Scenario #1 – You have a sole-source fixed-price contract that you have had for several years and the government has issued a modification to increase the quantity of end items to be delivered. They have priced the increased quantity using the prices included in the original contract. You agreed to this pricing knowing that your indirect rates, because of increased commercial volume, are running significantly lower than the ones used in the governments pricing and you start thinking about what you might do with this windfall profit.
Scenario #2 – You propose and negotiate a firm-fixed-price contract based on the historical cost data from your last contract for a similar product. You are not concerned about the projected cost of performance since you already have plans in place to automate the manufacturing process that will cut production time in half. The additional profits due to the reduced costs will guarantee an exceptional year.
If either of these scenarios sound familiar, you are probably feeling pretty good. Maybe you should reconsider.
Compliance with the Truthful Cost or Pricing Data Act
With increased government spending, Congress is reviewing the Pentagon’s enforcement of the law intended to prevent unjust profits based on incomplete and inaccurate cost and pricing data used to establish contract pricing. In reviews already performed, where profit levels of 12% to 15% were expected, the government has found profit levels between 25% to 80%. Cost or pricing data (defective pricing) audits are now a major audit objective of the Defense Contract Audit Agency (DCAA) who has formed a specialized twenty-person unit to handle these audits.
Compliance with the law being reviewed is P.L. 87-653, the Truth In Negotiations Act (TINA). Now known as the Truthful Cost or Pricing Data Act, the law was implemented in 1962 to level the playing field during contract price negotiation. It requires the DISCLOSURE of any information known to the contractor and not to the government that a “reasonable prudent buyer and seller would expect to affect price negotiations significantly”.
It is a DISCLOSURE requirement that does not require the use by the government or the contractor of any data provided. Cost or pricing data is defined at FAR2.101 as verifiable facts, not judgements, available at the date of agreement on price. It does not have to be recorded to be DISCLOSED. It is more than historical accounting data. It includes but is not limited to:
- Factual data supporting projections of business prospects and objectives related to operations costs,
- Unit cost trends such as those associated with labor efficiency,
- Make-or-buy decisions,
- Estimated resources to attain business goals, and
- Information on management decisions that could have a significant bearing on costs.
The requirement is included in contracts by:
- FAR 52.215-10, Price Reduction for Defective Cost or Pricing Data
- FAR 52.215-11, Price Reduction for Defective Cost or Pricing Data – Modifications
- FAR 52.215-12, Subcontractor Certified Cost or Pricing Data
- FAR 52.215-13, Subcontractor Certified Cost or Pricing Data – Modifications
The government has historically considered TINA a statutory requirement and invoked the Christian Doctrine to read the clause into contracts whether these clauses are included or not.
Upon agreement on contract pricing, you will be asked to execute the TINA certification contained at FAR 15.406-2 to certify that the data provided is accurate, current and complete. If you have any concerns that someone in your organization might have cost or pricing data that has not been disclosed, you should perform what is known as a “sweep” to identify any additional cost or pricing data prior to signing the certification. You have approximately five business days to perform such a review. Any data found needs to be provided to the government and its relevancy explained. If, in the government’s view, this data impacts the contract, pricing negotiations will be re-opened. Keep in mind that un-disclosed, omitted or falsified data found later may be viewed as a commitment of fraud with the associated civil and criminal remedies.
For a brief primer on TINA, read “Tips for Truthful Cost or Pricing Data Act Compliance”.
Questions? Talk to a government contract accounting and tax specialist to discuss your specific situation.