Redstone Government Consulting Blog | Proposal Cost Volume Development & Pricing (5)

For government contractors your indirect rate structure is critical to your competitiveness, perhaps more so than any other element of the proposal.  In today’s LPTA environment, most offerors are going to be very similar when it comes to technical capabilities and past performance, so almost always award decisions come down to cost.  For the select few companies that have a technical edge or a differentiator in the way of performance that outweighs the cost to your government customer you can stop reading now.  The vast majority of companies working with the federal government don’t have this luxury, so what are they doing to set themselves apart when it comes to developing their indirect rates and overall wrap rates (wrap rates are a function of total direct and indirect costs for a labor hour divided by the direct labor hourly rate); hence, a lower wrap rate is perceived to be a more competitive overall cost structure)?

The Fair Labor Standards Act of 1938 (FLSA), which is administered and enforced by the Wage and Hour Division (WHD) of the Department of Labor (DOL) imposes, among other things, minimum wage and overtime pay requirements. It is certainly nothing new and has been a hot topic amongst Human Resources professionals over the past months as President Obama directed the Secretary of Labor to update the regulations. With much speculation and rumblings of possible changes, all have been anxious for the impending proposed rule to be revealed.  

On June 18, 2015, as a retired “civil servant” whose personnel records now reside with OPM, I was notified by OPM that OPM had “recently become aware of a cybersecurity incident that may have exposed my personal information”.

Congratulations! You have won your first prime federal contract – now what do you do?! Unfortunately, regardless of how many contracts a company has won, the focus seems to be on “the win” and NOT how a company is going to manage and administer the contract. Larger companies’ that have been around for years have figured out through the “school of hard knocks” (i.e. Government audits, ACO cure notices, contract terminations, debarments, system inadequacies, etc…), how to comply with all the federal laws and regulations that are inevitably part of the Federal government contract you were just awarded.

In a recent Federal Circuit ruling, KBR found out that “simple negligence” in its calculations of a reasonable price range for subcontractor’s price proposal resulted in a “Gross Negligence ruling” by the courts. Kellogg Brown & Root Services, Inc. (KBR) v. U.S., No. 203-5030, slip op. (Fed. Cir. Feb, 3, 2014).

Coming as no surprise, President Obama signed the Bi-Partisan (2014) Budget Act on December 26, 2013 including an executive compensation cap of $487K (coincidentally one-half of the most recent statutory cap of $952,308 and significantly lower than an alternate bill with a cap of $625K).  This maybe Obama’s “crowning achievement” over his two terms proving that if someone (The President) whines enough and ignores all of the regulatory history and the fundamental principle that commercial prices constitute a reasonable cost, he will achieve his goal of forcing large government contractors to absorb more and more of their executive’s compensation.  It should be noted that the prior cap and the methodology was based upon compensation of publicly traded corporations with $50 million or more in revenues; hence, that cap was artificially low considering that a number of large government contractors have revenues in the billions and that executive compensation is correlated to company size/revenues.

With the House of Representatives having passed its version of the FY 2014 National Defense Authorization Act (NDAA), as well as a federal budget agreement, both of which establish new guidelines and annual ceilings on allowable government contractor executive salaries, the question is what will the Senate do with both agreements when they address those specific revised caps. Moreover, because the House-passed federal budget and the NDAA have different annual compensation caps and contractor personnel to which these caps would be applicable, will these differences be reconciled in final versions of both budget and NDAA agreement?

The National Defense Industrial Association’s (NDIA) September Procurement Division Committee meeting provided insights and information that we believe is of  interest to our readers.  These comments are our own interpretations and opinions based upon our presence at the meeting.

Government contractors who are required to submit certified cost and pricing data as part of a bid proposal face increasingly greater risks of government rejection or award disqualification during pre-award review or even worse, defective pricing allegations after award causing government mandated downward negotiated price adjustments. In today’s government procurement environment where procurement commands and their auditors hold contractors to solicitation and cost analysis provisions with such rigidity, equating to a zero error tolerance during proposal evaluations, contractors must not fail to meet the “certified cost or pricing data” submission or disclosure expectations in the pre-award proposal preparation process as intended within the Truth-in-Negotiations Act (TINA).

All one has to do is read a recent article written by David Cox, President of the American Federation of Government Employees (AFGE), to derive the answer to this question, and the answer is that contractor employee compensation should be brought in line with the salaries that public sector employees (e.g., federal civilian personnel) are paid.