Defective Pricing - Contractor Offsets

This is our eighth and final posting in our series on defective pricing. If you missed any of the previous ones, you can find them through these quick links.

• Part 1 - What is Cost or Pricing Data?
• Part 2 - Government's Burden of Proof
• Part 3 - Facts vs. Judgement
• Part 4 - "Submission" of Cost or Pricing Data
• Part 5 - Contractor Obligation to Continuously Update Cost or Pricing Data
• Part 6 - Remedies Available to the Government
• Part 7 - Successful and Unsuccessful Defenses to Defective Pricing
• Part 8 - Contractor Offsets (this posting)

The 1987 Defense Authorization Act amended the TINA to give statutory recognition to contract offsets for defective cost or pricing data that result in understated costs. The amended TINA places the burden of proof for such offsets on the contractor and disallows using any intentional understatements to offset defective cost or pricing data that resulted in a price increase.

Contractors must certify to the contracting officer that, to the best of its knowledge and belief, it is entitled to the offset in the amount requested and proves that the cost or pricing data were available before the date of agreement on price and that the data was not submitted before such date.

According to the statute, there are two situations where contractor offset proposals will not be considered. First, offsets shall not be permitted if the understated data was known by the contractor to be understated before the “as of” date specified on the Certificate of Current Cost or Pricing Data. Secondly, the Government proves that the facts demonstrate that the contract price would not have increased in the amount to be offset even if the available data had been submitted before the date of agreement on price.

Offsets are not vehicles to increase contract prices. There is a limit to the amount of offset available to the contractor. The amount of the offset may equal, but not exceed, the amount of the Government’s claim for overstated cost or pricing data arising out of the same pricing action.

The offset does not have to be in the same cost grouping as the overstated cost or pricing data. So, for example, understated material costs could offset overstated labor costs. Offsets must be for the same contract as the defective pricing allegation however.

The key to prevailing in an offset proposal situation rests on three key elements. First, the contractor must prove that the higher cost or pricing data was available before the “as of” date specified on the Certificate of Current Cost or Pricing Data. Secondly, the contractor must show (or prove) that the data was not known to it before the date of agreement on price. And finally, the contractor must prove that the data was not submitted to the Government.