Thursday, September 22, 2011

Defective Pricing Risk Assessments

The Truth in Negotiations Act (TINA) was enacted to provide the Government with a contract price reduction mechanism if a contractor fails to disclose the most accurate, complete and current data as of the date of agreement on price, and the contract price was increased as a result of that failure. TINA applies to negotiated contracts greater than $700 thousand, regardless of type.

In order to determine whether Government contractors comply with TINA, auditors from various agencies conduct systematic reviews of contracts subject to TINA. The GAO (Government Accountability Office, the various IGs (Inspector Generals') offices, and DCAA (Defense Contract Audit Agency), are among those agencies. As a general rule, the larger the contract, the more likely it is to be audited for compliance with TINA. There is a threshold above which audits are certain. At one time, this threshold was $100 million. There are other factors that affect the number of audits to be conducted at a particular contractor. These include, but are not limited to (i) prior findings, (ii) the adequacy of a contractor's estimating system, and (iii) "audit leads" derived from any number of sources.

Once a contract has been selected for review, the auditor will perform a risk assessment to determine the likelihood that defective pricing occurred. Based on the risk assessment, the auditor will decide whether to continue the review or cancel it. In order to perform the risk assessment, the auditor will, at a minimum, request the following items from the contractor. The Government (the auditor) has a contractual right, affirmed by various courts, to access this data.

  • Copies of the initial and any revised proposal
  • Identification of significant subcontract
  • Identification of significant inter-organizational transfers
  • Final Certificate of Current Cost or Pricing Data
  • Identification of all cost or pricing data submitted before or during negotiations
  • A listing of additional data submitted after date of agreement on price (if any)
  • Costs incurred to date by cost element and estimates at completion (EAC) by cost element

Recently, the audit program for TINA compliance (i.e. defective pricing) was modified to include a significant new step to the "risk assessment" phase of the audit. This new step, called the "walk-through" is potentially onerous and we advise contractors to prepare ahead of time. This new audit step reads:

Coordinate a date with the contractor to provide a walk-through of its certified position and the major events associated with this pricing action.  Invite the Contracting Officer.  This should include the following:
     a. Highlighting all significant cost or pricing data provided to the contracting officer (e.g., latest certified proposal plus any subsequent cost or pricing data submitted up to the time of price agreement to include sweep data) to include a discussion of the contractor’s documentation of negotiations.
     b. A discussion of the contractor’s internal controls in place at the time of negotiations to ensure that the most accurate, complete and current data were disclosed to the Government.  
     c. Have the contractor identify how the costs were accumulated in the accounting system to facilitate a comparison of the actual costs to the proposed/negotiated costs.  For example, if the contractor proposed by WBS, have the contractor identify the charge numbers for each WBS.  Another example would be if the actual costs were accumulated in more detail than the proposed costs.  In this case, the contractor would need to identify how the actual costs roll up to the proposed costs in order to perform an accurate over/underrun test. 

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