Tuesday, June 14, 2011

Defective Pricing Lead Sheets - Part 1

Contract awards that are based on cost or pricing data are subject to TINA (Truth in Negotiations Act) if they exceed $700 thousand. Essentially, TINA requires contractors to submit to the Government, current, complete, and accurate cost or pricing data in connection with negotiating contract prices. If it is discovered later that the contractor withheld or didn't otherwise submit all cost or pricing data that could have impacted the negotiated price, TINA gives the Government the right to take back some of the contract price.

The Government has a program to review awarded contracts to see if they are in compliance with TINA. Obviously the Government cannot review each and every award so they use a risk-based approach to select contracts for review. Awards that exceed a certain threshold, currently $100 million or more, are automatically selected for review. Everything else is thrown into buckets for judgmental sampling. Note the term "judgmental". Contracts are not randomly selected - there's usually some reason why a particular contract is selected for a review.

One of the primary tools the Government uses to select contracts for review is the "Defective Pricing Lead Sheet". This is a two part analysis. Part 1 is completed after the contractor's price proposal has been audited and Part 2 is completed after receipt of the Government PNM (Price Negotiation Memorandum). A PNM is the Government's view of what happened during contract negotiations. Each Part has a series of questions and concludes with a numerical "Defective Pricing Potential" score on a scale of 1 to 10 with 1 being "Not Probable" and 10 being "Probable".

Once completed, these Defective Pricing Lead Sheets are then used to decide which contracts should be audited for compliance with TINA - the higher the "probability" rating, the higher the potential for selection.

The Defective Pricing Lead Sheet is not the only basis for selecting contracts for post award reviews. Other factors include the adequacy of contractors' estimating systems and the frequency of past violations of TINA.

In the next two blogs, we will walk through the specifics of the Defective Pricing Lead Sheets, commenting on why certain questions, depending on how they're answered, could increase the probability of TINA violations.

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