Reference no: EM133393599

Case Study: The Defective Subcontractor Data Problem A contracting officer awarded a sole source, non-commercial, firm-fixed-price service contract with a one-year period of performance for a price of $10,000,000. The contractor submitted certified cost or pricing data with its proposal, including certified cost or pricing data it received from a prospective subcontractor. The contracting officer performed a cost analysis prior to negotiating price. Relying on the certified cost or pricing data submitted by the contractor, including the certified cost or pricing data submitted by the prospective subcontractor, she reached agreement on total price, not on individual elements of cost, and determined the price to be fair and reasonable. The contract contained the clause at FAR 52.215-10, "Price Reduction for Defective Certified Cost or Pricing Data (AUG 2011)." The prospective subcontractor's proposed price was $2,220,000. The prime included that entire amount in its proposal. The prime did not negotiate with the prospective subcontractor before award of the prime contract, planning instead to negotiate the subcontract price after it knew what price it would get from the government. But, after contract award the contractor decided to do the work itself instead of negotiating and awarding a subcontract. (Note: This was not improper.) The work cost the contractor $1,960,200, including the contractor's G&A (10%) and profit (10%). The contractor completed the job acceptably. There were no changes, equitable adjustments, or claims. The government paid the contractor $10,000,000. After payment, the Government's contract audit office discovered that the prospective subcontractor's certified cost or pricing data had been defective as of the date of price agreement and that the prospective subcontractor had intentionally submitted the defective data to the contractor. However, the contractor did not know that the prospective subcontractor's data were defective. The auditor believed that the defective certified cost or pricing data had caused the contracting officer to agree to a contract price that was $237,000 higher than she would have agreed to had the prospective subcontractor's certified cost or pricing data not been defective. The contracting officer agreed with the auditor's findings.

Questions for the contracting officer:

(1) Pursuant to the text of the price reduction clause, by what dollar amount should the contracting officer reduce the contract price, excluding any interest and penalty? You must show how you derived your answer from specific words in the clause and on what words you relied. "Common sense" or "it's obvious" are not acceptable justifications without reference to specific words in the contract clause. Explain how you calculated the amount and show any arithmetic. $0.00 is a permissible answer.

(2) Should you seek the payment of interest? Yes or no?

(3) Should you seek payment of a penalty? Yes or no?