Fair Pricing with Cost Transparency Act

Vern Edwards said:

What do you think?

Well....

Vern Edwards said:

Will a new law and more regulation fix the problem?

No

Vern Edwards said:

If not, what would?

With many years under my belt I am reserved to think nothing will ever totally fix the problem.  I dislike saying it but cheaters cheat.  In such discussioins I always remember a conversation I had with a fellow CO who spent time in retail before coming to the government.  He worked for a big box company.   At first I was surprised but then I guess it made sense when he told me that the company acknowledged that shoplifting would always be a problem and had a line item in the company's books (my simple term) where X amount of product in dollar value was written off each year to such a loss.  When he let me know the amount for the one particular store he worked for in a city I was at the time amazed until I realized how much the store probably did in sales each year.

War story of sorts yes and circling back to the subject it is clear that regulation won't fix the problem.  Constant theme in Forum it would seem.  

To the question - acknowledge that some things will never get fixed, give some credit to the workforce that they do they best they can considering all the circumstances (to much regulation, adequacies of their abilities, adequacies of management, etc.) and deal with the "eaches" and move on.  And turn on a light bulb to Congress that legislation is not always the answer.

1. I learned long ago that relying on prices previously paid for something - especially in a non competitive acquisition or mod - is not a reliable indicator of fair and reasonableness. The prices relied upon could be inflated. There is often no context to how those prices were determined to be fair and reasonable. 

The IG report mentioned that and I am familiar with such situations from my Stateside assignments . It’s obvious, from being a WIFCON participant since it’s beginning, that many acquisition personnel favor and use this technique in non-competitive situations. It’s fast and relatively easy.

Relying only on prices previously paid in competitive acquisitions can sometimes also be unreliable. In Germany and some other  countries in the late 1980’s (and I expect that nothing has changed), the US Army was not using cost priced negotiated acquisition or estimating methods. In Germany, all US and German government construction contracts used unit priced contracts, based upon standard DIN defined units and estimated quantities. For estimating purposes for new contracts (and mods) The US and German government construction agencies simply collected unit pricing information for estimating and price analysis purposes.

My assistant Resident Engineer in the Kaiserslautern Area Office was German. Her fiancé, worked for a higher German State Construction Office that provided oversight of the various German construction offices in the Southwest States in Germany. He told her that German construction contractors working in the K-Town and nearby areas in the Rhineland Pfalz State were colluding during the initial contract competition to divide up awards. In addition, Kaiserslautern area contractors were paying a 3% kickback to certain high level K-Town Area Bauamt design and construction officials for awards of Indirect Construction contracts (the prevalent acquisition method) for the US Forces. Her fiancé’s office was in the investigative/fact finding stage. I was told not to share that information at the time.

I returned Stateside in the fall of 1989. About a year later,  My German friends who worked for me in K-Town told me that the German Government had indicted and were prosecuting at least the K-Town Bauamt Director and his Design office chief, maybe others and some contractors for corruption.  One of the two Bauamt officials died of a heart attack and the other went to prison.

The USACE Europe Division, who collected pricing information and used it for estimates and award purposes, and the various Army and Air Force  Installations relied upon historical unit pricing for new awards and for pricing mods. I doubt if they knew about any collusion and corruption. In my experience nobody had any expertise in cost based acquisition for sole source acquisition or mods or claims.

The above is only to stress that relying only upon previously paid prices for estimates or pricing purposes, while convenient, comparably simple and faster than also using cost based or other methods or other methods, isn’t always a reliable indicator of fair and reasonable pricing - particularly for sole source pricing. Yep - it’s faster and easier, saves work and provides justification for awarded prices. 

2. I agree with the proposed legislative measure to require contractor to provide cost or pricing data and other than cost or pricing data if necessary.

I wonder how much it would widely be used by the acquisition workforce for other than  - maybe - situations similar to Transdigm.

3. Would it fix the problem? Don’t know the context of “the problem”. 

But it would be available for those acquisition officials who need it and would use it and have some cost based acquisition expertise.

Here is the substance of the proposed law...

Quote

‘‘If the contracting officer determines that the information on the prices submitted by the offeror or contractor is not adequate for evaluating the reasonableness of the price of the contract, subcontract, or modification of the contract or subcontract, the offeror, contractor, or subcontractor shall be required to submit to the contracting officer uncertified cost information to the extent necessary to determine the reasonableness of such price.’’

(my emphasis)

But here is what the FAR already says...

Quote

FAR 15.403-3 Requiring data other than certified cost or pricing data.

      (a)(1) In those acquisitions that do not require certified cost or pricing data, the contracting officer shall—

                * * * * *

                (ii) Require submission of data other than certified cost or pricing data, as defined in 2.101, from the offeror to the extent necessary to determine a fair and reasonable price (10 U.S.C.2306a(d)(1) and 41 U.S.C.3505(a)) if the contracting officer determines that adequate data from sources other than the offeror are not available. This includes requiring data from an offeror to support a cost realism analysis;

                * * * * *

(my emphasis)

Is there a difference?

is uncertified cost information different than data other than certified cost or pricing data?

ji20874 said:

Here is the substance of the proposed law...

(my emphasis)

But here is what the FAR already says...

(my emphasis)

Is there a difference?

is uncertified cost information different than data other than certified cost or pricing data?

I believe that the purpose of the law is to put teeth into FAR 15.403-3 by making it a contractor requirement to provide it not just a KO requirement to “require it”.  The context cited is Trandigm and it’s refusal to provide cost and/or other data to justify sole source pricing of its manufactured parts.

Thanks, Joel, for that insight.

In the DODIG summary:

Quote

We determined that TransDigm earned excess profit on 46 of 47 parts purchased by the DLA and the Army, even though contracting officers followed the FAR and Defense Acquisition Regulation Supplement (DFARS) allowed procedures when they determined that prices were fair and reasonable for the 47 parts at the time of contract award. When we compared the awarded prices for the 47 parts on 113 contracts to TransDigm’s uncertified cost data, our analysis determined that only one part purchased under one contract was awarded with a reasonable profit of 11 percent. The remaining 112 contracts had profit percentages ranging from 17 to 4,451 percent for 46 parts. We determined profit percentages of 15 percent or below to be reasonable.

Emphasis added.

What is the FAR definition of excess profit?

joel hoffman said:

The context cited is Trandigm and it’s refusal to provide cost and/or other data to justify sole source pricing of its manufactured parts.

Why should TransDigm have to "justify" its pricing? What law requires a prospective contractor to justify its prices?

Very skeptical about that IG report.  

A single manufacturer of specialized parts purchased mostly, perhaps exclusively, by the US Government.  The buyer procures these items in small quantities as needed (so it seems from IG report).

There is a large risk / opportunity cost for the manufacturer here.  Accordingly, a large profit when it pays off. 

Don't like those high prices?  Don't buy in the least cost-effective way possible.    

I doubt cost analysis accounts for the opportunity cost of the manufacturer.    Must be some (likely substantial) cost for the manufacturer to keep making and storing these widgets, just so the (single?) buyer can purchase a few whenever they need them.   

Monopsony - Monopoly pricing is going to be messy and probably sub-optimal for one or both parties.  Econ 101 here.  

Analogy: A family member has a really nice vintage Porsche.  He needed some rando part for the engine.  From what I gather, this part is exclusively used by a few models of Porsche made in the early 2000s.  This part (forget its name or what it does, not a car guy) is literally a small piece of metal - no moving parts.  Weights a pound or two.   The material costs couldn't have been more than a few dollars.   The Porsche mechanic in our area had one in stock, and charged (approximately, this was a few years ago) $200.    $200 for a $5 part.    $5 for the part.  $195 for having a small retail warehouse of obscure German car parts located within a short driving distance.   This would be excess profit, no?

Vern Edwards said:

Why should TransDigm have to "justify" its pricing? What law requires a prospective contractor to justify its prices?

They did not have to, because no law was violated.  That brings us to this:

Vern Edwards said:

What do you think? Will a new law and more regulation fix the problem? If not, what would?

No, another new law will not fix this specific problem, at least, not without creating more problems than it's worth.  The solution to this problem was already passed in the 2020 NDAA, resulting in a prudent adjustment to current regulation.  That adjustment is already in the process of being promulgated, at DFARS Case 2020-D008 where it addresses 10 U.S.C. 2306a(d).  This statute produced the following changes proposed to DFARS about reporting and tracking contractors in CPARS for failure to make a good faith effort to comply with a reasonable request to submit data other than certified cost or pricing data:

Quote

215.403-3

Requiring data other than certified cost or pricing data.

(a)...

(4) In accordance with 10 U.S.C. 2306a(d) and in lieu of the factors for consideration listed in FAR 15.403-3(a)(4), a determination by the head of the contracting activity that it is in the best interest of the Government to make the award to an offeror that does not comply with a requirement to submit data other than certified cost or pricing data shall be based on consideration of pertinent factors, including the following:

(A) The effort to obtain the data.

(B) Availability of other sources of supply of the item or service.

(C) The urgency or criticality of the Government's need for the item or service.

(D) Reasonableness of the price of the contract, subcontract, or modification of the contract or subcontract based on information available to the contracting officer.

(E) Rationale or justification made by the offeror for not providing the requested data.

(F) Risk to the Government if award is not made.

and:

Quote

242.1502

Policy...

(g) Past performance evaluations in the Contractor Performance Assessment Reporting System...

(ii) Shall, unless exempted by the head of the contracting activity, include a notation on contractors that have denied multiple requests for submission of data other than certified cost or pricing data over the preceding 3-year period, but nevertheless received an award (10 U.S.C. 2306a(d)(2)(B)(ii)).

Basically, the Proposed Rule raises the stakes of TransDigm's actions, to, at a minimum, the level of an HCA for review.  It also shines a light on these types of actions by requiring they be addressed in past performance evaluations (which will affect source selections of the prime's management since these parts are sourced from their subs).  That should be enough to dissuade bad faith without creating too many unintended consequences, e.g., dissuading new entrants to the DoD industry pool.  No more involvement of Congress is needed, so the subject bill should not be enacted into law.

I hope a staffer on the Hill looks into this bill for redundancy with 10 U.S.C. 2306a(d).  I hope these Congresspeople talk to each other (how's that for theory?)

The issue which precipitated this bill is not the lack of C&P data, it seems to be more about whether C&P data should take priority over market conditions.

Just the fact that the IG report keeps using the term 'profit' instead of 'margin' makes me skeptical of the whole thing. I seriously doubt the IG review was sufficient to determine actual profit (margin is typically a percentage; profit is a number)

Quote

"We calculated the excess profit for the 46 parts by using the cost per part that TransDigm provided, adding a 15-percent profit, and subtracting the result from the contract’s price per unit."

Report No. DODIG-2019-060: Review of Parts Purchased From TransDigm Group, Inc. (Redacted) (defense.gov)

Trandigm's response is worth noting:

Quote

"TransDigm also said it believes the report "ignores significant real costs incurred," counting those costs as profit, and failed to adequately compare costs to similar commercial contracts...In truth, much of TransDigm's margin success comes from the commercial side of the business and the desire of airlines to pay a premium for hard-to-find spare parts. At the time the probe was ordered, sales to the U.S. government accounted for less than 10% of total revenue."

TransDigm Cleared for Takeoff After Pentagon Closes Probe Into Pricing | The Motley Fool

If Congress had appropriated sufficient funds back in the 90's to buy the most economic quantity of sea-launched cruise missiles we would have been paying around $500K per copy.  As it was we were paying closer to $1M.  I suspect if this same IG looked at it they would 'find' we overpaid by $500K each.

Vern Edwards said:

Why should TransDigm have to "justify" its pricing?

Contracting Officers must purchase supplies at fair and reasonable prices. When the KO can’t determine reasonableness from price analysis only when negotiating with a sole source, they would need additional data and perform some type of cost analysis. 

43 of the 47 different parts manufactured by Transdigm or its subsidiaries were NOT commercial items. The DoD IG report addressed those transactions where certified cost or pricing were not required.

“15.403-3 Requiring data other than certified cost or pricing data. 

 (a) (1) In those acquisitions that do not require certified cost or pricing data, the contracting officer shall—

                (i) Obtain whatever data are available from Government or other secondary sources and use that data in determining a fair and reasonable price;

                (ii) Require submission of data other than certified cost or pricing data, as defined in 2.101, from the offeror to the extent necessary to determine a fair and reasonable price (10 U.S.C.2306a(d)(1) and 41 U.S.C.3505(a)) if the contracting officer determines that adequate data from sources other than the offeror are not available.

              (iii) Consider whether cost data are necessary to determine a fair and reasonable price when there is not adequate price competition..”

Without quoting the applicability references in Part 31 (mainly because I accidentally deleted them from my notes and didn’t want to recopy them) let’s cut to the chase:

“31.201-3 Determining reasonableness.

       (a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.”

joel hoffman said:

Contracting Officers must purchase supplies at fair and reasonable prices. When the KO can’t determine reasonableness from price analysis only when negotiating with a sole source, they would need additional data and perform some type of cost analysis.

How will additional data help the CO if the seller says, "You can have all the data you want. It won't change the price. No one else stocks the item you want. If you don't want it at that price, we won't stock anymore either"?

The proposed legislation was intended to require contractors to provide reasonable, information in response to a request. I don’t know the contextual timeframe of the Congresswoman’s  speech .  The DoD IG Report was dated in 2019. The proposed FAR change doesn’t go that far.

There is no FAR definition of excess profits but when price of a part that cost $128 to make is over $7000, it should stand to reason that the profit is excessive. The company refunded some excessive profits, perhaps similar to the days before TINA when GAO would request refunds of excess pricing.

joel hoffman said:

There is no FAR definition of excess profits but when price of a part that cost $128 to make is over $7000, it should stand to reason that the profit is excessive.

Another possible explanation is a flawed methodology used to derive the excess profit.  The fact that the IG findings were producing margins of several thousand percent raises many red flags to me.  I've dealt with too many IG auditors to take for granted that they have the slightest clue of what they are doing.  

Quote

"The independent review concluded that the ability of contracting officers to obtain data in a sole-source commercial environment is constrained not only by the regulations, but by whether or not a contractor choses to provide requested information."

More regulation? Double-Secret Probation for all who fail to comply I assume?

joel hoffman said:

There is no FAR definition of excess profits but when price of a part that cost $128 to make is over $7000, it should stand to reason that the profit is excessive.

@joel hoffmanIn your opinion. I do not know of any official definition of "excess profits" that applies to government contracts. Do you? I know that there has been no restriction on profits since expiration of the Renegotiation Act during the 1970s. And I do not know of any law that compels a firm to sell to the government at a price the government likes.

joel hoffman said:

43 of the 47 different parts manufactured by Transdigm or its subsidiaries were NOT commercial items. The DoD IG report addressed those transactions where certified cost or pricing were not required.

Ah yes, but in a commercial environment it's easy for the vendor to walk away because of their seller power regardless of how the item is classified.

For the government to try and fix that with C&P data is like going to the Toyota dealer and expecting them to give you the price  you determined to be fair by pricing up all the components they used to build the car in December 2020. In fact, when I took my truck in for service last week the dealer was charging $12K over invoice for a  new 4-Runner.  At first I thought "wow; they are gouging the crap out of people." Then I noticed all the employees sitting around and the grand total of 5 cars on their lot, and wondered how they were getting paid.  So is that "gouging" or "covering your fixed costs as properly allocated to a very low volume of sales"?

See GAO, Statement of William H. Sheley, Deputy Director of Procurement and Systems Acquisition Division before the Senate Committee on Armed Services, on Profit Limitation Statutes, April 2, 1980:

Quote

The Renegotiation Act died because industry claimed, and the Congress agreed, that (i) excess profits were not consistently and equitably defined and (2) the costs of administration probably exceeded the benefits to the Government. With respect to this latter point, I don't believe it will ever be possible to measure costs vs. benefits of any profit limiting statute because the benefits being sought are largely intangible.

If the Government believes that contractors should not earn "excess profits" on Government contracts, then it would only be consistent to ensure contractors don't suffer "excess losses" on Government contracts. You can't have it both ways.

Also, requiring a contractor to include cost information does not mean the prospective contractor would be required to change its price.

General.Zhukov said:

Analogy: A family member has a really nice vintage Porsche.  He needed some rando part for the engine.  From what I gather, this part is exclusively used by a few models of Porsche made in the early 2000s.  This part (forget its name or what it does, not a car guy) is literally a small piece of metal - no moving parts.  Weights a pound or two.   The material costs couldn't have been more than a few dollars.   The Porsche mechanic in our area had one in stock, and charged (approximately, this was a few years ago) $200.    $200 for a $5 part.    $5 for the part.  $195 for having a small retail warehouse of obscure German car parts located within a short driving distance.   This would be excess profit, no?

@General.ZhukovI think this analogy is apt. What constitutes excess profit? One could argue that if adequate market research is conducted - whether by a consumer or the USG - then caveat emptor. If I buy a premium product like a Porsche, part of the "bargain" is that I'll need to pay premium prices for replacement parts. What's $200 to someone who probably paid >$100K for a Porsche? 

I hate resorting to worn phrases, but context is important.  

REA'n Maker said:

Ah yes, but in a commercial environment it's easy for the vendor to walk away because of their seller power regardless of how the item is classified.

For the government to try and fix that with C&P data is like going to the Toyota dealer and expecting them to give you the price  you determined to be fair by pricing up all the components they used to build the car in December 2020. In fact, when I took my truck in for service last week the dealer was charging $12K over invoice for a  new 4-Runner.  At first I thought "wow; they are gouging the crap out of people." Then I noticed all the employees sitting around and the grand total of 5 cars on their lot, and wondered how they were getting paid.  So is that "gouging" or "covering your fixed costs as properly allocated to a very low volume of sales"?

And this. 

Scarcity is a huge driver of cost. 

If I was in the start-up business, I'd take a deep dive into what companies like Transdigm are producing and try to offer a competing product. Sell the heck out of it to whomever in the acquisition office will listen, and angle for a competitive procurement. 

Then again, if I were in the start-up business, I'd probably run as far and as fast away from an industry as heavily-regulated as Federal contracting. #sadbuttrue

IMO the real question is, if the KO found the price to be reasonable, on what grounds did the auditor make their decision and what information did the auditors have that the KOs didn’t.  I read the IG report but not reading the BCM or P/NM it’s hard to really see how the price was determined reasonable other than yeah this is what we paid last time and it’s in line, a little more, or a little less now than it was then…  

Yes, we all know we have an issue with Professionalism in the series and the training is less that stellar and many KOs just want to satisfy the PM and the incentive for the PM is to spend the money to get it off their books, which in itself is a perverse incentive. Until the goal is to not bankrupt yourself at the end of every FY and KOs take the approach that they are spending their own money rather than meet my milestone, award the thing and get the PM off my back,  whatever congress passes won’t change the outcome.

I guess congress could pass a law that gives them the ability to clawback money that someone determines, within a reasonable period, they overpaid for the items. But then again, who would do business with the Govt with such a clawback in the contract and who would determine whether or not the overpayment exists? Clearly the KO or the KO’s next level thought the price was fair because often the alternative is to get nothing, and in the SS environment the KTR has you over a barrel,  but that exists in any environment, until new competitors enter the market and drive prices lower.

Last month, I saw another DoD-IG report on TransDigm Group and I thought I ignored it.  I didn't and it is on the Home Page.

That report is Audit of the Business Model for TransDigm Group Inc. and Its Impact on Department of Defense Spare Parts Pricing (DODIG-2021-043).  It went public on 12/13/21.  The DoD-IG report that Vern posted was from 2/25/2019 and appears to be part 1 of this effort.  

I decided to see what TransDigm Group had to say about the latest DoD-IG report and it is:  TransDigm Comments on DOD IG Report. dated 12/13/2021.

The draft bill that Vern posted is labeled the Second Session of the current Congress.  In short, if that bill is/has been introduced it will be in 2022.  If it goes nowhere over the next 6 or 7 months watch the next House version of the NDAA for 2023.

If the government wants better prices, it must do better requirements planning, market analysis, and strategizing, and it must educate and train a cadre of first rate price negotiators.

New "cost data" laws will accomplish nothing. But Congress's only power is legislation, so laws are the only solutions it understands. And the top people in agencies, the political appointees, are afraid to say that, and are unable to propose a better alternative.

It will do no good to give more cost data to people who lack market savvy, a long-term strategy, and negotiation table know-how. It will only overwhelm and confuse them.

As William Munny told Little Bill, "Deserve's got nothin' to do with it."

Vern Edwards said:

How will additional data help the CO if the seller says, You can have all the data you want. It won't change the price. If you don't want it at that price, we won't stock anymore.

The proposed legislation appears to be targeted toward a specific contractor.

Don Mansfield said:

…requiring a contractor to include cost information does not mean the prospective contractor would be required to change its price.

I agree.

uva383 said:

IMO the real question is, if the KO found the price to be reasonable, on what grounds did the auditor make their decision and what information did the auditors have that the KOs didn’t.  I read the IG report but not reading the BCM or P/NM it’s hard to really see how the price was determined reasonable other than yeah this is what we paid last time and it’s in line, a little more, or a little less now than it was then…  

Yes, we all know we have an issue with Professionalism in the series and the training is less that stellar and many KOs just want to satisfy the PM and the incentive for the PM is to spend the money to get it off their books, which in itself is a perverse incentive. Until the goal is to not bankrupt yourself at the end of every FY and KOs take the approach that they are spending their own money rather than meet my milestone, award the thing and get the PM off my back,  whatever congress passes won’t change the outcome.

I guess congress could pass a law that gives them the ability to clawback money that someone determines, within a reasonable period, they overpaid for the items. But then again, who would do business with the Govt with such a clawback in the contract and who would determine whether or not the overpayment exists? Clearly the KO or the KO’s next level thought the price was fair because often the alternative is to get nothing, and in the SS environment the KTR has you over a barrel,  but that exists in any environment, until new competitors enter the market and drive prices lower.

I thought it has been explained in the audit report and in at least two examples that relying only on previous sales pricing doesn’t necessarily produce a fair and reasonable price. It covers the KO’s ass  to justify why they paid a proposed price.

Vern Edwards said:

If the government wants better prices, it must do better requirements planning, market analysis, and strategizing, and it must educate and train a cadre of first rate price negotiators.

…It will do no good to give more cost data to people who lack market savvy, a long-term strategy, and negotiation table know-how. It will only overwhelm and confuse them.

As William Munny told Little Bill, "Deserve's got nothin' to do with it."

I agree.

There is another possible view. If a contractor can get away with outrageous prices on sole source acquisitions, KO’s who take the easy route to justify what they are paying and poor negotiators or worse, those that don’t negotiate, why wouldn’t they keep doing it?   

Nothing compels a firm to sell to the government but I’ll bet that a firm would rather sell products at lower than outrageous prices than sell little or nothing.

From the Transdigm response:

Quote

The report presents profit percentages in a misleading and provocative manner.  This includes computing profit as a percentage of cost rather than as a percentage of revenue—the internationally recognized method and business standard

When you see a report with "findings" that look more like statistical outliers you have to question the entire methodology - and this report was used as the basis for proposed legislation.  Gosh; it's almost as if the people we sent to Washington will use anything to justify using the power of government to punish their enemies and gain the support of the most fanatical and febrile zealots among us.

joel hoffman said:

I thought it has been explained in the audit report and in at least two examples that relying only on previous sales pricing doesn’t necessarily produce a fair and reasonable price. It covers the KO’s ass  to justify why they paid a proposed price.

Nor does a clumsy attempt at calculating cost & profit necessarily produce a fair and reasonable price.  COs and CSs are not auditors.

I negotiated a 'reverse' deal whereby the Navy was selling GFM/GFP from the losing contractor to Hughes after a down-select.  Hughes' offer was based on their total costs to buy and rehab the GFM/GFP, not the price the Navy paid when they bought the GFM/GFP.  Hughes was willing to walk away at the cost for them to buy new material.  The biggest hurdle I faced was getting my leadership to understand that C&P data was irrelevant and market conditions were the primary driver of the negotiated price.

On 1/21/2022 at 4:52 AM, REA'n Maker said:

Gosh; it's almost as if the people we sent to Washington will use anything to justify using the power of government to punish their enemies and gain the support of the most fanatical and febrile zealots among us.

Outrage is fashionable in Congress, and elsewhere.

Maybe, instead of focusing on the contracting process, Congress should ask why the government buys and uses things that will need hard-to-get and pricey spare parts in a few years.

How much longer are we going to need manned "fighter" aircraft and strategic bombers? ("Dogfight" means firing a missile at a plane that's still over the horizon.) How long will aircraft carriers last in a war with a major nation armed with hypersonic missiles? (Like China.) Do we still need airborne infantry divisions? (To make mass drops behind enemy lines? Really? Like Market-Garden in WWII, that great success?)

How many of our "needs" are driven by necessity and how many by a desire for cultural preservation? Nostalgia?

Vern Edwards said:

How many of our "needs" are driven by necessity and how many by a desire for cultural preservation? Nostalgia?

I do not know why but your post brought this to mind "Victory Vertical".

I forget where I first found this, but here is a quote by Henry Ford on prices/costs that I often share when I hear/see similar debates as this one:

Quote

"Our policy is to reduce the price, extend the operations, and improve the article. You will notice that the reduction of price comes first. We have never considered any costs as fixed. Therefore, we first reduce the price to the point where we believe more sales will result. Then we go ahead and try to make the prices. We do not bother about the costs. The new price forces the costs down. The more usual way is to take the costs and then determine the price; and although that method may be scientific in the narrow sense, it is not scientific in the broad sense because what earthly use is it to know the cost if it tells you that you cannot manufacture at a price at which the article can be sold? But more to the point is the fact that although one may calculate what a cost is, and of course all of our costs are carefully calculated, no one knows what a cost ought to be. One of the ways of discovering it...is to name a price so low as to force everybody to dig for profits. We make more discoveries concerning manufacturing and selling under this forced method than by any method of leisurely investigation." - Henry Ford

Matthew Fleharty said:

I forget where I first found this, but here is a quote by Henry Ford on prices/costs that I often share when I hear/see similar debates as this one...

Good philosophy when you're engaged in mass production.

REA'n Maker said:

Nor does a clumsy attempt at calculating cost & profit necessarily produce a fair and reasonable price.  COs and CSs are not auditors.

I negotiated a 'reverse' deal whereby the Navy was selling GFM/GFP from the losing contractor to Hughes after a down-select.  Hughes' offer was based on their total costs to buy and rehab the GFM/GFP, not the price the Navy paid when they bought the GFM/GFP.  Hughes was willing to walk away at the cost for them to buy new material.  The biggest hurdle I faced was getting my leadership to understand that C&P data was irrelevant and market conditions were the primary driver of the negotiated price.

That’s great. Now, please show how a part that allegedly cost $128 to produce and sold for over $7000 is a fair and reasonable price buying it from the manufacturer, not a dealer. I’m assuming that the KO or CS justified the priced based upon historical prices for that item. Perhaps I am assuming too much.

joel hoffman said:

Now, please show how a part that allegedly cost $128 to produce and sold for over $7000 is a fair and reasonable price buying it from the manufacturer, not a dealer.

I'm not following your point about manufacturer vs. a dealer.   

If you see a pair of these vacuum tubes that cost less than $128 to produce selling for $7000, buy them quick because you can flip them and make some serious bucks. Or would that be corrupt?

NOS Western Electric 300B, Black Plate, 1964 & 1966, Matched Pair | TubeDepot.com

On 1/20/2022 at 8:03 AM, Vern Edwards said:

The chair of the House Committee on Oversight and Reform is proposing a new law, the "Fair Pricing with Cost Transparency Act.

What do you think? Will a new law and more regulation fix the problem? If not, what would?

I looked through the IG report.  Maybe this recommendation has the most merit to me

Quote

• establish a team of functional experts to analyze data reported as a result of the revised and updated memorandum. The team of functional experts should assess parts and contractors deemed to be at high risk for unreasonable pricing and identify trends and perform price analysis and cost analysis of high-risk parts to identify lower cost alternatives or fair and reasonable pricing for future procurements.

If an agency is buying something needed, they ought to have knowledgable functional experts that at least can say what’s a reasonable price/cost.  COs can leverage that expertise for negotiating. 

The way most COs are trained combined with limited experience, they can’t really benefit from cost or pricing data or other price/cost information.  Sure auditors are available but the process of using them is cumbersome and time consuming.  When a CO finally gets the audit findings, contractors can bring up lots of new information during negotiations.  Then often the CO is lost for lack of understanding and assistance.  It’s either wing it or go back again to the auditor.

Here’s a question - how many government negotiators understand accounting and specifically cost accounting?

$128 : $7000 = $0.128 : $7.00

I can easily see $7.00 as a reasonable price for something that costs 12 or 13 cents to produce.  Think of a specialty bottle of water.

Or look at buying a new vehicle today, especially those in demand.  A $50,000 MSRP Ford Bronco is selling some places at $30,000 over sticker.  Wonder what cost or pricing data from Ford shows as the cost?

Just like lots of contracting areas, we don’t need more policy, procedures, regulations or laws.  We need better and trained people who are held accountable for results and rewarded accordingly for good performance.

And who knows?  That contract with Transdigm might have delivered the part that kept an airplane flying.  It might be that under the circumstances, the best possible contract price was negotiated.

I honestly don’t know how much manufacturers normally mark up their products. I do know that a friend of mine is related to a family who still owns one of the original Ford dealers in Montana or Idaho. FMC would sell the dealer one vehicle per year at a deeply discounted price. The family let my friend buy a new 1997 Ford F-150 under that program. The dealer sticker price was about $23,000. He paid $13,000 for it including shipping from the factory.  Of course that doesn’t necessarily represent the FMC cost. But the dealer cost at the time would have been much closer to $19,000- $20,000.

I can’t speak for the present but in the late 60’s to early 70’s, the Air Force Academy Cadet Store sold everything to Cadets at cost with no markup. The store sold a wide variety of goods like a smaller Base Exchange Store. Most everything cost about 50% of suggested or pre-tagged retail prices. It seemed to me at the time, comparing prices between other stores and the Cadet Store, that retail store prices ran about 100% of a store’s cost from a manufacturer or wholesale supply. Of course that also included all of a retail store’s costs plus profit margins.

So, yes - I can see that normal retail markups on supplier prices for their internal costs plus profit can be substantial and I don’t have a clue what normal manufacturer markups in a competitive market are.

I say competitive because the FAR cites    a competitive market in the description of “fair and reasonable price”.

joel hoffman said:

I honestly don’t know how much manufacturers normally mark up their products.

Is the product sold in a competitive market?

If so, maybe there are two questions: Not how much they can mark it up, but (1) how much can they sell it for and (2) how little can they make it for.

See Car: A Drama of the American Workplace (1999), by Mary Walton. One of the best business books I've ever read. In fact, THE best.

Vern Edwards said:

Is the product sold in a competitive market?

If so, maybe there are two question: Not how much they can mark it up, but (1) how much they can sell it for and (2) how little they can make it for.

See Car: A Drama of the American Workplace (1999), by Mary Walton. One of the best business books I've ever read.

Yes competitive. I was editing my post to add that while you posted.🤠

Vern Edwards said:

See Car: A Drama of the American Workplace (1999), by Mary Walton. One of the best business books I've ever read. In fact, THE best.

I’ve read summaries and reader reviews. Looks fascinating and reminds me of one of my favorite recent movies, “Ford vs. Ferrari”.

Modern textbooks on product and service pricing describe three basic pricing strategies: cost-based, market-based, and value-based.

The Contract Pricing Reference Guides describe cost-based and market-based pricing in Volume 1, Price Analysis, but do not describe value-based pricing. The choice of strategy is up to the seller.

FAR Subpart 15.4 reflects a cost-based strategy, as does the DODIG attack on TransDigm. The DODIG has asserted that profit in excess of 15 percent of costs is "excessive".

1. Is there any legal requirement that companies selling to the government take a cost-based pricing approach to product pricing and price negotiation?
2. Is there any moral imperative that companies take a different approach to pricing when dealing with the government than with other customers?
3. If no to Questions 1 and 2, is the government's application of policies grounded in cost-based pricing (e.g., TINA) overly broad?
4. If so, when if ever should the government demand a cost-based approach?
5. Is it possible that the government's cost-based pricing apparatus (requiring detailed cost proposals, TINA, proposal "audits," etc.) costs more than it's worth, as perhaps demonstrated by the outcome of the 10-year United Technologies defective pricing litigation?

https://www.wiley.law/alert-3531

https://www.crowell.com/files/20190401-Defective-Pricing-and-FCA.pdf

https://www.crowell.com/pdf/newsroom/GovtContractor_Bodenheimer_Oct06.pdf

https://www.opn.ca6.uscourts.gov/opinions.pdf/15a0062p-06.pdf

@Vern Edwards  My responses:    

1. Is there any legal requirement that companies selling to the government take a cost-based pricing approach to product pricing and price negotiation?  No
2. Is there any moral imperative that companies take a different approach to pricing when dealing with the government than with other customers? No
3. If no to Questions 1 and 2, is the government's application of policies grounded in cost-based pricing (e.g., TINA) overly broad? Yes
4. If so, when if ever should the government demand a cost-based approach? In limited circumstances, yes.  The government is a unique buyer for some things and a cost-based approach can be the only reasonable method.  But the exceptions are very few. 
5. Is it possible that the government's cost-based pricing apparatus (requiring detailed cost proposals, TINA, proposal "audits," etc.) costs more than it's worth, as perhaps demonstrated by the outcome of the 10-year United Technologies defective pricing litigation?  Certainly.  In most situations, the government should have a sound understanding of a fair price.  Cost-based pricing tools are often used just because policies say they are required but may not add value.

I especially liked the defective pricing litigation statement that the government wasn’t injured because it got what it paid for.

On 1/21/2022 at 2:52 PM, joel hoffman said:

That’s great. Now, please show how a part that allegedly cost $128 to produce and sold for over $7000 is a fair and reasonable price buying it from the manufacturer, not a dealer.

As Vern points out, cost of production is only one way to analyze whether a price is fair and reasonable.

Consider this: if more than 15% profit is "unreasonable" I expect the DODIG to investigate the COVID vaccine contracts next. The vaccine reportedly costs approximately $1.20 per dose to produce, yet the US Government paid anywhere from $15-$20 per dose...that's a "profit" of over 1,000%! 😳

Duplicate Post

Matthew Fleharty said:

Consider this: if more than 15% profit is "unreasonable" I expect the DODIG to investigate the COVID vaccine contracts next. The vaccine reportedly costs approximately $1.20 per dose to produce, yet the US Government paid anywhere from $15-$20 per dose...that's a "profit" of over 1,000%! 😳

Lots of luck with that DoDIG.  The majority of the contracting work was done by HHS.  I also don’t think any cost data was involved.  Even though sources claim production cost is $1.20 per dose, it’s just speculative and there’s no real basis for that.  This is one of those instances where suppliers have everyone over a barrel.  We don’t want to pay that?  Suppliers respond with “We will sell it elsewhere.”

formerfed said:

Lots of luck with that DoDIG.  The majority of the contracting work was done by HHS.  I also don’t think any cost data was involved.  Even though sources claim production cost is $1.20 per dose, it’s just speculative and there’s no real basis for that.  This is one of those instances where suppliers have everyone over a barrel.  We don’t want to pay that?  Suppliers respond with “We will sell it elsewhere.”

I think the Army awarded the contracts for the original round of COVID vaccines. Nevertheless, I wasn't being serious - just trying to establish the absurdity of using an arbitrary 15% markup brightline with a product that is relevant in all of our lives

Matthew Fleharty said:

Nevertheless, I wasn't being serious - just trying to establish the absurdity of using an arbitrary 15% markup brightline with a product that is relevant in all of our lives

Sorry, I wasn’t trying to be argumentative.  I completely agree.

On 1/22/2022 at 12:48 PM, Vern Edwards said:

Modern textbooks on product and service pricing describe three basic pricing strategies: cost-based, market-based, and value-based.

The Contract Pricing Reference Guides describe cost-based and market-based pricing in Volume 1, Price Analysis, but do not describe value-based pricing. The choice of strategy is up to the seller.

FAR Subpart 15.4 reflects a cost-based strategy, as does the DODIG attack on TransDigm. The DODIG has asserted that profit in excess of 15 percent of costs is "excessive".

1. Is there any legal requirement that companies selling to the government take a cost-based pricing approach to product pricing and price negotiation?
2. Is there any moral imperative that companies take a different approach to pricing when dealing with the government than with other customers?
3. If no to Questions 1 and 2, is the government's application of policies grounded in cost-based pricing (e.g., TINA) overly broad?
4. If so, when if ever should the government demand a cost-based approach?
5. Is it possible that the government's cost-based pricing apparatus (requiring detailed cost proposals, TINA, proposal "audits," etc.) costs more than it's worth, as perhaps demonstrated by the outcome of the 10-year United Technologies defective pricing litigation?

These questions harken back to this fascinating discussion thread from last year featuring Vern and @bob7947 @joel hoffman @here_2_help:

After reviewing the history and ideas on display in there, my answer to question #5 is "No"; instead, the Courts should be eliminated from the dispute process and a contractor should got one shot at resolving a TINA dispute via board of contract appeals.  Yes, this takes an act of Congress to change the statute that is pointed out in the thread by Bob, but it would stop the endless, costly appeals you cite as evidence for TINA costing more than it's worth.

A much simpler fix is available to eliminate the impetus for attacks on entities like TransDigm for not using a cost-based strategy.  When a seller uses market-based or value-based pricing, a TINA exception often inherently applies.  If a CO determines one of the five exceptions to certified cost or pricing data requirements applies, I think there is plenty of permissibility at FAR 15.403-3(a) already for COs to be directed by memorandum to use an expanded definition of "price analysis" that could be added to the Contract Pricing Reference Guides (CPRG).  That definition could include market-based and value-based pricing options and could direct the buyer to ask seller to categorize its pricing approach as one of the three, so buyer knows which analysis method to use.  The CPRG is the key here, to avoid any more Congressional acquisition reform delays and finger-pointing.  Whoever owns and updates the CPRG is the office of primary responsibility for this.  I wonder what wickets they must jump through to change it.

@WifWafAre you saying that it's not possible that the government's cost-based pricing apparatus costs more than it's worth?

And you are proposing that Congress revise the Contract Disputes Act of 1978 to eliminate appeal of a CO's final decision to the Court of Federal Claims and then to the Court of Appeals for the Federal Circuit and on to the Supreme Court?

And you think those two courses of action would be simple?

If your answers to the above three questions are yes, then I question your notions of probability and cost-benefit analysis.

Vern Edwards said:

@WifWafAre you saying that it's not possible that the government's cost-based pricing apparatus costs more than it's worth?

No I am not - apologies for misreading the question.  I answered more of a question of "What is the solution to a cost-based pricing apparatus (requiring detailed cost proposals, TINA, proposal "audits," etc.) that costs more than it's worth?"

WifWaf said:

When a seller uses market-based or value-based pricing, a TINA exception often inherently applies.

No TINA exception is predicated upon the seller's pricing strategy.

Vern Edwards said:

And you are proposing that Congress revise the Contract Disputes Act of 1978 to eliminate appeal of a CO's final decision to the Court of Federal Claims and then to the Court of Appeals for the Federal Circuit and on to the Supreme Court?

And you think those two courses of action would be simple?

I will clarify my assumptions.  To do so I will answer Question #1.  Keep in mind I am not advocating for anything here, just stating facts.  My answer to "Is there any legal requirement that companies selling to the government take a cost-based pricing approach to product pricing and price negotiation?" is "Yes": see provision FAR 52.215-20's incorporation of FAR Table 15-2, paragraph II.A.(2) where a CO may instruct contractors, "Obtain certified cost or pricing data from prospective sources for those acquisitions (such as subcontracts, purchase orders, material order, etc.) exceeding the threshold set forth in FAR 15.403-4 and not otherwise exempt, in accordance with FAR 15.403-1(b)."  Table 15-2 was written that way because the statute at 10 U.S.C. 2306a behind FAR's subcontract pricing policy requires the CO to ensure an offeror for a subcontract is required to submit cost or pricing data before the award of the subcontract at a threshold price or higher.

Because of this, what I submitted to you assumed that the alternative to revising the Contract Disputes Act is that Congress revise the Truth in Negotiations Act.  How else could the government's application of policies grounded in cost-based pricing (e.g., TINA) be converted to market-based or value-based in circumstances where no exception to requirements for certified cost or pricing data applies?

WifWaf said:

My answer to "Is there any legal requirement that companies selling to the government take a cost-based pricing approach to product pricing and price negotiation?" is "Yes": see provision FAR 52.215-20's incorporation of FAR Table 15-2, paragraph II.A.(2) where a CO may instruct contractors, "Obtain certified cost or pricing data from prospective sources for those acquisitions (such as subcontracts, purchase orders, material order, etc.) exceeding the threshold set forth in FAR 15.403-4 and not otherwise exempt, in accordance with FAR 15.403-1(b)."

@WifWafYou are misinformed.

Nothing in FAR Table 15-2 requires a contractor or subcontractor to use a cost-based approach to product pricing. It requires only that the contractor submit certified cost or pricing data and prescribes a format for doing so.

FAR Table 15-2 does not require that the price be based on the certified cost or pricing data or set in a particular way. The certified cost or pricing data might indicate that the deliverable will cost $X to produce, but the contractor is free to set is price at $2X or $10X or $100X.

TINA is a disclosure statute, not a pricing statute.

Vern Edwards said:

Nothing in FAR Table 15-2 requires a contractor or subcontractor to use a cost-based approach to product pricing. It requires only that the contractor submit certified cost or pricing data and prescribes a format for doing so.

FAR Table 15-2 does not require that the price be based on the certified cost or pricing data or set in a particular way. The certified cost or pricing data might indicate that the deliverable will cost $X to produce, but the contractor is free to set is price at $2X or $10X or $100X.

TINA is a disclosure statute, not a pricing statute.

If this is the intent of the statute and a revision to TINA is not required, then two things are needed: regulatory changes, and a culture shift.

The statute was promulgated at FAR Table 15-2 requiring prime contractors to, "Conduct cost analyses for all subcontracts when certified cost or pricing data are submitted by the subcontractor."  This does not leave room for a value-based "4,451 percent profits" (to quote the DODIG) in the same context where cost analysis as defined as, "the review and evaluation of any separate cost elements and profit or fee in an offeror's or contractor's proposal, as needed to determine a fair and reasonable price..." [FAR 15.404-1(c)(1)].  Then of course at the prime level, FAR 15.404-1(a)(3) requires, "Cost analysis shall be used to evaluate the reasonableness of individual cost elements when certified cost or pricing data are required."  Some of this appears to have played the telephone game with Congress's original intent.  Perhaps a taskforce like a miniature Section 809 Panel could be enlisted to reconcile these regulations to the statute.

Once the FAR and all its Supplements are cleaned up, as for the culture shift, I would recommend market- and value-based pricing be introduced to COs via a cadre-of-experts approach, similar to the way DCMA Commercial Item Group was established.  Unfortunately, that took an act of Congress too (-; just a few NDAAs).  The cadre would be experts on analyzing the "judgmental information" included in the FAR 2.101 definition of "Data other than certified cost or pricing data".  I assume all acquisitions where value-based pricing is used would require this uncertified data.

Therefore, to resolve the problem at hand, I submit my post from earlier today (at least revise the CPRG) for acquisitions in which certified cost or pricing data are not required, and I submit the above for acquisitions in which the data are required.

The purpose of cost or pricing data is not to force the contractor into cost-based pricing.  Rather, the purpose is to have the contractor disclose its costs so that the Government can understand and prepare for any negotiations that might be appropriate.  Thus, I agree that TINA is a disclosure statute, not a pricing statute.  

If a contracting officer saw a certified cost or pricing submission with a 4,451% mark-up for profit, one supposes that contracting officer might benefit from that information in his or her own negotiations preparations.  But even though thousands of contracting officers have attended DAU negotiations classes, how many of them actually know anything about negotiating?  Six?  Forty? A hundred?  Whatever the number is, it seems to me that it is a very small number.

@WifWafYou are making this too hard.

As ji20874 has pointed out, the purpose of TINA is to ensure the CO has the information needed to make a reasonable estimate of what it will cost the contractor to perform. The presumption is that a reasonable cost plus a reasonable profit will equal a reasonable price, no matter how the contractor has set its price. That would be the government's going-in negotiation position.

As mentioned at the beginning of this thread, there are at least three approaches to pricing, only one of which is cost-based. The other two are market-based and value-based. And some companies likely use some combination of methods.

How about we apply TINA only to major system production contract actions and allow agency heads to apply it to sole source contract actions valued at less than the major system threshold but more than $50 million on a case-by-case basis and with written risk-based justification. That would reduce the cost of its administration, but would entail some risk of price gouging. We'll reduce that risk by setting up a special pricing and negotiation training program for experienced COs who will be assigned to negotiate cost-based pricing actions.

We'll let agencies request noncertified cost or pricing data in sole source contract actions valued at between $50 million and $10 million when pricing will be cost-based, but not when it's market-based or value-based. Offerors would have to disclose their pricing method. When pricing is market-based or value-based, offerors would have to provide a description of how they arrived at the price they propose.

Would that scheme expose the government to too much risk of price gouging? Would the risk exceed the cost of wider application? We don't know, so we'd have to do some fact-based policy analysis.

I would like to clarify one aspect of cost based pricing. Modifications of existing contracts pursuant to a clause that provides for a price adjustment based upon cost impacts/increase/decrease in contractor’s cost would generally be cost based, not value or market based. Of course, equitable adjustments include consideration of profit in the cost or credit.

joel hoffman said:

I would like to clarify one aspect of cost based pricing. Modifications of existing contracts pursuant to a clause that provides for a price adjustment based upon cost impacts/increase/decrease in contractor’s cost would generally be cost based, not value or market based. Of course, equitable adjustments include consideration of profit in the cost or credit.

Agreed. When a contract clause, such as a Changes clause, provides for a price adjustment based on the effect of some event on the contractor's cost of performance, or when it seeks breach damages, the amount of the adjustment must be based on incurred or estimated allowable cost plus a reasonable profit.

See Kellogg Brown & Root Services, Inc., ASBCA 57530, 19-1 BCA ¶ 37,205:

Quote

"Equitable adjustment" is a term of art. United Launch Services, LLC, ASBCA No. 56850 et al., 16-1 BCA ¶ 36,483 at 177,764; Gen. Builders Supply Co. v. United States, 409 F.2d 246,250 (Ct. Cl. 1969). "Equitable adjustments…are simply corrective measures utilized to keep a contractor whole." Bruce Constr. Corp. v. United States, 324 F.2d 516,518 (Ct. Cl. 1963). They are "closely related to and contingent upon the altered position in which the contractor finds himself." Id.; see Sauer Inc. v. Danzig, 224 F.3d 1340, 1348-49 (Fed. Cir. 2000) (observing an equitable adjustment covers increased costs resulting from a change, or changed conditions, leading to extra work); VHC Inc. v. Peters, 179 F.3d 1363, 1366–67 (Fed. Cir. 1999) (stating "[a]n equitable adjustment makes a contractor whole after the Government modifies a contract," and "depends on actual costs incurred"). An equitable adjustment reflects "‘a particular contractor's costs,’ and not the universal, objective determination of what the cost would have been to other contractors at large." Bruce Constr., 324 F.2d at 518–19. Thus, an equitable adjustment is not based upon market prices, but reasonable incurred costs. Software Design, Inc., ASBCA Nos. 23616, 24897, 82-2 BCA ¶ 16,073 at 79,740. "This consideration of the particular contractor's actual and probable costs is tied to the overall function meant to be served by equitable adjustments," which is to keep a contractor whole. Nager Electric Co. v. United States, 442 F.2d 936, 946 (Ct. Cl. 1971). An equitable adjustment's use of actual cost data ensures that it does not produce a windfall. See Propellex Corp. v. Brownlee, 342 F.3d 1335, 1338 (Fed. Cir. 2003).

There is one exception to that rule—when, in the absence of cost information, a court or board adopts the "jury verdict" approach to determining an equitable adjustment or breach damages. See Cibinic & Nash, The "Jury Verdict" Approach: Equitable Technique or Contractor Bonanza?, in The Nash & Cibinic Report (December 1991). The authors discuss four versions of the jury verdict approach.

See also Cibinic & Nash, Equitable Adjustments: Cost or Value?, The Nash & Cibinic Report (August 2019).

Vern Edwards said:

TINA is a disclosure statute, not a pricing statute.

This is the single most important concept that so many people get wrong. Both government and contractor. Vern's sentence should be put on T-Shirts and handed out to Cost/Price Analysts and contract auditors everywhere.