Cost realism analysis
- Dream home problem
- Pale mail problem
- Smythe enterprises
Cost realism analysis is the process of evaluating the methodology by the offeror to estimate the proposed cost and is done by using information other than cost or pricing data (Cole, 2001). This technique is useful in selecting the offeror that best fits the awards of the contract. It is done with the assistance of the project office and other members of the Government acquisition team such as reviewers and auditors (Cole, 2001). They evaluate the proposed cost to: verify the offeror's understanding of the requirements, assess the degree to which the cost proposal reflect the work effort approach described in the technical proposal and to assess the degree of risk that the offeror can provide the goods or services at the offered amount.
The American concept's decision to submit a proposal of $150,000 appears to be totally unrealistic since their estimated proposed costs are way below the rest of the offerors estimated proposed costs and the projected cost of building the dream house at $220,000. Their decision to lower the cost could have been driven by their desire to win the client's contract. The American concept is striving to fight competition from its prospective rivals by lowering the target cost. This will, in essence, make them dominate the market since most clients would prefer contractors who utilize the resources, hence lowering costs.
[...] Smythe Enterprises Escalation simply refers to the rise in the cost or prices of commodities. Escalation can be obtained by the use of current prediction utilizing econometric models of the United States economy which calculates it as the ratio of the future value to the current value expressed as a decimal. Wage increases are very crucial in calculating the estimated proposed cost of the contract with increasing inflation, the wages and salaries of the workers should increase in more or less the same rate. [...]
[...] By conducting cost realism analysis, the Northern Inc. has underestimated its proposed cost by failing to include the wages for its employees in their proposed cost. Their decision to reduce the wages of their employees would be disastrous to their business since none of the employees will consider working with them given the reduced wages and reduction of employees in the area. The United mail which pays higher than Northern Inc. will only have 80 percent of its employees working on the contract and therefore it's reasonable to expect that the Northern Inc. [...]