Government Contracts Monitor

Agency Cannot Ignore Solicitation’s Labor Rate Realism Analysis Requirement, Even in a Fixed Price Contract

August 25, 2014

A recently-released GAO decision demonstrates the importance of paying attention to a solicitation’s wording in deciding whether to challenge a competitor’s labor rates as being too low. In Iron Vine Security, LLC, B-409015, decided January 22, 2014, the highly-ranked Iron Vine attacked the agency’s failure to evaluate the realism of the much lower-priced awardee’s proposed fixed labor rates. The GAO agreed with the agency that agencies generally are not required to conduct a price realism analysis where a solicitation anticipates the award of a time-and-materials contract with fixed price labor rates. This is because the risk of cost increases in such a situation is borne by the contractor, rather than the Government. However, where an agency, at its discretion, provides for the use of a price realism analysis in a solicitation for a fixed-price contract in order to assess the risk inherent in an offeror’s proposal, then the failure to conduct such analysis is “unreasonable” and violates the solicitation.

Iron Vine involved a small business set-aside conducted by the Department of Health and Human Services, Centers for Medicare and Medicaid Services (CMS) for services, personnel, materials, equipment and facilities. The procurement was conducted under the Federal Supply Schedule (FSS) procedures of FAR Subpart 8.4, soliciting quotes from vendors holding FSS contracts under Schedule No. 70. The RFQ anticipated issuance of a time-and-materials task order, with fixed-price, fully-burdened labor rates. Award was to be made on a best-value basis, with non-cost/price factors, when combined, being equal in importance to cost/price. The RFQ required that each quote include proposed labor categories, associated labor rates and the number of hours by category. The RFQ further required a “basis of estimate” that “explains the rationale for the proposed costs and that contains a level of detail to fully support the review of the quote.” Importantly, the RFP explicitly stated that the “cost/price volume of each quote will be analyzed and evaluated to determine . . . realism and/or reasonableness,” and that “[t]he proposed cost/price will also be evaluated to determine if it reflects understanding of the Government’s requirements, and the degree of risk it presents.” The RFQ further stated that “[c]ost reimbursable line item quotes (including Labor Hours and Time & Materials) will be evaluated on the basis of cost realism,” citing FAR 15.404-1 & FAR 2.101.

After negotiations with the companies submitting the two most highly-rated quotes, and evaluation of revised quotes, Iron Vine received the highest non-price ratings and was deemed the lowest risk. However, CMS determined that “the minor-to-moderate . . . additional non-price benefits associated with the Iron Vine quote does not support the significant [almost $9 million or 42.3%] price premium associated with that benefit,” and awarded to the substantially lower-priced Spann & Associates, Inc. (Spann).

Iron Vine protested to GAO, arguing that CMS failed to evaluate the realism of Spann’s unduly low labor rates and consider the risks inherent therein in undertaking the agency’s cost/technical trade-off. CMS’s cost/price evaluation assessed the realism of the vendors’ proposed labor categories, labor mix and labor hours. CMS also found the proposed labor rates reasonable (i.e., not too high; see FAR 15.404-1(b)), because they were below the rates on each vendor’s GSA Schedule 70 price list. However, CMS candidly admitted that it had not evaluated the vendors’ proposed labor rates for cost realism (see FAR 15.404-1(d)), asserting such “was never [the agency’s] intention.”

GAO quickly disposed of the agency’s argument that the RFQ did not require a cost realism analysis of the vendors’ proposed labor rates. While agreeing that the agency did not have to provide for a cost realism analysis, GAO found that the RFQ language here “clearly advised vendors that the agency’s evaluation would include a realism assessment of the vendors’ proposed ‘time and materials,’ which included proposed labor rates.” The GAO further stated that “it would be unreasonable for the agency to exclude the time-and-materials labor rates from its realism assessment because the two largest elements of cost in a time-and-materials line item are labor rates and number of hours.”

GAO similarly rejected the agency’s alternative arguments that the agency’s technical and past performance evaluations of Spann’s proposal satisfied the price realism analysis requirement. Specifically, CMS argued that the facts that Spann (i) identified certain staff members who were either currently employed by Spann or had signed letters of intent, and (ii) had satisfactorily performed other contracts in the same geographic area, established that CMS had no reason to be concerned about performance risks. GAO found these arguments “unavailing,” noting, perhaps most importantly, that “there is no indication that the agency considered any of these points during its contemporaneous evaluation.” GAO further found that there was nothing in the record evidencing the rates paid to either the current employees or those on the prior contracts, or that those rates were comparable to the discounted rates quoted here.

GAO concluded that CMS deviated from the RFQ’s evaluation scheme, in failing to evaluate the realism of the vendors’ proposed labor rates, and specifically whether they reflected a lack of technical understanding or risk, as required by the RFQ. GAO summarily asserted that the agency’s failure in this regard “prejudiced the protester,” and sustained Iron Vine’s protest on this basis. GAO directed CMS to reevaluate the realism of the vendors’ proposed labor rates, or, if CMS decides that such an evaluation is not necessary, that CMS revise the RFQ accordingly and obtain and evaluate new quotes.

This case demonstrates that an agency need not commit to a cost realism analysis in connection with a fixed price procurement. However, where it does, then the agency must comply. Conversely, if a disappointed offeror believes the awardee’s labor rates are too low and the solicitation requires a cost realism analysis, there may be a valid basis for protest.