Even for a Fixed Price Contract, Valid Price Realism Analysis Requires Logical Reasoning
November 15, 2016
By: Lindsay Simmons
The Federal Acquisition Regulation (FAR) generally does not require a price realism analysis in the context of a fixed price contract. Instead, the agency is merely required to determine that the offered price is fair and reasonable (i.e. not too high). However, if the government exercises its discretion to conduct a price realism analysis (to evaluate whether the proposed prices are too low), that analysis must provide logical support for the agency’s conclusions. This fundamental requirement was reiterated by the recent Government Accountability Office (GAO) decision in NCI Information Systems, Inc., B-412870.2 (October 14, 2016).
The protest involved the issuance of a task order for IT services by the Department of the Interior on behalf of the National Guard. The solicitation, which was issued to holders of the Department of the Army’s Information Technology Enterprise Solutions - 2 Services (ITES-2S), indefinite-delivery, indefinite-quantity (IDIQ) contract, contemplated the award of a single fixed-price task order with optional time-and-materials and fixed-price contract line item numbers (CLINs) to be exercised at the discretion of the government. Award was to be made on a best value basis, considering technical, past performance, and price. The technical factor contained two subfactors (technical capability and management approach) and was more important than past performance. When combined, technical and past performance were significantly more important than price. Offerors had to submit both (i) a work breakdown structure (WBS) identifying labor categories and estimated hours for each labor category necessary for the successful completion of the effort as part of the technical volume; and (ii) a price proposal setting out the proposed monthly price for each CLIN for the base and option periods but not detailed information showing labor categories, labor rates, or hours used to determine the offerors’ fixed price.
The agency received two timely responses, one from the incumbent, NCI Information Systems, Inc. (NCI), and another from HP Enterprise Services, LLC (HPES). The technical evaluation panel (TEP) rated NCI higher on the technical factor and HPES higher on past performance, but HPES’ proposed price was approximately $43.3 million less than that of NCI. Significantly, while HPES received “Excellent” ratings for three elements under the management approach subfactor, it was rated “Poor” on the fourth. The Poor rating was based in part on two significant weaknesses assessed by the TEP. The first of these reflected the TEP’s determination that HPES’ proposed number of hours did not appear sufficient to meet the requirements listed in the solicitation’s Performance Work Statement (PWS). For example, HPES proposed considerably fewer hours for PWS Sections 4.0 and 7.0 than the government’s independent cost estimate (IGCE). The TEP based the second significant weakness on its belief that HPES’ WBS relied too heavily on the use of shared resources. While the TEP recognized that some efficiencies may be achieved through shared resources, it expressed concern that the highly specialized nature of the majority of technical positions involved requires the use of full-time subject matter experts so that sharing those resources would create holes in the coverage of required areas of responsibility. Despite giving HPES an overall rating of “Satisfactory” for the management approach subfactor, the TEP did not believe that HPES could correct these problems and stated that “there is still great risk with the staffing plan”.
The contracting officer also asked the TEP to comment on the offerors’ proposed pricing. It responded by observing that, “[b]ased on knowledge of the requirements and historical knowledge, it is believed that the prices and labor hours quoted by HPES are so low that HPES will not have the ability to satisfactorily satisfy the requirements.” The TEP also explained that, while the use of shared resources might provide some overlap in PWS Section 7.0 (in the form of individuals who could handle more than one type of issue), such overlap will be limited due to the nature of the expertise required and “it does not provide redundancy” [because] there is too much work for one person to accomplish in the event the other FTE is not available to work, which places the deliverables for this area at risk.” Further, given the substantially smaller number of FTEs being proposed, moving personnel from one area to cover another would put multiple deliverables at risk. With respect to PWS Section 4.0, the TEP acknowledged that HPES could achieve some efficiencies by its proposed move to a virtual information system environment, there would still be a need for “touch labor” and the touch labor pool would have to be divided between two sites – and “the TEP did not think that the HPES proposal provided enough personnel to adequately support the two locations.”
Based on the TEP’s noted realism concerns with both the level of effort and the price proposed by HPES, the agency decided to conduct a price realism analysis to determine whether HPES’s low price was consistent with its technical approach; reflected realistic unit pricing; and reflected an understanding of the requirements. After performing several different analyses in this regard, the agency concluded that “[w]hile the price proposed by HPES may present some degree of risk, the information presented clearly shows that the proposed price is commensurate with the proposed technical approach and reflects realistic labor category pricing.” It also concluded that “the government cannot reach a determination that HPES’[s] proposed price is clearly unrealistic” based on “all circumstances presented and the fact that the vast majority of this effort is [fixed price], which significantly reduces risk to the government.” The CO’s tradeoff analysis weighed the risk presented by HPES’ technical approach against the $43.4 million cost premium represented by NCI’s proposal and decided that the lower risk offered by NCI was not worth the price premium. HPES was awarded the task order.
NCI protested, arguing in part that the agency’s price realism analysis unreasonably disregarded the TEP’s stated concern that HPES’ proposed prices and labor hours were so low that it would not be able to satisfactorily perform the work.
The GAO agreed, finding first that “[t]he various analyses undertaken by the agency . . . did not provide any logical support for a conclusion that HPES’s low price was consistent with its technical approach. In this regard, the agency’s analysis relied on a comparison of HPES’ proposed price to a price calculated using labor rates from HPES’ ITES-2S IDIQ contract and the level of effort provided in its proposed WBS, positing that if the price calculated using the IDIQ labor rates was significantly higher than HPES’s proposed price, that difference would “suggest that the proposed price is not reflective of the proposed technical approach and is, therefore, unrealistic.” This comparison led the agency to conclude that HPES’s proposed price to be consistent with HPES’s technical approach. As the GAO pointed out, however, such an analysis does not address HPES’s technical approach, nor does it consider the proposal’s extensive use of shared resources--which the TEP identified as a concern. Similarly, the GAO held that the agency’s various price realism analyses performed failed to “provide any insight into whether HPES’s proposed approach can be performed at the low price proposed or whether HPES’s low price reflected a lack of understanding of the solicitation’s requirements.” The failure of the analysis to logically address the TEP’s concerns proved fatal, as the GAO explained: “On this record, we cannot find reasonable the agency’s conclusion that the various analyses performed by the agency “clearly shows that the proposed price is commensurate with the proposed technical approach and reflects realistic labor category pricing.”
Depending on the circumstances, it may be difficult to discover useful information about the agency's price realism analysis. But such information can be vitally important. Contractors that miss out on a fixed price award should determine whether the agency performed a price realism analysis in connection with its source selection decision. If so, the contractor should be on the lookout for disconnects between the aims of the price realism analysis, the conclusions drawn by the agency, and the agency's stated bases for its findings. Such disconnects can provide good grounds for a protest.
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