On January 15, 2021, the Office of Management and Budget issued a memorandum (M-21-11) to the heads of all executive departments and agencies entitled “Increasing Attention on Federal Contract Type Decisions”.  The memorandum stresses the need for the government to exert greater management attention to the level of risk involved in contract performance by both the government and the contractor and the preference for competitively awarded fixed-price or fixed-price incentive contracts.

Federal Acquisition Regulations, or FAR, restrict the use of cost type and time and material/labor-hour contracts to situations where requirements are not clear enough to allow for a fixed-price contract (i.e. existence of a high level of risk in estimating and performing on the contract requirements). Time and material and labor-hour contracts, unless capped by the number of hours allowed are also considered to be high risk because the contractor is paid a fixed loaded labor rate for the number of hours worked plus, in the case of T&M contracts, the actual cost of materials used.

The end result of this memorandum is that when considering the issuance of a cost-type contract or one representing a potential risk to the government, agencies are asked to document the contract-type rationale for why other contract types are not suitable and what steps are planned for obtaining a more balanced sharing of risk.  Hence, if agencies need to ask and support the use of cost type, T&M and labor hour contracts, they will migrate to using fixed-price type contracts.  Large contracts normally awarded as a cost-type contract will possibly be broken into smaller tasks and awarded on a hybrid basis (fixed price task orders for those tasks that can be identified as lower risk and cost-type for those where there is greater risk in performance) to better address associated risk.

The government’s move to negotiated fixed-price contracting is reinforced with DCAA’s established audit priorities for 2021.  Among these priorities is increased Truth in Negotiation Act (TINA) defective pricing audits performed on a post-award basis on fixed-price contracts. This act, currently known as the Truthful Cost or Pricing Data Act, applies to fixed-price contracts of $2,000,000 or more and requires contractors to certify that the cost or pricing data provided to the government regarding the pricing of a given contract are accurate, complete, and current as of the date of agreement on price.

“Cost or pricing data is defined as all facts that, as of the date of price agreement or, if applicable, an earlier date agreed upon between the parties that are as close as practicable to the date of agreement on price, prudent buyers and sellers would reasonably expect to affect price negotiations significantly.” (FAR 15.801).

Failure of a contractor to disclose all cost or pricing data to the government can result in a reduction in contract pricing and if egregious – fines, penalties, and criminal remedies.  It is extremely important that as a contractor bidding on and receiving fixed-price contracts, you implement processes and practices that disclose to the government all pertinent data related to your proposal pricing and price negotiations whether used or not, and document the price negotiations to reflect its disclosure and whether used by the government in establishing contract pricing.

One way this is done is in the performance of a “sweep” of all personnel involved in the cost estimating process to ensure they have no information, old or new, that would impact the pricing data provided to the government in developing and negotiating a given contract’s pricing.  This “sweep” is to be performed immediately after agreeing on contract pricing with the government and before the signing of the Certificate of Current Cost and Pricing Data contained at FAR.406-2.

This is to certify that, to the best of my knowledge and belief, the cost or pricing data (as defined in section 2.101 of the Federal Acquisition Regulation (FAR) and required under FAR subsection 15.403-4) submitted, either actually or by specific identification in writing, to the Contracting Officer or to the Contracting Officer’s representative in support of (identify proposal) are accurate, complete, and current as of day, month and year when price negotiations were concluded).

The wording of this certification should not be altered in any way.  It should also be understood that this certification includes the cost or pricing data supporting any advance agreements and forward pricing rate agreements between the offeror and the Government that are part of the proposal.

The government will request the execution of this certification at the completion of price negotiations and agreement on price.  DO NOT automatically sign the certification at the negotiation table especially if some time has elapsed since the preparation and submission of your proposal. If data is found during the “sweep” process, the contractor should immediately provide the new data to the government along with an explanation of its potential impact on the pricing negotiated.

Non-compliance with the requirements of the Truth in Negotiations Act known as “Defective Pricing” is identified by the government through the performance of a DCAA post-award audit and remedied through the price reduction clauses at FAR 52.215-10 and FAR 52.215-11 and the assessment of interest on any amounts of over-payment resulting from the defective pricing.  Egregious defective pricing situations may also lead to the False Claims and False Statement Act which can result in fines, penalties, and potential criminal remedies.

In that regard, it is important to recognize that fraud is:

  1. the act of knowingly and willfully making, presenting or asserting a false, fictitious, or fraudulent claim against the government;
  2. putting forward a material fact known to be untrue or made with reckless indifference to its truth;
  3. presenting “half-truths” or omissions which conceal material facts; and
  4. a failure to correct known system deficiencies which lead to defective pricing.

This process only applies to fixed-price contract pricing since the government ensures cost-type contract pricing through the audit of incurred contract cost.

Have a question related to your specific situation? Contact Neena Shukla, CPA, CFE, CGMA, FCPA, CTP, partner and leader of the Government Contracting Team.