Jackson Kelly PLLC

Government Contracts Monitor

Cost Realism Analysis Sets a High Bar for Everyone

June 27, 2017

By: Lindsay Simmons

Effective communication of all sorts requires attention to detail, accuracy, and clarity. Simply put, words matter. In many contexts, numbers matter too. And while some circumstances may call for the use of generalization, puffery or creative ambiguity, proposal preparation calls for a more straightforward approach. As the recent Government Accounting Office (GAO) decision in AdvanceMed Corporation, B-414373 (June 1, 2017), reminds us, accuracy and clarity are especially important when a solicitation provides for a cost realism analysis. The case offers invaluable lessons for all participants of a bidding process involving a cost realism analysis. For offerors, it highlights the need to really explain their proposed approach so that agencies can really understand what they are analyzing for cost realism. And for potential protesters, it underscores the need to really dissect both the offeror’s recorded explanation and the agency’s documented understanding to identify any discrepancies.

The AdvanceMed matter involved the Department of Health and Human Services, Centers for Medicare & Medicaid Services (CMS) issuance of a cost-plus-award-fee (CPAF) task order under a request for proposals (RFP) for Medicare and Medicaid program integrity services. The solicitation called for proposals to support the agency’s fraud, waste, and abuse detection, deterrence, and prevention activities within the Western Jurisdiction. Offeror proposals were to be assessed on a best-value basis, considering cost and five non-cost factors, including accomplishing and integrating functional requirements, key personnel and staffing plan, and past performance. When combined, the non-cost factors were more significant than cost.

The RFP also provided that the evaluation of proposed costs would include a cost realism analysis. This approach required the agency to document its assessment of the likely costs under each offeror’s technical approach and document the basis for its conclusion that the proposed costs were (or were not) realistic for the work to be performed. To enable this evaluation, the solicitation required offerors to provide a Basis of Estimate, including details about the assumptions and rationales used in preparing their proposals, as well as a break down of the proposed hours and costs by each of the tasks—Investigations, Transition, Vulnerabilities, Data Analysis, Lead Management, Appeals Support, Support to CMS, Support to Law Enforcement, Information Technology, and Quality Assurance.

CMS awarded the task order to Health Integrity, LLC. While AdvanceMed’s bid received a slightly better technical rating than the awardee, after the agency’s cost realism adjustments to both offerors’ proposed costs, AdvanceMed’s bid came in at $20.56 million more than that of Health Integrity. CMS explained its decision—in light of non-cost factors being more important than cost—on the basis that a marginal difference in technical merit did not justify the 23.96% cost premium associated with AdvanceMed’s proposal.

AdvanceMed protested, focusing on the Investigations task, among others, and asserting that the agency’s cost realism analysis was inaccurate and insufficient. In addition to raising other protest grounds, AdvanceMed argued that Health Integrity’s proposal “double-counted” hours in a way that resulted in its costs being understated, particularly those relating to the critical Investigations task. For example, in justifying the proposed hours for Investigator/Auditors, the awardee’s Basis of Estimate described its assumptions concerning the number of investigations that could be maintained by each Full Time Equivalent (FTE) Investigator/Auditor on a rolling basis. However, AdvanceMed’s analysis of this proposal revealed that the same Investigators/Auditors assigned to perform the Investigations task work were also proposed to work on multiple other tasks. In fact, the awardee’s submitted cost summary indicated that these personnel were to perform work related to all of the other enumerated tasks. As a result, AdvanceMed argued that Health Integrity did not actually price all of the hours it estimated for the Investigations task, understating the proposed cost by $5.2 million on that task alone. AdvanceMed pointed out this sort of double-counting throughout the awardee’s proposal, noting that just four labor categories accounted for $13 million of understatement.

CMS responded by explaining that it reviewed the proposed hours by solicitation line item number (SLIN) and by labor category to determine whether the labor category was appropriate to perform the relevant tasks and whether the offeror allocated an appropriate amount of hours to complete the tasks as required. The GAO found this approach to be flawed because the agency’s evaluation at the SLIN level would not necessarily have revealed that the awardee double-counted and that the same FTEs proposed for the Investigations task were also proposed to perform a substantial number of hours on other tasks. The proper analysis, according to the GAO, required an evaluation of the level of effort at the task level.

Health Integrity argued that its Basis of Estimate indicated that the FTEs, whose primary task was Investigations, would also be supporting another task. The GAO was not persuaded by this response, as it failed to explain why such a substantial number of Investigator/Auditor hours were also allocated to perform all of the other enumerated tasks.  The awardee then went on to make a semantic argument: when it stated that the primary task was Investigations it was referring to investigations in an ordinary sense, and nearly all of the enumerated tasks involve some element of investigation. The GAO found this argument was unsupported by the awardee’s own proposal language, throughout which the awardee listed the primary tasks that a particular labor category would perform as they corresponded to the enumerated tasks with an upper-case letter. Thus, the most reasonable interpretation was that “Investigations” referred to the Investigations task.

Ultimately, the GAO found that there was nothing in the record to suggest that CMS really understood that the level of effort the awardee estimated for the Investigators to perform the primary task of “Investigations” included not only the work required by the Investigations task but also every other task in the statement of work. Failing to understand, and thus reasonably evaluate, the extent to which the awardee’s proposed costs for the Investigations task were realistic in light of its technical approach undermined the agency’s cost realism analysis, and the protest was sustained.

The decision itself does not make clear whether Health Integrity was attempting to artificially reduce its proposed cost or simply missed the double counting in the process of preparing its proposal. But at the end of the day, that doesn’t matter. Regardless of how the double counting ended up in the proposal, its presence in the proposal ultimately prevented Health Integrity from being able to perform the task order. If you want to win the award and survive a protest, you need to clearly and accurately lay out your technical approach and proposed cost in a way that will give the procuring agency an easy-to-understand, valid basis to conclude that your costs are realistic based on your proposed approach. If you don’t do that, the agency may not even have the chance to fully understand your proposal and reach a defensible conclusion about cost realism. If you do, however, you will rob your disappointed competitors of the ammunition they need to successfully protest on that basis.

© 2017 Jackson Kelly PLLC


© 2020 Jackson Kelly PLLC. All Rights Reserved.