GAO Sustains Protest for Agency’s Improper Cost Adjustment

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The Government Accountability Office (“GAO”) recently sustained a protest in the matter of Vectrus Mission Solutions Corporation; Vanquish Worldwide, LLC where an agency improperly adjusted an offeror’s proposal price upward when the offeror expressly had agreed to absorb any costs above a cap in its proposal.  The GAO’s decision provides insight into cost realism evaluations such as when they should be undertaken and when they can be avoided.  When permitted by the terms of a Solicitation, agencies conduct price or cost realism evaluations to determine whether an offeror’s proposed costs 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.” Generally, a cost realism evaluation is required to be performed for award of cost-reimbursement contracts because the offeror’s proposed costs are not dispositive in the government’s liability for allowable costs.  For Firm Fixed Price procurements, price realism becomes less important because the government’s liability for costs is set, and agencies may only perform a price realism analysis when the solicitation specifically advises that one will be performed.  The Vectrus case demonstrates a method by which offerors may avoid the impact of a cost realism evaluation in a cost-reimbursement contract, by shifting liability to align with fixed-price principles.

Vectrus protested the award of a cost-reimbursable contract to VS2 on the grounds that Vectrus’s proposal would have been the lowest-price offer had the agency not adjusted Vectrus’s price upward by nearly $20M, as Vectrus agreed to absorb certain costs exceeding a specific cap, shifting liability to it from the government for costs of certain work.  The agency justified its action by contending that “it had a reasonable concern regarding whether Vectrus’s assumption of liability would be borne out during contract performance” because the cost evaluator believed that Vectrus would not be able to perform the contract while absorbing the costs, as promised in its proposal, from informal statements made by Vectrus during discussions.  The GAO disagreed with the agency’s position, explaining that the evaluator’s position was unreasonable since the assumption of the evaluator directly contradicted the express acceptance of liability for cost overruns as stated in Vectrus’s proposal.  The GAO further explained that when the offeror expressly agrees to a cap on costs for specific work, concerns over such costs should be resolved in the determination of the offeror’s responsibility, rather than in a cost realism evaluation.  Rather than send the matter back to the agency for further evaluation, the GAO recommended that Vectrus be awarded the task order contract as the lowest priced acceptable offeror.

The Vectrus decision also dismissed the protest of a second disappointed offeror for lack of interested party status, despite being second in line for award after the agency cost adjustment.  Because it was no longer next-in-line for award after the GAO’s correction of the Vectrus price, the GAO dismissed its protest for lack of standing.  For more information on standing and interested party status, see this recent Vandeventer Black article on the issue.

Offerors on a cost-reimbursement procurement who are confident in their ability to absorb or avoid certain costs may use the Vectrus tactic of proposing a cap on such costs.  The agency still may determine that an offeror is not responsible, but the cap on costs will avoid an upward adjustment by the agency as part of the cost realism evaluation. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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