Here's a little mystery (at least to me) about FAR's implementation of the Truth in Negotiations Act (TINA).
Suppose that the government negotiated a $100 million firm-fixed-price contract after obtaining the submission and certification of cost or pricing data in accordance with FAR 15.403-4.
The contractor had planned to subcontract one part of the work and obtained a firm-fixed-price proposal from a prospective subcontractor in the amount of $20 million. The prospective subcontractor furnished cost or pricing data to the contractor. The contractor did a cost analysis. Based on that analysi and its negotiating history with the prospective subcontractor, the contractor decided that it could negotiate the proposed price down to $18 million. It added 10 percent for its overhead, which yielded a total subcontract cost of $19.8 million, which is what it included in its proposal to the government. The contractor submitted the prospective subcontractor's proposal, the prospective subcontractor's cost or pricing data, and the contractor's cost analysis of the prospective subcontractor's proposal as part of the cost or pricing data that it submitted to the government with its own proposal. After agreement on price the contractor certified the cost or pricing data, including the data from the prospective subcontractor.
The contractor was unable to make a deal with the prospective subcontractor after award, so it did the work itself. The total cost of its work, direct and indirect, was $17,000,000.
After contract award, DCAA conducted a TINA compliance audit and found that the prospective subcontractor's cost or pricing data had been defective. (DCAA was able to determine this because it discovered that the prospective subcontractor had submitted defective data as a prime contractor on other contracts.) DCAA calculated that the prospective subcontractor's defective data had increased the contract price by $3 million. The contracting officer concurred and notified the contractor that it would seek a price adjustment pursuant to the defective pricing clause, FAR 52.215-10, Price Reduction for Defective Cost or Pricing Data (OCT 1997).
Paragraph (a)(2) of the Price Reduction clause says that if the contract price was increased by any significant amount because of defective data from a prospective subcontractor, the price shall be reduced "accordingly." But paragraph ( limits the reduction when the defective data came from a prospective contractor that did not receive a subcontract. Paragraph ( reads as follows:
provided, that the actual subcontract price was not itself affected by defective cost or pricing data. [Emphasis added.]
II. "The Prospective Subcontract Cost Estimate Submitted By The Contractor"
In order to calculate the amount of the paragraph ( limit we have to know what dollar amount to use as "the prospective subcontract cost estimate submitted by the Contractor." $20 million was the prospective subcontractor's proposed price, but as for the cost estimate submitted by the contractor there seem to be two possibilities: (a) $18 million, which was contractor's estimate of the direct subcontract cost, and ( $19.8 million, which was its estimate of the total subcontract cost--the $18 million plus the 10 percent for the contractor's overhead. The clause simply says "cost," not direct cost or total cost. Obviously, the larger the amount used the higher the paragraph ( limit and the greater the possible price reduction. So what is the right amount?
Before you decide, take a look at FAR 15.407-1(f)(1), which says:
III. "The Subcontract Price Used For Pricing The Prime Contract"
FAR 15.407-1(f)(1) uses the phrase "the subcontract price used for pricing the prime contract" instead of the phrase "the prospective subcontract cost estimate submitted by the Contractor." Why? Is the subcontract price "used for pricing the contract" the price proposed by the prospective subcontractor, which was $20 million, or the price that the contractor expected to pay, which was $18 million? It would not seem to be the $19.8 million, because that was not the prospective subcontract "price," but the total cost to the contractor, including its own overhead. The proposed $20 million was was the starting point for the contractor's cost analysis and the basis for the estimate of what it would pay. The government considered that proposal when it evaluated the reasonableness of the $18 million estimated by the contractor. So $20M was certainly "used" for pricing the contract. Or is it more reasonable to say that $18M was "the subcontract price used"? Which is right and why?
IV. Implications and Calculations
What are the implications?
Suppose that the contractor's overhead rate was 10 percent of direct costs and that its profit rate was 5 percent of total costs (direct + overhead). Using those rates we can try to calculate the paragraph ( limit as follows:
Let L be the amount of the paragraph ( limit, expressed in dollars. Then based on the language of the clause:
Obviously, the dollar amount of the limit will depend on the amount that we use for N. So we have to decide what dollar amount to use: $18M or $19.8M. Or is it $20M? In order to make that decision we must interpret the language of paragraph ( of the Price Reduction clause. One would think that the decision must be based on the language of the clause, not the language in FAR 15.407-1(f)(1), because the clause is the language that the parties agreed to. Right? Should the contracting officer ignore FAR 15.407-1(f)(1)? If not, how should the contracting officer reconcile the differences in language?
Assuming that we must rely on the clause, it appears that our choice for "the prospective subcontract cost estimate submitted by the Contractor" is either $18M or $19.8M. If the number is $18M, we can calculate the limit as follows:
If the number is $19.8 million, we can calculate as follows:
Note that the first outcome, a limit of $1.155M, would not permit the government to recover the entire $3M by which the contracting officer thinks that the contract price was increased due to defective data. Is that significant?
What if we use the $20 million that might be suggested by FAR 15.407-1(f)(1)?
Think about it this way: If we have properly interpreted the FAR up to this point, then under the clause the possible values of N are: (1) $18 million and (2) $19.8 million. But under FAR 15.407-1(f)(1) the possible values are (1) $18 million and (2) $20 million. Either $19.8 million or $20 million will allow the government to recover the full $3 million price increase, while $18 million will limit the contractor's liability to $1.155 million, which is less than half of the amount of the overpricing. What bearing, if any, should that have on interpretation? Is it significant that only the $18 million is possible under both sets of language, or is that merely coincidental?
The clause uses the phrase "the prospective subcontract cost estimate submitted by the Contractor," but FAR 15.407-1(f)(1) uses the phrase "the subcontract price used for pricing the prime contract." What does each phrase mean in its own terms and what, if anything, is the significance of the differences in language?
Why limit the contractor's liability for defective pricing? What is the objective? What is the rationale? Why aren't those things explained in FAR Subpart 15.407-1? Are "cost estimate submitted" and "price used" supposed to be synonymous? What does "used for pricing" mean? Did the same person/people write the clause and 15.407-1(f)(1)? If so, why write them differently? If not, did the author of the newer language review the older language? Did anyone notice the differences in the language? Is so, why wasn't the language made to be the same?
So here's our problem: What number should we use for N? Why that number? What's the right answer? I have not found a case that interprets either paragraph ( of the price reduction clause or FAR 15.407-1(f)(1), and the TINA experts that I've spoken with were unsure of the correct answer and didn't even hazard a guess. Am I being dumb? Have I read carelessly? Have I missed something obvious? Have I missed something that is not obvious? Has anyone else noticed this? Is there a case that I don't know about that clears everything up. Is my arithmetic correct?
Any ideas? I really don't have a clue.