- Truth in Negotiations Act Overview and Update
NCMA Pikes Peak Chapter
October 18, 2012
Phillip R. Seckman
mckennalong.com
Today’s Agenda
• TINA overview and purpose
• Recent developments relating to commercial items and case
law
• The common compliance/subcontracting issues
• Best practices
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TINA: Overview and Purpose
• During contract negotiation, contractors are required to disclose
cost or pricing data regarding their costs and pricing
• Government is placed on equal information footing with the
contractor
• Improves government’s bargaining position and ability to
negotiate contracts and modifications
• Contractors must:
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Submit accurate, complete, and current cost or pricing data . . .
Existing on date of agreement on price . . .
For covered contract actions . . .
Not subject to an exception
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TINA Overview - When Does TINA
Apply?
• Negotiated contracts expected to exceed $700,000 (indexed)
– Government can ask for other than cost or pricing data for contracts
below threshold, but above simplified acquisition threshold if
necessary to determine price is fair and reasonablen
• Four exceptions (aka “prohibitions”):
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Contract awarded after adequate price competition
Price set by law or regulation
Commercial item contract (or modification)
TINA waiver (rare cases)
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When Does TINA Apply (continued)?
• Exception 1: contract prices based on adequate price
competition
– Two or more responsible bidders, competing independently, submit
offers and price is substantial factor; or
– There was a reasonable expectation that there would be two or more
offerors and CO can conclude offer was submitted with expectation of
competition; or
– Price is reasonable in comparison with recent prices for same or
similar items purchased in comparable quantities, under contracts
resulting from adequate price competition
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When Does TINA Apply (continued)?
• Exception 2: commercial items
– Commercial items defined at FAR § 2.101
– No cost or pricing data, but may rely on “other than cost or pricing
data”
– Recent changes relating to the commercial item definition - change is
in the air!
• September 2011 DCAA Guidance regarding commercial items
• September 2011 Update to DoD Commercial Item Handbook
• DoD’s proposed change to the commercial item definition in the FY 2013
NDAA
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Requirements for Submitting Cost
or Pricing Data
• Absent an exception or waiver, cost or pricing data are required
before:
– Contract awards of:
• Negotiated contracts expected to exceed $700,000 (indexed);
• Subcontracts at any tier expected to exceed $700,000 (indexed), if
contractor and each higher tier subcontractor required to furnish cost or
pricing data;
– Modifications:
• Of sealed bid or negotiated contracts expected to exceed $700,000 (even
if cost or pricing data initially not required)
• Of a subcontract expected to exceed $700,000 (if contractor and each
higher tier subcontractor required to furnish cost or pricing data)
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Requirements (cont.)
– Modifications/price adjustments include both increases and
decreases:
• Example: A $350,000 upward price modification may still be subject to
TINA when modification results from:
– Reduction of $550,000
and
– Increase of $200,000
(Δ of $550K)
+
(Δ of $200K)
Total Δ = $750K
• Agency head may still require submission of cost or pricing data
where the award or modification is below $700K, as long as:
– Contract is above simplified acquisition threshold; and
– Cost or pricing data is necessary to determine that the price is “fair
and reasonable”
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What is “Cost or Pricing Data?”
• Defined:
– All facts that “prudent buyers and sellers would reasonably expect to
affect price negotiations significantly”
• Factual, not judgmental; and therefore verifiable
• Includes factual data forming basis for contractor’s judgment of
estimated future costs
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Examples of Cost or Pricing Data
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Actual labor rates and hours
Indirect costs
Vendor/subcontractor quotations and analyses
Nonrecurring costs
Information regarding changes in production methods or volume
Unit cost trends (like those associated with labor efficiency)
Data supporting projections of business prospects and related
operations costs
• Data on management decisions that could have a significant
bearing on the costs
• Schedule or workload changes that affect costs
• Make-or-buy decisions
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TINA Issues: “Fact vs. Judgment”
• Pure judgments are not subject to disclosure
• Facts supporting a judgment should be disclosed, however
• Problem areas are data that are a mix between fact and judgment
– Examples: business strategies and estimates
• United States v. Lockheed Martin Corp., 282 F. Supp. 2d 1324 (M.D.
Fla. 2003)
– Disclosure of preliminary findings on work performance was required;
data was relevant to price negotiations
• “The [contractor]'s duty is to disclose all data which might affect the contract
price . . . . It cannot unilaterally decide what can be disclosed and what
cannot”
– Rejected Lockheed Martin’s arguments that:
• Data constituted judgment/estimate because it analyzed work performed to
predict future costs
• Data was not relevant because it was for a different type of labor being
performed
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Example: Subcontractor Bids
• Aerojet Solid Propulsion Co. v. White, 291 F.3d 1328 (Fed. Cir.
2002)
– Aerojet contracted to provide chemical compound for use in plastics
to the government
• Received multiple bids from two subcontractors to provide particular
chemical ingredient
• Aerojet used bids to price chemical at $1.98/lb and present as cost or
pricing data to government
– Aerojet solicited and received additional bids from subs that would
remain unopened until after negotiations
– Government and Aerojet agreed on final price on June 20, 1990
– Aerojet opened bids the next day; subcontractors priced chemical
ingredient at $1.47 or lower
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Aerojet Solid Propulsion
– Arguments:
• Government: the fact that Aerojet had received additional bids needed to
be disclosed
• Aerojet: contractor had no knowledge of prices in sealed bids until after
negotiations were over – could not affect price negotiations significantly
– Result?
– Held: TINA required disclosure of the additional unopened
subcontractor bids; mere knowledge of the existence of the
undisclosed bids could reasonably and significantly affect price
negotiations
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Disclosure by Date of Agreement Controls
• TINA requires full disclosure of data existing as of the date of
agreement on price
• Date of agreement on price means the date the parties agree
that the price has been negotiated
• Existing means actually existed
– “Should have” existed is irrelevant
– Data created after agreement does not need to be disclosed
– Data discovered after agreement but created prior to cutoff date
should be disclosed
• Perform “sweeps” after initial agreement and prior to the
mutually agreed to date of price
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Subcontract Requirements
• TINA applies to subcontracts
• “Subcontract” means a contract to furnish supplies/services for
performance of the SOW of prime government contracts,
including:
– First and lower tier subcontracts
– Purchase orders (and changes/modifications thereto)
– Transfer of commercial items between divisions, subsidiaries, or
affiliates of contractor or subcontractor
• Should “subcontract” include an agreement
– To support performance of government and commercial contracts?
– Acquired for contractor inventory?
– Acquired to support indirect cost functions?
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Subcontract Requirements (continued)
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Subcontracts (cont.)
• Prime must submit (or cause submission) to CO cost or pricing
data from prospective subs for subcontracts that are lower of:
– $12.5M or more; or
– Over $700K and more than 10% of prime contractor’s proposed price;
or
– Otherwise necessary for adequately pricing prime contract
• Subcontractors only required to submit cost and pricing data if
all higher-tier subcontractors and prime contractor required to
submit data
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Subcontracts (continued)
• “Availability of data” interpreted broadly against prime
contractors to require disclosure of all subcontractor data
• McDonnell Aircraft Co., ASBCA No. 44504, 03-1 BCA
¶ 32,154
– Prime contractor held liable for not disclosing subcontractor’s cost
analysis of a second tier’s subcontractor’s proposal
• “Controlling date” for submitting data is prime contract award
date
– Primes should be careful about agreeing on price with government
prior to subcontractor price agreement unless subcontractor obligated
to disclose all cost or pricing data to the prime as of the prime’s
agreement on price with the government
– Subcontractor data coming into existence after agreement on the
prime price should not be cost or pricing data when prime contract is
FFP
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Subcontracts (continued)
• Prime contractors liable to government for defective data of
prospective or actual subcontractors
– Cost or pricing data clause should be “flowed down” to subcontractor
by prime
– Prime contractors likely want indemnification provisions or other
protections in subcontracts for submission of defective data
– Lack of privity between government and subcontractor makes prime
contractor target for any subcontractor’s defective pricing
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Contractor Liability for Defective Pricing
• Government recovery under “Price Reduction” clause (FAR §§
15.408(b); 52.215-10)
• Government entitled to:
– Amount by which contract price overstated due to defective data, plus
– Interest from date of overpayment through date of repayment
• Contractors knowing submission of defective data may result in:
– Penalty equal to amount of overpayment
– Civil False Claims Act litigation
– Criminal prosecution
• Criminal false claims
• False Statements Act
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Impact of DOD’s Business Systems Rule
• New Business Systems Rule (DFARS § 252.244-7001) creates
withhold risk for a significant deficiency
• Purchasing systems must:
– Obtain subcontractor cost and pricing data in accordance with TINA
– Perform “Timely and adequate cost or price analysis and technical
evaluation for each subcontractor and supplier proposal or quote to
ensure fair and reasonable subcontract prices”
– Establish and maintain procedures to ensure performance of
adequate price or cost analysis on purchasing actions”
• CO may withhold up to 10% of amounts due from progress and
performance-based payments until significant deficiencies are
corrected
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Defenses to Existence of Defective
Pricing
• Not cost or pricing data
– Not factual
– Did not exist
– Not significant
• Government would not have relied on data (defense expressly
recognized in statute):
• Statute of limitations
– McDonnell Douglas, ASBCA No. 56568, 10-1 BCA ¶ 34,325
• Defective pricing claim dismissed under Contract Disputes Act’s statute of
limitations
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Defenses to Reduce Damages
for Defective Pricing
• Government must establish causal connection between
defective undisclosed data and contract price
• Presumed that natural consequence of nondisclosure was
dollar-for-dollar increase in price
• To rebut, provide evidence that disclosure would not have
impacted price
• Example: internal documents demonstrating that price offered to
government was absolute floor
• Example: government/upper tier contractor states lack of interest in the
data
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Weak Defenses to Defective Pricing Claims
• Agreement was on total price, not individual components
• Data was not “significant”
• No impact because contractor is sole source or in superior
bargaining position
• Inadequate proposal time (GKS, Inc., ASBCA No. 47106, 00-1
BCA ¶ 30,907)
• Government could have/should have known of relevant data
• Government aware that contractor’s price higher than
competitor
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Offsets to Liability
• Contractors may offset TINA liability for failing to disclose
required data by demonstrating that other data (not disclosed)
would have lowered the contract price
• To claim offset, contractor must:
– Certify entitlement to offset;
– Prove “offset” data was available prior to contract award and not
submitted; and
– Demonstrate that data relates to same pricing action as defective
pricing claim
• Offsets only applicable to reduce liability; cannot be used to
renegotiate contract price
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Government Audit Rights
• Government examines records to verify accuracy,
completeness, and currency of cost or pricing data
• “Audit and Records-Negotiations” clause (FAR § 52.215-2)
• Includes access to records relating to
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Proposal
Negotiation
Pricing
Performance
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Best Practices to Minimize Risk
• Seek commercial item exemption to greatest extent possible
• As prime contractor, include indemnification agreements with
subcontractors
• Pay attention to forward pricing rates and potential changes
• Agree with government on cutoff date for disclosing data
• Make final sweep at time of price agreement
• Err on side of disclosure
• Keep records of negotiations and preserve all files
• Disclose mistakes as soon as known
DOCUMENT, DOCUMENT, DOCUMENT
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Presenter
• Phillip R. Seckman
303-634-4338
pseckman@mckennalong.com
32230997
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