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.

GAO’s decision in MCR Federal, LLC, B-411977 et al. (Nov. 23, 2015) involved an Air Force solicitation, issued under the GSA OASIS Small Business Pool 6 IDIQ contract, for advisory and assistance services at its Life Cycle Management Center. Pricing under the solicitation ran the gamut—various line items were to be priced as fixed-price, cost-plus-fixed-fee, and cost-reimbursable. A task order was to be awarded to the offeror that submitted the lowest evaluated cost, technically-acceptable offer.

Offerors were instructed to propose unburdened direct labor rates—essentially, bare labor rates without the inclusion of overhead and administrative costs—for each of 43 identified labor categories. Offerors also were required to provide a summary of their proposed costs, complete with “a synopsis of the estimating methodology and data sources used to develop proposed costs, and any assumptions on which the costs were predicated.”  Offerors were to submit cost information for the prime offeror and any major subcontractor, defined in the solicitation as a subcontractor that would perform more than 10 percent of the total effort.

The solicitation further provided that cost/price proposals would be evaluated for reasonableness (whether the cost or price is too high), realism (whether the cost is too low), and balance (whether the costs are approximately equal over the life of the contract). As part of the realism analysis, the government would compute the offeror’s most probable cost by adjusting unrealistic proposed direct labor rates and indirect rate percentages upward, but would not adjust the offeror’s proposed skill mix or hours.

Twelve offerors submitted proposals. Of the 12, seven were found to be technically acceptable, including MCR Federal, LLC. MCR proposed two major subcontractors (whose names were redacted in the GAO’s published decision).

In its evaluation of MCR’s cost proposal, the agency found that MCR, as the prime offeror, had proposed rates below the most probable cost for 23 labor categories. The agency upwardly adjusted the proposed direct labor rates for these 23 categories to the government’s most probable labor rates. The agency also upwardly adjusted 4 of 8 labor categories proposed by one of MCR’s major subcontractors, and 8 of 9 labor costs proposed by the other major subcontractor. With respect to the subcontractors, the agency made the decision to upwardly adjust the rates after determining that the proposed costs had not been adequately substantiated. After the adjustment of MCR’s rates, MCR was not the lowest-cost, technically-acceptable offeror. The Air Force awarded the contract to a competitor.

MCR filed a GAO bid protest challenging the Air Force’s cost realism evaluation. MCR alleged, in part, that because its proposed rates were based on salary survey data, these upward adjustments were improper.

GAO found the Air Force’s evaluation of and adjustments to MCR’s proposed costs to be reasonable. It started its analysis by reiterating that agencies must evaluate costs under a cost reimbursable contract for realism—because “the government is bound to pay the contractor its actual and allowable costs” under a cost reimbursable contract, “an offeror’s proposed estimated cost of contract performance is not considered controlling.” Instead, an agency must evaluate an offeror’s proposed cost for realism and adjust them, as appropriate.

According to the Air Force, the labor rates proposed by one of MCR’s subcontractors were adjusted upwards because the subcontractor did not submit sufficient substantiating data to support its low rates. GAO agreed, finding that the subcontractor submitted only a “general discussion of how it determined what direct rates to propose for its employees[.]”

A general discussion was not enough. The solicitation required specific information and substantiating data—in the context of historical data, such as historical pay rates, offerors needed to submit that substantiating data with its proposal. Because MCR’s subcontractor failed to provide any substantiating data to justify its low rates, the Air Force properly adjusted its labor rates upwards. MCR’s protest was denied.

As Steve has recently written, unreasonable cost or price evaluations remain are fertile grounds for successful bid protests at GAO. But MCR Federal reminds offerors that cost adjustments may occur where an offeror—or its subcontractor—fails to provide adequate substantiating data.

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