Proposed Exceptions to Cost or Pricing Data

Over the past few weeks, we have been providing periodic updates to provisions included in the respective Senate and House versions of the fiscal year 2016 NDAA (National Defense Authorization Act). The House passed its version of the 2016 National Defense Authorization Act late last week. After the Senate passes their version, its on to conference committee to iron out the differences.

10 U.S. Code 2306a, also known as "truth in negotiations" sets forth the requirement for certified cost or pricing data. Section (b) of that statute lists the exceptions to the requirement including adequate price competition, prices set by law or regulation, commercial items, and certain contract modifications.

The House-passed fiscal year 2016 NDAA adds two additional exceptions to the requirement for certified cost or pricing data.

Section 804 adds the following:

(4) Commercial Item Determination - For purposes of applying the commercial item exception under paragraph (1)(B) to the required submission of certified cost or pricing data, the contracting officer may presume that a prior commercial item determination made by a military department, a Defense Agency, or another component of the Department of Defense shall serve as a determination for subsequent procurements of such item.

 Section 852 adds the following:

(5) Use of Recent Prices Paid by the Government - A contracting officer shall consider evidence provided by an offeror of recent purchase prices paid by the Government for the same or similar commercial items in establishing price reasonableness on a subsequent purchase if the contracting officer is satisfied that the prices previously paid remain a valid reference for c comparison after considering the totality of other relevant factors such as the time elapsed since the prior purchase and any differences in the quantities purchased or applicable terms and conditions.

Both provisions are generally good for contractors in that it may lessen the situations where expensive preparation of cost or pricing data is necessary. The provision in Section 852 will require offerors to do a bit of homework to provide evidence of recent purchases to the Government for the same or similar items.

Examples of Cost or Pricing Data

Most contractors have a pretty good understanding of the definition of and the types of items that constitutes "cost or pricing" data. If not, the idea is usually drilled into them during negotiations and when the certificate of current cost or pricing data is pushed across the table for signature, contractors will need to read and understand the definition before signing it.

Nevertheless, the Government continues to dedicate resources to defective pricing reviews (TINA audits) to test whether the contractor did indeed provide all the factual information it was aware of at the time of agreement on price. They dedicate these resources because there is payback, a return on their investment. The Government continues to find cases where contractors did not provide the most current, complete, and accurate data available to them as of the date of agreement on price. The consequences of getting caught are severe. The contract price is adjusted downward to reflect the impact of the non-disclosure, interest is applied on any overpayments that occurred, and more than likely, there will be a referral to an investigative body. Regarding the latter, audit guidance is written in such a way that an auditor, having disclosed defective pricing data, must have a good reason not to refer the matter for investigation.

The official definition of "cost or pricing data" is found in FAR 2.101 (Federal Acquisition Regulations). It states in part, "Cost or pricing data means all facts that, as of the date of price agreement ...prudent buyers and sellers would reasonable expect to affect price negotiations significantly. Cost or pricing data are factual, not judgmental, and are verifiable.

A contractor's judgment is not cost or pricing data but to the extent that judgment is based on factual matters, it is. The definition provides that "While they do not indicate the accuracy of prospective contractor's judgment about estimated future costs or projections, they do include the data forming the basis for that judgment".

FAR provides a non-exclusive list of items that are included in the definition of cost or pricing data. These include (parentheses are ours):

• Vendor quotations (even the ones that are not used in pricing)
• Nonrecurring costs
• Information on changes in production methods and production/purchasing volume,
• Data supporting projections of business prospects, business objectives, and related operational costs (this will impact indirect rate projections),
• Unit-cost trends such as those associated with labor efficiency (learning curve applications),
• Make-or-buy decisions (or, even if decisions have not been made, the fact that you're considering such alternatives should be disclosed),
• Estimated resources to attain business goals (affects indirect cost allocation bases), and
• Information on management decisions that could have a significant bearing on costs (union negotiations).

Proposed Change to Definition of Cost or Pricing Data

DoD is moving to replace all references to "Cost or Pricing Data" to "Certified Cost or Pricing Data in its FAR Supplement (DFARS).  This is not a significant change to the procurement regulations but it should clear up some confusion by making it clear when cost or pricing data submitted in response to a Government solicitation must be certified. The change should also improve consistency between DFARS and FAR. FAR was amended several months ago to add the word "certified" to the definitions of Cost or Pricing Data.

Under existing regulations, contracting based on the submission of certified cost or pricing data is considered a last resort. If there is adequate price competition, if prices are set by law or regulations, or if acquiring commercial items, etc, contracting officers are precluded from requiring certified cost or pricing data. The contracting officer can however request "information other than cost or pricing data" necessary to make a determination that proposed prices are reasonable. Sometimes this "information other than cost or pricing data" is required to be submitted in a format and detail that looks just like regular cost or pricing data. And that's where the confusion set in. There was anecdotal evidence that contracting officers were requiring prospective contractors to certify the "information other than cost or pricing data.

By the way, the threshold for requiring certified cost or pricing data (FAR 15.403-4) remains at $700 thousand.

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."

Cost or Pricing Data under New FAR Rule - Submit It Only When Required

The revised FAR coverage on cost or pricing data, certified cost or pricing data, and information other than cost or pricing data, which we began discussing yesterday, is designed to supplement existing coverage to "clarify ... and achieve greater understanding by contracting officers and contractors". The new rule neither expands nor diminishes the existing rights of contracting officers to request cost or pricing data (whether certified or other than certified) or other information, or the existing responsibilities of the offeror to submit such data or other information. It is important to note that the rule does not require, encourage, or authorize contracting officers to obtain cost or pricing data or other information unless it is needed to determine that prices offered are fair and reasonable, which may include the request for such data in connection with a cost realism analysis. As the rule strongly cautions, requiring contractors to submit more data than what is needed can ``lead to increased proposal preparation costs, generally extend acquisition lead time, and consume additional contractor and Government resources.'' Contracting officers must request only the amount of data necessary to make a determination that the price of whatever they are buying/negotiating, is fair and reasonable; no more and no less.

 

Whether a contractor must submit ``certified cost or pricing data'' is based on the requirements of TINA and its stated exceptions. With respect to ``data other than certified cost or pricing data,'' the introductory policy statement in FAR 15.402(a) has been clarified to tie together the contracting officer's longstanding statutory responsibility to request the data and information necessary to establish a fair and reasonable price--as stated in TINA at 10 U.S.C. 2306a(d)(1) and 41 U.S.C. 254b(d)(1)--with the caution that, in doing so, the contracting officer must not request more data than is necessary. By doing so, the FAR will provide a more complete articulation of the policy underlying the use of ``data other than certified cost or pricing data'' in establishing price fairness and reasonableness, in furtherance of the contracting officer's duty to serve as a responsible steward of the taxpayer's resources.

Some commentors responding to the proposed rule in 2007 expressed concern that it will result in contracting officers by-passing normal market research and pricing techniques and require contractors to submit full cost or pricing data as if the Truth in Negotiations Act (TINA) applied.

 

The FAR Councils addressed this concern. The Councils wrote that the current FAR, as well as the new rule, protect against this practice. Contracting officers must generally follow the order of preference at FAR 15.402, and are required by that section to ``obtain the type and quantity of data necessary to establish a fair and reasonable price, but not more data than is necessary.'' In theory, this could include all of the elements prescribed under FAR 15.408, Table 15-2. However, in most cases the data necessary for a contracting officer to determine cost fairness and reasonableness, or cost realism, will fall short of this level of data. The rule should not result in contracting officers requiring contractors to submit full cost or pricing data as if certification will be required when it is not necessary.

The "order of preference" used to determine the type of information required is

1. No additional information from the offeror, if the price is based on adequate price competition
2. Information other than cost or pricing data - pricing
3. Information other than cost or pricing data - cost data that does not meet the definition of cost or pricing data
4. Cost or pricing data.

 

Revised FAR Definition for Cost or Pricing Data

The FAR Councils just published extensive revisions to FAR regarding cost or pricing data, certified cost or pricing data, and data other than cost or pricing data. We are going to spend a few days to discuss these changes because while on one hand they appear minor and perhaps inconsequential, there are nuances to them that could have significant impact on the way that the Government awards contracts and on contractor responsibilities when submitting data in support of negotiations. This change has been in the works for several years. It was first published as a proposed rule in 2007 and the public comment period closed in November of that year. In fact the proposed rule has been fallowing for so long that we nearly forgot about it.

The premise behind the revision is to make FAR consistent with TINA (Truth in Negotiations Act).

The Councils believe that the implementation of TINA in FAR subpart 15.4 is not sufficiently clear. In particular, there is confusion regarding the right of the Government to request ``data other than certified cost or pricing data,'' the obligation of the offeror to provide this data, and the definition of this term.

This lack of clarity is due, in large part, to definitions that overlap and are not identical to TINA. For example, the term ``cost or pricing data'' is defined in the FAR to mean certified cost or pricing data, whereas TINA does not make certification part of the definition of this term. This regulatory refinement has led to confusion regarding the level of information that a contracting officer may request to establish fair and reasonable pricing including a misunderstanding by some that the data elements that comprise cost or pricing data cannot be requested by the Government unless the data are required by law to be submitted to the contracting officer in a certified form. This confusion has been exacerbated by the FAR's use of the phrase "information other than cost or pricing data,'' which has made it difficult for contracting officers to understand the circumstances when data other than certified cost or pricing data should be obtained to protect the Government from paying unreasonable prices.

 
The revised definition of "cost or pricing data" at FAR 2.101 is as follows. To make it easy to compare to the previous method, we have used the "line-out" method to show language that has been dropped and the "bold underline" method to show added language.

Cost or pricing data (10 U.S.C. 2306a(h)(1) and 41 U.S.C. 254b) means all facts that, as of the date of price agreement, or, if applicable, an earlier date agreed upon between the parties that is as close as practicable to the date of agreement on price, prudent buyers and sellers would reasonably expect to affect price negotiations significantly. Cost or pricing data are data requiring certification in accordance with 15.406-2. Cost or pricing data are factual, not judgmental; and are verifiable. While they do not indicate the accuracy of the prospective contractor's judgment about estimated future costs or projections, they do include the data forming the basis for that judgment. Cost or pricing data are more than historical accounting

data; they are all the facts that can be reasonably expected to contribute to the soundness of estimates of future costs and to the validity of determinations of costs already incurred. They also include, but are not limited to, such factors as--

The omitted language is now part of a new definition on "certified cost or pricing data". The added language was probably inserted because of contractor tendency to sometimes assert (in a defective pricing situation) that the examples of cost or pricing data that follow this definition was an inclusive listing.