Understanding the Impact of the Truth in Negotiations Act

No organization likes to feel they've been taken advantage of in a business deal, and the U.S. Federal Government is no exception. That's why Congress passed the Truth in Negotiations Act (TINA) in 1962. It's an essential ordinance every contracting firm must adhere to during government contract negotiations.

Interesting fact: The government renamed TINA the Truthful Cost or Pricing Data Act through the Federal Acquisition Circular (FAC) 2005-73. When did TINA change to Truthful Cost or Pricing Data Act? The shift became effective on May 29, 2013. However, the old acronym "TINA" has stuck. 

That said, TINA is considered one of the most difficult statutes for government contractors to comply with, as it involves continuous certification of data during a contract's proposal lifecycle. The process can be resource-intensive, requiring accurate record-keeping and financial transparency. However, the benefits of compliance are significant, as TINA compliance builds trust with government agencies. But if you don’t comply, the ramifications can include termination of a contract you've won, heavy fines and even other more serious legal recourse. 

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TINA is legislation designed to safeguard the U.S. government from being overcharged by contractors. Enacted to ensure full disclosure during the procurement process, TINA mandates that any firm submitting a government contract proposal must provide certified cost and pricing data if the procurement process enters the negotiation phase. 

TINA's primary objective is to prevent inflated costs and pricing and ensure the government pays a fair and reasonable price for goods and services. The scope of TINA covers various types of contracts, including fixed-price and cost-reimbursement contracts, ensuring comprehensive protection across different procurement scenarios.

Once contract negotiation begins, the government agency will expect you to submit proof of the costs you expect to incur while completing the job. The most relevant evidence would be invoices from your vendors on similar jobs you recently completed.

Other evidence includes historical cost information, vendor quotes, labor rates and overhead costs. The certification process involves you attesting that the data is accurate, complete and current as of the date of a respective cost paid. 

TINA also requires you to provide substantiation of your profit. Once again, you can turn to your records of recent projects to demonstrate how much your firm earned after expenses.

As with many policies requiring additional research and paperwork, finding loopholes or workarounds for the Truth in Negotiations Act may be tempting. For example, you could ask your potential Contracting Officer (CO) to let you split a $3 million proposal into two $1.5 million proposals, reducing paperwork and delays for both parties. But even if the CO agrees to this approach, it's still illegal. 

According to Part 13.003(c)(2) of the Federal Acquisition Regulation, project requirements cannot be broken down just to avoid regulatory thresholds—and that certainly applies to the TINA threshold.

According to National Defense, in this scenario, if your agency client later determined that your firm split a project to break free from TINA, the government could sue your firm for charging inordinately high prices and making an unreasonable profit.

Are there specific dollar amounts that trigger requirements? The good news is that the Truth in Negotiations Act doesn't apply to every contract you'll sign with the government. However, it kicks in for contracts and subcontracts with a price tag of at least $2 million (this amount increased from $750,000 in 2018).

TINA also applies to contract modifications totaling at least $2 million. Here's an unlikely scenario you should keep in mind: Your firm lands a government contract to perform $1.25 million of construction work. Because you're below the $2 million threshold, you push TINA out of your mind. But then your client cuts $750,000 of work from one area of the project while adding $1.25 million to another area. Even though the new value of the modified contract is $1.75 million, you've made $2 million in changes, which is enough to trigger TINA. 

Let's consider another scenario: Imagine your company has secured a government IT services contract valued at $1.5 million for a one-year period. Initially, you're comfortably below the TINA threshold. However, over the course of the year, the following modifications occur:

1. Three months in, the client requests an additional module, increasing the contract by $300,000.
2. Six months into the project, they expand the scope to include training services, adding another $400,000.
3. Nine months in, there's a need for enhanced cybersecurity measures, resulting in a $350,000 increase.

At this point, you might think you're still in the clear since the total contract value is now $2.55 million, and no single modification reached $2 million. However, TINA looks at the cumulative value of modifications. In this case, the total modifications amount to $1.05 million.

Now, suppose that in the final month, the client decides to extend the contract for another six months, adding $750,000 to the total. This final modification pushes the cumulative modifications to $1.8 million. While it's still below $2 million, any further changes could trigger TINA requirements.

This example illustrates how a series of seemingly minor modifications can accumulate over time, potentially triggering TINA requirements. It underscores the importance of diligently tracking all contract changes, no matter how small, to ensure compliance with TINA thresholds.

There are no loopholes for TINA compliance. But according to the National Law Review, you’re exempt from TINA if:

• The government agency you’re working with determines that the agreed-upon price results from adequate price competition. This exemption can apply when two firms submit competitive bids, when one firm offers a bid clearly priced to be competitive (even though no other bids were received), or when the agency determines through price analysis that your proposed price is reasonable when compared to current or recent prices.
• The agency determines whether the agreed-upon price aligns with prices set by law or regulation. When prices are already set by law, there's no need to justify your costs or profit.
• The agency is acquiring a commercial item. Part 2.101 of the Federal Acquisition Regulation provides a broad definition of commercial products and services. This designation applies to items typically used by nongovernmental entities for nongovernmental purposes and that are available to the general public.
• Due to exceptional circumstances, the agency's head of contracting activity has waived the requirement for cost or pricing data. In these rare cases, the CO or other head of contracting activity for the agency will issue a written waiver that includes reasons for the decision.
• The agency is modifying a contract or subcontract for a commercial item after awarding the primary contract or subcontract without receiving cost or pricing data. This exemption applies when you qualify for one of the first three exemptions on this list and when the modification to the contract doesn't change the item from commercial to noncommercial.

If a government agency wants to ensure your firm didn't overcharge them for a job, the investigation process will begin with an audit by a federal agency. An auditor from the Defense Contract Audit Agency or Government Accountability Office—or an agency inspector general—will review your documents for evidence or information that could have led to a lower price. They will look most closely at financial data from your previous proposals and jobs. After concluding their research, they will present this information to the agency’s CO, along with their recommendation on whether to take legal action.

If the CO does decide to initiate legal action, it's called a "defective pricing claim" and could lead to a request for a price reduction. Through this process, the agency will attempt to recover the amount it overpaid. A defective pricing claim can only be filed within a six-year statute of limitations.

During the defective pricing claim process, the contracting officer must demonstrate that:

1. The information in question fits the cost or pricing data definition.
2. You, the contractor, had reasonable access to accurate, complete, and current pricing data before the date of the price agreement.
3. You didn't submit or disclose this pricing data to the contracting officer or an authorized representative, and these individuals didn't know that this data existed or was significant to the proposal.
4. The government agency relied on the defective data it received in its negotiations with you.
5. The government's reliance on this defective data caused an increase in the contract's price.

In other words, the CO will need to prove that you withheld relevant pricing data deliberately to deceive the agency and convince them to accept an unreasonably high price for the contract.

As stated, there are five scenarios in which contractors can legitimately claim exemption from TINA compliance. If you believe your proposal fits into one of these scenarios, call this to the attention of the Contracting Officer (CO) you're working with as soon as possible. Doing so will not imply that your business is attempting to price your proposal inaccurately—it is simply a smart business practice that will save you and your potential client needless paperwork. In addition, once you have the CO's agreement in writing to grant an exemption, you will probably not have to present submission of cost or pricing data again throughout the negotiation process.  

Assuming your project doesn't qualify for an exemption, your business can protect itself against defective pricing claims by:

1. Ensuring you can provide complete, accurate and current cost and pricing data with any proposal for a contract or subcontract with a price tag of at least $2 million.
2. Providing this data as early as possible in the negotiation process. Come to an agreement with the government agency about when they would like to receive this and find a time that meets their expectations while fitting into your company's business cycles.
3. Recalling the five pieces of proof the agency will need to provide during the defective pricing claim process and be prepared to demonstrate that the agency's evidence is lacking in any or all of these areas.

Remember that even if a decision goes against your business, you still have the right to appeal. Keep all your pricing and proposal data available until the matter resolves itself.

Here are two examples of TINA in action: 

Subcontractor Quote Disclosure

A mid-sized aerospace company negotiated a $5 million contract with the Air Force to supply specialized aircraft components. During negotiations, the company received an updated quote from a key subcontractor that significantly reduced the cost of a major component. However, the company failed to disclose this new information to the Air Force before finalizing the contract price.

Two years later, during a routine audit, the agency's audit arm discovered the discrepancy. The Air Force determined that if the updated subcontractor quote had been disclosed, it would have resulted in a $300,000 reduction in the overall contract price. As a result, the aerospace company had to refund the $300,000 to the government, plus interest, and faced increased scrutiny on future contracts.

This example illustrates the importance of disclosing all relevant cost data, including updated subcontractor quotes, even late in the negotiation process. 

Labor Rate Disclosure in Contract Modification

A large IT services provider held a multi-year contract with a federal agency for system maintenance and upgrades. Midway through the contract, the agency requested a significant expansion of services, requiring a contract modification exceeding the $2 million TINA threshold.

During negotiations for this modification, the contractor used labor rates from the original contract proposal in their cost estimates. However, they failed to disclose that they had recently negotiated lower rates with their employees and subcontractors due to market changes.

When this came to light during a subsequent audit, the auditing agency determined that using the actual, lower labor rates would have reduced the modification price by approximately $450,000. The government sought to recover this amount, arguing that the contractor's failure to disclose the current, lower labor rates constituted defective pricing under TINA.

A great way to protect your firm from TINA trouble is to run your pricing processes on Deltek ProPricer solutions. With ProPricer, you can:

• Maintain your cost and pricing tables in one intuitive solution.
• Store access to "proof of cost" and "proof of profit" documentation in one place.
• Ensure total real-time visibility into all your indirect and direct rates.

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