Government Contracts Monitor

Cost Realism Evaluations – Let’s Get Real

May 20, 2014

A recent protest demonstrates that while an agency source selection authority (SSA) may disagree with the agency evaluators, and can conduct an independent reevaluation of proposals, the SSA’s independent judgments must be reasonable, consistent with the stated evaluation factors, and adequately documented. That was not the case in Prism Maritime, LLC, B-409267.2; B-409267.3 (Comp. Gen. April 7, 2014), where the SSA overruled the evaluators but his disagreement did not “withstand logical scrutiny.” The SSA may have veered off course because of the very low cost proposal submitted by Valkyrie, the awardee. Thus, our interest in this decision focuses on the agency’s cost realism analysis – found by GAO to be inadequate, undocumented and not considered in the source selection process.

Prism, a disappointed offeror, challenged the agency’s cost realism evaluation as inadequate and, in support of this protest ground argued that Valkyrie’s proposed cost was so low it could not recruit and retain qualified personnel for the contract. GAO agreed that the agency’s cost realism evaluation was inadequate, citing to the well-established principle that “for the award of a cost-reimbursement contract, an offeror’s proposed estimated cost of contract performance is not considered controlling since, regardless of the costs proposed by the offeror, the government is bound to pay the contractor its actual and allowable costs.” FAR § 16.301. As a consequence, a cost realism analysis must determine the extent to which an offeror’s proposed costs represent the actual costs likely to be incurred under the proposal, assuming reasonable economy and efficiency. FAR §§ 15.305(a)(1), 15.404-1(d)(1), (2). Where a contract involves a large amount of labor, as here, agencies are required to consider the realism of the proposed labor rates.

Here the agency’s entire cost realism evaluation consisted of just two spreadsheets – sheets that did not evidence any cost evaluation efforts. There was no narrative cost evaluation report, or any supporting materials (such as DCAA reports) used to perform the cost evaluation. Yet “agencies are required to adequately document their evaluations, and, where an agency fails to do so, it runs the risk that [GAO] will be unable to determine whether the agency’s evaluation conclusions are reasonable”. In this case—

There was nothing in the record to show the agency actually considered proposed direct labor rates.

There clearly was no meaningful evaluation of Valkyrie’s proposed wages since Valkyrie did not even identify which of its proposed employees were junior, mid-level and senior.

There was no basis in the record for GAO to determine whether any profit analysis was performed or, if it was, whether it was reasonable.

The record shows that, in making its source selection decision, the agency used the proposed, rather than evaluated, costs, a step that is inherently improper; and

There was nothing in the record demonstrating that the agency thought about the nature of a Cost Plus Incentive Fee (CPIF) contract. Importantly, the central feature of a CPIF contract is the financial risk and reward mechanism; the contractor is rewarded for reducing costs, and penalized for cost overruns. FAR § 16.405-1. Once a contractor greatly exceeds its proposed target cost, the incentive fee drops to the minimum, and the CPIF mechanism no longer works – there is no incentive to control costs. Thus, in the CPIF context, a lack of realism in an offeror’s proposed target cost can defeat the purpose of the incentive fee structure and independently cause performance risk. The agency gave no thought to these considerations.

GAO concluded that the agency “failed to perform a reasonable cost realism evaluation, and to the extent that it did perform any such evaluation, it did not use the results of that evaluation in its source selection decision.” In this budget conscious environment of ever-increasing awards to the low cost offeror, it is very refreshing to see GAO instruct an agency to get real: to perform and document a full and accurate cost realism evaluation.

Lindsay Simmons is the attorney responsible for the content of this article.

Attorneys

Lindsay Simmons