United States: Implications Of The Changing Cost And Pricing Data Thresholds For Prime Contractors And Subcontractors

Government contractors should explore updates to their purchasing system policies and procedures regarding subcontracts subject to Truthful Cost or Pricing Data (TCPD) and Cost Accounting Standards (CAS) requirements based on the upcoming effective date for the increased threshold for obtaining certified cost or pricing data. Specifically, Section 811 of the National Defense Authorization Act for Fiscal Year 2018 (Pub. L. No. 115-91, 131 Stat. 1283) (FY 2018 NDAA), amends 10 USC § 2306a and 41 USC § 3502, increasing the threshold for obtaining certified cost or pricing data to US$2 million. Inevitably, this increased threshold impacts subcontracting, particularly under contractor purchasing systems that are subject to the Department of Defense (DOD) Business Systems Rule. 

A recent memorandum issued by Shay D. Assad, Director of Defense Pricing/Defense Procurement and Acquisition Policy (DP/DPAP), which we addressed in a prior advisory, directs DOD contracting officers that, effective July 1, 2018, they shall use US$2 million as the threshold for obtaining certified cost and pricing data "in lieu of the threshold . . . at [FAR] 15.403-4." Notably, while this class deviation provides direction to DOD contracting officers, it does not change the "current threshold" in FAR 15.403-4. Accordingly, absent a contract specifying a different threshold, prime contractors must wait until the threshold in FAR 15.403-4 is updated to implement the US$2 million threshold before they may safely use it for subcontracts and modifications that are not otherwise exempt.

Under FAR 52.215-12 and 52.215-13, a prime contractor's obligation is to require a subcontractor to submit certified cst or pricing data when the expected value of the pricing action will exceed the threshold in FAR 15.403-4 and an exception does not apply. FAR 15.403-4(a)(1) states that certified cost or pricing data are required before the award or modification of subcontracts "expected to exceed the current threshold or, in the case of existing contracts, the threshold specified in the contract." The same paragraph currently provides that "[t]he threshold for obtaining certified cost or pricing data is US$750,000," and has not yet been updated to reflect the increased threshold. 

In the context of contractor purchasing system reviews, the Defense Contract Management Agency has taken the position that the threshold for obtaining certified cost or pricing data is established in FAR 15.403-4 and automatically updates with changes to the FAR, rather than remaining static based on when the prime contract was awarded. Thus, unless a different threshold is specified in a prime contract, once FAR 15.403-4 is updated with the US$2 million threshold, government contractors should revisit their policies and procedures, as this increased amount will become the threshold applicable to subcontract awards and modifications that are not otherwise exempt. 

More interesting is the impact of the increased thresholds when awarding subcontracts that may be subject to CAS. Specifically, prime contractors may have the ability to use the US$2 million threshold for subcontracts without waiting until the relevant clauses incorporate the new, higher threshold. The CAS clauses (e.g., FAR 52.230-2(d)) currently reference the US$750,000 threshold. Importantly, however, the CAS clause provides that it must be flowed down to "negotiated subcontracts in excess of $750,000, except that the requirement shall not apply to negotiated subcontracts otherwise exempt from the requirement to include a CAS clause as specified in 48 C.F.R. 9903.201-1." (emphasis added). Under CAS, a subcontract is exempt when, among other reasons, it is "not in excess of the Truth in Negotiations Act (TINA) thresholds, as adjusted for inflation (41 USC. 1908 and 41 USC. 1502(b)(1)(B)." 48 C.F.R. 9903.201-1(b)(2).  

Notably, 41 USC. 1502(b)(1)(B) provides, in relevant part, that the CAS are mandatory for subcontract procurements "in excess of the amount set forth in section 2306a(a)(1)(A)(i) of title 10 as the amount is adjusted in accordance with applicable requirements of law." Due to the FY 2018 NDAA, the amount set forth at 10 USC 2306a(1)(A)(i) is US$2 million for a contract entered into after June 30, 3018. 

Accordingly, prime contractors would have a sound basis to conclude that they need only flow the CAS clauses on subcontract awards made after June 30, 2018, if the awards are expected to exceed US$2 million. In other words, the increased threshold is immediately applicable to subcontracts for purposes of CAS as of July 1, 2018. Of course, before adopting such a practice, contractors should consult counsel to consider their particular circumstances and should also consider notifying their cognizant administrative contracting officers.

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