There are some strange rules in the world of government contracts. These rules sometimes lead to strange results. One rule requires awardees to offer jobs to incumbent employees in certain circumstances. So, you can propose to staff a contract with your competition’s employees without violating the rules. And, since government contracts often involve competitive procedures, theoretically you can beat the competition’s price by proposing to hire their employees at a lower wage. Sounds simple, right? What could go wrong?
A recent Government Accountability Office (GAO) decision provides some insights. In Valor Healthcare, Inc., B-412960, July 15, 2016, the Department of Veterans Affairs was seeking a contractor to provide primary care and mental health services for veterans at a clinic in Pennsylvania. Following an evaluation, the VA selected higher-rated and lower-priced Sterling Medical Associates over the incumbent, Valor Healthcare, Inc. Valor filed a protest with GAO and argued that the VA failed to evaluate the realism of Sterling’s pricing. The purpose of a “price realism review” is to determine whether proposed prices are too low which could increase the risk of poor performance or default. The rules don’t normally require a realism review for fixed price contracts—unless the solicitation requires such a review as in this case.
To support its challenge, Valor pointed to Sterling’s proposal to staff the clinic with Valor’s employees and noted that Sterling’s labor costs were below its own. GAO acknowledged that was an “obvious price realism concern,” especially where the VA knew that the majority of Sterling’s proposed staffing candidates were current Valor employees serving under the incumbent contract. GAO sustained the protest because the VA could not point to anything in the contemporaneous record to show that it adequately assessed the compatibility of Sterling’s pricing (including the labor costs) with the scope and effort of its technical approach.
There were other problems with Sterling’s pricing. Apparently, there were errors in Sterling’s “price breakdown spreadsheet.” GAO said that the VA should take those errors into consideration in the reevaluation. The record also did not show that the spreadsheet was submitted timely by Sterling. In fact, according to the record, the VA asked Sterling to submit the spreadsheet “approximately two months after the due date for revised proposals.” For this reason, the VA’s corrective action will necessarily include a determination of whether Sterling’s pricing submission was timely.
So, Sterling’s plan to hire Valor’s employees at a lower cost failed here. Maybe it was because Sterling had no realistic plan to retain the incumbent employees. Or maybe it was because Sterling failed to include its plan in its proposal or because it failed to clearly explain that plan. Those issues will be resolved by the VA in the reevaluation. Going forward, contractors like Sterling should take care to address this “obvious price realism concern” that arises when incumbent employees are proposed for hire at lower rates. But what about the timeliness questions raised by GAO in its decision? And what about the “errors” in the pricing spreadsheet? Those may be deal-breakers for Sterling even if it is able to address the price realism concerns appropriately. These problems serve as useful reminders for all contractors who want the federal government as a customer that sometimes it’s the simple things that need tending to . . . like pricing spreadsheets (and the math on those spreadsheets) and meeting deadlines for submission of proposals.