By Janice Muskopf

One of the most challenging and interesting positions that I’ve held over the course of my career was serving as a contracting officer (CO) responsible for the resolution and disposition of allegations of “defective pricing” contained in Defense Contract Audit Agency (DCAA) post-award audit reports. For those of you unfamiliar with defective pricing,  it is a company’s failure to disclose current, accurate, and complete data as of the conclusion of negotiations (or an earlier agreed-to date) which resulted in an increase to the contract price. The government’s rights in this area, including contract price reductions and the collection of interest, are established by the Truth in Negotiations Act (TINA), 10 U.S.C. 2306a. During my tenure as  a working-level CO, I dispositioned 50 cases, recovering more than $50 million in overpayments on behalf of the taxpayers and the affected programs. While the dollars may sound small to those of you who are involved in the business of very large-dollar major-weapon systems, I assure you this was not a simple matter!

So how was this possible? First, I had to learn about defective pricing. I had the benefit of a fantastic mentor by the name of Eugene Solimine, an Air Force attorney renowned for his knowledge of TINA and defective pricing. He taught me how to apply the statutory requirements and related case law to the circumstances of each defective pricing case. With his guidance, I conducted a deep dive into the specifics of each case to establish what took place during the pre-award negotiation and how that negotiation would have been affected by the undisclosed cost or pricing data. I was also able to brainstorm with my coworkers who were also working Truth in Negotiations (TiN) audits and exchange insights and strategies with them. Second, communication was an important key to resolution of the findings, through interactions with the DCAA auditors and the affected contractors. It was critical to understand the company’s rebuttal to the findings, as well as any associated offsets being presented. (In the context of defective pricing, an offset is more current, accurate, and complete cost or pricing data which the contractor failed to disclose during negotiations, and which would have supported an increase in the negotiated price.) Finally, I took all of the facts and arguments (and there were many!) into consideration and negotiated an outcome with the contractor based on what I believed to be the merits of each allegation. 

I have always viewed disposition of defective pricing audits as a niche skill within contracting, and even within the narrower field of contract pricing. Most Department of Defense (DoD) PCOs will never work a defective pricing case, and even those who do will likely only work one or two such cases in their entire careers. As a result, it has been challenging for the armed services to build a knowledge base in this area. The same is true for most DoD contractors—most companies have likely not been on the receiving end of a TINA audit, and as a result, they may not have a robust knowledge base in this area. In the absence of experience with and understanding of defective pricing, some interesting myths have arisen. I want to use this article to bust some of those myths, but first let’s cover some concepts fundamental to defective pricing.

As stated in the Defense Contract Audit Agency (DCAA) Contract Audit Manual (CAM), the government must prove five elements in order to sustain a finding of defective pricing:

  1. The information in question fits the definition of cost or pricing data. In general, we refer to the FAR 2.101 definition of cost or pricing data, which was itself derived from the TINA statute, to establish that the data in question meet the defini-tion of cost or pricing data.
  2. Current, accurate, and complete data existed and were reasonably available to the contractor before the agreement on price.
  3. Current, accurate, and complete data were not submitted or disclosed to the contracting officer or one of the authorized representatives of the contracting officer, and these individuals did not have actual knowledge of such data or its significance to the proposal.
  4. The government relied on the defective data in negotiating with the contractor. Reliance can be a tough subject to understand, and you may wish to refer to the 1993 TINA Handbook published by the Inspector General, Department of the Department of Defense  for further information. Page 7-6 states, “Reliance occurs when the Government negotiators directly or indirectly use, or establish a price (or price negotiation objective) wholly or partly based upon or derived from, cost or pricing  data the contractor submitted. [Reliance] includes use of audits, cost estimates, should-cost studies, technical evaluations, or any other studies…which, in turn, used or considered the cost or pricing data. This is true even if the Government negotiators based their price or negotiation objectives directly on such audits or estimates, rather than directly on the data submitted” by the contractor. 
  5. The government’s reliance on the defective data caused an increase in the contract price. Case law has established that the government is entitled to a presumption that a “natural and probable consequence” of the nondisclosure was an increase in the contract price, but this presumption is deemed “rebuttable,” meaning that ultimately the government must be able to demonstrate that it was harmed by the contractor’s failure to make a current, accurate, and complete data disclosure as of the date of price agreement for the original acquisition.

Keeping that background in mind, it is time for some myth busting! 

Myth 1: Defective pricing is fraud. From an industry perspective, I believe this myth has to be particularly discon-certing. In my experience, which spans more than 30 years, it has been the exception rather than the norm for findings of defective pricing to rise to the level of fraud. Absent evidence to the contrary, contractor failures to disclose current, accurate, and complete data are considered to be inadvertent. Today, the TINA threshold is $2 million, and as buys grow in dollar value and complexity, it seems reasonable that with a lot of moving pieces, data can fall through the cracks. On the other hand, if the same type of non-disclosure is identified repeatedly, at a minimum, this may have implications with respect to a company’s business systems and processes. Now, if a contracting officer suspects fraud, they certainly have an affirmative duty to bring that forward; however, it must be emphasized that the mere presence of defective pricing allegations does not mean a company has committed fraud. If you are interested in learning about the False Claims Act and its standards of proof, you may wish to start by reading the law itself, under 31 U.S.C. 3729. 

Myth 2: TINA only obligates a company to disclose the data that formed the basis of the proposal. This particular myth is concerning from a government perspective. TINA is designed to put the government on equal footing with the company. If this myth were fact, it would result in the contractor giving the government access to only that data which supports the proposed position. This would result in the contractor having access to all relevant data, while the government would have access to only the subset of data specifically selected by the contractor. Clearly that would be inconsistent with the intent of the TINA statute. Examining the statutory definition of cost or pricing data can be helpful to dispel this myth. From 10 U.S.C. 2306a(h)(1), “The term “cost or pricing data” means all facts that, as of the date of agreement on the price of a contract (or the price of a contract modification), or, if applicable consistent with subsection (e)(1)(B), another date agreed upon between the parties, a prudent buyer or seller would reasonably expect to affect price negotiations significantly. Such term does not include information that is judgmental, but does include the factual information from which a judgment was derived.” Note that the statutory definition states “all” facts. As a quick example: If a company receives a quote from a supplier for part XYZ for which the proposal is based on XYZ purchase order history, the company does have an obligation to disclose the quote to the government, even if the company chooses not to use the quote as part of its basis of estimate. The quote would meet the definition of factual data and would be relevant to the price negotiations.

Myth 3: A finding of defective pricing means the contracting officer did a bad job. One might ask the question, shouldn’t the contracting officer have been able to figure out that the contractor’s price was overstated, or that not all pertinent data had been disclosed? To assess the validity of this myth, let’s revisit the third element required to sustain an assertion of defective pricing: Current, accurate, and complete data were not submitted or disclosed to the contracting officer or one of the authorized representatives of the contracting officer, and these individuals did not have actual knowledge of such data or its significance to the proposal. If the contracting officer (or representative) had no knowledge of the data, how could they be held accountable for a price that was higher than it should have been as a result of data of which they were unaware?

Myth 4: The contractor is certifying to its proposal or the proposed or negotiated value. This notion can easily be cleared up by referring to the wording of the Certificate of Current Cost or Pricing Data, as set forth in FAR 15.406-2. The prescribed certificate language says, “This is to certify that, to the best of my knowledge and belief, the cost or pricing data (as defined in section 2.101 of the Federal Acquisition Regulation (FAR) and required under FAR subsection 15.403-4) submitted, either actually or by specific identification in writing, to the Contracting Officer or to the contracting officer’s representative in support of [identify the RFP or proposal] are accurate, complete, and current as of [enter the date of price agreement or, if applicable, an earlier date agreed upon between the parties that is as close as practicable to the date of agreement on price].” Note that the contractor is certifying to the cost or pricing data submitted in support of the proposal, not the proposal itself nor any specific numbers.

Myth 5: Firm Fixed Price (FFP) contracts are not subject to TINA. Just like any other contract type, FFP contracts valued at or above the TINA threshold are subject to TINA unless one of the statutory exceptions applies. The TINA exceptions can be summarized as follows:                    
When prices are based on adequate price competition;

  • When prices are set by law or regulation; 
  • When a commercial item is being acquired;
  • When a waiver has been granted;
  •  When modifying a contract or subcontract for commercial items; or
  • To the extent the data relates to an indirect Foreign Military Sale (FMS) offset.  

I have also heard assertions that a company is not required to disclose actual costs from a prior contract because that contract was FFP, or because that contract was competitively awarded. Again, contract type has no bearing on TINA applicability. Nor does the acquisition approach for the related prior buy disqualify the actuals for that effort from being cost or pricing data under a subsequent buy, if the later buy is subject to TINA. On another note, what could be more relevant to establishing what an effort will cost than understanding what the same or similar performance did cost? (See DFARS PGI 216.403-1(1)(ii)(B).)

Now that I have dispelled some of the most pervasive myths about defective pricing, I think it’s important to share what we are doing in the area of defective pricing, today, to improve outcomes. Defense Pricing and Contracting (DPC) is sponsoring a pilot program with Defense Contract Management Agency (DCMA), under which cognizant buying activities can delegate authority to work TiN audits to a dedicated DCMA team. If this pilot proves successful, the vision is that DCMA will house the DoD Center of Excellence for Truth in Negotiation issues, and will be able to assist the Services by taking over their defective pricing workload on an as-needed basis. I am hopeful that over time, this approach will facilitate more timely resolution and disposition of TiN audits across DoD. This would provide a benefit to Industry: Earlier disposition of TiN audits could lower the amount of delivery payments made, resulting in less interest due to the government. From a government perspective, this approach could help recover any monies due in a timely fashion, potentially before funds move to canceled status, so they might be available for use on behalf of the program and the customer.

As I reflect on the challenges people experience working these defective pricing cases, today, it certainly makes me grateful for the environment that I worked in years ago. I had a mentor who dedicated himself to teaching us, and co-workers with whom I could collaborate about similar issues. This new DCMA pilot has the potential to realize some similar synergies. Defective pricing is a tough subject and not necessarily a desirable subject to either work on or talk about. I think it is important, however, to have the dialogue, and of course to bust some myths! CM