Bargains or Red Flags: Satisfying An Agency’s Cost-Realism Analysis

By Grace Mahan

Like any other commercial customer, government agencies seek out bargains in their contracts for goods and services. Accordingly, it behooves government contractors to price their bids competitively. However, although tendering the lowest bid seems like a surefire way to win a contract award, the strategy can lead to the correction or dismissal of a bid on the grounds that it is unrealistically low.

In Trident Technologies, for example, the GAO upheld the Army’s rejection of a bid for engineering and analytical services that was deemed to be too low to permit the contractor to maintain quality employees. In its request for proposals, the Army informed bidders that employees on the current contract had been paid higher wages than those listed in the Department of Labor’s determinations. The Army recommended that bidders should also pay above-minimum rates to acquire and retain highly qualified employees.

The RFP provided that proposed costs in the bids would be evaluated for realism, probable cost, balance and reasonableness.  Nevertheless, Trident Technologies tendered a bid with labor rates beneath GS grade indicator rates. As a result, the Army asked Trident to justify that its proposed labor rates would not jeopardize the quality and stability of the contract workforce. Trident Technologies appeared to be tone deaf to what some would have understood to be the Army’s unequivocal preference for retaining the incumbent employees.  Rather than demonstrate how it would retain highly qualified employees, Trident Technologies simply responded that as a result of attrition, it would be able to hire new staff or promote from within at the normal wage determination rate instead of the higher rate paid to current employees.

The Army rejected Trident Technologies’ explanation, stating that Trident Technologies had failed to provide data-driven information to support its claim that it could hire suitable replacement personnel at the normal wage determination rate.

The GAO supported the Army’s conclusion, and its upward revision of Trident’s costs, holding that agencies must perform a cost realism analysis, and that the GAO will review the agency’s cost realism analysis only to determine whether it is “reasonably based and not arbitrary.” The GAO specified that agencies are not required to verify the cost of every item but rather should exercise informed judgment in determining the extent to which a bidder’s proposed costs are realistic for the work to be performed.

As it stands, Trident represents the proposition that even when award will be made to the lowest-price, technically acceptable bidder, an offeror should keep in mind the agency’s right to perform a cost-realism analysis. Accordingly, contractors should be prepared to provide detailed and data-based explanations to support the validity of their proposed costs. In doing so, contractors may avoid having their costs revised upwards by an agency and losing out on award, where the contractor believes it truly can offer the best bargain to the government.

Our firm has extensive experience in the federal procurement process, including representing companies in protests before the GAO. Please contact any of our lawyers if we may be able to assist you with these or other matters.

Posted in Government Contracts.