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The Complications of Cost and Pricing

NCMAExecutiveDirector

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The most challenging task in Government contracting is contract pricing, which requires contracting officers to award contracts at “fair and reasonable” prices. Pricing is challenging, because it is the most regulated of all Government contracting processes. Firms that want to sell their products and services to the Government often must prepare and submit thick packages of proprietary pricing information, and face potentially serious civil and even criminal sanctions if any of the information is inaccurate, incomplete, or outdated. Government personnel must deconstruct those packages and negotiate prices subject to review and criticism by various public and private watchdog organizations. Thus, the pricing process is labor intensive and very costly, both to would-be contractors and Government agencies.

The commercial sector is not encumbered by the same rules and risks. Strictly commercial firms need not submit to the heavy administrative demands imposed on Government contractors. Many firms that might sell to the Government are deterred by its onerous rules and procedures and by the threat of civil action and prosecution in reaction to even innocent mistakes. They fear that compliance with the Government’s rules would increase their overhead costs, reduce their profits, and make them less price competitive in the long run. Firms dedicated to the Government market must incur high, but unproductive, administrative costs, which they pass on to the taxpayer whenever possible.

To illustrate the difference between Government and commercial pricing practices, consider rules such as the Truth in Negotiations Act (TINA). TINA’s purpose is to require full disclosure of confidential business information to the Government, the kind of information that a company would not disclose to a commercial customer. There are potentially significant contractual consequences and the potential for costly litigation even for unintentional noncompliance. In some cases, litigation can take many years and have unpredictable consequences.

(For the history of an epic litigation spanning more than a decade in which a contractor spent millions in attorney’s fees to defend itself from charges of violating TINA, see United Technologies Corp., ASBCA No. 51410, 04-1 BCA ¶ 32,556 (2004); United Technologies Corp., ASBCA No. 51410, 05-1 BCA ¶ 32,860 (2005); Wynne v. United Technologies Corp., 463 F.3d 1261 (Fed. Cir. 2006); United States v. United Technologies Corp., 626 F.3d 313 (6th Cir. 2010); and United States v. United Technologies Corp., 950 F.Supp.2d 949 (2013). The litigation concerned the pricing of a production contract for aircraft engines, something that commercial aircraft manufacturers manage to obtain without similar litigation.)

TINA is not the only such rule. There are also cost “principles”, cost accounting standards and disclosure statements, and requirements to submit to intrusive proposal and contract audits. And contractors often must “flow down” some of the burdens imposed by pricing laws and regulations to their subcontractors.

Taxpayers want the Government to pay only “fair and reasonable” prices. Congress enacted the pricing laws and required publication of the regulations in pursuit of that objective and in reaction to cases in which some bad deals. While some of the bad deals were due to inappropriate and even unlawful contractor behavior, others were due to a lack of pricing knowledge and negotiating skill among the Government’s contracting workforce, prompting Congress to use laws and regulations as proxies for competence.

Effective contract pricing requires knowledge of a convoluted system of Government rules and of business accounting and marketing practices, and the ability to use a variety of analytical pricing methods. Thus, Government and the firms that do business with it must have a well-educated, properly trained, and truly professional workforce, one with the analytical, technical, business, and managerial skills needed to navigate the sea of pricing rules, cope with budget and revenue pressures, and make sound contracting decisions. But there is widespread agreement that we do not now have that workforce.

The development and maintenance of a professional acquisition workforce might convince Congress that it does not need so many legislative proxies for competence. That, in turn, might ultimately reduce the cost of doing business with the Government, attract new companies to Government work, make more innovative products and services available to Government agencies, and reduce the prices that the public must pay. We have long talked of workforce improvement, but accomplishment must matchthe rhetoric. It is now long past the time to stop talking. Several ideas and initiatives are in various stages of development. They should be given proper consideration.




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The "development and maintenance of a competent acquisition workforce" might actually be made easier if we could somehow reduce the ridiculous number of moving parts in the acquisition system. You reference ideas and initiatives "in various stages of development" that could improve the bloatus horrendous of TINA, FAR, and the government's pricing and compliance infrastructure. I am not familiar with these initiatives, Mike. Can you provide more information?

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Odessa,

The initiatives "in various stages of development" refer to the trade associations PSC, AIA, NDIA), OMB, the Congress and government agencies again looking at the current acquisition system; policies, regulations, statutes and processes to review how they might improve outcomes. For example, within DoD this takes the form of Better Buying Power 3.0. The Professional Services Council recently issued a report from their Leadership Commission (From Crisis to Opportunity). Other associations have also developed written recommendations and Congress is talking to most significant stakeholders. There isn't yet consensus on whether today's system is "bloated" or "horrendous," what areas (TINA, FAR, and the government's pricing and compliance infrastructure) require change, and if so, what. We will have to see what happens in coming weeks.

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