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Shelley Hall << Record >> 32 years in Department of Defense (retired Nov 2015) USAF (AFMC and AFSPC) Held unlimited Contracting Officer’s warrant for 23 years Community Relations and Content Manager for Skyway Expertise in services and supplies, Federal Supply Schedules, pre-and post-award, simplified acquisition to large dollar technically complex source selections, Foreign Military Sales, and commercial and non- commercial << Record >>

Skyway Insight© Webinar Training From Contracting Officers Topic: Cost Realism Host: Shelley Hall March 9 2017

Agenda What is cost realism? When is it used? Why is it used? How do CO’s identify cost realism issues? Most Probable Cost Protests based on cost realism analysis Final words

What is cost realism?

What is cost realism? 15.404-1(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. (3) Cost realism analyses may also be used on competitive fixed-price incentive contracts or, in exceptional cases, on other competitive fixed-price-type contracts when new requirements may not be fully understood by competing offerors, there are quality concerns, or past experience indicates that contractors’ proposed costs have resulted in quality or service shortfalls. Results of the analysis may be used in performance risk assessments and responsibility determinations. However, proposals shall be evaluated using the criteria in the solicitation, and the offered prices shall not be adjusted as a result of the analysis.

When is it used?

When is it used? Contracting officers have a great deal of latitude on deciding when to use cost realism. In reality, it can be used on any federal acquisition if the CO determines it’s necessary to arrive at a fair and reasonable price.

Why is it used?

Why is it used? Unrealistically Low Offers generally occur because the offeror: Does Not Understand Contract Requirements - Government requirements may not be clearly stated or the offeror may be unfamiliar with common product terminology. If the offeror underestimates the magnitude or complexity of a proposed task, the estimated costs could be far below the probable cost of successful contract performance.

Why is it used? (cont’d) 2. Did Not Properly Coordinate Proposal Preparation - The cost proposal may not be consistent with the offeror's technical proposal. The inconsistency may occur as the result of inadequate coordination between the team preparing the technical proposal and the team preparing the cost proposal.

Why is it used? (cont’d) 3. Consciously Understated The Proposed Cost/Price – In a competitive acquisition , an offeror may submit an unrealistically low price in order to win a contract. On cost-reimbursement contracts, the contractor may expect to recoup all or most of the costs related to any cost overrun that may occur. On fixed-price contracts, the contractor may hope to: (1) Increase the contract amount after award (e.g., through unnecessary or excessively priced contract modifications), or (2) Receive follow-on contracts at unrealistically high prices to recover losses on the buy-in contract.

How do CO’s identify cost realism issues?

How do CO’s identify cost realism issues? Example 1: The offeror has submitted a proposal on a contract that is part of a complex on-going research program to develop and test a state- of-the-art analysis system. In the technical proposal, the offeror has proposed to use 10 doctoral level engineers in completing the effort over a 12-month period. Instead of the market labor rate for doctoral engineers, the offeror has proposed the market labor rate for engineering assistants. It appears impossible to hire the proposed types of engineers at that rate.

How do CO’s identify cost realism issues? (cont’d) Example 2 - The offeror has proposed to integrate a top- of-the-line material handling unit into a new system being designed for the Government. However, the price proposed is 50 percent less than the lowest known sales price for the item.

How do CO’s identify cost realism issues? (cont’d) Example 3 - The offeror has proposed to conduct a stringent test program in a special test facility located in the contractor's plant. However, the proposal does not include the overhead cost normally applied to test units using the test facility.

Most Probable Cost

Most Probable Cost The probable cost is the Government's estimate of what it will cost for the offeror to complete the contract based on the Government's evaluation of the offeror's technical proposal and proposed costs.

Protests based on cost realism analysis

Protests Many protests have challenged the Government’s use of cost realism analyses. They are generally sustained based on the contracting officer's judgment on cost realism -- as long as that judgment is: •Informed; •Accurate; •Sufficiently thorough for the acquisition situation; •Reasonable -- not arbitrary; and •In accordance with evaluation criteria stated in the solicitation.

Protests Smartronix, Inc.; ManTech Advanced Systems International, Inc. The record demonstrates that the agency’s evaluation was reasonable and adequately documented, or, even assuming an error in the methodology used to evaluate the realism of vendors’ proposed direct labor rates, the protester has failed to demonstrate competitive prejudice. Challenging the agency’s best-value tradeoff by selecting a lower technically- rated, lower-priced quotation is denied where the decision was reasonable and consistent with the terms of the solicitation.

Protests Smartronix, Inc.; ManTech Advanced Systems International, Inc. (cont’d) Protest on the issuance of a task order to another contractor which was issued under the General Services Administration (GSA) Alliant Government Wide Acquisition Contract (GWAC), for the provision of technical support services. Protestor challenged the agency’s cost realism evaluation and the reasonableness of the agency’s best-value determination. Protest was denied.

Protests AM Pierce & Associates Inc. As part of a cost realism analysis in a negotiated procurement the agency used the protester’s actual indirect cost rates from the prior fiscal year, instead of the protester's significantly lower proposed rates. There where major discrepancies between the historical rates and its proposed rates, and the agency could not determine that the proposed rates were realistic.

Protests AM Pierce & Associates Inc. (cont’d) Agency used labor rates for current employees when evaluating the protester’s labor costs. The solicitation stated that the agency would determine whether the proposed direct labor costs were based on named employees and reserved the right to evaluate the costs at a higher rate to match the personnel proposed.

Protests AM Pierce & Associates Inc. (cont’d) Protestor stated that the agency failed to perform a proper best-value tradeoff and essentially converted the basis for award from best-value to lowest-priced, technically acceptable. This is denied where the record shows that the agency performed a best-value tradeoff that was reasonable and adequately documented. Protest was denied.

Final Words

Final Words Be prepared for the CO to do a cost realism analysis on almost every acquisition. Read, re-read, and re-read your proposal to ensure that the cost/price reflects (1) the requirement and (2) your technical proposal. If you are using some innovative thought process to develop your cost/price, provide a detailed explanation on how it was done.

Skyway Acquisition Solutions, LLC        Shelley Hall Email: shelley.hall@skywayacquisition.com www.skywayacq.com