What is cost reimbursement contract

what is cost reimbursement contract

Defective Pricing in Cost-type Contract

By Anonymous on Monday, August 12, 2002 - 11:10 am:

Could someone please help me understand how you could have defective pricing (under the Truth in Negotiations Act) in a cost-reimbursement contract? TINA applies to cost contracts unless an exemption applies, and I'm trying to figure out why.

For example, doesn't TINA generally require that cost or pricing data be submitted prior to the date of agreement on "price"? Is there really any such agreement in a cost contract?

And let's say that the offeror has cost or pricing data that indicates that its cost to manufacture an item is really $10 and not the $12 it has proposed but the offeror neglects to furnish this cost or pricing data prior to award. If the Govt does a post-award audit and discovers the data, has there been a TINA violation? (A CAS violation maybe, but where's the TINA violation?) The contractor gets paid its actual allowable costs, not the amount it estimated in its proposal, so how has the failure to disclose the undisclosed data affected the contract price? In order for the Govt to recver damages under TINA it has to prove that failure to discose the cost or pricing data caused the contract to be overpriced, and I can't figure out how the nondisclosure causes the Govt to pay anything more than it would have paid had the data been disclosed.

I apologize if this is a dumb question - I must be overlooking something.

By Vern Edwards on Monday, August 12, 2002 - 11:46 am:

TINA requires that firms disclose all of the facts that they have in their possession that could affect the government's analysis of their cost estimates during contract negotiation. The purpose of the law is to put the government on the same informational footing as the firms with which it negotiates when price is not established through competition or set by law or regulation.

As originally drafted, TINA would have applied only to incentive contracts. But Congress decided to apply it to all types of contracts after DOD objected that application to only incentive contracts would make defense firms wary of incentive arrangements.

The negotiation of the estimated cost for a cost-reimbursement contract affects the negotiation of fee, whether fixed fee or incentive fee. It also affects funding decisions and program decisions that depend on funding. Thus, policy states that when competition, law, or regulation do not determine costs or prices, firms must provide the government's negotiators with all of the facts that may affect their decisions during the negotiation of costs and fees.

By AnonYmus on Monday, August 12, 2002 - 12:35 pm:

Vern did an excellent job of answering the question, but I'd like to add a bit more.

Lots of people think that a cost-plus type contract has no limit on the amount of costs that the contractor will be reimbursed. This is not true, of course.

The negotiated estimated cost is fixed unless subsequently modified. If a contractor is going to overrun but fails to notify the C.O. timely (see 52.232-20, -21, & -22) then the contractor may not get the extra costs reimbursed.

So TINA would apply. If the estimated cost was inflated because of a failure to provide cost or pricing data, then the gov't. has been harmed.

One more point: A number of cases have stated that a contractor's failure to disclose leads to a (rebuttable) presumption that the cost has been inflated.

By Anonymous on Monday, August 12, 2002 - 03:21 pm:

I'm still not sure I understand. Maybe a hypothetical situation might help.

Assume an offeror submits a cost proposal estimating that it can perform the work for $950,000. Negotiations occur, and the parties agree on a fixed fee of $50,000. The contractor had in its possession, but did not submit to the Govt, cost or pricing data indicating that it probably could perform the work for $850,000.

The contract is awarded and the contractor performs the work, incurring $850,000 in cost. It is paid the $850,000 plus the $50,000 fee for a total of $900,000.

DCAA does a post-award audit, finds the undisclosed cost or pricing data, and alleges defective pricing. What should the Govt recover?

Surely not the $100,000 diference between the disclosed and undisclosed data, because the contractor never received the $100,000 benefit. I guess Vern would say that the failure to disclose might have led to excess profit, but that seems like it would be very difficult to prove (have there been any board decisions on this theory?). Assuming that the Govt could prove that it would only have negotiated $40,000 profit instead of $50,000 if the undisclosed data had been disclosed, would there be any other damages?

By joel hoffman on Monday, August 12, 2002 - 04:18 pm:

Using your example, the Government would seek the difference in 'fee', assuming a fee based on $850k vs a fee base of $950k, in a defective pricing action.

I don't see any other direct damages from the scenario you described. I don't believe that consequential damages (e.g. loss as a result of another unfunded requirement, because the excess funds were used for the inflated obligation) are covered by TINA, but will do some research.

happy sails! joel hoffman

By seen it happen on Monday, August 12, 2002 - 05:07 pm:

The comment in Vern Edward's post about how the analysis process "affects funding decisions and program decisions that depend on funding" raises another feature of cost contracts for me. I'm not sure it is formally stated, but some working with these contracts agree they are much more in line with a co-operative effort or partnership than other contract types. A high level of trust and honesty is very important.

Some things are appropriately kept in confidence on both sides in general or during particular stages. That said, deception, by either side, in a cost contract can be particularly poisonus and have expensive results. Consider the example (try it at $8.5/$9.5 or $850/$950 million though) where the government's independent cost estimate is more closely aligned with the contractor's real estimate and the contractors dishonest cost proposal is thrown into the budgeting process.

One of the ugly times in an agency comes when one vital program requires more funding than expected and other, less important ones, are cut to meet its new requirement. No amount of victory celebration at coming in "under estimate" a year or two down the road will restore other programs that lost vital funding and were reduced in scope -- perhaps even cancelled -- due to the contractor's early dishonesty. In fact, one result can be bitterness within the agency toward those who supported the program having the false celebration. It leaves behind a form of cancerous rot. In my opinion such a contractor should suffer real pain, not a slap.

By Vern Edwards on Monday, August 12, 2002 - 05:16 pm:

The defective pricing clause (FAR § 52.215-10)says that the government is entitled to a cost reduction if any cost under a cost-reimbursement contract was increased due to defective pricing.

Defective pricing could be related to any direct or indirect cost. Thus, for example, if the government agreed to an estimated cost based on a proposed subcontract price, and the subcontract was defectively priced, the government could seek a reduction in the estimated cost and the fee. If the government actually reimbursed the contractor based on the defectively priced subcontract, then the government might be entitled to a reduction in the prime contract estimated cost and the fee, to recovery of the excess amounts paid to the prime, and to interest and a penalty.

By anonconorig on Monday, August 12, 2002 - 07:23 pm:

Seenithappen:

I too have seen this happen and you are correct. Something I am trying to resolve with my company also. As my father, who spent 23 years in the Navy and 15 more years as a program manager gave me sage advice. " You may think you 'won' the first time around but loe unto you for any future business." Memories are long for most.

By seen it happen on Monday, August 12, 2002 - 09:01 pm:

Much the same can happen with other contract types as far as a project needing more than expected. The point to me is that a cost contract is different. The government is assuming cost risk in particular. It hopes to select a real partner in minimizing those risks. In an ideal situation it finds one that will work co-operatively not only to handle its cost, but to help point out undue cost drivers in government actions. Such partnerships exist and are a pleasure to work with. I've seen that too and remember those days as being on my personal "profit" side. We did good things together and we made lasting progress.

A contractor that will, in this more trusted environment, play games with these matters is much like a cheating spouse. The poison spreads from the couple to family and friends. Anonymous seemed to doubt damage done. Vern Edwards explained the bare facts and mentioned the budget process. The damage, as explained in my earlier opinion, often goes well beyond those more direct ones.

By Eric Ottinger on Tuesday, August 13, 2002 - 09:33 am:

All,

It is a truism that the only thing that is really negotiated on a cost type contract is the fee. Strictly speaking, the only thing that the government is going to recoup, in the way of defective pricing for a cost type contract, is the extra fee.

The fee is the issue. Generally, if there is more cost there will be more fee. In DoD we use weighted guidelines. If you put more cost into the weighted guidelines the result will be more fee.

The obvious exception is a situation where the fee is set by competition. Under the current rules, defective pricing shouldn’t apply to a competitive contract. (This was not always true in the past.)

AnonYmous is missing a big point. The government is not required to fund a contract beyond the estimated cost. Equally, if the government chooses not to provide the additional funding, the contractor is not required to keep working beyond the estimated cost. If the government does decide to provide funds, the contractor is required to keep working on a cost/ no fee basis.

I very much agree with Anonconorig and Seen I Happen. Some people seem to think that the concept of past performance was invented recently. In the real world a contractor who refuses to play straight, and causes large problems for the customer, is always going to have a problem getting follow-on contracts. And this has always been true.

Of course, going into a big project both sides tend to be overoptimistic. But that is another issue. It seems to be a constant that large projects will often overrun egregiously. This is true on both the government and the private side. This kind of mutual folly is, of course, a different issue from the intentional low-ball.

Eric

By joel hoffman on Tuesday, August 13, 2002 - 10:08 am:

Eric, Two questions and two comments.

I'll have to do some research, but when did "defective pricing" (assuming that you are referring to the Truth In Negotiation Act)apply to competitive contracts?

You said: "In the real world a contractor who refuses to play straight, and causes large problems for the customer, is always going to have a problem getting follow-on contracts. And this has always been true." By "the real world", were you referring to private and commercial contracting?

Most states and local governments, as well as the

federal gov't (when using IFB procedures) end up with the same trouble makers, time after time. A "non-responsible bidder" determination is extremely difficult and time consuming. The flexibility allowed by a best value, trade-off, RFP process does allow us to choose another firm. However, the Government's extensive use of negotiated acquisition for other than major weapons and systems contracts or overseas contracts is relatively recent. Lowest price bidding had been the preferred method for much acquisition for quite a while and still is predominant in public contracting.

We should all remember that the TINA defective pricing clauses were designed as administrative tools, within the contract, to help recover certain negotiated costs as a result of "defective pricing", without having to prove malice or criminal intent to deceive the Government's negotiators. These clauses are most effective as an administrative tool, not as an accusatory tool or as a punishment. happy sails! joel

By Vern Edwards on Tuesday, August 13, 2002 - 10:16 am:

"In the real world a contractor who refuses to play straight, and causes large problems for the customer, is always going to have a problem getting follow-on contracts. And this has always been true."

I don't know what "real world" that quote refers to, but in the real world that I know every single one of the government's major contractors has been nailed for defective pricing, and worse, but they're still getting contracts.

By Vern Edwards on Tuesday, August 13, 2002 - 10:29 am:

Joel:

In the past, some components of the Department of Defense required offerors to submit and certify cost or pricing data even when a contract was awarded through competitive negotiation. For many years, some DOD contracting offices felt that adequate price competition was not present when technical factors were weighed more heavily than cost or price in a source selection.

I'm serving as an expert witness in a case involving a contract awarded in the early 1980s, in which the contractor has been charged with defective pricing and false claims, even though the government solicited and received competitive proposals. The U.S. attorney's position is that the government's request for cost or pricing data was justified due to the fact that adequate price competition did not exist in light of the fact that technical factors were weighed more heavily than price.

As an Air Force contracting officer in the 1970s and 1980s, I was routinely required by senior staff to demand cost or pricing data in competitive negotiated acquisitions, based on the notion that there adequate price competition did not exist when technical factors were weighed more heavily than price or cost.

By AnonYmus on Tuesday, August 13, 2002 - 10:36 am:

All,

This is a red-herring argument because the contractor's actual costs are irrelevant to a defective pricing determination. That's why they call it "cost OR PRICING data."

Defective pricing occurs when contract PRICE is increased because the contractor failed to submit accurate, current or complete cost or pricing data during negotiations. Vern's 1st post is wrong, or at least not complete.

A cost reimbursable contract price is composed of two pieces -- estimated cost and fee. If either piece is increased because of defective pricing, then the contractor is liable. Doesn't matter what the contractor's actual costs will be; only matters what was disclosed during negotiations.

As a recent ASBCA decision (Lockheed Martin d/b/a Sanders -- Feb 2002) recently quoted:

"In McDonnell Douglas Helicopter Systems, ASBCA Nos. 50447 et al. 00-2 BCA 31,082 at 153,465, we set forth the burden of proof for defective pricing appeals:

In defective pricing cases the Government bears the burden of proof on three elements--1) that the information in dispute is “cost or pricing data” under the Truth in Negotiations Act, 10 U.S.C.A. § 2306a; 2) that cost or pricing data was not meaningfully disclosed; and 3) that it relied to its detriment on the inaccurate, noncurrent or incomplete data presented by the contractor. As to the third element, once nondisclosure is established a rebuttable presumption arises that a contract price increase was a natural and probable consequence of that nondisclosure. Sylvania Electric Products, Inc. v. United States, 479 F.2d 1342 (Ct. Cl. 1973). However, “[t]he ultimate burden of showing the causal connection between the incomplete or inaccurate data and an overstated contract price remains with the Government.” Grumman Aerospace Corporation, ASBCA No. 27476, 86-3 BCA 19,091 at 96,494."

Eric,

I acknowledge your point. I tend to take the contractor's view of the world, which revolves around the risk of not getting paid for all costs. Your point, which is more from the Government customer's view, revolves around providing sufficent funds to accomplish the SOW. Both points are valid, I think, but including yours does make for a more complete answer.

By AnonYmus on Tuesday, August 13, 2002 - 10:38 am:

Erratum -- I meant Vern's 2nd post, where he discusses cost reduction for increased costs. That's not the correct interpretation -- should be a "price" reduction for increase to negotiated contract "price."

By joel hoffman on Tuesday, August 13, 2002 - 10:43 am:

Thanks for the information, Vern. Our Federal Publications' and West Publishing's "Briefing Papers" on TINA are missing. There are a couple of good, comprehensive articles on TINA, there. happy sails! joel

By Vern Edwards on Tuesday, August 13, 2002 - 10:46 am:

AnonYmus:

Please read FAR § 52.215-10, Price Reduction for Defective Cost or Pricing Data (Oct 1997), paragraph (a):

"(a) If any price, including profit or fee, negotiated in connection with this contract, or any cost reimubursable under this contract, was increased by any significant amount.

(3). the price or cost shall be reduced accordingly and the contract shall be modified to reflect the reduction."

Now, where was I wrong?

By AnonYmus on Tuesday, August 13, 2002 - 12:56 pm:

Vern,

You were wrong because your answer was misleading or, if you prefer, incomplete.

Read the original question in the thread again. We are inquiring into whether, or to what extent, defective pricing can occur on a cost reimbursable contract. You replied,

"The defective pricing clause (FAR § 52.215-10)says that the government is entitled to a cost reduction if any cost under a cost-reimbursement contract was increased due to defective pricing.

Defective pricing could be related to any direct or indirect cost. Thus, for example, if the government agreed to an estimated cost based on a proposed subcontract price, and the subcontract was defectively priced, the government could seek a reduction in the estimated cost and the fee."

As I pointed out, the government is entitled to a price reduction for any increase in price. Actually, the remedies include:

1. Dollar for dollar downward price adjustment

2. Refund of any overpayments with interest

3. An additional amount, equal to the amount of the price overstatement (not mandatory)

Vern, you are usually right on the money. In this case, however, you were slightly off.

Sorry, but I have to stick to my guns on this one.

By AnonYmus on Tuesday, August 13, 2002 - 01:08 pm:

Let me add some more on TINA, for those who might be interested.

There's a great pamphlet out, kind of dated, but still excellent. It's called "Living with TINA: A Practical Guide to the Truth in Negotiations Act" and was authored by Clarence Kipps and John Lloyd Rice. It's available from the Washington Legal Foundation.

Here's a relevant quotation:

"Under TINA, the "significance" of undisclosed facts is relevant to two considerations. Facts are cost or pricing data if prudent negotiators would reasonably expect those facts to affect price negotiations significantly. Where there is a TINA violation, the Government is entitled to a price adjustment to exclude "any signficant sums" by which the contract price was increased because of defective cost or pricing data. 10 USCA 2306a(d). In making both determinations, courts and boards state that signficance is not measured as a percentage of contract price or by the dollar value shown by undisclosed data but refers to the logical connection between the data and the issues negotiated. See Sylvania Elec. Prods, Inc. v United States, 202 Ct. Cl. 16, 479 F.2d 1342 (1972). (etc.)"

There's a lot more. As I said, it's a great resource.

By Vern Edwards on Tuesday, August 13, 2002 - 01:25 pm:

AnonYmus:

What are you talking about?

Suppose that a prime contractor negotiates a sole source CPFF contract with the government with an estimated cost of $100,000,000. Suppose further that the estimated cost included $15,000,000 for a sole source FFP subcontract for a noncommercial item. Both the prime and the sub submitted and certified cost or pricing data.

The subcontractor performs and the prime pays the sub the $15,000,000 and seeks and obtains reimbursement from the government. Subsequently the government's auditor finds that the subcontract was defectively priced (the sub's cost or pricing data were not accurate, complete or current) and that the subcontract price should have been $10,000,000. The contracting officer agrees.

Pursuant to FAR § 52.215-10(a), the government is entitled to a reduction in the cost that was increased due to the sub's submission of defective cost or pricing data. The prime must repay the excess $5,000,000 plus simple interest. If the contracting officer finds that either the prime, or the sub, or both, knowingly submitted defective data, the the prime must pay a penalty.

Are you saying that what I have just described is not a case of defective pricing?

Are you saying that the "cost reimbursable" was not increased due to the defective pricing?

Are you saying that the defective pricing clause does not entitle the government to a reduction in the amount that it reimbursed the prime for the payment that it made to the sub, and to a refund of the excess amount with interest?

Have you read the defective pricing clause? Did you see the part that says that if any "cost reimbursable" was increased due to defective pricing then the "cost" shall be reduced accordingly?

In what way was my answer misleading or incomplete? In what way did I mislead? What was missing?

By Vern Edwards on Tuesday, August 13, 2002 - 01:33 pm:

AnonYmus:

You have quoted Kipps and Rice out of context. The quote appears on page 15 of their pamphlet, in the section entitled, "Significance is not necessarily measured by monetary value."

The defective pricing clause says that the government is entitled to a reduction when defective pricing caused the price or a cost to be increased "by any significant amount." Kipps and Rice cited court cases which held that what is a "significant amount" is not determined on the basis of percentage of contract price or dollar value. That has nothing whatsoever to do with the point that I have been making.

By joel hoffman on Wednesday, August 14, 2002 - 08:19 am:

Federal Publications and the West Publishing Company have published several "Briefing Papers", which are comprehensive reviews of many of the administrative and legal issues concerning of TINA. The articles include recommended guidelines for contractors to stay out of trouble with TINA. Here are three of those issues:

#89-11 November 1989 "Truth In Negotiations Act/Edition III"

#93-08 July 1993 "Subcontractor Cost or Pricing Data/Edition II"

#95-08 July 1995 "Impact of FASA on The Truth In Negotiations Act"

I read where KO's routinely required Cost or Pricing data for competitively negotiated contracts, despite the exemptions for such circumstances. The alleged reasons were various, e.g. perceived lack of competition, requiring certification of C&P submitted for "price realism" analysis, etc.

Thanks for advising me about the first and last articles, Vern. happy sails! joel

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