Proposed FAR Revision for Computing Interest on Defective Pricing

The FAR councils have proposed to change the method of calculating interest on defective pricing from simple interest to interest compounded daily.

The councils do not expect this proposed rule to have a significant economic impact since the number of contractors found to have submitted defective cost or pricng data are a minute subset of contractors to whom the Truth in Negotiations Act (TINA) applies. While this may be so, the proposed change will have a significant effect on those contractors who are found to have violated TINA. First of all, defective pricing is not going to be alleged unless it is significant in the first place. Secondly, iinterest on defective pricing is calculated from the time the contractor receives a payment that was inflated because of defective pricing until it repays the Government. This is usually several years. Its not uncommon for these cases to extend five years. We've seen one at eight years. There are probably cases longer than that. Daily compounding is going to cost about 20%  more than simple interest over a five year period.

The comment period for this proposed regulation runs until November 22, 2010. Go to http://www.regulations.gov/ for details on how to comment.