Are labor hours that risky?

If you did a quick poll of federal employees on whether they think that government contracting has a culture of "risk avoidance" or whether it has a culture of "risk management," I'd put the over-under around 90% for risk avoidance. Give or take, it's fair to say that the perception is that government contracting is an industry where folks don't love risk.

Which is a shame, because the Federal Acquisition Regulations explicitly encourage acquisition professionals to, uh, avoid risk avoidance. The rule in FAR 1.102-2(c)(2) contends that "[t]he cost to the taxpayer of attempting to eliminate all risk is prohibitive" and that the government "will accept and manage the risk associated with empowering local procurement officials to take independent action based on their professional judgment."

Ok, sure.

One of the ways that contracting officers attempt to manage risk is through the use of "contract types." We've talked about cost-reimbursable contracts before and how the government bears more risk in a cost-type contract than in a fixed-price-type contract.

The general argument is that fixed-price contracts are less risky to the government than other types of contracts because the contractor bears the risk of performing at a financial loss. If the government buys a bunch of widgets with a unit cost of $1 but it turns out the unit cost is $2, the contractor eats the loss.

In between fixed-price and cost-reimbursable contracts is a "time-and-materials" or "labor-hours" contract. In a LH contract, a contractor can charge "fixed hourly rates that include wages, overhead, general and administrative expenses, and profit for each category of labor" up to a ceiling amount.

Here's an example of the theory of how this works. Imagine a particular service—say, repairing a toilet—takes 10 hours to complete at $100 per hour. In a fixed-price contract, the government will pay $1000 no matter whether it takes 15 hours to repair the toilet or 5 hours to complete. The government is paying $1000 all in for a fixed toilet. In a LH contract, the government would pay $500 if it takes 5 hours to fix the toilet. But the government might also need to modify the contract if the job isn't done at 10 hours because it would still have a broken toilet! If it takes 15 hours, the government might end up paying $1500 under a LH contract.

Recently, the GAO decided a case that turned on the relative risk of LH contracts. Let me warn you now, though: it's actually kind of weird?

The case involved a request for quotations issued by the IRS in January 2021 for "consultation and subject matter expertise for the agency’s data delivery services programs, which included design, configuration, customization, development, integration, and implementation of data analytics and reporting capabilities." The solicitation stated that the IRS would pick the winner using a best-value approach where the government was “more concerned with obtaining superior technical performance or reduced risk than making an award at the lowest overall cost to the Government.”

In the end, the IRS made an award to MAXIMUS, with a total evaluated price of $32,651,502 and with High Confidence ratings on all of the non-price factors. IBM protested, noting that it too had High Confidence ratings on all of the non-price factors and a lower total evaluated price of $26,313,644.

Take a moment and re-read that last paragraph. Both IBM and MAXIMUS had the best possible technical ratings and IBM came in with a $6 million lower cost. Knowing nothing else, I would have predicted IBM would have won. But it lost!

Why? Here's what the GAO wrote:

The source selection authority (SSA), who was also the contracting officer, concluded that MAXIMUS’s quotation represented the best value to the IRS. In so finding, the SSA explained that MAXIMUS’s quotation included significantly more fixed-price labor hours than IBM’s quotation, which represented less risk to the IRS. Accordingly, even though both vendors had identical non-price ratings, the SSA determined that MAXIMUS’s staffing approach, which included approximately 45 percent more fixed-price labor hours than IBM’s, was worth the associated 24 percent premium.

I have stared at this paragraph a lot and it flummoxes me. On paper, MAXIMUS is projecting costs of more than $32M and IBM is projecting lower costs with fewer fixed-price labor hours. Is the argument really that MAXIMUS had more butts in seats for longer than IBM and, therefore, less risky?

Reading the opinion in full, the reasoning appears to have been that IBM did not guarantee that its senior staff and subject-matter experts would stick around through the whole life of the contract:

The evaluators explained that the reductions in senior staffing hours were achieved by “rolling off” (i.e., eliminating) senior staff and SME labor hours in the option years of the contract. The evaluators concluded that this reduction “raises concern” of having limited senior staff guiding junior staff to complete the requirements. These concerns were shared by the SSA, who noted in the tradeoff that “there were some concerns related to IBM’s proposed level of effort/labor mix” for the O&M subtasks.

In other words, the IRS seems to have been worried that IBM is underpredicting the actual effort necessary to deliver on the contract. That's a reasonable concern! Still, the government assigned IBM a High Confidence rating for the management approach? It's a bit strange to think that a lower ceiling is riskier than a higher ceiling given that both received high confidence ratings.

Whatever. Them's the breaks? I don't know what else to tell you.

Other than this, perhaps. Remember that the solicitation explained that the government is "more concerned with obtaining superior technical performance or reduced risk than making an award at the lowest overall cost to the Government." Apparently, if you can reduce the risk enough, the government's willing to pay the premium.

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