The Department of Defense (“DoD”) recently issued a final rule regarding contractor disclosures of defective pricing issues on DoD contracts, which can arise where the contractor’s certified cost or pricing data is inaccurate, incomplete or is not current. In such cases, these errors and omissions can result in significant contract overpayments by the government. While the new rule incentivizes contractors to voluntarily disclose defective pricing matters, the rule’s impact may be somewhat muted by contractors’ existing mandatory disclosure obligations under the Federal Acquisition Regulation (‘FAR”).
On May 4, 2018, DoD issued Defense Federal Acquisition Regulation Supplement (“DFARS”) 215.407-1(c)(i), Defective certified cost or pricing data. The new rule, which can be found here, provides that, when in receipt of a contractor’s voluntary disclosure of a defective pricing matter, the contracting officer will discuss the level of involvement needed from the Defense Contract Audit Agency (“DCAA”) in reviewing the disclosure, which can range from a technical review of discrete cost elements, to a limited scope audit, or the requirement for a full scope audit of the contractor. The contracting officer is, at a minimum required to discuss with DCAA:
- The completeness of the contractor’s voluntary disclosure on the affected contract;
- The accuracy of the contractor’s cost impact calculation for the affected contract; and
- The potential impact on existing contracts, task or deliver orders, or other proposals the contractor has submitted to the government.
Moreover, although not directly stated in the rule, the analysis may, in practice, adopt many or all of the steps that DCAA currently undertakes (as set forth in DCAA’s Contract Audit Manual Section 4-707.7 regarding DoD’s Contractor Disclosure Program) to determine whether an audit is necessary in connection with all disclosures, including those involving contract overpayments. These factors include:
- How the contractor discovered the disclosed matter;
- The contractor’s methodology for quantifying the cost impact;
- Whether the contractor took corrective action(s) in accordance with their business ethics awareness and compliance program;
- Whether the disclosed subject matter is an isolated incident or appears to be systemic in nature;
- Whether the contractor appears to have included all directly associated costs and related burdens;
- Whether the contractor appears to have removed expressly unallowable costs associated with the incident;
- Whether the contractor is planning to make a refund or credit to the government; and
- The impact on currently planned and in-process audits that may be affected by the disclosed issue.
In any event, the new DoD rule is designed to encourage more voluntary disclosures by contractors on defective pricing issues on DoD contracts. Because DoD contracting officers now have the discretion to request less than a full audit on the contractor, the new rule encourages contractors to voluntarily disclose defective pricing issues earlier and in a fulsome manner, as doing so may avoid the need to conduct a full audit in favor of a less burdensome and expedient approach. In this regard, DFARS 215.407-1(c)(i) modifies, by relaxing, the requirement in FAR 15.407-1(c) that contracting officers must request a DCAA audit (previously read to be a full audit) regarding the accuracy, completeness, and currency of the contractor’s certified cost or pricing data.
While the effectiveness of DFARS 215.407-1 remains to be seen, the incentives it provides should encourage early engagement with the government on defective pricing issues, particularly due to the potentially serious consequences that such matters pose for contractors, which can include false claims implications. However, notwithstanding the new rule, contractors should not overlook their existing disclosure obligations, including whether they may already have an obligation to disclose defective pricing matters under the FAR’s mandatory disclosure rules.
Since December 2008, FAR 9.406-2(b)(1)(vi) and 9.407-2(a)(8), which apply to both DoD and civilian contracts, have required contractors to timely disclose significant overpayments to the government. These rules have been broadly construed by the government to include all material contract overpayments which could include
certified cost or pricing data issues. The failure to make a timely disclosure under FAR 9.406-2 and 9-407-2 may subject a contractor to false claims liability, suspension or debarment, or other serious administrative sanctions. Accordingly, while the new DoD rule incentivizes contractors to disclose defective pricing issues, contractors should not overlook whether they have existing obligations to disclose under the mandatory disclosure regulations.