Cost Realism in Contract Proposals

Is price reasonableness really unreasonable?

By Bob Lohfeld    Washington Technology, December 15, 2014

With so many IT and professional services contracts being awarded to the lowest priced offeror, you have to wonder if the government is worried about awarding contracts to firms whose prices are unreasonably low.

As it turns out, in many procurements the government does not look for unreasonably low prices, and in some instances, is prohibited from doing so. In these procurements, low price has no floor.

The rules for examining price reasonableness and cost realism are complex and generally not well understood by capture and proposal professionals, so I thought I would point out some of the more interesting aspects of these rules about how low you can go.

Price reasonableness

Price reasonableness has nothing to do with low prices. Instead, it focuses on prices being too high. The government can assess price reasonableness by several methods—the most popular is comparing your bid prices to the prices of other bidders or comparing your prices to an independent government cost estimate (IGCE).

In both methods, the government looks at how high your bid is compared to the other bidders or the IGCE, and the amount of acceptable deviation is up to the government contracting officer’s discretion. In practice, the government tosses out very few bids for unreasonably high pricing because it is much easier in best value procurements to show that the high priced offeror simply didn’t provide the best value for the government when the source selection authority trades off cost and non-cost factors.

The question of price reasonableness being reasonable is really an inappropriate question since it only looks at the high side of pricing and doesn’t examine the question of pricing being so low that it jeopardizes contract performance. Looking at the low side of pricing is the realm of cost realism.

Cost realism in proposals for cost plus contracts

In cost reimbursable contracts, it is well established that the government is obligated to pay a contractor for actual and allowable costs incurred in the performance of the contract, not costs proposed by the contractor during the bidding process.

Because contractors tend to understate their costs when bidding, FAR 15.305(a)(1) and 15.404-1(d), require the government to review detailed cost information to determine whether the proposed costs are realistic and represent the costs that are likely to be incurred under the contractor’s proposed technical approach.

This additional cost information can include a detailed breakout of direct labor rates, estimated hours, indirect rates, other direct costs, and profit. The government analyzes this information to determine whether the offeror’s proposed costs demonstrate a reasonable understanding of the work to be done, are realistic, and are consistent with the technical approached proposed by the offeror. The contracting officer determines the level of analysis conducted; however, there is a requirement that this analysis must be done and the results documented in the contract file.

If the bid price is determined to be too low, the contracting officer has considerable discretion in what is done next.

Normally the bid price is adjusted upward to offset the unrealistic pricing, and in some cases, the technical score of the offeror can be lowered by showing that their unrealistic pricing demonstrates a lack of understanding of the work to be performed. The probable cost adjustment and the ability to down score the technical proposal act as a safety net to prevent awards from going to offerors with unrealistically low proposed costs on cost reimbursable contracts.

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