Breakout Session # 809 Steven M. Masiello, Esq. McKenna Long & Aldridge LLP

2. Managing Subcontract Defective Pricing Breakout Session # 809 Steven M. Masiello, Esq. McKenna Long & Aldridge LLP Date Wed. April 27, 2005 Time 1:20pm-2:20pm NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

3. Introduction • Background • Discussion of the problem area(s) • Latest developments • Practical considerations The content of this presentation is drawn from a Thomson West Briefing Paper co-authored by Steven M. Masiello and Phillip R. Seckman entitled “Managing Subcontract Defective Pricing Liability” and is reprinted and distributed with the permission of the Publisher. NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

4. Background • TINA is codified by statute • 10 U.S.C. § 2306a • 41 U.S.C. § 254b • TINA is implemented by regulations contained in the Federal Acquisition Regulation (FAR) • 48 C.F.R. § 15.401, et seq. NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

5. Background (cont.) • Fundamental TINA concepts • Place the government on “equal footing” in price negotiations with contractors • Requires disclosure of data; not a particular pricing method or result NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

6. Background (cont.) • When cost or pricing data are required • Four discrete “pricing actions” • Prime contracts • “offeror … shall be required to submit … before the award of the contract” • “contactor … shall be required to submit … before the pricing of a change or modification to the contract” NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

7. Background (cont.) • Subcontracts • “offeror for a subcontract (at any tier) of a contract … shall be required to submit … before the award of the subcontract if the prime contractor and each higher-tier subcontractor have been required to make available cost or pricing data” • “subcontractor … shall be required to submit … before the pricing of a change or modification to the subcontract” NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

8. Background (cont.) • Prohibition on obtaining cost or pricing data • Contract below simplified acquisition threshold, or • Any exceptions apply • But, may require other information to check price reasonableness or cost realism NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

9. Background (cont.) • Exceptions to the requirement to submit cost or pricing data • Adequate price competition • Prices set by law or regulation • Commercial items, including modifications • Waiver NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

10. Background (cont.) • The government bears the burden of proof on each element of defective pricing claim NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

11. Background (cont.) • Three elements: • Disputed information is cost or pricing data • Prime contractor failed to disclose information or failed to provide data in an understandable format • Government relied to its detriment upon defective data which had an effect on the negotiated price NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

12. Rebuttable Presumption of Causation Reliance • The government enjoys a presumption that nondisclosure has the “natural and probable” effect of increasing the price of the contract • Contractor may rebut presumption with a showing that nondisclosure did not increase price NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

13. Rebuttable Presumption (cont.) • If contractor showing sufficient, government burden to show nondisclosure caused price increase NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

14. Problem Area(s) • Prime contractor receives and discloses its subcontractor cost or pricing data to the government • Later, subcontractor data changes and prime is unaware of change • Prime requests (or fails to request) all current subcontractor(s) data of price agreement with the government NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

15. The Problem Area(s) (cont’d) • Subcontractor does not respond or refuses to provide any data to prime or, incorrectly states that existing data is current • Prime contractor proceeds to certify its cost or pricing data NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

16. The Problem Area(s) (cont.) • Prime contractor is subject to a government claim of subcontract defective pricing • Subcontractor data was not knowable to the prime contractor NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

17. “Reasonably Available” Defense • The traditional decisional law - “knew or should have known” the cost or pricing data existed • Contractor not responsible for unknowable facts of its subcontractors, so long as acted with reasonable diligence NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

18. Reasonably Available Defense (cont.) • Recognizes practical inability to force all lower tier subcontractors to “sweep” or submit data multiple times – no subcontract or legal right exists. NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

19. New Strict Liability Standard • The new standard – mere existence of the defective subcontractor data equates to “reasonably available” data NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

20. New Strict Liability Standard (cont.) • New standard of “strict liability” expands the prime contractor’s obligation to certify to the accuracy of the subcontractor’s data • At the time of prime government agreement on price, and • Again at the time of prime/sub agreement on price NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

21. McDonnell Aircraft (ASBCA 2003) • Prime contract for F/A-18 Aircraft Avionic Systems • McAir argued subcontractor’s (Ford) pricing analysis of second-tier subcontractor (Ferranti) was not “reasonably available” NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

22. McDonnell Aircraft (cont.) • McAir requested Ford’s submission of all cost or pricing data several times up through agreement on prime contract price • McAir and Ford entered into a subcontract approximately six months later and certified its cost or pricing data NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

23. McDonnell Aircraft (cont.) • Board found McAir had obligation to certify cost or pricing data on two separate occasions – prime contract and subcontract price agreements • Mere existence of subcontract pricing analysis resulted in reasonable availability of data to McAir NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

24. Aerojet (Fed. Cir 2002) • Prime contract found liable for defective pricing because it failed to disclose subcontract quotes placed in an unopened lock box • Mere existence of more recent quotes gave “unfair advantage” – unexplained presumption of causation/reliance NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

25. Aerojet (cont.) • Court rejected argument that parties were on “equal footing” during negotiations – i.e., neither knew quotes’ impact • Decision results prime contractor indemnity to government for unknowable price fluctuations of subcontractors NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

26. New Developments • United Technologies I (ABSCA 2004) • Reaffirmed proposal is not cost or pricing data • Factual backup for proposal may be cost or pricing data • Classified causation and reliance doctrine • Impact of presumption of “natural and probable consequences” • Government burden to prove reliance NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

27. New Developments (cont.) • United Technologies II (ABSCA 2005) • Upon reconsideration, government failed to prove reliance • Did not review final proposals supporting cost or pricing data • Post-negotiate memorandum statements of reliance were unsupported • Compensation/price analysis performed • Presumption rebutted by lack of specific evidence of government reliance or “cost analysis” review of final proposal NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

28. New Developments (cont.) • SAIC False Claims Case • Air Force issued a notice on February 11, 2005, advising contracting officials to acquire comprehensive proposal back-up materials • Air Force also issued a December 20, 2004 alert that was focused upon other SAIC government contracts. NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

29. New Developments (cont.) • Industry responds April 4, 2005 • Claiming Air Force alert fails to adhere to proper notice and comment procedures for rulemaking • Impermissible expansion of TINA disclosure to require disclosure in the format of Table 15-2 when that format is discretionary NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

30. New Developments (cont.) • Future combat system subject to TINA • Army abandons use of Other Transaction Authority for traditional FAR approach of negotiated procurement • As of April 5, 2005, subject to TINA, CAS and Program Integrity Act • TINA not applicable to procurements for commercial items or where there is adequate price competition NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

31. Practical Considerations – Prime Contractors (and Higher Tier Subcontractors) • Review your subcontracting policies and procedures • Be aware that mere flow-down of the standard FAR “price reduction” clause may provide insufficient protection NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

32. Practical Considerations – Prime Contractors (cont.) • Where submission of subcontractors' cost or pricing data conflicts with confidentiality policies • Direct submission to the DCAA or other government officials may not be sufficient to fulfill TINA disclosure obligations • Subcontractor can request that the prime contractor agree with the government to allow for direct submission of data NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

33. Practical Considerations (cont.) • Indemnity • Prime contractor (or higher tier subcontractor), should include a defective pricing indemnity term • Require that the subcontractor agree to provide indemnity at the time it submits its proposal and at all times thereafter up to relevant price agreement NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

34. Practical Considerations – Subcontractors • Indemnity • Resist indemnity for defective pricing liability • Determine whether the relevant subcontract fits within a TINA exemption NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

35. Practical Considerations (cont.) • Ask that the “price reduction” clause be flowed down; creating a limited liability comparable to prime contractor’s liability to government • If an indemnity provision is unavoidable, attempt to limit the coverage to only claims brought by the government NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

36. Practical Considerations (cont.) • Agree to remit payment only if/when the prime contractor (or higher-tier subcontractor) has been subject to an actual price reduction NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

37. Practical Considerations – Golden Rule • Consult an attorney with TINA experience • The investment you make before defective pricing liability arises will help you avoid claims for defective pricing NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

38. Managing Subcontract Defective Pricing Steven M. Masiello McKenna Long & Aldridge LLP 1875 Lawrence Street, Suite 200 Denver, Colorado 80202 (303) 634-4355 FAX: (303) 634-4400 smasiello@mckennalong.com 32106636 NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”