Realism in Competitive Reimbursable Costs

Are your proposed costs for U.S. government competitive reimbursable costs realistic? If not, then you may find that the U.S. government source selection officials will unilaterally adjust your proposed costs to what they believe is the most probable cost based on their evaluation.

 

Tips

  • Delineate your cost and technical assumptions, perceived risks and your risk-mitigation strategy and tactics.
  • Support your proposed new or novel technical approaches and solutions with empirical evidence indicating prior success or high probability of success of the proposed effort to accomplish the solicited work.
  • Ensure your cost estimates are for the same resources included in the technical proposal.1.Base your estimates on your current and prior actual cost whenever possible.2.If you’re proposing less than your current or prior actual costs, provide convincing support on actions you’ve taken or concrete plans to reduce costs.3.When actual costs aren’t available or applicable, use verifiable market data (for example, salary surveys, supplier quotes, etc.) that are representative of the resources included in your technical approach.

The U.S. government will perform cost realism on offerors’ proposals for cost reimbursable contracts intended to be awarded based on competition. Most of these contracts are awarded to the offeror who is perceived as proposing the best value, with the evaluation of the technical solution weighted equal to or higher than the proposed costs.

The Federal Acquisition Regulation (FAR) source selection guidance at FAR 15.303(c) states: “The evaluation factors and significant sub-factors that apply to an acquisition and their relative importance, are within the broad discretion of agency acquisition officials …”

Nevertheless, source selection procedures require that:

1. Price or cost to the government shall be evaluated in every source selection; and

2. The quality of the product or service shall be addressed in every source selection through consideration of one or more non-cost evaluation factors such as past performance, compliance with solicitation requirements, technical excellence, management capability, personnel qualifications and prior experience.

Since the U.S. government will be obligated to pay actual allowable costs under the standard U.S. government terms and conditions for cost reimbursable contracts, the FAR also require performance of cost realism analysis to ascertain whether or not your proposed costs are under- or overestimated.

FAR 15.305(A)(1), Cost or Price Evaluation, states that “When contracting on a cost-reimbursement basis, evaluations shall include a cost realism analysis to determine what the government should realistically expect to pay for the proposed effort, the offeror’s understanding of the work and the offeror’s ability to perform the contract.

When the cost realism techniques are specified in the solicitation, then the government must use these techniques as described. When the techniques are not included in the solicitation, the government source selection officials are provided broad discretion regarding the methodology employed for performing their cost realism.

If your cost proposal is deemed to be to low, it may be interpreted as an indication that you do not understand the scope of work and/or that you will be unable to perform. Even when your proposed costs demonstrate an understanding of the work and ability to perform, your proposed costs may still be adjusted to the U.S. government’s estimate of the most probable cost for comparison to the other offerors.

If other evaluation factors are close or equal, the resulting upward adjustment to your proposed costs may result in an award to another offeror based on a comparison with its lower probable cost.

You must be prepared to defend your proposed costs as the most probable cost within the context of the solicitation requirements, your proposed solution and your basis of cost estimates.

Want more information? Consult with your government contracting advisor.

Eric Cohen, CPA is the President and Founder of E. Cohen and Company CPAs, a full-service CPA firm serving nonprofit organizations, government contractors, professional service companies and other industries with audit, tax and business advisory services for over 25 years. The firm was commended as a SmartCPA Reader’s Choice by SmartCEO magazine and a “Best Accounting Firm to Work For” by AccountingToday magazine. For more information, visit www.ecohencpas.com or call 301-917-6200.