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FAR 15 Mistake After Award

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I have a FAR part 15 contract, firm fixed price. The contractor alerted us to a mistake after award - specifically that his bonding rate was submitted as 4%, when 0.4% is what was intended.

The contractor argues that no contract price correction is warranted because this is a firm fixed price contract that was negotiated, and he already lowered his price twice during negotiations.

The Government believes it should be entitled to a correction in the contract price for the difference between 0.4% and 4%.

Anyone have any thoughts on this? Could the Government possibly use FAR part 15.508 for Discovery of Mistakes (which then references 14.407-4), to correct this mistake? I understand that those sections are used by contractors to rectify mistakes they discover (in their favor), but it seems like the Government should have some recourse in this situation. I've come up empty on my review, however, so any advice would be welcome.

Thanks.

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If you will answer these questions, the community here will be better able to help you.

(1) Why did the contractor notify you of the mistake?

(2) Was the contract awarded competitively?

(3) Are you talking about construction contract with performance and payment bonds?  Or are you talking about advance payment, infringement, or fidelity bonds?

(4) What correction is the contractor asking for?

(5) Why did the contractor notify you of the mistake?

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(6) if the answer to question number 2 is “no”,  was the negotiated price based upon certified cost or pricing?

If the negotiated price was based upon certified cost or pricing, the bond rate would likely be defective cost or pricing, thus subject to a price reduction, without any accusation of wrongdoing necessary. 

I don’t remember seeing a bond rate as high as 4 percent. That should probably have stood out as questionable, at least triggering discussion during negotiations. It is relatively easy to verify the proposed bond rate if it looks high. For that matter, a 0.4% rate for performance and payment bonds is somewhat low,  and would normally be associated with a large contract price for relatively low risk nature of the work.and excellent bondability of the contractor. 

For example: “The cost of a performance bond usually is less than 1% of the contract price; however, if the contract is under $1 million, the premium may run between 1% and 2%. Bonds may be more costly, depending upon the credit-worthiness of the contractor. Labor and material payment bonds are companions to the performance bond.”

https://www.nspe.org/sites/default/files/resources/pdfs/Licensure/FTC/FTC-Jun-02-GuideSuretyBonds.pdf

Wasn’t there a detailed government estimate for this negotiation and technical and cost analysis to prepare the prenegotiation objectives?  A difference of 3.6% on a large contract price would seems to me to be significant enough to notice. 

At any rate, the Truth in Negotiations Act was intended to provide an administrative method for price reductions due to misrepresented cost or pricing data, even when unintentional.

I am guessing that this is a construction contract and that the contractor notified the government of the discrepancy. Tthe contractor appears to be acting upfront but is posturing to try to deflect a price reduction. I probably would too, hoping to persuade the government not to reduce the price. 

See   15.407-1 Defective certified cost or pricing data.and the applicable clause for defective Cost or Pricing. 

Note too, per the clause and 15.407-1, that the contractor’s argument for not decreasing the price is not a valid defense. It’s simply posturing on their part. 

Be firm, if the assumed circumstances that I described are applicable. 

You can contact me if you want to discuss the situation in detail. 

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As an exception to the above discussion, if the government didn’t rely on the bond data during the price negotiations, depending upon the facts of the situation,  there might be a defense but we may need to know more about the context and do some more research. 

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Construction contract.

The project was sent to the MATOC but only one contractor bid (we were expecting more). Negotiations were held, final price agreed upon, and then we asked for a certificate of current cost or pricing data, which was provided. The task order was then awarded.

A couple weeks later the contractor provided its performance and payment bond, and then realized that had used an incorrect factor of $40 per $100 versus $4 per $1,000.

Here's where it gets tricky. When the Government learned of the mistake, we tried to do a unilateral mod for the difference.

 

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I read through 15.407-1, and it seems to apply except my reading of that section requires us to do an audit first. That seems like a waste of time since the contractor informed us of the mistake.

Nevertheless, is that a hoop we have to jump through anyway?

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The law, or in other words I would suggest case law, would suggest that 15.407-1 does not mean a thing unless FAR 52.215-10 and 11 give you the right in the awarded contract explained by 15.407-1.    The suggestion is then make sure the 10/11 clauses are in the contract (MATOC or task order?) before you go down the light fantastic too far!

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1 hour ago, TheLaw said:

A couple weeks later the contractor provided its performance and payment bond

To have defective cost or pricing data, the contractor must have been required to submit cost or pricing data that are current, complete and accurate as of the date of agreement on price or an earlier agreed upon date.  This means that the data must have been in existence at the time of agreement on price.  The above statement raises the question as to whether the contractor had the bond when the price was agreed to.  If it did not, proving defective pricing would be problematic.  If it did have the bond, but did not disclose it before agreement on price, defective pricing is more likely.

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5 hours ago, TheLaw said:

I read through 15.407-1, and it seems to apply except my reading of that section requires us to do an audit first. That seems like a waste of time since the contractor informed us of the mistake.

My memory is pinging me that there is either a class deviation or a proposed DFARS rule that waives the audit, or else leaves it to KO discretion based on perceived risk.

That's all I have.

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TL, are you the agency lawyer?

The only information that you should need to verify is what information the contractor had at the time of proposal preparation and at the time of negotiation to base its proposed price on. The contractor inserted a number in its proposal - what was it based upon and how did it or could it have verified that information. Even if it was a typo in the estimating software, it was defective - in my opinion.  A "desk audit" by interview over the phone could take care of that requirement, I think. If the contractor informed you it was a mistake and explained the mistake, that might be all you should need. 

I don’t know the details of course. Im making an educated guess, based upon your description of the scenario. 

Quote

15.407-1 (c) If, after award, the contracting officer learns or suspects that the data furnished were not accurate, complete, and current, or were not adequately verified by the contractor as of the time of negotiation, the contracting officer shall request an audit to evaluate the accuracy, completeness, and currency of the data. The Government may evaluate the profit-cost relationships only if the audit reveals that the data certified by the contractor were defective. The contracting officer shall not reprice the contract solely because the profit was greater than forecast or because a contingency specified in the submission failed to materialize.. 

I don't think that the contractor has a valid defense, if it SHOULD have known what the bond was going to cost.  The contractor should have sent a copy of the bonding agent's invoice with the payment request and there should be enough info to determine who the agency was that provided the bond.

I'm assuming that overhead and profit were added to the bond price.  A 3.6% error in the price of the task order is significant.

Does the ID/IQ include the clause 52.215-10, Price Reduction for Defective Certified Cost or Pricing Data, and/or 52.215-11, Price Reduction for Defective Certified Cost or Pricing Data—Modifications?

There is much case law that I recommend the lawyer on your team research to fit the situation. 

An “Audit” doesn’t have to be a big deal. If this is a military contract, I would find someone in DCAA to speak with about how to verify what info is needed. Maybe someone other than an auditor can handle it. 

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20 hours ago, joel hoffman said:

The only information that you should need to verify is what information the contractor had at the time of proposal preparation and at the time of negotiation to base its proposed price on. The contractor inserted a number in its proposal - what was it based upon and how did it or could it have verified that information.

Joel, I'm not sure what this means.  Are you saying that a contractor has to base its proposal on cost or pricing data?  Also, are you saying that FAR 15.407-1(c) requires contractors to verify their proposals in addition to the cost or pricing data that are disclosed to the government?

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What it means is that rather than a detailed audit, the OP already knows that the contractor proposed a 4 percent performance and payment bond rate, the government relied on it for negotiations but the actual rate is only 0.4 percent. Thus,  the task order cost has been inflated by 3.6% due to defective cost data.

To prove that it is defective cost or pricing data and to be able to obtain a corresponding price reduction, the government needs to know that the contractor knew or should have been able to know what the actual bond rate was going to be at the time of the negotiation. 

22 hours ago, joel hoffman said:

15.407-1 (c) If, after award, the contracting officer learns or suspects that the data furnished were not accurate, complete, and current, or were not adequately verified by the contractor as of the time of negotiation, the contracting officer shall request an audit to evaluate the accuracy, completeness, and currency of the data. 

Retreadfed, the Contractor doesn't have to have the bond in hand to know what the rate will be.  The bonding agency will be able to tell the contractor what the rate will be and the contractor knows what it has paid in the past. The rate didnt' just suddenly shrink to 1/10 of what was proposed. I am not going to debate the OP about the wisdom of the negotiator accepting the proposed 4% rate, without further investigating. A competent government estimator will also have a good idea what bonds are going for.  We learned methods for estimating bond rates in my first government class and I often called local bond agencies for information.  That's a topic for another day.

There is a whole lot of caselaw on the subject of defective cost or pricing data and price reductions that the OP’s lawyer or the OP can review if he/she is the lawyer.  

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On 4/11/2019 at 10:48 AM, TheLaw said:

I have a FAR part 15 contract, firm fixed price. The contractor alerted us to a mistake after award - specifically that his bonding rate was submitted as 4%, when 0.4% is what was intended.

The contractor argues that no contract price correction is warranted because this is a firm fixed price contract that was negotiated, and he already lowered his price twice during negotiations.

The Government believes it should be entitled to a correction in the contract price for the difference between 0.4% and 4%.

Anyone have any thoughts on this? Could the Government possibly use FAR part 15.508 for Discovery of Mistakes (which then references 14.407-4), to correct this mistake? I understand that those sections are used by contractors to rectify mistakes they discover (in their favor), but it seems like the Government should have some recourse in this situation. I've come up empty on my review, however, so any advice would be welcome.

Thanks.

Seems like you may have a case for defective pricing. The contractor relied upon a set of facts/data to generate a proposal, which you then relied upon, in order to negotiate an award. You both agreed on a price. That company then duly certified that the data utilized was current/accurate/complete. But after award, it was discovered that this was not retroactively true.

When notified, you were almost distracted by the fact that the negotiation was complete/over.

Who cares. Uncle Sam may have paid more due to defective data.

As mentioned, definitely see that clauses 52.215-10/-11 are in the contract and/or task order and get clarity on the matter.

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Joel, and Sunstrider, it seems to me that both of you are saying that a proposal is cost or pricing data.  Also, there is a hint that a contractor has to use cost or pricing data in preparing its proposal.  If this is what you are saying, I have to disagree.  Proposals are not cost or pricing data and contractors do not have to use cost or pricing data to prepare their proposals.  See, United Technologies Corp., 04-1 BCA 32556.

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Ok, so you disagree. Fine. I’ve gotten three price reductions for defective cost or pricing data. It can work.

There is a whole lot of caselaw on the subject of defective cost or pricing data and price reductions that the OP’s lawyer or the OP can review if he/she is the lawyer

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12 minutes ago, joel hoffman said:

Ok, so you disagree.

If you are saying that a proposal is cost or pricing data and that a contractor has to base its proposal on the cost or pricing data it submits to the government, please provide some authority to support this statement.  I have given you a case citation that specifically addresses these issues and that demonstrates these positions are wrong.  If this is not what you are saying, clarify what your position is.   I don't care if you have gotten price reductions before.  This forum is to impart knowledge of what is proper contracting.  What you seem to be saying above is just plain wrong. 

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I don’t intend to debate you . The OP and his/her lawyer can read up and see if the specific circumstances will support a price reduction for defective pricing. 

I don’t know the specifics - the OP didn’t elaborate when I wondered how they wouldn’t  have questioned a whopping 4% proposed bond rate. Don’t know if they relied on the rate or not. Bond rate is a direct multiplier in a proposal . It ought to have been visible to to a proposal reviewer during a cost analysis for developing pre-negotiation objectives. If the government only performed price analysis, they they don’t know how to negotiate a sole source construction contract.

Back in the 1980’s, the Engineer IG investigates and found that the USACE often weren’t properly performing technical and cost analysis; they were often simply relying upon price comparisons between proposals and government estimates during proposal reviews and negotiations. We instituted major changes in policy and training on technical, cost and price analysis and and  how to develop pre-negotiation objectives. 

I am certain that contractors generally know what rates they pay for bonds before submitting a bid or proposal and that this one allegedly admitted that there was a math error.  

Construction contractors have to consult with their surety agents during the bidding or proposal stage. If a bid bond was involved (this started out as a task order competition), the bonding company would have investigated bonding capacity and pre-approved bonding the task order. A surety won’t issue a bid bond unless the contractor is bondable and has adequate bonding capacity for the job. 

Open proposals tie up that amount of a construction company”s bonding capacity for bidding other work. 

Contractors are well aware of what bonds cost before award of a task order or contract. I

Headed to Atlanta to visit daughter this week. 

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While like most of us I'm a bit in the dark about what really happened, I can easily envision a spreadsheet mistake where the decimal was in the wrong place. If the parties contracted on that basis, I would have a hard time thinking it was defective pricing.

Also, to Retread's points, I agree with him. A contractor's obligation is to disclose cost or pricing data, then certify that what was disclosed is accurate, complete, and current. Period. What used to be called TINA is a disclosure requirement, not a use requirement.

The contractor should want to move on from this situation quickly, as it calls into question the adequacy of its Estimating System. A bilateral mod based on mutual mistake would seem to be the fix. Of course, if there is some rule preventing a bilateral mod to correct a mutual mistake, I'm sure somebody will let me know.

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PepeTheFrog agrees with a bilateral modification based on mutual mistake.

This does not seem like a classic or provable case of defective pricing (in the term of art for federal contracting, not in the general sense of the two words "defective pricing"). Nobody will disagree that the contractor priced their proposal wrong (and that the pricing was "defective" in some way), but that is different from satisfying the elements of a defective pricing case.

Here is the DCAA audit guidance, according to Briefing Papers article, on defective pricing:

"(1) The information in question fits the definition of certified 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 that 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."

https://www.crowell.com/files/Litigation-and-Proof-in-Defective-Pricing-Cases.pdf

Numbers (1) and (2) seem questionable.

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Thank you, Pepe for listing the conditions for defective pricing which appear to perfectly fit the instant scenario. 

The contractor has admitted a mistake. This indicates that it knew the bond rate** at the time that the proposal was being prepared and a mistake was made in the proposal. I am fairly certain that the contractor knew or should have known the applicable bond rate when it prepared the proposal. As I said before, the contractor would have worked with the bonding company’s agent before submitting a price proposal.

An audit or desk audit could confirm whether or not the contractor specifically knew the rate or what it was paying for other bonds. 

[**The stated bond rate in the proposal is cost or pricing data that supports the cost of the bond. The contractor should identify the source and basis for the proposed bond rate, consistent with the instructions for submission of proposal information including cost or pricing data to support the proposed bond cost. 15.408]

The contractor could have inadvertently overlooked the error - an accidental misrepresentation of what the bonding rate would be, when  the proposal was being printed and delivered to the government. OK- Possible that it was a simple mistake. But it is defective data. 

However, the contractor had at least three  more opportunities to notice and correct the error/misrepresentation /mistake: 

1) during preparation for negotiations. 

2) during negotiations -especially when the negotiators for both parties   typically recalculate bottom lines as negotiations proceed to a settlement. 

3) during a sweep or even a cursory review of the supporting data after negotiations before certifying that the data were current, complete and accurate as of the date of agreement. 

H2H is right in suggesting that the contractor ought to quickly move on and agree to a bi-lateral mod for “a mutual mistake”, rather than using arguments that are specifically impermissible by the (TINA) Statute and that could possibly raise other ramifications.

And yes - the contractor must truthfully identify a bond rate (cost) used to support its price if it is known - that’s not a judgmental cost - it’s factual.  Misrepresentation by accident or intentionally still produces defective cost or pricing data...

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1 hour ago, joel hoffman said:

Misrepresentation by accident or intentionally still produces defective cost or pricing data

Misrepresentation of cost or pricing data produces defective pricing.  A proposal is not cost or pricing data.  Defective pricing does not result from misrepresentation in a proposal.  That may be fraud, but it is not defective pricing.

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3 hours ago, Retreadfed said:

Misrepresentation of cost or pricing data produces defective pricing.  A proposal is not cost or pricing data.  Defective pricing does not result from misrepresentation in a proposal.  That may be fraud, but it is not defective pricing.

A cost proposal includes a breakdown of cost elements with supporting data either included or referenced. Here, the bond rate would be supporting cost or pricing data for the  breakdown of the bond cost. Thus cost or pricing data are part of the proposal. 

See, for example:  https://www.dla.mil/Portals/104/Documents/Aviation/IndustryDays/Cost and Price.pptx?ver=2018-06-04-085632-903

See also the Instructions for Table 15-2 in 15.408. 

 

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8 hours ago, joel hoffman said:

A cost proposal includes a breakdown of cost elements with supporting data either included or referenced. Here, the bond rate would be supporting cost or pricing data for the  breakdown of the bond cost. Thus cost or pricing data are part of the proposal. 

See, for example:  https://www.dla.mil/Portals/104/Documents/Aviation/IndustryDays/Cost and Price.pptx?ver=2018-06-04-085632-903

@Retreadfed provided a citation to a Board of Contract Appeals case which is supposedly related to this issue. In response and in opposition, joel hoffman cites to a PowerPoint presentation by "Natarsha Goode" and "Dawn Hampton," two employees of Defense Logistics Agency.

Which is more persuasive as a source of reference or citation for a contracting professional? Natarsha and Dawn, or a Board of Contract Appeals case? The choice is yours!

By the way, even if Natarsha and Dawn, two employees of Defense Logistics Agency, are more persuasive than the Board of Contract Appeals, PepeTheFrog does not see where the PowerPoint slides support the assertion above. Slide 22 states "What is a Cost Proposal? A breakdown by cost element with supporting data..." Is this the magic slide? Or is it the colorful picture of a pyramid representing the "Cost Proposal Package" on slide 40?

8 hours ago, joel hoffman said:

See also the Instructions for Table 15-2 in 15.408. 

Here is the other citation: Instructions for Table 15-2 in FAR 15.408. Here is a quotation from that citation:

"C. As part of the specific information required, you must submit, with your proposal—(1) Certified cost or pricing data (as defined at FAR 2.101). You must clearly identify on your cover sheet that certified cost or pricing data are included as part of the proposal."

@joel hoffman Is this the section to support your assertion? Have you actually thought this through and considered each of Retreadfed's points?

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I’m only stating that cost and pricing are part of the proposal. I gave two references. 

Retreadfed said a “proposal is not cost or pricing data. “ Not sure what he was trying to say. The FAR and the Statute both require the contractor to submit cost or pricing data with the proposal to support the proposed price. . 

Pepe, do you think that cost or pricing data aren’t part of the proposal? 

And do you think that the government must prove intent and fraud rather than administratively seek and obtain a price reduction due to defective cost or pricing data that increased the price?

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