TITLE: B-298912, Magellan Health Services, January 5, 2007
BNUMBER: B-298912
DATE: January 5, 2007
***************************************************
B-298912, Magellan Health Services, January 5, 2007
DOCUMENT FOR PUBLIC RELEASE
The decision issued on the date below was subject to a GAO Protective
Order. This redacted version has been approved for public release.
Decision
Matter of: Magellan Health Services
File: B-298912
Date: January 5, 2007
Howard J. Stanislawski, Esq., Patrick K. O'Keefe, Esq., Joel Singer, Esq.,
and Patrick F. Linehan, Esq., Sidley Austin LLP, for the protester.
Joseph J. Petrillo, Esq., and Karen D. Powell, Esq., Petrillo & Powell,
P.L.L.C.; and John S. Pachter, Esq., Jonathan D. Shaffer, Esq., Stephanie
D. Capps, Esq., and Mary Pat Gregory, Esq., Smith Pachter McWhorter PLC,
for Ceridian Corporation, an intervenor.
Douglas Kornreich, Esq., Department of Health and Human Services, for the
agency.
Louis A. Chiarella, Esq., and Christine S. Melody, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
1. Protest challenging agency's evaluation of technical proposals is
denied where the record establishes that the evaluation was reasonable and
consistent with the evaluation criteria.
2. Agency's cost realism evaluation of awardee's proposal was unreasonable
where agency failed to take into account cost adjustments made by its own
cost analyst to awardee's proposal, and instead utilized awardee's
proposed costs as the basis for its source selection decision.
3. Agency's cost realism evaluation of awardee's proposal was improper
where, although knowing that awardee had proposed to recruit the incumbent
workforce and match all existing salaries but had also failed to propose
direct labor rates consistent with existing salaries, agency failed to
adjust awardee's proposed labor rates as part of its cost realism
evaluation.
4. Protest challenging adequacy of agency's "best value" source selection
decision is sustained where there is insufficient information and analysis
in the record, which includes both a contemporaneous source selection
document and a post-protest statement, to determine that the selection
official's key conclusion of technical equality, notwithstanding the
higher technical rating assigned to the protester's proposal, was
reasonable.
DECISION
Magellan Health Services protests the award of a contract to Ceridian
Corporation under request for proposals (RFP) No. 05FOHEAP, issued by the
Division of Federal Occupational Health (FOH), Department of Health and
Human Services (HHS), for employee assistance program (EAP) services.
Magellan, the incumbent contractor, argues that the agency's evaluation of
offerors' technical proposals, as well as the agency's evaluation of
Ceridian's cost proposal, were unreasonable. Magellan also protests that
the agency's source selection decision was improper, insofar as the agency
failed to document the basis for its conclusion that the higher-rated
Magellan proposal and the lower-rated Ceridian proposal were technically
equal as part of its "best value" determination.
We sustain the protest.
BACKGROUND
FOH, a component of HHS, is the federal agency with responsibility for
developing and maintaining prevention, intervention, and rehabilitation
programs and services for federal employees who have alcohol and/or other
problems. To fulfill this mission, FOH designs various occupational health
services, including workplace-based behavioral health services, to promote
and maintain the physical and mental health of federal employees. RFP
Statement of Work (SOW) sect. C.I.A. EAP is the occupational health
program by which FOH provides behavioral health services to approximately
400 federal agencies, departments, and other governmental organizations,
and the estimated 1,350,000 employees of those entities and their family
members, at locations throughout the United States, as well as certain
international locations. Agency Report (AR), Nov. 1, 2006, at 2; Protest
at 2.
The RFP, issued on September 8, 2005, contemplated the award of a
cost-plus-fixed-fee contract for a base year, together with four 1-year
options, for the required EAP services. RFP sect. L.1. In general terms,
the SOW required the contractor to provide all personnel and equipment
necessary to perform the EAP services needed to assist employees in their
efforts to resolve personal problems that may adversely affect work
performance "in the quickest, least restrictive, most convenient, and
least costly manner while strictly respecting clients' confidentiality."
SOW sect. C.I.D.1.
The RFP established three evaluation factors: technical; small
disadvantaged business (SDB) participation plan; and cost. RFP sect.
M.3.4. The technical factor in turn consisted of four subfactors, with
various assigned point weights: technical approach and management plan (40
points); key personnel and personnel management (25 points); past
performance (20 points); and continuous quality improvement process (15
points). RFP sect. M.5.A. The SDB participation plan factor was worth 5
points. RFP sect. M.4. The RFP expressed the relative importance of the
evaluation factors as follows:
The technical proposal (including the Small Disadvantaged Business (SDB)
Plan) will receive paramount consideration in the selection of the
Contractor(s) for this acquisition, although estimated cost will also be
considered. In the event that the technical evaluation reveals that two
or more Offerors are approximately equal in technical ability, then the
estimated cost, and SDB Plan of the Offeror will become paramount.
RFP sect. M.2. Award was to be made to the responsible offeror whose
proposal was determined most advantageous to the government based on
consideration of all evaluation factors. RFP sect. M.3.4.
Five offerors, including Magellan and Ceridian, submitted proposals
(consisting of separate technical and business proposals) by the November
9 closing date. An agency technical evaluation panel (TEP) evaluated
offerors' technical proposals and determined that four, including
Magellan's and Ceridian's, were technically acceptable. AR, Tab 6, TEP
Technical Report, Dec. 19, 2005, at 3. The TEP later also reviewed
offerors' business proposals, while other agency employees evaluated
offerors' past performance, SDB participation plans, and proposed costs.
Based on consideration of all evaluation factors, the contracting officer
determined that four offerors' proposals, including those of Magellan and
Ceridian, were within the competitive range. Id., Tab 14, Competitive
Range Determination, Mar. 15, 2006. The agency held discussions with the
offerors whose proposals were in the competitive range.
HHS received revised proposals from only three offerors. The agency
evaluated the revised proposals and made a second competitive range
determination consisting of the proposals of Magellan and Ceridian. Id.,
Tab 23, Competitive Range Determination, June 1, 2006. HHS held additional
discussions with Magellan and Ceridian, and both offerors submitted final
proposal revisions (FPR) by the August 11, 2006, closing date. The agency
then evaluated the offerors' FPRs, with final ratings and proposed costs
for Magellan and Ceridian as follows:
+------------------------------------------------------------------------+
| Factor | Magellan | Ceridian |
|---------------------------------+-------------------+------------------|
|Technical | | |
|---------------------------------+-------------------+------------------|
|Technical Approach (40) | 39.66 | 35.92 |
|---------------------------------+-------------------+------------------|
|Key Personnel (25) | 24.42 | 22.66 |
|---------------------------------+-------------------+------------------|
|Past Performance (20) | 20.00 | 19.00 |
|---------------------------------+-------------------+------------------|
|Quality Improvement (15) | 15.00 | 15.00 |
|---------------------------------+-------------------+------------------|
|Overall (100) | 99.08 | 92.58[1] |
|---------------------------------+-------------------+------------------|
|SDB Participation Plan (5) | 5.00 | 4.75 |
|---------------------------------+-------------------+------------------|
|Total Point Score | 104.08 | 97.33 |
|---------------------------------+-------------------+------------------|
|Proposed Cost | $170,090,773 | $150,163,847 |
+------------------------------------------------------------------------+
Id., Tab 33, TEP Technical and Business Review Report, Aug. 28, 2006; Tab
31, SDB Participation Plan Evaluation, Aug. 15, 2006; Tab 35, Source
Selection Decision.
The contracting officer subsequently determined that Ceridian's
lower-rated, lower-cost proposal represented the best value to the agency
and made award to Ceridian. Id., Tab 35, Source Selection Decision, at 28.
This protest followed.
DISCUSSION
Magellan's protest raises numerous issues regarding the agency's
evaluation of proposals and subsequent source selection determination.
Magellan alleges that the agency's evaluation of Ceridian's technical
proposal was improper,[2] and that HHS's cost realism evaluation of
Ceridian's proposal was unreasonable. Magellan also argues that the
agency's source selection decision was improper because, as part of the
determination that Ceridian's lower-rated, lower-cost proposal represented
the best value to the government, the agency failed to document its
apparent key conclusion that the proposals of the two offerors were
technically equal notwithstanding the difference in technical ratings.
As detailed below, we find no basis to question the agency's evaluation of
Ceridian's technical proposal. However, with regard to the agency's cost
realism evaluation of Ceridian's proposal, the record shows that the
evaluation was unreasonable in several ways. Further, the record indicates
that HHS failed to document how, as part of its source selection decision,
it determined the lower-rated proposal of Ceridian to be technically
equivalent to the higher-rated proposal of Magellan.
Technical Evaluation of Ceridian's Proposal
Magellan argues that the agency's evaluation of Ceridian was not
adequately documented, that Ceridian's proposal failed to meet mandatory
RFP requirements, and that Ceridian's proposal had various deficiencies
that were not properly reflected in its point score. Although we do not
here specifically address all of Magellan's arguments about the evaluation
of Ceridian's technical proposal, we have fully considered all of them and
find that they afford no basis to sustain the protest.
In arguing that Ceridian's technical proposal was not adequately
documented, the protester contends that the evaluation record provides no
explanation as to how the TEP evaluators translated their findings of
strengths and weaknesses into point scores. We disagree.
In reviewing an agency's evaluation, we will not reevaluate technical
proposals; instead, we will examine the agency's evaluation to ensure that
it was reasonable and consistent with the solicitation's stated evaluation
criteria and procurement statutes and regulations, and adequately
documented. Urban-Meridian Joint Venture, B-287168, B-287168.2, May 7,
2001, 2001 CPD para. 91 at 2. When utilizing a point score evaluation
rating system, an agency need not demonstrate with mathematical certainty
how the rating was derived, but rather need only show that the rating was
consistent with the solicitation's stated evaluation criteria and
supporting documentation. An offeror's mere disagreement with the agency's
evaluation is not sufficient to render the evaluation unreasonable.
Ben-Mar Enters., Inc., B-295781, Apr. 7, 2005, 2005 CPD para. 68 at 7. Our
review of the record here shows the agency's evaluation of Ceridian's
technical proposal to be unobjectionable.
The TEP conducted its evaluation by having each evaluator separately
assess each offeror's proposal under the technical subfactors. The record
indicates that the TEP members had a narrative description of each
technical subfactor criterion, including a list of discrete SOW
requirements, when conducting their evaluations. Each TEP evaluator
documented his or her findings (i.e., strengths and weaknesses) for each
offeror's proposal by evaluation subfactor, and assigned point scores in
relation to the maximum points available. A TEP consensus determination of
evaluation findings and ratings of each proposal was then developed. AR,
Tab 6, TEP Technical Report, Dec. 19, 2005, at 3, 9-15. For example, the
TEP found a total of 34 strengths and 12 weaknesses in Ceridian's initial
proposal under the technical approach and management plan subfactor as
part of determining the offeror's assigned rating here. Id.
The TEP evaluated Ceridian's revised proposal, and later its FPR, in a
similar fashion (on these occasions the TEP noted only the proposals' new
strengths as well as new and/or continued weaknesses). Again the record
includes the worksheets showing how each evaluator rated Ceridian's
revised proposal and FPR under each technical subfactor, including where
the offeror's proposal responded to previously-identified weaknesses. Id.,
Tab 19, TEP Technical Report, May 2, 2006; Tab 33, TEP Technical and
Business Review Report, Aug. 28, 2006.
We find that the TEP evaluation ratings of Ceridian's proposal were
adequately documented and consistent with the identified strengths and
weaknesses. First, the protester's focus on the offerors' ratings is
misplaced, as point scores and adjectival ratings are but guides to, and
not substitutes for, intelligent decision-making. TPL, Inc., B-297136.10,
B-297136.11, June 29, 2006, 2006 CPD para. 104 at 17. Further, there is
simply no requirement that the record contain an explanation, as Magellan
contends here, of how the agency evaluators translated individual
strengths and weaknesses into point scores, only that the point scores be
adequately supported in order to determine their reasonableness.
Magellan also argues that Ceridian's technical proposal failed to meet
numerous RFP requirements and should have been rejected as technically
unacceptable. For example, Magellan alleges that Ceridian's proposal
failed to address SOW sect. C.II.A.2.b ("The Contractor shall identify
qualified SAPs [substance abuse professionals] who are conveniently
located to employee worksites. A complete list of all SAPs shall be
submitted . . . within thirty (30) days of contract award . . . ."), as
well as sect. C.II.A.14 ("The Contractor shall design and conduct a
promotional campaign . . . . The promotional campaign is to be designed
and submitted . . . within 60 days after contract award and updated
annually thereafter").[3] The protester also argues that the agency's
evaluation of Ceridian's proposal ignored various deficiencies that the
agency had itself identified and that the awardee failed to address.
As a preliminary matter, the record indicates that all of the specific SOW
provisions to which Magellan refers apply to "contractor" requirements.[4]
For example, as noted above, the relevant SOW provision states only that
the contractor is to identify qualified substance abuse professionals who
are conveniently located to employee worksites, and submit a complete
listing within 30 days of contract award. Rather than establishing a
proposal requirement, this language establishes that the provision was
intended only to require designation of the substance abuse professionals
after award. See Citrus College; KEI Pearson, Inc., B-293543 et al.,
Apr. 9, 2004, 2004 CPD para. 104 at 3.
In any event, we find Magellan's assertion that Ceridian's technical
proposal failed to address various SOW requirements to be factually
inaccurate. The record clearly establishes that Ceridian's revised
proposal and/or FPR addressed each of the SOW requirements that Magellan
claims were lacking. For example, Ceridian's FPR stated in relevant part
that "Ceridian will submit a complete list of all SAPs . . . within
30 days of contract award,"[5] AR, Tab 29, Ceridian's FPR, Vol. I,
Technical Proposal, at 1-25, and that Ceridian will work with FOH to
develop annual promotional plans and materials. Id. at 1-110 to 1-115; see
also Tab 4, Ceridian's Proposal, Vol. I, Technical Proposal, attach. B,
FOH EAP Program Deliverable Schedule, at 11 (Ceridian shall "design a
promotional campaign and update it annually . . . and submit [it] within
60 days after contract award"). Similarly, the record also indicates that,
contrary to the protester's assertions, Ceridian fully addressed the
weaknesses identified in its initial technical proposal, and the TEP took
this information into account when evaluating the awardee's FPR. The fact
that Ceridian's initial proposal had various perceived weaknesses is
simply not determinative of whether the agency's technical evaluation of
Ceridian's final proposal was reasonable, since Ceridian addressed those
weaknesses in its subsequent submissions.
Cost Realism Evaluation of Ceridian's Proposal
Magellan asserts that HHS failed to perform a reasonable cost realism
evaluation of Ceridian's proposal. As the protester points out, the
solicitation required the agency to perform a cost realism analysis to
determine the extent to which an offeror's proposed costs represent what
the government realistically expects to pay for the proposed effort. By
contrast, Magellan alleges, HHS did not take into account the fact that
Ceridian's cost proposal failed to propose the required level of effort,
and understated its direct labor rates while also proposing to pay
existing employee salaries. The protester maintains that the agency's
failure to reasonably determine Ceridian's realistic costs adversely
affected the agency's resulting source selection decision.
The RFP instructed offerors to base their cost proposals on cost tables
included with the solicitation. RFP sect. L.9. The cost tables, one for
the base year and each option year, included various direct labor
categories as well as estimated quantities of hours for each labor
category. For example, the Field Consultant labor category had an
estimated quantity of 256,495 hours per year, and the Field Counselor
labor category had an estimated quantity of 91,416 hours per year.[6] RFP
amend. 1, attach. 7, Pricing Tables for Section B, at 2. The RFP also
advised offerors that the levels of effort set forth in the cost tables
represented HHS's current estimates for the base year and option year
requirements for the required EAP services, and that as part of their
proposals, offerors were required to propose costs for the levels of
effort stipulated in each of these tables. RFP sect. B.1.a.
The RFP also informed the offerors how the agency planned to evaluate cost
proposals:
The Offeror, at a minimum, must submit a cost proposal fully supported
by cost and pricing data in sufficient detail to allow the Government to
complete a cost analysis which establishes the reasonableness of the
proposed costs. A complete cost and complete cost breakdown in support
of Section B Tables shall be furnished by the Offeror.
RFP sect. L.9.
Ceridian, as part of its revised proposal, generally accepted the agency's
estimated levels of effort for the various labor categories with the
exception of the field consultant and field counselor categories. Here,
Ceridian proposed levels of effort that were somewhat lower than the HHS
estimates.[7] AR, Tab 18, Ceridian's Revised Proposal, Vol. II, Business
Proposal, at Tables I -- V. Ceridian's revised proposal also utilized base
year direct labor rates of $[DELETED] per hour for field consultants and
$[DELETED] per hour for field counselors. Id. at Table I.
The agency performed several cost evaluations of Ceridian's revised
proposal. An FOH business review found that Ceridian's failure to use the
RFP-specified direct labor hours in its cost proposal necessitated an
evaluated cost increase of $1,106,799.[8] Id., Tab 20, FOH Business
Report, May 15, 2006, at 4-5. Additionally, the TEP completed a business
review of each offeror's revised cost proposal, and with regard to
Ceridian's proposed labor rates stated:
FOH has knowingly approved, under the current contract, average labor
rates for the Key Personnel categories of counselors and consultants
that are higher than industry standard. This is in recognition of
demonstrated capabilities and performance of high quality that are
difficult to find. If Ceridian is to recruit and retain these staff, it
is likely that Ceridian will have to pay higher rates than proposed.
Consequently, direct labor costs may be significantly higher than
proposed or Ceridian may not successfully recruit sufficient staff
experienced in serving FOH customers in the highly specialized manner
required. Ceridian then would have to recruit and train more
inexperienced staff than projected in the proposal. The more new staff
recruited, the greater the risk of decreased quality of service that is
unacceptable to customer organizations.
FOH notes that Ceridian has not provided letters of commitment from
current experienced consultants and counselors at the proposed rates of
pay, and recommends that Ceridian reconsider what rates will be
necessary to attract and retain sufficient numbers of these experienced
high performing staff and/or adequately describe how the high quality of
service required by FOH's customer organizations will be ensured.
Id., Tab 24, TEP Business Review Report, June 13, 2006, at 4.
The TEP also directed comments to the agency's cost analyst regarding the
shortcomings it perceived in Ceridian's proposed labor rates, stating:
Direct Labor rates will need to be adequate for the successful offeror
to recruit/retain sufficient numbers of the highly capable and highly
performing current Counselors and Consultants for the services to be
acceptable to FOH's customer organizations. Customer organizations have
demonstrated exceptional loyalty to the FOH EAP because of their
recognition of the exemplary service they have received from these
critical staff, who were designated as Key Personnel for this contract.
A significant factor in the successful offeror's ability to
recruit/retain these key staff is the ability to pay staff reasonably
commensurate with their performance and historical reimbursement they
have received. The IGCE [independent government cost estimate] was based
on FOH's extensive experience in developing budgets that are required to
recruit and retain sufficient numbers of high performing Counselors and
Consultants. Ceridian is not knowledgeable of current staff performance
levels or their current rates of pay and thus has proposed direct labor
rates that are inadequate as indicated below by the variances from the
IGCE. For this comparison, the IGCE has been adjusted upward by 2% to
account for the delay in start date since the IGCE anticipated a start
date in 2005:
Base year (where retention is key):
a. a. Field consultants -- Ceridian $[DELETED]/hr; IGCE $[DELETED].
Ceridian expects to offer one time signing bonuses and to hire
[DELETED] of the 199 consultants and counselors. Total cost
difference for Base Year = $[DELETED].
b. b. Field counselors -- Ceridian $[DELETED]/hr; IGCE $[DELETED].
Total cost difference for Base Year = $[DELETED].
Based on the RFP specified level of effort for these two categories of
Key Personnel, the total difference in proposed Base Year direct costs
is $1,154,701.[9]
Overhead and G&A costs would need to be added to these direct costs to
calculate the total difference in proposed costs. Additionally, since
the above calculation only considers the Base Year, these costs would be
significantly higher over the five year life of the contract. The
proposed signing bonus is not likely to be sufficient incentive to
recruit these Key Personnel because of the significant reduction in pay
they would be offered.
This review team believes that Ceridian would need to significantly
increase the direct labor costs proposed for these two categories of Key
Personnel if they are to successfully deliver the performance required
under this contract.
Id. at 10-11.
In its FPR, Ceridian responded to the agency's expressed concern regarding
its ability to attract and retain high quality staffing. The agency's
specific inquiry and Ceridian's response thereto are as follows:
1. FOH notes that Ceridian has not provided letters of commitment from
current experienced consultants and counselors at the proposed rates of
pay, and recommends that Ceridian reconsider what rates will be
necessary to attract and retain sufficient numbers of these experienced
high performing staff and/or adequately describe how the high quality of
service required by FOH's customer organizations will be ensured.
Ceridian understands that there are top performers that FOH wants to
retain, and that in order to ensure a smooth transition of the services,
we would want/need to retain as many existing field employees as
possible.
In order for this to occur, Ceridian will match all existing salaries of
the field employees plus increase them by [DELETED]% for the standard
merit increase.
Id., Tab 29, Ceridian's FPR, Vol. II, Business Proposal, at 29.
Ceridian's cost proposal, however, did not adjust the proposed direct
labor rates for field consultants and field counselors. Rather, as with
its revised proposal, Ceridian's FPR set forth base period direct pay
rates of $[DELETED] per hour for field consultants and $[DELETED] per hour
for field counselors. Ceridian's FPR also did not alter the number of
hours proposed for the field consultant and field counselor labor
categories. Additionally, Ceridian proposed that its overhead rate
([DELETED] percent) and general and administrative expenses (G&A) rate
([DELETED] percent) would be ceilings, or caps. Id. at 29, Table I.
The agency was aware that Ceridian's proposed pay rates (of $[DELETED] per
hour for field consultants and $[DELETED] per hour for field counselors)
were not in fact the existing salaries for these field employees.
Specifically, HHS knew that Magellan's FPR had proposed its incumbent
workforce using current salary levels, which were $[DELETED] per hour for
field consultants and $[DELETED] per hour for field counselors.[10] Id.,
Tab 28, Magellan's FPR, Vol. II, Business Proposal, at sections 3.1.4,
3.3.1, Table I. Further, the agency verified the accuracy of Magellan's
proposed direct labor rates against employee earning statements. Id., Tab
32, Cost Evaluation of Magellan's FPR, at 9, 27. These pay rates were even
higher than those in the IGCE used by the TEP as part of its business
review to determine that Ceridian's pay rates were too low to successfully
deliver the performance required by the RFP.
HHS then performed a cost evaluation of Ceridian's FPR. As with previous
cost reviews, the cost evaluation found that Ceridian had not proposed
sufficient levels of effort for the field consultant and field counselor
labor categories. The cost analyst determined that Ceridian's understated
levels of effort should result in an adjustment of $[DELETED] in direct
costs and $[DELETED] in associated overhead.[11] Id., Tab 34, Cost
Evaluation of Ceridian's FPR, at 2. The HHS cost evaluation did not,
however, make any adjustments to Ceridian's proposed direct labor rates,
including those for the field consultant and field counselor labor
categories. In support of this decision the cost analyst stated:
The offeror provided a copy of his 2006 salary rate structure which
shows the targeted reference point for employees' salaries. We verified
the proposed rates to the ranges shown in the salary rate structure
provided by the offeror, matching each labor category to the zone and
grade shown in the documentation. We consider the offeror's proposed
labor rates to be acceptable for the purpose of establishing a budget
for direct labor.
Id. at 3. While having made various adjustments to Ceridian's proposed
costs, the agency's cost analyst nevertheless did not develop a total,
bottom-line evaluated cost for the offeror's proposal. Id. at 2.
The contracting officer subsequently reviewed Magellan's and Ceridian's
proposed costs by major cost element (i.e., direct labor, other direct
costs, overhead) and performance period as part of her source selection
decision. Id., Tab 35, Source Selection Decision, at 8-19. While expressly
accepting the cost analyst's finding that Ceridian's FPR had failed to
propose the government-estimated levels of effort for the field consultant
and field counselor labor categories as part of its direct labor costs,
id. at 9, the contracting officer did not consider the corresponding cost
adjustment to Ceridian's proposal, or address the concerns expressed by
the TEP business review that Ceridian's direct labor rates for the two key
field labor categories needed to be "significantly increase[d]." Id., Tab
24, TEP Business Review Report, June 13, 2006, at 11. Instead, for
purposes of the agency's award determination the contracting officer
considered only the offerors' proposed costs.[12] Id., Tab 35, Source
Selection Decision, at 2, 8, 15, 28.
When an agency evaluates proposals for the award of a cost-reimbursement
contract, an offeror's proposed estimated cost of contract performance is
not considered controlling since, regardless of the costs proposed by the
offeror, the government is bound to pay the contractor its actual and
allowable costs. Metro Mach. Corp., B-295744, B-295744.2, Apr. 21, 2005,
2005 CPD para. 112 at 9; Hanford Envtl. Health Found., B-292858.2,
B-292858.5, Apr. 7, 2004, 2004 CPD para. 164 at 9; see FAR sect. 16.301.
Consequently, a cost realism analysis must be performed by the agency to
determine the extent to which an offeror's proposed costs represent what
the contract costs are likely to be under the offeror's technical
approach, assuming reasonable economy and efficiency. FAR sections
15.305(a)(1), 15.404-1(d)(1), (2); The Futures Group Int'l, B-281274.2,
Mar. 3, 1999, 2000 CPD para. 147 at 3.
A cost realism analysis is the process of independently reviewing and
evaluating specific elements of each offeror's cost estimate to determine
whether the estimated proposed cost elements 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 proposal. FAR sect. 15.404-1(d)(1); Advanced Comms. Sys.,
Inc., B-283650 et al., Dec. 16, 1999, 2000 CPD para. 3 at 5. An offeror's
proposed costs should be adjusted when appropriate based on the results of
the cost realism analysis.[13] FAR sect. 15.404-1(d)(2)(ii). Our review of
an agency's cost realism evaluation is limited to determining whether the
cost analysis is reasonably based and not arbitrary. Jacobs COGEMA, LLC,
B-290125.2, B-290125.3, Dec. 18, 2002, 2003 CPD para. 16 at 26. For the
reasons set forth below, we find that the agency failed to conduct a
proper cost realism analysis of Ceridian's proposal.
As a preliminary matter, although Ceridian's proposal included a fixed fee
amount of $[DELETED] (based on a rate of [DELETED] percent of the
offeror's proposed costs), the cost analyst removed the offeror's entire
proposed fee amount from his cost analysis, believing that "[t]he
determination of an acceptable fee is left to the discretion of the
Contracting Officer." AR, Tab 34, Cost Evaluation of Ceridian's FPR, at 7.
As the purpose of a cost realism analysis is to determine how well the
proposed costs and profit represent the cost of the contract, FAR
sect. 15.404-1(c)(1), it was improper to omit Ceridian's proposed fixed
fee from the cost realism analysis. Similarly, the agency's cost analysis
removed $[DELETED] in employee signing bonuses and $[DELETED] in
educational materials from Ceridian's FPR because "the offeror was unable
to provide supporting documentation" for these amounts. [14] AR, Tab 34,
Cost Evaluation of Ceridian's FPR, at 5. An agency's cost realism
evaluation is to consider whether an offeror's proposed costs
realistically reflect the costs to perform the work as proposed, and
proposed costs should be adjusted downward only if the agency concludes
that actual costs will likely be lower than proposed, not because the
proposed costs are insufficiently supported by invoices or other means.
Accordingly, these downward adjustments to Ceridian's proposed costs were
also improper.
Further, HHS's cost realism evaluation of Ceridian's proposal was
unreasonable because the contracting officer failed to take into account
the cost adjustments recommended by the agency's own cost evaluation, and
instead considered only the offeror's proposed costs in the source
selection decision. As shown above, the contracting officer accepted the
cost analyst's finding that Ceridian had failed to propose sufficient
levels of effort for the field consultant and field counselor labor
categories as part of its direct labor costs. The contracting officer,
however, failed to consider the corresponding cost adjustments of more
than $1 million to Ceridian's proposed cost.[15] In fact, the contracting
officer failed to consider anything other than the offerors' proposed
costs in her source selection decision.[16] When an agency determines that
adjustments to an offeror's proposed costs are in fact necessary, the
agency must then base its source selection decision on the offeror's
adjusted cost. FAR sect. 15.404-1(d)(2)(i) ("The probable cost shall be
used for purposes of evaluation to determine the best value"); see Eigen,
supra (holding that an agency's source selection decision must be based on
the actual cost difference between offerors' proposals).
Even more significantly, the agency's cost realism evaluation of
Ceridian's proposal was also unreasonable with regard to the offeror's
proposed direct labor rates for the field consultant and field counselor
labor categories. As detailed above, Ceridian's FPR expressly agreed to
match existing salaries as part of its effort to attract and retain as
many existing EAP field employees as possible. Nevertheless, Ceridian's
proposed direct labor rates (of $[DELETED] per hour for field consultants
and $[DELETED] per hour for field counselors) did not reflect the
incumbent employees' existing salaries (of $[DELETED] per hour for field
consultants and $[DELETED] per hour for field counselors). Moreover, HHS
was aware of both the existing salary rates and the discrepancy between
these rates and Ceridian's proposed labor rates (which were also
substantially lower than the rates in the agency's own IGCE, for that
matter). On this record, the agency's failure to make any adjustment here
to Ceridian's proposed costs was improper.
The agency argues that its cost evaluation of Ceridian's proposal here was
reasonable. HHS points to the fact that the agency cost analyst
specifically reviewed Ceridian's proposed direct labor rates and
determined that no adjustments were necessary. AR, Nov. 1, 2006, at 4-5.
We disagree.
As set forth above, HHS's cost evaluation did not take exception to any of
Ceridian's proposed direct labor rates because it determined that
Ceridian's proposed rates were supported by the offeror's current salary
structure. There is no evidence in the record, however, that the agency
cost analyst also considered what Ceridian had actually proposed to do
here--to "match all existing salaries of the field employees plus increase
them by [DELETED]% for the standard merit increase." Id., Tab 29,
Ceridian's FPR, Vol. II, Business Proposal, at 29. Since Ceridian had
proposed to match all existing field employee salaries, a proper cost
realism analysis would compare Ceridian's proposed hourly rates to the
incumbent employees' current pay rates, and adjust accordingly.[17] Quite
simply, an offeror's current salary structure is irrelevant to its
probable costs if, as is the case here, the current salary structure is
not what the offeror is proposing to use.
The HHS cost evaluation of Ceridian's FPR also fails to explain how the
offeror's proposed labor rates were realistic when the agency's own
business review of proposals recognized that Ceridian's labor rates were
not sufficient to permit it to perform as proposed. As set forth above,
the TEP clearly recognized the internal inconsistency between what
Ceridian was proposing (i.e., being able to attract and retain a
high-performance organization) and what Ceridian's cost proposal
represented. Id., Tab 24, TEP Business Review Report, June 13, 2006, at 4.
The TEP then expressly pointed out to the agency cost analyst that
Ceridian's labor rates here were substantially below the IGCE--amounts
which the TEP believed were required to recruit and retain a sufficient
number of high performing counselors and consultants. The TEP also
concluded that Ceridian would need to substantially increase the direct
labor rates proposed for these two key personnel categories if the offeror
was to successfully deliver the performance required under this contract.
Id. at 10. Notwithstanding the TEP's realism analysis of Ceridian's
proposal here, the record indicates that the HHS cost analyst and
contracting officer do not appear to have considered this information in
the cost evaluation of Ceridian's FPR and source selection decision,
respectively.
The agency does not deny that Ceridian's FPR failed to reflect the
existing salaries for the field employees that it expressly agreed to
match. Nevertheless, HHS also argues that Ceridian's cost proposal was
reasonable because it was based on the best information available to the
offeror. Specifically,
the rate of compensation offered by Magellan was not publicly available
to other offerors. . . . An offeror must find an acceptable method to
estimate labor costs based on its most probable cost. Here, Ceridian
used its own actual cost experience for the same type of staff, as the
government cost analyst found.
AR, Nov. 27, 2006, at 5.
The agency's argument here reflects a fundamental misunderstanding of what
is required as part of a cost realism evaluation. A cost realism
evaluation implements an agency's obligation to guard against unsupported
claims of cost savings by determining whether the costs as proposed
represent what the government realistically expects to pay for the
proposed effort, based on the information reasonably available to the
agency at the time of its evaluation. See Metro Mach. Corp., B-297879.2,
May 3, 2006, 2006 CPD para. 80 at 9. HHS was fully aware of the incumbent
employees' existing salaries, and that Ceridian's proposed pay rates were
substantially less than the existing salaries (as well as the agency's own
IGCE). The agency's contention here that Ceridian's proposed costs were
based on the best information available to the offeror is simply not
relevant, and does not relieve the agency from conducting a reasonable
cost realism evaluation based on the information readily available to it.
Further, a proper cost realism evaluation prevents an offeror from
improperly "having it both ways"--that is, from receiving a technical
evaluation rating based on its proposed performance but failing to propose
costs that reasonably reflect that performance. Here, Ceridian's technical
evaluation rating was in part based on its representation that it would
attract and retain as many existing field employees as possible by
matching existing salaries; however, the firm did not propose direct labor
rates that reflected existing pay rates. In such a circumstance, it is the
government's cost realism analysis that should ensure that an offeror's
evaluated costs properly reflect its proposed performance. The failure to
undertake such action here made the HHS cost realism evaluation of
Ceridian unreasonable.
HHS argues that Magellan has not been prejudiced by any defects in the
agency's cost realism evaluation of Ceridian's proposal, since Ceridian's
overall cost would remain lower than Magellan's in any event. Our Office
will not sustain a protest unless the protester demonstrates a reasonable
possibility of prejudice, that is, unless the protester demonstrates that,
but for the agency's actions, it would have had a substantial chance of
receiving the award. McDonald Bradley, B-270126, Feb. 8, 1996, 96-1 CPD
para. 54 at 3; see Statistica, Inc. v. Christopher, 103 F.3d 1577, 1581
(Fed. Cir. 1996). Here, we recognize that the identified errors in the
agency's cost realism evaluation of Ceridian's proposal do not alter the
offerors' relative cost rankings (i.e., Ceridian's evaluated cost would
apparently still be lower than Magellan's). However, based on our
conclusion, discussed below, that the contracting officer's determination
of technical equivalency was without any supporting documentation (and
that, as a result, the agency may have to undertake a cost/technical
tradeoff as part of its best value determination), and the RFP award
language which provided that the technical proposal was of paramount
importance, we find the cost realism analysis defects here--totaling more
than $10 million--to be clearly prejudicial to the protester.[18]
Source Selection Decision
Magellan asserts that the agency's source selection decision was
unreasonable. Specifically, the protester argues that the contracting
officer's determination that Magellan's and Ceridian's FPRs were
technically equal is not supported by any documentation that demonstrates
a reasonable basis for such a determination. Magellan contends that HHS's
failure to provide a basis for its conclusions that the offerors'
proposals were technically equal, notwithstanding the difference in
technical ratings, resulted in an improper award decision. We agree.
As set forth above, the RFP established that offerors' technical
proposals, including SDB participation plans, would be of paramount
consideration here, and that award would be made to the offeror whose
proposal was determined to be the best value to the government based on
consideration of all evaluation factors.
The TEP evaluated Magellan's and Ceridian's FPRs and made various
adjustments to its previous technical evaluation ratings. As part of its
final evaluation the TEP recommended that award be made to Ceridian,
stating, "Federal Occupational Health recommends award to Ceridian as the
vendor offering the best combination of value and price to the
Government." AR, Tab 33, TEP Technical and Business Review Report, Aug.
28, 2006, at 1. The TEP report, however, contained no discussion regarding
the relative technical merits of the two offerors' proposals.
In making the source selection decision here, the contracting officer
premised her determination on review and acceptance of the evaluation
findings and ratings of the offerors' proposals under the stated
evaluation factors as follows:
+------------------------------------------------------------------------+
| Offeror |Technical Score |SDB Participation Plan| Proposed Cost |
|---------------+----------------+----------------------+----------------|
|Magellan | 99.08 | 5.00 | $170,090,773 |
|---------------+----------------+----------------------+----------------|
|Ceridian |92.75[19] | 4.75 | $150,163,847 |
+------------------------------------------------------------------------+
Id., Tab 35, Source Selection Decision, at 4-5, 8, 15. The contracting
officer then set forth her rationale for the selection of Ceridian as
follows:
Ceridian Corporation has submitted a proposal which has been determined
to offer the best value to the Government. Therefore [it] is considered
to be in the best interest of the Government to award a contract to [the
offeror] which has been determined to be responsible and otherwise
qualified and eligible to receive an award under applicable laws and
regulations. Award, cost plus fixed fee, in the amount of $29,573,143.00
is recommended with four one-year options in the amounts of
$29,247,528.00, $29,540,129.00, $30,311,643.00, and $31,491,404.00
respectively, for a total contract award amount including options of
$150,163,847.00.
Id. at 28.
At the time of her contract award decision, the contracting officer
prepared no contemporaneous documentation that in any way discussed the
relative technical merits of the offerors' proposals. Subsequently, along
with the agency report filed in response to Magellan's protest, the
contracting officer stated that the agency had determined that the
offerors' proposals were "technically equal," or "essentially technically
equal."[20] Contracting Officer's Statement at 5, 8. While this
post-protest declaration asserted repeatedly that the two offerors'
proposals were technically equal, it contained no discussion of the basis
for this conclusion.
In reviewing an agency's evaluation of proposals and source selection
decision, we examine the supporting record to determine whether the
decision was reasonable, consistent with the stated evaluation criteria,
and adequately documented. University Research Co., LLC, B-294358 et al.,
Oct. 28, 2004, 2004 CPD para. 217 at 8; Johnson Controls World Servs.,
Inc., B-289942, B-289942.2, May 24, 2002, 2002 CPD para. 88 at 6; AIU N.
Am., Inc., B-283743.2, Feb. 16, 2000, 2000 CPD para. 39 at 7. An agency
which fails to adequately document its source selection decision bears the
risk that our Office may be unable to determine whether the decision was
proper. Johnson Controls World Servs., Inc., supra.
While source selection officials may reasonably disagree with the
evaluation ratings and results of lower-level evaluators, Verify, Inc.,
B-244401.2, Jan. 24, 1992, 92-1 CPD para. 107 at 6-8, they are nonetheless
bound by the fundamental requirement that their independent judgments be
reasonable, consistent with the stated evaluation factors, and adequately
documented. AIU N. Am., Inc., supra, at 8-9 (protest sustained because
selection official did not document the basis for concluding that
proposals were technically equal, after the evaluation panel concluded
that one proposal was superior to the other); see University Research Co.,
LLC, supra (protest sustained where source selection official failed to
state any basis for rejecting the award recommendation of the agency
project officers). In reviewing an agency's evaluation, we will consider
the entire record, including documentation prepared after the source
selection decision was made; however, we will accord greater weight to
contemporaneous materials rather than judgments made in response to
protest contentions. Beacon Auto Parts, B-287483, June 13, 2001, 2001 CPD
para. 116 at 6.
As shown above, the contracting officer prepared no contemporaneous
documentation indicating that Ceridian's and Magellan's proposals were
technically equal as part of the agency's best value award determination.
Nothing in the TEP report shows that the agency evaluators concluded the
proposals were technically equal; in fact, the point scores suggest
otherwise. Notwithstanding the fact that Magellan's FPR was scored higher
than Ceridian's FPR, as documented by the TEP, the source selection
decision is devoid of any discussion as to how, or even if, the
contracting officer determined before award that the offerors' proposals
were technically equal.
The contracting officer's post-protest statement also fails to meet the
fundamental requirement that a selection official's judgments be
reasonable, consistent with the stated evaluation factors, and adequately
documented. Rather, she simply stated in conclusory form that the two
offerors' proposals were "technically equal" or "essentially technically
equal"--despite the TEP's assessment that Magellan's proposal merited a
higher overall rating as well as higher ratings under three of four
technical subfactors. Like the source selection decision, the post-protest
statement is also devoid of any substantive consideration as to how the
contracting officer determined that the offerors' proposals were
technically equal, and its conclusory statement falls far short of the
requirement to adequately document source selection judgments. AIU N. Am.,
Inc., supra.
In its report to our Office, HHS argues that the contracting officer was
justified in concluding that the technical proposals of Magellan and
Ceridian were approximately equal, and cites generally to the source
selection decision and evaluation documents in support thereof. The agency
also argues that the technical proposals of Ceridian and Magellan
indicated that both offerors could perform the required work very well.
AR, Nov. 1, 2006, at 3.
The agency's arguments here are misplaced. First, while arguing that the
contracting officer was justified in concluding that the technical
proposals of Magellan and Ceridian were approximately equal,
notwithstanding Magellan's higher technical rating, HHS points to no
specific documents in the record, contemporaneous or otherwise, which
support that conclusion. We note that the TEP never concluded that
offerors' proposals were technically equal, but only that Ceridian's
proposal offered the best combination of value and price to the
government. Further, the fact that the technical proposals of Ceridian and
Magellan demonstrated that both offerors would be able to perform the work
requirements very well is not relevant to the determination which the
agency made here without explanation--that the proposals of Magellan and
Ceridian were technically equivalent.
In light of the absence of any documentation or support for the purported
technical equality of the offerors' proposals, the RFP award language that
the technical proposal would receive paramount consideration, and the fact
that Magellan's technical proposal was higher-rated, we view the selection
decision here as unsupported.
RECOMMENDATION
In summary, we find that HHS's cost realism evaluation of Ceridian's
proposal was unreasonable, and that the reliance on the offeror's proposed
cost (as opposed to the government's evaluated cost) as the basis for the
agency's award determination was improper. We also find that the
contracting officer's conclusion that the offerors' proposals were
technically equal lacked any supporting documentation and was, therefore,
improper.
We recommend that the agency perform a proper cost realism evaluation of
Ceridian's FPR, and then rely on that cost realism evaluation as part of
its source selection determination. We also recommend that HHS make a new
source selection decision containing a sufficient and documented
comparative analysis of the offerors' proposals and the rationale for any
cost/technical tradeoffs. If, upon reevaluation of FPRs, Magellan is
determined to offer the best value to the government, HHS should terminate
Ceridian's contract for the convenience of the government and make award
to Magellan. We also recommend that Magellan be reimbursed the costs of
filing and pursuing this protest, including reasonable attorneys' fees. 4
C.F.R. sect. 21.8(d)(1) (2006). Magellan should submit its certified claim
for costs, detailing the time expended and cost incurred, directly to the
contracting agency within 60 days after receipt of this decision. 4 C.F.R.
sect. 21.8(f)(1).
The protest is sustained.
Gary L. Kepplinger
General Counsel
------------------------
[1] While the source selection decision states that the TEP's overall
technical score for Ceridian's FPR was 92.75, a review of the TEP
evaluation worksheets indicates that Ceridian's overall technical score
was 92.58. Id., Tab 33, TEP Technical and Business Report, Aug. 28, 2006;
Tab 19, TEP Technical Report, May 2, 2006.
[2] Magellan originally protested that the agency's evaluation of its
technical proposal was also unreasonable and that it should have received
a higher technical rating. Protest at 7. The agency specifically addressed
this issue in its report to our Office, discussing the minor perceived
weaknesses in Magellan's technical proposal that resulted in a less than
perfect rating. Contracting Officer's Statement at 6-7. As the protester's
comments offered no rebuttal to the agency position here, see Comments,
Nov. 13, 2006, at 4-5, we regard the argument as abandoned. Remington Arms
Co., Inc., B-297374, B-297374.2, Jan. 12, 2006, 2006 CPD para. 32 at 4
n.4; L-3 Comms. Westwood Corp., B-295126, Jan. 19, 2005, 2005 CPD para. 30
at 4.
[3] Magellan cites approximately 12 SOW requirements that it alleges
Ceridian's proposal left unaddressed. Comments, Nov. 13, 2006, at 7-8.
[4] The solicitation explicitly defined the term "contractor" as a
post-award business entity with whom a contractual relationship had been
established, and distinguished it from the term "offeror," which was
defined as a preaward entity that submits a proposal. SOW sect. C.I.I.
[5] Ceridian's FPR also included a listing of SAPs that indicated among
other things, proximity to employee worksites. Id., Tab 29, Ceridian's
FPR, Vol. I, Technical Proposal, attach. D, List of Network Providers.
[6] The field consultant and field counselor categories represented the
solicitation's two largest estimated labor categories, and together
comprised 347,911 of the total 537,971 estimated labor hours for each
performance period. RFP amend. 1, attach. 7, Pricing Tables for Section B,
at 2.
[7] Ceridian proposed a total of [DELETED] hours for field consultants
while the HHS estimate was 1,282,475 hours (a difference of [DELETED]
hours). Similarly, Ceridian proposed a total of [DELETED] hours for field
counselors in comparison to the HHS estimate of 457,080 hours (a
difference of [DELETED] hours).
[8] The agency cost analyst also determined that Ceridian's revised cost
proposal was not based on the field consultant and field counselor levels
of effort as specified in the RFP. Id., Tab 22, Cost Evaluation of
Ceridian's Revised Proposal, at 2-3.
[9] This figure is apparently the product of the government's estimated
levels of effort for the field consultant and field counselor labor
categories for the base year, and the difference between the IGCE and
Ceridian hourly rates for these labor categories ([DELETED]).
[10] We note that with each proposal submission (i.e., initial, revised,
and FPR), Magellan updated its proposed direct labor rates, including
those for field consultants and field counselors, based upon then-current
salary data.
[11] Together with the offeror's rate for G&A ([DELETED] percent), the
total cost associated with Ceridian's understated levels of effort for
field consultants and field counselors is approximately $1,026,611
([DELETED]).
[12] The contracting officer also considered only Magellan's proposed cost
in her source selection decision; we note, however, that the cost analysis
of Magellan's FPR found that an upward adjustment of only $80,098 was
warranted.
[13] Further, the end product of an agency's cost realism analysis should
be a total evaluated cost of what the government realistically expects to
pay for the offeror's proposal effort, as it is the agency's evaluated
cost and not the offeror's proposed cost that must be the basis of the
source selection determination. FAR sect. 15.404-1 (d)(2)(i); Eigen,
B-249860, Dec. 21, 1992, 92-2 CPD para. 426 at 5.
[14] As mentioned above, as part of its proposed effort to retain the
incumbent workforce, Ceridian proposed to pay signing bonuses to a
specified number of employees in various amounts. Similarly, Ceridian
proposed various educational materials as part of the EAP promotional
campaign mandated by the SOW.
[15] The agency argues that its cost realism evaluation properly examined
Ceridian's proposal and made adjustments as necessary. AR, Nov. 1, 2006,
at 4. The agency report fails to mention or recognize, however, that
notwithstanding the cost adjustments that the agency's cost analyst
determined appropriate, the contracting officer never took these
adjustments into account in her source selection decision.
[16] Similarly, in her post-protest declaration, the contracting officer
continued to view the existing cost differential between Magellan's and
Ceridian's proposals only in terms of the offerors' proposed costs.
Contracting Officer's Statement at 16.
[17] Based on the total agency-estimated levels of effort for the field
consultant and field counselor labor categories, and the difference
between the existing and Ceridian hourly labor rates, plus overhead and
G&A, the adjustment here is approximately $9,209,633 ([DELETED]). This
amount does not include the additional [DELETED] percent standard merit
increase that Ceridian also proposed.
[18] Magellan also argues that the agency's cost realism evaluation of
Ceridian's proposed overhead and G&A rate caps was unreasonable. The
protester does not contest the acceptability of Ceridian's indirect cost
caps per se. Rather, Magellan argues that because HHS found the "price
concession" (under which Ceridian agreed to reduce its recovery at the
rate of [DELETED] percent of its incurred costs) proposed by Ceridian in
its revised proposal to be improper, and because Ceridian merely replaced
its price concession with overhead and G&A rate ceilings, those indirect
rate ceilings must also be improper. Comments, Nov. 13, 2006, at 15-16.
When an offeror agrees to cap certain cost items--including by means of
indirect rate ceilings--then that cap can reasonably be used by the agency
as the probable cost for purposes of a cost realism analysis, BNF Techs.,
Inc., B-254953.3, Mar. 14, 1994, 94-1 CPD para. 274 at 12, even where the
indirect rate caps replace some other cost limitation device that the
government deems improper.
[19] As mentioned above, Ceridian's actual technical score was 92.58.
[20] The contracting officer's statement also implies, without expressly
stating, that because the agency found the offerors' proposals to be
technically equal, the selection of Ceridian's lower-cost proposal did not
involve a cost/technical tradeoff determination.