In the context of the Federal Acquisition Regulations (FAR), the terms "cost reasonableness" and "cost realism" have very different meanings and purposes. It is easy to confuse the two similar sounding terms and some bidders have even appealed contract awards before the Comptroller General based on a lack of understanding between cost reasonableness and cost realism (or price reasonableness and price realism).
First, understand the following relationships:
- Cost reasonableness - fixed price contracts
- Cost realism - cost type contracts
The purpose of a cost reasonableness review in a competition for the award of a fixed-price contract is to determine whether the prices offered are too high, as opposed to too low.
The purpose of a cost realism review in a competition for the award of a cost-type contract is to determine whether the prices offered are too low. In a cost-type environment, estimated costs are not dispositive, because regardless of the costs proposed, the Government is bound to pay the contractor its actual and allowable costs (see FAR 15.605(d)). A price realism analysis determines the extent to which an offeror's proposed costs represent what the contract should cost, assuming reasonable economy and efficiency.