You will be redirected to the page you want to view in  seconds.

The complications of cost and pricing

Aug. 26, 2014 - 02:56PM   |  
Michael Fischetti is the Executive Director of the National Contract Management Association.
Michael Fischetti is the Executive Director of the National Contract Management Association. (Jenifer Morris)

One of the most controversial areas in government contracting surrounds cost and pricing: the means by which a contracting officer makes a ďfair and reasonableĒ price determination. This can be expensive to bidders, especially if they are required to provide ďcertified cost and pricing dataĒ and respond to Defense Contract Audit Agency or contracting officer questions. Recent inspector general reports have highlighted the problem.

Commercial companies donít have similar requirements and arenít structured for it. They maintain that creating such cost-accounting compliance would incur extra overhead costs, drive up prices, and hurt them competitively. Contractor concerns involve onerous government requirements, inapplicability, and potentially abandoning the government market.

Perhaps the biggest difference between government and commercial buying practices is symbolized in the Truth in Negotiations Act (TINA). Its main intent is to ensure accuracy of a contractorís costs before negotiating with the government and includes providing government access to all cost or pricing data the contractor used to develop its offer. If the cost rises and the bidder is found to have withheld any data, the government can get back the added costs.

So what is cost or pricing data? Does it incorporate only verifiable facts, judgments, or estimates, or does it also include unverifiable information? Also, what about subcontracts and subcontractor cost disclosure? What alternatives exist if the contractor canít produce data? Companies spend money in many areasónot just on salary, material, plant, equipment, research, pensions, insurance, etc., but also on business development, lobbying, financing, travel, idle plant, investments, political activity, and so on. They may perform in foreign countries and derive their product and price from a variety of sources and scenarios.

When a firm competitively wins a government award, the government receives the best value and the contractor can manage its costs to mitigate risk and increase profit. However, when competition is lacking or the product isnít commercial, the government must determine a fair and reasonable (not low) price by other means, potentially including cost analysis and the review of cost and pricing data. TINA requires contractors to provide their contract cost estimates as of the date of price agreement.

How else can price be verified without reviewing contractor internal costs? Is this a communication issue of misunderstanding each otherís motivations? Is the government only interested in following rules and process, but not mission outcome? Is this another problem arising from an untrained or inexperienced acquisition workforce? Complaints have been heard for years that government contracting is overregulated, burdensome and should rely more on ďcommercialĒ practices. Providing cost and pricing data is unique, costly, and sometimes inappropriately required. However, under the right circumstances, itís a reasonable way to determine a contractís fair and reasonable price.

Taxpayers want confidence that the prices the government pays are fair and reasonable. The rules governing that determination arenít simple and rely on judgment. Both parties must ensure each otherís interests are met. Thus, the contractor must support the government requirement to determine a fair and reasonable price, which can be accomplished in a variety of ways tailored to the situation.

This topic points out once again the need that both parties to a transaction develop a strong, professional cadre with the depth of technical, business, contracting, program, relationship, and analytical knowledge and skills to manage through this thicket of complex guidance, data, and various internal and external pressures to make the proper business judgments and trade-offs their constituents demand.

This issue isnít new, has always been controversial, and so today some traditional arguments are once again heard. It persists because itís complex. But hiring and developing professional contracting managers to understand and solve the complexities of contractual cost and pricing is the ultimate solution versus solving them legislatively or through the media or court of public opinion. Letís move forward to develop professional standards widely adopted and recognized throughout both government and industry and then support and qualify our top-caliber managers against those standards, so they can make the proper business judgments our citizens deserve.

More In Blogs

More Headlines