Proposed FAR Rule to Increase TINA Threshold to $2 Million

Section 811 of the 2018 NDAA (National Defense Authorization Act) increased the TINA (Truth in Negotiations Act) threshold from $750 thousand to $2 million. This threshold marks the point at which contractors must certify that the cost or pricing data they submit in support of a pricing action is current, complete, and accurate.

In May 2018, the Defense Department issued a class deviation to implement the new threshold for contracts awarded after July 1, 2018, The Civilian Acquisition Council issued a similar class deviation shortly thereafter, applicable to non-DoD contracts. In both cases, modifications to contracts awarded prior to that date were subject to the old lower threshold.

The FAR councils have just issued a proposed regulation that will make these class deviations permanent. The proposed regulations does not significantly differ from the provisions of the temporary class deviations which everyone has been operating under for the past 15 months.

The Government's estimate of cost savings that will result from this threshold is interesting, if true. The Government estimates that savings accruing to contractors will average $41 million per year and savings to the Government will average $6 million annually. Those figures represent the reduced work required to ensure the accuracy of cost or pricing data.

The full text of the proposed regulation can be accessed here.

DCAA to Triple The Number of Defective Pricing Audits

Bloomberg published an article last week reporting that DCAA (Defense Contract Audit Agency) plans to triple the number of defective pricing audits in the upcoming fiscal year. Defective pricing audits are tests for contractor compliance with the Truth in Negotiations Act (TINA).

According to the article, DCAA intends to complete 60 defective pricing audits in the coming fiscal year.  During fiscal years 2017 to 2019, the Agency completed 26, 21, and 20 respectively. Bloomberg notes that at least two congressional committees are reviewing the Pentagon's enforcement of TINA, a law intended to prevent unjustified profits based on incomplete, flawed or inaccurate cost or pricing data (actually the term "flawed" is not part of TINA. TINA refers to 'current', 'complete', and 'accurate').

Not only does DCAA intended to triple the number of audits it intends to complete but it also plans to quintuple the number of audit hours applied to those reviews.

One of the reasons, besides ongoing Congressional oversight, for the increase in the number of defective pricing audits is the track record of positive audit findings. The former Director for defense pricing noted that during his tenure, 100 percent of the contracts examined at one top-25 defense contractor had 'suspect' defective pricing. And he also added that "If one looks deep enough there is some element of fraud typically lurking". For example:

In a number of cases we expected profit outcomes of 12% to 15% ... but (the auditors) found levels of between 25% and 80% on some sole-source weapons contracts. That does not happen by outstanding performance but by faulty contractor cost estimating or in the worst case, fraud.

Since fiscal year 2015, nearly 75 percent of defective pricing audits have uncovered potential noncompliances with TINA. The amount challenged is almost $600 million (though after the issues are settled, will be something less than that). Ten of those audits have been referred to investigators as suspected irregular conduct and eight of those ten are currently active cases.

TINA applies to negotiated contracts over $700 thousand or $2 million, depending upon when the contracts were negotiated. Competitively awarded contracts and contracts based on commercial item pricing are not subject to TINA. It is likely that DCAA will be concentrating its efforts on the larger Defense contracts; the top 10 or the top 25. If you don't fall in those categories, it is unlikely that your contracts will be selected for audit.

New TINA Threshold Implementation Considerations

The threshold requirement for submitting certified cost or pricing data raises from $750 thousand to $2 million in less than a month (July 1, 2018). See "Its Official - TINA Threshold for All Government Contracts Will Increase to $2 Million" for a fuller explanation.

What about modifications made to a prime contract that was entered into before July 1st? Those contracts will still have the $750 thousand threshold clause.

In the case of a change or modification made to a prime contract that was entered into before July 1, 2008, the threshold for obtaining certified cost or pricing data remains at $750 thousand.

What about subcontracts by prime contractors under a pre-July 1, 2018 contract awarded after July 1, 2018? In this case, an exception is available" but you've got to ask.

Upon the request of a contractor that was required to submit certified cost or pricing data in connection with a prime contract entered into before July 1, 2018, contracting officers can modify the contract to reflect a $2 million threshold for obtaining certified cost or pricing data for subcontracts entered into after July 1, 2018. 

Such modification won't cost a contractor anything. According to the regulations, contracting officers shall make all such modifications without requiring consideration.

If you're ready to award a subcontract between $750 thousand and $2 million requiring the submission of certified cost or pricing data, hold off for a month so all parties can benefit from the higher threshold. If you're a subcontractor on the cusp of receiving a subcontract between $750 thousand and $2 million requiring the submission of certified cost or pricing data, talk to the prime contractor about deferring award until after July 1, 2018.

More information is available here.

TINA Threshold Rises to $2 Million on July 1st 2018

A lot of people have been wondering and writing to this blog about the effective date of the new TINA (Truth in Negotiations Act) threshold. For DoD (Defense Department) contracts (at least), the new threshold takes effect on July 1, 2018.

Section 811 of the fiscal year 2018 NDAA (National Defense Authorization Act) increased the threshold for obtaining certified cost or pricing data under 10 USC 2306a (also known as the Truth in Negotiations Act or TINA) from $750,000 to $2 million. With little hope of pushing through a change to the Federal Acquisition Regulations (FAR) in time, the Defense Department has issued a "class deviation" which effectively does the same thing as a FAR change. A copy of the class deviation can be downloaded (or read) here. This deviation remains in effect until its incorporated into the FAR (or otherwise rescinded).

The increased TINA threshold also increases the CAS (Cost Accounting Standards) threshold as well. 41 USC 3502 equates the CAS threshold to the TINA threshold. The class deviation for TINA therefore acts to increase the CAS threshold as well.

Good news all around.

2018 NDAA - TINA Threshold to Increase to $2 Million

The threshold for requiring certified cost or pricing data is currently set at $750,000. This applies to the award of negotiated contracts, subcontracts and modifications (see FAR 15.403-4). This threshold is set by statute, a couple of statutes actually. 10 USC 2306A - Cost or pricing data: truth in negotiations sets the threshold at $500,000 while 41 USC 3502 - Required cost or pricing data and certification allows for that threshold to be adjusted for inflation every five years. There have been a number of adjustments since the 1994 baseline to bring the original threshold up to the current $750,000.

That threshold is about to increase significantly. Sec 811 of the 2018 NDAA (National Defense Authorization Act) which includes the enhanced reporting requirements for DCAA (Defense Contract  Audit Agency) discussed yesterday (see 2018 NDAA - New DCAA Reporting Requirements) also includes a provision that increases the TINA (Truth in Negotiations Act) threshold from $750,000 to $2,000,000. The adjustment provisions every five years still apply.

This is good news for a lot of contractors and prospective contractors and should facilitate proposal preparation and contract award. It is not a license for contractors to prepare shoddy proposals however. Contracting officers must still ensure that negotiated prices are fair and reasonable and will still, in many cases, require cost or pricing data - just not certified cost or pricing data. This also means that the Government will have a much smaller universe of contracts on which it can conduct Defective Pricing audits.

Contractors Unwittingly Subject to TINA

Suppose that a prospective contractor submits a proposal that falls under the threshold requiring certified cost or pricing data (currently $750,000) but subsequent to submitting the proposal, the Government decides to add additional quantities that causes the resultant contract to exceed that threshold. Is that contractor required to certify its cost or pricing data?

The short answer is 'yes'. FAR 15.403 (and 10 USC 2306a, the Truth in Negotiations Act or TINA) applies to the dollar value of a contract (or subcontract). The eventual value of the contract action, not the original proposed value, is determinative.

Contractors need to be aware of this. Even if the Government does not require them to sign a certificate of current cost or pricing data, the requirement still applies (see Christian Doctrine and Is Your Contract Subject to a TINA Audit), Some contractors have unwittingly signed up for something they didn't plan for.

There may be ways around this requirement. If the Government negotiates a contract based on the original proposal and subsequently negotiates a modification to add the additional quantities, and neither the proposal nor the modification rise to the threshold level, neither the basic contract nor the modification(s) would be subject to TINA. Each pricing action stands on its own when it comes to the requirement for certified cost or pricing data.

Another situation that may surprise contractors is modifications of contracts that did not require certified cost or pricing data because it was exempt (perhaps because it was based on adequate price competition). Certified cost or pricing data would still be required for any modification should the value of that modification exceed the $750,000 TINA threshold.

Is Your Contract Subject to a TINA Audit?

Now that DCAA (Defense Contract Audit Agency) is nearly current in its audits of contractor incurred cost proposals and the new Administration has lifted it federal hiring freeze, the Agency is preparing to hire as many as 500 new auditors and may be turning its attention to other types of audits that have been curtailed in favor of higher priority assignments. One of those program areas where DCAA has been eager to resume, with the DoD Office of Inspector General's active encouragement, is contractor compliance with the Truth-in-Negotiations Act (TINA).

The Truth-in-Negotiations Act applies to negotiated contracts where contractors submitted certified cost or pricing data to the Government. You can determine whether TINA applies by looking for the contract clauses at FAR 52.215-10, 11, 12, or 13. The absence of one or more of these four clauses doesn't necessarily mean the contract is not subject to TINA however. The Government makes mistakes from time to time in drafting their contracts and has been know to inadvertently omit the TINA clause. Since TINA is a statutory requirement, the Government sometimes invokes the Christian Doctrine to "read" the clause into the contract. Refer to DCAA's Contract Audit Manual (CAM) 14-112.1 for information on the Christian Doctrine.

Just because a contractor submitted certified cost or pricing data and the respective clauses are included in the contract however, doesn't mean the contract is subject to TINA. The Government must also have relied on the certified cost or pricing data. In many negotiations, the Government does not rely on submitted certified cost or pricing data in arriving at a fair and reasonable price, but instead, relies on other factors such as previous prices paid. DCAA has been burned many times where alleged TINA violations have been discarded by contracting officers because either the contractor or contracting officer has shown that the agreed-to price was based on something other than certified cost or pricing data. Here's where contractors can be pro-active when DCAA begins a TINA review - someone knowledgeable about the negotiations should assess whether certified cost or pricing data, even though submitted, was relied upon by the Government in establishing the negotiated price.

The Government PNM (Price Negotiation Memorandum), which is the Government's view of what transpired during negotiations, usually includes a statement as to whether the Government negotiator relied upon certified cost or pricing data. DCAA will rely on this statement when initiating its TINA review however that particular statement is usually "boilerplate" verbiage and can and should be refuted if it is not true. Contractors will not usually have access to the Government PNMs but should be in the practice of writing up their own view of negotiations, giving clear narrative as to what was submitted and what was relied upon in arriving at a negotiated price.

To learn more about TINA (i.e. Defective Pricing) refer to our eight part series from 2010.

Pilot Program for Increased Cost or Pricing Data Threshold

The Fiscal Year 2016 National Defense Authorization Act (NDAA) authorized a pilot program to test the "efficacy" of using a risk-based approach to increasing the threshold for submission of cost or pricing data. Currently, the threshold sits at $750,000. Under the pilot program, that threshold significantly increases to $5 million.

The purpose of increasing the TINA (Truth in Negotiations Act) threshold is to make things easier on contractors and contracting officers. Auditors are generally opposed to the increased thresholds however, there is a probability that by October 2018 when the pilot program ends, the test will be rendered a success and the $5 million threshold will be made permanent.

The Department of Defense is now seeking candidates to test this authority and has requested the Army, Navy, and Air Force to each nominate at least one candidate program. The nominations must address the following six elements/questions.

1. Whether the Government received, within the previous 12 months, adequate certified cost or pricing data and completed cost analysis, with similar configuration, and quantity and delivery schedules.
2. Whether the price analysis demonstrates historical pricing stability with no significant expectation of future deviation.
3. Report any deficiencies with DFARS 252.215-7002 (estimating system requirements) or DFARS 252.242-7006 (accounting system administration)
4. Have contractors/subcontractors demonstrated a history of providing quality products in accordance with delivery terms?
5. Have contractors/subcontractors demonstrated a history of providing data required by the contracting officer to determine the proposed prices are fair and reasonable?
6. Identify any significant previous audit findings or other required previous contract adjustments.

If you think that you or one of your programs is a candidate for this pilot program, it wouldn't hurt to nominate yourself. Let your contracting officer know of your interest. 

You can read the entire guidance memorandum here.

Avoid "Courtesy Bids" - Government Considers Them to be Fraud Indicators

Although the number is down from a few years ago, the Government still performs audits of contractor compliance with TINA (Truth-in-Negotiations Act). These audits are also referred to as Defective Pricing audits. Under TINA, contractors have the affirmative duty to ensure that the cost or pricing data submitted to support a proposal to the Government is based on data that is current, complete, and accurate. Under current audit guidance, all instances of defective pricing are considered for possible fraud referral. That does not mean that all instances of defective pricing are ultimately reported as potential fraud - it means that the auditors will discuss among themselves and consult the DoD-IG's (Inspector General's) listing of fraud indicators to assess whether the submission defective cost or pricing data was laced with fraud.

The DoD-IG maintains a listing of Fraud Red Flags and Indicators on its website. DCAA auditors, as part of every audit they perform, are required to consult one or more of the indicator listings as pertinent to the particular audit they are performing. One of the fraud risk indicators for defective pricing is the contractor's use of vendor "courtesy bids".

In a published case study, DCAA reviewed the contractor's estimate for material pricing and found that the contractor's estimates for five of 40 parts selected for audit were based on courtesy bids. Vendors confirmed to the auditors that they issued courtesy bids when requested but they refused to do business with the contractor because of the complicated Government regulations that would have to be followed. The contractor used these courtesy bids to price the material, but later, purchased the parts from other vendors at lower prices.

Requests for competitive bids sent to vendors that a contractor knows will be either too high to be considered or does not meet contract specifications are not current, complete, and accurate cost or pricing data. The purpose of these bid solicitations is to create the appearance of competition and conceal secretly inflated prices included in the proposal.

Now here's the bottom line. According to the DoD-IG, such courtesy bids (also called complementary, or cover bids) are a form of bid rigging. Bid rigging occurs when competitors conspire to raise prices or keep prices artificially high when competitive bids are solicited prior to contract or subcontract award. Auditors will now be specifically looking for instances of courtesy bids. Contractors will do well to avoid even the appearance of incorporating them into cost or pricing data.

TINA Threshold May Raise to $5 Million (from $750 thousand)

We've been discussing some of the contracting provisions included in the House and Senate versions of the fiscal year 2016 National Defense Authorization Act (NDAA). The House and Senate have different versions and at some point, the two Bodies will have to come together and compromise on a final bill to send the President. So, at this point, there's no guarantee that some of these provisions will survive the compromise committee. But, it's interesting nonetheless to see which legislative proposals have made it through to the final versions of the respective House and Senate bills.

One provision that will have significant impact on contractors and the contracting community is a proposal to raise the threshold for cost or pricing data from $750 thousand to $5 million. Now that's a big jump. Here's what the Senate Armed Services Committee reported concerning the increased threshold:

The committee recommends a provision that would amend the Truth in Negotiations Act (Public Law 87–653; 10 U.S.C. section 2306a) to raise the threshold for the requirement to provide certified cost or pricing data in non-price competitive procurements on non-commercial items from the current $750,000 to $5.0 million. For non-price competitive procurements valued at less than the new threshold of $5.0 million but more than the current threshold of $750,000, the Department of Defense (DOD) would be required to establish a riskbased contracting approach, under which certified cost or pricing data would be required for a risk-based sample of contracts, to ensure that DOD is getting fair and reasonable prices for such contracts. 

The committee believes that a 100 percent review of certified cost or pricing data on thousands of small contracts is not the best use of DOD’s limited acquisition and auditing resources, particularly for those contracts that have been awarded based on a technical competition. By enabling DOD to adopt a risk-based contracting approach, this provision should free up significant resources to be applied in areas where they are likely to achieve a better return.

In addition, the provision will enable non-traditional contractors to participate in innovative DOD research projects valued at less than $5.0 million without triggering government-unique contracting procedures, enhancing DOD’s access to cutting-edge technologies developed by companies that might otherwise be unwilling to do business with the government. Limitation of the use of reverse auctions

We're not at all sure what the committee has in mind in proposing a "risk-based contracting approach under which certified cost or pricing data would be required for a risk-based sample of contracts" because they don't define risk factors.

We guess this is one of those cases where we have to wait until the law passes to learn what it all means.

FAR Council Proposing to Raise Certified Cost or Pricing Data Threshold to $750,000

The FAR Council today published a proposed rule that will raise the threshold for for certified cost or pricing data from $700 thousand to $750 thousand. Under FAR 15.403-4, contractors and prospective contractors are required to certify that the cost or pricing data submitted in support of a proposal is current, complete, and accurate. The actual certification states:

This is to certify that, to the best of my knowledge and belief, the cost or pricing data (as defined in Section 2.101 of the Federal Acquisition Regulation (FAR) and required under FAR subsection 15.403-4 submitted, either actually or by specific identification in writing, to the Contracting Officer or to the Contracting Officer's representative in support of ________ are accurate, complete, and current as of ____________. This certification includes the cost or pricing data supporting any advance agreements and forward pricing rate agreements between the offeror and the Government that are part of the proposal.

The intent for increasing the TINA threshold (Truth-in-Negotiations Act), according to the FAR Council, is not to reduce Government oversight but to maintain the status quo, by adjusting thresholds to keep pace with inflation. If the threshold was not adjusted for inflation, the number of contracts subject to TINA would continue to grow, because more and more contracts will be above the stated threshold.

The new threshold will probably become effective on October 1, 2015.

Contractor Pays $10 Million to Settle False Claims Act Allegations

Another day, another press release from the Department of Justice announcing yet another Government contractor has paid a bucket load of dollars to settle False Claims Act Allegations. There was no admissions of guilt, mind you, nor a determination of liability - only some money changing hands to settle some allegations. In this case, the contractor settled for $10 million.

It looks to us as if the charges began as defective pricing. Justice referred to "misrepresentations during contract negotiations" and "false statements to inflate the price of goods or services sold to the government". Those statements sound like the contractor did not furnish current, complete, and accurate cost or pricing data as required by the Truth in Negotiations Act.

At one time, the Government had a robust program for reviewing contracts for compliance with the Truth in Negotiations Act (TINA). Those reviews (audits) have all but disappeared. In fact, DCAA has programmed only 35 staff years out of a workforce of 4,668 to perform TINA reviews. That's less than one percent. We don't know why the significant drop-off except perhaps the feeling by Agency management that there was not sufficient payback on those kinds of audits.

The Government approaches TINA violations (i.e. failure to furnish current, complete, and accurate cost or pricing data during negotiations) as potential referrals for violations of the False Claims Act. In fact, every "positive" defective pricing audit report had to be either referred for investigation or a written justification as to why the auditor did not believe a referral was warranted had to be prepared.  It is, of course, easier to refer a defective pricing finding for investigation than it is to write up justification as to why it should not be referred and have that judgment questioned by supervision and management up the line.

The DoJ press release did not state the manner in which this alleged False Claims Act violation came to their attention. It could have been a contract auditor, a contracting officer, or perhaps a whistle-blower. Whatever manner, contractors should be aware that there is a panoply of Government oversight activities just doing their jobs and internal whistle-blowers looking to strike it rich.

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. 

FAR Threshold for Certified Cost or Pricing Data

UPDATE: Effective October 1, 2015, the threshold increases to $750,000. See details here.

Effective October 1, 2010, the threshold for requiring certified cost or pricing data (FAR 15.403-4(a)) is increased for inflation from $650 thousand to $700 thousand. A slew of other inflation-related thresholds are increased as well. For a complete matrix of all FAR thresholds by FAR cite, click here.

In publishing these adjustments, the FAR councils were careful to point out that "... the intent is not to reduce Government oversight but to maintain the status quo, by adjusting thresholds to keep pace with inflation. If thresholds are not adjusted for inflation, the number of contracts subject to the acquisition-related threshold will continue to grow, because more and more contracts will be above the stated thresholds."

Defective Pricing - Significance

Today we're wrapping up our series on defective pricing with a few comments on what is significant when it comes to the impact of the failure to disclose current, complete, and accurate cost or pricing data. As you recall from a previous post, one of the Government's burdens of proof is that cost or pricing data must be such that a reasonable person (i.e. prudent buyer and seller) would expect it to have a significant effect on price negotiations.

Neither TINA nor FAR define "significant amount". The Courts and the BCA (Board of Contract Appeals) have made differing decisions regarding what is a significant amount. The working guideline from DCAA, the Agency responsibile for testing contractor compliance with TINA, is the lesser of five percent of the contract price or $50,000 dollars. Since the Government expends a substantial amount of resources finding, pursuing, and settling claims of defective pricing, materiality (or significance) is a key facton in determining whether to proceed. For a cost-type contract, this $50 thousand equates to a much larger figure because the potential savings to the Government is only the fee. For a cost type contract with a 5 percent fee, the defective pricing allegation would be $1,000,000.

The $50,000 potential savings to the Government is only a working guideline for DCAA and does not apply if a contractor's deficient estimating practices have resulted in recurring defective pricing or the potential price adjustment is due to a systemic deficiency which affects all contract priced during the period.

Finally, the $50 thousand guideline is a fully burdened figure. The actual defective pricing might start out a much smaller figure that grows to $50 thousand when fringe benefits, overhead, General and Administrative expenses, and profit is added.

Defective Pricing - Offsets

Failure to submit current, complete, and accurate cost or pricing data often times hurts the contractor as much or more than the Government. Bad estimating is bad estimating. When the Government alleges defective pricing, contractors have the authority to submit "offsets". Contracting officers must allow an offset for any understated cost or pricing data the contractor submitted.  However, the offset cannot exceed the amount that the Government is seeking to recover. There can never be an increase in contract price as a result of offsets.

The offset does not have to be in the same cost grouping as the overstated cost or pricing data. Material costs could offset labor costs, for example. Contractors must prove two things. First, that the higher cost or pricing data was available before the "as of" date specified on the Certificate of Current Cost or Pricing Data and secondly, the data was not submitted to the Government.

Case law has identified two instances where contractors were not entitled to an offset. In one case, the contractor knew that its cost or pricing data was understated before the certification data. In other words, if a contractor purposefully understated its bid for whatever reason (e.g. competitive pressure), that understatement would not comprise a valid offset. Secondly, the Government was able to prove that submission of the data before the "as of" date specified in the certificate would not have increased the contract pricie in the amount of the proposed offset.

Defective Pricing - Will I be Audited?

The Defense Contract Audit Agency (DCAA) is the lead Government Agency in testing contractor compliance with TINA (Truth in Negotiations Act). But they are not the only Agency performing such reviews. The Comptroller General (i.e. GAO) and the Inspector General (IG) organizations also have statutory rights. The GAO and the IG generally initiate their reviews in connection with other activities (such as a fraud referral) so most contractors will encounter only DCAA.

DCAA's selections are based on its Post Award Audit Selection System (PASS). The PASS is a risk assessment model that provides objective and verifiable risk determinations. It considers the adequacy of contractor estimating and accounting systems, historical rates of positive occurrences, and values of previous recommended price adjustments. Each of these four factors is assigned a weight between one and four with one being the lowest risk. If the result is under four, the contractor is determined to be low risk. If the result is over 12, the contractor is considered high risk. Other thresholds include medium low and medium high. The PASS rating determines how many defective pricing reviews DCAA will initiate. Obviously, the higher the risk, the more audits.

DCAA then takes the universe of contracts awarded, stratifies according to size and type (e.g. FFP, Incentive, CPFF) and selects from each strata, a number according to the PASS rating. For example, for FFP contracts between $25 and $100 million, a high risk contractor might have 100 percent reviewed while a low risk contractor might have one out of every four selected for audit. These strata and selection criteria change slightly from year to year so you should request your DCAA auditor to provide the PASS rating and the selection criteria.

Smaller contractors are automatically considered high risk so they do not have individual PASS ratings. Contracts awarded to smaller contractors are added to a pool and selection is made based on the high risk PASS rating. Because contracts are pooled and selections are somewhat random, many smaller contractors are rarely audited for compliance with TINA.

Defective Pricing - Government has Burden of Proof

Last week, we posted several articles on the Truth in Negotiations Act. We defined cost or pricing data, why it is important, the difference between facts and judgment, and some of the Government's fraud indicators related to contractor failure to comply with TINA. Today, we pick up another element of defective pricing, the Government's burden of proof in asserting defectiv pricing.

Defective cost or pricing data (Defective Pricing) occurs when, after a contract is negotiated, it is discovered that the data used to price the contract was inaccurate, incomplete, or noncurrent.. Under TINA and the contract price reduction clause, the Government is entitled to an adjustment in the contract price (including fee) when it can be shown to have relied upon the defective data. The Government always bears the burden of proof in a defective pricing case. Based on a 1993 General Dynamics ASBCA (Armed Services Board of Contract Appeals) case, the Government must prove the following:

• The information meets the definition of cost or pricing data. Refer to our January 4th post for the definition of cost or pricing data. Data must be factual, not judgmental.
• The information existed before the date of agreement on price.
• The data was reasonably available before the date of agreement on price.
• The data the contractor submitted was not accurate, complete, or current.
• The undisclosed data was the type that prudent buyers or sellers would have reasonably expected to have a significant effect upon price negotiations.
• The Government relied on the defective data.
• The Government's reliance on the defective data caused an increase in the contract price. As a side note, case law has made this final point rather easy for the Government to prove. Baring evidence to the contrary, the natural and probable consequences of defective pricing is an increase in the contract price.

If the Government fails to establish proof in any of these seven criteria, it will not prevail.

Cost or Pricing Data - Facts vs. Judgment

This week we have been discussing TINA, the Truth in Negotiations Act and the law's implication for government contractors. The law applies generally to negotiated contracts. So awards based on adequate price competition, prices set by law or regulation, and commercial items are exempt. The law requires contractors to submit current, complete, and accurate cost or pricing data in support of negotiations. Cost or pricing data is generally that which is factual in nature. And herein lies one of the most contentious issues when it comes to defective pricing; is it fact or is it judgment?

The distinction between fact and judgment is often difficult to make. Information that mixes fact and judgment will require disclosure because of the underlying factual information. A management decision is that kind of information. Management decisions are generally a conglomeration of facts and judgment. To determine whether management decisions can be classified as cost or pricing data, it is helpful to consider the following factors:

• Did management actually make a decision?
• Was the management decision made by someone with the authority to approve or disapprove actions affecting costs?
• Did the management decision require some sort of "action" affecting the relevant cost element, or was the "decision more along the lines of preliminary planning for possible future action?
• Is there a substantial relationship between the management decision and the relevant cost element?
• Is the management decision the type of decision that prudent buyers and sellers would reasonably expect to affect price negotiations significantly?

For example, a management decision to give employees a five percent cost of living adjustment is cost or pricing data. But, if that decision had to be first approved by the Board of Directors, it might not be cost or pricing data, depending upon whether the Board typically, historically, and expectantly "rubber stamps" management decisions (cost or pricing data) or actively involves itself in the process of determining the rate of increase (not cost or pricing data until board approval).  A decision to defer pay raises is cost or pricing data but if a deferral was one of several options being considered as a way of cutting costs, it would not be cost or pricing data.

Fraud Indicators related to Defective Pricing (TINA)

Recently, we've been discussing cost or pricing data and some of the implications that failure to furnish current, complete, and accurate cost or pricing data can have on government contractors. If a contract price was increased because a contractor failed to submit current, complete, and accurate cost or pricing data, the contract price will be reduce by the impact of that failure. And, if that wasn't enough, the matter could be referred for criminal investigation. To assist in helping auditors determine whether TINA noncompliance should be referred to an investigative organization for potential fraud, the DoD-IG published a Handbook of Fraud Indicators.

According to the DoD Inspector General, the following are general fraud indicators that relate direct to defective pricing reviews and should be considered for referral for criminal investigation.

• High incidence of defective pricing.
• Repeated defective pricing involving similar patterns or conditions.
• Continued failure or refusal to correct known system deficiencies.
• Consistent failure to update cost or pricing data with knowledge that past activity showed that prices have decreased.
• Specific knowledge that is not disclosed regarding significant cost issues that will reduce the proposed cost.
• Repeated denial by responsible contractor employees of the existence of historical records that are subsequently found.
• Continued failure to make complete disclosure of data known to responsible personnel.
• Altered or false documents.

DCAA has taken this this matter very seriously. It has instructed its auditors to consider whether any of these fraud indicators exist for each and every postive defective pricing audit report it issues and if found, to refer the matter for investigation.