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Column: Defective Pricing Audits
By Stephen Knight, Edmund Amorosi and Amanda C. DeLaPerriere
Smith Pachter & McWhorter
Near the end of 2020, the Office of the Under Secretary of Defense (OUSD) published two memoranda regarding (1) creation of a new defective pricing audit team within the Defense Contract Management Agency (DCMA) and (2) the Defense Dept.’s need to gather data on contractors who refuse to provide “other than certified cost or pricing data.”
The memoranda are available at https://bit.ly/3dDrVDe and https://bit.ly/2ZElrvE.
DCMA’s New Role in Handling DCAA Defective Pricing Audit Reports
The first memo was dated Sept. 30, 2020, from Kim Herrington, Acting Principal Director, Defense Pricing and Contracting. It was titled “Delegation of Defective Pricing Authority to the Defense Contract Management Agency.”
The memo announced a new DCMA team, mainly composed of former Defense Contract Audit Agency officials, to determine whether certified cost or pricing data are defective and whether to reduce the contract price.
The memo stated that procuring Contracting Officers may refer defective pricing audits to the DCMA team for resolution.
If the DCMA team accepts the request for assistance it will:
- Take all actions to resolve the DCAA findings;
- Issue to the Contracting Officer final decisions as needed;
- Execute any contract modifications necessary to implement any contract modifications necessary; and
- Litigate any resulting appeal or case.
Further, because DCAA claims to have made substantial progress in resolving the backlog of incurred cost audits, contractors may expect an increase in defective pricing audit activity.
Because of the fact-specific nature of defective pricing audits, the new DCMA team will likely rely on the DCAA audit findings.
The DCMA team will not have participated in the contract negotiations and will not have a full evaluation of the relevant facts.
Contractors are thus well advised to take preemptive action in advance of these audits by redoubling their efforts to document their disclosures during negotiations, as well as concessions that could reduce any potential defective pricing claim by the government.
Risks in Providing (or Not Providing) “Other than Certified Cost or Pricing Data” where Certified Cost or Pricing Data Are Not Required
The second memo, also from Herrington, was titled “Call for Quarterly Reporting of Contractor Denials of Requests for Data Other than Certified Cost or Pricing Data to Evaluate Price Reasonableness for Department of Defense Contract Awards.” It was dated Oct. 6, 2020.
The second memo reiterated “the need” for regular reports of contractors who refuse to provide data “other than certified cost or pricing data.”
The “need” for data on contractors who refuse to provide “other than certified cost or pricing data” originated with Section 803 of the National Defense Authorization Act for FY 2020.
Section 803 “requires an annual report to Congress identifying offerors or contractors that have denied multiple requests for submission of uncertified cost or pricing data but have received an award based on the head of the contracting activity’s determination that an award is in the best interest of the government.”
OUSD’s Defense Pricing and Contracting section issued a previous memorandum in 2019 implementing Section 803 of the NDAA by requiring a quarterly report of contractor denials of requests for other than certified cost or pricing data.
DFARS Procedures Guidance and Information 215.403-3(6) further implemented this reporting requirement.
These actions by Congress and DOD demonstrate the government’s further erosion of the exemptions from certified cost or pricing data disclosure requirements, especially for commercial items (recently renamed to “commercial products” and “commercial services”).
Congress and DOD apparently desire the cost data relating to goods and services that should be subject to price analysis.
With such cost data, the government will be able to calculate a contractor’s profit rate.
DOD’s analysis seeks to establish a “reasonable price” by first establishing “reasonable costs” and then a “reasonable profit.”
But the FAR and DFARS are silent on what constitutes a “reasonable profit,” other than the weighted guidelines analysis imposed on contracting officers. The only regulatory limits on profit are found in FAR 15.404-4(c)(4) and then applicable only to cost-type contracts.
Contractors should be alert to DOD’s efforts to obtain cost data (as part of “other than certified cost or pricing data”) and to impose arbitrary limits on profit.
Contractors will need to assess the costs and benefits of declining a request for voluntary submission of “other than cost or pricing data,” which will result in inclusion on some type of “list,” versus potential attempts by the government to use these data to reduce margins.
If a contractor agrees to provide “other than certified cost or pricing data,” the contractor should still remind DOD that any efforts to use cost analysis to reduce profits rather than price analysis to negotiate a fair and reasonable price are inconsistent with the regulations.
The authors are members of Smith Pachter McWhorter’s Government Contracts Group. If you have questions regarding the potential impact of this issued guidance, please contact Ed Amorosi at eamorosi@smithpachter. com.
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