Defense Contractors - More than just Cost and Pricing Data and Lower Preference for Fixed Price Contracts Are Here
Key Details: On October 28, The Department of Defense (DoD) issued two final rules to amend the Defense Federal Acquisition Regulation Supplement (DFARS). The two final rules, titled “Requiring Data Other Than Certified Cost or Pricing Data” and “Repeal of Preference for Fixed-Price Contracts”, are set to implement sections of the National Defense Authorization Act (NDAA) for Fiscal Years 2020 and 2022. As these two final rules relate to contract cost and pricing, government contractors are encouraged to thoroughly review and understand the new requirements they may be required to comply with. For further information and expertise, contact Ryan & Wetmore.
Requiring Data Other Than Certified Cost or Pricing Data
This final rule was effective as of October 28, 2022, and provides additional requirements relating to data submission other than cost or pricing data. The requirement for providing cost and pricing data can be found in FAR Part 15 – Contracting by Negotiation. Under this section, the government seeks acquisitions of the best value through competition to determine a fair and reasonable price.
Under FAR 15.403-4 – Requiring Certified Cost or Pricing Data, “the threshold for obtaining certified cost or pricing data is $750,000 for prime contracts awarded before July 1, 2018, and $2 million for prime contracts awarded on or after July 1, 2018.” Furthermore, unless there is an exception, certified cost or pricing data are required to be submitted before “accomplishing any of the following actions expected to exceed the current threshold or, in the case of existing contracts, the threshold specified in the contract”:
- The award of any negotiated contract (except undefinitized actions).
- The award of a subcontract of any tier if the contractor and higher-tier subcontractors were required to furnish the data.
- The modification of any sealed bid or negotiated contracts.
Contractors are encouraged to review table 15-2 in FAR Part 15.408 for instructions on submitting cost and pricing proposals when certified cost or pricing data is required.
What is the Final Rule?
The DoD published a proposed rule on August 30, 2021, to implement Section 803 of the NDAA for the Fiscal Year 2020. This section prohibited contracting officers from determining whether the price of a contract (or subcontract) is fair and reasonable using only prices the government paid historically. As such, this final rule requires contracting officers to consider more than just historical prices in determining if costs are fair and reasonable.
The final rule also establishes that contractors and offerors must make a good faith effort to comply with a contracting officer’s request for other data and that the government must include a note about past performance evaluations of the contractor in the Contractor Performance Assessment Reporting System (CPARS). This is only applicable if the contractor has denied multiple requests for submission of data other than cost or pricing.
Per FAR Part 2.101, “data other than certified cost or pricing data means pricing data, cost data, and judgmental information necessary for the contracting officer to determine a fair and reasonable price or to determine cost realism.” This definition notes that this may include identical types of data as certified cost or pricing data that is consistent with Table 15-2 as highlighted above, just without certification. For example, sales data and information reasonably required to explain the contractor’s estimating process may be required. This includes:
- The judgmental factors that are applied to mathematical methods used in estimating. This includes data factors that are used in projections.
- Any contingencies that are included in the proposed price.
The goal of providing data other than certified cost or pricing data is to enable the contractor to support a cost realism analysis. Contractors required to submit data can use the format as prescribed in FAR Part 15.403-5.
Contractors are encouraged to perform the following activities to reduce risks when data submission is requested:
- Develop a pricing and indirect rate structure that is consistent and produces profitable results.
- Designate a pricing manager within the organization that can work with other departments when other data are required.
- Gather the necessary materials ahead of discussions with contracting officers.
- Ensure your accounting system is government contracting compliant and that it can produce accurate and reliable data.
- Document the judgmental factors or contingencies used in estimating and forecasting methods.
- Ensure your pricing and cost data are accurately reflected in your accounting system.
Repeal of Preference for Fixed-Price Contracts
The second final rule issued by the DoD also amends the DFARS and implements Section 817 of the NDAA for the Fiscal Year 2022. As such, this final rule repeals Section 829 of the NDAA for Fiscal Year 2017 and removes text regarding the implementation of Section 829.
Section 829 required contracting officers to prefer fixed-price contracts when determining the contract type for an award. This section also mandated approval of cost-reimbursement type awards by the head of the contracting agency for contracts that were greater than $25 million. The final rule revises this section and no longer requires preference for fixed-price contract awards or approval requirements.
As the preference for fixed-price contracts is no longer required, contractors may begin experiencing higher quantities of cost-reimbursement type contracts. With this, contractors must ensure they have the necessary accounting system requirements in place to remain compliant. Contractors are encouraged to take the following steps to ensure compliance:
- Ensure your accounting system complies with the various Cost Accounting Standards. This includes, but is not limited to:
- Ability to segregate and allocate direct and indirect costs into appropriate cost pools.
- When calculating indirect rates, ensure your accounting system can accumulate cost pools in logical groupings with allocation bases that have a causal relationship with the indirect costs.
- Utilize a consistent method when estimating costs for a proposal.
- Ensure cost allocations are done consistently and only allocated once to a cost objective.
- Create an unallowable cost policy that identifies costs as unallowable. Understand the requirements under the Truth-In-Negotiation-Act (TINA) as it applies to contract negotiations.
- Ensure your accounting system complies with Standard Form 1408 (Pre-Award Accounting System Survey) requirements. It is considered a “pre-award audit”, which is necessary for the award of any cost type contract. This includes, but is not limited to:
- Properly identifying and accumulating direct costs by contract.
- Logically allocating indirect costs to intermediate and final cost objectives.
- Ensuring your labor distribution system charges labor correctly.
- Creating a timekeeping system that provides an audit trail and appropriately allocates employee time.
- Developing an accounting system that can produce adequate and reliable data.
- Develop an internal control system that oversees approval, structure, access, and policies.
- Develop and maintain an accounting policies and procedures manual for employees to follow.
- Many more accounting system compliance items that are beyond the scope of this article.
With these two final rules, contractors are encouraged to fully understand the requirements they may need to comply with. Contractors can get ahead of these final rules by ensuring that they have the necessary data and documentation in place when requests occur and that their accounting system is in full compliance with the requirements that cover cost-reimbursement type contracts. For further information and expertise, contact Ryan & Wetmore today.
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Peter T. Ryan co-founded Ryan & Wetmore in 1988 with business partner Michael J. Wetmore. Peter provides clients with the best strategies for success. His expertise extends across various industries. Peter obtained a Master of Business Administration in Finance from the University of Baltimore and a Bachelor of Arts in Accounting from the Catholic University of America.
About Rosie Cheng
Rosie Cheng is a Finance Consultant at Ryan & Wetmore. She focuses on government contracting services and produces many of the firm’s government contracting newsletters. Rosie graduated from Georgetown University with a Master of Science in Management and from William and Mary with a Bachelor of Business Administration.