The Defective Subcontractor Data Problem

A contracting officer awarded a sole source, non-commercial, firm-fixed-price service contract with a one-year period of performance for a price of $10,000,000. The contractor submitted certified cost or pricing data with its proposal, including certified cost or pricing data it received from a prospective subcontractor. The contracting officer performed a cost analysis prior to negotiating price. Relying on the certified cost or pricing data submitted by the contractor, including the certified cost or pricing data submitted by the prospective subcontractor, she reached agreement on total price, not on individual elements of cost, and determined the price to be fair and reasonable. The contract contained the clause at FAR 52.215-10, "Price Reduction for Defective Certified Cost or Pricing Data (AUG 2011)." The prospective subcontractor's proposed price was $2,220,000. The prime included that entire amount in its proposal. The prime did not negotiate with the prospective subcontractor before award of the prime contract, planning instead to negotiate the subcontract price after it knew what price it would get from the government. But, after contract award the contractor decided to do the work itself instead of negotiating and awarding a subcontract. (Note: This was not improper.) The work cost the contractor $1,960,200, including the contractor's G&A (10%) and profit (10%). The contractor completed the job acceptably. There were no changes, equitable adjustments, or claims. The government paid the contractor $10,000,000. After payment, the Government's contract audit office discovered that the prospective subcontractor's certified cost or pricing data had been defective as of the date of price agreement and that the prospective subcontractor had intentionally submitted the defective data to the contractor. However, the contractor did not know that the prospective subcontractor's data were defective. The auditor believed that the defective certified cost or pricing data had caused the contracting officer to agree to a contract price that was $237,000 higher than she would have agreed to had the prospective subcontractor's certified cost or pricing data not been defective. The contracting officer agreed with the auditor's findings.

Questions for the contracting officer: (1) Pursuant to the text of the price reduction clause, by what dollar amount should the contracting officer reduce the contract price, excluding any interest and penalty? You must show how you derived your answer from specific words in the clause and on what words you relied. "Common sense" or "it's obvious" are not acceptable justifications without reference to specific words in the contract clause. Explain how you calculated the amount and show any arithmetic. $0.00 is a permissible answer. (2) Should you seek the payment of interest? Yes or no? (3) Should you seek payment of a penalty? Yes or no?

• Please see the attached you can find The Defective Pricing Clause

5121510 Price Reduction for Defective Certified Cost or Pricing Data (AUG 2011} (a) If any price, including prot: or fee, negotiated in connection with this contact, or any cost reimbursable underthis contract, was increased by any signicant amount because (1) The Contractor or a subcontractor furnished certied cost orpricing data thatwere not complete, accurate, and current as certied in its Certicate of Current Cost or Pricing Data; (2) A subcontractor or prospective subcontactor nnished the Contactor certied cost or pricing data that were not complete, accurate, and current as certied in the Contractor's Certicate of Current Cost or Pricing Data; or (3) Any of these parties furnished data of any description that were not accurate, the price or cost shall be reduced accordingly and the contract shall be modied to reect the reduction (b) Any reduction in the contract price under paragraph (a) of this clause due to defective data 'om a prospective subcontractor that was not subsequently awarded the subcontract shall be limited to the amount, plus applicable overhead and prot markup, by which (1) the actual subcontract or {2] the actual cost to the Contractor, ifthere was no subcontract, was less than the prospective subcontract cost estimate submitted by the Contractor; provided, that the actual subcontract price was not itself affected by defective certied cost or pricing data. (c](l) If the Contracting Ofcer determines under paragraph (a) of this clause that a price or cost reduction should be made, the Contractor agrees not to raise the following matters as a defense: (i) The Contractor or subcontractor was a sole source supplier or otherwise was in a superior bargainingposition and thus the price ofthe contract would not have been modied even if accurate, complete, and current certied cost or pricing data had been submitted. (ii) The Contracting Ofcer should have known thatthe certied costorpricing data in issue were defective even though the Contractor or subcontractor took no afrmative action to bring the character of the data to the attention of the Contacting Ofcer. (iii) The contract was based on an agreement about the total cost of the contract and there was no agreement about the cost ofeach item procured under the contract. (iv) The Contractor or subcontractor did not submit a Certicate of Current Cost or Pricing Data. (2)(i] Except as prohibited by subdivision {cX2)(ii) of this clause, an offset in an amount determined appropriate by the Contracting Ofcer based upon the facts shall be allowed against the amount of a contract price reduction if (A) The Contractor certies to the Contacting Ofcer that, to the best of the Contactor' 5 knowledge and belief, the Contractor is entitled to the offset in the amount requested; and (B) The Contractor proves that the certied cost or pricing data were available before the \"as of" date specied on its Certicate of Current Cost or Pricing Data, and that the data were not submitted before such date. (ii) An offset shall not be allowed if (A) The understated data were known by the Contacmr to be understated before the \"as of\" date specified on its Certicate of Current Cost or Pricing Data; or (B) The Government proves that the facts demonstrate that the contact price would not have increased in the amount tobe offset even ifthe available datahad been submitted before the "as oi\" date specied on its Certicate of Current Cost or Pricing Data. (d) If any reduction in the contact price under this clause reduces the price of items for which payment was made prior to the date of the modication reecting the price reduction, the Contacmr shall be liable to and shallpay the United States at the time such overpayment is repaid (1) Interest compounded daily, as required by 26 U_S_C_ 5622, on the amount of such overpayment to be computed from the date{s) of overpayment to the Contactor to the date the Government is repaid by the Contractor at the applicable underpayment rate effective for each quarter prescribed by the Secretary ofthe Treasury under 26 U.S.C. 6621(a)[2); and (2) A penalty equal to the amount ofthe overpayment, if the Contractor or subcontractor knowingly submitted certified cost or pricing data that were incomplete, inaccurate, or noncun'ent. (End of clause)