Padding Costs for a Fixed Price Contract

What do you mean by "padding" costs?

I'll give you examples:

Bidder estimates 3 people to make $50/hr, but known to make only $35/hr.  Materials estimated at $40,000, and expected to cost only $30,000.  Fee is estimated at 6% but the expected profit is much more.  If the costs were lower and the expected profit is 12%, then the awards people would choke on the amount of the fee.  Bidder claims the extra padding is to cover possible risk.

Is this a sole source negotiated, new contract where the “bidder” provided a cost breakdown with its “bid” (proposal) or at the request of the government to support its sole source proposal?

The question of “defective pricing” depends upon whether this data is actual “cost or pricing data” to support a non-competitive proposal. There are also other factors to consider, depending upon the specific circumstances.

EDIT- Added this paragraph: If the data is “cost or pricing data”, in order to be “defective cost or pricing data”, the proposer must certify it in accordance with FAR 15.406-2   “Certificate of current cost or pricing data.”

However, based upon the scenario described, the supporting detailed data does appear to be false with the intent to mislead, regardless of whether or not it is legally considered to be “cost or pricing data” under the law and FAR in subpart 15.4.

To put it in simpler terms, the examples as, specifically described, appear to be lying with the intent to mislead a government official.

Corduroy Frog said:

Does "padding" costs for a fixed price contract constitute Defective Pricing?  Bear in mind that the customer has accepted the fixed price in the event of an award.

Does the complexion change if the customer requests "cost and pricing information"?

"Padding" a price by asking for an amount that is much higher than the cost estimate is not defective pricing. Defective pricing is giving the contracting officer certified cost or pricing data---assertions of fact---that were not accurate, complete, or current as of the date of price agreement.

Generally, estimates are not cost or pricing data, but the factual existence of an estimate is cost or pricing data. Thus, if a contractor develops multiple cost estimates, high, low, and most-probable, but discloses only the high estimate, and not the others, the nondisclosure would be an instance of defective pricing.

Certified cost or pricing data also include any statements of fact that an offeror provides in support of an estimate. 

If an offeror were to support a proposed price by stating in an estimate that an employee was paid $50/hr when, in fact, the employee was paid $35/hr, that would be an instance of defective pricing.

If the offeror provided a statement to the contracting officer that an employee had been paid $35/hr, but that the offeror planned to pay $50/hr in the future, when in fact there was no such plan, that, too, would an instance of defective pricing.

See, generally, FAR 15.407-1, Defective certified cost or pricing data. See also Bodenheimer, Defective Pricing Handbook, 2019-2020 Edition (Thomson Reuters, 2019).

joel hoffman said:

However, based upon the scenario described, the supporting detailed data does appear to be false with the intent to mislead...

I'm not sure that I agree.  It appears that the offeror is honest and has disclosed the historical information, and is asserting that the increase is to cover risk.  So I cannot discern any defective pricing.  If the Government thinks the proposed prices are too high, it can negotiate for lower prices.  That's fair.

Corduroy Frog said:

Does the complexion change if the customer requests "cost and pricing information"?

Assuming that this means that it isn’t cost or pricing data that will be required to be or has been certified as complete and accurate, it wouldn’t likely be termed as “defective pricing” under the defective cost or pricing clauses.

ji20874 said:

I'm not sure that I agree.  It appears that the offeror is honest and has disclosed the historical information, and is asserting that the increase is to cover risk.  So I cannot discern any defective pricing.  If the Government thinks the proposed prices are too high, it can negotiate for lower prices.  That's fair.

Some good points. I’ve been assuming heretofore that the proposer hasn’t disclosed or explained the basis of the pricing to the government negotiator. Mr. or Ms. Frog appeared to indicate that the proposed costs are inflated, at least in part, to make it look like the proposed profit rate is lower.

I just noticed that the OP has appeared to me to have edited their explanatory follow on post to add (or else I misread the original version of the second post):

Corduroy Frog said:

If the costs were lower and the expected profit is 12%, then the awards people would choke on the amount of the fee. Bidder claims the extra padding is to cover possible risk.

It is unclear to me whether the “bidder” explained (“claimed”) to the government negotiator that the “bid” is padded or that it is padded to cover extra risk. If so, it isn’t clear when - before, during or after acceptance and award.  

Corduroy Frog said:

Bidder claims the extra padding is to cover possible risk.

If the government negotiator was aware of the quoted claim during negotiations and agreed to the price, it would not appear to me to be “defective”, false or ultimately deceptive. There would have been no reliance on deceptive information.

It’s still unclear to me from the two posts whether this is information provided under a sole source negotiated action, a competitively negotiated action or an IFB action. Mr./Ms. Frog used the term “bidder” twice.

Corduroy Frog said:

I'll give you examples:

Bidder estimates 3 people to make $50/hr, but known to make only $35/hr.  Materials estimated at $40,000, and expected to cost only $30,000.  Fee is estimated at 6% but the expected profit is much more.  If the costs were lower and the expected profit is 12%, then the awards people would choke on the amount of the fee.  Bidder claims the extra padding is to cover possible risk.

Just want to capture the second post as of the time of my last post above.

Emphasis added concerning what appears to be contradictory or at least unclear language. ‘Would choke’ (if they knew?) and ‘bidder claims’ (to whom and when?).

Corduroy Frog said:

Bidder estimates 3 people to make $50/hr, but known to make only $35/hr.  Materials estimated at $40,000, and expected to cost only $30,000.  Fee is estimated at 6% but the expected profit is much more.  If the costs were lower and the expected profit is 12%, then the awards people would choke on the amount of the fee.  Bidder claims the extra padding is to cover possible risk.

You have not said what cost or pricing data were provided.  A contractor can base a proposed price on anything it wants.  It does not have to base its proposal on the current, complete and accurate data it provides the government.  The purpose of providing such data is to place the government in essentially the same position as the contractor in regard to estimating what it will cost to perform the contract.

31.205-7 discusses contingencies. Does FAR Part 31 apply to this solicitation and award? We don't know. But if it does, then contingencies ...

Quote

... that may arise from presently known and existing conditions, the effects of which are foreseeable within reasonable limits of accuracy; e.g., anticipated costs of rejects and defective work ... are to be included in the estimates of future costs so as to provide the best estimate of performance cost.

(Emphasis added.)

Thus, if the contractor can support its "padding" through reference to historical costs or to known/foreseeable risks (the effects of which can be quantified), then the "padding" is perfectly fine. Otherwise, not so much.

On 2/19/2021 at 5:47 PM, here_2_help said:

Does FAR Part 31 apply to this solicitation and award?

The OP stated the contract is FFP.

Retreadfed said:

The OP stated the contract is FFP.

Did the OP state whether the contract was subject to cost analysis? If so, I must have missed that. Perhaps it was competed and price reasonableness was determined in relation to other offerors' prices.

here_2_help said:

Did the OP state whether the contract was subject to cost analysis? If so, I must have missed that. Perhaps it was competed and price reasonableness was determined in related to other offerors' prices.

The OP isn’t talking. We don’t know if it is competitive or sole source. Apparently, a price breakdown has been furnished. That’s about all we know.

It's me again - appears a number of people don't know what I am presenting, and I may have given incomplete information.

The Frog is a Mr.

There is an intent to deceive.  No one wants to propose a fee of 12% because the selection committee would throw the contractor out on his butt.  So in order to get to the desired price, other costs have to be padded, and only a 6% fee is proposed.  The padding of labor or materials may (or may not) be to cover risk, and it appears if risk is a significant factor, the proposal is quite a bit more palatable to those who know.  Significant risk should be solved with a cost-plus contract, but for a small contractor, getting the customer to agree to a cost-plus contract is more difficult than hitting the moon with a pea-shooter.

The only question was whether the above-described practice was an example of defective pricing.  I read the response by Vern Edwards very intently, and it appears he is saying it is not deemed as defective pricing, unless cost and pricing information is requested.  It could be considered dishonest, and it seems to me that it is.  In the real world, however, putting the risk into an exorbitant fee is met with much more consternation than padding labor/material costs for risk.

Okay, based on the new information from the original poster, I am changing my mind.

You mentioned earlier that this is a fixed-price arrangement.  And I am assuming it is sole-source since it appears a cost analysis is being performed.  Are we talking about a fixed-price, sole-source procurement?

The parties need to agree on a bottom-line price.  Agreement on all of the cost elements is not required.  

If you are on the Government side, forget about everything you have been talking about and start a meaningful negotiation.  If you are on the contractor side, well, I don't have any advice for you.

Corduroy Frog said:

No one wants to propose a fee of 12% because the selection committee would throw the contractor out on his butt.

So, this is appears to a competitive selection, though Mr. Frog has not specifically clarified that. 

On 2/19/2021 at 6:10 AM, Vern Edwards said:

Defective pricing is giving the contracting officer certified cost or pricing data---assertions of fact---that were not accurate, complete, or current as of the date of price agreement.

If it is competitive, any cost and price breakdown furnished will not be “certified cost or pricing data” or “cost or pricing data” that will be “certified”.  

It is “data other than certified cost or pricing data” or can be termed as “cost or pricing information” - but it won’t be “certified” as “accurate, complete or current as of...”

It isn’t “defective pricing” for which the government could take a pricing adjustment under a contract clause for Defective Pricing.

Corduroy Frog said:

There is an intent to deceive

If it is false information, provided* with the intent to deceive, and the government doesn’t know or learn that it is false, thus is deceived and relies upon it to make make an award, depending upon the specific facts of the situation, it might be considered a false statement or false claim or otherwise fraudulent under other statutes than those concerning “defective pricing”.

However, the burden of proof would be upon the government, if they wanted to pursue the matter. 

(* provided, either with the proposal as a break down or upon a request of the government during the competition, e.g. to evaluate the reasonableness of the price)

A price adjustment for “defective pricing” is administratively available under the defective pricing clauses without having the additional legal burden, expense and effort to prove an intent to deceive or to prove false statements, false claims or other fraud under criminal statutes. That was one of the original intended benefits of the Truth in Negotiations Act, passed in 1962**. But that remedy is not available if this thread concerns a competitive acquisition for which an exception to allowing the government to require “certified cost or pricing data”.

** I remember one or more of my negotiations class instructors back in 1981 or so explaining that the Navy - Admiral Hyman Rickover in particular - were prime proponents for the enactment of TINA - with respect to negotiating for the Nuclear Submarine program back in the 1950’s and early 1960’s. Here is one Paper covering and/or referencing some of the history of TINA. When I get some time, I intend to do some more research to check if my memory is accurate.  

https://apps.dtic.mil/dtic/tr/fulltext/u2/a619685.pdf

Reading the foregoing, I am reminded of two lines from the last stanza of Tom O'Bedlam's Song:

"With an host of furious fancies,
Whereof I am commander,
With a burning spear and a horse of air
To the wilderness I wander.
By a knight of ghosts and shadows
I summoned am to tourney
Ten leagues beyond the wide world's end:
Methinks it is no journey."

🤗

Corduroy Frog said:

I read the response by Vern Edwards very intently, and it appears he is saying it is not deemed as defective pricing, unless cost and pricing information is requested.

I don’t think that Vern said that.

“Cost and pricing information” is not necessarily “certified cost or pricing data”.

On 2/19/2021 at 6:10 AM, Vern Edwards said:

Defective pricing is giving the contracting officer certified cost or pricing data---assertions of fact---that were not accurate, complete, or current as of the date of price agreement.

“Defective pricing” pertains to a specific remedy for a very specific type of requested “cost or pricing information”.

Corduroy Frog is mixing terms plus referred to  a “bidder”, “awards people”, “selection committee” and “contractor” .

Corduroy Frog said:

The only question was whether the above-described practice was an example of defective pricing.

That question has been answered and references provided.

Vern Edwards said:

That question has been answered and references provided.

He appears to have misunderstood your very good answer and references.

_____________

EDIT: Added the FAR 2.1 definition that includes a description of cost or pricing “information” that isn’t “certified cost or price information” -

“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. Such data may include the identical types of data as certified cost or pricing data, consistent with Table 15-2 of 15.408, but without the certification. The data may also include, for example, sales data and any information reasonably required to explain the offeror's estimating process, including, but not limited to—

(1) The judgmental factors applied and the mathematical or other methods used in the estimate, including those used in projecting from known data; and

(2) The nature and amount of any contingencies included in the proposed price.“

Well, I did my best. He's on his own.

Vern Edwards said:

Well, I did my best. He's on his own.

Yes, it was very good.

here_2_help said:

Did the OP state whether the contract was subject to cost analysis?

Whether the government performs cost analysis on a proposal does not prohibit a contractor from including anything it wants in its proposal for an FFP contract.  Further, the FAR does not prohibit a contracting officer from agreeing to a price for an FFP contract that may include unallowable costs so long as the price is fair and reasonable.

Retreadfed said:

Whether the government performs cost analysis on a proposal does not prohibit a contractor from including anything it wants in its proposal for an FFP contract.  Further, the FAR does not prohibit a contracting officer from agreeing to a price for an FFP contract that may include unallowable costs so long as the price is fair and reasonable.

My point was (as I suspect you know) that the contract type is not as relevant to the application of the cost principles as whether cost analysis is performed. The cost principles apply whenever the government performs cost analysis on the contractor's proposal. Your second sentence is true but not germane because that was not the point you were making in your previous post.

here_2_help said:

My point was (as I suspect you know) that the contract type is not as relevant to the application of the cost principles as whether cost analysis is performed.

Sorry, but I did not get that from your earlier post.  This brings up another issue with the drafting of the FAR.  Whether the government is to use the cost principles as a tool when conducting cost analysis is an ambiguous topic in the FAR.  FAR 31.102 says that the cost principles shall be used in the pricing of fixed price contracts whenever cost analysis is used.  On the other hand, FAR 15.404-1(c)(2) makes the use of the cost principles discretionary when conducting a cost analysis.

What is the latest threshold for Cost and Pricing Data??

Corduroy Frog said:

What is the latest threshold for Cost and Pricing Data??

To award a contract or to modify a contract?

Is there a separate threshold depending on whether it is a new contract or a mod??

Retreadfed said:

To award a contract or to modify a contract?

C. Frog, for the current threshold for contracts and mods, See: 15.403-4 Requiring certified cost or pricing data (10 U.S.C. 2306a and 41 U.S.C. chapter 35).

Check out paragraphs (a)(1),  (a)(2) and (a)(3).

Edit: Sorry, Retreadfed, I meant to respond to C. Frog. I didn’t notice that it was your post I quoted.

temporarily deleted.

On 2/22/2021 at 1:29 PM, Retreadfed said:

Sorry, but I did not get that from your earlier post.  This brings up another issue with the drafting of the FAR.  Whether the government is to use the cost principles as a tool when conducting cost analysis is an ambiguous topic in the FAR.  FAR 31.102 says that the cost principles shall be used in the pricing of fixed price contracts whenever cost analysis is used.  On the other hand, FAR 15.404-1(c)(2) makes the use of the cost principles discretionary when conducting a cost analysis.

Are you saying that the cost analysis “technique and procedure” in  (c)(2)  (iv) is discretionary? 
 “(iv) Verification that the offeror's cost submissions are in accordance with the contract cost principles and procedures in part  31 and, when applicable, the requirements and procedures in 48 CFR chapter 99, Cost Accounting Standards.”

“ ... (2) The Government may use various cost analysis techniques and procedures to ensure a fair and reasonable price, given the circumstances of the acquisition. Such techniques and procedures include the following:”

I would disagree with your conclusion that the cost analysis doesn’t have to consider the cost principles. , when the cost principles in 31.1 are applicable to the proposed contract action.

If the cost principles are applicable to the pricing, then cost analysis should verify that the cost submission is in accordance with the cost principles and, when applicable, CAS.

One must read the applicable FAR coverage in context to avoid ambiguity and rendering applicable requirements meaningless. Your assertion of ambiguity is certainly convenient. So is your assertion that a proposer can base its proposal on anything that it wants to.

joel hoffman said:

Your assertion of ambiguity is certainly convenient. So is your assertion that a proposer can base its proposal on anything that it wants to.

And true.