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    The incumbent proposed base labor rates that are at least 20% lower than the rates that they are currently billing the Government. The incumbent's labor rates are also 20% lower than the other Offeror's proposed base labor rates for the same labor category. Question 1 - Should the Government during its realism analysis adjust the base labor rates? If we do, wont that cover up the fact that the incumbent is buying-in and intends to get well after contract award. Essentially, if the decision of award comes down to price, haven't I made the contractor well by hiding the risk that they may not be able to retain their own workforce? Question 2 - Or, what about the fact that the labor rates on the current contract are 20% higher than they should be. Is this fair and reasonable? Question 3 - Or what if they are not the incumbent and they are bidding 20% lower than the other Offeror's. Do I adjust their labor rates? Isn't that saying - Mr. Contractor you have to fire the Administrative assistant making $8/hr and hire one making $15/hr because you are lower than the other Offeror's. Question 4 - If their technical eval is very good - why should I challenge their prposed labor rates. is retaining 90% of the incumbents labor force at the higher rate fair and reasonable?or in the best interest of the Government? Question 5 - should we adjust the direct labor base rates during realism. Realism should be used to adjust labor hours, travel, material and the like. Not their base labor rates. And when we adjust costs using realism, it should be used to sparingly - here and there - it should not be used to FIX a proposal - is that right? Question 6 - If the decision to award comes down to price - and I have adjusted - then price is no longer a discriminator. Risk is no longer identifiable - I understand that realism is used to identify when a proposal is too low, but there has to be a line between fixing a few labor hours or 80% of their proposal. One more question - Question 7 - can I discuss cost risk in my cost report even if I do not adjust for realism? for example, can I identify the risk in retaining the current workforce with base labor rates that are 20% lower than the incumbents if I do not adjust them? I was told that if I do not adjust, then I should not discuss it in my cost report. If I do not adjust for realism - should I remain silent in my report with regards to identifying risk? And finally - Question 8 - if an Offeror states that they will retain 90% of the incumbents workforce, but proposed a base labor rate 20% lower than the incumbent - should I adjust their base labor rates to equal the incumbents higher rates? Again where is fair and reasonable? maybe the incumbents rates are too high now? What if they said they would retain 90% of the workforce and gets points in the tech eval but because of their low rates are unable to retain them after award? is that an excuse to pay the higher rates? please answer each question


    Answer(s): In a CRA, you are evaluating and documenting specific elements of an offeror’s proposed cost to determine whether the costs are realistic for the work to be performed.  You should base your analysis on the proposal and your evaluation criteria only.  In cost reimbursement contracts, the Government pays the cost.  You must determine if their rates are reasonable IAW FAR 31.201-3.  Contractors should be invoicing based on actuals.  When the Contracting Officer reviews the invoices for approval, they will be checking to see that the rates billed are in line with the rates in the contract. 
    See FAR 15.404-1(d)
     (1) Cost realism analysis is the process of independently reviewing and evaluating specific elements of each offeror’s proposed cost estimate to determine whether the estimated proposed cost elements are realistic for the work to be performed; reflect a clear understanding of the requirements; and are consistent with the unique methods of performance and materials described in the offeror’s technical proposal.
    (2) Cost realism analyses shall be performed on cost-reimbursement contracts to determine the probable cost of performance for each offeror.
    (i) The probable cost may differ from the proposed cost and should reflect the Government’s best estimate of the cost of any contract that is most likely to result from the offeror’s proposal. The probable cost shall be used for purposes of evaluation to determine the best value.
    (ii) The probable cost is determined by adjusting each offeror’s proposed cost, and fee when appropriate, to reflect any additions or reductions in cost elements to realistic levels based on the results of the cost realism analysis.
    (3) Cost realism analyses may also be used on competitive fixed-price incentive contracts or, in exceptional cases, on other competitive fixed-price-type contracts when new requirements may not be fully understood by competing offerors, there are quality concerns, or past experience indicates that contractors’ proposed costs have resulted in quality or service shortfalls. Results of the analysis may be used in performance risk assessments and responsibility determinations. However, proposals shall be evaluated using the criteria in the solicitation, and the offered prices shall not be adjusted as a result of the analysis.
    See also Chapter 8
    Question 1 –See FAR 15.404-1(d)  You may adjust the rates to find the probable cost to reflect any additions or reductions in cost elements to realistic levels based on the results of the cost realism analysis.  You would want to document any performance risk created by the difference in the proposed rates vs. the current rates.  This is potentially something to discuss with the contractor during negotiations, after a competitive range has been established, should the Government determine it in its best interest to enter into discussions (and whether this was specified in the solicitation).  Keep in mind that you’re not changing their actual proposal, but rather making a copy of their proposed cost and adjusting rates in accordance with FAR 15.404-1 for your analysis and report.  You will speak to the risk created by the deltas between the actual proposed rates, and the adjusted rates in your report, but keep in mind that the proposed cost is what is incorporated into the contract, not your adjusted realism costs.
    Question 2 – Perhaps…  You must only evaluate the proposal against the criteria in the solicitation.  Perhaps the incumbent has an agreement with the employees to accept a 20% pay cut, or perhaps they’re planning to make up that difference in overhead or from profit/fee on other contracts.
    Question 3 – No, if another offeror (not the incumbent) proposes rates that are lower than the incumbent rates, they are not under any obligation to hire the employees of the incumbent contractor.  The Government is buying labor categories, not specific people…  If an administrative secretary for offeror X makes $8/hour, is qualified to do the required work, the offeror would not need to fire its administrative secretary to hire the incumbent’s administrative secretary making more (or less!).
    Question 4 – You should evaluate cost separately from the technical volumes.  If their technical evaluation is very good, and their proposed cost is realistic for the work to be performed; reflects a clear understanding of the requirements; and is consistent with the unique methods of performance and materials, you wouldn’t necessarily need to adjust the cost. 
    Question 5 – Did your solicitation specifically indicate that you would be performing a realism analysis?  Did your solicitation require offerors to substantiate their proposed direct and indirect labor rates through payroll verification, contingent offer letters, DCAA rate verification or approval letters or other detailed justification methods? 
    GAO has opined that an agency may adjust direct labor rates in CR type contracts when found to be drastically inconsistent with the rates verified by current and contingent employees (actual current labor rates).  While it is true that current employees might leave and be replaced at lower rates, the possibility of changes to personnel does not negate the fact that the actual rates currently being paid to personnel proposed by the incumbent are the most realistic rates available.  Further, in this scenario, the incumbent is proposing to retain 90% of its workforce.  See AM Pierce & Associates Inc., B-413128 et al. (Aug. 22, 2016) and Not Limited to Downward Adjustment (DCAM 9-311.4a and EDAW, Inc., CGEN B-272884, Nov. 1, 1996) for further information.
    For CR type contracts, you must use the probable cost of contract performance developed in your cost realism analysis to determine the best value and the risk associated with the offeror’s technical proposal.  An award based on an unreasonably low cost proposal would be false economy because the final price paid by the Government will depend on the final contract cost. 
    Question 6 – If the award decision comes down to cost and you have adjusted the rates upward, the cost is still a discriminator, as is the risk associated with the deltas. See Adjustments May Be Large Relative to Proposed Costs (Westinghouse Electric Corp., CGEN B-250486, Feb. 4, 1993).
    Even firms with sophisticated estimating systems can submit unrealistic cost proposals. As you estimate probable cost, the difference between the probable cost and the offeror's proposed costs may be quite large as long as the difference is supported by the facts of your analysis.
    Question 7 – If you’re not adjusting for realism, then where are you getting the data to be able to identify the risk created in their proposed cost?  If you adjust for realism, discuss the deltas and associated risk in your report.  If you do not adjust the rates, then no risk has been identified in your analysis and you wouldn’t have any risks to discuss in your report.
    Question 8 – Not necessarily.  When an incumbent contractor proposes rates lower than the incumbent’s current rates, but intends to retain a percentage of the workforce, this could be a buy-in strategy, but the proposed rates are the rates the Government would agree to pay upon contract award.  The contract will be based on the proposed cost and fee, not the evaluated cost and fee, and paid in actuals.  If you adjust the rates,  you should document the deltas in your report and speak to the performance risk should the incumbent lose its’ staff post award. Many contractor employees would rather take a 20% pay cut than lose their job altogether.  Did the proposal submitted include signed letters from the proposed/current personnel showing the 20% reduction in pay? This is something that could be noted as a significant weakness (depending on your evaluation criteria) and talked about during discussions (after establishment of a competitive range). 

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