DOD IGAlthough the DODIG report (DODIG-2014-088) was not released because of FOUO (For Official Use Only) restrictions, the summary statements published by the DOD-IG suggest that the DOD-IG has absolutely no interest in adhering to the long-standing acquisition principles concerning commercial items and commercial item pricing (wherein the price is the price and the contractor’s profit or loss is not a factor).  The DOD-IG reported that a government contractor had significantly over-charged the government for spare parts for certain military helicopters (which presumably have commercial variants); specifically, that DLA (Defense Logistics Agency) had potentially overpaid about $9 million on 33 of 35 spare parts which were sole-sourced to the particular government contractor.  To preclude this from recurring, the DOD-IG recommended a DOD acquisition policy “to establish a percentage of commercial sales that is sufficient to determine fair and reasonable prices when items are being acquired on a sole-source contract and market-based prices are used”.  Translated, the DOD-IG wants DPAP (Defense Procurement Acquisition Policy) to provide percentages of commercial sales (presumably versus sales to the Government) to “add clarity” to the FAR 2.101 definition of items or services customarily used by the general public or by non-government entities.

Perhaps the most ominous aspect of this DOD-IG report is its recommendation that government contracting officers should be requesting “information other than cost or pricing data, to include cost data, if the sales data are not sufficient” (by implication to determine that the sole-source commercial price is fair and reasonable).  In supporting this recommendation, this DOD-IG report and a similar report on a different helicopter contractor provided examples of specific parts along with the disparity between the actual price paid and the price which should have been paid (analogous to a “should cost” approach).  The basis for the “should cost” appears to be cost data which was obtained by the DOD-IG through an IG subpoena (which has relatively broad authority including access to actual cost data for commercial items which is data that DLA apparently believed DLA had no authority to request (under FAR Part 12) during contract negotiations.   Coincidentally, in its Annual Report to Congress for 2013, one of DCAA’s wish list items (recommendations to improve the audit process) is for an expanded DCAA subpoena authority to include cost or pricing data during the pre-award process.  It remains to be seen if any regulatory authority will act on DCAA’s recommendation, but with respect to the DOD-IG they are already using (or abusing) their subpoena authority to obtain cost data for contractor commercial items.

Although this particular DOD-IG report was in the context of commercial items in a sole-source situation, prodding agencies to obtain “other than cost or pricing data to include cost data” could easily expand into any commercial item pricing wherein the contracting officer decides that he/she does not have sufficient information to determine a fair and reasonable price.  If DCAA or any other subpoena authority is expanded to apply the pre-award process, one can anticipate that commercial pricing will become one more area where the government will simply demand more information notably to include actual cost data to tremendously enhance the government’s negotiating position.  In negotiations, nothing is better than knowing the seller’s cost versus dealing strictly with seller commercial pricing data.         

One random observation, the DOD-IG referred to other than cost or pricing data which is an outdated reference; it is now stated (FAR 15.403-3) as other than certified cost or pricing data or as certified cost or pricing data (FAR 15-403-4), which is essentially a “technicality” because the DOD-IG objective is for the government to request and obtain cost data.

 

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Written by Michael Steen

Mike Steen is a Senior Advisor with Redstone Government Consulting, Inc. and a specialist in complex compliance issues to include major contractor cost accounting & business system regulations, financial compliance, resolution of DCAA audit issues, Cost Accounting Standards application, litigation support, and claims preparation. Prior to joining Redstone Government Consulting, Mike served in a number of capacities with DCAA for over thirty years, and upon his retirement, he was one of the top seven senior executives with DCAA. Mike Served as a Regional Director for two DCAA regions, and during that time was responsible for audits of approximately $25B and 800 employees. In October 2001, he was selected for the Senior Executive Service and in 2006 he received the Presidential Rank Award. During Mike’s tenure with DCAA, he was involved in conducting or managing a variety of compliance audits, to include cost proposals, billing systems, Cost Accounting Standards, claims, defective pricing, and then-evolving programs such as restructuring, financial capability and agreed-upon procedures. He directly supported the government litigation team on significant contract disputes and has prepared and presented various lectures and seminars to DCAA staff and business community leaders. Since joining Redstone Government Consulting in June 2007, Mike has developed and presented training and seminars on Government Contracts Compliance to NCMA, Federal Publications Seminars and various clients. Mike also is a prolific contributor of written articles to government contracting publications, as well as to our own Government Insights Newsletter. Mike also serves as the director of our training service offerings, with responsibilities for preparing and developing course content as well as instructing our seminars to clients and general audiences throughout the U.S. Mike also serves as a faculty instructor for the Federal Publications Seminars organization. Education Mike has a BS Degree in Business Administration from Wichita State University. He is also a graduate of the DCAA Director’s Fellowship Program in Management, and has a Masters Degree in Administration from Central Michigan University. Mr. Steen also completed a number of OPM’s management and executive development courses.

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Topics: Compliant Accounting Infrastructure, Defense Contractors, DOD IG