2.4.3.5  Cost or Price Factor

Cost or price to the Government will be evaluated in all source selections.  AFFARS MP5315.3 paragraphs 5.5.3 and  5.5.4 and provision M002 of the template provide guidance in determining what cost to the Government will be the most useful measure of evaluated price in a given situation.  These sources will also help you to describe how you intend to evaluate the Cost/Price factor.

- Purposes of Cost/Price Evaluation (Sub-paragraph not in Template) Cost/price is evaluated for two purposes:

•  The Cost/Price factor is evaluated to assess the reasonableness of the proposed price.

•  For cost type contracts (and some fixed price incentive, or in exceptional cases, fixed price type contracts -- see FAR 15.404-1(d) and AFFARS 5315.402(a)), proposal costs/prices are evaluated for realism to determine whether the proposed costs are realistic for the work, reflect a clear understanding of solicitation requirements, and are consistent with the offeror's unique methods of performance in the technical proposal.  For incentive fee contracts that include a target price and ceiling price, be specific on which number will be used to determine affordability.  Also consider affordability constraints by fiscal year when using 3400 funding.

The way the Cost/Price factor is evaluated depends on contract type.

-  How Cost/Price is Evaluated (Sub-paragraph not in Template)

The Cost/Price evaluation usually begins with an explanation of how cost/price to the Government will be evaluated. Examples:

•  cost/price of the basic effort only

•  basic plus all options

•  down select portions priced as Not-to-Exceeds

•  most probable cost

•  most probable life cycle cost

Evaluation of Cost/Price will be based on a defined quantity (such as a "Best Estimated Quantity" if variable quantities are involved).

-  Cost/Price Evaluation - Cost Type Contracts and Fixed Price Incentive Contracts (Sub-paragraph not in Template)

The proposed price is usually an offeror's best estimate of what the costs are anticipated to be.  What the Government will actually pay by the end of such a contract will be based on actual costs during performance, and these can vary substantially from the original estimated cost.  Therefore, in source selection, you need to make your best estimate of what you expect an offer to actually cost based on the requirement and the approach.  If you disagree with the offeror's assessment of what the anticipated cost of performance will be, then you must consider this difference during your evaluation for cost type contracts, and may consider it for fixed price incentive contracts.  You do this by computing the Government's estimate of Most Probable Cost (MPC).  MPC computation is discussed below.  This MPC is then presented as part of the briefing to the SSA, fully documented, and used as the evaluated cost/price during source selection.

-  Assessment of Realism (Sub-paragraph not in Template)

For cost type contracts (and some fixed price incentive, or in exceptional cases, fixed price type), realism is assessed to ensure the offeror understands the magnitude and complexity of the effort.  When it is appropriate to assess realism for fixed-price type contracts (see FAR 15.404-1(d)), you perform a cost/price realism analysis (CPRA) to determine technical, cost, and/or schedule risks, but you do not adjust the proposed price.  When you assess realism for cost contract types and fixed price incentive when used, you use the results of the CPRA not only as a risk assessment tool but also to generate the MPC that will be used in the integrated assessment (the Cost/Price factor) for selecting the proposal for award.  Where cost models are used by the Government to arrive at the MPC, the offeror should have access to such models (except for proprietary information related to ownership and data rights of the model originator, if applicable) to ensure understanding of the tools that will be used to assess the realism of the proposed costs. Offeror cost models used to support proposed costs should be made available to the Government evaluators as part of the cost/pricing information submitted by the offeror.  The Government's evaluation must include quantification of uncertainty analysis for ACAT I programs.  It is recommended for programs smaller than ACAT I.  Detailed methodologies for the uncertainty analysis can be found in the Air Force Handbook of Cost Uncertainty and Risk Analysis.  This handbook is available from the Air Force Cost Analysis Agency (AFCAA).

-  Most Probable Cost2 (MPC) (Sub-paragraph not in Template)

Proposed costs (and, in certain circumstances, prices) are evaluated for realism to identify proposals which are significantly over or under priced compared to the Government's estimate of the true probable costs of performance based on the proposed technical approach.  The Government is trying to preclude awarding to an offeror proposing an unrealistically low cost which cannot be substantiated as credible.  This situation is particularly undesirable in flexibly priced contracting, (i.e., cost reimbursement) where there is a great potential for cost overruns.  For cost type contracts, the Government uses its estimate of the probable cost of an offer as the evaluated cost.  Buy-ins are also a concern in fixed-price type contracts, but these proposals must be evaluated (under the Cost/Price area) at the proposed contract prices since they reflect the price the Government will pay.  Cost/price realism may still be assessed for FPI and, in exceptional cases, other fixed-price contracts in order to determine whether the offeror understands the complexity and scope of requirements.  Significant differences between the MPC and offered price may be considered in the Cost/Price Risk rating (see paragraph 2.4.3.6 below).  However, the Government may not adjust the offered price under the Cost/Price factor in source selections for fixed-price contracts.  Nevertheless, the SSA should be made aware of the magnitude of the difference between the MPC and the offered price.  The results of the analysis may be used in risk rating assessments of the appropriate Mission Capability subfactor.

-  Computing the MPC (Sub-paragraph not in Template)

The Government prepares a MPC by quantifying technical proposal risks into dollars and adding or subtracting these amounts to/from the proposed costs/prices and by factoring in additions or deletions based on an audit or other assessments.  Estimated profit or fee is included in computing the MPC.  For CR or FPI contracts, this final number (MPC) (up to the ceiling price for FPI) is used as the evaluated cost/price of the offer for source selection purposes.  For FFP contracts (and FPI at ceiling price) however, the Government must use the offered price in evaluating the Cost/Price factor.  Any significant departure from the MPC may be reflected in the Cost/Price Risk rating when used, or may be used, in risk rating assessments of the appropriate Mission Capability subfactor.  See FAR 15.404-1(d)(3) for use of cost realism analysis on competitive FPI contracts and other competitive fixed-price type contracts.  Section M of the solicitation must clearly state what will be included in the Government's MPC calculation (e.g., CLIN prices, option prices, other Government costs, GFP adjustments, performance incentives or award fees, adjustments for risk, etc.).

__________________________________________________________________

2 MPC is defined as the most frequently occurring value (mode) resulting from the analysis.  The application of various statistical techniques inherent in uncertainty analysis will result in a mathematically correct MPC, as well as a range (or distribution) of possible costs from which cost/price confidence levels may be determined.  This form of cost/price uncertainty is not the uncertainty referred to under the Mission Capability Technical ratings, rather it means the uncertainty and risk inherent in the cost estimating process.