This is our sixth of an eight part series on defective pricing - the failure of a contractor to submit current, complete, and accurate cost or pricing data. Refer back to yesterday's post for links to the other parts of this series. Today, we will discuss remedies available to the Government whenever significant defective pricing is discovered.
The Government can reduce the contract price if the government discovers that a contractor, or prospective subcontractor, or actual subcontractor submitted defective cost or pricing data. There are two contract clauses that allow for this and are found in all negotiated contracts, one for basic contracts and the other for contract modifications (see FAR 52-215-10 and -11). Even if these clauses were somehow omitted, the courts and boards would probably “read them” into the contract based on the Christian Doctrine because they are statutorily required.
The Government can reduce the contract price by any significant amount by which the contract price was increased because of the defective cost or pricing data. The Government can also add profit or fee to the price reduction. The term “significant” amount is somewhat subjective. There was a Board case where $15 thousand was determined to be significant (Kaiser). At some point, the cost of pursuing a defective pricing case will exceed the potential recovery and the Government will not pursue those.
The Government can recover interest on any overpayments it made because of the defective cost or pricing data. In order to calculate interest, the Government must first determine the date that the overpayment was made. In the case of a direct cost, this might not be too difficult. However, if an indirect rate was defectively priced, the overpayment occurs every time the contractor submits a claim for reimbursement (e.g. public voucher or progress payment).
If a subcontractor submits defective cost or pricing data to the prime, the Government can recover from the prime contractor to the extent that the defective subcontractor data increased the prime contract price. In practice, this is difficult to apply.
If the prime contractor uses defective subcontractor data, but subcontracts with a lower priced subcontractor (or fails to subcontract at all), the government can only reduce the prime contract price by the difference between the subcontract price the prime contractor used to price the contract and the actual subcontract price if the contractor subcontracted with a lower priced subcontractor or the contractors actual cost if the contractor failed to subcontract the work.
One final cautionary note. The Government can collect penalty amounts where the contractor or subcontractor knowingly submitted defective cost or pricing data. This penalty is equal to the amount of the overpayment. On each and every defective pricing audit that DCAA conducts, it also makes an assessment as to the likelihood that the contractor “knowingly” submitted defective cost or pricing data.