(Editor’s Note. The following discussion is based on a commentary in the April 27, 2005 edition of The Government Contractor written by Karen Manos of the law firm of Howrey LLP.) In pricing many of its proposals, the large contractor Science Applications International Corp. applies a risk factor to proposed hours based upon its Internal Quantitative Risk Analysis (QRA) designed to identify such risk factors as "internal inefficiencies, inoperable equipment and unanticipated delays." In a highly unusual action, the Air Force issued two alerts to its buying offices asserting SAIC engaged in defective pricing and proposed (and achieved) higher profit margins in failing to disclose the QRA and resulting variance hours. In support of its position one of the alerts alluded to FAR Table 15-2 Instructions saying it requires contractors to submit "any information reasonably required to explain your estimating process including (1) the judgmental factors applied and the mathematical or other methods used in the estimates, including those used in projecting from known data and (2) the nature and amount of any contingencies included in the proposed price."

The commentator says the alerts, in addition to "besmirching" the reputation of a highly reputable major contractor, are flawed. First, contrary to the position in the notices, a contractor’s judgmental risk assessment is not cost or pricing data. The commentator alludes to Litton Systems (ASBCA No. 36509) where standard hours based on industrial engineer estimates and a "delay factor" based on estimates of personal fatigue and delay applied to standard hours were deemed "pure judgment" rather than a mix of fact and judgment and hence not cost or pricing data. While facts on which a risk assessment is based is cost or pricing data, neither the risk assessment itself nor the fact it exists is cost or pricing data. Second, allusion to FAR 15-2 Instructions is inappropriate because that section does not define cost or pricing data which is defined in FAR 2.101 which specifically states it "does not include information that is judgmental, but does include the factual information from which judgment was derived." Finally, the Air Force is wrong in its assertion that higher profit margins had to be disclosed, arguing parties do not negotiate a profit margin on fixed price contracts but rather negotiate a price based on "total price" not individual elements of cost or profit.

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