In the 1980’s the Air Force held a competition between Pratt & Whitney and General Electric for the $10 billion market for F15 and F16 fighter jet engines needed for a six-year period. When DCAA tried to initiate a defective pricing audit on the first year contract the Air Force initially resisted saying the contracts between Pratt and GE were awarded on a competitive basis and hence such an audit was inappropriate. As the years passed the Air Force resistance faded and DCAA commenced defective pricing audits generating 30 audit reports spanning over a decade. By 1998 the Air Force issued a final decision seeking $95 million but the amount escalated until it reached the current amount of $299 million. There were two decisions, one addressing a variety of issues affecting what constitutes cost or pricing data and another decision made in reconsideration whether the Air Force actually relied on what was asserted to be defective cost or pricing data. (Editor’s Note. For our discussion of the initial decision we have relied on a Commentary in the February 23, 2005 issue of The Government Contractor written by David Bodenheimer of the law firm of Crowell & Moring LLP while our discussion of the reconsideration is based on Commentary in the May 2005 edition of the Procurement Law Advisor written by Terrence O’Connor who practices law in Alexandria, VA..)

1. Vendor quotes not used in BAFO. The Air Force contended that disclosed vendor quotes were not used in the pricing of its Best and Final Offer which the Board rejected saying TINA is not a "disclosure statute" and its plain language does not obligate a contractor to use any particular cost or pricing data to put together its proposal. This was consistent with prior cases (e.g. Hughes Aircraft Co – "contractor does not have to either itself use the cost information or analyze it for the government") and DCAA guidance (TINA "does not require a contractor to use such data in preparing its proposals").

2. Proposal was not certified. The Air Force argued that Pratt certified its BAFO proposal, which triggered TINA liability for alleged "misstatements" in the proposal. The Board stated it was unaware of any statute, regulation or contract provision that obligates the contractor to certify its BAFO proposal as opposed to its initial offer. Further, the Board stated the proposal itself was not cost or pricing data because it was a "mix of judgments" how to perform the work at a price covering anticipated cost and profit.

3. Escalation estimate is a judgment. For material escalations used in its pricing, the Air force asserted Pratt used inconsistent escalation rates. The Board ruled the material escalation factor used was in essence a judgment as to future material costs and was therefore not cost or pricing data.

4. Data not available prior to certification. In response to an audit request in 1993, Pratt prepared a retrospective summary explaining some pricing of unquoted parts in the original 1983 proposal where the Air Force then asserted defective pricing for alleged errors in this contractor summary. The Board ruled that "reconciliation errors" made 10 years after the original proposal did not have any connection to cost or pricing data certified in 1983. It quoted Muncie Gear Works (ASBCA No. 18184) – "no defective pricing for data unavailable until after contract award."

This part of the case revolved around whether the government did or did not rely on the defective data. As discussed above, the Air Force had seen Pratt’s initial offer but not the data in the BAFO so it had not relied on the defective BAFO data which was the basis for the Air Force’s defective pricing claim against Pratt. The decision shows how the process works. First the government starts with a presumption that "the natural and probable consequence of defective cost or pricing data is to cause an overstated price." As a result, a contractor must overcome this presumption, which Pratt did. It was able to prove that neither DCAA, the Air Force price analyst, the CO nor the cost panel that reviewed the BAFO prior to award relied on the data and the government was unable to show the defective cost or pricing data caused an increase in the contract price.

Next the board addressed the issue of whether the defective pricing resulted in increasing the price of the options the Air Force exercised following the BAFO – were any of the options based on the defective BAFO data? Again the Board ruled that lack of reliance was fatal to the Air Force. First, before examining any options, the Air Force received different offers and those offers, not the BAFO, were the basis of the option exercises and contract award to Pratt and second, the CO for the options was new and had not seen the defective BAFO data. The Board concluded the Air Force had failed to prove defective pricing for the contracts.

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