Managing Risk Under 'The Truth In Negotiations Act (TINA)'

THE RISKS ASSOCIATED WITH DEFECTIVE PRICING 

INTRODUCTION:

 
We have previously discussed at this site the development of credible cost and pricing data. That data is the product of not only estimating and pricing but also job cost accounting for managing contracts, business system design to meet Cost Accounting Standards (CAS) and the integrated aspects of the company business system demonstrating regulatory compliance:

Pricing With Credibility

Pricing Small Business Federal Government Contracts

Small Business Systems Development

DCAA Audits and Small Business Job Cost Systems

The purpose of this article is to cite the specifics of the “Truth in Negotiations Act” and recommend  management techniques to comply with this law and avoid defective pricing claims by the US Government. 

THE TRUTH IN NEGOTIATIONS ACT (TINA)

Public Law 87-653 (codified by 10 USC 2306a) was originally enacted in 1962 to place the Government on equal footing with the contractor during contract negotiations.  The following are the principal features of the law:

• Defines requirements for obtaining cost or pricing data

•  Requires certification that data are current, accurate, and complete

• Delineates exceptions to the requirement

• Addresses data submission for pricing of commercial items, below threshold contracts, and “other information”

•  Provides right of Government to examine contractor records

• Defines cost or pricing data

• Provides rules governing defective pricing

• Downward Contract price adjustment

• ·Recovery of overpayment (cost & profit) & interest (as of 1985)

• 2 M Threshold for contract actions (DOD recently increased from 750 K) Recent Procurement Reforms

• Contract actions include contracts, subcontracts, and modifications

•  TINA applicability is not affected by contract type

•   For subcontracts, the $2M threshold applies to the submission of data from the subcontractor to the prime contractor.

 
FIVE POINTS THE GOVERNMENT UTILIZES FOR ESTABLISHING DEFECTIVE PRICING

 
1)    The information in question fits the definition of cost or pricing data.

(2)    Accurate, complete, and current data existed and were reasonably available to the contractor before the agreement on price.

(3)    Accurate, complete, and current data were not submitted or disclosed to the contracting officer or one of the authorized representatives of the contracting officer and these individuals did not have actual knowledge of such data or its significance to the proposal.

(4)    The Government relied on the defective data in negotiating with the contractor.

(5)    The Government’s reliance on the defective data caused an increase in the contract price.

MANAGING THE RISK OF A DEFECTIVE PRICING CLAIM

 
A government auditor relates to TINA and defective pricing whether or not it is required contractually and uses the TINA provisions as a frame of reference in how he or she views trend analysis of your company. Even if you do not have the TINA requirement in your bid or your contract, be aware the auditor is forming his or her opinion of your compliance with the law against the TINA framework.

Post award audits can be ordered at any time by a PCO. During such audits your proposal is juxtaposed to your incurred cost and historical data on a given contract. During such juxtapositions, defective pricing stands out glaringly.  If you become aware of an anomaly, cover your tracks by immediately assessing the impact and deciding whether or not a disclosure should be made.  

Integrate your system from pricing to billing to close out utilizing a consistent cost structure template and be aware you are putting audit history in place and that historical trends are what auditors follow.
 

Keep all subsequent disclosures under proposals to the government well documented, serialized and current at the prime and subcontract level, reflecting them in a detail record of negotiation.  

If you have commenced work prior to final negotiations under a letter contract or similar interim arrangement, conduct a sweep of actual costs and commitments and reflect them in an updated proposal to the government prior to negotiation of a final price.  Reassess quotes, escalation factors, indirect costs and related factors in the same manner if a proposal expires and you are asked to extend your pricing. 

If substantive conditions in an open proposal estimate change, document them thoroughly and disclose them to the government based on an astute analysis of your risk if they can be misconstrued as defective pricing by an auditor.  Carefully convey the impact on the prospective contract and its pricing to the contracting officer if you decide to disclose. 

Consistency with CAS and your CAS disclosure statement as well as your latest negotiated forward pricing rates is mandatory. Any departure from these baselines will attract audit attention.
In many defective pricing instances what you knew and when you knew it becomes a factor.  Continually assess changing conditions that may dramatically impact your cost performance and manage them by taking corrective actions, developing workarounds and carefully communicating requirements to your subcontractors and suppliers. 

Remember under TINA you are required to perform cost/price analysis of your subcontractors if their work scope exceeds the $700k threshold. You must submit the results with your proposal to the government.  If a disclosure becomes necessary, make it sooner rather than later when the data may be under the cloud of a negative audit finding.

SUMMARY

 
Defective pricing actions by the government can have a severe impact on your past performance rating.  They must be cited by you with any new business proposal in which you are asked if your company has been accused or convicted of a violation of the law or has open or pending government adjudications regarding legal violations. 

Sculpt and educate your auditor, contracting officers and government analysts on the specifics of your company business system and preserve its integrity over the long run to maximize your win potential and lower the risk of defective pricing claims by the government. 

A good rule of thumb is to consider every proposal as if it were under TINA compliance whether or not you must submit a “Certificate of Current Cost and Pricing” under TINA.  This will keep your business system sharp, your ethics and standards high and your past performance record clean.

 

Registering Your Business For Federal Government Contracting

You have worked hard establishing your small business in the commercial market; or you have succeeded in your profession working for large enterprises. You have established yourself and you are recognized as a success by your superiors, your peers and your subordinates. Someone or something one day attracts your attention with the suggestion that the federal government may be in the market for your skills, products or services. This article will address the path to expanding your existing business or initially undertaking a business involving federal government contracts.

GETTING STARTED

The best way to explore federal government contracting possibilities is to expand your business plan to include a sector for that type of business or develop your start up plan including a federal government business sector. Doing business with the Federal Government is not "Rocket Science" but it is different. It embodies a set of regulations entitled, "The Federal Acquisition Regulation" or FAR, which contain the rules by which the government and industry abide in contracting for supplies and services. The FAR had its genesis during World War II and has evolved since that time to control and regulate the ever-expanding amounts of goods and services which the federal government buys.

The following are the most important "Mechanical Steps" necessary in positioning your business to begin selling to the federal government. They are listed in the necessary sequence for becoming a supplier entity in the government system. A link to appropriate web sites is provided at each step.

A. Register Your Company With Your State And with the IRS:

Incorporation is fairly inexpensive and can be done yourself via the WEB for either a non-profit or a for-profit business. 
You may download free instructions to register a Limited Liability Company (LLC) in your state from the BOX in the right margin of this site.  

B. Register at the System For Award Management Web Site:

System for Award Management (SAM)

C.  SBA Hub Zone Program

Note that Hub Zone qualification is based on where the business is located and where the personnel in the business reside as well.

D. To obtain A Veteran-Owned or Disabled Veteran Owned Certification:

Veteran-Owned Business Certification

E. For Searches on Federal Buys:

Contract Opportunities  is the gateway for all federal business. The search tool there is a very powerful engine with many filters that are useful. It is well worth the time to learn the filters. Every federal agency is required by regulation to advertise there and you will be amazed at the products and services the federal government buys.

For insights and cautions regarding SAM Contract Opportunities see:  What Small Business Should Know About SAM Contract Oppotunities

F. For an example of a small business capability statement check the following web site:

Your Capability Statement

A capability statement is always a good idea for marketing. The link above as an example. It was found on the web in the public domain Note that the site is a SDB. Later you will get into proposal preparation and the regulations governing the types of grants and contracts, as well as billing the government for your work and other factors.

G.  Questions for you:

Are you planning to produce a deliverable, distinct, end product such as software, hardware, a commodity, a report, a conference, a survey or a study, sell it to meet the government's statement of work and bill for the end product when delivered?

OR

Are you planning to price your services at an hourly rate, sell them by labor categories with professional job descriptions to perform the government's statement of work and bill by the hour for labor and at cost for material and travel?

Answers to the above questions are key factors in how you set up your business and price your work in proposals to federal agencies. The answer to the above questions is "Yes" in both cases for some businesses. Some small businesses sell their product commercially, but contract for product implementation and support on a service contract basis.

"EVMS" Drives True Project Status, By Integrating Project Cost, Schedule And Estimate At Completion

Image:  Wikipedia.org

Recently a question regarding project management  prompted me to recommend a simple application of an Earned Value Management System (EVMS) to deal with a project management problem.

The question and my answer are as follows:

Question:

How do you keep yourself on task and on budget during a start up?

What are some techniques that you use to keep you (and your team?) on task, and on budget, during a business start up?

Answer:

Plan to measure your "Bang for the Buck". Establish tangible tasks in the form of a plan. Set milestones for them in time at a budget value for each milestone tied out to the total budget. The milestones should be things you can look at and say, "That's done".

Status your plan regularly. When milestones are completed, credit the budget value as earned. Tasks may cost more than their budgets to complete. That is cost variance for completed tasks.

If milestones are not completed by their scheduled date do not credit their budget value as earned. Behind schedule tasks are thus contributing to a cumulative budgeted schedule variance in time.

If you are running an unfavorable schedule variance for incomplete tasks and an unfavorable cost variance for completed tasks you are in trouble.

Corrective action, additional resources or a work around plan will be necessary to recover from negative variances. You will investigate the tasks behind schedule and over cost to determine the problem, the cause, the resolution, the corrective action and the likelihood of overrunning your total budget or being late due to events at time now. You will have time to do something about it.

The above technique can be used for starting a company or running a project. This technique is commonly referred to as Earned Value Management. It should not be driven to a level of detail that is unmanageable.

Prudently used this approach gives insight into the dynamics of physical accomplishment driving project status as opposed to plan versus actual cost tracking which tells you only that you are spending money.

Several approaches were recommended in response to the question for keeping a new start-up company on track with regard to staying within budget and time constraints. EVMS is the most effective project management technique to achieve that sort of objective.

Please visit the below Wikipedia article from which the graphic leading this post was downloaded for an excellent explanation of EVMS and its application on projects:

http://en.wikipedia.org/wiki/Earned_value_management

In short, the technique:

1. Ties budget to schedule

2. Establishes measurable means to track project status

3. Accounts not only for the money being spent but also for what is being accomplished with the expenditure.

4. Allows in-process cost and schedule corrective action in time to favorably influence the project outcome.

I have utilized the EVMS technique from the smallest of projects to large-scale systems programs. It is well worth learning and practicing. If you become involved in large enough government projects EVMS will be required under your contract by government and prime contractor customers.

Many companies recognize the benefits of EVMS project management and apply it without being required to do so by contract. It produces excellent results.

Government Acquisition Categories

The federal government generally recognizes 6 principal categories of acquisitions. Below is an extract from the FAR for each. It is possible for a product to go through, or be supported by, all 6 acquisition categories during its life cycle.

FAR 34.005-3 - CONCEPT EXPLORATIONS

Whenever practicable, contracts to be performed during the concept exploration phase are for relatively short periods, at planned dollar levels. These contracts are to refine the proposed concept and to reduce the concept's technical uncertainties. The scope of work for this phase of the program is consistent with the government's planned budget for the phase. Follow-on contracts for such tasks in the exploration phase are awarded as long as the concept approach remains promising, the contractor's progress is acceptable, and it is economically practicable to do so.

FAR 34.005-4 - DEMONSTRATIONS

Whenever practicable, contracts for the demonstration phase provide for contractors to submit, by the end of the phase, priced proposals, totally funded by the government, for full-scale development. The contracting officer provides contractors with operational test conditions, performance criteria, life cycle cost factors, and any other selection criteria necessary for the contractors to prepare their proposals.

FAR 34.005-5 Full - FULL SCALE DEVELOPMENTS

Whenever practicable, the full-scale development contracts provide for the contractors to submit priced proposals for production that are based on the latest quantity, schedule, and logistics requirements and other considerations that will be used in making the production decision.

FAR 34.005-6 - FULL PRODUCTION

Contracts for full production of successfully tested major systems selected from the full-scale development phase may be awarded if the agency head (a) reaffirms the mission need and program objectives and (b) grants approval to proceed with production.

FAR 35.002 - RESEARCH AND DEVLEOPMENT

The primary purpose of contracted R&D programs is to advance scientific and technical knowledge and apply that knowledge to the extent necessary to achieve agency and national goals. Unlike contracts for supplies and services, most R&D contracts are directed toward objectives for which the work or methods cannot be precisely described in advance. It is difficult to judge the probabilities of success or required effort for technical approaches, some of which offer little or no early assurance of full success. The contracting process is used to encourage the best sources from the scientific and industrial community to become involved in the program and must provide an environment in which the work can be pursued with reasonable flexibility and minimum administrative burden.

Contracts are used only when the principal purpose is the acquisition of supplies or services for the direct benefit or use of the federal government. Grants or cooperative agreements are used when the principal purpose of the transaction is to stimulate or support research and development for another public purpose.

FAR 37.1 - SERVICES

"Nonpersonal services contract" means a contract under which the personnel rendering the services are not subject, either by the contract's terms or by the manner of its administration, to the supervision and control usually prevailing in relationships between the Government and its employees.

"Personal Services Contract" means a contract that, by its express terms or as administered, makes the contractor personnel appear, in effect, Government employees.

"Service Contract" means a contract that directly engages the time and effort of a contractor whose primary purpose is to perform an identifiable task rather than to furnish an end item of supply. A service contract may be either a nonpersonal or personal contract. It can also cover services performed by either professional or nonprofessional personnel whether on an individual or organizational basis. Some of the areas in which service contracts are found include the following:

(a) Maintenance, overhaul, repair, servicing, rehabilitation, salvage, modernization, or modification of supplies, systems, or equipment
(b) Routine recurring maintenance of real property
(c) Housekeeping and base services.
(d) Advisory and assistance services
(e) Operation of Government-owned equipment facilities, and systems
(f) Communications services

Free Small Business Federal Government Contracting Books And Supplements

You may download the book, Small Business Federal Government Contracting and its supplement, as well as the other titles listed above from the  “Box” in the right margin of this site.

Use the links below to access more recent articles here since the publication of the book and the supplement.

SMALL BUSINESS COMPANY TRAINING

MANAGING INDUSTRY TEAMING RELATIONSHIPS

UTILIZING THE FREEDOM OF INFORMATION ACT (FOIA) 

UNSOLICITED GOVERNMENT CONTRACT PROPOSALS

VITAL TIPS FOR PROJECT MANAGEMENT 

FIXED PRICE VS. COST PLUS IN CONTRACTING 

MAKING AN ASUTE BID/NO BID DECISION 

THE TRUTH IN NEGOTIATIONS ACT (TINA) 

You may also benefit from the free "Reference Materials" in the "Box". Contract agreements, incorporation instructions for all the US states, guidance on marketing and business planning are all included. 

Other books by Ken available as free downloads in the "Box" include:

"A Veteran's Photo/Poetry Journal of Recovery
From Post Traumatic Stress Disorder " 

"Odyssey of Armaments" My Journey Through the Defense Industrial Complex"

Need For Agility Drives Large And Small Business New Technology Partnerships

Image:  TetraTech

" WASHINGTON TECHNOLOGY" By Scott Lee

"Smaller players and the larger contractors work together in a new model of agile programs. With successful mentorship and partnership programs, larger contractors gain access to contracts for which they would otherwise be ineligible."

__________________________________________________________________________

"Conversely, smaller contractors that lack the resources for federal procurements can break into this competitive marketplace by teaming with larger providers.

At the same time, new acquisition reform efforts aimed at streamlining and improving technology procurements are helping to ensure that agency CIOs are more involved in the process, and are responsible for the success or failure of all IT projects at their agency.

For the agency, the combination of these developments creates greater demand for technology collaboration and agile solution development.  With increased CIO involvement and improved agency coordination, programs should benefit by sharing common capabilities through inter-program collaboration.  At the same time, with a shift towards smaller, agile application solutions, as opposed to traditional grand-scale programs, agencies can lower the risk of cost overruns and schedule slippage.

For the large contractors supporting the agency, increased collaboration and more agile development increases the need to team with smaller innovative tech firms in emerging IT areas and then share those capabilities across programs.

For example, with the increasing need for sharing geospatial data across not only the Defense Department but also civilian agencies, contractors can help CIOs leverage their existing geographic software and imagery with available commercial-off-the-shelf solutions from smaller software companies, as opposed to developing custom applications.

When customization is required for success, the same small software companies can help large contractors fill highly specialized capability gaps without the need to directly acquire the innovation. Ultimately, with the right teaming arrangement, program outcomes are optimized which benefits all industry partners.

However, there are always challenges when it comes to developing the right teaming relationship. There is often a lack of transparency and mistrust in the majority of teaming relationships.

Many of these challenges come down to a lack of communication, and a misunderstanding of what each side brings to the table. For smaller specialized companies, it is easier to show their value propositions to both the government customer and the larger primes.

In today’s rapidly evolving government IT arena, these unique value propositions can be anything from spatial data management to mobility to the Internet of Things (IoT) to specialized cybersecurity offerings. These are the new innovation areas that are moving away from being “talked about” to actually being implemented.

In particular, spatial data collection and visualization is fundamental to decision support for all federal agencies.  There will never be a shortage in the need for insightful, actionable data for helping government become more responsive and effective. Government will always need on-demand decision support data about a wide-range of subjects – including disaster recovery, income levels, air quality, disease patterns, environmental incidents or population trends.

For larger contractors, it may be difficult to build out or acquire these types of capabilities in a rapid fashion.  Furthermore, with acquisition reform efforts like FITARA giving agency CIOs more input in the procurement process, it’s even more important for larger contractors to demonstrate greater value with the right teaming arrangements.

Ultimately, we all want successful business outcomes produced by the unmitigated success of our customer agencies. This can be achieved through nimble teaming relationships where the smaller players and the larger contractors work together in a new model of agile programs."

Need for agility drives need for new technology partnerships

ABOUT THE AUTHOR:

Scott Lee is VP Defense & Intelligence TerraGo

A native of the Birmingham, AL area, Scott Lee joined the US Navy in 1993 as an all-source and imagery analyst serving aboard the USS Mount Whitney (LCC-20) in Norfolk, VA and USSTRATCOM in Omaha, NE. Following service and education in Omaha, he joined the ERDAS IMAGINE team in Atlanta, GA where he worked in several capacities to include training, project management and business development.

A Tool To Assess The Forthcoming Major Changes To The Federal Acquisition Regulation (FAR)

 

Image: Defense Acquisition University (DAU) Contracting Cone 

(PLEASE CLICK IMAGE TO ENLARGE)

GSA is working with the FAR Council and other stakeholders on major changes to the Federal Acquisition Regulation. "WASHINGTON TECHNOLOGY" - " FAR overhaul: The challenges in tackling federal procurement’s 5,000-page beast"

Examine the Defense Acquisition University (DAU) "Contracting Cone" as a utility in understanding changes by the Federal Government to the FAR and associated acquisition processes.

_________________________________________________________________

"DAU"

"The Contracting Cone outlines the full spectrum of available FAR and Non-FAR contract strategies. The supporting materials provide details about each contracting strategy, to enable collaborative discussions to select the right strategy based on environment, constraints, and desired outcomes. The goal of the interactive graphic below is to provide visibility into new or lesser known strategies and ensure the full range of contract strategies are considered.

Click on the strategies in the tables below to explore the details."

FAR Based
Fed Supply Schedules (FAR 8.4)	Task Order/Delivery OrderBlanket Purchase Agreement
Commercial Items (FAR 12)
Simplified (FAR 13)	Micro PurchasePurchase OrderBlanket Purchase Agreement
Negotiated Contracts (FAR 15)
IDIQ (FAR 16.5)	Single AwardMultiple Award
Letter Contract (FAR 16.603)
Agreements (FAR 16.7)	Basic AgreementBasic Ordering Agreement
Small Business (FAR 19)	Set-AsideDirect 8a
Broad Agency Announcement (FAR 35.016)
SBIR/STTR Programs (15 USC 638)
Commercial Solutions Opening (DFARS 212.2)

Non-FAR
Other Transactions	Research (10 USC 4021)Prototype (10 USC 4022)
Procurement for Experiments (10 USC 4023)
R&D Agreements	CRADA (15 USC 3710a)PIA (15 USC 3715)TIA (32 CFR Part 37)

Scenarios: What Are You Contracting For?

Compare 2-3 Contracting Strategies

Contract Strategy/Contract Type Matrix

Managing Subcontractors And Independents As A Small Business Prime Contractor

                       

              

Industry teaming is a fact of life in small business federal government contracting. Your team for a given contract pursuit may consist of several types of industry partners external to your organization. 

If you are the prime contractor on a multiple company program by virtue of a teaming agreement, the challenge may involve issuing purchase orders to independent contractors as individuals and negotiating fully executed subcontracts with firms subcontracting to you.

The techniques in managing each of these partner types are distinct. The contractual and regulatory factors are introduced in the following link:

What is a Small Business Federal Government Contractor

This article will convey guidance for a small business federal government prime contractor, in managing the external business relationships with other companies as subcontractors and independents as individuals.

EARLY AND CAREFUL PARTNER SELECTION/TEAM MANAGEMENT

Finding industry teaming partners should occur synonymous with finding an opportunity. We have previously discussed marketing federal business opportunities:

Multiple Front Marketing

SAM Contract Opportunities

Small Business Teaming

Assuming you have located an industry partner or perhaps a mix of subcontractors and/or independent individuals you wish to engage, make sure they have the capabilities to perform the parts of the statement of work on the program you are targeting. Remember that the quality of your proposal, your probability of a win, and ultimately your past performance rating on the contract, will reflect your supplier management. The government will hold you accountable for their performance. In some cases agencies will reserve the right to approve your key personnel and subcontractors before issuing your prime contract.

Two general guidelines should be observed:

1. Do not subcontract in excess of 40% of the program to another company in terms of hours, dollars and % of total work scope. The FAR regulations specify 49% as a ceiling but it is best to reserve 60% of the effort for your company employees and independent contractors under your control to avoid appearances of a front.

2. Do not exceed 50% of the internal labor hours for your company share of the program with contractors as individuals. Government source selection boards need some assurance that the capability to lead and perform major parts of the program resides in the permanent party of the small business prime contractor.

If you exceed the 50% rule for independents, include contingent hire agreements demonstrating the point in time where they will become full time employees or will be replaced by full time employees. A contingent hire agreement may be downloaded from the Box Net References Cube in the right margin of this site.

Sign subcontractors and independents to proprietary data agreements.  Develop thorough teaming agreements with subcontractors, including an explicit statement of work attachment to each agreement quantifying, the work scope guidelines in paragraph 1, above. A teaming agreement is available for download in the Box Net references cube at this site.

The independent should also understand the specific work and hours he or she will be expected to perform on the job and such personnel should be retained on a contractor retention agreement which is also available for download in the Box Net References cube at this site.

Teaming agreements, contingent hire agreements, contractor retention agreements and subcontractor proposals must be either included in your proposal submission to the government or made available for government fact finding.

CONTRACT DOCUMENTATION AND TRANSITION FROM PROPOSAL TO CONTRACT

During the proposal stage of the business relationship with your industry partners you will be issuing them requests for proposals (RFP’s) for their portion of the effort.

For independent contractors this may be as simple as asking them to sign contingent hire agreements or contractor retention agreements.


But you must include in the RFP’s to the companies which you propose as subcontractors the terms and conditions of your agency prime contract RFP and other specific guidance to make the proposal and subsequent contracting process work smoothly. This should include administrative guidelines and agreed upon cost targets and technical guidance.

Specify a due date for their proposals in response to your RFP in time to roll their data into your cost volume and provide guidance on the handling of fully loaded rate backup to which you do not have access to forward to the government auditors. This usually includes sealed packages provided by your subcontractors that you will not open, since they contain overhead and G&A rate information which is highly proprietary to the subcontractor.

Keep in mind that you are in a constant negotiation with these partners until you award them subcontracts to replace the teaming agreements when your team wins the program. Please see the following article for detail guidance on that point:

Contract Negotiation

Naturally the technical and management volumes of the proposal will be completed in consonance and in parallel with the subcontractor RFP cost proposal responses.

At contract award, be prepared to negotiate and execute formal subcontracts to the companies with whom you are teamed and to issue purchase orders to your independents to commence work. At that point you have achieved the contract baseline and you will commence work.
 Insure that your subcontracts and purchase orders contain limitation of funds and funding exposure protection for all parties in accordance with the following article:

Limitation of Funds and Funding Exposure

BASELINE MANAGEMENT

Please read the following article carefully on baseline management and bear in mind that work scope change sensitivity must be managed carefully and formally documented between you and your industry partners by change orders to formal subcontracts and purchase orders:

Contract Baseline Management

SUMMARY

This article has provided an overview of subcontractor and independent contractor management from the early marketing stages of a contract pursuit through proposal preparation and submission then contract award and baseline management.

Please read the reference links in the text above carefully and check the table of contents at this site for other information relevant to this topic.