Understanding the cost evaluation process of a competitive procurement

In Fiscal Year 2021, $1.1T was obligated on contractual services and supplies¹. Many of these procurement efforts utilized the source selection processes outlined in Federal Acquisition Regulation (FAR) Part 15, Contracting by Negotiation. When a Government agency issues an RFP, contractors need to understand the evaluation criteria as typically presented in Section M of that RFP (where award evaluation factors are typically found). This section is where the agency explains whether it will select the winner by using best value or lowest price technically acceptable (LPTA) criteria, or by some other tradeoff process. Under all of these methods, cost is a significant factor whether or not it is formally rated by the evaluation team.

On larger competitive procurements, a Source Selection Authority (SSA) and/or Source Selection Evaluation Board (SSEB) are charged with making a final decision on the winner of the competition. They are frequently assisted by a Technical Evaluation Team, Past Performance Evaluation Team, and/or a Cost Evaluation Team (CET). This article will draw back the curtain and look at what goes on behind the scenes on the CET.

CETs are frequently comprised of auditors, cost estimators, and other financial analysts. The CET typically receives feedback from technical experts on the Technical Evaluation Team after they have completed their technical review. The evaluation process that CETs follow is in Section M (there it is again!) of the RFP. Most Section M’s state that the CET assesses each cost proposal for completeness, reasonableness, and realism.

Once a cost/price proposal is received, the CET focuses its efforts in assisting the Contracting Officer in determining if the cost proposal is adequate or complete per the terms of Section L of the RFP. Section L contains all the instructions, conditions, and notices to the offerors. It essential that all prospective offerors prepare internal checklists (if Section L does not require it to be submitted within the proposal) containing all items required for the cost/price proposal. An incomplete proposal may negatively impact the offeror’s evaluation and rating.

Once adequacy is determined, the CET turns its attention to assessing the reasonableness and realism of the proposed costs. Reasonableness is generally a criterion evaluated by technical experts as it typically refers to whether or not the proposed technical approach is realistic in its impact on cost. The typical focus of the CET is on realism and establishing a most probable cost (sometimes referred to as a “should cost”), which is referenced in FAR 15.404-1(d)(2), Proposal Analysis Techniques. For best value types of competitive procurements, these most probable cost determinations are the baseline by which offerors’ proposals are evaluated and selected by the SSA/SSEB.

So, how does an offeror help minimize the amount of upward adjustments to the most probable cost suggested by the CET? Here is a list of suggestions:

• Use your most current Forward Pricing Rate Agreements/Recommendations (FPRA/FPRR) for labor and indirect expenses, if applicable.
• If you do not have an FPRA or FPRR for labor costs, use your most current labor cost data in generating your basis of estimate. Clearly state your approach to annual compensation reviews.
• Use recent comparable historical data, as applicable, and provide evidence that the data are valid within the bases of estimate.
• Use recent vendor/subcontract quotes. Ideally, obtain at least three quotes. If less than three quotes are obtained, document why. Conduct and document a cost/price analysis. Provide this analysis as support within the bases of estimate.
• Minimize Subject Matter Expert (SME) judgment as a basis of estimate and see the previous two points.
• Ensure that all cost assumptions, factors, and rates provided in the RFP are used and calculated properly.
• Instead of just stating an escalation rate that is utilized, explain the basis by which it was estimated and provide evidence within the bases of estimate for why it is realistic (e.g., historical data within the company, economic cost indices within the specific industry/cost type).
• If you do not have an FPRA or FPRR for indirect costs, use your most recent budget and forecasts for indirect costs. Clearly state your approach to budgeting and forecasting. Ensure that the impact of winning the proposal is included in the latest budget and forecast.
• If you have approved provisional indirect billing rates, think twice before using those as the basis for your indirect expense estimate as they are not necessarily intended for pricing use.