Cost Realism and Competitive Range

[DebbieLester]

For a cost reimbursement solicitation, to what degree must cost realism be considered prior to estabilishing a competitive range? Is a complete cost realism analysis required?

[Don Mansfield]

As opposed to an "incomplete" cost realism analysis? Please explain the distinction that you are making.

[ContractPriceAnalyst]

Based on FAR 15.306©, I would say that a cost realism assessment needs to be conducted if that is an envaluation factor.

I will add that it may not be reasonable to establish a Government Estimate of Most Probable Cost (GEMPC) that does not equal the proposed cost prior to establishment of the competitive range and entering discussions with those offerors that have an opportunity to respond to the applicable Evaluation Notices. Prior to entering discussions, it may be difficult to determine whether the proposed costs are realistic for the work to be performed; reflect a clear understanding of the requirements; and are consistent with the unique methods of performance and materials described in the technical proposal. With that said, clear documentation is the key.

[Navy_Contracting_4]

For a cost reimbursement solicitation, to what degree must cost realism be considered prior to estabilishing a competitive range? Is a complete cost realism analysis required?

Isn't this addressed in your Source Selection Plan (SSP)? Or are you at an early phase of an acquisition where you don't have an SSP yet, and you're asking a philosophical question?

[DebbieLester]

The solicitation and SSP indicate that a limited review of the business proposal will be accomplished prior to establishment of the competitive range. The solicitation goes on to describe what the limited review, at a minimum, would entail (e.g. comparison to Govt cost estimate, check for mathematical accuracy, a review of proposed assumption for consistency with soliciation assumptions), and that a complete cost analysis and cost realism analysis would will be accomplished after establishment of the competitive range or prior to award.

However, I have received some feedback that the solicitation langauge may not be appropriate. I do understand that we need to take into account the relative price of proposals but I’m not so sure that means that we need to do a cost realism analsyis or cost analysis prior to competitive range.

[Guest Vern Edwards]

If you know in advance that you intend to establish a competitive range and conduct discussions, then you had better be able to answer Don Mansfield's question. Why would you base a competitive range determination on an analysis that you consider to be less than "complete." What do you mean by that? How sound would your competitive range determination be if based upon an incomplete analysis? You had better have a reasonable answer to that question before you are asked for one.

Your question suggests that you would establish a competitive range based on a less than complete cost realism analysis. In what sense would it be less than complete? What would be missing? What would you learn from a complete analysis that you would not learn from one that is not complete?

[joel hoffman]

Price, as a factor, is generally required to be a consideration in the establishment of a competitive range. If price becomes a discriminator in the selection of firms to include in the competitive range for discussions, you should have performed a thorough price evaluation, not a "limited review".

[Navy_Contracting_4]

FAR 15.305(a)(1) requires that for cost-reimbursement contracts, “evaluations shall include a cost realism analysis.” Any cost realism analysis, whether before or after the competitive range determination, is, of necessity, going to be only as complete and thorough as the availability of information allows. I would argue that, when discussions are required, no cost realism analysis is “complete” until discussions have been held and final proposal revisions have been received and evaluated. Thus, isn't any cost realism analysis conducted before determining the competitive range “incomplete” in some way, by definition?

[Guest Vern Edwards]

I would argue that, when discussions are required, no cost realism analysis is “complete” until discussions have been held and final proposal revisions have been received and evaluated. Thus, isn't any cost realism analysis conducted before determining the competitive range “incomplete” in some way, by definition?

No.

Whether a cost-realism analysis is complete depends on how you planned to do it and what you hoped to accomplish, and whether you were able to do it as planned and accomplish those ends. It does not follow that a cost-realism analysis is incomplete if discussions are to be conducted. It could very well be the case that the cost-realism analyses were completed as planned, that the CO learned what he wanted to know, and that the competitive range determination was based on the results. The CO may not want to discuss costs at all during discussions.

[Navy_Contracting_4]

The solicitation and SSP indicate that a limited review of the business proposal will be accomplished prior to establishment of the competitive range. The solicitation goes on to describe what the limited review, at a minimum, would entail (e.g. comparison to Govt cost estimate, check for mathematical accuracy, a review of proposed assumption for consistency with soliciation assumptions), and that a complete cost analysis and cost realism analysis would will be accomplished after establishment of the competitive range or prior to award.

However, I have received some feedback that the solicitation langauge may not be appropriate. I do understand that we need to take into account the relative price of proposals but I’m not so sure that means that we need to do a cost realism analsyis or cost analysis prior to competitive range.

I've found nothing that requires a cost realism analysis be completed, or even conducted, before determination of the competitive range. Based on your description of the process as explained in the SSP and solicitation, it appears that the plan is to do the cost realism analysis after determination of the competitive range. I wouldn’t characterize the limited review of the business proposal as a cost realism analysis at all.

[Guest Vern Edwards]

I've found nothing that requires a cost realism analysis be completed, or even conducted, before determination of the competitive range. Based on your description of the process as explained in the SSP and solicitation, it appears that the plan is to do the cost realism analysis after determination of the competitive range. I wouldn’t characterize the limited review of the business proposal as a cost realism analysis at all.

I don't think that's good advice, Navy. I disagree with you.

Price or cost is a mandatory evaluation factor in every source selection. See FAR 15.304( c)(1).

Cost realism is a mandatory factor when evaluating proposals for cost-reimbursement contracts. See FAR 15.305(a)(1). See also FAR 15.404-1(d)(1) and (2), which state:

(d) Cost realism analysis.

(1) Cost realism analysis is the process of independently reviewing and evaluating specific elements of each offeror’s proposed cost estimate to determine whether the estimated proposed cost elements are realistic for the work to be performed; reflect a clear understanding of the requirements; and are consistent with the unique methods of performance and materials described in the offeror’s technical proposal.

(2) Cost realism analyses shall be performed on cost-reimbursement contracts to determine the probable cost of performance for each offeror.(i) The probable cost may differ from the proposed cost and should reflect the Government’s best estimate of the cost of any contract that is most likely to result from the offeror’s proposal. The probable cost shall be used for purposes of evaluation to determine the best value. (ii) The probable cost is determined by adjusting each offeror’s proposed cost, and fee when appropriate, to reflect any additions or reductions in cost elements to realistic levels based on the results of the cost realism analysis.

It is well-established that you cannot eliminate a technically acceptable proposal from the competitive range without considering its relative cost. See Meridian Management Corp., B-285127, 2000 CPD para. 121:

Cost or price to the government must be included in every RFP as an evaluation factor, and agencies must consider cost or price to the government in evaluating competitive proposals. 41 U.S.C. § 253a( c)(1)( (1994); FAR §15.304( c)(1); Kathpal Techs., Inc.; Computer & Hi-Tech Management, Inc., B-283137.3 et al., Dec. 30, 1999, 2000 CPD ¶ 6 at 9. This requirement means that an agency may not exclude a technically acceptable proposal from the competitive range without taking into account the relative cost of that proposal to the government. Columbia Research Corp., B-284157, Feb. 28, 2000, 2000 CPD ¶ ___; Kathpal Techs., Inc.; Computer & Hi-Tech Management, Inc., supra.

See also, more recently, Arc-Tech, Inc., B-400325.3, 2009 CPD para. 53.

So:

(1) FAR requires that a CO consider price or cost when evaluating competitive proposals.

(2) When evaluating competitive proposals for a cost-reimbursement contract, a CO must compare proposals on the basis of probable cost, not proposed cost. Probable cost is an output of cost realism analysis. So a CO must perform a cost realism analysis when evaluating competitive proposals for a cost reimbursement contract.

(3) A CO cannot eliminate a technically acceptable proposal from the competitive range without considering its cost. When considering the cost of a proposal for a cost-reimbursement contract a CO must consider its probable cost, not its proposed cost.

Thus, a CO must make a cost realism analysis prior to making a competitive range determination among proposals for a cost-reimbursement contract.

Don's question in Post #2 remains to be answered.

[Don Mansfield]

Navy,

FAR 15.306( c )(1) states:

Agencies shall evaluate all proposals in accordance with 15.305(a), and, if discussions are to be conducted, establish the competitive range. Based on the ratings of each proposal against all evaluation criteria, the contracting officer shall establish a competitive range comprised of all of the most highly rated proposals, unless the range is further reduced for purposes of efficiency pursuant to paragraph ©(2) of this section.

Now to FAR 15.305(a)(1):

Cost or price evaluation. Normally, competition establishes price reasonableness. Therefore, when contracting on a firm-fixed-price or fixed-price with economic price adjustment basis, comparison of the proposed prices will usually satisfy the requirement to perform a price analysis, and a cost analysis need not be performed. In limited situations, a cost analysis (see 15.403-1©(1)(i)() may be appropriate to establish reasonableness of the otherwise successful offeror’s price. 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. Cost realism analyses may also be used on fixed-price incentive contracts or, in exceptional cases, on other competitive fixed-price-type contracts (see 15.404-1(d)(3)). (See 37.115 for uncompensated overtime evaluation.) The contracting officer shall document the cost or price evaluation.

So, the way I read this is that a competitive range determination must be based on the results of the proposal evaluation. The proposal evaluation must include a cost realism analysis when contracting on a cost-reimbursement basis. Doesn't it follow that a cost realism analysis be completed prior to the establishment of the competitive range?

[joel hoffman]

Well, the gentlemen above have explained the requirements very well. I think the word "complete" used in Debbie's posts may be somewhat ambiguous. One must "complete" the initial price or cost evaluation as well as the technical evaluation for each proposal. Both are necessary in the overall proposal evaluation, prior to the establishment of the competitive range for discussions, as described above.

After discussions, one requests final proposal revisions, then (again) "completes" the evaluation of revised price and technica proposals prior to the trade-off or other source selection decisions.

[Navy_Contracting_4]

Thus, a CO must make a cost realism analysis prior to making a competitive range determination among proposals for a cost-reimbursement contract.

Vern,

I stand corrected. Thank you for catching my error.

[Guest Vern Edwards]

The source selection plan should reflect the anticipated response to the solicitation. If they expect only a small number of proposals, say, three or four, then the best course of action might be to perform a cost realism analysis for every proposal. However, the GAO says that a CO need not evaluate the price or cost of a technically unacceptable proposal. So, if the agency expects a large number of proposals, say, eight or more, one way to avoid some cost realism work would be to proceed as follows:

1. Evaluate technical proposals and group them as follows based on the results:

a. Technically acceptable.

b. Technically unacceptable, but easily made acceptable and potentially best value through discussions.

c. Technically unacceptable, but not easily susceptible of being made acceptable.

2. Based on the GAO decisions, perform a cost-realism analysis for 1a and 1b proposals, but not 1c proposals.

3. Establish a competitive range that includes the most highly rated 1a and 1b proposals.

4. Eliminate all others from the competitive range.

That approach would eliminate the need to perform a cost realism analysis on 1c proposals. How much work might that procedure save? I don't know. It depends. But the procedure does not add work and might save some. Of course, the CO should describe the procedure in the RFP.

If you think long enough you might come up with a variation on that procedure that could save even more work without violating Part 15.