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Subcontractor Defective Pricing - Audit Scope

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If a prime contractor suspects subcontractor has defective pricing after award of the subcontract, is the prime responsible for performing a post-award (or defective price) audit of the subcontractor?  If the prime is responsible for performing the audit, can they limit the scope of the audit to the allegedly defective piece?  Relevant facts: subcontractor submitted Certified Cost or Pricing.

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Let's ask the question this way: If the government believes that the subcontractor defectively priced its proposal, who will the government go after with respect to the required price reduction and any repayments?

Does that help answer your question?

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Guest Vern Edwards
2 hours ago, Zag2009 said:

If a prime contractor suspects subcontractor has defective pricing after award of the subcontract, is the prime responsible for performing a post-award (or defective price) audit of the subcontractor? 

The standard FAR clauses place no such express responsibility upon the prime.

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While there is no specific clause requiring a prime contractor to conduct such an audit (even assuming there is a clause in the subcontract giving the prime the right to do so), if FAR 52.203-13 is in your contract, I suggest that you read it and determine if the sub's conduct would warrant a report under that clause.  Also, if you believe the sub submitted defective cost or pricing data, but you continue to bill the government at the prices set forth in the subcontract, you need to consider your own potential False Claims Act liability and whether your conduct exhibits current responsibility.

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Guest Vern Edwards

While Retread's caution is sound, it is important to keep in mind that defective pricing, in and of itself, is not a crime, nor does it necessarily involve a civil false claim.

If a prime "suspects" defective pricing by a sub, the first question the prime's managers should ask is on what basis the prime suspects. In my opinion, if the prime thinks that there is a good chance that the subcontract was defectively priced, the prime should first take up the matter with the sub, because defective pricing is a contractual, not criminal, matter. Consult an attorney.

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Unfortunately, I’ve witnessed a couple of situations where the Air Force OSI and or Army CID got involved in what were fairly obvious defective pricing situations and turned them into criminal actions, only to later lose them due to inability to prove intent. In the meantime we couldn’t proceed with any defective subcontract pricing actions. After the investigative agencies totally screwed up the criminal cases, our  KO’s got cold feet and wouldn’t pursue the defective pricing issues.  I’m sure that both the primes and their subcontractors incurred legal costs in defending themselves.  In addition, in both cases, Feds (?) entered their offices and seized files related to the contracts and subcontracts. Likely disrupted their contract performance.

So, even if defective pricing technically isn’t a crime, that doesn’t guarantee that overzealous Federal criminal investigators can’t make life difficult for the prime or its subs.  

Of course, when it isn’t your one million recoverable dollars, you don’t have to worry much about it.  One of the purposes of the Truth in Negotiatiins Act was to provide an administrative process  to be able recover costs without having to prove criminal intent. 

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Interesting to me how other folks focus on the word "responsible" in the OP. The question that was asked was answered, but did the answers help anybody?

To me, it's not a matter of "responsibility" or a duty imposed by a contract clause; instead, I see it as risk mitigation. The prime should mitigate the risk that the government will, eventually, find the subcontract to be defectively priced because it will be the prime that will be held responsible for the noncompliance. There is no guarantee that the subcontractor will have the financial resources available to indemnify the prime for legal fees, penalties, and interest paid to the government. Thus, the prime should take action to address the situation and, if necessary, remediate it.

Perhaps I'm in the minority here, but that's the way I see it.

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I’m with you, h2h.

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To be clear about my suggestions, I was specifically referring to potential liability under the False Claims Act, 31 U.S.C. 3729.  This is not a criminal statute, but provides for a civil penalty for submitting a false claim.  The statute imposes a penalty for knowingly submitting a false claim, i.e., a claim that is not true.  The statute says:

the terms “knowing” and “knowingly”—

(A) mean that a person, with respect to information—

(i) has actual knowledge of the information;

(ii) acts in deliberate ignorance of the truth or falsity of the information; or
(iii) acts in reckless disregard of the truth or falsity of the information; and
(B) require no proof of specific intent to defraud;
In light of the  limited facts we have, Vern's advice about consulting a lawyer is sound.

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Slippery slope here. If the prime did an analysis of the proposal, did the analysis support the proposed? Was there a negotiation plan? If so, what are the facts that were not disclosed that would reasonably expect to affect price negotiations (and the analysis and negotiation plan) significantly? Suggest you put that story together and ask the subcontractor for a response.     

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23 hours ago, here_2_help said:

Let's ask the question this way: If the government believes that the subcontractor defectively priced its proposal, who will the government go after with respect to the required price reduction and any repayments?

Does that help answer your question?

I know that the government would ultimately look to the prime contractor for any price reduction or repayments.  My question really relates to whether there are any FAR clauses that mandate the prime contractor perform a defective price audit in accordance with certain requirements (e.g. full scope vs. limited scope audit of suspected defective piece) if the prime suspects defective pricing exists after award.  I understand that doing so would mitigate risk of the government performing their own audit if we were to ensure all issues were remediated, but just wondering if there are any FAR clauses that mandate the prime (not just CO) to perform this type of audit.

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All - thank you for your input.  Yes my question has been answered, and additional insight provided by multiple responses will be taken into consideration, specifically related to False Claims.   

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Guest Vern Edwards
5 hours ago, Zag2009 said:

My question really relates to whether there are any FAR clauses that mandate the prime contractor perform a defective price audit in accordance with certain requirements (e.g. full scope vs. limited scope audit of suspected defective piece) if the prime suspects defective pricing exists after award. 

 

On 3/7/2018 at 4:15 AM, Vern Edwards said:

The standard FAR clauses place no such express responsibility upon the prime.

Asked and answered.

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On ‎3‎/‎6‎/‎2018 at 1:15 PM, Vern Edwards said:

The standard FAR clauses place no such express responsibility upon the prime.

Yes thank you.  Exactly what I was looking to confirm.  Saw your response after I responded to a previous post clarifying my question. 

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