Cost Realism Analysis - Part II

Last Wednesday, we began a series on Cost Realism Analyses. Cost realism analyses are not audits - they are typically much less in scope than a full audit or even audits of parts of a proposal. They usually happen when the Government is evaluating competitive bids. Sometimes they happen without the bidders' knowledge. They usually occur when the Government is concerned that one or more of the bids submitted are unrealistically low. Unrealistically low bids occur for a variety of reasons; failure to understand contract requirements, failure to properly coordinate proposal preparation, and consciously understating the proposed cost/price with the hopes of "getting healthy" later on through contract modifications. Bids that are found to be unrealistically low based on cost realism analyses, are usually excluded from futher consideration.

There have been many protests to the Comptroller General (GAO) challenging Government cost realism analyses. GAO generally sustains the contracting officer's judgment on cost realism as long as that judgment is informed, accurate, sufficiently thorough for the acquisition situation, reasonable - not arbitrary, and performed in accordance with the evaluation criteria stated in the solicitation.

The cost realism process generally goes something like this:

1. The Government must assure that the solicitation states how cost realism analysis will be used in the contract award decision.
2. The Government compares bids with its own in-house estimate of the likely cost of the project (the IGE or Independent Government Estimate).
3. The contracting officer obtains information other than cost or pricing data needed to support cost realism analysis
4. If necessary, the contracting officer obtains other information to support his/her analysis
5. If necessary, the contracting officer obtains analysis support from other members of the acquisition team. This could be in-house personnel, audit support, and field support.
6. The contracting officer identifies costs/prices that are understated for the required contract effort.

When performing cost realism reviews, the Government will focus on those areas that appear to have significant variances from the "probable costs" - however "probable costs" were determined. It could be labor hours, labor dollars, material quantities, material prices, indirect rates or a combination of these, or all of these.

So be forewarned, just becuase you submit a bid on a competitive procurement, does not mean that someone from the Government won't come poking around your records. You need to be ready to support the reasonable of your bid.