Cost realism is the process by which the government evaluates whether your proposed costs in a cost-reimbursement (cost-plus) contract are realistic for the work proposed, reflect a clear understanding of the requirements, and are consistent with your technical proposal. This evaluation assesses whether your costs are too low, as well as too high, to perform the requirements (FAR 15.404-1(d)).
For federal solicitations, the agency will review your estimated costs to determine if they are probable to be incurred. This means they will analyze if your proposed labor hours, labor rates, materials, and other direct costs are sufficient to accomplish the performance work statement (PWS) or statement of objectives. If the government determines your costs are unrealistic, they may adjust your proposed costs upward for evaluation purposes to reflect what they believe the work will actually cost. This adjusted cost is then used for comparison with other proposals, but your contract would still be awarded at your proposed, lower cost, leaving you responsible for any overruns.
To address cost realism, ensure your price volume directly aligns with your technical volume. Provide clear, detailed justifications for all cost elements. Document your basis of estimate for labor hours, showing how they support the tasks described. For labor rates, demonstrate their consistency with your accounting system and any published rates. The goal is to provide enough detail that the contracting officer can clearly see how your proposed costs lead directly to successful performance.