Can Contractors Ask the Government for More Price Information?

With budget cuts making price more important in winning government contracts, contractors should know that the government is allowed to provide more helpful information during price discussions than the standard “sharpen your pencil” refrain.  FAR 15.306 (e)(3) lets the government “inform an offeror that its price is considered by the Government to be too high, or too low, and reveal the results of the analysis supporting that conclusion. It is also permissible, at the Government's discretion, to indicate to all offerors the cost or price that the Government's price analysis, market research, and other reviews have identified as reasonable.”

Unfortunately, the government rarely uses this broad authority. Contracting officers can be reluctant to get more specific on price, and prefer to err on the side of caution when it comes to price discussions. In the end, they disclose only the bare minimum that they have to disclose.  This safe approach, however, is not always the right one. In one GAO decision, an agency told an offeror simply that its price was “overstated” when its price was 8 times the government estimate. GAO said that the agency had to tell the offeror much more than “overstated.”  Creative Information Technology, Inc.  B- 293073.10, Mar. 16, 2005.

If the government is stingy with price information, it might help to remind the agency that the FAR lets the government be more helpful in discussing price with government contractors.  In one case, the GAO had no problem with an agency telling offerors during the first round of discussions about those line item prices which varied from the government estimates by more than 20%, nor with telling offerors during the second round all of the agency's estimates. Kaneohe General Services, Inc., B- 293097.2, Feb. 2, 2004.

More recently, the GAO concluded that there was nothing wrong with the VA telling each offeror in the competitive range where its price stood in comparison to the average of all current offers in the competitive range. Walsh Investors, LLC, B-407717, B-407717.2, January 28, 2013.  These decisions show that an agency can often give government contractors information more helpful pricing than to just “sharpen your pencil.”  Because there is no harm in asking the government for more information, contractors should ask.

Terry O’Connor is the Director of  Government Contracts with Berenzweig Leonard, LLP, a DC region business law firm. Terry can be reached at toconnor@BerenzweigLaw.com.

Whistleblowing Sounds Again

The Department of Justice recently joined a whistleblower’s lawsuit alleging that The Gallup Organization (Gallup) violated the Truth in Negotiations Act (“TINA”), 10 U.S.C. §2306a, in United States ex rel. Lindley v. Gallup, DCDC No. 1:09cv01985.

TINA provides that (in most cases), before the government awards a sole source contract, the contractor must submit and certify “cost and pricing data” on which the contractor bases its estimated cost of providing the goods of services, including labor hours required to perform the work.  If a contractor submits false cost or pricing data the contractor commits misconduct commonly referred to as “defective pricing.”  If a contractor knowingly engages in defective pricing, then the contractor violates the False Claims Act.

According to the allegations, Gallup compensated its employees based, in part, on the gross margin generated by projects for which the employees were responsible.  Under Gallup’s pay-for-performance system, employees received incentive compensation based on the projects gross margin – i.e., the difference between total costs and revenue.  Gallup had many years of historical data showing the cost of performing contracts.  The complaint alleges that Gallup employees submitted false cost and pricing data to the government, inflating the supposed cost of performing contracts in order to artificially increase the price of the contracts.  The employees kept a separate internal set of books showing the actual lower costs which the Gallup used to calculate its gross margin and the amount of the employees’ incentive pay.

The complaint also alleges other misdeeds by Gallup, including shifting costs from fixed-price to cost-plus contracts, improperly upgrading labor categories, and conflicts of interest.  But the flagship allegation is the alleged violation of TINA.  The fact that Department of Justice has joined the lawsuit shows that DoJ believes that the whistleblower’s claims have substantial merit.

Gallup’s compensation system is an example of how a compensation system that was intended to incentivize employees to increase the company’s gross margin by reducing costs can have the opposite effect of encouraging employees to increase profit margins by submitting false cost and pricing data, thereby fraudulently inflating the price of sole source contracts.  As this case illustrates, it is important for contractors to carefully assess their compensation systems to assure they do not encourage fraud.

The author, John W. Polk, is an attorney with Berenzweig Leonard LLP located in the Washington, D.C. region.  He can be reached at jpolk@berenzweiglaw.com.