The Department of Defense (“DoD”) recently issued a final rule implementing Section 803 of the National Defense Authorization Act for Fiscal Year 2020, which provides clarification of the requirements applicable to an offeror’s submission of information to support its pricing, i.e., other than certified cost and pricing data. (DFARS Case 2020-D008 (“Rule”), effective October 28, 2022.) The issue addressed by the Rule is the type of support an offeror must provide for its prices. The Rule:
- Amends Defense Federal Acquisition Regulation Supplement (“DFARS”) Section 215.403-3, which addresses the contracting officer’s (“CO”) use of “other than certified cost or pricing data” by prohibiting COs from relying only on historical prices for a product or service to determine whether an offeror’s price is fair and reasonable.
- Contains requirements to enforce an offeror’s submission of other than certified cost or pricing data (as defined further below, this includes information that is uncertified such as vendor quotations and nonrecurring costs). It makes an offeror ineligible for an award unless the offeror makes a good faith effort to comply with a CO’s reasonable requests.
- Amends DFARS 242.1502 to include a notation on a contractor’s Contractor Performance Assessment Report System (“CPARS”) report if the contractor has rejected multiple CO requests for the submission of such data during the past three years yet still received an award.
Below we briefly discuss the data types involved. Then, with these data concepts in mind, we address the Rule’s amendments to the DFARS, which affect how COs must consider other than certified cost or pricing data when determining price reasonableness.
Cost or Pricing Data Generally
A CO uses cost or pricing data submitted by offerors, whether or not the data is certified, to determine fair and reasonable prices to be paid by the government for goods or services.
Cost or pricing data are generally factual, verifiable information, at the time of price agreement, that prudent buyers and sellers would expect to significantly affect price negotiations. This data may include information such as vendor quotations, nonrecurring costs, make-or-buy decisions, and estimated resources to attain business goals. (See Federal Acquisition Regulation (“FAR”) 2.201.)
Certified Cost or Pricing Data
The government generally requires certified cost or pricing data for prime contracts valued at $2 million or more (if awarded on or after July 1, 2018) or $750,000 (if awarded before July 1, 2018) when none of the exceptions, such as adequate price competition or acquisition of commercial products or services set forth in FAR 15.403-1(b), apply. (See FAR 15.403-4.1)
If an offeror’s certified cost or pricing data is “defective” (i.e., not complete, accurate, and current), that may reduce the contract price and include interest and penalties. (See FAR clause 52.215-10 (Price Reduction for Defective Certified Cost or Pricing Data).) Moreover, inaccurate certified cost or pricing data may expose contractors to False Claims Act liability, which can result in treble damages and penalties.
Other Than Certified Cost or Pricing Data
When certified cost or pricing data are not required, COs must still obtain other than certified cost or pricing data “as necessary to establish a fair and reasonable price” for goods or services. (FAR 15.402(a)(2).) COs have been given regulatory direction regarding the means to obtain “other than certified cost or pricing data” by “relying first on data available within the Government; second, on data obtained from sources other than the offeror; and, if necessary, on data obtained from the offeror.” (FAR 15.402(a)(2)(ii)(A).) Consistent with this order of preference, FAR 15.404-1 states the CO must obtain this data from offerors or contractors when “there is no other means for determining a fair and reasonable price.”
A 2019 DoD Inspector General review found that these statutory and regulatory policies “discourage contracting officers from asking for uncertified cost data when determining whether a price is fair and reasonable” and “give contractors the advantage when it comes to not providing uncertified cost data to contracting officers for sole-source parts and do not contain a mechanism that provides contracting officers the ability to obtain uncertified cost data from contractors when requested.”2 Section 803 of the National Defense Authorization Act for Fiscal Year 2020 and the amendments to the DFARS discussed here provide COs the encouragement lacking before to gather this data from contractors.
The Rule’s Amendments to the DFARS
COs Prohibited from Considering Only Historical Prices
The Rule adds language to DFARS 215.403-3 to prohibit the CO from “solely” using historical prices paid by the government to determine whether a price is fair and reasonable. The Rule also amends DFARS 215.404-1(b)(ii) to state that price reasonableness “shall not be based solely on historical prices paid by the Government.” The Rule’s prohibition thus requires analysis by COs but may also increase requests for additional data from offerors. This section directs a CO to consider several relevant factors, as a whole, when conducting a price reasonableness analysis for commercial and noncommercial items. For instance, a CO is directed to consider the elapsed time between the prior purchase and differences in the volume purchased. The Rule makes clear that “the inclusion of the requirement in DFARS 215.403-3 was intentional to ensure the contracting officer is aware of the requirement in the event that prior prices paid by the Government are the only information available,” and “other than certified cost or pricing data will likely have to be obtained” (emphasis added).
DFARS 215.404-1(b)(v) further explains the factors the CO must consider to determine price reasonableness. For example, the CO must consider “materially different terms and conditions, quantities, and market and economic factors.” And for similar items, the CO must “consider material differences between the similar item and the item being procured.” Material differences are those that could reasonably influence price reasonableness. To assess these material differences, the CO must further consider factors such as market prices, the age of data, the volume, and completeness of data (e.g., date, quantity sold, sales price, and customer), and the nature of transactions (e.g., terms and conditions, sales price, warranty information, and preferred customer awards).
Instead of just a mechanical reliance on historical prices, the Rule appears to require COs to use more common sense and calls for them to conduct a better reasoned, more comprehensive analysis to determine whether prices ultimately paid by the government are reasonable—essentially a thorough business analysis. As a result, COs face an increased burden to conduct a thoughtful analysis, which may also result in increased CO requests to offerors for other than certified cost or pricing data to assist in their price reasonableness analysis. Increased CO requests will no doubt increase the administrative burden on offerors to comply with these requests.
Offerors Required to Make Good Faith Effort to Comply with CO’s Requests
The Rule also requires an offeror to make a good faith effort to comply with a CO’s reasonable request to submit data other than certified cost or pricing data. Otherwise, the CO may declare an offeror ineligible unless the head of the contracting activity (“HCA”) determines that it is in the best interest of the government to make the award to that offeror. The HCA is “the official who has overall responsibility for managing the contracting activity.” (FAR 2.101.) The HCA may delegate this authority to at least one level above the CO. (See DFARS Procedures, Guidance, and Information (PGI) 215.403-3(7).)
Contractor’s Denials of Requested Information Annotated in CPARS
The Rule also amends DFARS 242.1502, which discusses contractor performance information. In a CPARS report, the Rule requires COs, unless exempted by the HCA, to “include a notation on contractors that have denied multiple requests for submission of data other than certified cost or pricing data over the preceding 3-year period, but nevertheless received an award.” The Rule did not make the HCA’s authority here delegable, unlike the HCA’s authority to make the best-interest determination described above, which may make it less likely that exemption requests will be approved.
This requirement originated from Section 803 of FY 2020 NDAA directing the DoD to produce an annual report identifying products or services from the offerors described above that should have a cost-analysis conducted and to “assess the extent to which these offerors are sole-source providers within the defense industrial base and develop strategies to incentivize new entrants into the industrial base to increase the availability of other sources of supply for the product or service.” The notation in a contractor’s CPARS may also result in a more competitive market place for the government to acquire goods and services (similar to the possible effect of the prohibition on COs solely considering historical prices paid by the government to assess price reasonableness).
Contractors must take heed of the Rule’s new requirements for a CO to determine fair and reasonable prices based on other than certified cost or pricing data. The Rule increases the burden on COs to conduct a comprehensive price reasonableness analysis, and not solely rely on historical prices. As a result, contractors and offerors must stand ready to make a good faith effort to provide information that the CO reasonably requests to conduct a price analysis, with the understanding that the CO has significant discretion in requesting these types of information. (However, DFARS 215.403-3 does not specifically discuss the scenario where a contractor disagrees over the reasonableness of the CO’s request.)
Consequently, a contractor must assess its risk tolerance for being declared ineligible for a contracting opportunity if it decides not to provide the requested “other than certified cost or pricing data.” The risk assessment should also consider that CPARS reports will now include notations of when contractors denied a CO’s “reasonable requests” for submission of data to analyze price reasonableness.
1 FAR 15.403-4 implements the requirements in the Truthful Cost or Pricing Data Act, commonly referred to by its previous name, “TINA” or the “Truth in Negotiations Act.“ See 41 U.S.C. § 3502; 10 U.S.C. § 2306a.
2 Inspector Gen., U.S. Dep’t of Def., Report No. DODIG-2019-060, Review of Parts Purchased from TransDigm Group, Inc. (2019) 32-33, available at https://media.defense.gov/2019/Feb/27/2002093922/-1/-1/1/DODIG-2019-060.PDF.