Cost Realism Evaluation & Analysis in Government Contracting

Oftentimes bidders find that their cost realism evaluation in government contracting may be flawed and they may want to file a bid protest. A common problem in the evaluation process is when the agency fails to properly evaluate whether the number of hours proposed by each contractor is realistic from a cost standpoint. 

If warranted in the solicitation, a government contracting agency should demonstrate and document its analysis of the cost realism of widely varying labor hours proposed by each offeror.

What is Cost Realism Analysis? 

Cost realism analysis is the process of independently reviewing and evaluating specific elements of each offeror’s proposed cost estimate to determine whether the estimated proposed cost elements are realistic for the work to be performed, show a clear understanding of the requirements, and are consistent with the unique methods of performance and materials described in the offeror’s technical proposal. Find out more about 13 CFR 125.6 Understanding Rules of Prime Contractor’s Limitations on Subcontracting FAR 52.219 14.

Proper Agency Evaluation 

When conducting a cost realism evaluation in government contract pricing, the agency should decide the extent to which an offeror’s proposed costs represent what the contract costs are likely to be under the offeror’s unique technical approach, assuming reasonable economy and efficiency. See FAR 15.305(a)(1), FAR 15.404-1(d)(1), (2).

GAO Bid Protest Analysis: GAO has ruled that when an agency evaluates proposals for the award of a cost-reimbursement contract, an offeror’s proposed estimated cost of contract performance is not considered controlling for cost realism because, regardless of the costs proposed by the offeror, the government is bound to pay the contractor its actual and allowable costs. See Magellan Health Servs., B-298912, Jan. 5, 2007, 2007 CPD ¶ 81 at 13; Federal Acquisition Regulation (FAR) § 16.301.

When filing a bid protest that alleges an improper analysis in government contract pricing, GAO will only review an agency’s analysis to determine whether it was reasonably based and not arbitrary.

•  For a proper evaluation, the agency should not simply verify that you provided all required cost information.
• The government is required to take reasonable and documented steps to assess what costs are likely to be incurred under each offeror’s technical approach and to explain the basis for its conclusion that the proposed costs are realistic for the work to be performed. See FAR 15.404-1(d)(2).

Note: Price analysis and cost realism techniques under FAR 15.404-1(b)(2)(i) are for the purpose of establishing a fair and reasonable price, while the techniques for various evaluations in government contracting is for the purpose of determining whether proposed costs are too low. See FAR 15.404-1(d)(1). Read information about Federal Cost-Reimbursement Contract Types.

FAR 15.404-1 Language

Many government agencies argue that they are only required to conduct a cost realism analysis in certain situations. However, the FAR does not say that if facts present themselves to question the contractor’s understanding of the work, that reasonableness does not mandate such an inquiry. At the end of the day, it’s the taxpayer dollars that are at risk. The Following are excerpts from the FAR clauses

d) Cost realism analysis.

(1) Cost realism analysis is the process of independently reviewing and evaluating specific elements of each offeror’s proposed cost estimate to determine whether the estimated proposed cost elements are realistic for the work to be performed; reflect a clear understanding of the requirements; and are consistent with the unique methods of performance and materials described in the offeror’s technical proposal.

           (2) Cost realism analyses shall be performed on cost-reimbursement contracts to determine the probable cost of performance for each offeror.

                (i) The probable cost may differ from the proposed cost and should reflect the Government’s best estimate of the cost of any contract that is most likely to result from the offeror’s proposal. The probable cost shall be used for purposes of evaluation to determine the best value.

                (ii) The probable cost is determined by adjusting each offeror’s proposed cost, and fee when appropriate, to reflect any additions or reductions in cost elements to realistic levels based on the results of the cost realism analysis.

           (3) Cost realism analyses may also be used on competitive fixed-price incentive contracts or, in exceptional cases, on other competitive fixed-price-type contracts when new requirements may not be fully understood by competing offerors, there are quality concerns, or past experience indicates that contractors’ proposed costs have resulted in quality or service shortfalls. Results of the analysis may be used in performance risk assessments and responsibility determinations. However, proposals shall be evaluated using the criteria in the solicitation, and the offered prices shall not be adjusted as a result of the analysis.

FAR 15.305 Proposal evaluation.

(a) Proposal evaluation is an assessment of the proposal and the offeror’s ability to perform the prospective contract successfully. An agency shall evaluate competitive proposals and then assess their relative qualities solely on the factors and subfactors specified in the solicitation. Evaluations may be conducted using any rating method or combination of methods, including color or adjectival ratings, numerical weights, and ordinal rankings. The relative strengths, deficiencies, significant weaknesses, and risks supporting proposal evaluation shall be documented in the contract file. See  Legal Information Institute

(1) Cost or price evaluation. Normally, competition establishes price reasonableness. Therefore, when contracting on a firm-fixed-price or fixed-price with economic price adjustment basis, comparison of the proposed prices will usually satisfy the requirement to perform a price analysis, and a cost analysis need not be performed. In limited situations, a cost analysis may be appropriate to establish reasonableness of the otherwise successful offeror’s price (see 15.403-1(c)(1)(i)(C)). When contracting on a cost-reimbursement basis, evaluations shall include a cost realism analysis to determine what the Government should realistically expect to pay for the proposed effort, the offeror’s understanding of the work, and the offeror’s ability to perform the contract. Cost realism analyses may also be used on fixed-price incentive contracts or, in exceptional cases, on other competitive fixed-price-type contracts (see 15.404-1(d)(3)). (See 37.115 for uncompensated overtime evaluation.) The contracting officer shall document the cost or price evaluation.

The Power of Documentation

When the agency conducts a cost realism analysis, it show have clear documentation in the record. This can make the difference in winning or losing a bid protest.  The documentation should articulate the basis for the analysis and show a path to the result. Many agencies will always claim that there are specific contracts that require a cost realism analysis. If the contested contract does not require it, the agency will almost always argue that none needed to be done and that the contracting officer was well within his or her discretion. Find out more about SBA Certificate of Competency COC Program & Bid Protests and Special Rules When Appealing SBA COC & Small Business Certificate of Competency Decisions.

However, one may find that the solicitation, especially in a situation where it is the agency’s very first procurement, addresses pricing risks through the evaluation criteria.  Fear or unbalanced pricing  ( understated), lack of understanding because of low pricing may always be scattered throughout the solicitation. However, an offeror may submit an offer that contains a remarkably low price. However, the government will still disregard.

The bottom line is that the FAR certainly mandates what types of contracts must have a cost realism analysis. However, one should not turn a blind eye when facts present what could arguably be an alarming situation where an offeror’s price is obviously too low.  The taxpayer may end up paying in the long run.

Do Obvious Factors in Proposal Warrant a Cost Realism Analysis?

Normally, a cost realism assessment is not considered in the evaluation of proposals for the award of a fixed-price contract, because these federal contracts place the risk of loss upon the Offeror. However, when the solicitation tends to put a substantial emphasis on watching for unnecessary administrative costs and oversight of the contractor, it would also seem reasonable that when the proposed price is way under the government’s estimate, and the red flags are screaming at the agency, that it should be justified in not performing a cost realism analysis.

Of course, the agency can simply sit back and wait for the inevitable to happen and then spend more tax payer dollars fixing the problem. When awarding a fixed-price contract, an agency may provide for a price realism analysis for the purpose of measuring an offeror’s understanding of the solicitation requirements, or of assessing the risk inherent in an contractor’s bid.

The following cases show how the courts look at the cost realism analysis by the contracting agency.

Ohio KePRO, Inc., B-417836, .2 (Nov. 18, 2019) (contracting agency’s cost realism evaluation was deemed to be flawed because the government failed to reasonably evaluate protester’s proposed direct labor rates and assess the realism of the offeror’s proposed level of effort; GAO also found that the contracting agency’s technical evaluation was flawed because it failed to reasonably evaluate the awardee’s proposed level of effort and the level of documentation in the record was insufficient.

Sayres & Assocs. Corp., B-418374 (Mar. 30, 2020) (GAO found that the government’s cost realism evaluation failed to reasonably evaluate the protester’s proposed escalation rate or reasonable show and explain how the the government determined that the historical data and narrative provided by the protester to justify its rate was inadequate)

For help filing a bid protest that challenges an improper agency cost realism analysis and evaluation in government contract pricing, call our bid protest lawyers at 1-866-601-5518 for a Free Initial Consultation.