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TINA Sweeps and Defective Pricing (Part 2 of 2)

Nick Sanders

In Part 1 of this article, we discussed compliance risks associated with “defective pricing” in general, and then focused on the Government’s roles and responsibilities. In Part 2, we want to focus on the contractor’s roles and responsibilities, as established by solicitation provisions and by contract clauses. Then we’ll wind up with a business case discussion, in which we apply what we learned.

As noted at the end of Part 1, the government contracting officer is responsible for inserting the appropriate provisions and clauses into the RFP and into the awarded contract. FAR 15.408 lists the required provisions and clauses, and prescribes when they are to be used. As relevant to this article, they include:

52.215-10, Price Reduction for Defective Certified Cost or Pricing Data
52.215-11, Price Reduction for Defective Certified Cost or Pricing Data—Modifications
52.215-12, Subcontractor Certified Cost or Pricing Data
52.215-13, Subcontractor Certified Cost or Pricing Data—Modifications
52.215-20, Requirements for Certified Cost or Pricing Data and Data Other than Certified Cost or Pricing Data
52.215-21, Requirements for Certified Cost or Pricing Data and Data Other than Certified Cost or Pricing Data—Modifications

Those provisions and clauses establish the contractor’s duties with respect to providing certified cost or pricing data to the government. To the extent they invoke or reference FAR requirements, those individual regulatory requirements also become part of the contractor’s duties. Let’s look at those duties.

Contractor and Subcontractor Roles and Responsibilities

The first thing one notices is that there is a set of provisions/clauses for initial contract proposals and another set for post-award modifications. Looking first at the set that applies to initial contract proposals, we can see that the contractor (and its subcontractors, and its prospective subcontractors) are responsible for providing accurate, complete, and current certified cost or pricing data, and that any such certified data that was not accurate, complete, and current subjects the contract price to a unilateral price reduction, so long as the price was increased by a “significant amount” based on the government’s reliance on that defective certified cost or pricing data.

The math can get complicated. There are special rules for calculating the impact of defective certified cost or pricing data received from a prospective subcontractor that never actually received a subcontract. (See 52.215-10(b).)

If the contracting officer has determined that there has been defective pricing, then the contractor is prevented, by the language in the provision/clause, from raising the following defenses:

The Contractor or subcontractor was a sole source supplier or otherwise was in a superior bargaining position and thus the price of the contract would not have been modified even if accurate, complete, and current certified cost or pricing data had been submitted
The Contracting Officer should have known that the certified cost or pricing data in issue were defective even though the Contractor or subcontractor took no affirmative action to bring the character of the data to the attention of the Contracting Officer
The contract was based on an agreement about the total cost of the contract and there was no agreement about the cost of each item procured under the contract
The Contractor or subcontractor did not submit a Certificate of Current Cost or Pricing Data

As we noted in Part 1, it is the responsibility of the contracting officer to ensure that the contractor executes a CCCPD; however, it doesn’t matter whether or not one is actually executed, since the contractor is prevented from using the omission of an executed CCCPD (when it was required) at as a defense. (Further, the provision/clause language also requires a contractor to submit a CCCPD, so there’s really no getting out of it when required.]

Any payments made by the government to the contractor that were inflated, based on the defective pricing, entitles the government to repayment with interest (compounded daily). Further, if the contractor knowingly submitted a false CCCPD—i.e., it knew it had committed defective pricing but executed the CCCPD anyway—then the government is entitled to impose an additional penalty equal to the amount of the overpayment. (This is the administrative remedy prescribed by the provision/clause language; but as we’ve noted before, the government has a propensity to consider those invoices/requests for payment as being false claims.)

The prime contractor is responsible for standing in the government’s shoes and obtaining certified cost or pricing data (in the required format) from any subcontractor whose pricing action trips the threshold at 15.403-4—before award of that subcontract. The certified cost or pricing data is to be submitted in the format of FAR Table 15-2, and the prime contractor is required to obtain a CCCPD from the subcontractor, certifying that the cost or pricing data was accurate, complete, and current as of the date of price agreement. (We note that the clause does not seem to give the parties leeway to agree on a different date, as the CCCPD between prime and government permits.)

If the subcontract value is greater than 10% of the prime’s (or higher tier subcontractor’s) contract value then the certified cost or pricing data becomes part of the prime’s cost or pricing data, and must be submitted to the government. Further, the prime contractor (or higher tier subcontractor) is also responsible for performing cost or price analysis on the data it receives from its subcontractors. (Remember that the prime also has to award its subcontracts at fair and reasonable prices.) That analysis becomes cost or pricing data and may have to be submitted to the government (and updated!) as part of compliance. (See 15.404-3(b) and (c).)

The prime contractor is responsible for flowing the cost or pricing data requirements down to its subcontractors if the subcontract value exceeds the 15.403-4 threshold, and each tier must also flow the requirements down to the next tier, until nobody has a contract action that exceeds the threshold.

The continuing requirement regarding subcontractors (at any tier) is why defective pricing risk actually increases once the proposal has been submitted. The risk increases because after proposal submission the proposal teams breathe a sigh of relief, get some sleep, and then are assigned to new projects. It is rare to see the proposal team kept intact throughout negotiations. Thus, the lines of communication between prime and subcontractor, and between subcontractor and lower-tier subcontractor, degrade. The data flow slows or even stops. Meanwhile, the requirements are still in place and contractors still have the duty to update their cost or pricing data to keep it accurate, complete, and current until completion of price negotiations.

Looking at the provisions/clauses that apply to post-award modifications, we see that the requirements are much the same. Any post-award pricing action that exceeds the 15.403-4 threshold and it not exempted by 15.403-1 requires submission of certified cost or pricing data, with the same administrative remedies for defective pricing as would apply to a pre-award defective certification. However, FAR 15.403-2 does exempt certain contract modifications from the requirement. The exemptions include: (1) the exercise of an option at the price established at contract award or initial negotiation, and (2) proposals used solely for overrun funding or interim billing price adjustments.

There’s more to write concerning information other than certified cost or pricing data but, as we noted in Part 1, we want to focus on the classic requirements pertaining to certified cost or pricing data. So let’s move on to a business case where we can apply what we’ve learned: the defective pricing allegations made against BAE Tactical Vehicle Systems (BAE) (formerly Stewart & Stevenson) as initially discussed in this article, which addressed this ASBCA decision.

Allegations of Defective Pricing Regarding BAE’s Proposal to Definitize a UCA

Here is a chronology of events as we gleaned them from the decision:

April 2008 – BAE submits its initial proposal
30 May 2008 -- Contract award via UCA (undefinitized contract action), price negotiations commenced
May - September 2008 – negotiations ongoing; multiple iterations of Bills of Material (BOMs) including one generated on 11 September 2008
22 September 2008 - Negotiations concluded, price agreement reached, "handshake date"
24 September 2008 -- BAE Systems executes Certificate of Current Cost or Pricing Data (CCCPD), with an "effective certification date" of 04 September 2008
24 September 2008 -- Contractor "sweep" date, final BOM created and uploaded

Looking at the chronology above, the first thing we see is that BAE conducted its “sweep” after the price agreement “handshake date,” concurrent with execution of the CCCPD but well after the CCCPD’s effective date—nearly three weeks after the effective date the parties had agreed upon. We have seen many contractors do the same thing: they run their sweeps after the price agreement has already been reached. That has always confused us.

As we have discussed throughout this two-part article, defective pricing risk exists up to—but not after—the “handshake date” when price agreement has been reached. By definition, any changes to cost or pricing data that occur after than date cannot be said to have significantly impacted the contract price.

So what purpose does conducting a sweep after that date serve?

Suppose the sweep uncovers some cost or pricing data that was not accurate, complete, and current. The contractor can notify the contracting officer and offer to reopen negotiations. If the offer is not accepted, then the contractor has some measure of defense against downstream allegations of defective pricing. But if the offer is accepted, then negotiations are reopened—and that moves the “handshake date” to whenever the new final price agreement date is. That means that another sweep will have to be performed, to identify any new changes to cost or pricing data. And if that new sweep uncovers more changes, then the process will have to repeat … potentially forever. That doesn’t make much sense to us.

In our view, it makes much more sense to perform sweeps just before the price agreement date. Do one complete sweep, identify any changed cost or pricing data, and disclose the changes as the final part of negotiations. Then execute the CCCPD right away. Risk is minimized and no further sweeps are necessary.

Another thing that confuses us about the BAE situation is that the effective date of the CCCPD (04 September) was well before the actual price agreement date (20 September). If the parties agreed on that effective date, that’s fine. But then any changes to cost or pricing data that occurred after the effective date are irrelevant to price negotiations—by mutual agreement of the parties. Specifically, there was no need for BAE to generate additional BOMs after 4 September; the BOMs generated on 11 September and 24 September were irrelevant to the price negotiations. Similarly, the sweep on 28 September was nice, but unless it uncovered cost or pricing data that were defective as of 04 September, who cares?

Seen in this light, let’s look at some of the government’s allegations and BAE’s defenses, as described by Judge O’Sullivan in her decision (link above). Our commentary is in italics. We should note that we are not attorneys and our thoughts and opinions are simply those of a layperson. Do not rely on us for legal advice.

DCAA determined that BAE received updated quotations for 40 different part numbers up to and including 4 September 2008 but failed to disclose these updated quotations to the government. Further, DCAA determined that, prior to 4 September, BAE issued purchase orders to vendors for 11 parts at lower prices than disclosed to the government. BAE argued that the government relied on vendor quotations and purchase order prices that were the same as, or higher than, the prices in the 24 September sweep BOM; the government relied on quotations from unqualified vendors; and the government relied on quotations received after the 04 September certification date.

We suspect the prices in the 24 September sweep BOM are irrelevant to the dispute. What matters (or what should matter) are the quotes and prices disclosed to the government up to (but not past) the 04 September CCCPD effective date.

DCAA determined that BAE did not use the most current exchange rate (USD to Euro) in the costs proposed with respect to two part numbers. BAE used a rate of 1.5846 in its costs proposed in April of 2008. In August 2008 it had checked exchange rates online, at which time the rate was 1.467220, but it did not update the proposed costs for the two parts. BAE argued that the government had as much access to the publicly available foreign exchange rates as BAE did, and a contractor is not required to use any particular data in its proposal.

We agree that TINA is a disclosure requirement and not a use requirement. (See our article on that point, here.) However, we aren’t so sure about BAE’s argument that the government should have checked the exchange rates before finalizing the contract price. Remember, one of the prohibited defective pricing defenses is “the Contracting Officer should have known that the certified cost or pricing data in issue were defective even though the Contractor or subcontractor took no affirmative action to bring the character of the data to the attention of the Contracting Officer.”

DCAA found that BAE had not updated its proposed prices for 215 parts that BAE planned to manufacture in house to reflect the labor rates agreed on in a recently finalized forward pricing rate agreement. BAE argued that the Army was not only aware of the updated rates, but (a) used them prior to the 4 September certification date in negotiating prices for engineering change proposals and individual parts on other contracts; and (b) proposed price reductions to FAB SHOP parts after receiving the new rates, which reductions were accepted by BAE.

This is one that’s a bit confusing to us. If BAE disclosed the new part pricing and agreed to associated price reductions, then it’s hard to see how the contract price would have been significantly inflated from a lack of disclosure. On the other hand, if BAE disclosed the new part pricing after the price agreement date, and the associated price reductions were reflected in a contract modification subsequent to UCA definitization, then perhaps the government has room to argue that the CCCPD was defectively executed on the certification date, even though the government ended up not being harmed. (If that’s correct, then this is yet another reason that post-certification sweeps are not particularly useful.)This is probably an issue that would have been developed at trial, had one been permitted to take place.

DCAA found that BAE did not disclose the most "relevant" historical data with respect to one part called a thrust washer, namely a purchase order issued before the certification date at a unit price considerably below BAE’s proposed unit prices for the part. BAE argued that the lower purchase order price for the thrust washer that DCAA relies on for its "historical data" defective pricing allegation was incorporated into the 24 September sweep BOM.

As we have repeatedly asserted, we believe that the 24 September “sweep” BOM is irrelevant to the question as to whether or not the contract price was significantly impacted by defective certified cost or pricing data as of the mutually agreed-to effective date of 04 September. Thus, the question at trial should have been whether the lower purchase order price was (or was not) disclosed as of 04 September.

DCAA reviewed engineering drawings that called out quantities of parts needed for the contract and determined that some of the parts proposed by BAE were not required and others were required in a quantity less than that proposed. BAE argued that the Army controlled the FMTV configuration and had actual knowledge of required quantities, that quantity errors in any event may not qualify as defective pricing, and that the government has not identified with any specificity what cost or pricing data was "defective" or cited to any errors in quantities in the underlying engineering drawings or other cost or pricing data.

DCAA likes to look at engineering drawings in a number of its audits. The problem is, while engineering drawings call out parts and quantities of parts, the quantities shown on drawings do not always translate into purchase order quantities. Suppliers often specify minimum buy quantities, such that the contractor might need 10 but the minimum buy is 100—so you would price 100 not 10. In addition, Manufacturing often increases needed quantities to account for scrappage (low yields) and other factors. The process of converting a drawing to an Engineering BOM to a Manufacturing BOM is a complex one. That’s why when one is negotiating the contract price, one looks at the Consolidated BOM and not at engineering drawings when seeking to determine the quantities of parts actually required for the contract. More fundamentally, we need to ask whether the average DCAA auditor has the training and experience to actually understand how to read a drawing and how to walk the process from drawing to CBOM. (Isn’t that a GAGAS requirement in order to be able to express an opinion?) Thus, while BAE’s argument that the Army controlled the configuration and had as much insight into the necessary parts and quantities of parts as BAE had is probably not a strong one (see our commentary on issue #2, above), BAE probably had a number of other strong arguments to be made at trial, had one taken place.

BAE also advanced other arguments in its submissions to the ASBCA. They included the position that DCAA used the wrong BOM as the baseline for defective pricing. DCAA used the 11 September BOM but it should have used the 28 September “sweep” BOM. Our opinion is that neither of those two BOMs is relevant. The only BOM that should have mattered was the one closest to, but not after, the 04 September CCCPD effective date.

We have spent a lot of time (and words) discussing the requirements associated with certified cost or pricing data and how a contractor should interpret those requirements when implementing controls and processes to militate the risk of defective pricing. Even so, these two articles, taken together, are really a high-level summary of the risks. We could have written an entire book on the topic (as other have). However, the next question is: what are you going to do now? How are you going to use this information to enhance your compliance program?

UPDATE: After this article was drafted but before publication, Law360 carried a very brief notice that BAE and the US Government settled their False Claims Act lawsuit over the alleged defective pricing of BAE’s FMTV contract. As part of the settlement, BAE agreed to “pay the U.S. government $3 million, and return ‘unallowable costs,’ to resolve a Michigan federal court False Claims Act suit claiming it inflated parts and labor costs on a $3.6 billion U.S. Army truck contract.” Considering that the original COFD (which was subsequently rescinded by the contracting officer) demanded $56 million, this has to be considered to be a victory for BAE and its attorneys.

TINA Sweeps and Defective Pricing (Part 1 of 2)

Nick Sanders

Many government contract compliance practitioners are aware of the Truth-in-Negotiations Act (or Truthful Cost or Pricing Data) or whatever the kids are calling it these days (I’m calling it TINA). Whatever you call it, it is really two statutes (10 U.S.C. 2306a and 41 USC 35) —that, together, require contractors to submit (1) accurate, (2) complete, and (3) current “cost or pricing data” under certain circumstances, and then to certify that they have done so. (The statutes define the term “cost or pricing data” but FAR 2.101 also defines that term, as well as the term “certified cost or pricing data”.) The remedy associated with providing “defective” cost or pricing data—i.e., a failure to disclose accurate, complete, and current cost or pricing data when the contractor has certified that it has done so—is specified in the implementing regulations and associated contract clauses. However, as we’ve noted from time to time on this blog, the real kicker comes from being accused of liability under the civil (or perhaps even criminal) False Claims Act for any inflated invoices related to its defectively certified contract price. The False Claim Act penalties are far more severe than the administrative remedies for a mere defective certification.

A contract price that was increased from defective certified cost or pricing data is said to have been “defectively priced,” to the extent that the government negotiators relied on that defective data to establish the contract price. (Our understanding of case law is that defective certified cost or pricing data is presumed to have led to an inflated contract price.) Thus, a common compliance concern is “defective pricing” and many government contractors implement some form of control to minimize their defective pricing risk. Many contractors have implemented “sweeps” to provide assurance that all cost or pricing data has been disclosed. The sweeps are efforts—via phone call and via email and other means—to survey the original cost proposal data inputs to identify any information that has since been updated, so that the updated data can be disclosed to government negotiators prior to certification.

The key requirement of TINA is that all cost or pricing data must be kept accurate, complete, and current not only at the time of proposal submission, but also through negotiations—right up until the “handshake” date upon which final price agreement has been reached. Thus, the risk of defective pricing exists until that date (it actually increases after proposal submission, because the proposal team is often disbanded); but there is no risk after the “handshake” date. Whatever new information comes to light after the date of price agreement is irrelevant to the negotiations, so long as it was not known before that date.

The government has implemented its own processes to identify contractor defective pricing. The most common effort is the “post-award” audit (or whatever they’re calling it these days) conducted by DCAA. DCAA starts with looking at actual contract costs compared to proposed (and agreed-upon prices) and asks if any underruns were intentional—i.e., based on a lack of disclosure of certified cost or pricing data. The risk from those audits has decreased markedly in recent years, since (as we’ve reported) DCAA’s focus has been elsewhere. However, the risk of a civil False Claims Act case that originates with an allegation of defective pricing made by a whistleblower seemingly has increased at the same time, such that defective pricing remains a compliance concern.

But it’s tough to develop a compliance program when you really don’t understand the risks and the risk inflection points.

Vern Edwards recently said that there are not ten people in the United States (outside of attorneys who specialize in the area) who really understand TINA requirements and risks associated with defective pricing. Assuming he’s correct, that means that there are a lot of contractors out there who may be basing compliance efforts on an incorrect understanding. They may be mitigating the wrong risks or they may be mitigating the rights risks but at the wrong time.

So we thought we’d devote an article (or two) to the topic. Not that we necessarily claim subject matter expertise such that we are one of those rara avis people who understand the topic completely. Still: we’ve been doing this for a number of years and have seen some things, and we’ve thought about this a bit. And we’ve had some discussions with top people such as Vern (and Don), who have helped us shape our thoughts into something that we believe will add some value.

The first thing we noticed is that compliance requirements differ between contractor and government personnel. The FAR establishes certain roles and responsibilities for government contracting officers and other personnel involved in negotiations, while applicable solicitation provisions and contract clauses establish another set of roles and responsibilities for the contractor. We thought it might be helpful to first focus on the government’s roles and responsibilities, and then discuss the contractor’s roles and responsibilities (in the second part of this article).

The Government’s Role and Responsibilities

The government contracting officer is required to acquire goods and services at “fair and reasonable prices.” Thus, in a negotiated procurement the contractor’s proposed costs must be evaluated reach a conclusion that the price is reasonable. Generally, the type of data a contractor is expected to provide will be either (1) certified cost or pricing data, or (2) information other than certified cost or pricing data. In competitive acquisitions, price analysis of the offers may be sufficient to determine that the awarded contract price is fair and reasonable, but in non-competitive acquisitions some type of cost data is very likely to be required. However, FAR 15-402(a)(3) cautions contracting officers to only require the minimum data necessary for their determination, stating: “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.”

A contracting officer is prohibited from requiring a contractor to certify its cost or pricing data in certain circumstances (see 15.403-1). Importantly, it is not the contractor who gets to determine whether or not those circumstances are present; that responsibility is given to the contracting officer. (However, if an exception applies but the contracting officer still requires contractor certification, then the certification doesn’t matter: the cost or pricing data will be deemed to be uncertified cost or pricing data. See 15.403-4(c)). Further, even if obtaining certified cost or pricing data is prohibited, the contracting officer may still require the contractor to provide information other than certified cost or pricing data. But for purposes of this blog article we are going to focus on the requirements associated with certified cost or pricing data, because that is where the risk lies.

Unless an exception applies, a contracting officer must obtain certified cost or pricing data for every action (new contract award or modification to an existing contract) that is expected to exceed $750,000 in value. Frequently, contracts are awarded via competition but subsequent modifications are not; and thus the contractor may have to provide certified cost or pricing data at that later time. When a contracting officer is required to obtain certified cost or pricing data, it must be obtained not only from the prime contractor, but also from any subcontractor (at any tier) whose subcontract (or subcontract modification) exceeds $750,000, unless the subcontractor’s contract action is valued at less than 10 percent of the total prime contract action. (See 15.404-3(c).) [Note: this is the contracting officer's responsibility. A prime contractor is required to obtain certified cost or pricing data for all actions that exceed $750,000--period. The prime is required to submit the subcontractor's certified cost or pricing data if the subcontract action exceeds 10 percent of the total prime contract value.]

When certified cost or pricing data is required, it is normally formatted in accordance with FAR Table 15-2 (as discussed at 15.403-5 and as found at 15.408). The format also applies to any subcontractor required to submit certified cost or pricing data. As we shall see, the prime contractor is responsible for updating any subcontractor certified cost or pricing data in addition to its own, and may also be required to perform its own cost or price analysis on that data (and submit that analysis along with other certified cost or pricing data). But regardless of what the contractor does (or does not) do, the government contracting officer is still required to look at the certified cost or pricing data as part of their determination that the price is fair and reasonable. The FAR states (at 15.404-3(a)) that –

The contracting officer is responsible for the determination of a fair and reasonable price for the prime contract, including subcontracting costs. The contracting officer should consider whether a contractor or subcontractor has an approved purchasing system, has performed cost or price analysis of proposed subcontractor prices, or has negotiated the subcontract prices before negotiation of the prime contract, in determining the reasonableness of the prime contract price. This does not relieve the contracting officer from the responsibility to analyze the contractor’s submission, including subcontractor’s certified cost or pricing data.

The contracting officer is responsible for informing the contractor if they learn that any certified cost or pricing data is defective before the agreement on price—regardless of the impact that correcting the data will have on contract price. (See 15.407-1(a). “The contracting officer shall consider any new data submitted to correct the deficiency, or consider the inaccuracy, incompleteness, or noncurrency of the data when negotiating the contract price.”)

In addition, the contracting officer is responsible for establishing and documenting the government’s pre-negotiation objectives and the pertinent issues to be negotiated, as well as for documenting the negotiation via a Price Negotiation Memorandum (PNM). Importantly for this topic, the PNM is required to address the use of certified cost or pricing data. When certified cost or pricing data was obtained, the PNM must address whether the CO –

… relied on the certified cost or pricing data submitted and used them in negotiating the price; recognized as inaccurate, incomplete, or noncurrent any certified cost or pricing data submitted; the action taken by the contracting officer and the contractor as a result; and the effect of the defective data on the price negotiated; or determined that an exception applied after the data were submitted and, therefore, considered not to be certified cost or pricing data.

(See 15.406-3(a)(6).)

Critically, it is the responsibility of the government contracting officer to require the prime contractor to execute a Certificate of Current Cost or Pricing Data (CCCPD) whenever certified cost or pricing data is required. It is that CCCPD that turns mundane cost or pricing data into certified cost or pricing data. It is that CCCPD that creates defective pricing risk. Without a contractor certification, there can be no defective pricing. (But as we will see, a lack of certification, when one was required, is no defense to an allegation of defective pricing.) It is the contracting officer’s responsibility to obtain the executed CCCPD from the contractor, using the exact language and format specified by 15.406-2.

The CCCPD has two important dates: the date it was signed (signing date) and the date it is effective (effective date). The signing date “should be as close as practicable to the date when the price negotiations were concluded and the contract price was agreed to.” The effective date is to be “the day, month, and year when price negotiations were concluded and price agreement was reached or, if applicable, an earlier date agreed upon between the parties that is as close as practicable to the date of agreement on price.” Thus, the effective date can be the handshake date on which price agreement was reached, or it can be a different date if the parties agreed on one. But it is the effective date of the CCCPD that establishes the cut-off point, after which there is no risk of defective pricing.

One final responsibility of the government contracting officer: to insert the appropriate solicitation provisions and contract clauses as required by FAR 15.408. It is those provisions and contract clauses that establish the contractor’s roles and responsibilities, which we will discuss in the next part of this article.

UPDATE: BAE Systems Defective Pricing and False Claims Cases

Nick Sanders

The decision to allege that a contractor has violated the False Claims Act when it has “defectively priced” its contract proposal (i.e., violated the Truth-in-Negotiations Act or Truthful Pricing Data Act or whatever you want to call it) has long interested and—truthfully—confused us. See, for example, this article, originally published in 2013. A couple of years later we referenced it in another article discussing a lawsuit filed against BAE Systems Tactical Vehicle Systems (which used to be called Stewart & Stevenson before the acquisition by BAE Systems), in which the government alleged that BAE’s defectively priced proposal (submitted in 2008) had led it to submit false claims. In that latter article we summarized the allegations thusly—

The factual heart of the allegations is BAE Systems’ certified cost and pricing data submitted to the U.S. Army for a contract awarded in 2008 to build 20,000 trucks. Now these trucks were not your commercial Fords or Dodges; instead, these trucks were ‘Family of Medium Tactical Vehicles’ or FMTVs. The FMTV production contract actually goes back to 1996—nearly twenty years ago—when Stewart & Stevenson originally designed and built them at its plant in Sealy, Texas. Stewart & Stevenson held the contract for ten years (between 1996 and 2006, and then the Sealy plant was merged with Armor Holdings, Inc., who held the contract for two years (2006 to 2007). BAE Systems bought Armor Holdings, Inc. in 2007 and merged it into its Land & Armaments Division (which also included the old United Defense manufacturing operations). BAE Systems continued to hold the Army’s FMTV contract until 2010, when it lost it to Oshkosh. (We wrote about that competition and its aftermath here and also here.) In 2011, the final FMTV rolled-off the Sealy production line and the plant was shuttered in mid-2014.

But the fact that the plant was closed and most employees laid-off didn’t stop the DCAA auditors and the Defense Criminal Investigative Service and the Army Criminal Investigation Command and the DoJ’s Civil Division Commercial Litigation Branch from filing suit against the parent company seven years after the alleged violations took place.

Looking back we can now put some (but by no means all) of the pieces together, using ASBCA decisions. Apparently, the cognizant contracting officer had issued a COFD (Contracting Officer Final Decision) and demand for $56 million—in an entirely separate action from the government’s False Claims suit filed in a District Court. BAE Systems appealed that COFD at the ASBCA. The appeal proceeded until the government requested an indefinite stay because of the other litigation. Judge O’Sullivan, writing for the Board, denied that stay—and her decision provided some clues into what had (allegedly) happened.

According to the Board’s decision—

After the May 2008 award of the FMTV contract, the Army and BAE TVS commenced price negotiations, which were concluded on 22 September 2008. On 24 September 2008, BAE TVS executed a Certificate of Current Cost or Pricing Data stating that the cost or pricing data it provided the government during price negotiations were current, accurate, and complete as of 4 September 2008 (the effective certification date). On 15 July 2014, following a post-award audit by the Defense Contract Audit Agency (DCAA), the Army CO issued a final decision finding defective pricing with respect to the FMTV contract and demanding repayment in the amount of $56,386,953 plus interest. …

BAE TVS contests the government's defective pricing allegations in the following major respects: first, it contends that DCAA (and the CO, who adopted DCAA's determinations) used the wrong bill of material (BOM) as the baseline for the defective pricing allegations. While DCAA used a BOM dated 11 September 2008 (which was generated after the effective certification date of 4 September 2008), it should have used the BOM generated when BAE TVS, at the direction of the CO, conducted a ‘sweep’ of cost or pricing data that concluded on 24 September 2008 and incorporated the data from the sweep into a superseding BOM (hereinafter the ‘sweep BOM’) that was disclosed to the Army by uploading it on 24 September 2008 to a file transfer protocol (FTP) website used to share data with the Army during price negotiations.

(Internal citations and footnotes omitted.)

BAE provided several other arguments, among them the assertion that cost or pricing data (e.g., vendor quotes) received after the certification date cannot constitute defective pricing, and the assertion that data incorporated into the “sweep” BOM (i.e., the BOM submitted after agreement on price) cannot constitute defective pricing.

Which is all interesting stuff, and got us thinking about the timing of things with respect to compliance with the “truth in negotiation” contract clauses, and those thoughts will likely show up in a future blog article. But in the meantime, we have learned that the COFD led to a payment demand for $56.4 million, that BAE appealed that COFD, that the government filed a parallel suit in District Court under the False Claims Act, and that the government wanted the ASBCA appeal put on hold while it pursued its civil suit in District Court.

(This situation appears to be similar to that faced by United Technologies Corp., where parallel litigation took place before the ASBCA and at a District Court. In that case, the finding by the ASCBA that there was no defective pricing, because the government had not relied on the defectively priced cost or pricing data, conflicted with the District Court’s finding that the government had been harmed by a false certification.)

In any case, Judge O’Sullivan, as we noted above, denied the government’s request for a stay. So what did the government do in response to that denial?

The contracting officer rescinded the COFD that had alleged defective pricing, the COFD that had led to BAE Systems’ appeal. Accordingly, BAE Systems’ appeal was dismissed by the ASBCA.

As Judge O’Sullivan wrote for the Board—

Where a contracting officer unequivocally rescinds a government claim and the final decision asserting that claim, with no evidence that the action was taken in bad faith, there is no longer any claim before the Board to adjudicate. The government's voluntary action moots the appeal, leaving the Board without jurisdiction to entertain the appeal further.

Thus, the parties will now turn their attention to the District Court, where the trier of fact (and a jury) will attempt to determine whether BAE Systems knowingly submitted a false Certificate of Current Cost or Pricing Data, and whether that allegedly false Certificate created a series of false claims predicated on an inflated contract price. In 2008.

And speaking of ancient history, whatever happened to Boeing and the government’s dispute about EELV pricing? You know, the one where Boeing ended up filing suit against the government? We suspect it’s been settled, but who knows?

If you know the latest status of that EELV controversy, send us an email, would you?

The Dangers of UCAs

Nick Sanders

Undefinitized Contract Actions (UCAs) are the bane of government contracting.

Nothing_But_Trouble UCAs are government contract actions where performance is authorized to commence prior to the finalization of some aspect of the contract, such as price, terms, or specifications. In other words, the parties have entered into a binding agreement without a final contract. Examples of UCAs are letter contracts and orders under basic ordering agreements, where performance has officially started but no price has been agreed upon.

The regulations addressing UCAs are scarce. DFARS 217.74 implements the applicable statutory requirements and provides guidance to DoD contracting officers. Among other things, it requires each UCA to contain a “definitization schedule”—i.e., a plan for coming to agreement (typically price) in accordance with a schedule. The rules regarding that schedule are that it must provide for contract definitization within either: (1) The date that is 180 days after issuance of the action or (2) The date on which the amount of funds obligated under the contract action is equal to more than 50 percent of the not-to-exceed price.

But that rarely happens. It is a rare (and happy!) event when a UCA is actually definitized within 6 months of issuance. Historically, the government has blamed delays on inadequate contractor proposals. To be clear, UCAs typically require two proposals: the first one to develop the SOW and associated not-to-exceed price, and the second one to definitize the price. Historically, it is the second proposal that has been the perceived problem. At the point the proposal is submitted, the contractor has already incurred some (or a lot) of costs, and the government wants to see and understand those costs as part of reaching a final price. Importantly, this approach differs from the standard Part 15 solicitation/proposal/evaluation/award process, because some aspect of the proposal is no longer an estimate; some aspect is based on known historical costs. And to make matters even more interesting, the contractor continues to incur costs as the government evaluates the definitization proposal and while the parties are negotiating. Thus, the cost data submitted in the proposal is almost immediately obsolete.

The government’s concern with adequate and “qualifying proposals” submitted from the contractor. In fact, the DFARS regulations are quite subjective in defining what constitutes a “qualifying proposal,” requiring that a qualifying proposal is one that “a proposal containing sufficient information for the DoD to do complete and meaningful analyses and audits.” The kicker is that, if the contracting officer determines that the contractor’s definitization proposal is inadequate, then “the contacting officer may suspend or reduce progress payments under FAR 32.503-6, or take other appropriate action.” In other words, failure to submit a qualifying proposal means that, technically, the contractor is in material breach of its contract.

We should also mention that, at many contractors, the cost of preparing and negotiating a UCA definitization proposal is a direct cost of the UCA; that cost is not treated as being B&P. Why? Because, unlike traditional FAR Part 15 proposals for new work, the submission of a UCA definitization proposal is an actual contract requirement—i.e., if the contractor doesn’t submit it, then it is in a material breach of its contract. On the other hand, if you are one of the contractors that treats all proposals as being B&P (which you can do if you want), then a prolonged period of UCA negotiation may blow your B&P budget and end up impacting your G&A expense rate, which could be a problem.

Further, the contractor should expect to see a lower profit when UCAs are used, when compared to a traditional FAR Part 15 contract. The reason for this is that, since some part of the final price is based on actual costs, the contractor’s risk is perceived to be lower than it otherwise would be, thus the contractor would not be entitled to a higher profit.

If the UCA contains the clause 52.216-26 (“Payments of Allowable Costs Before Definitization”) then the contractor will not be receiving payment for 100% of the costs it is incurring while awaiting definitization. Generally speaking, the contractor will be reimbursed for no more than 85% of its allowable costs, without any profit or fee, during the time between commencement of performance and final contract definitization. If the customer doesn’t move quickly to definitize then the contractor could see some cash flow impacts.

Further, the requirement that only allowable costs be invoiced means that the UCA needs to be treated as a cost-type contract, even if the final definitized contract action will be firm, fixed-price. Contractors that are happy with FFP contracts but unprepared for cost-type contract requirements are in for a shock if they receive a UCA—and that is likely a significant cause for many inadequate or non-qualifying contractor proposals. Those contractors had proposed—and thought they were receiving—a FFP contract award, and they were unprepared for receipt of a cost-type UCA that came with audit rights. Remember, award of a cost-type contract requires a finding that the contractor has an adequate accounting system, whereas award of an FFP contract does not have that same requirement. Thus, many contractors’ accounting systems may not support accounting for a UCA or developing a “qualifying” proposal suitable for fact-finding and negotiation.

For all the above reasons, we dislike UCAs. Contractors should try very hard to avoid them. That being said, often a UCA is the only way to go. If the customer tells you “take the UCA or I’ll find somebody else that will” you often have little choice in the matter. Nobody likes to turn down work. So you take the UCA and try to make the best of a bad situation.

Now let’s discuss the business challenge faced by L-3 Communications Integrated Systems (L-3) when it received a UCA that it could not definitize, brought to us by the U.S. Court of Federal Claims, courtesy of Judge Kaplan, in this decision.

L-3 entered into a UCA with the US Air Force to provide training services. To complicate matters, the UCA was for a Foreign Military Sale (FMS) to the Royal Australian Air Force. There were several CLINs in the contract, among which was reimbursement for use of an L-3 training simulator. L-3 was to be reimbursed on a per-hour basis, with separate rates for each operating period of the UCA. The UCA was awarded September 5, 2014 and the parties entered into definitization negotiations on December 18, 2014, after L-3 submitted a qualifying proposal containing a Standard Form 1411.¹ The parties reached agreement on all CLIN pricing, except for X031 and X032. After months of negotiations, the parties were very far apart regarding the per-hour simulator reimbursement rate.

Despite L-3 providing additional information to support the reasonableness of its proposed simulator prices, the Air Force refused to budge. The negotiators stated that “the government could not justify any more movement on the prices” even though L-3 thought it had provided them with that justification. (We assume the Air Force negotiators felt some special obligation to the Australians to get for them the best deal possible.) The Air Force negotiators stated that if L-3 wouldn’t agree to the lower hourly prices, then it would have “no choice” but to definitize the pricing via unilateral action.²

As Judge Kaplan wrote, ”On October 29, 2015, the Air Force issued Amendment PZ0001 ‘unilaterally definitizing the UCA.’ In it, the Air Force stated that the amendment was issued in accordance with ‘DFARS 252.217-7027(c) ‘Unilateral.’’ Importantly, the unilateral contract mod clearly stated that it was being issued “subject to contractor appeal as provided in the contract’s Disputes clause. So it was probably not a surprise when, nearly a year later, L-3 filed its appeal with the CoFC, alleging that the unilateral contract modification was “was arbitrary, capricious, and unreasonable in that it denied L-3 PID a reasonable rate of return on the Simulator CLINS, not covering the cost to perform these line items, let alone provide for a reason[able] profit, in violation of FAR Subpart 15.4.”

Unfortunately for L-3, the company made a crucial mistake in its approach to appealing the modification: it had failed to receive a formal Contracting Officer Final Decision (COFD). It had nothing to appeal. Now, you and I might think that a unilateral contract mod that cited the Disputes clause was a COFD, but we would be wrong. The Disputes clause and related legal requirements, and legal precedent, establish a very formal structure to these things—and one of the required steps is for the contractor to first submit a certified claim to the contracting officer. If the CO rejects that claim, then that is a COFD that can be appealed. But L-3 never submitted that claim; it went directly to the CoFC—and that mistake caused its case to be tossed “without prejudice.” Thus, L-3 is free to now submit its certified claim to the CO, have it be rejected, and to then refile its appeal with the Court.

The problem with that situation is that L-3 will be incurring double attorney fees (all of which are unallowable pursuant to the cost principle at 31.205-47). So L-3 may think twice about its next steps. We also hope that L-3 will think twice about accepting any FMS-related UCAs in the future. In fact, we hope that L-3 (and other government contractors) think twice before ever accepting a UCA, because they tend to be more trouble than they are worth.

1 The SF 1411 was cancelled in 1997. We find use of the form in 2014 to be inexplicable and a little bizarre.

2 At this point, L-3 had been performing under the UCA for more than a year. Obviously, the USAF was under some pressure to definitize the UCA (since at that point they were likely in violation of the statutory requirements). Still, the USAF likely still had some choices about how to proceed, including escalating the matter to a higher contracting authority for resolution.

Paying the Pension Piper

Nick Sanders

Lockheed Martin has recently received $13.2 million from the US Air Force to compensate it for impacts to pension plan accounting.

No big deal, right?

What’s $13 million compared to the half-a-trillion overall defense budget?

We get that. We really do. From a pure materiality perspective, this is hardly worth reporting.

But from another perspective—looking at bad decision-making and failed leadership—this is an event worth noting.

This blog has reported, several times, on the liability created more than 10 years ago when CAS 412 and 413 were revised to address the impacts of the Pension Protection Act. For example, here’s a link to an article we published in 2012—more than five years ago!—reporting that DoD had failed to account for contractor pension liabilities potentially worth billions of dollars. We quoted from various news sources, some of whom were themselves reporting quotes from then-DoD Comptroller Robert Hale, who implored contractors to “work” with the DoD in “tight fiscal times” to minimize impacts from the pension accounting rule changes.

The key point of this story is that DoD was aware, from the beginning, that the rule changes were going to result in an increase in pension plan costs. DoD was aware and not only did nothing about it, but actively prevented contractors from including estimates of the increased pension costs in their cost proposals. Thus, liabilities that could have been covered via obligation using funds from 10 years ago must be covered with today’s current period funds.

As if funds were somehow going to be less tight in 2016 and 2017 than they were in 2006 and 2007.

There’s some good news here, not that anybody at DoD should try to claim credit for it. The good news is that the stock market has done extraordinarily well since the financial meltdown in 2007 and 2008. Thus, by kicking the can down the road for a decade, the impact was minimized. Instead of an impact measured in billions of dollars, we are seeing one measured only in millions.

How lucky for us all—especially the warfighters who would otherwise have been significantly impacted by this bureaucratic tomfoolery.

Last year we reported that Boeing received $22.6 million from the US Air Force to cover its additional pension plan costs.

Now Lockheed has received $13.2 million—also from the US Air Force—for its additional pension plan costs. In the words of the Pentagon announcement, “This sum reflects the total of the individual contract adjustment to which the contractor is entitled as result of the impact of the PPA on its affected contract with the U.S. government and Air Force Space Command.”

Interestingly, the announcement stated that the payment amount was being funded from “missile procurement; and research, development, test, and evaluation funds” related to Government Fiscal Years 2010, 2011, and 2012. We didn’t know you could do that. We didn’t know you could obligate funds 5 or more years after the close of the Government Fiscal Year!

But apparently one can, because that’s what was done. We assume it was done via “no-year” money previously authorized for those GFYs, but obviously we do not know the details.

In any case, DoD has now “paid the piper” with respect to two very large defense contractors. There may well have been other payments that we simply missed, or perhaps there are still some payments to come. We would expect Raytheon to receive a payment, given that it is a fully CAS-covered contractor and has an (inactive) defined benefit pension plan (which are the two qualifications necessary to submit a claim). Obvously smaller, non-CAS-covered contractors will not qualify, even if they have a defined benefit pension plan and were otherwise impacted by the Pension Protection Act. (See our article on that issue if you are interested.)

We have other articles on this topic to be found via use of the keyword search feature, for those individuals who are interested in reviewing the history of how we got here. (Search using “pension”.) Our first article was posted in 2010.

Thus, the DoD has been deferring action for a long time. It’s notable that the pension piper is being paid today, and it’s also notable that the payment amount(s) are much smaller than many (including us!) had feared.

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Page 70 of 278

TINA Sweeps and Defective Pricing (Part 2 of 2)

TINA Sweeps and Defective Pricing (Part 1 of 2)

UPDATE: BAE Systems Defective Pricing and False Claims Cases

The Dangers of UCAs

Paying the Pension Piper

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