What is Defective Pricing and Why Should You be Worried?

Whether you call it “defective pricing” (DP) or Truth in Negotiations Act (TINA) or even the current labeling of Truthful Cost or Pricing Data Act (TCoPD - 41 USC Ch. 35) there is not much new about the impact to Federal Government contractors. The law supporting this goes back to 1962 in an environment where Congress believed contractors were overcharging the Government for negotiated goods or services. My how times have not changed. This could also describe our current Congress and may create worry among government prime and subcontractors.

What Exactly is Truthful Cost or Pricing Data Act (TCoPD)?

Well, TCoPD is really a test of negotiated contracts (think Federal Acquisition Regulation (FAR) Part 15, Contracting by Negotiations) among the Government and prime contractors or even subcontractor that exceed $2 million in contract value. TCoPD was designed to place the government in the same position as the contractor to ensure that price negotiations are fair and reasonable through having access to factual information that is accurate, complete, and current. This factual information is called cost or pricing data (defined in Federal Acquisition Regulation (FAR) Part 2) and is essentially verifiable such as purchase order history, vendor quotations, nonrecurring costs, changes in production methods, and related costs of operations that are not judgements and can be expected to lend to the soundness of estimates of future costs. To that end, contractors must provide certain certified cost or pricing data to the government when negotiating a contract or a contract modification over a specified amount. This not only relates to federal government prime contractors, but also subcontractors to those prime contractors.

What Provides the Authority for Conducting a TCoPD Audit?

Generally, the Defense Contract Audit Agency (DCAA) conducts TCoPD audits of prime contracts and subcontracts that are over $25 million with the federal government. The authority to conduct these audits comes from the contract clauses included in your contracts and subcontracts: FAR 52.215-10, 11, 12, and 13 (titled, Price Reduction for Defective Certified Cost or Pricing Data) and relate to prime and subcontractor contracts and contract modifications. This allows for the implementation of FAR 15.408(b) through (e) for a price reduction in contractor/subcontractor defective cost or pricing data submitted to the government in negotiations.

For the government to have a TCoPD finding against a prime or subcontractor, there are five tests in negotiated contracts/subcontracts that the government must prove:

1. The information in question fits the definition of cost or pricing data;
2. Accurate, complete, and current data existed and was reasonably available to the contractor/subcontractor before the agreement on price or another date agreed upon by the parties;
3. Accurate, complete, and current data was not submitted or disclosed to the contracting officer (Government’s or prime contractor’s) or one of their designated representatives and that these individuals did not have actual knowledge of such data or its significance to the pricing proposal;
4. The Government or prime contractor relied on defective certified cost or pricing data in negotiating with the contractor/subcontractor; and
5. The Government's or prime contractor’s reliance on defective certified cost or pricing data caused an increase in the final contract price.

Again, the burden of proof is on the Government or prime contractor to prove ALL the five tests above.

What Should You do if the Government or Prime Contractor can Prove All Five Tests?

1. Determine whether there is an exception, such as adequate price competition or prices were set by law or whether it was a commercial item.
2. Determine whether the FAR contract clauses were intentionally left out of the final contract or subcontract and there was intent to not include in the price reduction contract/subcontract clauses in with the contract/subcontract.
3. The Government initiated a waiver of cost or pricing data to be submitted by contractor/subcontractor and thus cost or pricing data was not required.
4. Check to see whether “offsets” are available to be used where the accurate, complete, or current cost or pricing data would have increased the price to the contractor/subcontractor.

Why Worry About a Finding?

Well, beyond just covering the instance of, perhaps one finding, the government or prime contractor can look at other contracts/subcontracts to determine whether the finding cited is pervasive and the conditions impact other contracts/subcontracts and thus leads to more audits. This can impact your profitability on a contract/subcontract or lead to litigation costs to defend your contracting process. For those that have an approved Estimating System, it could lead to the contracting officer’s revisiting your system approval and possibly result in a withhold of contract payments if the Business System clause is in the contract. Payment withholds will impact your company’s cashflow. Further, it could lead to federal government investigators looking into potential fraud in your contracting process. In fact, defective cost or pricing data in contracting is one of the highest white collar crime areas for investigators review of fraud.

What Can I Do?

There is an old saying: prevention is worth a pound of cure. Periodic evaluation of your contracting process may disclose potential weaknesses in contracting and submission of accurate, complete, and current cost or pricing data in negotiations. Consider planning your negotiations to ensure the personnel involved are knowledgeable of what cost or pricing data is and who is responsible for coordinating and submitting the data to the negotiator. Review your company’s “sweep process” where, prior to signing the required certificate of accurate, complete, and current information, all departments such as purchasing, engineering, operations, and contracting departments “sweep” for more accurate, complete, and current information. Further, identify the responsibilities of key individuals within this process and let it be known what is expected of these individuals and when. Doing these things may take some of the worry away from a defective pricing finding now and in the future.

Redstone Government Consulting, Inc, with its experienced accountants and lawyers, can assist contractors through the facts and evidence collection, preparing a rebuttal to an audit finding, as well as Government contracting discussions. Make us part of your team!