October 08, 2018 On Corporate Counsel's Desk

Federal Contract Modifications: Getting Your Client out of the Cost Analysis Weeds

Sean Dowsing

For many federal contractors, negotiating a contract modification with their government counterpart, the contracting officer, is a nightmare. Contracting officers’ default answer when faced with a contract modification proposal is often to conduct a “cost” analysis which “is the review and evaluation of any separate cost elements and profit or fee in an offeror’s or contractor’s proposal.” 48 C.F.R. § 15.404-1. In other words, it is a line-by-line analysis of the contractor’s proposal in which profit and contingency are sliced and diced in an effort to save the government money. For a large proposal, this analysis is frustratingly slow and often fails to address the contractor’s concerns with respect to risk and profit, all while the government maintains the power to simply issue a unilateral contract modification and force your client to perform the work anyway. It is death by a thousand cuts. Contractors lose the ability to balance risk and profitability among the various scopes of work needed for the changed condition.

Before we dive much further, let’s look at how this issue typically arises and the point at which counsel is retained. Your client has an existing contract to provide services to a federal government agency. Your client encounters a changed condition that was not originally envisaged by its contract and the government agrees. The government issues a request for proposal to your client to perform the additional work. Your client prices it out, submits the proposal and, at the government’s request, provides a copy of its proposal breakdown. The government contends that the contract modification is not subject to competition, so a cost analysis must be performed. The contracting officer analyzes the bid breakdown line by line, nitpicking every individual element of the proposal in an effort to reduce the overall proposal price. Your client has contingency that is built into the individual cost items to adequately compensate for the risk and effort associated with the additional work. The fact that the contract modification will affect your client’s work with its other clients (i.e., your client must dedicate more resources than originally planned to this particular contract) is not a concern to the contracting officer. Knowing that the contracting officer can issue a unilateral contract modification if negotiations break down, your client engages you as counsel to assist with negotiations and begin claim preparation if necessary.

Now that you have stepped in as counsel to assist with negotiations, what can you do to get negotiations back on track? Your client is hoping that you will find a loophole or some new perspective that will get the client out of the line by line cost analysis. Your goal as counsel is to go from “cost” analysis to “price” analysis, which is “the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit.” 48 C.F.R. § 15.404-1(b)(1). Price analysis is the 10,000 ft. view. More often than not, it is hugely advantageous to your client because (1) it does not analyze proposed profit, and (2) your client can have contingency in the individual line items without them being picked apart. For example, if your client believes an extra employee may be needed to perform a scope of work, your client can price that into the proposal without it being individually scrutinized in a “price” analysis approach. In a cost analysis, the inclusion of that extra employee will be scrutinized and likely not paid for.

In getting from cost to price analysis, your first hurdle is 48 C.F.R. § 15.404-1(a)(2) which states that “price analysis shall be used when certified cost or pricing data are not required.” 48 C.F.R § 15.403(b) delineates when certified cost data is required.  Of particular relevance is the exemption for adequate price competition, in which instance certified data is not required. 48 C.F.R § 15.403(c)(1). Adequate price competition can be established by showing that the contractor’s price is reasonable in comparison with the same or similar items, adjusted to reflect market conditions. 48 C.F.R § 15.403-1(c)(1)(iii).

There are three techniques that can be used to establish adequate price competition: (1) If your client has performed similar work in the past, that work and its price can be presented to the contracting officer to show that the contractor’s latest proposal is in line with what it has performed previously; (2) You can use the Freedom of Information Act (state and federal versions) to identify similar contracts performed and their prices paid; (3) You can hire an outside consultant to assist. Counsel should take care to protect the work-product privilege when an outside consultant is engaged.  After all, if negotiations fail, litigation is likely.

Once adequate price competition has been established (and it is thereby determined that the contractor does not have to provide certified pricing data), the next step is proposal analysis techniques.  See 48 48 C.F.R § 15.404.  The C.F.R does not treat all price analysis techniques equally. The two preferred methods are: (1) comparing the proposal prices to others received in response to the solicitation; and (2) comparing the proposal prices to historical prices paid for the same or similar work. The first method is not applicable here because your client is involved in a sole-source type contract modification.

As to the second method, by now, your client has obtained prior pricing data for similar work which is how it got over the 48 C.F.R § 15.404-1(a)(2)’s certified data requirement in the first place. This data can be presented to the contracting officer, modified for market conditions and other economic factors, and then used to determine whether your client’s proposed price is reasonable. This data can also be presented alongside an outside consultant’s report to strengthen the case. By presenting this data and making arguments as to changes in the market, you have put the contracting officer in the position of denying the historical prices paid and the relevance of the outside consultant’s report —which is a tough pill to swallow if that is the only data available to the contracting officer.

Contracting officers often do not have the in-depth FAR knowledge necessary to come to this analysis on their own. You and your client need to take them there. Once you have established that certified pricing data is not required and present your historical prices paid, you will have successfully moved your client’s negotiations from the painful “death by a thousand cuts” cost analysis to the 10,000-foot-view price analysis. This will let your client control its risk on the individual line items and, in the event that the contracting officer is not receptive, you have set your client up for a future claim against the government.

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Sean Dowsing

Orion Construction, San Diego, CA