Resolving Proposal Inadequacies - Contracting Officers Failure to Document

The Defense Department Inspector General (IG) recently evaluated whether contracting officers took actions that were appropriate and complied with FAR (Federal Acquisition Regulations) 15.4, Contract Pricing, when the auditors (specifically DCAA or Defense Contract Audit Agency) determined that a contractor's price proposal was inadequate because those proposals did not comply with the specific requirements of FAR 15.4.

The good news is that the IG found that contracting officers did indeed take appropriate action to address proposal deficiencies identified by DCAA. In 23 of 23 proposals identified by DCAA as unacceptable as a basis for negotiations, contracting officers took the necessary actions to resolve the inadequacies.

The bad news however is that the contracting officers did not document the inadequacies or the actions taken to address the inadequacies in the contract file. Such documentation is required by FAR 15.406-3, Documenting the Negotiation.

The (Acting) Undersecretary of Defense for Acquisition and Sustainment recently sent out a reminder to contracting officers to, in essence, get their act together and comply with the documentation requirements. The memorandum reminded contracting officers that they have an affirmative requirement to document all DCAA identified inadequacies and to document why the actions taken appropriately address the contract price proposal inadequacies. By doing so, the memorandum concluded, contracting officers will have properly accounted for any issues of noncompliance or other discrepancies identified int he DCAA audit.

While we were auditors, we encountered many contractor proposals that were inadequate in not including the detail and support required by FAR 15.4. Some deficiencies were certainly more egregious than others but when the magnitude rose to a level where we didn't think the Government could achieve fair and reasonable pricing based on the garbage submitted, we would advise the contracting officer accordingly and recommend he/she not negotiate. Whatever actions contracting officers might have taken to resolve those inadequacies were rarely satisfactory to the audit community. Evidently contracting officers answer to a higher power than the contract auditor who are often viewed as an impediment to a smooth negotiation process.

The full IG report can be read or downloaded here.

Be Prepared When You Go In To Negotiations With The Government

No one has a good count on the number of Government contractors. By one estimate, over 50,000 companies contract with the Department of Defense and there are many Governmental agencies besides DoD. Whatever the number, there are a lot of Government contractors but relatively few of them have had to go through the process of actually negotiating a contract price under FAR Part 15 procedures, Contracting by Negotiations.

Negotiating a fair and reasonable price is a complex process involving consideration of many factors including

• actual costs and completion estimates
• the amount of profit or fee in relation to the total cost, the complexity of the work, quality, efficiency, and ingenuity of the contractor's performance and the technical and financial risk assumed, and
• the competitiveness of the end price.

Costs constitute an important factor in the contract price negotiation and the discussion between the contractor and the contracting officer include the objective of arriving at a definitive agreement, to the maximum extent possible, on the amount of costs to be considered in the price.

Definitive agreement on each element of cost however may not always be possible because of honest differences of opinion or other considerations between the negotiating parties. As a result, negotiation involves a give and take proposition and the contracting officer usually cannot negotiate a price which includes cost considerations exactly in accordance with his/her "pre-negotiation objective" (PNO). Contracting officers develop their PNOs based on all available data and information including the contractor's certified cost proposal, the results of technical evaluations, and either audits or cost analyses performed by DCMA  (Defense Contract Management Agency) or DCAA (Defense Contract Audit Agency).

In some instances, a total end price may be negotiated without specific monetary resolution of all of the individual cost elements or other pricing factors involved. When this happens, the Government's "view" of negotiations can differ markedly from the contractor's "view".

Sometimes, the profit rate the Government is willing to pay is a hindrance to a speedy end to negotiating sessions. Cost or pricing data is typically based on factual matters. For example, a contractor solicits two quotes for a proposed material item and selects the lower of the two. But profit considerations largely rely on judgment. How does one measure "complexity of work", "ingenuity of contractor's performance", or "technical risk".

Prenegotiation Objectives

"Prenegotiation objectives" establishes the Government's initial negotiation position. These objectives assist in the contracting officer's determination of fair and reasonable prices. They take into account the results of the contracting officer's analysis of the offeror's proposal including all pertinent information (e.g. field pricing assistance, audit reports, and technical evaluations, fact-finding results, the independent Government cost estimate if there is one, and price histories). They also include profit objectives when cost analysis is required.

FAR 15.406-1 requires the contracting officer to establish prenegotiation objectives before the negotiation of any pricing action but allows discretion to the extent that the scope and depth of the analysis supporting the objectives be commensurate with the dollar value, importance, and complexity of the pricing action. These prenegotiation objectives are always in writing and in most cases, approved by a supervisor or manager before negotiations commence. The written memorandum is often referred to as a POM (Prenegotiation Objective Memorandum).

Most Governmental procuring agencies have specific instructions or manuals guiding the preparation of the POM. Most of these contain detailed instructions that go beyond the generalities of FAR 15.406 but are entirely consistent with those basic requirements.

POMs are never shared with contractors before negotiations and rarely afterwards. In some cases, contractors are able to acquire them in connection with appeals or litigation.

POMs include both factual matters and judgmental factors. Generally speaking, the more judgment involved, the more flexible the negotiating position becomes. Price/cost analysis reports and audit reports are usually pretty factual. Labor rates and material costs are usually based on contractor history so the only thing to discuss in negotiation is escalation percentages. Quantities (e.g. hours per assembly) are sometimes based on history but could include judgmental aspects as well (e.g. complexity factors).

Contractors also develop prenegotiation strategies, though for small companies, there is not a lot of formality to it. Contractors have the advantage of having prepared the proposal and will usually have a better grasp of the inherent facts and judgments than would the Government. Contractors must ensure that they do not run afoul of the Truth in Negotiations Act (TINA) when negotiating contracts. Penalties for violating TINA can be severe.

When you are sitting at the table negotiating a contract, you should be alert for positions proffered by contracting officers that are not factual or realistic. While these positions may be part of his/her negotiation objective, they may not always be practical, viable, reasonable, or realistic. In a recent negotiation, it became obvious to us that the Government had made a significant error in calculating the hourly rate for one of the proposed labor categories. Bringing that fact up to the negotiator, allowed him to revise his negotiation strategy and ultimately it expedited the negotiation process.

Additional Data Provided at Negotiations

After submitting a proposal, contractors have a continuing responsibility to provide current, complete, and accurate cost or pricing data right up until the date of agreement on price. Realistically, most of the updated data is provided just before or during contract negotiations rather than piece-mealed. Many things can change between the time the proposal was submitted and when negotiations begin. The pay raise that was projected for proposal purposes might have become historical data by the time of negotiations. Indirect rates could have changed. Perhaps there were some updated vendor quotations or subcontractor estimates. Or perhaps, because of other circumstances, that thing you were going to build in-house must now be outsourced. All of these events are cost or pricing data and must be disclosed to the Government (and certified to) prior to the date of agreement on price.

If the contracting officer requested an audit of your proposal and the audit resulted in significant findings, there is a strong likelihood that the auditor will participate in negotiations to answer questions about audit rationale/computations. Where significant updates were provided after the audit was completed, the contracting officer might also request the auditor to assess the propriety of the additional data provided. This may include, for example, providing advice on the contractor's rationale for a revised estimate, verifying data to the contractor's books and records or other supporting data, or running various Government position scenarios using the data through audit report schedules and underlying spreadsheets, where appropriate.

There is a fine line between supporting the negotiations process and performing additional audit work. The auditor will need to exercise some judgment here and there may be situations where he/she cannot comment on the updated data because of its significance relative to the proposal that was audited. Sometimes the auditor will have to back off and recommend the contracting officer request a supplemental audit.

Sometimes, with particular data, contractors think their chances of explaining its impact are better with the contracting officer then with the auditor so they withhold data from the auditor with the intention of providing it to the contracting officer at negotiations. Don't do that. If an auditor attends negotiations and finds that the contractor furnished data that should have been disclosed during the audit, it will not enhance your position and could very well lead to a referral for investigation.