Pursuant to the Truth in Negotiations Act (TINA), contractors are required to submit current, accurate, and complete cost or pricing data when negotiating certain contracts with the Government.  On November 20, the Department of Defense (DoD) published a proposed rule to amend the Defense Federal Acquisition Regulation Supplement (DFARS).  The change would require DoD contracting officers to request a limited-scope audit if a contractor voluntarily discloses defective pricing,^[1] unless a full-scope audit is “appropriate for the circumstances.”  In theory, if the rule is implemented, contracting officer would have the flexibility to focus an audit on the defective portions disclosed by the contractor and not reexamine all previously provided pricing data.  Though the proposed rule appears to be DoD’s attempt to provide limited relief to defense contractors facing significant regulatory burdens under TINA, it is not clear the rule as written will provide any such relief.

The Proposed Rule

The proposed rule amends DFARS Section 215.407-1 to:

• Require DoD contracting officers to request a limited scope audit unless a full-scope audit is appropriate for the circumstances, when a contractor voluntarily discloses defective pricing after contract award;

• Direct the contracting officer to consult with the Defense Contract Audit Agency (DCAA) to determine the appropriate scope of an audit following a voluntary defective pricing disclosure; and

• Clarify that voluntary disclosure of defective pricing does not waive Government entitlement to the recovery of any overpayments, or the rights to pursue defective pricing claims.

In evaluating whether a limited-scope audit or full-scope audit is appropriate, the contracting officer is directed to request that DCAA evaluate (1) the completeness of the contractor’s voluntary disclosure; (2) the accuracy of the contractor’s cost impact calculation for the affected contract; and (3) the potential impact on existing contracts, task orders, delivery orders, or other proposals submitted by the contractor.

Impact on Contractors

Because of the permissive language in the proposed rule, it is unclear whether this rule could lead to meaningful relief for contractors. Under TINA, a contracting officer may unilaterally adjust a contract price to exclude any significant amount by which the contract price was increased due to defective pricing.  DoD, like other government agencies, is authorized to examine and audit “all records” related to the proposal, pricing, and performance of a contract, subcontract, or modification to evaluate the accuracy, completeness, and currency of certified cost or pricing data required to be submitted under TINA.

When defective pricing audits occur, they are time-consuming and burdensome for a contractor, sometimes lasting years. To mitigate the risk of defective pricing claims or audits, contractors frequently resubmit certified cost or pricing data – sometimes reflecting only minor changes in pricing – because data that are frequently updated are less likely to be considered outdated or inaccurate and, by extension, defective.  These frequent submissions are burdensome not just to the contractors who must conduct repeated “sweeps” for updated data, but also for the Government, which must review the updated submissions.

Contractors recently voiced concerns about these burdens in connection with DoD’s Better Buying Power initiatives.  Commenting on regulatory requirements whose costs outweigh their benefits, contractors recommended that DoD clarify policy guidance to reduce repeated submissions of certified cost or pricing data.  In addition, contractors requested revision of regulatory guidance regarding the requirement for contracting officers to request an audit even where a contractor voluntarily discloses defective pricing after contract award.

Following the contractors’ requested policy clarifications, DoD initiated a study in September 2015 to identify “unnecessary requirements for which costs exceed benefits.” Among the recommended changes to DoD policies was a suggested a return to a 1980s practice that provided contractors the option to voluntarily disclose defective pricing data post-award and provide DoD with refunds, without risk of initiating defective pricing claims and associated audits.  As a result of this study’s recommendations, DoD directed the Defense Procurement and Acquisition Policy (DPAP) office to submit a revision to the DFARS to eliminate the requirement that a contracting officer must request an audit if a contractor voluntarily discloses defective pricing post-award.  Unfortunately, the November 20 proposed rule addresses these concerns in only a very limited way and fails to adopt contractors’ suggestion for refunds without audit risk.  Under the proposed rule, although the contracting officer has the discretion to order a limited audit, the standards for making this determination are vague and the incentive for the contracting officer to make this determination is unclear.

While arguably a step in the right direction, the permissive language of the proposed rule provides no solid assurances to defense contractors about what to expect following a defective pricing disclosure and does nothing to reduce the burden of repeated submission. The proposed rule directs a contracting officer to request a limited-scope audit, unless a full-scope audit is “appropriate for the circumstances.”  The proposed rule provides no guidance as to when a full-scope audit may be “appropriate,” however, giving significant discretion to individual contracting officers.  And the proposed rule expressly states that contractors who voluntarily disclose defective pricing may still be subject to defective pricing claims by the Government.  Given these limitations, it is unlikely that the proposed rule will meet its stated goals of promoting voluntary contractor disclosure of defective pricing or reducing the burdens on contractors related to repeated submissions of certified cost and pricing data and defective pricing audits.

Comments on the proposed rule must be submitted by January 19, 2016. Comments should reference “DFARS Case 2015-D030” and may be submitted by mail, email, or online.  Full submission instructions can be found here.

_{[1] “Defective pricing” refers to any contracting action subject to TINA where the negotiated contract price, including profit or fee, was increased by a significant amount because the contractor furnished to the Government cost or pricing data that were not complete, accurate, and current when certified.}