Contents

Cost or Pricing Data Defined
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Understanding the Requirements
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The Submission Requirements
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The Current Requirement
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The Accurate Requirement
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The Complete Requirement
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Defective Pricing
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Proposal Sweeps
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Access to Records
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Conclusion

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Cost or Pricing Data

by: Gregory L Fordham

(Last updated Dec 2015)

Cost or pricing data are required when the dollar value of a negotiated contract is more than $750,000 and the proposal is not subject to several exemptions like adequate price competition, prices set by law or regulation or the sale of commercial items. The requirement for cost or pricing data originates from the Truth in Negotiations Act (TINA), (10 USC, §2306a, P.L. 87-653).

The TINA was first enacted in 1962 as a means to legislatively curb excess profiteering by government contractors. Since the goal was the negotiation of a fair and reasonable price, the law’s objective was to place the government on an equal negotiating level as the contractor by requiring contractors to make certain disclosures about the proposals they prepared for their products and services. Once both sides were equipped with the same information, all that separated the parties would be their negotiation skills.

Despite its well meaning intentions, the TINA and its progeny, cost or pricing data, have caused much consternation and by many accounts have even deprived the government from the goods or services it desires, since some contractors have refused to sell to the government whenever TINA applies. The TINA requirements are onerous. Some even claim impossible to actually achieve. So, contracting with the government when TINA requirements apply has considerable risk, which should be understood by every covered contractor.

Cost or Pricing Data Defined

TINA does not impose pricing restrictions or even guidelines. Rather, the requirements of TINA impose disclosures. The required disclosures are known as 'cost or pricing' data.

As defined in the act,

Cost or pricing data means all information that is verifiable and that, as of the date of agreement on the price of a contract (or the price of a contract modification), a prudent buyer or seller would reasonably expect to affect price negotiations significantly. Such term does not include information that is judgmental, but does include the factual information from which a judgment was derived.

The TINA requirements have been incorporated in the FAR at Subpart 15.403-4. Of course, the regulations have expanded on the definition of cost or pricing data in an attempt to clarify the kinds of data that should be disclosed by contractors. FAR Section 2.101 defines cost or pricing as,

“Cost or pricing data” (10 U.S.C. 2306a(h)(1) and 41 U.S.C. 254b) means all facts that, as of the date of price agreement, or, if applicable, an earlier date agreed upon between the parties that is as close as practicable to the date of agreement on price, prudent buyers and sellers would reasonably expect to affect price negotiations significantly. Cost or pricing data are factual, not judgmental; and are verifiable. While they do not indicate the accuracy of the prospective contractor’s judgment about estimated future costs or projections, they do include the data forming the basis for that judgment. Cost or pricing data are more than historical accounting data; they are all the facts that can be reasonably expected to contribute to the soundness of estimates of future costs and to the validity of determinations of costs already incurred. They also include, but are not limited to, such factors as—
(1) Vendor quotations;
(2) Nonrecurring costs;
(3) Information on changes in production methods and in production or purchasing volume;
(4) Data supporting projections of business prospects and objectives and related operations costs;
(5) Unit-cost trends such as those associated with labor efficiency;
(6) Make-or-buy decisions;
(7) Estimated resources to attain business goals; and
(8) Information on management decisions that could have a significant bearing on costs.

Understanding the Requirements

Both the statutory and regulatory definitions of cost or pricing data make several important distinctions. First, cost or pricing data are facts. They are not estimates. So, projections, such as forward pricing rates, are arguably not cost or pricing data, although after a projection has been created its existence is a fact that may be disclosable.

Second, since cost or pricing data are facts they are things that must be in existence. So, it is not required that contractors perform any particular analysis. For example, it is not required that a contractor perform a learning curve analysis to validate its labor estimate. Of course, if one has been performed it is potentially disclosable.

Third, cost or pricing data is not limited to the elements used in preparing the proposal. Indeed, all facts relevant to the proposed work are disclosable, including those not used by the contractor in developing the proposal. For example, unused vendor quotes are disclosable.

Fourth, a contractor’s cost or pricing data will contain all kinds of facts. Many of them may even be contradictory. For example, the last time a particular piece part was purchased the contractor paid a certain amount. At the same time, the current vendor quote for that piece part could be a different amount. Since both are facts, and if both could affect price negotiations significantly, they are both disclosable. Even the case where several vendor quotes are obtained and for whatever reason the contractor selects one over another when preparing its estimate, all of the quotes are cost or pricing data that are disclosable.

Although TINA requires contractors to submit cost or pricing data, it does not require that contractors actually use their cost or pricing data when preparing their proposals. In fact, the courts and administrative boards have repeatedly affirmed the position that a contractor's price and cost or pricing data submitted under TINA are unrelated.

The purpose of the TINA is to place the government in an equal bargaining position by having contractors disclose any facts that would have a material effect on the negotiation of price. The actual method of price determination still remains with the art of negotiation.

Since there is no requirement for contractors to actually use their cost or pricing data when preparing their proposals, there is also no requirement that the lowest priced fact be used when preparing contractor proposals. Rather, the requirement is simply to disclose the existence of those facts and then let the parties negotiate a mutually acceptable price based on the knowledge of those facts. As a result, it is best for contractors to simply disclose the facts and then argue about which ones, if any, should be used when preparing proposals. After all, the lowest vendor may not be responsive, responsible or the “best value”.

The Submission Requirement

The TINA places the burden of submitting cost or pricing data squarely on the shoulders of the contractor. The government, or more generally buyers, need not ask for cost or pricing data in those situations meeting the disclosure requirements. So, contractors should not be comforted by the fact that buyers or their auditors did not ask for particular cost or pricing data.

Although the TINA requires contractors to submit current, accurate and complete cost or pricing data, the submission requirement can be satisfied in one of two ways. First, contractors may physically submit the data with their cost proposals. Second, contractors may specifically identify in writing the location of the data.

Since cost or pricing data are so voluminous and extend beyond the calculation of price and even the data used by the contractor in developing its price it is not practical to physically submit cost or pricing data. Rather, it is probably best to specifically identify in writing the location of the data.

This latter methodology is probably best accomplished through a systems approach to the problem that is described in a written policy and procedure that can be given to auditors and other recipients of the contractor’s cost or pricing data. By supplying the procedure manual along with some other artifacts such as a bill of material, the disclosure requirement can be satisfied.

This methodology also ensures compliance with TINA requirements and protects the contractor from having failed to “submit” cost or pricing data when an auditor or buyer representative did not ask for a particular fact. Indeed, the systems approach ensures that they have constructive receipt whether or not they actually looked at any of it.

The Current Requirement

Neither the statute nor the regulations provide definitions of current, accurate or complete; however, the courts and contract boards have provided some distinguishing guidelines. The interpretation of 'current' has become fixed in interpretation as meaning at the time of final agreement on price as articulated in the TINA certificate. This is much more lenient than the requirements of FAR Table 15-2 which suggests that contractors continually update their cost proposals for any change in their cost or pricing data.

While buyers would likely want to have sellers follow the FAR update requirements for TINA, those processes are expensive and time consuming. Consequently, sellers would likely prefer to meet the minimum requirements of the certification and provide the data in a more efficient manner and only when the chance of actually receiving an order is likely or at least convinced that the process is not just a wild goose chase or an illusion created by the buyer just to negotiate lower prices in contract actions that ultimately do not even meet the TINA threshold criteria.

One of the trickier elements of the current requirement happens in larger, multi-segmented organizations where the existence of a fact may take time to disseminate through the organization such that a segment knows of its existence. Although there has been some fluctuation regarding the amount of time needed by an organization to obtain the data and funnel the data to its destination, courts have not accepted significant time lags between the date the 'organization' was first made aware of the data and the date it was disclosed to the government. Some relief is possible though in that the regulations, in FAR Subsection 15.804-4(a), allow the contractor to "submit it [the certification] as soon as practicable after price agreement is reached". This provision can apparently be used to allow the contractor some time to review its data for timeliness before completing the certification. Also, TINA allows the parties to negotiate a date of certification but requires that the date be as close to the date of final price agreement as possible.

The Accurate Requirement

To be accurate the data must be submitted in a usable form and must identify the relationship of the data to the contract price being negotiated. The usable form may be either specific reference to data in the contractor's records or data provided with the proposal; however, merely referencing raw data or providing raw data without identifying its relationship to the contract price does not satisfy the accuracy requirement.

In one case, the contractor had made available its materials purchase records without providing a bill of materials listing the items included in the contract price. Without the bill of materials the raw purchase data was considered not to be in an 'usable' form; consequently, the proposal was not accurate.

Although the TINA does not describe a particular format for satisfying the “accurate” or usable form requirement, the regulations provide a proposal format in Table 15-2 at FAR 15.408 that is to be used for submitting cost proposals and submitting cost or pricing data. Contractors should not lose sight of the fact that neither the certificate nor the contract price adjustment penalty is linked to Table 15-2. Rather, all of the TINA penalties are tied to the statutory requirement to supply current, accurate and complete data cost or pricing data without regard to a particular format.

Since the accurate requirement speaks to usable form, the requirements of Table 15-2 arguably address that requirement. At the same time, there is no magical format for satisfying that requirement and, in the end, the TINA requirements are so vast that the Table 15-2 requirements will not fully satisfy them. Consequently, contractors should not think that their obligations have been met by simply following Table 15-2.

When confronted with a dispute about the Table 15-2 requirements, buyers will have to assess whether they want to withhold business opportunities from sellers whose proposals do not follow the Table 15-2 requirements. Of course, such a decision could be counterproductive for a host of reasons. For example, even with an intransigent vendor a buyer could be foregoing very favorable pricing, nonetheless. So, prudent buyers should perform adequate market research to avoid making this mistake, which they are supposed to do anyway.

On the other hand, sellers will want to carefully weigh how they deal with customers. They do not want to miss sales opportunities. At the same time, they do not want to unnecessarily reduce margins as a result of the more expensive and time consuming cost or pricing data requirements; or, unnecessarily revealing sensitive financial data to a prospective customer that looks to be abusing the process. Of course the latter consequence can be somewhat negated by making customers suspected of abusing the process request assist audits and then argue about the results with them rather than divulge the data to them directly.

In the end, there is no penalty for sellers not following the FAR's Table 15-2 guidelines. Furthermore, a buyer's only recourse is to withhold awards. As a result, sellers may want to devise a tiered approach in recognition that cost or pricing data will likely change over the course of the negotiation process, particularly if it takes many, many months. In other words, start with some basic schedules that provide basic data about the sellers price and explain that more detail is available and will be provided when auditors or other representatives are dispatched to review it. Of course continuing a prickly approach through final negotiation where little data is ever provided has considerable compliance risks, although it is still possible and there are a few contractors that have been able to make it work.

The Complete Requirement

The requirement for complete is a 'reasonable man' concept. The requirement of cost or pricing data states the test as being whether "prudent buyers and sellers would reasonably expect" the data to effect price negotiations significantly. In this regard, the concept of significance is rather misleading. Courts and boards have repeatedly affirmed the position that any increase in contract price as the result of incomplete cost or pricing data is a significant amount.

Indeed, the courts and contract boards have looked more at the actual dollar value than the relationship of the dollar value to the total contract price when adjusting contract values. Consequently, $20,000 of a proposed contract price of $15 million and $8,050 of a proposed $548,100 contract have both been considered significant values.

Defective Pricing

Failure by the contractor to submit adequate cost or pricing data is known as defective pricing. In such cases, the government is entitled to a downward price adjustment in contract value to the extent that the contract price was inflated due to the contractor's failure to comply. This provision is incorporated in TINA at §2306(a)(d) and in the required contract clause at FAR Subsection 52.215-22.

In other words, if the lowest disclosed vendor quote was $15 but it is later determined that there was an even lower vendor quote for $10 that was not disclosed (perhaps even obtained in support of different order for another customer) then the contract price is adjusted downward by $5 plus any related markups that are necessary to compute a price adjustment. The linkage between defective cost or pricing data and an inflated contract price is assumed. Therefore, if defective pricing is ever alleged it then becomes the contractor's burden to prove that submission of current, accurate and complete data would not have altered the agreed upon price. Perhaps most notable here is that the contractor may not use as a defense against defective pricing that a certification of cost or pricing data was not submitted.

A contractor's liability for defective pricing may not end with the contract price adjustment. Also in play are the various penalties, including jail time, under the False Claims Act as well as other fraud statutes. So again, it is safer to make the required disclosures and then argue about their relevance to contract price during negotiations--assuming the contractor even wants to consummate a contract covered by the TINA.

Proposal Sweeps

Since there likely will be a time difference between the customer’s review of the seller’s cost or pricing data and final agreement on price, the seller can have significant compliance risk with the “current” requirement. To eliminate this risk, the parties can negotiate a reasonable date on which to calculate the current requirement.

When the final negotiation on price is mid month, the cutoff date may be the end of the immediately preceding month since that may be the best cost information and facts available to the seller. At the same time, sellers should perform a “sweep” that updates the disclosure of facts from the last submission date to the date of final agreement on price.

If the sweep uncovers new facts, the question then becomes how will any updates be used? This is more of a problem for buyers than sellers. Buyers that want to insist that new data produced in a sweep re-opens negotiations may never reach a final agreement. On the other hand, sellers will have satisfied their submission requirement by updating their cost or pricing data in a sweep.

Access to Records

Included in TINA is the government's right to examine all records of the contractor or subcontractor related to-

  • The proposal for the contract or subcontract;
  • The discussions conducted on the proposal;
  • Pricing of the contract or subcontract; or
  • Performance of the contract or subcontract.

The government's right to examine contractor records has been incorporated on the Standard Form 1411 that is required, under regulation, to be submitted with the contractor's cost proposal. By signing the Standard Form 1411 the contractor grants the contracting officer the right to examine anytime prior to award books, records, documents and other types of factual information regardless of form that will permit an adequate evaluation of the proposed price. Of course the government's rights are not revoked merely because the contract award has been made. Rather, the government's right to examine the contractor's records are incorporated in the required contract clause of FAR subsection 52.215-2, Audit-Negotiation.

Conclusion

Cost or pricing data are facts. So, they are not a calculation, a methodology or even a presentation format. Consequently, they are not the schedules created by contractors showing the calculation of their proposed prices, since those are just estimates about future performance.

By contrast, cost or pricing data are the facts related to the proposal whether or not the contractor actually even used them in developing its proposal. In fact, there is no requirement that the disclosures actually be used by the contractor when calculating price or conducting negotiations.

A contractor's duty to disclose cost or pricing data is affirmative. In other words the data need not be requested by the buyer. Instead the disclosure obligation is entirely the seller's.

The disclosure requirements are very expansive and have been characterized by many as nearly impossible to satisfy. The best chance of compliance is through a systems approach that accomplishes the submission requirement through a constructive mechanism because actual delivery of the data is likely impractical.

When confronted with a negotiated government contract where cost or pricing data or data other than cost or pricing data are being requested or required, the Atlanta Georgia office of Celestial Defense provides three important consulting services to government contractors in general, defense contractors in particular and even the government, if desired. Those services involve expert knowledge of:

  • The various federal acquisition methods and whether or not cost or pricing data are required or could be required as well as the actual methods for satisfying the requirements when cost or pricing data are required or what options are available when cost or pricing data are not required or they are the method of last resort;
  • Assessment of and response to DCAA or other outside audit findings related to inadequate estimating systems, inadequate proposals or failures to provide cost or pricing data (defective pricing); and
  • Performing compliance assessments to determine whether existing policies and procedures actually satisfy estimating and proposals requirements and recommend fixes to existing systems that are weak or inadequate.