14 minutes ago, Matthew Fleharty said:

Nevertheless, I wasn't being serious - just trying to establish the absurdity of using an arbitrary 15% markup brightline with a product that is relevant in all of our lives

Sorry, I wasn’t trying to be argumentative.  I completely agree.

On 1/22/2022 at 12:48 PM, Vern Edwards said:

Modern textbooks on product and service pricing describe three basic pricing strategies: cost-based, market-based, and value-based.

The Contract Pricing Reference Guides describe cost-based and market-based pricing in Volume 1, Price Analysis, but do not describe value-based pricing. The choice of strategy is up to the seller.

FAR Subpart 15.4 reflects a cost-based strategy, as does the DODIG attack on TransDigm. The DODIG has asserted that profit in excess of 15 percent of costs is "excessive".

1. Is there any legal requirement that companies selling to the government take a cost-based pricing approach to product pricing and price negotiation?
2. Is there any moral imperative that companies take a different approach to pricing when dealing with the government than with other customers?
3. If no to Questions 1 and 2, is the government's application of policies grounded in cost-based pricing (e.g., TINA) overly broad?
4. If so, when if ever should the government demand a cost-based approach?
5. Is it possible that the government's cost-based pricing apparatus (requiring detailed cost proposals, TINA, proposal "audits," etc.) costs more than it's worth, as perhaps demonstrated by the outcome of the 10-year United Technologies defective pricing litigation?

These questions harken back to this fascinating discussion thread from last year featuring Vern and @bob7947 @joel hoffman @here_2_help:

After reviewing the history and ideas on display in there, my answer to question #5 is "No"; instead, the Courts should be eliminated from the dispute process and a contractor should got one shot at resolving a TINA dispute via board of contract appeals.  Yes, this takes an act of Congress to change the statute that is pointed out in the thread by Bob, but it would stop the endless, costly appeals you cite as evidence for TINA costing more than it's worth.

A much simpler fix is available to eliminate the impetus for attacks on entities like TransDigm for not using a cost-based strategy.  When a seller uses market-based or value-based pricing, a TINA exception often inherently applies.  If a CO determines one of the five exceptions to certified cost or pricing data requirements applies, I think there is plenty of permissibility at FAR 15.403-3(a) already for COs to be directed by memorandum to use an expanded definition of "price analysis" that could be added to the Contract Pricing Reference Guides (CPRG).  That definition could include market-based and value-based pricing options and could direct the buyer to ask seller to categorize its pricing approach as one of the three, so buyer knows which analysis method to use.  The CPRG is the key here, to avoid any more Congressional acquisition reform delays and finger-pointing.  Whoever owns and updates the CPRG is the office of primary responsibility for this.  I wonder what wickets they must jump through to change it.

Edited January 25, 20223 yr by WifWaf
Changed, "In that case," to "If a CO determines one of the five exceptions to certified cost or pricing data requirements applies,"

@WifWafAre you saying that it's not possible that the government's cost-based pricing apparatus costs more than it's worth?

And you are proposing that Congress revise the Contract Disputes Act of 1978 to eliminate appeal of a CO's final decision to the Court of Federal Claims and then to the Court of Appeals for the Federal Circuit and on to the Supreme Court?

And you think those two courses of action would be simple?

If your answers to the above three questions are yes, then I question your notions of probability and cost-benefit analysis.

2 minutes ago, Vern Edwards said:

@WifWafAre you saying that it's not possible that the government's cost-based pricing apparatus costs more than it's worth?

No I am not - apologies for misreading the question.  I answered more of a question of "What is the solution to a cost-based pricing apparatus (requiring detailed cost proposals, TINA, proposal "audits," etc.) that costs more than it's worth?"

19 minutes ago, WifWaf said:

When a seller uses market-based or value-based pricing, a TINA exception often inherently applies. 

No TINA exception is predicated upon the seller's pricing strategy.

1 hour ago, Vern Edwards said:

And you are proposing that Congress revise the Contract Disputes Act of 1978 to eliminate appeal of a CO's final decision to the Court of Federal Claims and then to the Court of Appeals for the Federal Circuit and on to the Supreme Court?

And you think those two courses of action would be simple?

I will clarify my assumptions.  To do so I will answer Question #1.  Keep in mind I am not advocating for anything here, just stating facts.  My answer to "Is there any legal requirement that companies selling to the government take a cost-based pricing approach to product pricing and price negotiation?" is "Yes": see provision FAR 52.215-20's incorporation of FAR Table 15-2, paragraph II.A.(2) where a CO may instruct contractors, "Obtain certified cost or pricing data from prospective sources for those acquisitions (such as subcontracts, purchase orders, material order, etc.) exceeding the threshold set forth in FAR 15.403-4 and not otherwise exempt, in accordance with FAR 15.403-1(b)."  Table 15-2 was written that way because the statute at 10 U.S.C. 2306a behind FAR's subcontract pricing policy requires the CO to ensure an offeror for a subcontract is required to submit cost or pricing data before the award of the subcontract at a threshold price or higher.

Because of this, what I submitted to you assumed that the alternative to revising the Contract Disputes Act is that Congress revise the Truth in Negotiations Act.  How else could the government's application of policies grounded in cost-based pricing (e.g., TINA) be converted to market-based or value-based in circumstances where no exception to requirements for certified cost or pricing data applies?

24 minutes ago, WifWaf said:

My answer to "Is there any legal requirement that companies selling to the government take a cost-based pricing approach to product pricing and price negotiation?" is "Yes": see provision FAR 52.215-20's incorporation of FAR Table 15-2, paragraph II.A.(2) where a CO may instruct contractors, "Obtain certified cost or pricing data from prospective sources for those acquisitions (such as subcontracts, purchase orders, material order, etc.) exceeding the threshold set forth in FAR 15.403-4 and not otherwise exempt, in accordance with FAR 15.403-1(b)."

@WifWafYou are misinformed.

Nothing in FAR Table 15-2 requires a contractor or subcontractor to use a cost-based approach to product pricing. It requires only that the contractor submit certified cost or pricing data and prescribes a format for doing so.

FAR Table 15-2 does not require that the price be based on the certified cost or pricing data or set in a particular way. The certified cost or pricing data might indicate that the deliverable will cost $X to produce, but the contractor is free to set is price at $2X or $10X or $100X.

TINA is a disclosure statute, not a pricing statute.

3 hours ago, Vern Edwards said:

Nothing in FAR Table 15-2 requires a contractor or subcontractor to use a cost-based approach to product pricing. It requires only that the contractor submit certified cost or pricing data and prescribes a format for doing so.

FAR Table 15-2 does not require that the price be based on the certified cost or pricing data or set in a particular way. The certified cost or pricing data might indicate that the deliverable will cost $X to produce, but the contractor is free to set is price at $2X or $10X or $100X.

TINA is a disclosure statute, not a pricing statute.

If this is the intent of the statute and a revision to TINA is not required, then two things are needed: regulatory changes, and a culture shift.

The statute was promulgated at FAR Table 15-2 requiring prime contractors to, "Conduct cost analyses for all subcontracts when certified cost or pricing data are submitted by the subcontractor."  This does not leave room for a value-based "4,451 percent profits" (to quote the DODIG) in the same context where cost analysis as defined as, "the review and evaluation of any separate cost elements and profit or fee in an offeror's or contractor's proposal, as needed to determine a fair and reasonable price..." [FAR 15.404-1(c)(1)].  Then of course at the prime level, FAR 15.404-1(a)(3) requires, "Cost analysis shall be used to evaluate the reasonableness of individual cost elements when certified cost or pricing data are required."  Some of this appears to have played the telephone game with Congress's original intent.  Perhaps a taskforce like a miniature Section 809 Panel could be enlisted to reconcile these regulations to the statute.

Once the FAR and all its Supplements are cleaned up, as for the culture shift, I would recommend market- and value-based pricing be introduced to COs via a cadre-of-experts approach, similar to the way DCMA Commercial Item Group was established.  Unfortunately, that took an act of Congress too (-; just a few NDAAs).  The cadre would be experts on analyzing the "judgmental information" included in the FAR 2.101 definition of "Data other than certified cost or pricing data".  I assume all acquisitions where value-based pricing is used would require this uncertified data.

Therefore, to resolve the problem at hand, I submit my post from earlier today (at least revise the CPRG) for acquisitions in which certified cost or pricing data are not required, and I submit the above for acquisitions in which the data are required.

The purpose of cost or pricing data is not to force the contractor into cost-based pricing.  Rather, the purpose is to have the contractor disclose its costs so that the Government can understand and prepare for any negotiations that might be appropriate.  Thus, I agree that TINA is a disclosure statute, not a pricing statute.  

If a contracting officer saw a certified cost or pricing submission with a 4,451% mark-up for profit, one supposes that contracting officer might benefit from that information in his or her own negotiations preparations.  But even though thousands of contracting officers have attended DAU negotiations classes, how many of them actually know anything about negotiating?  Six?  Forty? A hundred?  Whatever the number is, it seems to me that it is a very small number.

@WifWafYou are making this too hard.

As ji20874 has pointed out, the purpose of TINA is to ensure the CO has the information needed to make a reasonable estimate of what it will cost the contractor to perform. The presumption is that a reasonable cost plus a reasonable profit will equal a reasonable price, no matter how the contractor has set its price. That would be the government's going-in negotiation position.

As mentioned at the beginning of this thread, there are at least three approaches to pricing, only one of which is cost-based. The other two are market-based and value-based. And some companies likely use some combination of methods.

How about we apply TINA only to major system production contract actions and allow agency heads to apply it to sole source contract actions valued at less than the major system threshold but more than $50 million on a case-by-case basis and with written risk-based justification. That would reduce the cost of its administration, but would entail some risk of price gouging. We'll reduce that risk by setting up a special pricing and negotiation training program for experienced COs who will be assigned to negotiate cost-based pricing actions.

We'll let agencies request noncertified cost or pricing data in sole source contract actions valued at between $50 million and $10 million when pricing will be cost-based, but not when it's market-based or value-based. Offerors would have to disclose their pricing method. When pricing is market-based or value-based, offerors would have to provide a description of how they arrived at the price they propose.

Would that scheme expose the government to too much risk of price gouging? Would the risk exceed the cost of wider application? We don't know, so we'd have to do some fact-based policy analysis.

I would like to clarify one aspect of cost based pricing. Modifications of existing contracts pursuant to a clause that provides for a price adjustment based upon cost impacts/increase/decrease in contractor’s cost would generally be cost based, not value or market based. Of course, equitable adjustments include consideration of profit in the cost or credit.

10 hours ago, joel hoffman said:

I would like to clarify one aspect of cost based pricing. Modifications of existing contracts pursuant to a clause that provides for a price adjustment based upon cost impacts/increase/decrease in contractor’s cost would generally be cost based, not value or market based. Of course, equitable adjustments include consideration of profit in the cost or credit.

Agreed. When a contract clause, such as a Changes clause, provides for a price adjustment based on the effect of some event on the contractor's cost of performance, or when it seeks breach damages, the amount of the adjustment must be based on incurred or estimated allowable cost plus a reasonable profit.

See Kellogg Brown & Root Services, Inc., ASBCA 57530, 19-1 BCA ¶ 37,205:

Quote

"Equitable adjustment" is a term of art. United Launch Services, LLC, ASBCA No. 56850 et al., 16-1 BCA ¶ 36,483 at 177,764; Gen. Builders Supply Co. v. United States, 409 F.2d 246,250 (Ct. Cl. 1969). "Equitable adjustments…are simply corrective measures utilized to keep a contractor whole." Bruce Constr. Corp. v. United States, 324 F.2d 516,518 (Ct. Cl. 1963). They are "closely related to and contingent upon the altered position in which the contractor finds himself." Id.; see Sauer Inc. v. Danzig, 224 F.3d 1340, 1348-49 (Fed. Cir. 2000) (observing an equitable adjustment covers increased costs resulting from a change, or changed conditions, leading to extra work); VHC Inc. v. Peters, 179 F.3d 1363, 1366–67 (Fed. Cir. 1999) (stating "[a]n equitable adjustment makes a contractor whole after the Government modifies a contract," and "depends on actual costs incurred"). An equitable adjustment reflects "‘a particular contractor's costs,’ and not the universal, objective determination of what the cost would have been to other contractors at large." Bruce Constr., 324 F.2d at 518–19. Thus, an equitable adjustment is not based upon market prices, but reasonable incurred costs. Software Design, Inc., ASBCA Nos. 23616, 24897, 82-2 BCA ¶ 16,073 at 79,740. "This consideration of the particular contractor's actual and probable costs is tied to the overall function meant to be served by equitable adjustments," which is to keep a contractor whole. Nager Electric Co. v. United States, 442 F.2d 936, 946 (Ct. Cl. 1971). An equitable adjustment's use of actual cost data ensures that it does not produce a windfall. See Propellex Corp. v. Brownlee, 342 F.3d 1335, 1338 (Fed. Cir. 2003).

There is one exception to that rule—when, in the absence of cost information, a court or board adopts the "jury verdict" approach to determining an equitable adjustment or breach damages. See Cibinic & Nash, The "Jury Verdict" Approach: Equitable Technique or Contractor Bonanza?, in The Nash & Cibinic Report (December 1991). The authors discuss four versions of the jury verdict approach.

See also Cibinic & Nash, Equitable Adjustments: Cost or Value?, The Nash & Cibinic Report (August 2019).

19 hours ago, Vern Edwards said:

TINA is a disclosure statute, not a pricing statute.

This is the single most important concept that so many people get wrong. Both government and contractor. Vern's sentence should be put on T-Shirts and handed out to Cost/Price Analysts and contract auditors everywhere.