Contracting officers have the responsibility to determine that contractor prices are fair and reasonable based on the factors influencing the requirement such as urgency, mission criticality, project complexity, related risk, etc.
The contractor proposal is related to a changed requirement to an existing contract so the contracting officer must also determine the contractor proposed contract costs are allowable, allocable, and reasonable as discussed in FAR Part 31. The negotiation is also being conducted in a non-competitive environment.
FAR 31.105 discusses the use of FAR Subpart 31.2 in construction and A&E contracts.
Comments concerning the problem:
1) You have determine that the labor rate of $50.80 per hour is in compliance with Davis Bacon wage determinations for the location.
2) A labor burden of $17.78 is proposed to cover contractor costs for OASDI, Medicare, FUTA, SUTA, and workers comp. These are costs that the contractor must pay by either federal or state law. The categories of overhead are covered in FAR 31.205-41, Taxes. All categories appear to be allowable. I believe you will find most paid by the Federal Government on your employee leave and earning statement as well. You will have to determine if the proposed rate of $17.78 per labor hour is reasonable for the labor rate of $50.80 per hour?
3) I would expect the contractor to propose an additional overhead or G&A rate. Contractors must recover all overhead costs and they do that by charging a portion to each contract. This overhead/G&A rate is to cover all other allowable, allocable, and reasonable overhead costs other than labor burden in this contract proposal. Many possible categories of costs are discussed in FAR 31.205. All possible categories of indirect costs are not discussed and just because a cost is not covered does not mean it is not allowable. Overhead in these categories is the cost of doing business or "opening the doors" to the business and can include depreciation, all utilities, insurance, accounting services, secretary salary, owner compensation, etc.
4) Profit is reward for risk and you are probably using weighted guidelines or another accepted methodology to establish your objective in this area.
There are a couple of documents that you may already have that you can use to assist in determining the proposed costs allowable and allocable and eventually fair and reasonable or as a basis to negotiating a lower contract price.
1) Previously submitted payrolls: contains information on paid labor rates and burden
2) Davis Bacon wages and fringe benefits determination. What are the required fringe benefits. Some of these may be direct labor or they could be indirect and included in the overhead rates
3) Overhead rates developed in previous contracts or mods with the same contractor or with other contractors for similar work
4) The "Schedule of Prices" and supporting information required by Unified Facilities Guide Specifications (UFGS) 01 20 00.20, FAR 52.236-15 Schedule of Work, and FAR 52.232-5 (b)(1) Payments under Fixed-Price Construction Contracts
5) If the above are still not sufficient for developing a negotiation objective and negotiating with the contractor, you can always require the contractor to provide a more detailed breakdown of their overhead rate not associated with labor burden.
6) Independent Government Estimate: must comply with applicable FAR parts and contract requirements such as UFGS as well
Construction contracts are also allowed to charge both a field and home office overhead rate.
Based on the information provided, I'm not sure you can or want to deny the contractor overhead request. Detail analysis is required. Let me know if you require additional information.