Contracting Officers are required to determine price reasonableness before making a contract award. There are a variety of methods provided for in the Federal Acquisition Regulations (FAR) for contracting officers to determine reasonableness; competition, cost or pricing data, or information other than cost or pricing data. Historically, cost or pricing data is the most-used basis for establishing price reasonableness although current FAR guidance states that it is to be used as a last resort. The procurement of major weapons systems do not lend them to competitive pricing so the requirement for and use of cost or pricing data to negotiate prices is still prevalent.
Cost or pricing data means all facts that as of the date of price agreement prudent buyers and sellers would reasonably expect to affect price negotiations significantly. Cost or pricing data are factual, not judgmental; and are verifiable. While they do not indicate the accuracy of the prospective future costs or projections, they do include the data forming the basis for that judgment. Cost or pricing data are more than historical accounting data; they are all the facts that can be reasonably expected to contribute to the soundness of estimates of future costs and to the validity of determinations of costs already incurred.
Defective cost or pricing data is that data which is subsequently discovered to have been inaccurate, incomplete, or non current. Under the Truth-in-Negotiation Act (TINA) and contract price reduction clauses, the government is entitled to an adjustment in the contract price, to include profit or fee, when it relied on defective cost or pricing data.
Subsequent to award of a negotiated contract under which a contractor submitted cost or pricing data, the government has audit rights to the books and records. The Contracting Agency (and by extension, DCAA) has audit rights, the GAO (Comptroller General) has audit rights, and the Inspector General has audit rights. All of these agencies at one time or another, have initiated audits of compliance with TINA (aka defective pricing audits) although only DCAA has a regular and systematic plan for performing such reviews.
Over the next few days, we will be digging deeper into certain aspects of defective pricing. We will discuss the five elements that the Government must prove in order to sustain a defective pricing allegation. We will discuss the nature of offsets where contractors found in noncompliance with TINA can mitigate some or all of the impact. And we will draw a distinction between facts which are cost or pricing data and judgment which is not cost or pricing data.