pci’s trending cost & pricing series – 2017 defective ... spring hill rd. suite 500 tysons,...
TRANSCRIPT
1government contracting
PCI’s Trending Cost & Pricing Series – 2017
Defective Pricing –Hazards and Defenses
December 21, 2017
2government contracting
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
David Bodenheimer
Partner
Crowell & Moring LLP1001 Pennsylvania Ave., NW
Washington, DC 20004-2595
D: 202.624.2713)
3government contracting
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.
5government contracting
Background
• Cost based pricing
• GAO reports of ‘alleged overpricing’
• ASPR Certificate of Current Pricing
• Defective pricing data clause
• Congressional Concern
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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
7government contracting
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!
8government contracting
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
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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
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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
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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.
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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.
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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
15government contracting
Identify the differences between Certified
Cost or Pricing Data, Data other than
Certified Cost or Pricing Data
16government contracting
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
17government contracting
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.
18government contracting
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.
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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
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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
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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.
22government contracting
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.
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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
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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
26government contracting
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.
27government contracting
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.
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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
30government contracting
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
31government contracting
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
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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
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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
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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)
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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
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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
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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+
40government contracting
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
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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
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Notice to Contracting Officer
• Coordinate any specific concerns of the
PCO
• Obtain negotiation memorandum
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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
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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
46government contracting
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