Thursday, June 16, 2011

Defective Pricing Lead Sheets - Part 3

We've been discussing the "lead sheets" that the Government uses to aid in selecting contracts to review for compliance with the Truth in Negotiations Act (TINA). In Part 1, we discussed the preparation and use of the Defective Pricing Lead Sheet. Yesterday in Part 2 we discussed Section A of the form that is completed at the time a proposal is evaluated by the Government. Today we discuss Part B which is completed after receipt and analysis of the PNM.

A PNM or Price Negotiation Memorandum is the Government's view of the events that transpired during a negotiations and justification for negotiating a fair and reasonable price. It is usually quite detailed and explains the contractors proposal and the extent that it used audit results and technical reviews in establishing the price. There are ten questions that the reviewer must answer regarding the negotiated price. After answering the questions, the reviewer must rate the probability of defective pricing from a 1 to a 10 with 10 being the highest probability.

1. Was there a significant amount of elapsed time between proposal audit and negotiations? A contractors responsibility to submit current, complete, and accurate cost or pricing data does not end when it submits its proposal. It continues right up to the date of agreement on price. The longer the period of time between the proposal and the conclusion of negotiations, the more chance there is that updated cost or pricing data became available.

2. Has there been a major change in the accounting system between the date the proposal was prepared and the date of agreement on price? Accounting system changes could affect the nature of direct and indirect charging patterns among other things.

3. Was the contractor's proposal updated to the date of agreement on price? See item 1.

4. If the proposal was revised prior to or during negotiations but not reaudited, does the PNM state whether the supporting data were also updated? There have been many cases where contractors have provided ostensibly updated cost or pricing data during negotiations that was not supported.

5. Does the PNM identify any supporting data introduced by the contractor subsequent to the audit but not submitted for audit review? Auditors get very suspicious when this happens. They sometimes believe that the contractor is withholding information from them on the assumption that it will undergo less scrutiny by the contracting officer or price analyst.

6. Is there a material difference between the negotiated amount and the audit recommended amount? There are a number of reasons why this might happen. This may indicate the submission of additional data subsequent to the audit. Or, quantities change from the numbers proposed.

7. Does the PNM identify any other conditions such as changes in design, production methods, make-or-buy decisions (etc) that might indicate potential defective pricing? Sometimes contractors propose to make parts in house but decide late to buy them (or vice versa). Maybe they didn't have the sufficient in-plant capacity or perhaps they determined later that it was cheaper to buy. Whatever the reason, the auditors will likely inquire as to when the decision to change from make to buy (or vice versa) was made.

8. Any peculiarities in the contract type or method? Was work started under a letter contract? Is this the last buy under a production or spares contract? If work was begun under a letter contract, some history should be available by the time negotiations commence. That historical data should be disclosed.

9. Does the PNM indicate what data the contracting officer relied upon? This is absolutely critical to any assertion of defective pricing. The contracting officer must have relied upon cost or pricing data to negotiate the contract price. There are situations where the contracting officer will not rely on cost or pricing data.

10 Does the PNM indicate any potential defective pricing on subcontracts or interdivisional work? Contractors are responsible for ensuring the reasonableness of subcontract and interdivisional pricing and should essentially follow the same steps in negotiating with its subcontractors that the Government takes in negotiating with its prime contractors. When negotiations with subcontractors have not been concluded at the time of prime contract negotiations, the Government is at risk.

Tomorrow we will conclude this series by offering some advise on how contractors should approach their responsibility to furnish current, complete, and accurate cost or pricing data thereby minimizing the chance of being rated highly probable for defective pricing.

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