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.

The GAO’s decision in KinetX Aerospace, Inc., B-406798, B-406798.2, B-406798.3 (Aug. 21, 2012), involved a Navy procurement for systems engineering support services.  The solicitation was issued to small business holders of the SeaPort-e multiple award contract.  Importantly, the solicitation called for the resulting task order to be issued on a cost-reimbursement (not a fixed-price) basis.

KinetX Aerospace, Inc. was one of three offerors to submit a proposal.  During its evaluation of proposals, the Navy reviewed two salary survey websites, payscale.com and glassdoor.com.  The Navy determined that, given historic cost information and the complexity of the requirement, only labor rates in the 90th percentile and above on the salary surveys were realistic for certain labor categories.  As a result, the Navy upwardly adjusted KinetX’s proposed labor costs for those categories in which KinetX had proposed lower rates.

The Navy ultimately awarded the contract to a competitor.  KinetX filed a GAO bid protest, objecting in part to the Navy’s decision to upwardly adjust some of KinetX’s its proposed labor rates.

The GAO began its analysis by noting that unlike for a fixed-price contract, “[w]hen an agency evaluates proposals for the issuance of a cost-reimbursement order, an offeror’s proposed estimated cost of contract performance is not considered controlling since, regardless of the costs proposed by an offeror, the government is bound to pay the contractor its actual and allowable cost.”  For this reason, the government must conduct a cost realism analysis to independently determine the likely cost to the government, and adjust an offeror’s costs to realistic levels based on the analysis.

In this case, the GAO noted that the Navy had not upwardly adjusted the proposed costs of current KinetX employees or contingent hires, but only certain unidentified personnel.  For these individuals, “the requirements here present highly complex, specialized engineering challenges for which there is only a small community of engineering expertise available.”

The GAO held that while KinetX disagreed with the Navy’s determination as to what represented the likely labor costs, “it has not shown that the agency’s determination in this regard was unreasonable.”  Moreover, the GAO noted, “KinetX did not explain in its proposal or in response to the agency’s identified concerns in discussions how it will be able to provide personnel in these labor categories at its proposed rates.”  The GAO denied KinetX’s bid protest.

The KinetX Aerospace Inc. GAO bid protest decision demonstrates that when it comes to cost-reimbursement contracts, an offeror may not necessarily have the last word on its own proposed labor rates.  Contractors run the risk of an upward cost adjustment–especially where, as with KinetX, they cannot demonstrate the ability to recruit and retain qualified personnel at the proposed labor rates.