Defective Pricing

What is Defective Pricing?

Simply put, knowingly submitting false cost or pricing data to the government on negotiated contracts. Defective pricing is any contracting action subject to the Truth in Negotiations Act (TINA) where the negotiated contract price including profit or fee was increased by a significant amount because:

The contractor furnished to the Government cost or pricing data that were not complete, accurate, and current as certified in the contractor's Certificate of Current Cost or Pricing Data;

A subcontractor or a prospective subcontractor at any tier furnished to the contractor cost or pricing data that were not complete, accurate, and current as certified in the contractor's Certificate of Current Cost or Pricing Data; or

Any of the above parties furnished data of any description that were not accurate.

5 Elements Needed to Prove Defective Pricing

1. Cost or Pricing Data: The data issue constitutes cost or pricing data;

2. Reasonable Availability: The cost or pricing data was reasonably available to the contractor prior to the date of the parties agreement on price;

3. Nondisclosure: The contractor failed to submit and the Government lacked actual knowledge of current, accurate, and complete cost or pricing data;

4. Government Reliance: The Government detrimentally relied on the defective cost or pricing data in negotiating with the contractor;

5. Causation: The Government’s reliance upon the defective cost or pricing data caused an increase in the contract price.

Remedies for Defective Pricing

When defective pricing occurs, the Government is entitled to a price reduction to eliminate any significant overpricing related to the defective data. That reduction must consider increases in both cost and profit or fee related to the defective data. In addition to a price adjustment, the Government is also entitled to:

Interest on any overpayments that resulted from the defective pricing of supplies or services accepted by the Government.
A penalty equal to the amount of any overpayment, if the contractor knowingly submitted cost or pricing data which were incomplete, inaccurate, or not current.

The Government entitlement to these remedies is incorporated in the prime contract using one of the following clauses:

Price Reduction for Defective Cost or Pricing Data, or
Price Reduction for Defective Cost or Pricing Data --Modifications.
The prime contract also requires that covered subcontracts must include the substance of the appropriate clause above.

Managing a Post-Award Audit

So you have been notified by DCAA or other agency that they would like to perform a post award audit on your TINA contract. The reason for this audit is so that they can determine that the information provided at negotiation was current, complete and accurate. The first step is to understand what steps and processes the auditor will undertake. All DCAA audit programs can be found at: http://www.dcaa.mil/

You can also find the DCAA audit program as of February 2016 here:

File:Truth in Negotiations Audit.pdf

Definitions

Audit Baseline The audit baseline is the last proposal submitted by the contractor to the Government (or upper-tier contractor), adjusted for factual information provided up to and during negotiations.

Underrun/Overrun Testing Underrun/Overrun testing identifies potential defective pricing leads by comparing actual costs incurred to the audit baseline. These are normally performed at the cost element level.

Transaction Testing When variances occur between what was proposed and actual costs incurred, the auditor will perform transaction testing to identify the causes of the variances.

Reliance In order for Defective pricing to occur, it must be demonstrated that the government (or higher-tier contractor) relied on the defective data.

Damage It also must be proved that the government (or higher-tier contractor) was damaged by the defective data.

Defective Pricing - Interest and Penalties

The government is entitled to interest on the over-payment amount from the date of original payment to the date the contractor repays the amount. If the inaccurate data was knowingly submission by the contractor, the government is entitled to an additional penalty amount, equal to the overpayment amount. Any offsets the contractor may be due are forfeited if the contractor’s cost or pricing data certification was known to be false.

Claims made against the government for payment on the defectively priced contract based on a false statement may be prosecuted under both the Civil and Criminal False Claims Acts. Penalties under these acts range from $10,000 to $1 million and up to five years imprisonment for each count.

A contractor convicted under any of these acts also faces suspension and debarment from doing business with the government, as provided in FAR subpart 9.4. Since August 1995 under the “Common Rule,” a decision by one federal agency to suspend and/or debar a contractor is binding on all federal agencies.

Reference

Chapter 5 Recognizing and Adjusting for Defective Pricing, Acquisition http://www.acq.osd.mil/dpap/cpf/docs/contract_pricing_finance_guide/vol4_ch5.pdf

Federal Acquisition Regulation