cost proposal for award.
ERC challenges the agency’s cost realism analysis of both the awardee’s and ERC’s proposal and maintains that the MPC adjustments were unreasonable. GAO states that when an agency evaluates a proposal for the award of a cost-reimbursement contract, an offeror’s proposed estimated costs are not dispositive because, regardless of the costs proposed, the government is bound to pay the contractor its actual and allowable costs. Consequently, the agency must perform a cost realism analysis to determine the extent to which an offeror’s proposed costs are realistic for the work to be performed. An agency is not required to conduct an in-depth cost analysis or to verify each and every item in assessing cost realism; rather, the evaluation requires the exercise of informed judgment by the contracting agency. Further, an agency’s cost realism analysis need not achieve scientific certainty; rather, the methodology employed must be reasonably adequate and provide some measure of confidence that the rates proposed are reasonable and realistic in view of other cost information available to the agency as of the time of its evaluation. Because the contracting agency is in the best position to make this determination, GAO reviews an agency’s judgment in this area only to see that the agency’ cost realism evaluation was reasonably based and not arbitrary
With regard to ERC’s assertion that the awardee deviated from the composite rates, GAO notes that the composite rates provided in the RFP were “[f]or information purposes only,” and offerors were permitted to deviate from these rates with adequate justification. Both DCAA and the agency found the awardee’s rates to be reasonable, given that five of the six rates that deviated downward from the RFP?provided rates were based on the hourly rates of current employees working under very similar conditions. Moreover, the record shows that the cost evaluation did result in certain upward adjustments to the awardee’s rates to reflect the average actual direct labor rates for the labor categories where incumbent employees were performing. Based on this record, GAO finds no basis to conclude that the agency’s evaluation of the awardee’s labor rates was unreasonable.
With regard to attrition rate, the record shows that DCAA based its lower rate on the awardee’s experience in performing a contract similar in scope to this requirement. The agency adopted DCAA’s recommendation in this area, which resulted in a downward reduction in the awardee’s MPC. Given the small impact attributable to the application of an attrition rate on the awardee’s MPC, the protester has not shown that it was prejudiced, even if the application of the attrition rate was in error.
ERC also argues that the agency unreasonably increased its fringe rates in the MPC analysis. Specifically, ERC contends that the adjustments were based on an inappropriate application of linear regression analysis. The upward adjustments of ERC’s fringe rates were due to DCAA recommendations. In this regard, DCAA questioned ERC’s proposed fringe rates because they were inconsistent with the firm’s established practices. When questioned about this disparity, ERC responded that “its proposed method for allocating fringe costs is not necessarily how it will be accounting for them.” DCAA therefore projected ERC’s fringe rates for 2009 using a linear regression analysis, based on historical data from 2005 to 2008 of the actual fringe rates incurred by ERC on a contract of similar scope to the requirement here. This resulted in an upward adjustment to ERC’s proposed fringe rates of between .3 and 1.1% for each of the ordering periods. The protester has not shown that DCAA’s use of the linear regression technique was unreasonable here. Since ERC failed to provide DCAA with an adequate explanation for proposing fringe rates that were different from what it was currently using, DCAA reasonably used an evaluation technique that relied on ERC’s actual performance to determine ERC’s fringe rates–a technique that all parties agree is a good predictor of overhead rates when there is a good correlation between historical pools and bases. Given that the RFP advised offerors that rates would be examined by DCAA, and given that DCAA’s analysis of ERC’s fringe rates was reasonable, GAO has no basis to question the agency’s following of DCAA’s recommendation to upwardly adjust ERC’s fringe costs in the MPC evaluation. The protests are denied.