Overview
This section prescribes policies and procedures for handling specialized cost and pricing circumstances, including defective data, make-or-buy programs, forward pricing rate agreements, and should-cost reviews. It establishes the Government's right to adjust contract prices when certified data is found to be inaccurate and provides frameworks for ensuring long-term pricing efficiency and system reliability.
Key Rules
- Defective Certified Cost or Pricing Data: If data is found to be inaccurate, incomplete, or noncurrent, the Government is entitled to a price adjustment (including profit/fee) plus interest. In cases of "knowing" submissions of defective data, the Government may also assess a penalty equal to the amount of the overpayment.
- Offsets: Contractors may offset overstatements with understatements discovered in the same pricing action, provided the contractor certifies the entitlement and proves the data was available before the "as of" date.
- Make-or-Buy Programs: Required for negotiated acquisitions valued at $20 million or more (unless for R&D without production). The Government evaluates these plans to ensure the contractor is managing performance at the lowest cost and risk while meeting socioeconomic goals.
- Forward Pricing Rate Agreements (FPRAs): COs must use negotiated FPRA rates as the basis for pricing all contract actions during the agreement period. While the FPRA itself is not certified, the data supporting it is covered by the certificate submitted for each specific contract action.
- Should-Cost Reviews: Unlike traditional cost analysis, these reviews do not assume historical costs are valid; instead, a multi-functional team analyzes a contractor’s operations to determine what a program should cost if the contractor operated with maximum efficiency.
- Estimating Systems: Contractors are expected to maintain reliable estimating systems; any significant deficiencies identified by auditors must be documented and considered by the CO during proposal analysis and negotiations.
Practical Implications
- Financial Exposure: Contractors face significant liability for "defective pricing" (Truth in Negotiations Act violations) that can persist long after contract award, requiring rigorous internal controls for data validation.
- Operational Oversight: The Government can challenge a contractor's internal business decisions—such as whether to manufacture a component in-house or outsource it—if those decisions do not result in the best value or lowest cost to the taxpayer.