U.S. federal agencies conduct realism analyses on cost-reimbursable contracts to determine whether costs in a prospective contractor’s proposal are realistic and consistent with the proposed technical solution. Under such contracts, the government must pay contractors all actual and allowable costs, regardless of the proposed costs. Proper realism analysis helps the government determine whether the contractor’s proposed costs are so low that they fail to reflect a clear understanding of the solicitation’s requirements. Since contractors may submit artificially low bids on cost-reimbursable contracts to gain a competitive advantage, cost-realism analysis is necessary to ensure performance under these contracts is not compromised. In recent years, such contractor strategies have also contributed to the government’s shift away from the use of cost-reimbursable contracts. The Federal Acquisition Regulation (FAR) § 15.404-1(d)(2) outlines the requirements of cost realism analysis under such contracts to determine the probable cost of performance. Under FAR § 15.404-1(d)(3), cost realism analysis may also be utilized under limited circumstances in certain fixed-price contracts when new or complex requirements still need to be fully understood. Contractors may challenge the adequacy of the government’s cost realism analysis in a post-award bid protest by alleging that the agency failed to conduct a cost realism analysis or did not conduct such an analysis on a reasonable basis.

When evaluating the pricing of prospective contractors, the government must determine whether the proposed pricing is realistic for the work to be performed. The government performs price realism analysis to ensure that the offerors’ pricing reflects a clear understanding of the technical performance requirements. While the Federal Acquisition Regulation (FAR) does not provide agencies with a specific roadmap to conduct price realism analysis, the government must still conduct realism analysis on proposed pricing where the solicitation so requires. Furthermore, the government must also conduct such an analysis if the solicitation advises offerors that the government will review proposed pricing to ensure that the prices are not so low that they demonstrate a lack of understanding of the technical requirements. In the latter scenario, the solicitation must also warn offerors their proposed solution may be rejected if the government determines their proposed pricing as unrealistic. By conducting price realism analysis in such situations, the government ensures that offeror pricing is consistent with the proposed technical solution.

In B-422309, the Government Accountability Office (GAO) sustained a protest alleging that the price realism analysis conducted by the Air Force was unreasonable. The April 2024 bid protest decision concerned a Request for Proposal (RFP) that contemplated the award of an indefinite-delivery, indefinite quantity (IDIQ) contract for base operations support services at the Homestead Air Reserve Base in Florida. Under the IDIQ contract, the Air Force planned to issue fixed-price, time and material (T&M) and cost-reimbursable task orders for the management of materiel, fuel, and services such as ground transportation, traffic operations and real property maintenance. The evaluation under the RFP was to be conducted in two phases, first of which involved an evaluation of proposed pricing. Notably, the RFP advised prospective offerors that their proposed pricing would be evaluated for price realism, if necessary. The RFP also warned prospective offerors that their proposed prices must be based on their corresponding technical approach and demonstrate a logical correlation to the staffing proposed in the technical approach. All offerors with unfavorable proposed pricing were to be excluded from the competition after the first phase. Under the second phase of the evaluation, the Air Force would evaluate the offerors’ proposals for technical acceptability, starting with the lowest priced proposal. To conclude the second phase, the technically acceptable proposals would be evaluated for past performance, with the Air Force finally awarding the contract to the proposal offering the most favorable combination of price and past performance.

Government agencies must document their evaluations decisions in sufficient detail to provide a reasonable basis to support an award. When a protestor challenges the reasonableness of the government’s evaluation in the form of a bid protest, adjudicative forums such as the Government Accountability Office (GAO) first question whether the government’s evaluation is adequately documented before determining whether the evaluation is consistent with the solicitation’s stated evaluation criteria. Therefore, when an agency fails to document its evaluation or retain evaluation materials, it bears the risk that there may not be sufficiently detailed supporting rationale in the record for the adjudicative forum to conclude that the government had a reasonable basis for the award decision. In such cases, the GAO will typically sustain the protest challenging the government’s evaluation decision and recommend that the agency reevaluate the proposals and sufficiently document its rationale. The adjudicative forum will also generally recommend that the procuring agency terminate the awarded contract for the government's convenience if as a result of the reevaluation, an offeror other than the awardee is in line for the award.

When evaluating proposals received in response to competitive procurements, the government may utilize a variety of techniques to ensure it obtains best value depending on the specific circumstances of the acquisition. In such procurements involving any one or a combination of source selection approaches, government evaluators often assign strengths and weaknesses to various aspects of the proposals to justify the government’s tradeoff decisions. A strength is an aspect of an offeror’s proposal that improves the probability of successful performance. Meanwhile, a weakness could be a defect in the proposal that increases the risk of unsuccessful performance. Notably, Federal Acquisition Regulation (FAR) § 15.306(d)(3) requires agencies to discuss significant weaknesses with offerors in the competitive ranges. However, not all strengths and weaknesses are created equal, and evaluators may not derive adjectival ratings from a mechanical count of the strengths and weaknesses alone. In other words, the government must qualitatively assess proposals based on the stated criteria in the solicitation when assigning adjectival ratings in competitive procurements. Additionally, agencies must adequately document their rationale so that a bid protest adjudicative forum such as the Government Accountability Office (GAO) has sufficient basis to review the underlying evaluation decision. Should the government assign adjectival ratings on a mechanical counting of strengths and weaknesses alone or fail to adequately document its evaluation rationale, the resulting award may be protested.