Thursday, April 21, 2011

Clerical and Math Errors Could be Costly

We've written frequently on the subject of defective pricing (Truth-in-Negotiations Act or TINA). Awards based on contractor submission of cost or pricing data are subject to TINA. Under TINA, contractors (or prospective contractors) have an affirmative duty to submit to the Government all factual information that could have a bearing on the contract price. The Government has a systematic program to test contractor compliance with TINA. The larger the contract, the more likely it will be flagged for review. Failure by contractors to furnish the Government all factual data, could lead to contract price adjustments.

TINA applies to factual data and information, not contractors use of estimates and application of judgment. Mathematical, clerical, administrative, and accounting errors fall into a gray area. These are netiher factual data nor estimates however the result of these kinds of errors could certainly lead to increases in contract prices.

The Government recently issued formal guidance to the effect that accounting, administrative, clerical, and computational errors attributable to underlying cost or pricing data are considered factual information and may result in defective pricing. Although a contractor proposal may contain mathematical errors that would not be considered defective pricing, mathematical errors attributable to the underlying factual cost or pricing data, not just the proposal calculations, can be considered defective pricing.

Facts underlying contractor opinions and projections are cost or pricing data; but judgments based on those facts are not. Therefore, errors in estimates i.e. estimated escalation factors, estimated direct labor rates, etc) generally would not result in defective pricing because these estimates represent judgments rather than factual, verifiable data (i.e. cost or pricing data).

Under this new guidance, auditors will probably be paying more attention to the accuracy of underlying data supporting contractor estimates.

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