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Cost Type contract - Labor Rates off on invoices


FARmer

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So recently I have come across a couple instances where invoices for a CR type contract are way off of the proposed labor rates. Now I know that it is expected that there be fluctuations in labor rates by 5 - 10%, but what about 40 - 50%? Should I as the CS request further back up data to support the increase in labor rate?

The CTR is stating that the labor rate at time of proposal was an error........

Thoughts?

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To be allowable, costs have to be reasonable as described in FAR 31.201-3. Also, FAR 31.205-6 has additional criteria that are to be used in determining the reasonableness of labor costs. If you do not believe the increased labor costs are reasonable, you are well within your rights to have the contractor justify the increases. Also, you may want to consider asking the cognizant auditor to audit the increased labor rates.

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Guest Vern Edwards

Was the contractor required to submit certified cost or pricing data in support of its proposal? If so, then the "mistake" may have been defective pricing, and you could seek a reduction in fee.

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Vern,

If the contractor knowingly proposed labor rates that were lower than it expected to run, would that still be a defectively priced proposal?

H2H

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Guest Vern Edwards

help:

Defective pricing is failing to disclose a fact or saying that something is fact when it is not fact. The answer to your question depends on the information that the contractor disclosed to the CO as "fact." It does not depend on what the contractor proposed or estimated, per se.

If the contractor erroneously said that it would pay $70/hour, but disclosed that it was currently paying $100/hour, then that would not be defective pricing.

If the contractor erroneously said that it would pay $70/hour and did not disclose the fact that it was currently paying $100/hour, then that would be defective pricing.

If the contractor erroneously said that it would pay $70/hour and said that it was currently paying that much or less when, in fact, it was paying $100/hour, then that would be defective pricing.

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Vern,

I agree with the disclosure requirement. My only hesitation was that, in this particular instance, the price was (seemingly) not inflated ... so what would the remedy be? Contract reformation/price adjustment would lead to a higher price, not a lower price. That's the source of my confusion.

That being said, I also recognize the False Claims Act implications and I believe there was a case winding through the Courts on the West Coast (Lockheed Martin?) that used an inducement theory -- i.e., the contractor induced the government to award a cost-type contract by knowingly underbidding its expected costs, which allegedly resulted in a contract that was fraudulently obtained ... and thus all invoices submitted under that contract were false claims. Not sure if the relator's case survived or not.

In any case, thanks for the reminder that TINA is a disclosure requirement not a use requirement.

H2H

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Guest Vern Edwards

Vern,

I agree with the disclosure requirement. My only hesitation was that, in this particular instance, the price was (seemingly) not inflated ... so what would the remedy be? Contract reformation/price adjustment would lead to a higher price, not a lower price. That's the source of my confusion.

Defective pricing exists independent of its effect on price or cost and fee. A price reduction is based on the effect of defective pricing.

See the price reduction clause at FAR 52.215-10, paragraph (a):

(a) If any price, including profit or fee, negotiated in connection with this contract, or any cost reimbursable under this contract, was increased by any significant amount because-

(1) The Contractor or a subcontractor furnished certified cost or pricing data that were not complete, accurate, and current as certified in its Certificate of Current Cost or Pricing Data;

(2) A subcontractor or prospective subcontractor furnished the Contractor certified cost or pricing data that were not complete, accurate, and current as certified in the Contractor’s Certificate of Current Cost or Pricing Data; or

(3) Any of these parties furnished data of any description that were not accurate, the price or cost shall be reduced accordingly and the contract shall be modified to reflect the reduction.

Now, what if the contract was negotiated on a sole source basis and the contracting officer could show that she agreed to a higher fixed fee based on the belief that the estimated cost was really tight? Might the CO argue that the fee was increased due to the defective pricing? (See FAR 15.401: "Price” means cost plus any fee or profit applicable to the contract type.) Just theorizing. Don't know that it's happened or that the matter would be worth pursuing.

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Thank you everyone for the great responses.

Just to add to it. The contract has been in place for a few years. The CTR does have an approved Cost Accounting System. Certified cost or pricing data was not asked for.

Vern's statement #2 "If the contractor erroneously said that it would pay $70/hour and did not disclose the fact that it was currently paying $100/hour, then that would be defective pricing." hit the nail on the head. This is exactly what happened. 5 months of invoices have come and gone with the $70 rate, and then all the sudden we see a rate $100 + per hr. No explanation, no disclosure to the CO, nada. My thought is to reject the invoice until something is received.

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Guest Vern Edwards

I wouldn't reject the invoice out of hand. I would ask for an explanation in writing and then determine whether the cost is reasonable.

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