Reasonable Cost is not Always Realistic Cost

GAO sustained a protest recently where the agency seemed to think that a reasonable cost was also a realistic cost.

That is not necessarily so.

A company called Ohio KePRO, Inc. (helpfully located in . . . Pennsylvania) protested a task order award to Livanta, LLC, a Maryland company. The Department of Health and Human Services, Centers for Medicare and Medicaid Services (CMS) had requested proposals for task order work to oversee beneficiary and claim reviews for Medicare beneficiaries nationwide.

The agency planned to award a cost-plus-fixed-fee contract to the winning bidder. Because the contractor would be paid however much the work wound up costing, plus a fee, the agency had to determine whether the company could realistically do the work for the cost proposed. This is called a cost-realism evaluation.

KePRO alleged that the agency failed to make such an evaluation, and GAO agreed. In a lengthy opinion that found several agency errors—we’ll only discuss the cost aspect today—GAO found little evidence in the record that the agency considered whether Livanta’s cost was realistic at all. According to the decision, KePRO alleged that “the agency’s cost evaluation was limited to whether direct labor rates were reasonable (i.e., too high), and did not assess whether the proposed labor rates were realistic (i.e., too low).” In other words, the protester argued that the agency confused a reasonable cost with a realistic cost.

GAO examined the record and agreed. It found that the award decision relied on a cost analysis performed by a contract specialist that mentions the solicitation’s cost realism requirement, but “does not evidence an evaluation of whether Livanta’s proposed labor rates were too low.” Instead, the cost analysis only found the rates reasonable “as they fall within the average range established.”

The contracting officer provided a sworn statement saying that the agency did determine the realism of the rates by comparing them to and considering any rates that were more than 20% below the rates to be unrealistic. However, when GAO looked at the rates, four of the nine proposed labor categories rates were 20% lower.

The agency also contended that it relied on a cost analysis performed by a financial management specialist to determine that Livanta’s proposed rates were realistic. But the specialist’s report specifically said that the cost realism analysis would be conducted by a different person and that it was focused on whether the costs were “allowable, allocable, and reasonable.”

GAO concluded that because the record reflected “no analysis or findings” regarding the realism of the proposed labor rates and the agency’s post-protest arguments were not supported (GAO didn’t say this but they were, in fact, contradicted by the record), the agency “failed to meaningfully consider the realism of Livanta’s proposed direct labor rates.”

Where an agency makes these kind of mistakes, confusing a reasonable cost with a realistic cost, GAO will often sustain a protest due to a flawed evaluation.

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