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Changes to “Cost or Pricing Data” Federal Acquisition Rules

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Federal Acquisition Circular (FAC) 2005-45 was published in the Federal Register on August 30, 2010. Among the several FAR revisions was the final rule implementing FAR Case 2005-036, Definition of Cost or Pricing Data. As the FAC Introduction states—

This final rule amends the FAR by redefining ‘cost or pricing data,’ adding a definition of ‘certified cost or pricing data,’ and changing the term ‘information other than cost or pricing data’ to ‘data other than certified cost or pricing data.’ The rule clarifies the existing authority for contracting officers to require certified cost or pricing data or data other than certified cost or pricing data, and the existing requirements for submission of the various types of pricing data. The rule is required to eliminate confusion and misunderstanding, especially regarding the authority of the contracting officer to request data other than certified cost or pricing data when there is no other means to determine that proposed prices are fair and reasonable. Most significantly, the rule clarifies that data other than certified cost or pricing data may include the identical types of data as certified cost or pricing data but without the certification. Because the rule clarifies existing requirements, it will have only minimal impact on the Government, offerors, and automated systems.

Currently, definitions of “cost or pricing data” and “information other than cost or pricing data” are found in FAR 2.101, Definitions. The rules that tell Contracting Officers when to obtain the data in support of their cost and/or cost realism analyses, is found at FAR 15.4, Contract Pricing. This FAR subpart implements the Truth in Negotiations Act (TINA). (We note that another FAR Case implemented in the FAC raised the TINA threshold from $650,000 to $700,000.)

The rules in this area are complex and, generally, poorly understood by both Government and contractor. Here is the current policy, as set forth in FAR 15.402—

Contracting officers must—

(a) Purchase supplies and services from responsible sources at fair and reasonable prices. In establishing the reasonableness of the offered prices, the contracting officer must not obtain more information than is necessary. To the extent that cost or pricing data are not required by 15.403-4, the contracting officer must generally use the following order of preference in determining the type of information required:

(1) No additional information from the offeror, if the price is based on adequate price competition, except as provided by 15.403-3(b).

(2) Information other than cost or pricing data:

(i) Information related to prices (e.g., established catalog or market prices or previous contract prices), relying first on information available within the Government; second, on information obtained from sources other than the offeror; and, if necessary, on information obtained from the offeror. When obtaining information from the offeror is necessary, unless an exception under 15.403-1(b)(1) or (2) applies, such information submitted by the offeror shall include, at a minimum, appropriate information on the prices at which the same or similar items have been sold previously, adequate for evaluating the reasonableness of the price.

(ii) Cost information, that does not meet the definition of cost or pricing data at 2.101.

(3) Cost or pricing data. The contracting officer should use every means available to ascertain whether a fair and reasonable price can be determined before requesting cost or pricing data. Contracting officers must not require unnecessarily the submission of cost or pricing data, because it leads to increased proposal preparation costs, generally extends acquisition lead time, and consumes additional contractor and Government resources. …

Given the complexity of the current regulatory scheme, it is unsurprising that the revisions are complex as well. Despite the name of the FAR Case, the major revisions seem to focus on “information other than cost or pricing data” rather than “cost or pricing data”. Here’s a link to the official Federal Register notice setting forth the various revisions. You should review it carefully. Here are some of the points that we noticed—

A new definition of “certified cost or pricing data” has been added, to emphasize the need to submit a Certificate of Current Cost or Pricing Data.
The current definition of “cost or pricing data” has been “refined” to emphasize that it encompasses “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.”
The phrase “information other than cost or pricing data” (which covers information submitted by offerors that are not cost or pricing data) has been renamed “data other than certified cost or pricing data”.

The new definition of “data other than certified cost or pricing data” includes the following—

… pricing data, cost data, and judgmental information necessary for the contracting officer to determine a fair and reasonable price or to determine cost realism. Such data may include the identical types of data as certified cost or pricing data, consistent with Table 15–2 of 15.408, but without the certification. The data may also include, for example, sales data and any information reasonably required to explain the offeror’s estimating process, including, but not limited to—

(1) The judgmental factors applied and the mathematical or other methods used in the estimate, including those used in projecting from known data; and

(2) The nature and amount of any contingencies included in the proposed price.

For comparison purposes, we show the revised FAR 15.4 below—

15.402 Pricing policy.

Contracting officers shall—

(a) Purchase supplies and services from responsible sources at fair and reasonable prices. In establishing the reasonableness of the offered prices, the contracting officer—

(1) Shall obtain certified cost or pricing data when required by 15.403–4, along with data other than certified cost or pricing data as necessary to establish a fair and reasonable price; or

(2) When certified cost or pricing data are not required by 15.403–4, obtain data other than certified cost or pricing data as necessary to establish a fair and reasonable price, generally using the following order of preference in determining the type of data required:

(i) No additional data from the offeror, if the price is based on adequate price competition, except as provided by 15.403–3(b).

(ii) Data other than certified cost or pricing data such as—

(A) Data related to prices (e.g., established catalog or market prices, sales to non-governmental and governmental entities), relying first on data available within the Government; second, on data obtained from sources other than the offeror; and, if necessary, on data obtained from the offeror. When obtaining data from the offeror is necessary, unless an exception under

15.403–1(b)(1) or (2) applies, such data submitted by the offeror shall include, at a minimum, appropriate data on the prices at which the same or similar items have been sold previously, adequate for evaluating the reasonableness of the price.

(B) Cost data to the extent necessary for the contracting officer to determine a fair and reasonable price.

(3) Obtain the type and quantity of data necessary to establish a fair and reasonable price, but not more data than is necessary. Requesting unnecessary data can lead to increased proposal preparation costs, generally extend acquisition lead time, and consume additional contractor and Government resources. Use techniques such as, but not limited to, price analysis, cost analysis, and/or cost realism analysis to establish a fair and reasonable price. If a fair and reasonable price cannot be established by the contracting officer from the analyses of the data obtained or submitted to date, the contracting officer shall require the submission of additional data sufficient for the contracting officer to support the determination of the fair and reasonable price.

We notice that the prohibition on obtaining cost or pricing data when certain conditions (e.g., adequate competition) are found has been de-emphasized in favor of a more detailed discussion of the types of data the contracting officer should obtain. This appears to represent a return to a pre-Federal Acquisition Streamlining Act (FASA) pricing environment, which may add to contractors’ proposal costs— meaning that, ultimately, the Government may end up paying more for the goods and services it, acquires.

There is quite a bit to absorb in the new rule(s). Some of the language seems favorable. Although we don’t necessarily like the revised emphasis on obtaining cost or pricing data (certified or not), we believe contractors should be able to navigate through the rocks and shoals, if they take the time to understand the revised requirements.

Latest Dreamliner Drama Involves Exploding Engine

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In late August, 2010, Boeing announced yet another delay to the first delivery of its 787 “Dreamliner” passenger aircraft. The Dreamliner, which has been plagued by problems and delays, is now due for first delivery in the first quarter of 2011, according to this Los Angeles Times article. The LA Times article reported that—

The new delay is largely because of the failure of a Rolls-Royce Trent 1000 test engine, which broke apart internally while being run on a ground-test stand at the engine maker's plant in Derby, England, this month.

We have reported on Dreamliner problems before—notably here and here. We have looked at Dreamliner supply chain management problems here—calling it a poster child of “what not to do.” And, to be clear, this is just the latest of a series of seemingly “surprise” production delays. As the LA Times noted, “In July, Boeing said poor workmanship on 787 horizontal tails built by Italian partner Alenia might cause first delivery to slip into the first weeks of 2011.” Boeing has already made at least $1 billion worth of loss provisions for the troubled program.

Remember, the first delivery was originally planned for May, 2008, according to this chronology.

What’s going on? We have no special insider information. But we can use Internet search engines. We found this great blog article over at The Economist. In that article, the author wondered if Boeing’s engineering talent has simply deteriorated to the point where the company has lost the formula of how to design and build great airplanes. The blog linked to a satirical piece over at The Onion—

Boeing Lays Off Only Guy Who Knows How To Keep Wings On Plane

CHICAGO—With the airline industry continuing to suffer under the ongoing recession, the Boeing Company was forced Monday to lay off Al Freedman, the only guy left at the corporation who knows how to keep wings from falling off planes. "We used to have a whole team of engineers who knew how to make the wings stay on, but those days are long gone," Boeing CEO James McNerney, Jr. said. "We'll make it work, though. The wings are not necessarily the most important part of the plane, anyway." McNerney added that at least they were able to save the job of the guy who knows how to prevent jet engines from exploding.

All attempts at humor aside, the blogger on The Economist site had a good point to make. The author wrote—

When The Onion starts making fun of your company's problems, you're in trouble. It means that those problems are well-known enough to be funny to a mass audience. That's the sign of a badly damaged reputation. … The way things have been going, it looks like Boeing's—and the Dreamliner's—problems may only get worse.

Indeed. This article reported that

The Boeing Co.’s sixth postponement of its 787 Dreamliner could put the planemaker at greater risk for paying penalties to customers frustrated by more than 21/2 years of delays. …

Even before Friday’s delay, Deutsche Bank AG analyst Myles Walton estimated that penalty payments to 787 buyers could reach about $5 billion. Boeing will probably try to use discounts, maintenance agreements, options, purchase rights, delivery-slot availability and other means instead of cash payments, Walton said.

Boeing already faces compensation claims for late 787s. National Aviation Co. of India Ltd., Air India’s state-owned parent, said this month that it plans to seek about $840 million for the delays in its order.

‘There’s a slippery slope here,’ said George Hamlin, president of Hamlin Transportation Consulting in Fairfax, Va., and a former Airbus SAS executive. ‘If some carriers start receiving penalties, all will want them. It’s unfortunate that this is coming piled on top of the earlier delays.’

Oil So Plentiful in Southwest Asia You Can Just Steal It

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Pundits and Internet trolls have engaged in protracted debates regarding whether the U.S. invasion of Iraq in 2002 was more about oil than it was about WMD. The American Conservative website notes that—

Controlling Iraq’s oil has historically been a vital factor in America’s involvement in Iraq and was always a crucial element of the Bush administration’s plans for the post-Saddam era. Of course, that’s not how the war was sold to the American people. A few months before the invasion, Secretary of Defense Donald Rumsfeld declared that the looming war had ‘nothing to do with oil, literally nothing to do with oil.’ The war was necessary, its planners claimed, because Saddam Hussein supported terrorism and, left unchecked, he would unleash weapons of mass destruction on the West.

Nevertheless, oil was the foremost strategic focus for the U.S. military in Iraq. The first objectives of the invading forces included the capture of key Iraqi oil terminals and oilfields. On March 20, 2003, Navy SEALs engaged in the first combat of the war when they launched a surprise invasion of the Mina al-Bakr and Khor al-Amaya oil loading terminals in the Persian Gulf. A few hours later, Marine Lt. Therral Childers became the first U.S. soldier to die in combat in the invasion when he was killed fighting for control of the Rumaylah oil field in southern Iraq.

Oil was also the first objective when U.S. forces reached Baghdad on April 8. Although the National Library of Iraq, the National Archives, and the National Museum of Antiquities were all looted and in some cases burned, the oil ministry building was barely damaged. That’s because a detachment of American soldiers and a half-dozen assault vehicles were assigned to guard the ministry and its records.

After all, the war’s architects had promised that oil money was going to rebuild Iraq after the U.S. military took control. In March 2003, Paul Wolfowitz told a Congressional panel, ‘The oil revenues of that country could bring between $50 and $100 billion over the course of the next two or three years. Now, there are a lot of claims on that money, but … we are dealing with a country that can really finance its own reconstruction and relatively soon.’ As Michael Gordon and Bernard Trainor explained in their 2006 book, Cobra II, ‘The Pentagon had promised that the reconstruction of Iraq would be ‘self-financing,’ and the preservation of Iraq’s oil wealth was the best-prepared and -resourced component of Washington’s postwar plan.’

Our various articles covering the official DOD reports to Congress regarding progress made in Iraq (example: here) have noted the importance of oil—and of the oil infrastructure—to stability in the region. The armed forces of the United States are huge users of oil. In March, 2010, we posted an article about the importance of oil to the armed forces, and the theft of approximately 10 million gallons of fuel from the U.S. Army at Camp Liberty, Iraq.

Well, here’s another story about theft of fuel from the U.S. armed forces. This time, the location is Afghanistan. On August 19, 2010, the Department of Justice announced that Michael Dugger, age 27, a former U.S. Army Sergeant, had pleaded guilty to one count of receiving a bribe as a public official. Another former U.S. Army Staff Sergeant, Steven Ringo, was also charged, but did not plead guilty; his case is still pending.

According to the DOJ press release—

Ringo and Dugger were stationed at Forward Operating Base (FOB) Shank, a U.S. Army installation in the Logar Province of Eastern Afghanistan. … the Army stores large quantities of fuel at FOB Shank and redistributes that fuel to installations in the surrounding area through government contractors. Dugger’s responsibilities included supervision of FOB Shank’s fuel redistribution process.

Dugger admitted that between January and February 2010 he aided and abetted a co-conspirator’s solicitation and acceptance of more than $400,000 in bribes from a government contractor, all in exchange for his co-conspirator’s creation and submission of fraudulent paperwork permitting that contractor to steal fuel from FOB Shank. Dugger also admitted that he helped his co-conspirator conceal the money in various locations in and around FOB Shank. The total value of the fuel stolen during the course of the scheme was at least $1.39 million.

The amount of fuel stolen was not disclosed, but we guess it was a substantial amount, given the $1.4 million value ascribed to the theft.

One of the guys who stole the 10 million gallons of fuel from Camp Victory (for subsequent resale on the black market) was sentenced to three years in prison. How does Mr. Dugger fare in comparison? The DOJ announced that, “At sentencing, Dugger faces a maximum penalty of 15 years in prison and a fine of $250,000; twice the gross gain or loss from the scheme; or three times the value of the payments solicited or received.” Ouch!

Informal Information Exchange or Espionage? Contractor Employee to Find Out Soon

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The U.S. Department of Justice (DOJ) release on Friday, August 27, 2010, wasted no words in announcing that a Washington, D.C., federal grand jury had indicted Stephen Jin-Woo Kim for “unlawfully disclosing national defense information to a reporter for a national news organization and making false statements to the FBI.” According to the DOJ press release, Kim (age 43) “was an employee of a federal contractor who was on detail to the State Department” at the time of the alleged crimes.

The DOJ provided the following details of the alleged crimes—

Kim knowingly and willfully disclosed information contained in an intelligence report classified Top Secret/Sensitive Compartmented Information (TS/SCI) to a reporter for a national news organization who was not entitled to receive it. The classified information related to the national defense, specifically, intelligence sources and methods and intelligence concerning the military capabilities and preparedness of a particular foreign nation.

… in September 2009, Kim made false statements to the FBI when he denied having had any contact with the reporter for a national news organization since meeting the reporter in March 2009, when in fact, Kim had had repeated contact with the reporter in the months following that meeting.

The Washington Post had a few more details, in this article. The Post article noted that Kim was “a senior adviser for intelligence on detail to the State Department’s arms control compliance bureau.” The Post reported that the “national news organization” to which Kim allegedly disclosed the classified information was Fox News, and noted that in June, 2009, Fox News reporter James Rosen reported that “U.S. intelligence officials had warned that North Korea planned to respond to a new round of U.N. sanctions with another nuclear test. Rosen reported that the CIA warning was developed through sources inside North Korea.”

The foregoing is not good. The DOJ press release stated what most everybody already knew—i.e., “The willful disclosure of classified information to those not entitled to it is a serious crime.” It noted that, “If convicted, [Kim] faces up to 10 years in prison for the unlawful disclosure of national defense information and up to five years in prison for the making of false statements.”

Kim’s attorneys are already spinning his defense. The Post article reported that the attorneys “faulted the government with criminalizing exchanges ‘that happen hundreds of times a day in Washington.’" According to Kim’s attorneys—

“In its obsession to clamp down on perfectly appropriate conversations between government employees and the press, the Obama Administration has forgotten that wise foreign policy must be founded on a two-way conversation between government and the public."

Um, how about “no”?

We’re not talking about policy; we’re talking about Top Secret SCI stuff here. Before anybody gets briefed into the compartment, they are told, in crystal clear language, just what unauthorized disclosure of such information would mean to the country—and to them personally.

The Post article also noted that Mr. Kim is not the first person to be charged with unauthorized disclosure of sensitive or classified information in recent months. The Post article stated—

Since December, prosecutors have indicted Thomas A. Drake, a National Security Agency official, with improperly handling classified information with a Baltimore Sun reporter; secured a guilty plea from Shamai Kedem Leibowitz, a former FBI contract linguist, for leaking documents to a blogger; and arrested Army Pfc. Bradley E. Manning, 22, suspected of giving a classified video of a U.S. military helicopter firing at civilians in Baghdad to the WikiLeaks.org site. Manning is also suspected of leaking 76,000 classified documents about the Afghanistan war that WikiLeaks posted this month.

The Post article didn’t mention the case of Dongfan “Greg” Chung, who was sentenced to 15 years in federal prison in February, 2010, for “six counts of economic espionage and acting as an unregistered foreign agent of the People’s Republic of China (PRC), for whom the engineer stole Boeing trade secrets related to several aerospace programs, including the Space Shuttle.” We reported that story here. Chung, a naturalized U.S. citizen, held a Secret clearance and, according to reports, spent the years between 1979 and 2003 working for both U.S. defense contractors (as an employee) and the People’s Republic of China (as a spy).

Nice.

We have no sympathy for such people, whether they have cute code names such as “The Falcon and The Snowman” or more mundane names, such as “Greg”.

Awesome Plea Bargain Saves former NASA Bigwig from Big Time in the Big House

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Far be it for us to criticize the recent plea bargain that the Department of Justice recently entered into with Courtney Stadd, who “previously served as NASA Chief of Staff and White House Liaison”—especially when “Attorney Burkhalter and NASA Inspector General Martin commended the outstanding investigative work of the agents from the NASA Office of Inspector General and prosecutive work of the U.S. Attorneys Office in the Southern District of Mississippi.” To the contrary, we commend Mr. Stadd and his attorneys for accepting the sweetheart deal.

According to the August 18, 2010 press release from the DOJ and the NASA Office of Inspector General, Mr. Stadd pleaded guilty to “conspiracy charges in connection with actions he took to obtain and receive funds from a $600,000 sole-source contract” awarded from the Stennis Space Center to Mississippi State University (MSU).

According to the plea hearing, Stadd admitted to conspiring with the NASA Deputy Chief Engineer of Programs to give the contract to MSU. MSU, in turn, awarded a $450,000 subcontract to Stadd’s consulting business. Apparently, Stadd ran a consulting business (on the side?) called either Capitol Solutions or Capitol Alliance Solutions. Hmm, can anybody say “criminal conflict of interest”?

We previously reported on another NASA “felony conflict of interest charge” in this article. That situation involved a former NASA scientist who participated in awarding contracts to his wife’s company. That scientist received a fine, probation, and community service. As we reported, “Prosecutors agreed Schoeberl did not deserve to go to jail, noting in court documents that he quickly accepted responsibility for his conduct, had no criminal history and had a lengthy record of service at NASA.” In contrast to that scientist, Mr. Stadd “met with senior government officials in an ill-fated attempt to stop the NASA Office of the Inspector General from continuing to investigate his activities.”

But that’s not all.

According to the press release, Stadd and the Deputy Chief Engineer of Programs had an agreement that the Deputy Chief Engineer would work on the subcontract received from MSU, after he left NASA. Under that subcontract--

Stadd received over $287,000 on the subcontract and admitted to inflating hours billed and falsifying invoices to MSU. Stadd further admitted to sending two false Quarterly Reports to MSU in August of 2005 stating that Valador Incorporated of Herndon, Virginia, ‘a service-disabled, veteran-owned small aerospace business with extensive satellite engineering experience,’ was also working on the contract, when he knew that in fact, Valador Incorporated was not involved on that contract. Stadd admitted to having paid the former Deputy Chief Engineer over $87,000 for his work on the subcontract. That Deputy Chief Engineer earlier plead guilty to a charge of conflict of interest.

So we know that Stadd admitted to submitting false claims and to making false statements. In addition—

Stadd admitted that, to further conceal the conspiracy, he created false documents in response to a Federal Grand Jury subpoena. The false documents included four invoices reflecting billing work unrelated to the Mississippi State University contract, documents purporting to calculate composite rates for billing Mississippi State University, and documents supporting the authorization for composite rates of billing when no such authorization existed.

Violations of the False Statements Act and the False Claims Act are serious, serious business. Each count can subject a person to huge fines and up to five years in Federal prison. Near as we can tell, Mr. Stadd was looking at least six counts of false statements and nearly $300,000 in false claims. Based on our rough back-of-the-envelope calculation, Mr. Stadd could have been fined nearly $1 million and been sentenced to more than 30 years in jail.

But Mr. Stadd’s defense team worked a miracle on his behalf. Instead of the foregoing, the press release reported that, “Stadd faces up to five years in prison and $250,000.00 in fines.” That’s some damn fine defense lawyering right there, in our opinion. On the Government’s side? Not so much—despite the words of praise found in the press release.

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Page 225 of 278

Changes to “Cost or Pricing Data” Federal Acquisition Rules

Latest Dreamliner Drama Involves Exploding Engine

Oil So Plentiful in Southwest Asia You Can Just Steal It

Informal Information Exchange or Espionage? Contractor Employee to Find Out Soon

Awesome Plea Bargain Saves former NASA Bigwig from Big Time in the Big House

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