PSC Supplemental Comments on USAID draft IDIQ template

1 July 6, 2012 PSC Supplemental Comments on USAID draft IDIQ template There are three principal areas of concern in the draft IDIQ template: (1) the cost evaluation matrix; (2) the use of a single ceiling for unburdened daily rates; and (3) the way fixed fee ceilings are treated. Each of these is addressed separately below. 1. Cost Evaluation Matrix The evaluation approach falls short of the standard to consider the price the USG will pay. Section L.5 requires offerors to complete a Cost Evaluation Matrix, proposing single unburdened ceiling daily rates for each labor category (per Section B.7), ceiling indirect cost rates and a fixed fee percentage ceiling, and using LOE plug figures. We do not believe that this is an appropriate methodology for cost evaluation at the prime award stage because it would impede the government s ability to fairly compare prices across offerors and would fail to consider the the overall price the government will actually pay, as required by FAR 15.405(b) Price negotiation. Furthermore, the use of single ceiling prices in an IDIQ competition rather than analysis of the actual cost that the government can reasonably be expected to pay would create the risk of a misleading result, which appears to be inconsistent with FAR 15.404-1(d)(2) Proposal analysis techniques, which states that while it is up to the agency to decide upon some appropriate and reasonable method for the evaluation of offerors prices, an agency may not use an evaluation method that produces a misleading result. Requiring offerors to use the plug figures for LOE, absent an actual or illustrative scope of work, precludes offerors from budgeting LOE based on their customary accounting practices or cost accounting standards. It therefore does not reflect the considerable disparities in the indirect cost rate structures and methods used to bill labor by different offerors. This could artificially cause offerors who bill certain types of labor indirectly to appear more expensive in this type of plug figure-based IDIQ evaluation method when in fact they may cost the government the same or less on actual Task Orders. For example, some organizations bill certain types of labor directly, such as home-office backstopping, that other organizations include in their indirect rates. Offerors that bill home-office backstopping directly would require more level of effort to provide the same package of technical assistance as an offeror that bills indirectly, and may have lower indirect rates as a result of the direct billing. The use of LOE plug figures, unburdened ceiling daily rates for direct labor and ceiling indirect cost rates will lead to a price evaluation by USAID, at the prime award stage, largely amounting to a comparison of labor rates and indirect rates at the rate level, which is inherently misleading for the reasons that OAA describes in USAID s Best Practices Guide for Indirect Costing: It is generally not possible to compare indirect costs between organizations at the rate level, whether they are a for-profit or non-profit firm. Indirect costs must be compared at the cost level. An indirect cost rate by itself has very little meaning. http://www.usaid.gov/business/regulations/bestpractices.pdf Given these facts, the evaluation method set forth in the template impairs the Contracting Officer s ability to evaluate proposals based on the price the government will actually pay.

2 Proposed Solution: Proposal budgets could be prepared according to an actual or notional scope of work incorporated in the RFP. This will help remedy the above situation, and provide an essential element for addressing the FAR 15.405(b) requirements. By providing a scope against which to budget level of effort for prime and subcontractors, with indirect rates applied according to each organization s cost structure, USAID can establish a realistic representation of cost to the government. AAPD 02-12 is silent on the question of how to include a notional scope of work, but USAID has successfully conducted numerous effective IDIQ procurements based on such scopes of work. The scope can be simple, thus minimizing the effort required on the part of the Contracting Officer or Technical Evaluation Committee. USAID could opt to require a brief technical approach for the sample task order or could simply evaluate the resulting price offers for cost realism. Following this approach at the prime award stage is consistent with the objective of understanding and increasing competition at the task order level, which provides the greatest opportunity for USAID to achieve better development outcomes at lower costs. 2. Unburdened Ceiling Daily Rates The requirement for single unburdened daily rate ceilings undermines the principles of CPFF contracting and transfers risks to contractors that are inappropriate to the contract type. Section B.7(a) requires offerors to propose and accept a single unburdened ceiling daily rate for each labor category. While we appreciate the objective of providing more standardization under task orders, we believe that this approach would limit contractors flexibility at the task order stage by requiring inappropriate risk tradeoffs. This requirement appears to be inconsistent with AIDAR 752.7007 Personnel Compensation, incorporated in the contract under Section B.7(a), which stipulates that personnel compensation be in accordance with the contractor s established policies, procedures, and practices, with reimbursement subject only to the USAID Contractor Salary Threshold. Requiring offerors to accept unburdened ceiling daily rates may preclude contractors from following their established policies, procedures, and practices, as required by AIDAR 752.7007. The negotiation of a fee (within the statutory limit of 10% fee on CPFF contracts) is reasonable because such contracts reimburse all reasonable, allocable, and allowable costs incurred by the contractor, and places responsibility on the contractor for payment (from the negotiated fee) of unallowable costs, including the cost of funds. The current draft template s requirement for unburdened ceiling daily rates requires offerors to choose between: a. Proposing high ceilings to be able to manage the contract in accordance with a risk profile consistent with the CPFF format, which means the proposal may be rejected based on what is perceived to be an uncompetitive price (but in fact may not be uncompetitive at the TO stage, as discussed above); or b. Accepting the extraordinary risk that it may face the choice of proposing staff that are less technically competitive but who will accept compensation within the predetermined unburdened ceiling, or proposing technically qualified staff to offer best value to USAID but whose compensation is above the ceiling rates (requiring the contractor to pay for the unallowable portion of the compensation from its negotiated fee.) Either option distorts the risk profile inherent in cost reimbursement contracts, skewing the contract form more toward fixed-rate (e.g., time-and-materials) mechanisms, without allowing for pricing considerations available to T&M contractors to adjust for uncertain labor requirements. For example, in

3 a fixed daily rate or fixed multiplier structure, contractors can manage their risks by offsetting any greater-than-anticipated labor costs with greater-than-anticipated recovery on other personnel. Pressuring contractors to set rate ceilings rather than fixed rates, and allowing only for subsequent reimbursement of actual costs incurred, creates the cost risks of fixed-rate mechanisms without the corresponding ability to offset those risks. The problems associated with requiring an unburdened ceiling daily rate are exacerbated by Section B.7 (a), which states that the ceiling rates proposed will remain operative for the entire life of the IDIQ contract period, which could be up to seven years (a five year ordering period plus the additional two years covered under Note 1 on page 9). Offerors cannot reasonably be expected to predict salaries for a diverse group of personnel seven years in advance, based on no actionable scope of work and an indeterminate volume of work. This fact is acknowledged by USAID in ADS 302.3.5.2, Standardization of Indefinite Quantity Contracts (IQCs), and AAPD 02-12 incorporated by reference therein, which states that CPFF IQCs are chosen when The pricing uncertainties in these contracts and their orders make it difficult, if not impossible, for offerors to estimate fixed rates or multipliers with any degree of confidence or realism. If offerors cannot estimate fixed rates with confidence, they cannot be expected to estimate even riskier rate ceilings with confidence. Proposed Solution: Follow standard cost reimbursement principles rather than attempt unburdened salary ceilings. Evaluate cost at the prime award stage by means of a sample TO. Evaluate CPFF TOs following best value principles. 3. Indirect Cost Ceiling Section L.5(b)1(b), page 68, states that the prime offeror and each major subcontractor must propose ceiling indirect cost rates. Further instructions are provided on page 69 and a similar clause is included on page 71. While we understand that it is common for USAID contractors to offer ceilings on some indirect cost rates to enhance their competitiveness, our understanding is that the government may only require indirect cost rate ceilings when the conditions of FAR 42.707(b) Cost-sharing rates and limitations on indirect cost rates are met, referenced below: (b)(1) Other situations may make it prudent to provide a final indirect cost rate ceiling in a contract. Examples of such circumstances are when the proposed contractor (i) Is a new or recently reorganized company, and there is no past or recent record of incurred indirect costs; (ii) Has a recent record of a rapidly increasing indirect cost rate due to a declining volume of sales without a commensurate decline in indirect expenses; or (iii) Seeks to enhance its competitive position in a particular circumstance by basing its proposal on indirect cost rates lower than those that may reasonably be expected to occur during contract performance, thereby causing a cost overrun. (2) In such cases, an equitable ceiling covering the final indirect cost rates may be negotiated and specified in the contract.

4 Proposed Solution: We believe that most established USAID contractors will not meet these regulatory conditions for government-mandated indirect rate ceilings. Accordingly, we recommend that USAID remove the requirement for offerors to accept indirect cost rate ceilings, allowing offerors to propose indirect cost rate ceilings that take into consideration their accounting practices and methods for determining indirect cost rates. Fixed Fee Percentage Ceiling Section L.5(b)(2) (page 71) states: The proposal for fixed fee shall be provided in accordance with Section B.X Ceilings on Fixed Fee/Profit. The proposal shall include: An explanation of the method used to establish the fixed fee/profit rate and how it is applied to all costs. The requirement for offerors to provide an explanation of the method used to establish the fixed fee/profit rate appears inconsistent with FAR 15.404-4(c)(5) Profit, which states The contracting officer shall not require any prospective contractor to submit breakouts or supporting rationale for its profit or fee objective but may consider it, if it is submitted voluntarily. Furthermore, our understanding from FAR 15.404-1(a)(3) Proposal analysis techniques is that analysis of fee as a separate cost element is not required due to the presence of adequate price competition. Proposed Solution: Delete the general requirement noted above and include guidance as to the circumstances under which it may be required. Fixed Fee Percentage Ceiling/Firm Fixed Price TOs Section B.5 (page 5) states: NOTE: For Firm-Fixed-Price (FFP) Task Orders, the ceiling percentage above serves as a basis for negotiation only. We believe that this statement is potentially misleading and should be revised and be supported by guidance that discusses the risks assumed by a contractor performing a FFP contract and the impact on the profit element of its proposed price. We do not believe that the FAR permits or expects a contracting officer, in every instance, to require a contractor to provide details of its estimated profit in connection with a FFP offer. Rather, there are limited instances in which a decision on an offeror s proposal does require cost analysis (for instance when there has been limited competition). Also, in saying that the ceiling percentage applicable to CPFF proposals serves as a basis for negotiation in connection with FFP orders, given the reallocation of risk to the contractor under a FFP order, this language should not be interpreted to mean that the ceiling percentage that has been negotiated for CPFF order is the contracting officer s negotiation goal. Proposed Solution: Revise to read: NOTE: The ceiling percentage above only applies to cost reimbursement type contracts. For Firm Fixed Price (FFP) Task Orders, the contractor assumes greater performance and financial risk, and is not subject to the limitations of FAR 15.404-4.

5 Additional Comments Completion vs. Term. In the guidance for Section B.5 on the bottom of page 6, the comments should be clarified to note that for completion type contracts, payment of the fee is tied to the schedule of deliverables. For term type contracts, the fee is invoiced on a percentage basis each month. Local Compensation Plan. In Section B.7(c), the template states: Unless otherwise authorized by the Mission Director, the compensation for CCN and TCN labor shall not exceed the Mission s Local Compensation Plan and shall be paid in the currency of the cooperating country. This constitutes a deviation from AIDAR 722.170, which recognizes the limit as prevailing compensation paid to personnel performing similar work in the cooperating country, as determined by the USAID Mission. The Local Compensation Plan does not necessarily reflect the labor market for high-level expertise, sourced competitively from the private sector for limited periods of time without a USG benefits package. We recommend that the AIDAR 722.170 language be used here instead. IDIQ COR Review. Section F.8(a), page 29, new guidance at top of the page, gives the USAID/W COR the option to review a mission s TO SOW for task orders at or above a threshold. However, Section F.8(d)(5), page 32, requires review and clearance of TO SOWs by the IDIQ COR. Requirement to Propose. Section F.8(a), page 29, states that contractors are not required to submit proposal for every TO. However, Section F.8(e)(3), page 35, under the performancebased contracting section, states that the Government expects full participation of all contractors or that Contractors must file no bid justification to any proposal request that they wish not to bid on. We recommend that F.8(a) be used in the template, since there is no consideration for submitting a proposal. Threshold. Section F.8(d)(1), page 32, states a $500,000 threshold for streamlined procedures vs. the same text with a $100,000 threshold is included on page 33. What is the threshold? Key Personnel. Section F.11, top of page 42, the guidance comment on key personnel states that the greater of 5 individuals or five percent of contractor staff under a TO may be designated as key personnel. Care must be taken in mandating a particular universe. For larger Task Orders, where there may be many local staff, the burden of contract administration for USAID and the contractor could be very large if the five percent requirement were imposed. Salary Increases. In Section H.2(1)(d), the RFP states: Annual salary increase (of any kind, cost of living and merit increases, or other) of percent cumulatively may be granted within twelve month period of satisfactory services under the contract. Annual salary increases of any kind exceeding these limitations or exceeding the maximum salary in Section H.3 may be granted only with the advance written approval of the Contracting Officer. The reference to H.3 should be to H.2. We recommend that the above-mentioned restriction on a to-be-determined percent for salary increases, cost of living adjustments and merit increases be removed from the template because it appears to be inconsistent with AIDAR 752.7007 Personnel Compensation, incorporated in the

6 contract under Section H.2 (page 46), which stipulates that personnel compensation be in accordance with the contractor s established policies, procedures, and practices, with reimbursement subject only to the USAID Contractor Salary Threshold (CST). The abovementioned restriction may preclude contractors from following their established policies, procedures, and practices, as required by AIDAR 752.700. The CST is an effective upper limit, and each Task Order contracting officer (TOCO) will have full authority to negotiate salary increases that would be reasonable at the time of any TO competition, subject to U.S. and local market rates. Technical Evaluation Criteria. The draft template discusses the relative importance of evaluation criteria differently, at different points. Compare Section L.4 (page 60), Section L.4(b) (page 61) and Section M.2 (page 77). Cost Evaluation Matrix. If the template continues to include a matrix, some clarification would be helpful. The following types of labor are included under the labor categories as examples in the Cost Evaluation Matrix (page 84): o Long-Term US-based o Long-Term Field-based o Consultant o Local-Hire Different offerors can interpret these types of labor differently. For example, it is not clear whether long-term US-based should be considered home-office staff or a non home-office hired long-term expatriate person. The same applies to Consultant, which can be interpreted as a short-term expatriate or short-term home-office person. Accordingly, offerors will not understand how to apply their indirect rates applicable to labor, which vary based on labor type. Furthermore, it is unclear whether the plug figures for level of effort are inclusive or exclusive of home-office backstopping. -0-