Agency Unreasonably Attempted to Skirt Requirement for Realism Evaluation of Proposed Professional Compensation Rates; COFC No. 18-1708C, Sparksoft Corporation v. United States and Scope Infotech Inc.

Pre-award protest challenging the agency’s decision not to conduct price realism analyses is sustained, where the agency is required to conduct such an analysis for offerors’ professional compensation rates, even when the contract is solicited as firm fixed price. According to the court, labeling a contract as firm fixed price, when the contract requires almost entirely professional services, does not excuse the government from performing a realism evaluation of the proposed professional compensation rates.

Sparksoft Corporation protested the Centers for Medicare and Medicaid Services’ decision not to conduct a price realism analysis on the professional compensation rates embedded within the firm-fixed-price component of bids submitted under a solicitation for IT services.

This contract has been subject to multiple protests and previous rounds of corrective action. The agency initially made award to Sparksoft and affirmed that decision after two separate protests from Scope. GAO sustained a third protest, finding that CMS improperly characterized an ODC software license as an open market item, rather than requiring the license to be priced according to the GSA schedule. Due to the nature of the solicitation, ODC items (if available) needed to be procured from the GSA schedule. GAO found that a software license Sparksoft quoted as an open-market item was offered by Carasoft on the GSA schedule. As a result, GAO concluded that CMS should have required Sparksoft to quote the software license according to the GSA schedule and not as open market item ODC.

CMS then reopened bidding for a fourth time, asking bidders for a revised price quote but stating that revised technical and business volumes were not necessary. In their new proposals, Sparksoft increased its total price, while Scope decreased its price. The CO asked Scope whether its new proposal resulted from the same level of effort and labor mix, and Scope confirmed. However, evaluators found several significant decreases in the total number of hours proposed, with some positions being entirely eliminated.

The panel concluded that some of these changes were acceptable and others were unacceptable, and made recommendations to Scope regarding the unacceptable changes. The agency also gave Sparksoft the opportunity to revise its quotation. Scope adding back some positions and hours to address the agency’s concerns and slightly increased its price. However, Scope’s quotation remained lower priced and the agency awarded it the contract.

Sparksoft then filed its own protest and the agency again reopened discussions, accepted revised quotes, and conducted a new evaluation. The requests for revised quotes modified the solicitation in a material way. In the requests, CMS explicitly stated that the agency would not conduct a price realism analysis on the entire quote as this was a firm fixed price contract. The labor portion of the work would be evaluated to ensure the labor categories and hours proposed are realistic to perform the work. However, CMS did not amend the portion of the RFQ that stated that the compensation for professional employees would be evaluated. Scope inquired about this discrepancy, and when it did not receive a satisfactory answer from CMS, filed this pre-award challenge.

As an initial matter, Scope challenged Sparksoft’s standing to challenge CMS’s actions, arguing that one of Scope’s industry certifications had lapsed during the course of the procurement and therefore the plaintiff was no longer eligible for award. In response, Sparksoft argued that the solicitation did not state that an offeror would be deemed ineligible for award for not having a current certification. Instead, the solicitation listed this certification as a single factor for evaluation. The court agreed and found that Sparksoft had standing. The court noted the solicitation did not state that the certification was mandatory for award and that the agency had not challenged Sparksoft’s standing.

Next the court turned to the merit’s of Sparksoft’s complaint. The case turned on whether the reference to FAR § 52.222-46 in the RFQ requires CMS to conduct a realism analysis on the professional compensation pertinent to the firm fixed-price portion of the submitted quotes. Sparksoft argued that CMS’ intention not to conduct a realism analysis was inconsistent with the requirements of the solicitation and created a patent ambiguity. According to Sparksoft, this ambiguity created a Catch-22 situation because it fears proposing high rates that would exceed those of competitors or lower rates that CMS would find unrealistic if it conducted a realism analysis, losing the bid either way.

In response, the government argued that the FAR does not mandate a price realism analysis before the award of a fixed-price contract. According to the government, FAR § 52.222-46 does not apply to the professional labor rates charged to CMS, but rather only applies to the professional rates paid by either Scope or Sparksoft to its employees. According to the government, that regulation governs the compensation provided to professional employees, not the prices charged to the agency for those employees’ work. The government also challenged the feasibility of conducting a realism analysis because offerors were not required to break out labor categories, hours, and hourly rates for the fixed-price portion of the quote.

Alternatively, the government argued that even if the plaintiff’s interpretation were correct, CMS resolved any ambiguity in the situation by informing bidders that it would not conduct price realism analyses on their entire quotes.

The court noted that the contract is priced almost entirely on a fixed-price basis, meaning the government will pay a flat fee for the IT services provided, regardless of the hours worked. However, this large fixed portion is virtually all for professional IT services performed by educated and trained individuals. The solicitation required offerors to provide their total compensation rates for professional employees, which they did. Both bidders also submitted the number of hours they expected the categories of identified employees to work for each of the contract years.

Accordingly, the court found that CMS possessed all of the information required to generate a realism analysis on the professional compensation proposed by both bidders – the proposed hours for each employee type, the proposed professional compensation ranges for each employee type, and the fringe benefit amount. Further, apart from the requirements of FAR § 52.222-46, CMS had reason to conduct a realism analysis due to Scope’s marked lowering of price—approximately 31 percent—compared to its original bid.

According to the court, while this drop would merit further investigation on its own, the fact the contract was composed almost entirely of professional services should have raised additional concerns for CMS. Essentially, because the great bulk of the contract was priced as a FFP and the FFP was almost entirely professional compensation, the court suggested Scope reduced its price by cutting into professional compensation rates, expected hours, and its own profit.

In fact, these changes did prompt CMS to raise concerns with Scope during the course of the procurement. Initially, Scope denied it had changed its level of effort or labor hours, but later the contractor stated that it had discounted its labor rates and reduced their fee in order to lower its price. The court found that these nebulous responses and the significant cuts to Scope’s proposed hours should have triggered CMS to conduct a realism analysis, even considering Scope’s decision to add back some hours and positions in its later revised quotation. The board explained that scaling back compensation along with positions and hours directly affects realism, and CMS should not have divorced the technical analysis from an evaluation of the realism of the professional compensation.

The court also found that CMS avoided the issue when it tried to argue that it informed the offerors that it would not conduct a price realism analysis. Due to the value of the contract and the nature of the work, the inclusion of and compliance with FAR § 52.222-46 is mandatory.

While the government argued CMS lacked the information needed to conduct a price realism analysis, the court noted that both offerors produced appendices to their briefs that showed how a price realism analysis could be completed with relative ease. Further, the court explained that performing a realism analysis on a range of compensation does not render the result without value. CMS could perform the analysis for the low, midpoint, and high professional compensation rates within the submitted ranges. At a minimum, such an analysis might indicate an offeror set its professional compensation ranges too low, which would present a risk to the government.

Finally, the court held that labeling a contract as “FFP,” when the contract requires almost entirely professional services, does not magically excuse the government from performing a realism evaluation of the proposed professional compensation rates.

The court concluded that CMS had an obligation to conduct a price realism analysis and that Sparksoft had demonstrated that it would be harmed if the agency did not. Accordingly, the court sustained the protest.

Sparksoft Corporation is represented by David B. Dixon and Meghan D. Doherty of Pillsbury Winthrop Shaw Pittman, LLP. The government is represented by Joshua A. Mandlebaum, Trial Attorney, Joseph H. Hunt, Assistant Attorney General, Civil Division, and Robert E. Kirschman, Jr., Director, and Patricia M. McCarthy, Assistant Director, Commercial Litigation Branch, Civil Division, Department of Justice. Scope Infotech Inc. is represented by Laurel A. Hockey, David S. Cohen, John J. O’Brien, and Daniel J. Strouse of Cordatis LLP.

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