Activity 44: Defective Pricing

FEDERAL ACQUISITION INSTITUTE | Contracting Professionals Smart Guide | Contract Administration | Defective Pricing 1

Contract Administration

Procedures for identifying and addressing contractor defective cost or pricing data and offsets.

Related Flow Charts: Flow Chart 44

Related Courses: CLC 056, CLC 058

Tasks

FAR Reference(s)

Additional Information

1. Identify factors that suggest cost or

pricing data may be defective.

Defense Contract Audit Agency Contract

Audit Manual (DCAM) 14-117 Possible

Defective Pricing Indicators.

Indicators of defective cost or pricing data may be uncovered

during day-to-day operations or during reviews of contractor

operations (e.g., technical reviews for negotiating other related

contracts, purchasing system reviews, or contract performance

reviews). Examples of situations that may raise your concern

about possible defective pricing include:

• Incurred costs (either generally or in a particular

category) seem to be running significantly less than

projected.

• Operations included in the contractor's proposal are not

actually performed in completing the contract.

• Direct cost items included in the proposal appear to be

priced higher than they should be based on information

available to the contractor (and not disclosed to the

Government) at the time of contract price agreement.

• Data presented during later negotiations with the same

company provide information that is significantly

different from that presented in earlier negotiations.

• Data collected during market research for a subsequent

contract are inconsistent with the certified data.

• Defective pricing is identified on related contracts.

• Operating budget plans (e.g., indirect cost budgets)

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Tasks

FAR Reference(s)

Additional Information

contain data that are different from the data in the

contract proposal.

• Labor-mix estimates do not include data on the actual

labor mix on the same or similar contracts.

• Review of other proposals indicates that the value of the

contractor's inventory was erroneously computed or the

latest valuation was not reflected in the contractor's

proposal.

• Estimating system reviews reveal deficiencies in

procedures for identifying and submitting cost or pricing

data.

• Contractor pricing personnel or negotiators informally

state that they failed to follow contractor internal pricing

policy or estimating and/or purchasing manual

instructions.

• Technical review of contract performance indicates that

quantity estimates were erroneous because the

contractor did not use current product drawings or failed

to read drawings correctly.

• Purchasing reviews indicate that the contractor did not

submit available evaluations of vendor quotations or

failed to reveal changes in its evaluations.

• Purchasing reviews indicate that purchase order

cancellations were not disclosed to the Government.

• Later technical evaluations indicate that the contractor

did not disclose projected increases in business volume

that would affect current and projected overhead and

general and administrative expense rates.

• Contract performance reviews indicate that the

contractor duplicated cost estimates for the same task.

• The make-or-buy plan submitted with the proposal is

significantly different than the plan being used in

contract performance.

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Tasks

FAR Reference(s)

Additional Information

• New or revised production processes which will be used

in contract performance were not disclosed.

2. Discuss concerns about possible

defective pricing with the contractor

and the auditor.

FAR 15.407-1(d) Defective certified

cost or pricing data.

After contract award, investigate whenever you suspect that the

data provided by the contractor or subcontractor were not

accurate, complete, and current as of the close of negotiations or

(if applicable) on another agreed-upon date.

To ensure that you understand the situation, you may wish to

contact the contractor to discuss your suspicions before

contacting the cognizant auditor. During your discussions:

• Describe the data that you suspect are defective.

• Unless it would jeopardize the Government's position,

describe the reasons that you suspect that the data are

defective.

• Obtain the contractor's position on whether the cost or

pricing data were accurate, complete, and current.

Document your suspicions and the results of your discussions

with the contractor. Place a copy in the affected contract file(s).

If you are not satisfied with the contractor's position, you may

wish to informally contact the cognizant auditor before requesting

a defective pricing audit. A situation that appears suspicious may,

in fact, result from using acceptable accounting and estimating

practices.

FEDERAL ACQUISITION INSTITUTE | Contracting Professionals Smart Guide | Contract Administration | Defective Pricing 4

Tasks

FAR Reference(s)

Additional Information

3. Consider the significance of the

possible defective pricing.

FAR 15.407-1(c) Defective certified cost

or pricing data.

FAR 52.215-10, Price Reduction for

Defective Certified Cost or Pricing Data.

FAR 52.215-11 Price Reduction for

Defective Certified Cost or Pricing

Data—Modifications.

DCAM 4-304-3 Postaward Audits of

Certified Cost or Pricing Data for

Possible Defective Pricing.

The FAR defective pricing clauses provide that the Government is

entitled to remedies if a contract price was increased by any

“significant amount” because the contractor provided cost or

pricing data that were not accurate, complete, and current.

However, it does not define what amount is significant.

One Board of Contract Appeals found that the Government was

entitled to a reduction of $5,000 even though that amount was

only two-tenths of one percent of the contract price. The decision

pointed out that the language of the Truth in Negotiations Act

does not vest in a contractor the right to keep amounts obtained

through supplying defective pricing data on the grounds that the

amount so obtained was insignificant in relation to the overall

contract price.

However, substantial resources are required to identify, pursue,

and settle defective pricing allegations. Accordingly, you should

consider the materiality of alleged defective pricing before you

decide to pursue the allegation.

There is no universal Government policy on materiality, but DCAA

provides one useful guideline. In DCAA potential price

adjustments of less than five percent of contract price or

$50,000, whichever is less, are normally considered immaterial

and not pursued unless:

• A contractor's deficient estimating practices have

resulted in recurring defective pricing; or

• The potential price adjustment is due to a system

deficiency, which affects all contracts priced during the

period.

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Tasks

FAR Reference(s)

Additional Information

4. If you still suspect that the contract

price significantly increased

because of defective cost or pricing

data, request an audit to evaluate

the accuracy, completeness, and

currency of the cost or pricing data

submitted by the contractor

through the close of negotiations.

FAR 15.407-1(c) Defective certified cost

or pricing data.

DCAM 4.304.3 Postaward Audits of

Certified Cost or Pricing Data for

Possible Defective Pricing.

Provide the following information in the request:

• Identify the data that you suspect are defective.

• Describe, in detail, your reasons for suspecting that the

data are defective.

• Provide the auditor a copy of:

o The price negotiation memorandum (PNM) if

one was not previously provided.

o The final proposal index of cost or pricing data

provided by the contractor.

o Any cost or pricing data provided to the

contracting officer to support the contractor's

pricing proposal, but not previously provided to

the auditor.

If the auditor needs any additional information or support to

complete the audit, provide it in a timely manner.

5. Prepare a defective pricing

memorandum documenting the

determination and any corrective

action taken as a result.

FAR 15.407-1(d) Defective certified

cost or pricing data.

FAR 33.211 Contracting officer’s

decision [disputes and appeals].

The pricing memorandum must include the following:

• The contracting officer’s determination as to whether or

not the submitted data were accurate, complete, and

current as of the date certified and whether or not the

Government relied on the data; and

• The results of any contractual action taken.

6. Distribute the memorandum.

FAR 15.407-1(d) Defective cost or

certified pricing data.

Distribute the defective pricing memorandum as follows:

• Send one copy to the cognizant auditor.

• If the contract has been assigned for administration,

send one copy to the administrative contracting officer

(ACO).

• Provide a copy of the memorandum or other notice of the

determination to the contractor.

Distribute other contractual documents as required by FAR and

agency procedures.

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Tasks

FAR Reference(s)

Additional Information

7a. If the amount due the Government

exceeds the amount remaining on

the contract, issue a demand letter.

FAR 15.407-1(b)(1) Defective cost or

certified pricing data [demand letter].

Ensure that the contract modification and any demand letter

include the following information:

• The repayment amount.

• The penalty amount (if any).

• The interest amount through a specified date.

• A statement that interest will continue to accrue until the

date repayment is made.

7b. If the cost or pricing data was

understated, consider an offset.

FAR 15.407-1(b) Defective certified

cost or pricing data.

The amount of the offset may equal, but not exceed, the amount

of the Government’s claim for overstated cost or pricing data

arising out of the same pricing action.

An offset must be allowed only in an amount supported by the

facts and if the contractor:

• Certifies to the contracting officer that, to the best of the

contractor’s knowledge and belief, the contractor is

entitled to the offset in the amount requested; and

• Proves that the certified cost or pricing data were

available before the “as of” date specified on the

Certificate of Current Cost or Pricing Data but were not

submitted. Such offsets need not be in the same cost

groupings (e.g., material, direct labor, or indirect costs).

An offset must not be allowed if:

• The understated data were known by the contractor to

be understated before the “as of” date specified on the

Certificate of Current Cost or Pricing Data; or

• The Government proves that the facts demonstrate that

the price would not have increased in the amount to be

offset even if the available data had been submitted

before the “as of” date specified on the Certificate of

Current Cost or Pricing Data.

FEDERAL ACQUISITION INSTITUTE | Contracting Professionals Smart Guide | Contract Administration | Defective Pricing 7

Tasks

FAR Reference(s)

Additional Information

8. Conduct settlement discussions

with the contractor to reach a

bilateral agreement.

FAR 15.407-1(d) Defective certified

cost or pricing data.

FAR 33.210 Contracting officer’s

authority [disputes and appeals].

If the contracting officer believes it would benefit discussions, the

cognizant auditor may be invited to participate.

In attempting to reach settlement do not—

• Make an agreement that precludes further defective

pricing audit reviews on the same or other contracts.

• Make an agreement that is contingent upon settling

defective pricing found in other contracts.

• Accept contractual goods or services on the same or

other contracts as compensation for, or disposition of, a

defective pricing case.

• Credit the amount of defective pricing in negotiating a

concurrent or subsequent contract, including a follow-on

contract.

• Adjust only one contract for defective pricing when the

same defective pricing was cited on multiple contracts

with the same contractor.

Settle, compromise, pay, or otherwise adjust any claim involving

fraud, or any claim or dispute for penalties or forfeitures

prescribed by statute or regulation that another Federal agency is

specifically authorized to administer, settle, or determine.

9a. If a settlement is reached, modify

the contract to reflect the defective

pricing settlement.

FAR 15.407-1(b)(1) Defective cost or

certified pricing data.

If the contract price is reduced as a result of the alleged defective

pricing, document the price reduction in a contract modification.

9b. If a settlement is not reached, issue

a final decision in accordance with

Contract Disputes statute.

FAR 15.407-1(d) Defective certified

cost or pricing data.

FAR 33.211 Contracting officer’s

decision [disputes and appeals].

See Activity 49: Resolving Disputes for further discussion.

FEDERAL ACQUISITION INSTITUTE | Contracting Professionals Smart Guide | Contract Administration | Defective Pricing 8

Tasks

FAR Reference(s)

Additional Information

10. Upon issuing a final determination

that the contractor submitted

defective cost or pricing data,

ensure that information relating to

the determination is reported in the

Federal Awardee Performance and

Integrity Information System

(FAPIIS) module of CPARS.

FAR 15.407-1(d) Defective certified

cost or pricing data.

FAR 42.1503(h) Other contractor

performance information [procedures].

Agencies must ensure information is accurately reported in

FAPIIS module of CPARS within three calendar days after the

contracting officer issues a final determination that a contractor

has submitted defective cost or pricing data.