On May 4, 2018, the Department of Defense (“DoD”) issued a final rule amending the Defense Federal Acquisition Regulation Supplement (“DFARS”) to state that, in the interest of promoting voluntary disclosures of defective pricing identified by contractors after contract award, DoD contracting officers have more discretion to determine the scope of the involvement of the Defense Contract Audit Agency (“DCAA”) in assessing such a disclosure. 83 Fed. Reg. 19645. This is a change from DoD’s November 2015 proposed rule, which required contracting officers to request at least a limited-scope audit when a contractor voluntarily discloses defective pricing. While arguably a step in the right direction, the permissive language of the final rule continues to provide only limited information to defense contractors about what to expect following a voluntary defective pricing disclosure. Nonetheless, by listing the types of information that the contracting officer must consider when deciding whether to request an audit, the rule arms contractors with potentially impactful information.

Final Rule Lacks Proposed Rule’s Audit Requirement

Following the regulatory history that is detailed in our prior post, DoD published the proposed rule seeking to encourage voluntary disclosure of defective cost or pricing data in November 2015. Thereafter, the agency received one public comment, which argued that the proposed rule’s requirement that the contracting officer request an audit each time a contractor discloses defective pricing is (i) a strong disincentive for contractors to voluntarily disclose defective pricing and (ii) may not be in the best interests of DoD in all circumstances.

The final rule (which will be codified at DFARS 215.407-1) is distinct from the proposed rule in that it removes the mandatory requirement to conduct an audit in all cases of voluntary disclosure of defective pricing. But, as DoD explains in the notice publishing the final rule, “in order to calculate appropriate price reductions . . ., it is necessary that contracting officers, at a minimum, discuss the disclosure with the [DCAA] . . . .” The rule therefore states, when faced with a voluntary disclosure, the contracting officer “shall discuss with DCAA the following: (A) Completeness of the contractor’s voluntary disclosure on the affected contract; (B) Accuracy of the contractor’s cost impact calculation for the affected contract; (C) Potential impact on existing contracts, task or delivery orders, or other proposals the contractor has submitted to the Government.” The rule explains: “This discussion will assist in the contracting officer determining the involvement of DCAA, which could be a limited-scope audit (e.g., limited to the affected cost elements of the defective pricing disclosure), a full-scope audit, or technical assistance as appropriate for the circumstances (e.g., nature or dollar amount of the defective pricing disclosure).”

Key Takeaway: Potentially Impactful Information

While arguably a step in the right direction, the permissive language of the final rule provides no solid assurances to defense contractors about what to expect following a defective pricing disclosure. Indeed, the rule explicitly states a voluntary disclosure of defective pricing does not affect the Government’s entitlement to any remedy therefor. In addition, it remains unclear whether this will reduce the number of audits and the extent to which contractors may face negative consequences. Nonetheless, although a contracting officer is not limited to discussing with DCAA the three points regarding a defective pricing disclosure that are listed in the final rule (i.e., completeness, accuracy, and potential impact), the specified areas of discussion with DCAA are useful insight into the information DoD believes contractors should include in a voluntary defective pricing disclosure. Contractors would be well-served to include a narrative discussion in such a disclosure that addresses those three points, about which the final rule obligates the contracting officer to confer with DCAA. Such a narrative could aid the contracting officer’s discussion with DCAA and impact the decision to request an audit.

Tags: cost or pricing data, DCAA, Defective Pricing, Department of Defense, DoD
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Photo of Susan B. Cassidy Susan B. Cassidy

Susan is co-chair of the firm’s Aerospace and Defense Industry Group and is a partner in the firm’s Government Contracts and Cybersecurity Practice Groups. She previously served as in-house counsel for two major defense contractors and advises a broad range of government contractors…

Susan is co-chair of the firm’s Aerospace and Defense Industry Group and is a partner in the firm’s Government Contracts and Cybersecurity Practice Groups. She previously served as in-house counsel for two major defense contractors and advises a broad range of government contractors on compliance with FAR and DFARS requirements, with a special expertise in supply chain, cybersecurity and FedRAMP requirements. She has an active investigations practice and advises contractors when faced with cyber incidents involving government information, as well as representing contractors facing allegations of cyber fraud under the False Claims Act. Susan relies on her expertise and experience with the Defense Department and the Intelligence Community to help her clients navigate the complex regulatory intersection of cybersecurity, national security, and government contracts. She is Chambers rated in both Government Contracts and Government Contracts Cybersecurity. In 2023, Chambers USA quoted sources stating that “Susan’s in-house experience coupled with her deep understanding of the regulatory requirements is the perfect balance to navigate legal and commercial matters.”

Her clients range from new entrants into the federal procurement market to well established defense contractors and she provides compliance advices across a broad spectrum of procurement issues. Susan consistently remains at the forefront of legislative and regulatory changes in the procurement area, and in 2018, the National Law Review selected her as a “Go-to Thought Leader” on the topic of Cybersecurity for Government Contractors.

In her work with global, national, and start-up contractors, Susan advises companies on all aspects of government supply chain issues including:

  • Government cybersecurity requirements, including the Cybersecurity Maturity Model Certification (CMMC), DFARS 7012, and NIST SP 800-171 requirements,
  • Evolving sourcing issues such as Section 889, counterfeit part requirements, Section 5949 and limitations on sourcing from China
  • Federal Acquisition Security Council (FASC) regulations and product exclusions,
  • Controlled unclassified information (CUI) obligations, and
  • M&A government cybersecurity due diligence.

Susan has an active internal investigations practice that assists clients when allegations of non-compliance arise with procurement requirements, such as in the following areas:

  • Procurement fraud and FAR mandatory disclosure requirements,
  • Cyber incidents and data spills involving sensitive government information,
  • Allegations of violations of national security requirements, and
  • Compliance with MIL-SPEC requirements, the Qualified Products List, and other sourcing obligations.

In addition to her counseling and investigatory practice, Susan has considerable litigation experience and has represented clients in bid protests, prime-subcontractor disputes, Administrative Procedure Act cases, and product liability litigation before federal courts, state courts, and administrative agencies.

Susan is a former Public Contract Law Procurement Division Co-Chair, former Co-Chair and current Vice-Chair of the ABA PCL Cybersecurity, Privacy and Emerging Technology Committee.

Prior to joining Covington, Susan served as in-house senior counsel at Northrop Grumman Corporation and Motorola Incorporated.

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