Overview
This section prescribes the policies and procedures for performing proposal analysis to ensure that the final agreed-to price in a government contract is fair and reasonable. It defines the specific techniques used—including price, cost, and cost realism analysis—and establishes the responsibilities of the contracting officer regarding subcontract pricing and profit objectives.
Key Rules
- Price vs. Cost Analysis: Price analysis (evaluating the total price without examining individual cost elements) is required when certified cost or pricing data are not required. Cost analysis (evaluating individual cost elements and profit) is mandatory when certified cost or pricing data are required.
- Preferred Techniques: The two preferred price analysis techniques are the comparison of proposed prices received in response to the solicitation and comparison with historical prices paid for the same or similar items.
- Cost Realism Analysis: This must be performed on all cost-reimbursement contracts to determine the "probable cost" of performance; it may also be used on fixed-price incentive contracts to assess performance risk.
- Unbalanced Pricing: Contracting officers must analyze all offers for unbalanced pricing (significantly over- or understated line items) and may reject an offer if the lack of balance poses an unacceptable risk.
- Pass-Through Limits: If an offeror intends to subcontract more than 70% of the total cost of work, the contracting officer must provide a written determination that the approach is in the government's best interest.
- Subcontractor Data: Prime contractors are responsible for conducting cost or price analysis on their subcontractors. Subcontractor certified cost or pricing data must be submitted to the government if the subcontract is the lower of $20 million or both 10% of the prime's price and above the simplified threshold.
- Profit Objectives: Agencies must use a structured approach for determining profit or fee objectives when cost analysis is performed to ensure contractors are motivated toward efficient performance.
Practical Implications
- Contractors must be prepared for "open-book" evaluations during cost-reimbursement or sole-source negotiations, where every labor hour and material quote will be scrutinized by technical and audit experts.
- The government’s use of "probable cost" rather than "proposed cost" for evaluating cost-reimbursable bids means that a low-balled bid may be adjusted upward during evaluation, potentially making the offeror less competitive.