Price Analysis — Price & Cost Analysis
Also known as: Price reasonableness, cost realism
What It Is
Price and cost analysis, governed by FAR 15.404-1, is how the contracting officer determines that the price the government will pay is fair and reasonable. Price analysis evaluates a proposed price without examining its individual cost elements — most often by comparing competing offers, comparing to historical prices, or using established catalog or market prices. Cost analysis examines the individual elements of an offeror's cost proposal (labor, materials, indirect rates, profit) and is used chiefly on cost-reimbursement contracts and where adequate price competition is lacking. Two related concepts matter: cost realism analysis (required on cost-reimbursement contracts and permitted on fixed-price work) assesses whether the proposed costs are realistic for the work — an unrealistically low cost proposal can be adjusted upward to a probable cost or treated as a performance risk; and price realism, on fixed-price buys, looks at whether a low price reflects a flawed understanding of the requirement.
When It Applies
- On every source selection — price or cost is always evaluated and must be found fair and reasonable before award.
- On firm-fixed-price competitions, where price analysis (usually offer-to-offer comparison) is the normal tool.
- On cost-reimbursement and T&M/labor-hour work, where cost realism and cost analysis test whether the proposed costs and rates are realistic.
Key Features
| Feature | What It Means |
|---|---|
| Fair and reasonable price required | The contracting officer must determine the price is fair and reasonable before award — adequate price competition is the most common basis. |
| Price analysis vs cost analysis | Price analysis compares the total price to other offers or the market; cost analysis examines the individual cost elements behind it. |
| Cost realism on cost-type work | On cost-reimbursement contracts, cost realism is required — unrealistically low costs may be adjusted to a probable cost for evaluation. |
| Price realism on fixed-price | When the solicitation provides for it, a low fixed price can be assessed for realism and treated as risk or a misunderstanding of the requirement. |
What It Means for an SDVOSB
For an SDVOSB, pricing is where many competitions are won or lost, and understanding the analysis the government will apply keeps you from two opposite mistakes. Price too high and you lose on a price-dominant or LPTA buy; price unrealistically low and you risk a cost-realism upward adjustment (on cost-type work) or a price-realism finding that your low price shows you misunderstand the scope. The fix is a price that is both competitive and defensible. Build your price from a realistic, limitations-on-subcontracting-compliant staffing plan, benchmark it with the price-to-win calculator, and make sure your indirect rates and labor categories are supportable — especially on cost-reimbursement and T&M work where the cost detail is examined.
How to Win Under It
- Build your price from a realistic basis of estimate — staffing, hours, and rates you can actually perform to.
- Benchmark against the likely competitive range with the price-to-win calculator, then price competitively for the selection method.
- On cost-reimbursement or T&M work, make sure your rates and cost elements are realistic and well documented to survive cost analysis.
- Keep your price consistent with your technical approach and the limitations on subcontracting so it does not read as unrealistic.
Common Pitfalls
- Bidding an unrealistically low price that triggers an upward cost-realism adjustment or a price-realism/risk finding.
- A disconnect between the technical approach and the price (e.g., staffing the price can't support), which evaluators flag as risk.
- Weak cost documentation on cost-type or T&M proposals, leaving rates and indirect costs unsupported under cost analysis.
Run the Numbers
Frequently Asked
What is the difference between price analysis and cost analysis?
Price analysis evaluates a proposed total price without looking at the individual cost elements — typically by comparing it to other competing offers, to historical prices, or to published catalog or market prices. Cost analysis goes inside the proposal to examine the individual elements (labor hours and rates, materials, indirect rates, and profit) for reasonableness and realism. Under FAR 15.404-1, price analysis is the normal tool when there is adequate price competition; cost analysis is used mainly on cost-reimbursement work and where price competition is lacking.
Can a federal proposal be rejected for being priced too low?
It can, in effect. On cost-reimbursement contracts, cost realism analysis is required, and a proposal with unrealistically low costs can have its evaluated cost adjusted upward to the government's probable cost — so the artificially low number does not help you and may signal performance risk. On fixed-price competitions, when the solicitation provides for a price-realism analysis, an unrealistically low price can be treated as reflecting a lack of understanding of the requirement and assessed as performance risk. A merely low but realistic price is fine; an unrealistic one is the problem.
Primary Sources
- FAR 15.404-1 — Proposal analysis techniques
- FAR 15.305 — Proposal evaluation (cost or price)
- FAR 15.402 — Pricing policy
Plain-English reference, not legal advice. How a source selection is conducted, and which evaluation method and procedures apply, is set by the specific solicitation, and the FAR is periodically amended — always read the actual solicitation (especially Sections L and M) and confirm its terms with the contracting officer before relying on this.
Change log (1)
- LaunchedPublished the federal source selection & evaluation methods reference covering how the government evaluates proposals and picks a winner — the best-value tradeoff (FAR 15.101-1), lowest-price technically-acceptable (LPTA, FAR 15.101-2), evaluation factors and subfactors (FAR 15.304), the technical and past-performance evaluations (FAR 15.305), price and cost analysis (FAR 15.404-1), the competitive range (FAR 15.306(c)), discussions and final proposal revisions (FAR 15.306(d) / 15.307), award without discussions (FAR 15.306(a)(3) / 52.215-1), oral presentations (FAR 15.102), the responsibility determination and Certificate of Competency (FAR 9.104 / Subpart 19.6), and debriefings (FAR 15.505 / 15.506) — each with a key-features table, a how-to-win checklist, common pitfalls, an SDVOSB-specific angle, FAQPage, Article, Dataset, and BreadcrumbList structured data, primary-source FAR citations, and cross-links into the glossary, solicitation types, clauses, contract types, how-to guides, FAQ, and the win-probability and price-to-win calculators.