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Cost Analysis

ACON 024


Alternate Definition

Cost analysis is the review and evaluation of the separate cost elements and profit or fee in an offeror’s or contractor’s proposal to determine a fair and reasonable price or to determine cost realism. Cost analysis includes the application of judgment to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency.

General Information

FAR 15.404-1(a)(1) requires the contracting officer to determine that the price to be paid is fair and reasonable. Cost analysis is one of six proposal analysis techniques that may be used to ensure that the final agreed-to price is fair and reasonable. The analytical techniques and procedures selected depend on the complexity and circumstances of each acquisition, including such factors as the solicitation method, the evaluation criteria stated in the solicitation and the extent of competition. The cost analysis techniques listed in FAR 15.404-1(c)(2) include:


  1. Verification of cost data or pricing data and evaluation of cost elements
  2. Evaluating the effect of the offeror’s current practices on future costs
  3. Comparison of costs proposed by the offeror for individual cost elements with actual costs, previous cost estimates, other cost estimates received in response to the Government’s request, independent government estimates, or forecasts
  4. Verification of compliance with contract cost principles and procedures in FAR Part 31 and 48 CFR Chapter 99, Cost Accounting Standards
  5. Identification of any cost or pricing data needed to make the proposal accurate, complete and current
  6. Analysis of the results of any make-or-buy program reviews


Cost analysis differs from price analysis in that cost analysis focuses on the reasonableness of each estimated cost element and adds a reasonable rate of profit/fee to arrive at the contract price. Cost analysis ignores the fact that the contract price may be out of line with the market value or intrinsic value of the work. Therefore, when cost analysis is used, price analysis should be used to verify that the overall price offered is fair and reasonable.


Cost analysis must be used to evaluate the reasonableness of individual cost elements when certified cost or pricing data are required. Cost analysis may also be used to evaluate data other than certified cost or pricing data to determine cost reasonableness or cost realism when a fair and reasonable price cannot be determined through price analysis alone (FAR 15.404-1).


Cost analysis is also used when selecting and negotiating the contract type. In the absence of effective price competition and if price analysis is not sufficient, the cost estimates of the offeror and the Government provide the bases for negotiating contract pricing arrangements. It is essential that the uncertainties involved in performance and their possible impact upon costs be identified and evaluated, so that a contract type that places a reasonable degree of cost responsibility upon the contractor can be negotiated (FAR 16.104(c)).


The fact that costs and profit/fee are analyzed separately does not mean that they must be negotiated separately. A fair and reasonable price does not require that agreement be reached on every element of cost.