Late last year, a spokesman for the Department of Defense announced without fanfare that the agency would increase audits of certified cost or pricing data under the Truth in Negotiations Act (“TINA”).  While the full effect of that enhanced focus on TINA compliance remains to be seen, a recent decision by the Armed Services Board of Contract Appeals (“ASBCA”) provides helpful guidance for navigating upcoming TINA audits and defending against defective pricing claims, particularly in situations involving an on-going program where documents contain both facts and judgmental estimates.

TINA[1] requires companies to disclose cost or pricing data to the government when negotiating contracts or contract modifications in excess of $2 million, unless an exception applies.[2]  The FAR defines “cost or pricing data” broadly to mean the “facts” that “prudent buyers and sellers would reasonably expect to affect price negotiations significantly.”[3]  The FAR goes on to state that cost or pricing data does not include “judgmental” information.  Id.  However, that leaves contractors with challenging questions about what counts as “judgmental,” and what to do with data containing both fact and judgment.

Despite the lack of a clear standard, the consequences of mistakenly failing to disclose data can be significant.  Contractors must certify that their data is accurate, complete, and current to the best of their knowledge as of the date of agreement on price.  If a contractor fails to turn over relevant information, the contract officer can adjust the contract’s price or costs for the effect of the non-disclosure[4] and assess double-damages in the event of a knowing violation,[5] and the Department of Justice may seek relief under the False Claims Act for a knowing or reckless false certification.

In Alloy Surfaces Company, ASBCA No. 59625, the ASBCA provided detailed guidance on navigating the requirement for cost or pricing data.  Its decision rejected the Army’s claim that a manufacturer should have disclosed data from an in-progress delivery order during price negotiations for the follow-on order.  The decision makes three key points:

  1. A contractor’s estimates and managerial judgments about performance — including work-in-progress — do not qualify as cost or pricing data.  That remains true even if the contractor’s estimates or judgments about performance turn out to be accurate or are produced near the end of production.
  2. There must be a causal nexus between a contractor’s supposedly defective data and the agency’s pricing decisions.  The government receives a legal presumption that it relied on the contractor’s data.  However, that presumption can be overcome, and if the agency chooses a pricing approach that does not depend on the missing or inaccurate data, it cannot prevail.
  3. The government may not rely on the defective pricing clause as a substitute for diligent negotiation.  If the agency knows of a shortcoming in its information during negotiation, it cannot ignore that fact by relying on its ability later to assert defective pricing.

Background

Alloy Surfaces Company involved a fixed-price IDIQ contract for the manufacture of helicopter decoy flares.  Slip Op. at 1.  The contractor had performed a dozen delivery orders (“DOs”) under that contract, but the parties expected production to triple for future orders.  To account for that significant increase in demand, the contractor introduced a new automated process for the thirteenth delivery order (“DO 13”), while also rolling out new production facilities for future DOs.  Id. at 4-6.  During a prove-out of the automated system, the Army learned that it would likely increase efficiency.  Id. at 28.

While performing DO 13, the Army requested a proposal for DO 14, which would use the new automated processes and facilities and increase the production rate.  Id. at 5-6.  The contractor planned to hire new personnel and incrementally introduce the new production processes to perform DO 14, resulting in inefficiencies (at least initially) and a negative learning curve.  Id. at 6-8.  The Contracting Officer was aware of these plans.  Thus, the contractor proposed a price based on two earlier DOs that did not reflect the recent automation, but that it contended would most closely reflect performance on the new DO and also included a 10% risk factor for lost efficiency.  Id. at 11.  It disclosed to the government its performance data for those two delivery orders, rather than the DO 13 data.

The Army did not agree with the contractor’s assessment and instead developed an independent cost estimate that was based in part on its observations of the contractor’s procedures, including the new automated procedures.  Id.  Ultimately, the Contracting Officer elected to negotiated a price based a weighted average of the DO data produced by the contractor but without the lost efficiency factor, and that was significantly higher than its own independent cost estimate.  Id. at 13.  The Contracting Officer testified that she agreed to the pricing “on the assumption” that the agency “would be able to recover any defective pricing cost later[.]”  Id. at 17.

The Contracting Officer was aware that she had not received data for the ongoing production under DO 13.  That data included work-in-process job cost sheets the contractor prepared monthly that included unit material and labor costs based on estimated equivalent units, which were used to develop forecasts and estimates to complete.  The contractor’s practice was to conduct a reconciliation of these job cost sheets once a job was complete and it no longer had to rely on job standards and estimated equivalent units.  Therefore, it did not disclose this data, which it did not consider cost or pricing data.

The ASBCA Rejects the Army’s Defective Pricing Claims

Years after concluding negotiations, the Army asserted that the contractor’s data was defective under 10 U.S.C. § 2306a(a) and FAR 52.215-10.  To prevail on its claim, the Army needed to prove:  (1) the contractor had “cost or pricing data” within the meaning of TINA; (2) the contractor did not meaningfully disclose that data; and (3) the government detrimentally relied on the defective data.  Slip Op. at 21-22.  For that third element, the government was entitled to a rebuttable presumption that it relied on the contractor’s data.  Id. at 22 (citing Wynne v. United Technologies Corp., 463 F.3d 1261, 1264 (Fed. Cir. 2006)).

  1. Estimates Are Not Factual Information, and They Do Not Become Factual Just Because They Turn Out to Be Right

The Army argued that the contractor’s work-in-process reports — which contained labor and material usage estimates — were factual data that should have been disclosed.  Slip Op. at 22.  The Army focused its claim on the fact that the last such reports (prepared shortly before the close of negotiations) turned out to be accurate — differing by just .0001 hours from what was later confirmed to be the actual production rates.  Id.

The ASBCA rejected that argument, explaining that even though the estimate proved to be accurate, that did not retroactively convert the estimate into “factual” information.  At the time of the parties’ price negotiations, the estimate was still just an estimate, which inherently contained the contractor’s judgments.  Id. at 24.  The ASBCA was also unpersuaded by the Army’s argument that the estimates should have been considered accurate (and thus factual) because they were made at the end of the contractor’s production cycle; the ASBCA held that “it is impossible to point to a time along the continuum where the estimates become accurate enough to possess the requisite degree of certainty” to qualify as cost or pricing data.  Id.

The ASBCA’s discussion is a helpful application of the rule that “[f]actual [i]nformation is discrete and quantifiable; it can be verified and audited.  Estimates and judgments, by their very nature, cannot be.”[6]  In the end, the in-process reports were estimates when they were generated, regardless of how accurate they later turned out to be, meaning they were not cost or pricing data.

The Army also took issue with the timing of the contractor’s reports, observing that the contractor’s management knew that DO 13 work-in-process reports were due to be issued a few days after the DO 14 negotiations.  On this point, some cases have held that data is reasonably available, and thus subject to disclosure, if management is aware of the information.[7]  But the Army’s argument was unavailing, because even assuming that the data was known to management, the data still was subjective and not verified until after negotiations concluded.  Slip Op. at 25.

The Army also suggested that the contractor’s management should have moved more quickly to finalize the estimates before negotiations ended, rather than doing so days afterward.  Id. at 26.  The ASBCA disagreed, finding that the contractor had followed its internal policy for evaluating work-in-process data, which involved taking a final inventory of units, reviewing time sheets, and reconciling work-in-process data with the number of units actually produced.  Id. at 25-26.  The contractor’s internal policy may have been critical in this result; because the contractor followed its normal practice, the ASBCA appeared unwilling to second-guess the timing of the contractor’s reports.

  1. The Government Cannot Prove Reliance on Allegedly Defective Data When It Elects a Different Basis for Negotiations

The ASBCA also found that despite a presumption that the government relies on a contractor’s defective data, here the contractor had rebutted that presumption by proving that the government had elected a different basis for negotiating price, even though it was aware that DO 13 data existed.  See Slip Op. at 26 (citing Aerojet Ordnance Tennessee, ASBCA No. 36089, 95-2 BCA ¶ 27922).

To establish reliance, the Army claimed that it would have negotiated a lower price for DO 14 if it had reviewed the work-in-process data about DO 13.  The Army’s argument seemed to be that because DO 13 used new automated processes — which would also be used for DO 14 —the DO 13 data “would have impacted” the Contracting Officer’s “willingness” to accept higher rates.  Id. at 29.

But as the ASBCA found, the facts were more nuanced than suggested by the Army, for two principal reasons.  First, the Board found that both parties knew that the automated processes adopted for DO 13 likely would increase efficiency and decrease costs.  Second, both parties knew that the contractor would perform the work in two new production facilities with newly hired personnel.  These new facilities and personnel could result in inefficiencies making production more costly (at least for some period of time).  Indeed, the contractor had failed first article testing during production prove-out of one of its new facilities.

The Contracting Officer was aware of these competing considerations and the need to balance the risks and benefits of automation, new facilities, and new personnel.  For that reason, the agency prepared its own independent cost estimate based in part on observation of the on-going production processes.  And ultimately, the Contracting Officer elected to use two DOs from different times in the life of the program to estimate the efficiencies the contractor would realize on DO 14 and to project its costs.  The Contracting Officer also elected to use the prior DO data, absent the 10 percent inefficiency factor proposed by the contractor, rather than its own independent cost estimate.  Id. at 29.

Considering these facts, the ASBCA found that the Army could not prove detrimental reliance on the lack of work-in-progress data from DO 13.  The Army already was “aware of the [positive] effect of automation,” — i.e., the lesson from DO 13 — but nonetheless concluded that the ramp-up inefficiencies would drive the contractor’s costs up.  Id. at 28.  It was thus unclear what the Army would have done if it had the work-in-process data from DO 13:  “Having the DO 13 data . . . merely would have reinforced the technical team’s conclusions about the effect of automation.”  Id.

Separately, the DO 13 data could not have helped the Army evaluate the risk of ramp-up inefficiencies at the contractor’s new facilities for DO 14.  Id. at 29.  DO 13 was performed at a previously-established facility and thus could not “shed any light” on how the new facilities might perform.  Id.

In sum, even if the data was cost or pricing data, the Army knew that such data likely existed and would have shown efficiencies, yet it elected a different approach to negotiate price.  There was no reason to think the DO 13 data would have changed the Army’s position.

  1. The Government Cannot Plan to Rely on the Defective Pricing Clause to Rectify Its Negotiation Shortcomings

During trial testimony, the Contracting Officer indicated that she went forward with the price negotiations despite the absence of DO 13 data “on the assumption that [the agency] would be able to recover any defective pricing cost later[.]”  Id. at 30.  The ASBCA warned that this calculated reliance on the defective pricing laws was inappropriate, explaining that the defective pricing clause “does not provide a procedure for re-pricing a contract after award.”  Id.  This is a helpful reminder that the defective pricing clause is not an all-purpose tool for adjusting a negotiated contract price, and that the government cannot rely on a claim of defective pricing to bail it out for failing to follow up on information of which it is aware.

Conclusion

As new TINA audits ramp up, Alloy Surfaces Company should be helpful for contractors negotiating large modifications or sole-source follow-on contracts, or navigating potential audits and claims.  The case reaffirms the distinction between factual information and judgmental information, explaining that a contractor need not provide estimates of in-progress work for a follow-on award, even if the estimates turn out to be accurate.  The decision also cautions agencies that they cannot rely on allegations of defective pricing to overcome their own negotiation failures or approaches.  Although agencies are entitled to a rebuttable presumption of reliance, that presumption can be overcome, and agencies may not substitute the defective pricing clause for hard work during price negotiations.

[1] FAR 2.101.  Although the Act was renamed as the Truthful Cost or Pricing Data Act, it is still commonly known as TINA.

[2] The two most common exceptions are (a) when there is adequate price competition and (b) when the procurement is for commercial items.  FAR 15.403-1(b).

[3] FAR 2.101.

[4] FAR 52.215-10; FAR 52.215-11; FAR 52.215-12; FAR 52.215-13.

[5] 10 U.S.C. § 2306a(f); 41 U.S.C. § 3507(a)(2).

[6] Litton Sys., Inc., ASBCA No. 36509, 92-2 BCA ¶ 24842.

[7] See Aerojet Solid Propulsion Co., ASBCA Nos. 44568, 46057, 00-1 BCA ¶ 30855.