February 6, 2023

Volume XIII, Number 37

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February 03, 2023

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DoD Final Rule to Promote Post-Award Disclosure of Defective Pricing Arms Contractors with Potentially Impactful Information

On May 4, 2018, the Department of Defense (“DoD”) issued a final rule amending the Defense Federal Acquisition Regulation Supplement (“DFARS”) to state that, in the interest of promoting voluntary disclosures of defective pricing identified by contractors after contract award, DoD contracting officers have more discretion to determine the scope of the involvement of the Defense Contract Audit Agency (“DCAA”) in assessing such a disclosure. 83 Fed. Reg. 19645. This is a change from DoD’s November 2015 proposed rule, which required contracting officers to request at least a limited-scope audit when a contractor voluntarily discloses defective pricing. While arguably a step in the right direction, the permissive language of the final rule continues to provide only limited information to defense contractors about what to expect following a voluntary defective pricing disclosure. Nonetheless, by listing the types of information that the contracting officer must consider when deciding whether to request an audit, the rule arms contractors with potentially impactful information.

Final Rule Lacks Proposed Rule’s Audit Requirement

Following the regulatory history that is detailed in our prior post, DoD published the proposed rule seeking to encourage voluntary disclosure of defective cost or pricing data in November 2015. Thereafter, the agency received one public comment, which argued that the proposed rule’s requirement that the contracting officer request an audit each time a contractor discloses defective pricing is (i) a strong disincentive for contractors to voluntarily disclose defective pricing and (ii) may not be in the best interests of DoD in all circumstances.

The final rule (which will be codified at DFARS 215.407-1) is distinct from the proposed rule in that it removes the mandatory requirement to conduct an audit in all cases of voluntary disclosure of defective pricing. But, as DoD explains in the notice publishing the final rule, “in order to calculate appropriate price reductions . . ., it is necessary that contracting officers, at a minimum, discuss the disclosure with the [DCAA] . . . .” The rule therefore states, when faced with a voluntary disclosure, the contracting officer “shall discuss with DCAA the following: (A) Completeness of the contractor’s voluntary disclosure on the affected contract; (B) Accuracy of the contractor’s cost impact calculation for the affected contract; (C) Potential impact on existing contracts, task or delivery orders, or other proposals the contractor has submitted to the Government.” The rule explains: “This discussion will assist in the contracting officer determining the involvement of DCAA, which could be a limited-scope audit (e.g., limited to the affected cost elements of the defective pricing disclosure), a full-scope audit, or technical assistance as appropriate for the circumstances (e.g., nature or dollar amount of the defective pricing disclosure).”

Key Takeaway: Potentially Impactful Information

While arguably a step in the right direction, the permissive language of the final rule provides no solid assurances to defense contractors about what to expect following a defective pricing disclosure. Indeed, the rule explicitly states a voluntary disclosure of defective pricing does not affect the Government’s entitlement to any remedy therefor. In addition, it remains unclear whether this will reduce the number of audits and the extent to which contractors may face negative consequences. Nonetheless, although a contracting officer is not limited to discussing with DCAA the three points regarding a defective pricing disclosure that are listed in the final rule (i.e., completeness, accuracy, and potential impact), the specified areas of discussion with DCAA are useful insight into the information DoD believes contractors should include in a voluntary defective pricing disclosure. Contractors would be well-served to include a narrative discussion in such a disclosure that addresses those three points, about which the final rule obligates the contracting officer to confer with DCAA. Such a narrative could aid the contracting officer’s discussion with DCAA and impact the decision to request an audit.

© 2023 Covington & Burling LLPNational Law Review, Volume VIII, Number 128

About this Author

Susan B. Cassidy, Government Contracts Attorney, Covington Burling, Law Firm

Susan Cassidy advises clients on the complex rules and regulations imposed on government contractors, with a special emphasis on the defense and intelligence sectors. She combines a sophisticated knowledge of the FAR and DFARS with the practical insight gained from senior in-house positions at both dedicated defense and commercial item contractors.

Ms. Cassidy conducts internal investigations for clients on wide array of government contracts and national security compliance issues. She regularly advises on FAR mandatory disclosure obligations and represents...

Brian Byrd, Covington Burling Law Firm, Government Contracting Attorney

Bryan Byrd has experience advising clients across a broad range of issues arising from their participation in government contracting.

Mr. Byrd’s practice covers multiple subject-matter areas, including: contract negotiations, bid protests, flow-down requirements, schedule contracts, compliance, and performance disputes. He works with clients in many industries, including life sciences, defense, and construction.