Defective Pricing - Significance

Today we're wrapping up our series on defective pricing with a few comments on what is significant when it comes to the impact of the failure to disclose current, complete, and accurate cost or pricing data. As you recall from a previous post, one of the Government's burdens of proof is that cost or pricing data must be such that a reasonable person (i.e. prudent buyer and seller) would expect it to have a significant effect on price negotiations.

Neither TINA nor FAR define "significant amount". The Courts and the BCA (Board of Contract Appeals) have made differing decisions regarding what is a significant amount. The working guideline from DCAA, the Agency responsibile for testing contractor compliance with TINA, is the lesser of five percent of the contract price or $50,000 dollars. Since the Government expends a substantial amount of resources finding, pursuing, and settling claims of defective pricing, materiality (or significance) is a key facton in determining whether to proceed. For a cost-type contract, this $50 thousand equates to a much larger figure because the potential savings to the Government is only the fee. For a cost type contract with a 5 percent fee, the defective pricing allegation would be $1,000,000.

The $50,000 potential savings to the Government is only a working guideline for DCAA and does not apply if a contractor's deficient estimating practices have resulted in recurring defective pricing or the potential price adjustment is due to a systemic deficiency which affects all contract priced during the period.

Finally, the $50 thousand guideline is a fully burdened figure. The actual defective pricing might start out a much smaller figure that grows to $50 thousand when fringe benefits, overhead, General and Administrative expenses, and profit is added.