Government Contracts Cost Realism Evaluation Was Unreasonable
Tuesday, August 20, 2019

Cost Realism Evaluation Was Unreasonable

By Government Contracts Editorial Staff

A protest of a cost realism evaluation was sustained because the government did not reasonably evaluate the protester’s proposed direct labor rates. The request for proposals for engineering, logistics, and program support services provided for 744,830 direct labor hours over the life of the contract and allowed the government to make upward adjustments to costs considered unrealistic. During discussions, the government announced a revised cost realism methodology where “[p]roposed direct labor rates supported by payroll data, contingency hire letters, [f]orward [p]ricing [r]ate [a]greements …, and subcontractors proposed on a [l]abor [h]our basis were considered to be realistic.” If an offeror’s proposed direct labor rate lacked this support, the rate would be compared to the 25th percentile of the rate for the labor category, and if an unsupported rate fell below the 25th percentile, the cost realism evaluation would raise the rate to the rate.

Upward Adjustment. The government advised the protester that some of its proposed labor rates were unrealistically low. After the protester raised its direct labor rates for all new hires, the government increased rates that were below the 25th percentile to the rate. These increases contributed to a $3.7 million upward adjustment to the protester’s proposal. In the best-value tradeoff decision, the source selection authority determined the protester’s superiority under the technical and past performance factors did not warrant its 14-percent cost premium. The protester contended the government improperly overlooked its current compensation rates and updated documentation, including payroll data. According to the protester, “it is unreasonable to insist on a high rate for new hires when the company has an established pay scale with existing, more experienced, long-term employees at lower rates.”

Inconsistent with Methodology. The Comptroller General found the government’s grounds for refusing to consider the protester’s current payroll data were not consistent with the described cost realism methodology. First, the government concluded the protester’s new hire rates were unrealistic because the protester “did not propose any of the personnel for which payroll records were provided to perform any of [the] new hire hours.” This conclusion was unreasonable because it provided no logical basis for excluding this category of rates, and it was inconsistent with the language of the revised cost realism methodology. Further, after abandoning the SSA’s determination that the protester’s rates were unrealistic due to insufficient sample size, the government asserted the rates failed to provide “details containing qualifications, education or experience” for the sampled employees. However, the cost realism methodology and the discussions letter did not require or request these types of supporting documentation. The discussions letter allowed offerors to substantiate rates generally with payroll data, and the protester provided the government with comprehensive payroll data. The Comptroller General recommended the government conduct and document a new cost realism evaluation of the protester’s new hire direct labor rates. (Valkyrie Enterprises, LLC, 34 CGEN ¶116,467)

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