Understanding the basics of cost realism can help offerors submit more competitive proposals and withstand cost realism challenges to award. The Government Accountability Office (“GAO”) cites cost realism as one of its “most prevalent reasons for sustaining protests” in its Fiscal Year 2021 Bid Protest Report.

What is a cost realism analysis?

A cost realism analysis is a FAR 15.404-1(d)(1)-prescribed proposal analysis technique where the agency determines if the proposed costs are realistic for the work to be performed. In a cost reimbursement contract, an offeror’s proposed costs are not controlling because agencies are responsible for all actual and allowable costs. A cost realism analysis determines if an offeror is proposing unrealistically low costs to secure award. An agency cost realism analysis evaluates each offeror’s proposed cost elements (e.g., direct costs, overhead, G&A, material and subcontracting, etc.) for the unique technical approach proposed to determine the expected cost of performance. If the agency determines a proposed cost element is unrealistic, the agency can adjust the offeror’s evaluated cost, typically upward. The agency uses each offeror’s evaluated cost to select the best value awardee. However, the contract award reflects the awardee’s proposed total cost.

What contract type does a cost realism evaluation apply to?

An agency is only required to perform a cost realism analysis on a cost-reimbursement type contract. FAR 15.404-1(d)(2). The GAO does not require a cost realism analysis for a time-and-material or labor-hour type contract. Iron Vine Security, LLC, B-409015, Jan. 22, 2014, 2014 Comp. Gen. Proc. Dec. P 193 at 6. The GAO does not require a cost realism analysis for fixed-price type contracts. URS Fed. Servs., Inc., B-412580, B-412580.2, Mar. 31, 2016, 2016 Comp. Gen. Proc. Dec. P 116 at 7; FAR 15.402(a). The only required proposal analysis methodology for a fixed-price type contract is a fair and reasonable determination, which generally examines whether the total proposed price (not individual cost elements) are too high, rather than too low.

What is the difference between a cost realism and price realism analysis?

The FAR does not use the term “price realism,” however, GAO uses the term to describe the proposal analysis described in FAR 15.404-1(d)(3) for competitive fixed-price contracts. People, Technology and Processes, LLC, B-418781.4, July 2, 2021, 2021 Comp. Gen. Proc. Dec. P. 252 at 7. In a fixed-price type contract, the contract price is subject to limited adjustments regardless of the contractor’s cost experience in performance. Therefore, a price realism analysis seeks to determine if an offeror’s proposed price is so low that the performance of the contract is at risk. Below are differences between cost realism and price realism.

What kind of cost realism issues does GAO review?

GAO sustains protests challenging unreasonable cost realism evaluations that competitively prejudice that offeror. GAO’s review of an agency’s cost realism evaluation is limited to determining whether the cost analysis is “reasonably based and not arbitrary.” Logistics Mgmt. Inst., B-417607 et al., Aug. 30, 2019, 2019 Comp. Gen. Proc. Dec. P 311 at 7. An agency cost realism evaluation “is not required to achieve scientific certainty.” Since the agency’s cost realism evaluation should be tailored to each offeror’s unique technical approach and costs, GAO’s review is fact specific. However, a few general cost realism issues that can be effectively challenged are:

• • • Improper adjustments to the unsuccessful offeror’s proposed cost
    • Missed adjustments to the awardee’s proposed costs
    • Errors in the magnitude of the cost adjustment
    • Failing to consider the costs of the unique technical approach
    • Inadequate documentation of the cost realism evaluation

What should offerors consider when submitting a proposal for a solicitation that requires a cost realism analysis?

Offerors should consider the following when submitting a proposal in response to a solicitation containing cost realism:

• • • Carefully review the solicitation to understand what portions or contract line items (“CLINs”) are subject to cost realism and what information is requested by the agency to support proposed costs.
    • Consider the applicable page count, if any, and provide substantiating data for all cost elements to limit the amount and magnitude of any adjustments to your proposed cost elements.
    • Protect the submitted information from disclosure such as by marking the proposed data in accordance with FAR 52.215-1(e).