How price is evaluated, and what "reasonable" means

Practitioner12 min

By the end you can

Know when competition alone establishes price reasonableness.
Apply the prudent-person test to a cost.

Price is evaluated in every source selection, apart from a narrow DoD, NASA and Coast Guard exception 1. On fixed-price competitions, comparing the proposed prices will usually satisfy the requirement for price analysis, because normally competition establishes price reasonableness 2.

Cost-reimbursement competitions add a cost realism analysis to judge what the government should realistically expect to pay and whether you understand the work 2.

Check 1

On a firm-fixed-price competition, what usually satisfies the requirement for price analysis?Comparison of the proposed pricesA full audit of each offeror's costsAn independent price set by GAO

When costs are examined, the test for a reasonable cost is whether, in its nature and amount, it does not exceed what a prudent person would incur in the conduct of competitive business 3.

Check 2

What is the FAR test for whether a cost is reasonable?It does not exceed what a prudent person would incur in competitive businessIt is lower than every competitor's costIt was approved by your accountant

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Sources

1. FAR 15.304(c)(1)

(i) Price or cost to the Government shall be evaluated in every source selection (10 U.S.C. 3206(c)(1)(B) and 41 U.S.C. 3306(c)(1)(B)) (also see part 36 for architect-engineer contracts), subject to the exception listed in paragraph (c)(1)(ii)(A) of this section for use by DoD, NASA, and the Coast Guard. (ii) In accordance with 10 U.S.C. 3206(c), for DoD, NASA, and the Coast Guard— (A) The contracting officer may choose not to include price or cost as an evaluation factor for award when a solicitation— (1) Has an estimated value above the simplified acquisition threshold; (2) Will result in multiple-award contracts (see subpart 16.5) that are for the same or similar services; and (3) States that the Government intends to make an award to each and all qualifying offerors (see 2.101). (B) If the contracting officer chooses not to include price or cost as an evaluation factor for the contract award, in accordance with paragraph (c)(1)(ii)(A) of this section, the contracting officer shall consider price or cost as one of the factors in the selection decision for each order placed under the contract. (C) The exception in paragraph (c)(1)(ii)(A) of this section shall not apply to solicitations for multiple-award contracts that provide for sole source orders pursuant to section 8(a) of the Small Business Act (15 U.S.C. 637(a)).

eCFR, Title 48, as of 2026-09-18. Read on eCFR

2. FAR 15.305(a)

Proposal evaluation is an assessment of the proposal and the offeror's ability to perform the prospective contract successfully. An agency shall evaluate competitive proposals and then assess their relative qualities solely on the factors and subfactors specified in the solicitation. Evaluations may be conducted using any rating method or combination of methods, including color or adjectival ratings, numerical weights, and ordinal rankings. The relative strengths, deficiencies, significant weaknesses, and risks supporting proposal evaluation shall be documented in the contract file. (1) Cost or price evaluation. Normally, competition establishes price reasonableness. Therefore, when contracting on a firm-fixed-price or fixed-price with economic price adjustment basis, comparison of the proposed prices will usually satisfy the requirement to perform a price analysis, and a cost analysis need not be performed. In limited situations, a cost analysis may be appropriate to establish reasonableness of the otherwise successful offeror's price (see 15.403-1(c)(1)(i)(C)). When contracting on a cost-reimbursement basis, evaluations shall include a cost realism analysis to determine what the Government should realistically expect to pay for the proposed effort, the offeror's understanding of the work, and the offeror's ability to perform the contract. Cost realism analyses may also be used on fixed-price incentive contracts or, in exceptional cases, on other competitive fixed-price-type contracts (see 15.404-1(d)(3)). (See 37.115 for uncompensated overtime evaluation.) The contracting officer shall document the cost or price evaluation. (2) Past performance evaluation. (i) Past performance information is one indicator of an offeror's ability to perform the contract successfully. The currency and relevance of the information, source of the information, context of the data, and general trends in contractor's performance shall be considered. This comparative assessment of past performance information is separate from the responsibility determination required under subpart 9.1. (ii) The solicitation shall describe the approach for evaluating past performance, including evaluating offerors with no relevant performance history, and shall provide offerors an opportunity to identify past or current contracts (including Federal, State, and local government and private) for efforts similar to the Government requirement. The solicitation shall also authorize offerors to provide information on problems encountered on the identified contracts and the offeror corrective actions. The Government shall consider this information, as well as information obtained from any other sources, when evaluating the offeror past performance. The source selection authority shall determine the relevance of similar past performance information. (iii) The evaluation should take into account past performance information regarding predecessor companies, key personnel who have relevant experience, or subcontractors that will perform major or critical aspects of the requirement when such information is relevant to the instant acquisition. (iv) In the case of an offeror without a record of relevant past performance or for whom information on past performance is not available, the offeror may not be evaluated favorably or unfavorably on past performance. (v) The evaluation should include the past performance of offerors in complying with subcontracting plan goals for small disadvantaged business (SDB) concerns (see subpart 19.7). (vi) For offerors that are joint ventures, the evaluation shall take into account past performance of the joint venture. If the joint venture does not demonstrate past performance for award, the contracting officer shall consider the past performance of each party to the joint venture. (3) Technical evaluation. When tradeoffs are performed (see 15.101-1), the source selection records shall include— (i) An assessment of each offeror's ability to accomplish the technical requirements; and (ii) A summary, matrix, or quantitative ranking, along with appropriate supporting narrative, of each technical proposal using the evaluation factors. (4) Cost information. Cost information may be provided to members of the technical evaluation team in accordance with agency procedures. (5) Small business subcontracting evaluation. Solicitations must be structured to give offers from small business concerns the highest rating for the evaluation factors in 15.304(c)(3)(ii) and (c)(4).

eCFR, Title 48, as of 2026-09-18. Read on eCFR

3. FAR 31.201-3

“A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business.”

FAR Council (eCFR, Title 48), as of 2026-10-19. Checked 2026-10-21. Official source

Sources

1. FAR 15.304(c)(1)

(i) Price or cost to the Government shall be evaluated in every source selection (10 U.S.C. 3206(c)(1)(B) and 41 U.S.C. 3306(c)(1)(B)) (also see part 36 for architect-engineer contracts), subject to the exception listed in paragraph (c)(1)(ii)(A) of this section for use by DoD, NASA, and the Coast Guard. (ii) In accordance with 10 U.S.C. 3206(c), for DoD, NASA, and the Coast Guard— (A) The contracting officer may choose not to include price or cost as an evaluation factor for award when a solicitation— (1) Has an estimated value above the simplified acquisition threshold; (2) Will result in multiple-award contracts (see subpart 16.5) that are for the same or similar services; and (3) States that the Government intends to make an award to each and all qualifying offerors (see 2.101). (B) If the contracting officer chooses not to include price or cost as an evaluation factor for the contract award, in accordance with paragraph (c)(1)(ii)(A) of this section, the contracting officer shall consider price or cost as one of the factors in the selection decision for each order placed under the contract. (C) The exception in paragraph (c)(1)(ii)(A) of this section shall not apply to solicitations for multiple-award contracts that provide for sole source orders pursuant to section 8(a) of the Small Business Act (15 U.S.C. 637(a)).

eCFR, Title 48, as of 2026-09-18. Read on eCFR

2. FAR 15.305(a)

Proposal evaluation is an assessment of the proposal and the offeror's ability to perform the prospective contract successfully. An agency shall evaluate competitive proposals and then assess their relative qualities solely on the factors and subfactors specified in the solicitation. Evaluations may be conducted using any rating method or combination of methods, including color or adjectival ratings, numerical weights, and ordinal rankings. The relative strengths, deficiencies, significant weaknesses, and risks supporting proposal evaluation shall be documented in the contract file. (1) Cost or price evaluation. Normally, competition establishes price reasonableness. Therefore, when contracting on a firm-fixed-price or fixed-price with economic price adjustment basis, comparison of the proposed prices will usually satisfy the requirement to perform a price analysis, and a cost analysis need not be performed. In limited situations, a cost analysis may be appropriate to establish reasonableness of the otherwise successful offeror's price (see 15.403-1(c)(1)(i)(C)). When contracting on a cost-reimbursement basis, evaluations shall include a cost realism analysis to determine what the Government should realistically expect to pay for the proposed effort, the offeror's understanding of the work, and the offeror's ability to perform the contract. Cost realism analyses may also be used on fixed-price incentive contracts or, in exceptional cases, on other competitive fixed-price-type contracts (see 15.404-1(d)(3)). (See 37.115 for uncompensated overtime evaluation.) The contracting officer shall document the cost or price evaluation. (2) Past performance evaluation. (i) Past performance information is one indicator of an offeror's ability to perform the contract successfully. The currency and relevance of the information, source of the information, context of the data, and general trends in contractor's performance shall be considered. This comparative assessment of past performance information is separate from the responsibility determination required under subpart 9.1. (ii) The solicitation shall describe the approach for evaluating past performance, including evaluating offerors with no relevant performance history, and shall provide offerors an opportunity to identify past or current contracts (including Federal, State, and local government and private) for efforts similar to the Government requirement. The solicitation shall also authorize offerors to provide information on problems encountered on the identified contracts and the offeror corrective actions. The Government shall consider this information, as well as information obtained from any other sources, when evaluating the offeror past performance. The source selection authority shall determine the relevance of similar past performance information. (iii) The evaluation should take into account past performance information regarding predecessor companies, key personnel who have relevant experience, or subcontractors that will perform major or critical aspects of the requirement when such information is relevant to the instant acquisition. (iv) In the case of an offeror without a record of relevant past performance or for whom information on past performance is not available, the offeror may not be evaluated favorably or unfavorably on past performance. (v) The evaluation should include the past performance of offerors in complying with subcontracting plan goals for small disadvantaged business (SDB) concerns (see subpart 19.7). (vi) For offerors that are joint ventures, the evaluation shall take into account past performance of the joint venture. If the joint venture does not demonstrate past performance for award, the contracting officer shall consider the past performance of each party to the joint venture. (3) Technical evaluation. When tradeoffs are performed (see 15.101-1), the source selection records shall include— (i) An assessment of each offeror's ability to accomplish the technical requirements; and (ii) A summary, matrix, or quantitative ranking, along with appropriate supporting narrative, of each technical proposal using the evaluation factors. (4) Cost information. Cost information may be provided to members of the technical evaluation team in accordance with agency procedures. (5) Small business subcontracting evaluation. Solicitations must be structured to give offers from small business concerns the highest rating for the evaluation factors in 15.304(c)(3)(ii) and (c)(4).

eCFR, Title 48, as of 2026-09-18. Read on eCFR

3. FAR 31.201-3

“A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business.”

FAR Council (eCFR, Title 48), as of 2026-10-19. Checked 2026-10-21. Official source