Enhance Your Understanding of the Truth in Negotiations Act (TINA)

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2 Enhance Your Understanding of the Truth in Negotiations Act (TINA) Breakout Session # B10 Janie L Maddox, Lecturer, U.S. Naval Postgraduate School Brent Calhoon, Partner, Baker Tilly Samantha Schwellenbach, Faculty Associate, U.S. Naval Postgraduate School Date July Time 2:30 3:45

3 Discussion Topics Basis in Law / Evolution TINA s Purpose Misperceptions of TINA Implementation of TINA TINA Thresholds Applicability & Exceptions How Offerors can Challenge Applicability What is Certified Cost Or Pricing Data? Judgment vs. Facts What is Data Other Than Certified Cost Or Pricing Data Certification of Cost or Pricing Data Defective Pricing- What is it? TINA Sweeps-What are they? Government Reliance Compliance Best Practices How can COs make TINA work Defective Pricing Liability Burden of Proof in Defective Pricing Possible Contractor Defenses 2

4 Basis in Law / Evolution Prior to 1962, businesses (offerors) submitting bids to the government were not held to any substantial requirement for disclosing all relevant cost or pricing information prior to conclusion of negotiations In 1962, the Truth-in-Negotiations Act (PL ; 10 U.S.C. 2306(a)), often referred to as TINA, was enacted to place DOD on equal footing in negotiating contract prices with commercial organizations In the mid-1980s the Government started treating defective pricing as an indication of criminal fraud In 1994, FASA extended TINA to civilian executive branch departments In 1995, FARA broadened exceptions to include commercial items In 2010, distinction added between certified cost or pricing data and data other than certified cost or pricing data, threshold -$700,000 In 2012, TINA turned 50 3

5 TINA s Purpose - Key Points TINA is intended to protect the Government when an offeror s cost is a significant factor in negotiating contract price In the absence of some objective indication of price reasonableness e.g., competition the government needs a mechanism to ensure it pays a fair and reasonable price TINA supports this need and seeks to level the negotiation playing field by placing the Government in the same position as offerors So, Government negotiators have access to the same cost or pricing data as the offeror s negotiators and recourse when its not submitted However, TINA does not create an equal position between the Government and the offeror There is no corresponding obligation on the part of the Government to disclose anything to the offeror 4

6 Misperceptions of TINA After all this time, considerable confusion remains: What is cost or pricing data? - Judgment vs. Facts? What must be done with it? (Contractors and Government) Under what circumstances can the Government request cost or pricing data and when and how much must a contractor provide it? What do terms like reliance, meaningful disclosure and sweep mean? When must contractors certify their cost or pricing data? Do contractors certify their proposal? What is data other than certified cost or pricing data? - How is it different from "certified cost or pricing data? What risks do contractors face when certification is required and when it isn t, but data is nevertheless requested by the Government? 5

7 TINA Implemented thru FAR subpart 15.4 Describes the contracting officer s responsibility to purchase supplies and services at fair and reasonable prices Establishes requirements for the submission of cost or pricing data (whether or not certified ) Establishes the circumstances under which a offeror must certify the accuracy, completeness and currency of cost or pricing data If certified cost or pricing data is required, establishes: - What the contracting officer must do with that data - How to document the extent to which the contracting officer relied on the offeror s certified data to negotiate the contract price Provides right of Government to examine offeror records (audit) Applicable Clauses FAR and Specifies proposal format (FAR Table 15-2 Instructions for Submitting Cost/Price Proposals) 6

8 TINA Thresholds $100,000 for contracts awarded before December 1, 1990 $500,000 for contracts awarded on or after December 1, 1990 $550,000 for contracts awarded on or after October 11, 2000 $650,000 for contracts awarded on or after September 28, 2006 $700,000 for contracts awarded on or after October 1, 2010 Note: CO s can request cost or pricing data for contract awards between the Simplified Acquisition Threshold and the cost or pricing data threshold with HCA approval 7 7

9 Applicability of TINA Negotiated prime contracts > $700,000 Prime contract modification or changes >$700,000 Aggregate absolute value of related modifications Negotiated subcontracts, modifications or changes > $700,000 at any tier, if prime contract and higher-tier subcontractor(s) were required to provide certified cost or pricing data 8

10 Applicability (cont.) Contract Modifications Applicability One must consider both price adjustment increases and decreases in terms of absolute values to determine if the adjustment requires the submittal of cost or pricing data. For example A price reduction of $500,000 and a price increase of $300,000 result in a net reduction of $200,000. However, if the sum of the absolute values exceeds the current TINA threshold cost or pricing data must be submitted. Price Reduction $ (500,000) $ 500,000 Price Increase 300,000 $ 300,000 Net Price Reduction $ (200,000) $ 800,

11 Applicability (cont.) Prime must obtain cost or pricing data for any TINA covered subcontract greater than $700,000, but only if prime is covered also Prime must submit (or cause submission of) the sub s data to the Government on a covered subcontract with a value that is either - $12.5 million dollars or more, or - $700,000 and more than 10% of the prime s proposed price The exercise of an option with previously agreed pricing is not a contract pricing action subject to TINA requirements 10

12 Exceptions from TINA Adequate Price Competition Prices Set by Law or Regulation Commercial Items Pricing Actions Less Than $700,000 Exceptional Cases Waiver by Head of Contracting Activity Modifications of Commercial Items-limited by standards 11

13 How Offerors Can Challenge and/or Avoid Applicability COs are not to insist on certified cost or pricing data where competition gives adequate assurances of price reasonableness Therefore Offerors should actively challenge demands by the Government or prime offerors for data/certification where price competition exists Get the exemption in writing. At least document your understanding that the exemption applies **Note: Ultimately the law gives COs discretion to require data in any appropriate circumstance, even where there is indication of price competition. o Offerors should emphasize the FAR policy statement that is not in the Government s best interest to unnecessarily require submission of data 12

14 What is Certified Cost or Pricing Data? All facts that, as of the date of price agreement, or, if applicable, an earlier date agreed upon by the parties that is as close as practicable to the date of price agreement, prudent buyers and sellers would reasonably expect to affect price negotiations significantly The concept of significant affect is not defined in the FAR and often ignored by Government auditors; almost every dollar is considered significant no amount is too small to pursue But, the DCAA Audit manual states that TINA price adjustments of up to 5% of the contract value or $50,000, whichever is less, normally should be considered immaterial 13

15 Certified Cost or Pricing Data (cont.) What are facts? Objective, verifiable information Cannot be determined based solely on the type of document. You must consider the nature of the information in the context of the particular negotiation in question. Each disclosure situation should be separately analyzed. Some things as a matter of common sense should be considered data. Other cases are much more difficult to assess Judgments and pure estimates are not cost or pricing data This has always been the law and this was affirmed in 1986 amendments to TINA and in the Texas Instruments case 14

16 Certified Cost or Pricing Data (cont.) Cost or pricing data includes more than just historical accounting data; they are all facts reasonably relevant to evaluate estimates of future costs and to the validity of costs already incurred. This may include, but is not limited to: - Vendor quotes; - Nonrecurring costs; - Information on changes in production methods and in production or purchasing volume; - Data supporting projections of business prospects and objectives and related operations costs; - Unit-cost trends such as yield rates and labor efficiency; - Make-or-buy decisions; - Estimated resources to attain business goals; and - Some information on significant management decisions 15

17 Judgment vs. Facts Offerors must disclose all facts necessary for the Government to evaluate - Judgmental forecasts of future business is not a fact - Bids outstanding or in the process are facts - Your bottom line for negotiations is not a fact (cost or pricing data) There may be a duty to disclose information that is a mix of fact and judgment, if judgment is necessary to understand the facts The fact that a management judgment has been made may be disclosable - e.g., a decision to invest in new equipment, a decision on make vs. buy Offerors are not liable for the accuracy of any judgmental estimate but must disclose all underlying factual data relating to those judgments, even if such data was not actually used in preparing estimates, - e.g., Estimates that essentially are verifiable, mathematical calculations rather than the result of applied judgment - It s the facts by which the future is estimated that s certified cost or pricing data 16

18 What is Data Other Than Certified Cost Or Pricing Data? Definition:.Such data may include the identical types of data as certified cost or pricing data, consistent with Table 15-2 of , but without the certification FAR Government will request with the expectation the contractor will provide But what exactly is it? Data to the extent necessary for the CO to determine a fair and reasonable price, such as: - Cost Data to determine the cost realism of competing offerors; and/or evaluate competing approaches - Price Data related to prices for commercial items t e.g., established catalog or market prices, sales to non-governmental and governmental entities Note: A contractor or subcontractor who fails to submit requested data is ineligible for award. FAR (a)(4) 17

19 Certification of Cost or Pricing Data Certification states that, to the best of the signatory s knowledge and belief that the cost or pricing data are accurate, complete, and current - Accurate: Cost or pricing data is free of error or misstatement - Current: The most recent data available up to the date of agreement, or other agreed to date, is submitted or disclosed - Complete: All reasonably available data relevant to the pricing action is submitted or disclosed The obligation to provide certified cost or priding data creates potential defective pricing liability and increased risk of fraud and false claims allegations for non-compliance 18

20 Certificate of Current Cost or Pricing Data (FAR ) This is to certify that, to the best of my knowledge and belief, the cost or pricing data (as defined in Section of the Federal Acquisition Regulation (FAR) and required under FAR subsection ) submitted, either actually or by specific identification in writing, to the Contracting officer or to the Contracting Officer s representative in support of * are accurate, complete, and current as of **. This certification includes the cost or pricing data supporting any advance agreements and forward pricing rate agreements between the offeror and the Government that are part of the proposal. Firm Signature Name Title Date of execution** *Identify the proposal, request for price adjustment or other submission involved, in giving the appropriate identify number (e.g., RFP No.). **Insert the day, month, and year when price negotiations were concluded and price agreement was reached, or, if applicable, an earlier data agreed upon between the parties that is as close as practicable to the date of agreement on price. 19

21 Defective Pricing - What is it? Defective pricing occurs when a contractor does not submit or disclose to the Government certified cost or pricing data that is accurate, complete, and current prior to reaching a price agreement. Defective pricing generally discovered during post-award audits during which records and data are examined and analyzed. Generally, Fixed Price contracts rather than Cost Reimbursable The objective of a post-award audit is to determine if the negotiated contract price was increased by a significant amount because the contractor did not submit or disclose accurate, complete, and current cost or pricing data. Penalties are assessed against payments made to Contractor to include offsets of higher costs by Contractor as long as the defective pricing is not considered intentional

22 TINA Sweeps What are they? Offeror s Obligation to Update Data Process whereby contractor reviews its records to determine if more current cost or pricing data exists and needs to be disclosed Offerors perform sweeps - After initial proposal submission and subsequent to proposal revisions - Prior to negotiations and before signing certificate - Generally occurs after negotiations (hand shake) but before contract award A sweep is not specifically required by regulations; it is a best practice internal control designed to improve TINA compliance Sweeps focus on new factual data that may significantly affect price negotiations 21

23 Government Reliance Occurs when Government negotiators directly or indirectly use or establish a price (or objective) wholly or partly based upon or derived from cost or pricing data the contractor submitted When an offeror is required to disclose and certify its cost or pricing data, the Government is required to Document in the PNM the extent to which the contracting officer (i) Relied on the certified cost or pricing data submitted and used them in negotiating the price; (ii) Recognized as inaccurate, incomplete, or noncurrent any certified cost or pricing data submitted; the action taken by the contracting officer and the contractor as a result; Possession of a Certificate of Current Cost or Pricing Data is not a substitute for examining and analyzing the offeror s proposal (FAR (d)) 22

24 Compliance Best Practices Challenge/avoid Applicability Offerors should pursue earlier cut-off date agreements allowed by regulations. Not often used, but a good solution for both sides Multiple Certifications (Pre-agreement, Post-agreement) No certifications in blank specify what data (facts) are being certified Prepare for Proposal submission, TINA sweeps, and Certificate submission. Submit proposal IAW FAR Table 15-2 and DFARS Proposal Adequacy Checklist Knowledge/education of senior leadership and establish clear roles for certificate signatory(s) 23

25 How Can COs Make TINA Work? Making sure the solicitation specifies: - Whether certified cost or pricing data are required; - And the offeror may submit a request for exception - Whether data other than certified cost or pricing data are required - The necessary pre-award or post-award access to the offeror s records; - Format required for submission of data Don t require the submission of cost or pricing data when adequate competition is anticipated Start negotiations as soon as possible after receipt of proposal Don t delay negotiations once initiated so limited updates are necessary Negotiations should be directed toward the offeror s submitted data, with revisions made in that data iaw the audit results and technical analyses Attempts at offering to settle at a total price figure, without defining how the total was derived from the data, could result in rendering TINA useless PNM Documentation of reliance of offerors data or lack thereof 24

26 Defective Pricing Liability Government gets price reduction for relying, to its detriment, on defective cost or pricing data. Currently, the Government also may: - Collect interest from the date of overpayment, and - Assess penalties for knowing submission of defective data Liability is statutory. A prime contractor may be liable regardless of whether data was submitted or a certificate was signed. While the law applies to subcontractors, there is no direct liability from subcontractors to the Government The Government may audit subcontractors and assess price reductions but against primes A prime contractor s ability to pass price reductions on to subcontractors depends on whether there are effective flowdowns and indemnities in the subcontract 25

27 Burden Of Proof In Defective Pricing Government must prove that: Data meets the definition of cost or pricing data; Data existed and was reasonably available before the date of agreement on price; Data submitted was not accurate, current, or complete; Undisclosed data was the type that prudent buyers or sellers would have reasonably expected to have a significant effect upon price negotiations; Government relied on the defective data; and Government s reliance on the defective data caused an increase in the contract price. 26

28 Possible Contractor Defenses Show: - TINA does not apply, not certifiable cost or pricing data - data at issue is not factual, is only judgmental(guesstimate) - there was adequate disclosure of facts - the Government actually knew the facts, even if you didn t disclose (asserting a government should have known is not a defense) - there was no Govt. reliance on the defective data - there would have been no impact on price if data were disclosed Challenge: - DCAA s use of data in calculating recommended reductions - DCAA sampling techniques Double-check DCAA s math and assumptions for consistency with your own or those established in negotiations Insist on use of negotiated, overheads and profits rates to calculate refunds, rather than proposal rates. Consistent with DCAA Audit Manual Substantiate that the price was a floor - would not have gone lower 27

29 Possible Contractor Defenses (cont.) Establish Offsets No affirmative recovery; just offsets Do your own reverse audits; look for undisclosed, higher data Can only offset for defective facts; not mistaken judgments Data must have been reasonably available at handshake date No offsets for intentional decisions not to use/disclosure higher priced data No offsets for bottom-line reductions May have offsets for negotiation reductions that are attributed e.g., to labor, material, overhead rates May offset cross category e.g., offset materials costs with labor costs No cross-contract offsets; but possible arguments regarding multiple orders handle via single bottom line negotiation. 28

30 Questions, Comments & Banter? Janie L Maddox Lecturer U.S. Naval Postgraduate School jlmaddox@nps.edu Brent Calhoon, CPA Partner Baker Tilly brent.calhoon@bakertilly.com Samantha Schwellenbach Faculty Associate U.S. Naval Postgraduate School slschwel@nps.edu 29