Government Contracts Monitor
Army Successfully Shifts Meal Headcount Pricing Risks to Contractors
May 1, 2013
With the winding down of operations in Iraq and Afghanistan, active duty military units are returning from overseas to their U.S. bases. One such military base is Fort Bragg. The Army, however, does not know exactly how many soldiers from the drawdown will be stationed at Fort Bragg. As a result, the Court of Federal Claims explained, “[I]t is unclear how much food will need to be requisitioned, received, stored, prepared, and served [at Fort Bragg] in the next few years.” In a recent pre-award bid protest, the Court supported the Army’s desire to shift all of the business risk, inherent in still undetermined troop levels at Fort Bragg, to the food service contractor. State of North Carolina Business Enterprises Program v. United States, No. 12-459C (Fed. Cl. Apr. 17, 2013).
In June 2012, the Army issued a solicitation for full food service at Fort Bragg. The solicitation was set aside for HUBZone small business concerns and was proposed for a one-year base period and four one-year options. In the solicitation, the Army expressly stated that there was “no way to accurately forecast the number of meals to be served or to provide interested contractors enough data to submit a reasonable proposal.” In short, the Army acknowledged that any headcount was “extremely unpredictable” and described the fluctuation of headcount as the “primary element of risk” in supplying meals under the solicitation.
To address this acknowledged uncertainty, the Army devised a unique pricing methodology that was counter to longstanding pricing policies in the food service industry. Industry practice was to divide the estimated price of performance by the number of meals to be served (e.g., headcount). In other words, “[h]eadcount drives price per meal.” The solicitation, however, was for an indefinite-delivery indefinite-quantity (IDIQ) contract priced on a per meal basis. The solicitation guaranteed a minimum payout of $10,000 for the base period and a potential overall maximum quantity of 15,883,475 meals. No estimates of actual headcount or likely meals served were provided in the solicitation. Instead, the solicitation required offerors to determine a “price per meal” and then multiply that cost by the set “MAX QUANTITY” number to arrive at a “MAX AMOUNT” price. The Army stated that award would be made to the lowest price technically acceptable offer.
The incumbent contractor submitted a bid under protest and then filed a formal bid protest with the Court of Federal Claims. The incumbent based its bid on sixteen years of food service experience and the headcounts it had historically experienced at Fort Bragg. Using the solicitation’s methodology, which was devoid of any actual or projected headcounts or meal number expectations, the incumbent submitted a MAX AMOUNT bid number assuming that the actual headcount would be lower than MAX QUANTITY. This approach was risky for the incumbent since if the actual headcount turned out to be less than the number on which it based its pricing, the incumbent would be stuck with a relatively low unit price and it could suffer a loss – or at least lower profit. Conversely, using a lower assumption on headcount could result in a higher unit price, making it less competitive and less likely to be awarded the contract.
The Court found nothing wrong with the Army’s “novel” pricing methodology or with shifting all of the risk of actual headcounts to the contractors. The Court held that “nothing requires the Army to bear the risk of fluctuating headcount, so long as the Army enables offerors to compete ‘intelligently’ by providing them with the ‘best available information.’” The Court also found the Army’s pricing methodology to be acceptable, ruling that the “issue is not whether the Army could have selected a pricing methodology that (from plaintiffs’ perspective) was better – the issue is whether the pricing methodology the Army did select is arbitrary, capricious, or otherwise contrary to law.” In other words, the Court left it to bidders “to either agree to assume the risks or to refrain from competing for the contract.”
Given the increased pressures of sequestration and overall federal government downsizing, contractors should expect that more federal agencies will use pricing methodologies similar to what the Army used here. Agencies will want to attempt to pass off uncertainty and risk inherent in expected quantities of goods or services under IDIQ contracts to the contractors, even if such methodologies are contrary to longstanding industry practices and have the potential to bring financial ruin to contractors based on bad assumptions they make from incomplete or unknown federal data. Be careful out there.
Michael J. Schrier is the attorney responsible for the content of this article.