Balancing staffing in federal contract proposals and solutions while balancing reasonable and realistic costs can be VERY challenging. Maintaining competitiveness without generating great risk in the mind of the evaluator is not easy. As we leverage protest decisions for competitive intelligence, the below complaint often comes up as a basis of protest (and it is often discussed in other conversations).

Determining COST realism has a high degree of subjectivity to it and our government friends have some latitude to determine what is and is not realistic.  Bidders will often exercise creativity in how they make their price to be more competitive.  In previous blogs, we have illustrated issues around realism where these tactics take the form of tinkering with staffing levels and staff compensation / labor rates. 

Some of our previous examples have illustrated what not to do.  Let’s explore a competition in which a challenger made all the right moves.

Anchors aweigh…your price down?

U.S. Department of the Navy, Naval Sea Systems Command (NAVSEA), Foreign military sales (FMS) follow-on technical support (FOTS) for International Fleet Support Program Office (PMS 326)

Protest Decision Date: December 13, 2023

Amentum challenged long-time incumbent VSE Corporation for what became a $592M contract to deliver a wide variety of professional services support for NAVSEA and its expansive FMS support for U.S. allies.

The overall evaluation looks straightforward.  Note Table 1 below with the “tale of the tape” between the protester and the winner.

The best value trade-off decision made by NAVSEA was seemingly reasonable considering a 3.5% difference in price and close non-cost evaluation.  This is very important to recognize because we have observed that NAVSEA leans toward being a discount buyer, meaning this fits into NAVSEA’s tendency to focus on price.   Without any means to justify an award to the incumbent, Amentum just locked up the win.

VSE submitted a protest on multiple grounds, but what’s relevant here is the challenge on cost realism and evaluation of the management factor.

Watch your head, because there’s little room to maneuver

NAVSEA approached this with substantially prescribed guidelines on required positions, labor hours for each position and escalation rates.  In this case, NAVSEA very much restricted how creative bidders could get.   From the protest decision, we have some interesting extracts from how NAVSEA evaluated cost.

The RFP specified that the evaluators would consider “[p]ertinent cost information, including but not limited to independent government cost estimates, comparisons of the Offerors proposed approaches and efforts to historical cost data from similar programs and effort, [and] cost modeling programs,” to analyze and–if necessary–upwardly adjust proposed direct labor and indirect rates.

For the labor rate evaluation, the cost/price analysis team (CPAT) reviewed compliance with the Navy’s labor mix and escalation guidance, analyzed any proposed uncompensated overtime, compared direct labor rates to substantiating data like payroll data or salary surveys, and assessed indirect rates.

NAVSEA often uses historical cost data and they will engage in adjustments (which they did here) to make some very detailed cost realism assessments.  However, there was some wiggle room that Amentum worked to utilize to be competitive.  VSE challenged these as risky.   

Maneuvering within a narrow channel

Amentum was challenging a very capable incumbent in VSE Corporation so they knew they had to get creative.  What did they do?

• Amentum deviated slightly from prescribed labor hours
• Amentum proposed a bare bones basic escalation rate for labor hours that was compliant
• Amentum proposed uncompensated overtime for exempt employees and backed it with historical data for other exempt employees and the same practice across other Amentum contracts

When we consider realism, it’s an assessment of risk.  NAVSEA had to assess realism as risk in terms of how a bidder’s offer would generate risk that could potentially negatively impact performance.  Amentum understood this and they utilized it to create some small degree of separation between themselves and incumbent VSE.

Regarding the uncompensated overtime, VSE challenged the validity of historical data as (at the time) Amentum was a relatively new company.  However, NAVSEA accepted the historical data which was likely drawn from AECOM / URS / EG&G legacy which was very mature and had already operated in and around NAVSEA for decades. 

Disparity in labor rates between VSE and Amentum

VSE went on to challenge cost realism by comparing its rates to Amentum’s rates.  Borrowing from the protest decision, we have:

Alleging the cost difference to be “significant” because Amentum’s rates were “28.5 [percent] lower than those proposed by VSE,” VSE asserts that the agency “was not at liberty to simply overlook and ignore the drastic difference in rates.”

Say what?  Cost realism has NOTHING to do with comparing one bidder to another.  The agency evaluates each bidder against standards established in the RFP.

Here we have an incumbent (VSE) who is seemingly using its labor rates as a basis for realism.  That is not how this works.

Editorial note: Do you think NAVSEA was already moving on? Our magic eight ball seems to say “Signs point to yes.”

Instead, NAVSEA evaluated Amentum’s labor rates by considering Amentum’s substantiating information in contingent hire letters and salary survey data to assess realistic costs.  Note the use of salary data is especially important because it establishes that Amentum could and has hired employees to work within specific salary ranges thereby validating it is indeed realistic.

Creativity in work location and employment status

VSE also challenged aspects of Amentum’s staffing (which, you know, is tied to management and ultimately cost).  More specifically, the use of 1099 independent contractors vs. full-time employees for some roles AND use of remote workers (saves money with less overhead expenses). 

On the topic of remote workers, VSE challenged this as being allowed per the RFP, but NAVSEA issued an amendment to allow this. 

Oops. Do you remember the sneaking suspicion we had about NAVSEA being ready to move on? We digress. The story continues.

Regarding 1099s vs. full-time employees, this is a tactic often used in staffing solutions as 1099 independent contractors have no fringe or other benefits and they are a simple pay-as-you-go labor option that can be ramped on and off as needed to reduce total staff that can be used to drive down overall labor cost.  VSE argued:

Amentum’s proposal relies heavily on 1099 workers,” who are not entitled to fringe and other benefits, when they “should be treated–and therefore evaluated–as employees,” who are entitled to such benefits.

VSE was really driving at the cost savings Amentum realized which drove their proposed price to be less than VSE’s proposal.  VSE also challenged the legality of using 1099 workers as it could be a violation of the Fair Labor Standards Act.  This is sometimes true with employers making what are actually full-time employees into 1099 workers to avoid the burden of supporting a full-time employee. 

In the end, NAVSEA accepted limited use of 1099s as they believed how Amentum would utilize 1099 workers as subject matter experts when and only as needed.  VSE challenged this creative staffing approach as risky and that should have been factored into a lower management factor evaluation.

In the end, NAVSEA found the relatively small adjustments in staffing strategy and related cost benefits to be appealing to make the award to Amentum.

What can we learn from this?

• Even with restrictive requirements in pricing, there is always some room for creativity
• Engaging the customer early (seems like Amentum did this well) to validate some tactics to balance execution and cost can give some wiggle room in an evaluation
• Cost realism has NOTHING to do with bidders vs. bidders…don’t even go there
• Making modest adjustments in full-time vs. 1099 staff can work provided it is not a radical change
• Demonstrating realism using actual salary data to prove a bidder can do what they claim goes a long way to defend realism
• If the federal customer changes the rules of the game to allow for a challenger to get creative, maybe they are just not that into you anymore

Are you interested in finding out more about trends in contract award decisions and even more about what has unraveled award decisions?  Check out how we go deeper into these topics via FedAgency Insight!  Contact us today! 

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Author: Brian Lindholm