Defective Pricing - Facts vs. Judgment

This is the third in our short series on defective pricing. You can read the first two parts here and here. So far we have covered the definition of "cost or pricing data" the statutory requirement for contractors to furnish current, complete, and accurate cost or pricing data and the Government's burden of proof in establishing the existence of defective pricing. The definition of cost or pricing data includes a requirement that cost or pricing data be factual data rather than judgmental data. The distinction between facts and judgment is often difficult to make but the ASBCA (Armed Services Board of Contract Appeals) has helped clarify some of the issues involved.

One common area of dispute is where information mixes fact and judgment. Typically, this mixed information should be disclosed because of the underlying factual information (Texas Instruments ASBCA No. 23678). For example, management decisions are generally a conglomeration of facts and judgment. To determine whether management decisions should be considered to be cost or pricing data, contractors should consider a variety of factors (Lockheed  ASBCA No. 36420):

• Did management actually make a decision?
• Was the management decision made by a person or group with the authority to approve or disapprove actions affecting costs?
• Did the management decision require some sort of action affecting the relevant cost element, or was the decision more along the lines of preliminary planning for possible future action?
• Is there a substantial relationship between the management decision and the relevant cost element?
• Is the management decision the type of decision that prudent buyers and sellers would reasonably expect to affect price negotiations significantly?

The following listing taken from Government sources are examples of information that conglomerates facts and judgment that were determined to be cost or pricing data;

• Information on changes in production methods and production volume
• Data supporting projections of business prospects, business objectives, and related operational costs;
• Unit-cost trends such as those associated with labor efficiency;
• Make-or-buy decisions;
• Estimated resources to attain business goals.

Where you have information that includes facts and judgment, its a good idea to disclose it, even if there is doubt that it would significantly impact the contract price. It is easier to disclose and include your assessment as to the potential impact up front, than to fend off the discovery of the information after the fact, such as during a defective pricing audit. If you disclose the information and allow the contracting officer the choice to use or not use the information when negotiating the contract, it could never be the basis for a contract price reduction because it was "disclosed".