(Editor’s Note. In this competitive marketplace, there are a lot of attempts to bid prices that “cheat the system”, resulting in “wage busting”, overly optimistic overhead projections and plain “buy ins”. These practices are particularly prevalent in professional services contracts where the solicitation lists total hours to be provided and offerors are asked to merely propose base salary rates, overhead and profit.
How do you compete in this environment? The following article identifies some practical measures you can take to lessen the impact of unfair competition for professional services. It is based upon an interesting article we found that was written in September 1998 in the Briefing Papers written by Louis Victorino and William Molinski of the law firm of Freid, Frank, Harris, Shriver & Jacobson. The insights are as valid today as when we wrote the article though we have updated some ideas to correspond to subsequent regulation changes (e.g. uncompensated overtime, notification requirements). Though the authors’ perspective is to protect contractors from “unfair” low bidders, we will address many of the methods bidders may use to gain an advantage and what other contractors can do to combat such tactics. The original article explicitly addresses professional services but we believe this article is quite relevant for other types of contracts.)
Compensation Plans
The offeror may promise to hire the highest quality professional, including a promise to hire the best of the incumbent’s personnel. The source selection official will often analyze the offeror’s compensation plan to determine if it is sufficient to attract and retain quality professionals.
The FAR 52.222-46, “Evaluation of Compensation for Professional Services” requires the submission of a compensation plan for solicitations of negotiated service contracts exceeding $550,000. The plan must set forth proposed salaries and fringe benefits for professional employees working on the contract as well as supporting data used to establish the compensation plan such as recognized salary surveys. The purpose of this requirement is to make sure that lower salaries do not make it difficult to attract and retain competent professionals so that the quality of service may be maintained. Should the CO fail to include this provision in the solicitation, you should raise this issue prior to the closing date for receipt of initial proposals.
The plan must be specific to the solicitation requirements. For example, if a contract specification requires proposed engineers to have 10 years experience with military software testing, it is not sufficient you demonstrate that software engineers can be hired at a given salary but you must demonstrate that professionals having the 10 years experience can be attracted and retained at the pay levels proposed. If you expect your proposed salary rates will be lower than the incumbent contractor, you need to be prepared to present special facts to explain your ability to offer lower rates and include them in the compensation plan. These facts may include (1) numerous recent hires at entry-level salaries (2) lower salaries in a different geographic area (3) downturn in the economy or lower-paid employees more readily available (4) special concessions offered by existing employees (5) unusual fringe benefit arrangements such as flexible working hours, “work-at-home” plans, daycare benefits, etc. Of particular importance will be historical evidence you have been able to hire quality professionals at the compensation proposed coupled with historical evidence you have not experienced excessive turnover.
Upon receipt of proposals, the source selection officials must review the compensation plans. The level of review will depend on how much the proposed rates deviate from those of the incumbent and the presence of language elevating the importance of the compensation plan. While proposed rates that are in line with incumbent salaries will most likely not require a detailed review, proposed rates considerably higher or lower will require a thorough review by procurement officials. A General Services Board of Contract Appeals case stated that compensation rates between 13 percent and 38 percent below the government’s estimate indicated the presence of “wage busting” and represented an inadequate compensation plan. Under recent changes to FAR 15, the government is obliged to apprise an offeror of perceived shortcomings with its compensation plan during the process of conducting discussions during its negotiations.
An adverse evaluation of the plan can affect a determination of whether the offeror is “responsible”. The failure to demonstrate it can attract or retain qualified personnel means the bidder lacks the resources to perform the work and hence is not a responsible offeror. An inadequate compensation plan can also be viewed as evidence of a failure to comprehend the complexity of work required, resulting in a lower technical evaluation. More commonly, if an offeror’s compensation plan is considered inadequate the government may adjust its proposed price upward to reflect more reasonable compensation rather than devalue its technical score. The increased use of “cost realism” analyses by the government on both cost and fixed price contracts has led to adjustments of “low ball” offers. If cost realism is a mandatory requirement of the solicitation, a “low ball” offer can be thrown out. You may want to request that a cost realism analysis be a mandatory requirement.
Key Employee Resumes
Since the government is largely buying time and expertise of professionals on these types of contracts, it needs information about the people each offeror proposes to use. This information is contained in resumes of key personnel.
Some competitors may use resumes to gain an advantage by proposing high-quality, high priced professionals for evaluation but using low-quality, low-priced individuals for actual performance. All government appeal boards and courts have strenuously denounced “bait and switch” tactics ruling that when quality of personnel is a key evaluation factor, a proposal may be rejected if the offeror (1) does not intend to use all of the proposed key personnel (2) does not affirmatively determine the availability of the key personnel or (3) fails to notify an agency in the final stage of a selection of the need to substitute key personnel due to hanged circumstances. A prerequisite for using a resume for a key personnel is that the offeror in fact makes an inquiry regarding future availability. It is not sufficient to merely review your personnel database to identify professionals with requisite skills. Once resumes have been submitted, you have a limited obligation to keep the CO apprised of changes in the status of proposed key personnel. This does not mean that all substitutions of personnel after award are prohibited as long as the awardee acted “reasonably and in good faith”. The Courts have ruled that hard evidence of bait and switch tactics include (1) failure to inquire about availability (2) affidavits from individuals whose resumes were submitted that the offeror failed to discuss the intended participation prior to proposed submissions (3) clear commitment of the individual to other work (4) use of labor rates wholly inconsistent with personnel proposed or (5) internal memorandum indicating intent not to use the personnel proposed.
Contractors are more effectively protected against “bait and switch” substitutions when the solicitation requires a formal commitment with each proposal of the availability and commitment of the persons whose
resumes are submitted. Such commitments often take the form of “certified” resumes and “letters of commitment”. A “certified” resume is typically defined as a resume signed by both the offeror and person represented certifying the information is true and complete and is available to work on the contract. “Letters of commitment” are letters from key personnel not employed at the time of offer that states they acknowledge their resume will be used in the offer and that they intend to accept a reasonable offer of employment should an award be made. Though non-incumbents often face a disadvantage in securing a workforce with relevant experience they, nonetheless, cannot expect to meet key employee listing requirements by promising to hire the incumbent’s key employees. They must either (a) contact the incumbent’s personnel and obtain permission to use their resumes or (b) offer other qualified personnel with their consent and advise the government you will consider incumbent personnel for any openings that may arise. contact the incumbent’s personnel and obtain permission to use their resumes or (b) offer other qualified personnel with their consent and advise the government you will consider incumbent personnel for any openings that may arise.
Uncompensated Overtime
Uncompensated overtime is defined as the hours worked in excess of 40 hours per week without additional compensation by employees exempt from the Fair Labor Standards Act who are directly charged to the contract. These employees are salaried executives, administrative or professional employees. A method of proposing low labor rates when salaries cannot be reduced is to require exempt employees to work overtime without additional compensation. Though there have been numerous proposals put forth and new audit guidelines issued from time to time the government still vacillates in its approach to uncompensated overtime. Proponents of using uncompensated overtime stress that it reduces the cost of services to the government through lowered labor rates while critics stress its unbridled use leads to dissatisfied workers, high employee turnover and a general reduction in quality. This difference of opinion is often reflected in some solicitations where it is often clear use of uncompensated overtime is not prohibited while in others offerors are often warned that proposing uncompensated overtime may result in an offer being downgraded technically. The Defense Department has stressed the potential for abuses citing examples of contractors who do not record overtime hours playing games by working one contract during normal hours (e.g. cost type) while another contract during the unrecorded time (fixed price or commercial). Auditors often provide conflicting guidance but commonly attempt to determine (a) whether contractors are charging all hours and when significant, urge them to do so (b) hours are allocated fairly among various contracts and (c) each hour worked is allocated its fair share of overhead costs. Government auditors have prescribed acceptable and non-acceptable methods that are beyond the scope of this article to cover.
A proposal that includes uncompensated overtime must be carefully reviewed. First, the proposal must conform to mandatory accounting rules. Second, the government must assure itself the proposed rates will be delivered. On fixed type contracts, there is less concern where the government will be primarily concerned that rates are not so low as to endanger performance. For cost-type contracts, unless uncompensated overtime can be compelled by agreement or rates are “capped”, there is considerable risk the government will not realize the benefits. Third, source selection officials must ensure the level of uncompensated overtime will not lower the quality by the offeror “buying-in”. Lastly, source selection officials may perform “cost realism” analyses where it is determined that performance may suffer or uncompensated overtime rates cannot be compelled, it may adjust proposed rates. However, adjustment to rates cannot be made under cost realism reviews unless these two conditions are met.
Recommendations
2. If you suspect your competitors are paying or planning to pay significantly less than you, make sure your compensation plan surveys address geographic area, company size and professional expertise. Provide a narrative describing trends or developments that would make your competitors’ low wages unrealistic (e.g. statistics showing a shortage of professionals in relevant disciplines).
5. Prior to submitting employee resumes, make sure the proposed professionals are available to work on the contract. If an employee must relocate, you should contact them to verify their willingness to do so and document the agreement by an internal memorandum or a signed statement.
8. If a competitor is selected, request a debriefing and attempt to obtain names of the key professionals. If you are the incumbent, ask employees if they were contacted. If your attorney doesn’t object, consider contacting non-employee personnel the competitor relied upon and determine their level of precommitment.
9. Monitor the awardee to determine if the assigned professionals match the resumes of personnel submitted. If not, consider filing a protest.
10. If you or your subcontractors plan on using uncompensated overtime, make sure that (a) you estimate overtime in the same way uncompensated overtime is accounted for and reported in your accounting system (2) the resulting workload will not render performance risky due to loss of key personnel or inefficiencies and (3) you and your subcontractor’s use of uncompensated overtime is delineated in your proposal.
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