Try, Try Again

security-600A recent defective pricing case, Alloy Surfaces Co., ASBCA No. 59625, 2020 WL 1896784, April 9, 2020, charmingly illustrates the Government’s doggedness in trying to reprice a contract using the Truth in Negotiations Act (TINA).  The Armed Services Board of Contracting Appeals did not buy into any of the Government’s arguments, finding that an undisclosed document reflecting fundamentally judgmental data did not constitute cost or pricing data and that disclosure of the document would not, in any event, have lowered the contract price.

In Alloy, the Army ordered M211 infrared decoy flares in a series of production runs under a 1999 contract and six delivery orders under a new IDIQ.  Alloy performed the 1999 contract order and these six delivery orders at its “Plant 1.”  In performing the last of the six delivery orders (DO 13), Alloy introduced automation into its production processes.  Alloy was performing DO 13 when the Army requested Alloy’s proposal for DO 14, which would require Alloy to increase production rates to about three times its production rate under DO 13.  To meet this increased demand, Alloy proposed to hire over 250 employees and to expand its new, second plant and open a third plant.  Alloy planned to use automation in performing the new order.

Alloy’s proposal was based on its actual labor and material usage factors from its two earliest delivery orders.  It also predicted that it would experience “negative 10%” learning because of the move to the two new plants and its newly expanded, inexperienced work force.  The Army generated its own, lower labor and material usage factors.  The Government acknowledged that “some inefficiency could occur due to additional production rate ramp-up.”  Further, the Army knew during negotiations that the Plant 1 automation had resulted in lower labor usage factors for its various production operations in performing DO 13 than Alloy had experienced in the first two production runs.  Indeed, the Army knew of the specific labor usage factors where Alloy had increased efficiency through automation, and it believed that material usage and labor usage under the new DO 14 would be lower than the “actuals” Alloy had disclosed for all but one of these many labor operations.

The negotiation largely centered on whether Alloy would experience decreased efficiency because of its need to ramp up production in these new facilities.  The price for DO 14 eventually negotiated – around $57 M – was based on the early two production runs’ usage factors, which were higher than the Army’s independent estimates, with no “negative learning” applied to those factors.

Years later, the Army alleged defective pricing based on Alloy’s failure to disclose “job cost reports” for DO 13.  The Contracting Officer’s Final Decision demanded a price reduction of almost $16 M, based on actuals for DO 13.  The defective pricing allegations reflected a large material-cost impact and a reduction of labor hour usage by almost two-thirds of the amount negotiated.

ANALYSIS

The Government’s position in Alloy illustrates almost every flaw a defective pricing allegation can possibly contain.  The Army’s allegation was based on judgmental rather than factual data and on data not available on the handshake date.  The Army negotiators knew, in general terms, that the actual costs for DO 13 would be lower than the ones used in negotiations, even if the specific costs of DO 13 had not been disclosed.  Finally, the Army’s decision simply repudiated the negotiators’ decision that, despite automation, the production ramp-up, new facilities, and new hiring would cause inefficiencies.

(a) Were the DO 13 “job cost reports” cost or pricing data? The “job cost reports” that were actually available to Alloy before the conclusion of negotiations contained both factual and judgmental data.  They covered “work in process” (WIP) under a partially completed job.  While the reports included the costs incurred on the job to date, the job’s costs could not be understood or used without knowing the quantities they represented, and those quantities could not simply be counted.  Determining the quantities represented by a particular WIP report required significant judgment in developing estimates for the “equivalent units” represented in a particular production period in a given report.

The Board agreed with the Government’s contention that the reports included both factual and judgmental information.  But the judgmental information, the “equivalent units,” was a fundamental part of the report, and the Board concluded that the WIP reports from the months prior to job completion were not cost or pricing data.

(b) Was the September DO 13 job cost report reasonably available to Alloy before the certificate “as of” date? The Government argued that the DO 13 job cost report for September, when production on this order had been completed, contained final, accurate, equivalent units (because the job had, by then, been completed).  The cutoff established for completion of DO 13 was a few days before the DO 14 handshake.  After this cutoff, though, and before it could finalize the report, Alloy had to take a final physical inventory, review labor timesheets, and reconcile the WIP data with the actual number of units produced and hours logged.  This process was not completed until a few days after the DO 14 handshake.  Absent any evidence that Alloy had held up this process, the Board found that the September report did not possess the degree of certainty necessary for it to qualify as cost or pricing data.  In other words, the only version of the report accurate enough to be cost or pricing data was not available to Alloy until after the date of agreement on price.

(c) Would the Government have relied on the WIP reports had they been produced?   The Board found the Army had not met its burden of showing “that having the final job cost report from DO 13 would have changed its decision to rely on the weighted average of the data” from the first two production runs.  The Army was aware of the effects of automation, and it knew that, as a result of automation, the actual costs of DO 13 would be lower than the actuals from the first two production runs.  The Board found that this knowledge of the effect of automation “undermines the causal connection between the allegedly undisclosed data and an overstated contract price.”  Further, while the DO 13 information would have told the Army a bit more about the benefits of automation, it would not have helped the Army estimate the inefficiencies of ramping up, which was the central point of the negotiations.  And finally, the Government offered no specifics as to how it would have used the information in negotiations.

COMMENT

The decision in Alloy made interesting use of the CO’s testimony.  First, the Board pointed out that the contracting officer had never asked for the DO 13 actuals.  Of course, it is clear from decades of TINA jurisprudence that the statute imposes an affirmative obligation on the contractor to produce data and that the Government did not have to ask for cost or pricing data to trigger Alloy’s obligation.  But the Board used the CO’s failure to request information on DO 13 to bolster its conclusion that the CO would not have relied on that data had it been produced.  With knowledge that the DO 13 “actuals” would show the extent to which automation had affected Alloy’s production costs, the CO exhibited no interest in receiving them.

Second, the Board also used this curious testimony by the Contracting Officer:

Q:  You signed the Modification P00025 relying on upon the certificate current costs and pricing data, on the assumption that you would be able to recover any defective pricing cost later, correct?

A:  Correct.

The Board concluded that the CO believed she could reprice the contract later to recoup any difference the DO 13 data would have made.   But the Price Adjustment clause does not provide a vehicle the Government can use to simply reprice a contract after award.

The decision also showed that the Board felt it had to distinguish the decision in Texas Instruments, Inc., ASBCA No. 23678, 87-3 BCA ¶ 20,195.  The Army cited Texas Instruments for the proposition that the reports involved in that case, which including both factual and judgmental data, constituted “cost or pricing data” pursuant to TINA.  But the Texas Instruments case was fundamentally different.  The “Rolled Up Run Cost” report involved in that case had been fully disclosed.  The run cost report was an estimating tool in which the appellant selected a single job order for each piece part or assembly that its estimators believed were predictive of future performance in making those parts/assemblies, and it used those selected job orders’ costs to “roll up” the costs of every piece part/assembly to obtain the cost of a complete unit.  The only “factual” part of the report was the cost of the single, selected job order for each parts, and appellant had produced the costs of all its job orders in its separate “Detail Job Order Cost Report.”  The Government was not complaining about non-disclosure; rather it complained that Texas Instruments’ estimating methodology in the Rolled Up Run Cost – fully disclosed to and understood by the Government – was not “accurate” or complete.  But only data, not estimating methodologies, are required to be “accurate” and “complete.”  In fact, estimates, by their very nature, cannot logically be either accurate or complete, and TINA imposes no such requirement.

Lastly, the Alloy decision appears to show the lengths to which the Government may go to reprice a contract when it later becomes dissatisfied with its negotiator’s decisions.  Any one of the flaws described in the decision should have been sufficient to convince the CO and DCAA that there had been no defective pricing.  But scenting an opportunity to recoup almost $16 M, the Government gamely hung in there and forced the appellant to litigate to restore over a quarter of the contract price.