What is 'cost realism' and how is it evaluated in a federal cost-reimbursement proposal?

Cost realism is the process where the government evaluates if your proposed costs on a cost-reimbursement contract are too low to perform the work, not just too high. For federal contracts, this evaluation is done under FAR 15.404-1(d). The contracting officer will look at your proposed costs to determine if they are realistic for the work, reflect a clear understanding of the requirements, and are consistent with your technical proposal. They will also assess if your proposed costs are reasonable and if your methods for calculating them are sound. Agencies want to avoid contractors underbidding and then struggling to complete the work, leading to contract modifications or performance issues. This is different from a firm fixed price (FFP) contract where the risk is entirely on the contractor. On a cost-reimbursement job, the government bears more of the cost risk, so they scrutinize your numbers more closely to ensure you can actually do the job as proposed.