When is cost realism analysis typically required?

• A. On fixed-price contracts only
• B. On cost-reimbursement and other non-fixed-price contracts, or when price proposals may contain unrealistically low or high costs given the technical approach.
• C. Only for time-and-materials contracts
• D. Never required

Answer: (B)

Cost realism analysis is used to check that the costs proposed by offerors are realistic for the work and technical approach being proposed. It helps identify when a price proposal might be unrealistically low or high and ensures that the planned costs align with the work required, mitigating risk for the government.

This is typically required for cost-reimbursement and other non-fixed-price contracts, where the government bears more of the cost risk and where proposed costs can influence funding and contractor performance. It’s also standard practice when price proposals appear unrealistically low or high given the technical approach, because such discrepancies can signal potential performance or financial risk.

It isn’t limited to one contract type like time-and-materials, and it isn’t correct to say it’s never required. The goal is to verify cost realism whenever the contract type or the proposal could lead to costs that don’t match the effort required. For example, if a proposal claims very low labor hours for a technically complex task, a realism review would assess whether those hours and rates are truly achievable given the scope and approach.