Agency’s Defective Pricing Claim Collapses—Contractor Did Not Withhold Cost Data, and the Data Would Not Have Changed the Price; Appeal of Alloy Surfaces Company, Inc. ASBCA No. 59625

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Appeal of government’s defective pricing claim is sustained. The government argued that the contractor had withheld cost data, which caused the government to overpay. The board, however, found that the cost data in question was based on estimates and was really just a management tool. As a result, the data was not certified cost or pricing data that had be disclosed under The Truth in Negotiations Act. Additionally, the board found that the government could not establish that the contract priced would have different if the contractor had disclosed the data. It was not clear that government had ever actually asked for the data, and, in any event, the government already knew, when it negotiated the contract price, what the data would have shown.

Alloy Surfaces Company had an IDIQ  contract with the Army to produce infrared decoy flares, which are fired from helicopters to avoid heat-seeking rounds. Between 2004 and 2006, the Army issued at least half a dozen delivery orders under that IDIQ contract. By the time the Army issued what the parties called Delivery Order (DO) 13, Alloy had automated portions of manufacturing process, resulting in labor and material efficiencies.

Around the time Alloy was finishing up with DO 13, the Army issued a request for proposal for DO 14. This new delivery order, however, required a significant increase in production. Before DO 14, Alloy had been producing 37,000 flares per month, but under DO 14, it would be producing 80,000 per month.

The price negotiations for DO 14 were complicated. On the one hand, Alloy had automated production which reduced costs. On the other hand, to increase production under DO 14, Alloy planned to open new production facilities and hire hundreds of new employees. Getting the new facilities and the new employees up to speed would necessarily result inefficiencies.  After some back and forth, the parties decided that they would base price on the weighted average of prices from two previous delivery orders.

Several years after DO 14 the Defense Contract Audit Agency audited DO 14 and found defective pricing. After reviewing the audit, the Army issued a final decision finding defective pricing and demanding repayment of over $15 million. The Army claimed that Alloy had withhold cost data from DO 13, which would have shown the efficiencies achieved through automation. The Army asserted that if it had the cost data from DO 13, it would be negotiated a lower price. Alloy appealed the decision to the ASBCA.

To prove a defective pricing claim under The Truth in Negotiations Act, the government must establish: (1) that the information at issue is “cost or pricing” data, (2) that the contractor did not meaningfully disclose the cost data, and (3) that the government relied on defective data.

The board found that the Army could not establish the first element. The information that Allow allegedly withheld—monthly job cost data for DO 13—was not “cost or pricing data” as defined by The Truth in Negotiations Act. Generally, documents that are based on estimates or management’s judgment, and not on a cost accounting process, are not considered certified cost data that must be disclosed to an agency.

Here, the documents the Army claimed to have needed were work in progress reports. These reports included judgmental information that could not be certified until after an accounting reconciliation. The reports were management tools that did not possess the requisite degree of certainty to qualify as certified data. The fact that these reports turned out to be relatively close to the actual data from the completed job reports does not change their status as management tools that did not need to be disclosed.

Moreover, the board found that the Army could not satisfy the reliance element of a defective pricing claim. The Army had not demonstrated that having the DO 13 data would have changed the price. The Army was aware that Alloy had automated its production and that this resulted in efficiencies. Having the DO 13 data would have simply reinforced what the Army already knew. Additionally, because the DO 13 data was from Alloy’s old plant, it would not have captured any of the inefficiencies attendant to the opening of two new plants. Indeed, it was not even clear that the Army had ever asked Alloy for the DO 13 data. The government could not prove that it was harmed by a lack of data when it had not even asked for the data.

Alloy is represented by David Z. Bodenheimer, Jason M. Crawford, and Jason C. Lynch of Crowell & Moring LLP. The government is represented by Scott N. Flesch, Harry M. Parent, and Robert B. Neill of the U.S. Army.

ASBCA - Alloy Surfaces