Cost Realism Analysis Could Increase Your Proposed Costs

Don't try to "buy in" on a Government cost-reimbursement contract and then complain that the Government increased your proposed costs. It might work sometimes (e.g. there is only one bidder) but the Government has resources to determine the propriety of proposed costs. Its a very simple task to line up the cost detail of the bidders and look for cost elements that are significantly higher or lower than others.

Here are some key facts to remember when you feel that the Government has not adequately assessed your cost proposal (i.e. has increased your proposed costs).

1. When the Government evaluates a proposal for the award of a cost-reimbursement contract, an offeror's proposed costs are not dispositive because, regardless of the costs proposed, the Government is bound to pay the contractor its actual and allowable costs (FAR 15.305(a) and FAR 15.404-1(d).
2. Consequently, the Government must perform a cost realism analysis to determine the extent to which an offeror's proposed costs are realistic for the work to be performed (FAR 15.404-1(d)(1).
3. The Government is not required to conduct an in-depth cost analysis, or to verify each and every item is assessing cost realism; rather, the evaluation requires the exercise of informed judgment by the contracting agency (FAR 15.404-1(c).
4. If an offeror protests the adequacy and sufficiency of the Government's cost-realism analysis, the GAO's (Government Accountability Office) review is limited to determining whether the cost analysis is reasonable. A protester's disagreement with a contracting agency's judgment, without more, does not provide a basis to sustain the protest.

In one recent case, an offeror low-balled its fringe benefit rate by excluding employer 401(k) matching contributions and bonuses. The Army, noting that whichever offeror won the contract was required by solicitation to hire incumbent employees and that those incumbent employees were already receiving 401(k) matches and bonuses, were concerned about the continuity of the existing workforce. The Army concluded that the offeror's proposed approach to these fringe benefit components was unrealistic because it would be unlikely for the offeror to obtain and retain qualified personnel.

In evaluating the offeror's proposal, the Army adjusted the fringe benefit package to match the incumbent's projected rate with the 401(k) and the bonus pool. This adjustment increased the offeror's estimated cost by more than $5 million and concomitantly, increased its estimated costs so that it was no longer the low bidder. Ultimately, the award went to another company.

A protest ensued but the GAO found no basis to disagree with the Army's evaluation citing the above listed factors. One of the offeror's contention was that the Government should have told them specifically what its concerns were with respect to the fringe rate. The GAO stated however that "The Government is not required to "spoon-feed" an offeror during discussions by identifying every possible area where a proposal might be improved or suggesting alternative approaches, agencies need only lead offerors into the areas of their proposals that require amplification or revision consistent with the requirements of the FAR".

Legal Cost to Defend Against Third-Party Lawsuits

Bechtel National operates a nuclear waste treatment plant in the state of Washington. In 2010 and 2012, two former Bechtel employees filed lawsuit against the company, alleging, among other things, sexual and racial harassment and discrimination. Bechtel and the former employees settled the lawsuits out of court. Bechtel then sought reimbursement of its litigation costs under its contract with the Energy Department.

Are those costs allowable, or not?

The Energy Department didn't think so. Although the Department provisionally approved the reimbursement at first, after further consideration, it disallowed the costs. After the contracting officer issued a final decision upholding the disallowance, Bechtel appealed to the U.S. Court of Federal Claims alleging breach of contract.

In 2010, Bechtel notified Energy of potential litigation arising out of its work at the Hanford site. The Energy Department informed Bechtel in writing that it was authorized to proceed with defense of the case but that authorization was not a determination of the allowability of costs - that determination would be made at a later date pursuant to relevant statutes, regulations, terms of the contract and other considerations.

A few months later, a former employee filed a lawsuit against Bechtel arising out of her termination. The employee alleged that she had been subjected to a hostile work environment and racial and sexual harassment. Additionally, she alleged that Bechtel transferred and ultimately terminated her employment in retaliation for the actions she took to report and stop the alleged harassment. Finally, she asserted that Bechtel had engaged in disparate treatment and took adverse employment actions against her on the basis of her sex and race. Ultimately, the parties settled out of court.

A couple of years later, a second discrimination lawsuit was filed against Bechtel by another former employee. This employee alleged that Bechtel discriminated and retaliated  against him on the basis of race and disability.

Bechtel requested the Energy Department to reimburse it for defending those suits. It asked for $500 thousand and the Energy Department reimbursed those costs on a provisional basis.

The Energy Department moves slowly. Four years later, in 2016, the contracting officer disallowed the costs. The contracting officer determined that the costs incurred by Bechtel in defending the lawsuits were unallowable. He found that the plaintiff's claim had more than very little likelihood of success on the merits and therefore unallowable.

In short, the costs at issue which were incurred as a result of violations of the contract's anti-discrimination provision were not allowable under the terms of specific contract clauses. Accordingly the Court of Claims ruled that the Government is entitled to judgment as a matter of law as to Bechtel's claim that the Energy Department violated the contract by disallowing the costs it incurred to defend and pay for the settlement of the two discrimination complaints.

You can read the entire decision here.

What's the Difference between "Meritorious" and "Clearly Meritorious"?

What is difference between "meritorious" and "clearly meritorious"? In the case of a company protesting a contract award by the Navy, it meant the difference between getting reimbursed for its cost of protesting and not getting reimbursed.

In 2016, the Navy issued an RFP for contractor support services. Award was to be based on the offer representing best value to the Government following certain evaluation factors. Seven firms submitted proposals including Herren Associates, Inc. Ultimately the contract was awarded to another firm.

Herren appealed to the GAO challenging the Navy's evaluation on several aspects of its proposal. There was some back and forth between the GAO, the Navy, and Herren and ultimately, the Navy advised the GAO that it needed to take corrective action to address the supplemental protest. Specifically, the Navy decided to reevaluate Herren's proposal and make a new best-value tradeoff decision.

Herren then filed a request for the reimbursement of protest costs noting that its protest grounds were clearly meritorious. Herren further maintained that reimbursement of costs is warranted because the Navy unduly delayed taking its corrective action.

When a procuring agency takes corrective action in response to a protest, the GAO may recommend reimbursement of protest costs where, based on the circumstances of the case, it determines that the agency unduly delayed taking corrective action in the face of a clearly meritorious protest, thereby causing the protester to expend unnecessary time and resources to make further use of the protest process in order to obtain relief. As a prerequisite to recommending the reimbursement of costs where a protest has been settled by corrective action, the protest must not only have been meritorious, but it also must have been clearly meritorious. What's the difference? A protest is "clearly meritorious" where a reasonable agency inquiry into the protester's allegations would reveal facts showing the absence of a defensible legal position.

 In this case, the GAO did not find reimbursement of protests appropriate. It disagreed with Herren that the company had raised clearly meritorious allegations . While Herren raised come compelling concerns, Herren's arguments necessitated a substantive response from the Navy for the GAO to fully assess the merits of the protest grounds. In GAO's view, the Navy was not without a defensible legal position. Because the allegations raised, and the Navy's responses thereto, presented a close question that warranted further research and analysis to determine the merits of the issues presented, the reimbursement of costs was not warranted.

The full GAO decision can be downloaded here.

Large Contractor Awarded $200 Million in Contracts Set Aside for Small Businesses

The Justice Department just announced that a Federal Grand Jury indicted three men with a 12-year fraud involving over $200 million in Government contracts - contracts intended for small business but actually performed by large businesses. This latest case is hardly unique. We've been reporting for some time about large companies using using straw owners to get work intended for small businesses. What is surprising about this case is the magnitude ($200 million) and its duration (12 years).

The defendants were charged with a conspiracy to commit fraud. The conspiracy involved operating construction companies with straw owners who qualified as a disadvantaged individual or as a service-disabled veteran, but who did not actually control the companies. The conspirators fraudulently obtained small business program certifications to win Government contracts to which they were not entitled. Thus, they enriched themselves, undermined the small business programs, and deprived honest small businesses the opportunities for work.

There were at least three companies involved.

1. Nuvo Construction was misrepresented to be majority-owned and controlled by a person referred to as JL in order to obtain certifications as a Small Disadvantaged Business. In reality, JL worked full-time for a different company and did not actually control Nuvo.
2. C3T was misrepresented to be majority owned and controlled by a person referred to as TA to obtain verification as a Service-Disabled Veteran-Owned Small Business. In reality, TA had virtually no involvement in C3T.
3. Pagasa was misrepresented to be a majority owned and controlled by a person referred to as OM in order to obtain certification as a Small Disadvantaged Business. In reality, OM relied on the assistance of conspirators to form Pagasa.

When interviewed, the principles involved in the scheme made materially false statements to investigators. But in the end, the Government found enough information for the indictment. They laundered proceeds of the fraud scheme in order to disguise and conceal the nature, source, and location of those fraud proceeds. They transferred fraud proceeds from these company accounts to accounts that they controlled.

Now the individuals are faced with the prospect of significant jail time and fines. Already the Government has confiscated more than $2.2 million from bank accounts and a Corvette.

You can read more about this case in the DOJ press release.

The Importance of a Precisely Worded Final Decision

In 2014, the Army awarded a contract to a company called Protec for maintenance, inspection, and repair of fire alarm, fire suppression, and evacuation systems in Germany. In 2015, the contracting officer posted an unsatisfactory report in CPARS (Contractor Performance Assessment Reporting System) and also refused to pay some of Protec's invoices.

In 2016, Protec submitted a certified claim regarding the unsatisfactory CPARS reports and a certified claim for the unpaid invoices. In 2017, the contracting officer issued a COFD (Contracting Officer Final Decision) denying the claim for several reasons including (i) failure to maintain required professional certifications and (ii) failure to submit untimely maintenance schedules and condition reports and failed to comply with schedules, (iii) partial completion of some inspections, (iv) failure to provide a proper quality control program. The COFD concluded that the CPARS evaluation was accurate, and that the Government cannot pay invoices when the contract called for services that, even if attempted, did not comply with the performance work statement and certification requirements. The result of these failures cased any work performed by Protec to "be of no value to the Government.

Protec appealed to the ASBCA but the Government quickly moved to have the appeal dismissed for lack of jurisdiction. The Government argued that the COFD was invalid due to the fact that the COFD's basis for denying the claims purportedly was a suspicion of fraud and therefor the ASBCA lacked jurisdiction.

The ASBCA denied the motion calling the Government's position nonsense. The ASBCA stated that a suspicion of fraud was not the basis for the COFD. In fact, the COFD did not even mention fraud or a suspicion of fraud. Since the COFD was based upon rationales that the contracting officer was authorized to asset, the ASBCA has jurisdiction over the appeals.

Final Rule on GAO Bid Protest Changes

The GAO (Government Accountability Office) published its final rule establishing a new mandatory electronic filing and document dissemination system for filing bid protests. The rule becomes effective on May 1st (one month from now). Oh, and by the way, it comes with a filing fee - it will now cost your $350 each time you file a bid protest.

There were 19 comments pertaining to the proposed fee when the GAO published its proposed rule. Five of the 19 were in favor of the fee. Fourteen commentators opposed the fee on the basis that it creates a barrier to filing protests for small businesses, some of which stated that they lack the resources to pay the fee. In particular, one commentator argued that a $350 fee would make a protest economically infeasible for small businesses seeking the award of very small contracts.

GAO responded:

GAO does not intend for the fee to discourage or reduce the number of protests. Rather, the proposed fee will cover the costs of establishing and operating EPDS (Electronic Protest Docketing System). GAO does not agree with the proposals to charge a fee that is higher than necessary to address the costs of EPDS or for the purpose of discouraging protests. With regard to a lower fee or fee waiver for small businesses, GAO has concluded that the anticipated fee of $350 is appropriate given the costs of the system. Additionally, GAO has concluded that the interest of administrative efficiency supports imposition of a uniform fee for all protests.

GAO doesn't want to discourage protests, but at $350 per filing, it would have cost Latvian Connection $157,000 to file its 450 bid protests over a five year period. Perhaps we should refer to the $350 fee as the "Latvian Fee".

There are a few other significant revisions to the bid protest regulations including (i)due dates, (ii) requests for documents (iii) the ability to request relevant documents not in the Government agency's possession, and (iv) handling protected documents. Read the full final rule here.