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PCI’s Trending Cost & Pricing Series – 2017

Defective Pricing –Hazards and Defenses

December 21, 2017


Your hosts

Bill Walter

Executive Director Government Contract Advisory Services

Dixon Hughes Goodman LLP

1410 Spring Hill Rd. Suite 500

Tysons, VA 22102

D. 703.970.0509

[email protected]

David Bodenheimer

Partner

Crowell & Moring LLP1001 Pennsylvania Ave., NW

Washington, DC 20004-2595

D: 202.624.2713)

[email protected]

mailto:[email protected]

mailto:[email protected]


Defective Pricing – Hazards

• Defective Pricing is one of the unique weapons in the

Federal Government’s arsenal.

• Since 1963, when applicable, Public Law 87-652 (aka

the “Truth In Negotiations Act” (TINA)) provides a

contractual right to the Government – in certain

circumstances - where the Contracting Officer can

reduce contracted prices – after the fact.

• When used effectively – TINA significantly levels the

playing field regarding superior knowledge regarding

cost and pricing data – while at the same time increasing

the cost of contracting with the Federal Government.


Relevant History of Defective Pricing


Background

• Cost based pricing

• GAO reports of ‘alleged overpricing’

• ASPR Certificate of Current Pricing

• Defective pricing data clause

• Congressional Concern


What is the Truth in Negotiations Act?

• Public Law 87-653 passed in 1962

• Premise is that a Government negotiator

will never know the company

• Tries to level the playing field

• It is the contractor’s responsibility to

comply -- not the Government’s

responsibility to extract


FASA versus TINA

• Federal Acquisition Streamlining Act:

– Public Law 103-355

– Applies to solicitations issue dafter October 1,

1995

• Cost or Pricing Data versus Certified Cost

or Pricing Data

• Impacts TINA coverage, not what

constitutes Defective Pricing!


FASA versus CAS

• Cost Accounting Standards: – Public Law 100-679

– Standards for cost accounting practices

• Some CAS exemptions are similar

– TINA Threshold

– Competitive (fixed price)

– Commercial items

• Downward price adjustments for noncompliance and

failure to follow your established practices

• CASB Disclosure Statement

• Significant annual administrative requirements


Fundamental Requirements

• Contractor is required to submit cost or pricing data

• The cost or pricing data must be:– current

– accurate and

– complete

• Contractor must execute a certification attesting to the fact that the require data was submitted

• TINA is strictly a disclosure statute – there is no limitation placed on what price or fee can be negotiated


Exemptions to TINA

and pricing strategies to avoid

TINA challenges


Prohibition – FAR 15.403-1

• Contracting Officer shall not require

Certified Cost Or Pricing Data to support

any action where the price is based on:

– Adequate price competition

– Prices set by law or regulation

– Acquisition of a commercial item

– Waiver has been granted

– Modifying commercial item subcontract or

contract


Waivers

• The agency head of contracting activity (HCA) may

waive the requirement:

– Exceptional cases

– Must be in writing

• The HCA may consider waiving the requirement if the

price can be determined to be fair and reasonable

without certified cost or pricing data.

• Waiver at the prime does not relieve a subcontractor

from the requirement to submit certified cost or pricing

data unless:

– An exception otherwise applies to the subcontract; or

– The waiver specifically includes the subcontract and the

rationale supporting the waiver for that subcontract.


Other “exemptions”

• The exercise of an option at the price established at

contract award or initial negotiation does not require

submission of certified cost or pricing data.

• Certified cost or pricing data are not required for

proposals used solely for overrun funding or interim

billing price adjustments.


Dollar Threshold - FAR 15.403-2

• $750,000 negotiated prime contract or

subcontract

• 2018 NDAA - $1M for DoD soon . . .

• Adjusted for inflation every 5 years*

• Currently same threshold for DoD &

civilian agencies*

* - updated by FASA – Next update in 2020


Identify the differences between Certified

Cost or Pricing Data, Data other than

Certified Cost or Pricing Data


Pricing Information and Data

• What type of data is needed to support the

pricing decision?

– Cost or Pricing Data

– Certified Cost or Pricing Data

– Data Other Than Certified Cost or Pricing

Data


What is Cost or Pricing Data?

• FAR 2.101 - All facts that, as of the date of price

agreement or, if applicable, another date agreed

upon between the parties that is as close as

practicable to the date of agreement on price,

prudent buyers and sellers would reasonably

expect to affect price negotiations significantly.

– Are factual, not judgmental, and are therefore

verifiable.

– Include the data that form the basis for future cost

projections.

– Are more than historical accounting data.


What is Cost or Pricing Data . . .

• Include such factors as:

– Vendor quotations;

– Nonrecurring costs;

– Information on changes in production methods and in production

or purchasing volume;

– Data supporting projections of business prospects and

objectives and related operations costs;

– Unit-cost trends such as those associated with labor efficiency;

– Make-or-buy decisions;

– Estimated resources to attain business goals; and

– Information on management decisions that could have a

significant bearing on costs.


What Isn’t Cost or Pricing Data

• Engineering estimates

• Judgment

• Cost breakdowns required to determine

the cost realism of competing offers or to

evaluate competing approached for major

acquisitions


Certified Cost or Pricing Data

• Cost and pricing data that were required to be

submitted and have been certified, or are

required to be certified

• The certification states that:

– to the best of the person's knowledge and belief

– the cost or pricing data are current, accurate and

complete

– as of the date of agreement on price – often before

contract award


The Certification

• This is to certify that, to the best of my knowledge and

belief, the cost or pricing data (as defined in section

15.801 of the Federal Acquisition Regulation (FAR) and

required under FAR subsection 15.804-2) submitted,

either actually or by specific identification in writing, to

the contracting officer or to the contracting officer's

representative in support of ........... * are accurate,

complete and current as of ......... **. This certification

includes the cost or pricing data supporting any advance

agreements and forward pricing rate agreements

between the offeror and the Government that are part of

the proposal.


Data Other Than . . .?

• Includes "cost or pricing data" that is not required to be

certified

• Pricing data, cost data and judgmental information

necessary for the contracting officer to determine a fair

and reasonable price

• May include sales data and any data reasonably

required to explain the offerors estimating process

including but not limited to:

– The judgmental factors applied

– the mathematical or other methods used in the estimate,

including those used in projecting from known data; and

– The nature and amount of any contingencies included in the

proposed price.


Format

• When certification is required:– format indicated in Table 15-2

– specify an alternative format

– permit submission in the contractor’s format. (unless the data are required to be submitted on one of the termination forms specified in Subpart 49.6)

• Format for data other than certified cost or pricing data:– may be submitted in the offeror’s own format unless

the contracting officer decides that use of a specific format is and the format has been described in the solicitation


Outline the Government’s remedies

– the Hazards


What is Defective Pricing?

• Contractor submits inaccurate, incomplete

or non-current data

• Other data that was current, accurate and

complete was reasonably available

• The Government did not have actual

knowledge of the data

• There was causation and reliance


Defective Pricing “Hazards”

• Price Adjustment

• Overpayment plus interest– Secretary of the Treasury Interest rate

• Penalties– Knowing submission

– an amount equal to the amount of overpayment made.

– Before taking any contractual actions concerning penalties, the

CO shall obtain the advice of counsel.


Guidance . . .

• After award, the CO can request an audit to evaluate the accuracy,

completeness, and currency of the data.

• The Government may evaluate the profit-cost relationships only if

the audit reveals that the data certified by the contractor were

defective.

• The contracting officer shall not reprice the contract solely because

the profit was greater than forecast or because a contingency

specified in the submission failed to materialize.

• If an audit finding recommends adjustment, the CO should give the

contractor an opportunity to support the accuracy, completeness,

and currency of the data in question.

• The contracting officer shall prepare a memorandum documenting

both the determination and any corrective action taken as a result.


Defenses


Defectice Pricing - Defenses

In this part, our instructors will present the steps used by the Government to seek out and identify Defective Pricing. We will also identify strategies and defenses you can take to avoid the risk of contract price adjustments and other penalties. Our panel of instructors will include accountants, auditors and attorneys who will examine TINA from several viewpoints and outline the risks imposed. The team will also review relevant case law and interpretations to help you understand the wide net that can be cast under this law – and steps you can take to avoid potential challenges. This second session will cover:

• Indicators of defective pricing

• DCAA audit guidance programs related TINA

• Risks that can trigger a DCAA Defective Pricing audit

• Case studies defining the boundaries of the criteria

• Discussion of recent, relevant cases


Proving Defective Pricing “5 Points”

• Government bears burden of proof for “five

points” of defective pricing

1. Is it Cost or Pricing Data?

2. Data Reasonably Available

3. Not Disclosed or Known to Government

4. Government Reliance on Data

5. Causation of Increased Price


Is It Cost or Pricing Data?

• Cost or Pricing Data

• Prudent Buyers & Sellers– Reasonably expect to affect

– Price negotiations significantly

• Facts versus Judgments– Factual and verifiable

– Not judgmental

• Sound Estimating– Facts reasonably expected to

– Contribute to soundness of

– Future costs and incurred costs

• Examples in FAR are not Exhaustive

Often hard to separate Facts from Judgments


Judgments are Guesses

• Escalation

• Engineering analogies

• Software coding efficiencies

• Quantitative risk analyses and risk ranges

• FAR Table 15-2 and disclosure of

estimating methods

• DCAM 14-104.7


Is It Reasonably Available?

• Reasonable Availability

• Overview – Handshake Date

– Disclosure required for data “reasonably

available” prior to price agreement

• Statute (10 U.S.C. § 2306a)

– Date of price agreement – or

– Other date agreed upon by parties

• Regulation (FAR § 15.408)

– “Reasonably available” standard


Showing Unavailability

• Reasonable Availability

• Burden of Proof• Agency bears burden of proving availability prior to handshake

• War Zone Availability• 2-day negotiations in Saigon

• Accounting System Limits• Not required to change accounting systems (Hughes)

• Manual data updates (Litton)

• Data not in system (Sanders)

• Sweep Data• Systematic query of organization

• Pre- or Post-Handshake

• Cut-off dates (FAR § 15.406-2(c))

• DoD policy to accept sweep data

• * DCAM § 14-105.5(a)


What is Disclosure?

• Disclosure Requirements

• “Submission” of Data (FAR 15.408)

– Actual submission

– Specific identification

• “TINA is a disclosure statute.”

– United Technologies Corp., 04-1 BCA 32,556


Focusing on Disclosure

• Disclose – No Duty to Use

– “The plain language of the Act does not obligate a contractor to use any

particular cost or pricing data to put together its proposal. Indeed, TINA

does not instruct a contractor in any manner regarding the manner or

method of proposal preparation.” United Technologies Corp., 04-1 BCA

32,556

– No Duty to Analyze Data

– No Duty to Create Data


DCAA Guidance: DP = Fraud Risk


Avoiding Fraud Indicators


Sandwiching Subcontractors

TINA vs. Subcontractors

• DCAA Allegations

─ Asserting Prime Reliance

• Strategic Realities

─ No 2-Front Wars

─ 10 Points of Proof

Prime Negotiation Record

“[Boeing] based its negotiation position with Resalab with respect to the estimated labor hours on its own in-house technical evaluation of Resalab’s man-hour estimate which involved a physical survey of Resalab and technical interface with Resalab.” The Boeing Co., ASBCA No. 20875, 85-3 BCA ¶ 18,351

Prime Sub+


Missing Deadlines

TINA Claims 6 Years Later

• Agency Allegations

– Final Decisions > 6 Years

• Legal Realities

– 41 U.S.C. § 7103(a)(1)(4(A)

• 6 Years after accrual

– FAR § 33.201 (“accrual”)

• Knew or Should Have

Known

ASBCA Precedent

“[T]he Government had established the

basis for its defective pricing claim . . .

more than six years before the COs’

June 2008 decisions issued.” McDonnell

Douglas Servs., 10-1 BCA ¶ 34,325


DCAA’s Role in Defective Pricing


DCAA Role in TINA

• DCAA is the primary auditor for Defective

Pricing

• Selects DP reviews as a part of the annual

plan

• Risk Analysis:

– DCAA 2016 Staff Allocation & Guidance

– Postaward Audit Selection System (PASS)

• Sends notice to contractor


Notice to Contracting Officer

• Coordinate any specific concerns of the

PCO

• Obtain negotiation memorandum


DCAA Notice of Post Award Audit

• Auditor to request from the Contractor:

– Copies of the proposal

– Identification of significant subcontracts and inter-

organizational transfers

– Final Certificate of Current Cost or Pricing Data

– Identification of all cost or pricing data submitted before

or during negotiations

– Costs incurred to date by cost element and estimates at

completion (EAC) by cost element


Initial Audit Steps

• Risk analysis is complete, next:

– Perform under/overrun analysis

– Review the PCO negotiation memorandum

– Review work papers if an audit was

performed of the proposal

• Evaluate the DP Lead sheet

• Identify other potential leads

– Review the permanent file

– Determine audit baseline


Essential Audit Lessons

• How to Survive the Audit

• Remember 5 Points of Proof

• Fight for Judgments

• Focus on Disclosure, Not Use

• Preserve the Documents

• Avoid Unnecessary Admissions

• Beware Inconsistencies

• Embrace your Subcontractor

• Check the Offsets

• Rebut the Audit

• Battle the FCA Allegations


Questions?