Tag Archives: Truth in Negotiations Act

Pentagon Plans to Triple Audits Amid Surge in Defense Spending

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Image: https://www.smalltofeds.com/2008/02/dcaa-audits-and-small-business-job-cost.html

BLOOMBERG.COM

A surge of defense spending is prompting the Pentagon’s audit agency to triple the number of evaluations it will undertake in order to uncover or prevent unjustified profits based on incomplete, flawed or inaccurate cost data.

The Defense Contract Audit Agency intends to complete as many as 60 Truth In Negotiations Act reviews in the coming fiscal year, compared to about 20 in the year ending Sept. 30.”

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“According to spokesman Christopher Sherwood. The agency completed 21 such audits in 2018 and 26 in 2017. About half the reviews focused on the top 25 defense contractors.

Efforts to bolster defense spending were aided by Congress’s decision to revise spending caps for the final two years of the 2011 Budget Control Act. That effectively added tens of billions of dollars potential defense spending to the Pentagon budget: $90.3 billion in fiscal year 2020 and $81.3 billion in the following year.

Congress has signaled its concern that the money could be misspent. The staff of Republican Senator Chuck Grassley, chairman of the Senate Finance Committee, as well as investigators for Democratic Representative Elijah Cummings, chairman of the House Oversight Committee, are already reviewing the Pentagon’s enforcement of the law intended to prevent unjustified profits based on incomplete, flawed or inaccurate cost and pricing data for military unique items.

“The committee is investigating whether defense contractors are providing complete and accurate cost data, as required by law,” Cummings said in an emailed statement.

The 1962 Truth In Negotiations Act sought to put government contracting officers on equal footing with company counterparts, requiring firms during negotiations to provide government buyers all the variables that influenced the final price of a product or service unique to the military. They must also legally certify that the information is accurate, complete and current.

The TINA audits are separate from Pentagon reviews that uncover instances of overcharging for basic spare parts such as nuts and pins. Those types of goods are considered “commercial items,” normally exempt from the law’s price data requirements since there is already publicly available data to compare them with.

Fraud Alert

Under the ramped up audit policy, the number of “work years,” or time devoted to compiling compliance audits, will increase by approximately 500%, Sherwood said.

Previous reviews show there’s reason to be concerned. As an example, Shay Assad, the Pentagon’s former director of defense pricing and contracting, said evaluations during his tenure showed that essentially 100% of the contracts examined at one top-25 defense contractor had suspect pricing.

“If one looks deep enough there is some element of fraud typically lurking,” he said.

Sherwood said the contracts most prone to significant risk of “excess profits” are large, firm-fixed price types. In 2015, the audit agency formed a specialized, 20-person unit to handle reviews of “high-risk” contracts.

Based on initial reviews commissioned before the team was formed, Assad said in a written statement that “it became obvious to us that we needed to step up defective pricing review efforts.”

80% Profits

“In a number of cases we expected profit outcomes of 12% to 15%,” Assad said, but they found levels of between 25% and 80% on some sole-source weapons contracts. “That does not happen by outstanding performance” but by faulty contractor cost estimating “or in the worst case, fraud,” he added. Assad retired this year.

Since 2015, the unit has conducted audits on 108 high-risk contracts totaling $74 billion. Of those, 79 — or nearly 75% — uncovered potential defective pricing of $589 million that could eventually translate into contractor repayments after the contested charges go through a negotiations process.

“If both parties arrive at a mutually agreeable settlement, the contractor will make a payment to the government,” Sherwood said. But if not, the government’s principal negotiator “issues a demand for payment, at which point the contractor may elect to make the payment or pursue legal action,” he added.

In that same period, the audit agency has referred 10 compliance audits with “suspected irregular conduct” to the Pentagon’s Defense Criminal Investigative Service. Eight of those 10 have resulted in active cases, Sherwood said.”

https://www.bloomberg.com/news/articles/2019-09-13/pentagon-plans-to-triple-audits-amid-surge-in-defense-spending

Managing Company Risk for Defective Pricing Under The Truth In Negotiations Act (TINA)

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Image:  Contractworks.com

“SMALLTOFEDS”  By Ken Larson

“Defective pricing actions by the government can have a severe impact on your past performance rating. 

They must be cited by you with any new business proposal in which you are asked if your company has been accused or convicted of a violation of the law or has open or pending government adjudications regarding legal violations.”


INTRODUCTION:
 
We have previously discussed at this site the development of credible cost and pricing data. That data is the product of not only estimating and pricing but also job cost accounting for managing contracts, business system design to meet Cost Accounting Standards (CAS) and the integrated aspects of the company business system demonstrating regulatory compliance:
The purpose of this article is to cite the specifics of the “Truth in Negotiations Act” and recommend  management techniques to comply  with this law and avoid defective pricing claims by the US Government.THE TRUTH IN NEGOTIATIONS ACT (TINA)

Public Law 87-653 (codified by 10 USC 2306a) was originally enacted in 1962 to place the Government on equal footing with the contractor during contract negotiations.  The following are the principal features of the law:
  • Defines requirements for obtaining cost or pricing data
  •  Requires certification that data are current, accurate, and complete
  • Delineates exceptions to the requirement
  • Addresses data submission for pricing of commercial items, below threshold contracts, and “other information”
  •  Provides right of Government to examine contractor records
  • Defines cost or pricing data
  • Provides rules governing defective pricing
  • Downward Contract price adjustment
  • ·Recovery of overpayment (cost & profit) & interest (as of 1985)
  • Contract actions include contracts, subcontracts, and modifications
  •  TINA applicability is not affected by contract type
  •   For subcontracts, the $2M threshold applies to the submission of data from the subcontractor to the prime contractor.
Below is an excellent presentation on further details of TINA by the National Contracts Management Association.  (Note: the version included here has not been updated for the recent TINA threshold change discussed above).
 
FIVE POINTS THE GOVERNMENT UTILIZES FOR ESTABLISHING DEFECTIVE PRICING
 
1)    The information in question fits the definition of cost or pricing data.
(2)    Accurate, complete, and current data existed and were reasonably available to the contractor before the agreement on price.
(3)    Accurate, complete, and current data were not submitted or disclosed to the contracting officer or one of the authorized representatives of the contracting officer and these individuals did not have actual knowledge of such data or its significance to the proposal.
(4)    The Government relied on the defective data in negotiating with the contractor.
(5)    The Government’s reliance on the defective data caused an increase in the contract price.MANAGING THE RISK OF A DEFECTIVE PRICING CLAIM

 
A government auditor relates to TINA and defective pricing whether or not it is required contractually and uses the TINA provisions as a frame of reference in how he or she views trend analysis of your company. Even if you do not have the TINA requirement in your bid or your contract, be aware the auditor is forming his or her opinion of your compliance with the law against the TINA framework.
Post award audits can be ordered at any time by a PCO. During such audits your proposal is juxtaposed to your incurred cost and historical data on a given contract. During such juxtapositions, defective pricing stands out glaringly.  If you become aware of an anomaly, cover your tracks by immediately assessing the impact and deciding whether or not a disclosure should be made.
Integrate your system from pricing to billing to close out utilizing a consistent cost structure template and be aware you are putting audit history in place and that historical trends are what auditors follow.
Keep all subsequent disclosures under proposals to the government well documented, serialized and current at the prime and subcontract level, reflecting them in a detail record of negotiation.
If you have commenced work prior to final negotiations under a letter contract or similar interim arrangement, conduct a sweep of actual costs and commitments and reflect them in an updated proposal to the government prior to negotiation of a final price.  Reassess quotes, escalation factors, indirect costs and related factors in the same manner if a proposal expires and you are asked to extend your pricing.
If substantive conditions in an open proposal estimate change, document them thoroughly and disclosethem to the government based on an astute analysis of your risk if they can be misconstrued as defective pricing by an auditor.  Carefully convey the impact on the prospective contract and its pricing to the contracting officer if you decide to disclose.
Consistency with CAS and your CAS disclosure statement as well as your latest negotiated forward pricing rates is mandatory. Any departure from these baselines will attract audit attention.
In many defective pricing instances what you knew and when you knew it becomes a factor.  Continually assess changing conditions that may dramatically impact your cost performance and manage them by taking corrective actions, developing workarounds and carefully communicating requirements to your subcontractors and suppliers.
Remember under TINA you are required to perform cost/price analysis of your subcontractors if their work scope exceeds the $700k threshold. You must submit the results with your proposal to the government.  If a disclosure becomes necessary, make it sooner rather than later when the data may be under the cloud of a negative audit finding.SUMMARY

 Defective pricing actions by the government can have a severe impact on your past performance rating.  They must be cited by you with any new business proposal in which you are asked if your company has been accused or convicted of a violation of the law or has open or pending government adjudications regarding legal violations.
For examples of TINA violations please see the “Federal Contractor Misconduct Data Base”, maintained by the Project on Government Oversight:
Sculpt and educate your auditor, contracting officers and government analysts on the specifics of your company business system and preserve its integrity over the long run to maximize your win potential and lower the risk of defective pricing claims by the government.
A good rule of thumb is to consider every proposal as if it were under TINA compliance whether or not you must submit a “Certificate of Current Cost and Pricing” under TINA.  This will keep your business system sharp, your ethics and standards high and your past performance record clean.”
ABOUT THE AUTHOR:
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Ken Larson is a 2 Tour US Army Vietnam Veteran, retired from 36 Years in the Defense Industrial Complex after working on 25 major weapons systems, many of which are in use today in the Middle East. 
As a Volunteer MicroMento Counselor  he specializes  in Small, Veteran-owned, Minority-Owned and Woman-Owned Businesses beginning work for the Federal Government. Micro Mentor is a non-profit organization offering free assistance to small business in business planning, operations, marketing and other aspects of starting and successfully operating a small enterprise.