Contractor did its due diligence by performing extensive salary surveys and proposed hourly rates that DCAA reviewed and determined them to be fair and reasonable. However, the incumbent personnel, in some cases, were making more that were proposed.
What course of action should Contractor pursue in order to mitigate the additional cost associated with the incumbent employees have first right of refusal. We could offer them a lesser rate which they may or may not accept. The down side to this is that the incumbent employees have been employed at their current positions for 20+ years and the Department of Energy's Labor Relations Department will, most assuredly, will take a dim view this.
Response: I would first do a cost analysis to determine the overall impact on the contract for those rates that are higher than and lower than proposed. Who knows, it may balance out. If it does balance out or there is no Material Impact on the costs than I would leave it alone.
Now the question is did the customer provide you the information on current incumbent employees salaries to use for proposal purposes? Probably not. If not, than it could be argued that information critical to the cost decision was not available.
I would first contact the CO or COTR and try to get authorization to allow an amendment to the contract for those incumbents that you must allow first right of refusal that would like to stay and that would be in the governments best interest to retain. Especially if the information was not available to anyone during the bid process.
I would explain from the view of impact on government if they cannot be retained at the least their current base rate. Then it shifts a little of the responsibility to the customer to determine if they will accept the people staying or leaving.
Be sure to show on a spreadsheet that is clear and concise the Cost Impact if they used the current incumbents rates. Let them see for themselves if the overall impact is material or not. Do not hesitate to show offsets for those higher rates with the lower rates. It shows you are requesting and negotiating in good faith. In addition, when looking at the impact, you can Choose not to apply G&A or Fee on the increased portion of the base rate. This is also a good faith negotiation technique.
In other words, you are requesting only an adjustment in the increase direct hourly rate plus the fringe benefits and payroll taxes as applicable. This is similar to what the government allows for SCA and Davis-Bacon employees when they have an increase the Base Wage Determination Rates.
And don't forget to look at the impact of any increase cost you did not expect in Fringe Benefits on those long-term employees, such as longer vacation, sick leave, health benefits, retirement etc.