Building a Compliant Cost Proposal That Stands Up to Review

Contractors pursuing competitive prime awards under FAR Part 15 face heightened expectations for cost realism, documentation, and historical support. Agencies rely on detailed cost narratives and supporting data to make best value determinations. Weak or unsupported pricing can delay negotiations or undermine award decisions, making early preparation and internal alignment critical to proposal success.

Highlights

• Cost Proposal Expectations. Competitive prime proposals require detailed cost volumes that clearly explain how labor, indirect rates, escalation, subcontractor costs, travel, and materials were developed.
• Basis of Estimate. Every proposed cost must be supported by a logical and documented methodology that demonstrates realism and reasonableness.
• Historical Alignment. Proposed indirect rates and labor assumptions should be consistent with historical data or clearly explain any variances.
• Documentation Risk. Weak or incomplete cost narratives can trigger additional questions, delay negotiations, and reduce evaluator confidence.
• Business Impact. Inaccurate or unsupported pricing affects award probability, negotiation leverage, and long-term contract profitability.

We often get calls from government contractors seeking help preparing their first prime competitive proposals. Many of our clients, starting as small businesses, begin their government contracting experience by proposing as a subcontractor to a larger prime contractor on a federal agency solicitation. Normally, this proposal as a subcontractor will be on a firm fixed-price (FFP) or possibly time and materials (T&M) basis. Larger prime contractors will seldom issue cost-reimbursable subcontracts to a small (or young) contractor. Issuing firm fixed-price subcontracts represents the lowest amount of risk to the prime contractor. The same is true for a Government agency – issuing a firm fixed contract to a contractor equals the lowest amount of risk to that agency. Issuing a cost-reimbursable contract or subcontract would represent the highest amount of risk to either the agency or the prime contractor. Therefore, when submitting a proposal as a prime contractor on a competitive effort for the first time, our clients need help in understanding exactly what the government expects to be successful.

When FAR Part 15 Applies to Your Proposal

This is where FAR Part 15 - Contracting by Negotiation comes into play. What is required of a contractor proposing as a prime contractor under a FAR Part 15 - Contracting by Negotiation solicitation? This is not intended to be an in-depth dive into part of FAR 15. This article is only intended to give background on the requirements for this type of solicitation. FAR Part 15 gives us the requirements and procedures for both competitive and non-competitive acquisitions that exceed the Simplified Acquisition Threshold (SAT). FAR Part 15 is intended to provide the Government agency with the best overall value for the solicitation. To do this, government contractors are required to submit sufficient proposed cost details so the Government can make the best value determination.

What the Government Expects in Your Cost Volume

Proposals can have many parts and required volumes. Most proposals will require technical, past performance, management and cost/pricing volumes. These volumes are mostly standard and required across all Government agency solicitations. Depending on the agency, there may be additional required volumes or parts to submit. For the purposes of this article, we are only concerned about the cost or pricing volume.

Let’s dive into the costs a government contractor would “normally” submit in a cost or pricing volume of a proposal. This is not an all-inclusive list, but it does include many of the costs that are required and proposed to perform on contracts. Proposed costs must be justified by a basis of estimate. This basis should reflect the realism and reasonableness of your proposed costs. All of this would be documented in the cost narrative portion of the overall cost volume.

Typical Costs Included in a Cost or Pricing Volume of a Proposal

Direct Labor Rates

The cost of the labor is identified specifically for the proposed effort. In some solicitations, the Government agency may provide direct labor benchmarks for use. In this case, a government contractor may use those benchmarks or propose other direct labor rates, provided they explain why they are not using the provided benchmarks. In almost all cases, it is better for the contractor to use the benchmarks. The Government is not in the business of providing useful information. When they do, government contractors are almost always better off taking it. If no benchmarks are provided, the government contractor must provide the basis of estimates for the proposed direct labor rates.

• What are some realism considerations?
• Are the direct labor rates taken from a salary survey? If so, is it a reputable survey tool like the Economic Research Institute (ERI) that allows for very specific technical (and non-technical) labor categories that capture locales along with education and years of experience?
• Are your proposed direct labor rates taken from company averages? This is a great way to provide realism, as long as you have enough employees in each proposed labor category to achieve an accurate labor average. Sometimes, especially for a small business, this is hard, if not impossible, to accommodate.
• And even if you can provide labor category averages, can you be certain that those labor average rates are reasonable?
• Have you compared your company’s averages to a survey tool like ERI to confirm?

Indirect Cost Pools/Rates

The indirect costs, in the form of a calculated percentage, will be allocated to the direct costs of the proposed effort. Most solicitations are very specific about what is required to justify your proposed indirect rates.

• Do they come from a Forward Pricing Rate Agreement (FPRA)? That’s great if so, but small businesses don’t have an FPRA.
• What about provisional bill rates? These “provisional” rates should only be proposed when they represent the contractor’s best estimate of indirect rates for the proposal time frame.

Most of the time, minus the Forward Pricing Rate Agreement (FPRA), the best option is to calculate estimated indirect rates specifically for the proposal at hand, making sure to include the proposed costs in the correct pool bases of your indirect pool rates. And, most solicitations will require 2-3 years of indirect rate history to justify your proposed rates. For example, proposing a G&A rate of 6% would draw scrutiny when your historical (last 2-3 years) G&A actual rates have been 15%.

Escalation

The amount, in the form of a percentage, costs will increase over the life of the proposed effort. Some solicitations will dictate the escalation to be used in the proposal. If not, be prepared to explain how and why you proposed a certain escalation. The spike that occurred during the COVID-19 pandemic has now tapered back off to pre-pandemic levels. Use survey data to justify your proposed escalation.

Subcontractors

The costs associated with contract effort to be performed by government contractors other than the prime contractor are necessary for the performance of the contract. Contractors must be prepared to justify all proposed subcontractor costs. Explain your rationale and reasoning behind why your subcontractors’ costs are reasonable. How do subcontractor costs compare to your own prime contractor costs for the same labor categories?

Travel

The cost of travel specifically required for the performance of the contract effort. Often, the contracting federal agency provides “plug” numbers for travel costs. All government contractors must propose the “plug” numbers as part of their total price. This keeps the playing field level for all competitors and reduces the number of questions they might receive from contractors trying to determine how many travel trips may be required. When no “plug” numbers are provided, be prepared to provide as many clear details about the proposed costs as possible. When proposing travel, include the number of trips, locations, number of travelers and estimated costs. GSA.gov provides cost guidance, including per diem limits, for all types of travel.

Equipment or Materials

The cost of raw material or equipment needed in the execution or delivery of the contract effort. Proposal estimates for these types of costs are often provided by the agency through “plug” numbers. Sometimes this is because the agency is not 100% sure what equipment or materials need to be purchased for contract performance. But there are times when the contractor must determine and propose the equipment and/or materials required for contract performance. When this is the case, be prepared to provide extensive details. For equipment, provide quotes for the proposed purchase, as you would when researching and then making the purchase. The same would apply to any required materials. If the proposal requires the contractor to design and build something, such as delivering an end item, then provide the bill of materials for the deliverable.

Will Your Cost Narrative Stand Up to Review?

Government contractors should try to put themselves in the reviewer’s shoes.

• Does your cost narrative clearly explain the rationale and methodology of all proposed costs?
• Does your historical cost data support the proposed costs?
• If not, then why? There are valid reasons why historical data might not be the best representation of your proposed costs.
• Can you explain the story behind those valid reasons?

Why Getting the Cost Volume Right Matters

The proposal process is the most stressful part of being a government contractor. Most people working on proposals can’t walk away from their normal day-to-day job duties to focus solely on the preparation of a proposal. Proposals turn 40-hour workweeks into 60- or 80-hour weeks. But the proposal process is also the most important part in ensuring your business thrives.

Redstone GCI helps government contractors of all sizes submit proposals across all Government agencies and all contract types. We would love to support you in the proposal process. Whether it is reviewing your pricing and cost volume for compliance to produce a complete pricing and cost volume submission, we are here to help.

Frequently Asked Questions (FAQs)

• What is a cost proposal under FAR Part 15? It is a detailed pricing submission required in many negotiated prime procurements. Contractors must explain how their prices were determined so the Government can determine whether they are fair, reasonable, and realistic.
• When does this requirement apply? It typically applies when competing as a prime contractor on negotiated procurements above the Simplified Acquisition Threshold. The solicitation will specify what cost or pricing information must be submitted.
• What does the Government evaluate in the cost volume? Agencies review how you developed your price, including labor rates, indirect rates, escalation, subcontractor costs, travel, and materials. They are assessing whether your numbers are supported and consistent with your business operations.
• Why does historical data matter? Historical indirect rates and labor data help evaluators determine whether your proposed costs are reasonable. If proposed rates differ from prior results, you must clearly explain the change.
• What is a basis of estimate? A basis of estimate is a brief explanation of how each cost element was calculated. It shows the data, assumptions, or methodology behind your pricing.
• What happens if pricing is not well supported? If proposed costs are not clearly explained or supported, they may draw additional scrutiny during evaluation. Contractors must be prepared to justify their pricing and methodology.