Editor’s note: This is the second post in a series focused on protest allegations related to cost and price analyses. The first post explained the basic principles on price and cost realism. Planned future posts will discuss benchmarks an agency may use in a realism analysis, the role of an offeror’s technical approach in a price/cost realism analysis, price reasonableness, and recent protest decisions involving cost/price analysis issues.
As discussed in the first post in this series, a cost realism analysis is required when an agency evaluates proposals for a cost-reimbursement contract. The analysis is required for cost-reimbursement contracts because under these contracts, an offeror’s proposed costs are not controlling–the Government will be bound to pay the contractor its actual, allowable, and reasonable costs. To determine the probable cost of performance, an agency may adjust the amounts an offeror proposed for given elements to reflect what the agency believes is realistic – the most probable cost. When an agency adjusts an offeror’s proposed amount and the offeror is not selected for award, those adjustments can become a ground for protest at GAO or the CFC.
Cost realism analyses are a standard part of an evaluation for the award of a cost-reimbursement contract. When an agency does a cost realism analysis, it reviews and evaluates specific elements of an offeror’s proposed cost estimates to determine whether the proposed costs (1) are realistic for the work to be performed, (2) reflect an understanding of the requirements, and (3) are consistent with the method of performance described in the offeror’s technical approach. If the proposed costs are inconsistent with these principles, the agency will make adjustments to determine the probable cost of performance.
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