In a competitive bid situation, the Government is keenly sensitive to unrealistically low offers. Unrealistically low offers generally occur, because the offeror:
- Does Not Understand Contract Requirements. Government requirements may not be clearly stated or the offeror may be unfamiliar with common product terminology. If the offeror underestimates the magnitude or complexity of a proposed task, the estimated costs could be far below the probable cost of successful contract performance.
- Did Not Properly Coordinate Proposal Preparation. The cost proposal may not be consistent with the offeror's technical proposal. The inconsistency may occur as the result of inadequate coordination between the team preparing the technical proposal and the team preparing the cost proposal.
- Consciously Understated The Proposed Cost/Price. In the face of competitive pressure, an offeror may submit an unrealistically low price in order to win a contract (i.e., use a buy-in pricing strategy).
- On cost-reimbursement contracts, the contractor may expect to recoup all or most of the costs related to any cost overrun that may occur.
- On fixed-price contracts, the contractor may hope to:
- Increase the contract amount after award (e.g., through unnecessary or excessively priced contract modifications), or
- Receive follow-on contracts at unrealistically high prices to recover losses on the buy-in contract.
- Are realistic for the work to be performed;
- Reflect a clear understanding of contract requirements; and
- Are consistent with the unique methods of performances and materials described in the offeror's technical proposal.
Sometimes cost realism analyses are performed in-house by the contracting officers' staff. Sometimes the work is farmed out to auditors or contract administrators. Tomorrow, we will look at some of the specific steps that are performed in a cost realism review.