Hiring Incumbent Employees At Low Labor Rates–What Could Go Wrong?

A company bidding to replace an incumbent service contractor cannot presume incumbent workers will take major pay cuts without setting itself up for a potentially successful protest.

FAR 22.12 generally requires successor service contractors to give a right of first refusal to qualified employees under the previous contract. And even when these nondisplacement rules don’t apply, many offerors’ proposals tout their efforts to retain incumbent employees. But asking incumbent employees to take significant pay cuts–and expecting them to accept–is unreasonable and can torpedo a proposal. Case in point: GAO sustained a protest recently against an awardee who had proposed high retention rate of incumbent workers, but lower pay for those positions.

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Cost Realism: Agency Must Evaluate Employee Compensation Rates

When an agency performs a cost realism evaluation under a solicitation involving significant labor costs, the agency must evaluate offerors’ proposed rates of employee compensation, not just offerors’ fully burdened labor rates.

In a recent bid protest decision, the GAO held that an agency erred by basing its realism evaluation on offerors’ fully burdened labor rates, without considering whether the direct rates of compensation were sufficient to recruit and retain qualified personnel.

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Cost Realism: Using Offeror’s Actual Rates Was Unobjectionable

In conducting a cost realism evaluation, an agency was entitled to use an offeror’s historic approved indirect rates and current incumbent direct labor rates to upwardly adjust the offeror’s evaluated cost, in a case where the offeror’s proposed rates were significantly lower.

The GAO recently held that an agency did not err by adjusting a protester’s rates to better align with the protester’s historic indirect rates and current direct rates, where the agency was unable to determine that the protester’s significantly lower proposed rates were realistic.

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GAO: Agency Reasonably Adjusted Sub’s Unsubstantiated Costs

Under a solicitation for a cost-reimbursable contract, an offeror’s proposed costs are not controlling, because the government is on the hook for the contractor’s actual and allowable incurred costs. Before making an award decision, the government must consider whether the proposed costs should be upwardly adjusted.

A recent GAO bid protest decision highlights the need for offerors bidding on cost-reimbursable work to make sure that their proposed costs are realistic and substantiated—including the proposed costs of major subcontractors.

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GAO: Agency Properly Upped Contractor’s Proposed Labor Rates

Here’s hoping that you had a wonderful Thanksgiving, full of relaxation, family time, football and lots of food.

For one Arizona contractor, the holiday was a little less festive this year, after the contractor lost out on a Navy cost-reimbursement contract–in part because the Navy unilaterally upped some of the contractor’s proposed labor rates.  The GAO found nothing wrong with the agency’s decision, holding that the Navy reasonably determined that the contractor’s proposed labor rates were unrealistically low.

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