Cost Realism Analysis

[dkubis]

Would you perform a cost realism analysis on a non-competitive proposal or modification to a cost contract?

The far language on cost realism at FAR 15.404-1 lends itself to a competitive acquisition with terminology like "best value" and "The probable cost is determined by adjusting each offeror’s proposed cost".

The DoD guide also states "When evaluating competitive offers"

Just wondering if cost realism analysis is required in a non-competitive environment such as a modification to a cost contract (increased effort).

[Navy_Contracting_4]

Generally speaking, cost-realism analyses are performed only on competitive proposals for cost-reimbursement contracts (or fixed price type contracts as described in FAR 15.404-1(d)(3)). In a non-competitive environment, a cost-realism analysis is not required, however, a rigorous cost analysis is normally conducted, but it's more with a view towards identifying excessive proposed costs, as opposed to identifying underbids, as is typically the case with cost-realism analyses.

[Don Mansfield]

That's not true. A cost-realism analysis is required on all cost-reimbursement proposals. There was a proposed rule that stated the following at FAR 15.404-1(d)(2):

Cost realism analyses shall be performed on competitive cost-reimbursement contracts to determine the probable cost of performance for each offeror.

[see 62 FR 26640-01, May 14, 1997]

However, the word "competitive" was removed in the final rule.

[Guest Vern Edwards]

The issue here is not what FAR requires, but what sound business sense requires.

When a CO receives a noncompetitive proposal for a cost-reimbursement contract, he or she should conduct a cost analysis to determine whether the proposed estimated cost is (1) realistic (i.e., high enough to cover the most likely cost of performance) and, if it is, then (2) reasonable (i.e., not more than what the job should cost given reasonably competent performance). One should not need an MBA or reference to the FAR to understand why this is so. To negotiate based on anything less would be dereliction of duty, deserving of warrant termination. Navy says that what I described "normally" doesn't happen. I'll take his word for it, since most COs aren't normally very competent.

[Navy_Contracting_4]

The issue here is not what FAR requires, but what sound business sense requires.

When a CO receives a noncompetitive proposal for a cost-reimbursement contract, he or she should conduct a cost analysis to determine whether the proposed estimated cost is (1) realistic (i.e., high enough to cover the most likely cost of performance) and, if it is, then (2) reasonable (i.e., not more than what the job should cost given reasonably competent performance). To negotiate based on anything less would be dereliction of duty, deserving of a kick in the a** immediately beore warrant termination. Navy says that "normally" doesn't happen. I'll take his word for it, since most COs aren't normally very competent.

That's not true. A cost-realism analysis is required on all cost-reimbursement proposals. There was a proposed rule that stated the following at FAR 15.404-1(d)(2):

[see 62 FR 26640-01, May 14, 1997]

However, the word "competitive" was removed in the final rule.

Don,

Thank you for catching my mistake. I allowed myself to be misled by the context of the language at 15.404-1(d)(1), (d)(2) and (d)(2)(ii) where it mentions "...each offeror," and the "competitive" language in (d)(3), and concluded the entire subsection on cost realism analyses covered competitive situations only. My mistake.

Vern,

Notwithstanding my oversight, noted above, regarding when cost realism analyses are required, the "rigorous cost analysis" that I pointed out "is normally conducted" in a non-competitive environment will certainly disclose if the offeror's proposal is "high enough," but in my experience with non-competitive proposals, that has never been a problem. I do agree with you that it's essential to assess that aspect of the proposal, but I question your concluding aspersion about "most COs." I'd venture to say you don't know "most COs," so it's presumptuous of you to state that "most COs aren't normally very competent," as if it's a fact, or something that you know.

[Guest Vern Edwards]

I have trained hundreds of COs every year for more than 20 years, and I supervised them before that. I have talked to them, reviewed their files, and tested them and know the results. I communicate with them privately. I share information with other people who do the same. I'll stick with my statement.

Most COs are not competent to do the work that they have been assigned to do because they have not been educated properly and trained effectively. They want to be competent, but they are not given the chance. I'll venture that most COs would agree that they have not been educated properly and trained effectively. And let's not even ask how many have been trained how to properly do a cost-realism analysis, one of the most challenging tasks in contracting.

Yes, I'll stick with my statement. If it makes it more palatable to you, consider it subjectively probabilistic in nature.

[dkubis]

OK, just to be straight, non-competitive environment, where you're relying on cost and pricing data a cost analysis is required and also adequate to determine cost realism.

Cost Realism Analysis is used in a competitive environment for cost contracts and is used to develop the probable cost of performance.

Correct?

[Don Mansfield]

No.

1. When certified cost or pricing data are required and the proposal is for a cost-reimbursement contract, a cost analysis as described in Vern's post #4 would be required.

2. When certified cost or pricing data are not required and the proposal is for a cost-reimbursement contract, cost realism analysis would be required.

3. Don't say "cost contracts" when you mean "cost-reimbursement contracts." A cost contract is a specific type of cost-reimbursement contract.

[Navy_Contracting_4]

Se FAR 15.404-1( c)(1) - "Cost analysis is the review and evaluation of any separate cost elements and profit or fee in an offeror’s or contractor’s proposal, as needed to determine a fair and reasonable price or to determine cost realism, and the application of judgment to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency." [emphasis added.]

[Don Mansfield]

Navy,

Believe it or not, I just read that in the FAR and came back here to edit my post. Thank you for returning the favor of correcting my mistake.