The Government Accountability Office (“GAO”) recently published its decision in a two protester challenge to cost realism adjustments made by the Navy during its evaluation of final proposal revisions (“FPRs”) for a base operations and administrative support services contract. In that decision, the GAO affirmed the Navy’s decision to adjust upward the proposed costs in the protesters’ cost proposals where the agency concluded that the protesters’ explanations for their rate reductions were inadequate. While the substance of the GAO’s decision is fairly unremarkable, it serves as a reminder to the contractor community that proposed costs for any cost-type contract, and proposal revisions in general, must be accompanied by sufficient explanation.

As background, the Navy began soliciting proposals in 2011 for an IDIQ contract with cost- and fixed price-type elements to provide a customer support center, systems administration, and network security support at its computer data center in New Orleans, Louisiana. The RFP contemplated a best value award decision, and the evaluation of the reasonableness and realism of offerors’ proposed cost/price. Of note, the RFP warned that the Navy could adjust proposed costs based on the results of this evaluation. Following two rounds of post-award protests and corrective action, the Navy issued an amended RFP in 2013. Recognizing that the initial awardee’s evaluated cost had been disclosed to offerors, the Navy’s amendment warned offerors that if their proposed costs were lower than the costs they originally submitted, they would “need to provide [a] rationale to support [the] lower price.”

The two protestors — KNWEBS, Inc. d/b/a CSI, Inc. (“CSI”) and Visual Awareness Technologies and Consulting, Inc. (“VATC”) — submitted FPRs with a lower proposed cost based, in part, on lower labor rates, professional escalation rates, and indirect cost rates. CSI and VATC offered some explanation in their FPRs for these reductions. However, the Navy refused to accept these explanations and adjusted the protestors’ proposed costs upward by approximately 13 and 20 percent, respectively.

In resolving CSI and VATC’s challenge to the cost realism adjustments, the GAO sided with the Navy with respect to each of the challenged adjustments. Concerning the professional escalation rates, the GAO found the agency’s consideration of a protester’s initially-proposed rates to be consistent with the cost realism provisions in Part 15 of the FAR. It further determined that the lack of detailed explanation concerning the reduced rates supported the agency’s conclusion that they were not realistic. Likewise, the GAO agreed with the Navy’s conclusion that a “generic, nonspecific citation to market research” and “salary surveys” did not justify a reduction in direct labor rates because the protester “did not identify the surveys it cited or provide other specific data.”

This decision serves as a warning to offerors preparing cost proposals and proposal revisions that explanation is critical. As illustrated here, a high-level or generic explanation may not be sufficient to justify a lower proposed cost or other proposal adjustments.