Cost Realism: Frequently Asked Questions

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David L. Bodner ●

Understanding the basics of cost realism can help offerors submit more competitive proposals and withstand cost realism challenges to award. The Government Accountability Office (“GAO”) cites cost realism as one of its “most prevalent reasons for sustaining protests” in its Fiscal Year 2021 Bid Protest Report.

What is a cost realism analysis?

A cost realism analysis is a FAR 15.404-1(d)(1)-prescribed proposal analysis technique where the agency determines if the proposed costs are realistic for the work to be performed. In a cost reimbursement contract, an offeror’s proposed costs are not controlling because agencies are responsible for all actual and allowable costs. A cost realism analysis determines if an offeror is proposing unrealistically low costs to secure award. An agency cost realism analysis evaluates each offeror’s proposed cost elements (e.g., direct costs, overhead, G&A, material and subcontracting, etc.) for the unique technical approach proposed to determine the expected cost of performance. If the agency determines a proposed cost element is unrealistic, the agency can adjust the offeror’s evaluated cost, typically upward. The agency uses each offeror’s evaluated cost to select the best value awardee. However, the contract award reflects the awardee’s proposed total cost.

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