Pricing in government proposals is more than a numbers game—it must reflect the actual cost and effort required to perform the work. This is where federal price realism comes into play. While many contractors focus on underbidding to win, price realism ensures that proposed prices are not just low, but believable, executable, and sustainable.
Understanding how federal agencies evaluate price realism—and incorporating that awareness into your pricing strategy—is essential for submitting competitive yet credible offers.
What Is Federal Price Realism?
Federal price realism refers to the government’s assessment of whether a contractor’s proposed price is too low to realistically perform the work. Unlike price reasonableness, which looks at whether a price is too high, price realism focuses on proposals that may be unrealistically low.
Agencies evaluate price realism to ensure that low bids do not reflect a lack of understanding, poor planning, or an unsustainable approach. A proposal may be rejected if its pricing is deemed so low that it risks performance failure.
When Is Price Realism Evaluated?
Federal price realism evaluations are not automatically part of every procurement. They are typically included in solicitations for cost-reimbursement contracts, but may also appear in fixed-price or hybrid contracts if the government specifically includes price realism as an evaluation factor.
The RFP must clearly state the agency’s intent to conduct a price realism analysis. If it’s not mentioned, the government generally does not evaluate whether a proposed price is too low—only whether it’s fair and reasonable.
When included, price realism is used to:
Assess the contractor’s understanding of the requirements
Evaluate the likelihood of successful performance at the proposed price
Mitigate the risk of contract failure due to underpricing
Methods Used to Assess Price Realism
Agencies use a range of methods to evaluate federal price realism, depending on the nature of the work and the solicitation structure. Common techniques include:
Comparative Analysis – Comparing proposed prices to other bids or to an independent government estimate
Cost Element Review – Examining labor rates, labor hours, materials, and indirect rates for adequacy and consistency
BOE (Basis of Estimate) Evaluation – Reviewing the narrative justification for the pricing approach
Historical Comparisons – Looking at pricing from similar past contracts
Regardless of the method, the goal is to determine whether the price supports the required level of effort and resources to successfully deliver the work.
Consequences of Unrealistic Pricing
Submitting a price that fails the realism check can have significant consequences. A proposal might be rated technically unacceptable, assigned low confidence in performance, or excluded from the competitive range altogether.
This is why federal price realism must be a core consideration during pricing strategy. A low price that cannot be defended can jeopardize the proposal, regardless of the technical score.
Moreover, an unrealistically low price can damage your reputation with the agency and hurt your chances in future procurements.
Balancing Competitiveness and Realism
Many contractors struggle with how to remain competitive on price while ensuring their bid passes the realism test. Some best practices include:
Start with a Solid BOE – Build your pricing from the ground up, using clear assumptions, labor categories, and rates
Align With the Technical Approach – Make sure your price reflects the actual level of effort described in the technical volume
Benchmark Internally – Use past proposals, actuals, or market data to test the realism of your price
Explain Any Deviations – If you’re pricing below market or under the IGE, provide rationale (e.g., efficiencies, incumbent advantage)
A strong proposal presents a consistent story across all volumes—technical, management, and price—where the pricing supports the solution, not contradicts it.
The Role of Narrative in Price Realism
When federal price realism is part of the evaluation, narrative support becomes critical. Agencies want to see how and why you arrived at your numbers. This can be presented through:
Basis of Estimate (BOE) – Describes assumptions, calculation methods, and sources used in pricing
Staffing Plans – Justify the labor hours and labor mix proposed
Risk Mitigation – Explain how pricing reflects risk management or cost controls
Efficiency Justification – Defend reduced pricing through innovation, automation, or proprietary methods
The narrative helps evaluators connect your price to your technical solution and determine if it can be executed successfully.
How to Prepare for a Price Realism Review
If the RFP includes federal price realism as an evaluation factor, incorporate the following into your proposal process:
Assign pricing strategy review to both the capture and pricing teams
Develop a justification narrative alongside the cost data
Use color team reviewers to flag inconsistencies between the price and other volumes
Include detailed BOEs or pricing notes to explain assumptions
Review prior bid feedback to identify past issues with pricing realism
Taking these steps early can avoid costly rework or rejection later in the process.
Conclusion
Federal price realism plays a vital role in protecting agencies from underperforming contractors and ensuring fair competition. For contractors, this means more than offering the lowest number—it means offering a price that can withstand scrutiny and deliver results.
By understanding how realism is evaluated and aligning pricing with your technical solution, you can submit proposals that are both competitive and credible.
To discuss how to strengthen your pricing strategy, contact Hinz Consulting. For active solicitations and price realism language, visit SAM.gov.
