What is the purpose of price realism analysis in a cost-type contract?

• A. To determine the lowest price among bids.
• B. To ensure the contractor's proposed costs are realistic for the work, given the technical approach.
• C. To determine the vendor's past performance rating.
• D. To assess the potential for cost overruns in the indirect costs.

Answer: (B)

Price realism analysis checks that the costs a contractor proposes for a cost-type contract are believable and achievable given the technical approach and work to be performed. In these contracts, the government reimburses actual costs, so it’s essential to confirm that the proposed costs aren’t unrealistically low or high relative to the work, schedule, and method described. This helps prevent proposing costs that look good on paper but cannot be earned because the plan isn’t feasible, and it also avoids overpricing beyond what the work requires. It’s not about simply choosing the lowest bid, assessing past performance, or focusing only on potential indirect-cost overruns—the core aim is to ensure the cost elements align with what the technical plan will require and can be realized. If the realism review finds inconsistencies, the agency can seek justification or revise the proposal to bring costs in line with the work.