Difference between revisions of "When Does a Management Decision Have To Be Disclosed Under TINA"

Revision as of 19:22, 13 February 2020

Introduction

TINA requires the disclosure in price negotiations of “cost or pricing data,” that is, all facts a prudent buyer or seller would reasonably expect to affect price negotiations significantly. 10 U.S.C. § 2306a(g). The Government takes the position that business plans and projections represent either “management decisions that could have a significant bearing on cost” or “facts that can be reasonably expected to contribute to the soundness of estimates of future costs” which FAR 15.801 includes within its expansive definition of cost or pricing data. Thus the Government asserts defective pricing claims based on a contractor’s failure to disclose such information, even when the plans or projections are not implemented nor finally adopted before agreement on price.

Over the years there have been arguments as to whether management plans, business strategies, budget forecasts, estimates and other judgmental projects represent cost or pricing data, and what is a contractor's duty under the Truth in Negotiations Act (TINA) to disclose. The Armed Services Board of Contract Appeals (ASBCA) had attempted to resolve some of the confusion, setting forth "bright line" rules for when plans and projections constitute "disable cost or pricing data.

In Lockheed Corp., ASBCA Nos. 36420, 37495, & 39195, May 23, 1995, the ASBCA provides guidance on three previously unresolved issues concerning disclosure of business plans and projections:

First, the ASBCA determines that business plans and projections do not become cost or pricing data until the contractor decides to act upon them. Once a contractor acts upon a decision, then it becomes cost or pricing data. For instance, if a contractor starts closing a facility or reducing headcount at a facility, then the contractor has acted upon that decision and it becomes cost or pricing data. It MUST be disclosed.

Second, the ASBCA articulates a two-part objective test for determining what constitutes a “management decision” that triggers the TINA disclosure obligation. The ASBCA ruled that:

• (1) the plan must bear a substantial relationship to costs, and

• (2) a company official with requisite authority must have decided to act on the plan.

Finally, the ASBCA reaffirms that purely judgmental estimates are not cost or pricing data, and it holds that projections containing a mix of facts (historical accounting data) and judgments (forecasts of future costs) need not be disclosed as long as the factual data have been previously disclosed.

The Government’s Contentions in Lockheed

The Lockheed case involved a 1982 Air Force contract for C-5B aircraft. The Air Force alleged that Lockheed engaged in defective pricing because it had “failed to disclose the existence of a major corporate initiative to lower its labor costs.” The Air Force claimed a $85.5 million adjustment for defective pricing.

The Air Force asserted that two undisclosed documents represented a Lockheed decision to implement lower entry rates for new hires. The first, referred to as “the Hantz Memorandum,” reported that Human Resources had established goals for collective bargaining in 1983, including “lowering the entry rate for new hires and broadening the rate ranges.” The second document, referred to as “the Gelac Presentation,” set forth alternative wage restructuring proposals, including one for a new, lower wage structure for clerical employees. The ASBCA rejected the Air Force’s contentions and held that neither of the documents was cost or pricing data.

A Decision to Act Triggers Disclosure

The ASBCA explained that the disclosure of business strategies and management plans is required only when a decision has been made to act on a strategy or plan.

The Bright Line Test

The ASBCA articulated a two-part objective test for determining what constitutes a “decision” bearing on costs.

First, “there should be a substantial relationship between the decision and the relevant cost element.”

Second, the decision must be made at a level of management having the authority to approve or disapprove actions affecting that cost element.

The ASBCA found the “authority to approve” was the “critical factor” in this case, since there was a direct relationship between Lockheed’s collective bargaining agreements and its direct labor rates. The ASBCA found that the Hantz Memorandum had not been issued or approved by a company official with the authority to decide what proposals to make to the union. In fact, no decision was made on just which proposals to offer the union until July 1983, and, at the time of certification, Lockheed had not completed its planning, much less submitted or even formulated a bargaining proposal. In light of these facts, the ASBCA held that establishing goals for planning purposes only, without the authority to act on them, “was too attenuated to qualify as having a significant bearing on costs.”

A Decision Must Be Made Formally

The ASBCA also rejected the Air Force’s argument that Millipore Corp., GSBCA No. 9453, 91-1 BCA ¶ 23,345, requires disclosure of plans before their formal adoption. In that case, the GSBCA held that although a final decision on a possible change in the contractor’s discount policy was not made until after agreement on price, disclosure was required because the contractor “was strongly committed to overhauling . . . the discount structure, throughout the period when the subject contract negotiations were conducted.” But in Lockheed the ASBCA concluded that Millipore presented an unusual fact pattern, one in which the contractor had already in fact determined to increase discounts before the date of price agreement.

Subsequent Events Are Not Relevant

The ASBCA rejected the notion that Lockheed’s subsequent negotiation of a new collective bargaining agreement providing for lower labor rates showed that a decision to achieve lower labor rates had been made before price agreement. The ASBCA concluded that post-agreement documents claiming that all of the company’s initial objectives had been achieved did not “establish that individuals with authority to decide which objectives actually to pursue with the union, and to what degree, had made any decision with respect to them” at the time of price agreement.

Mixed Fact/Judgment Cases

The ASBCA conceded that the Gelac Presentation consisted of mixed facts and judgments, but emphasized that the facts were well known to the Air Force. The ASBCA then concluded that projections containing a mix of judgments and facts are not disclosable cost or pricing data as long as the facts previously have been disclosed.

Since the mid-1980s, the Government has argued that the disclosure of the judgmental portions of mixed fact/judgment documents such as planning and budget documents is necessary to explain the significance of the factual data.

The Lockheed decision squarely limits the holdings of these earlier cases. The rule now is that mixed fact/judgment documents need not be disclosed if the underlying factual data previously have been disclosed.

Conclusion and Practical Guidelines

Lockheed provides important guidance about a contractor’s obligations to disclose plans and projections during price negotiations. It substantially clarifies just what information need not be disclosed as cost or pricing data. To minimize exposure to defective pricing claims, contractors should consider the following steps:

• Establish clear lines of responsibility defining who has authority to make decisions to act on strategies, plans, projections, or estimates substantially related to cost elements.

• Clearly label non-final plans/projections as “Preliminary” or “Draft” or use some other appropriate legend, and establish controls to prevent action being taken on plans/projections that management has not approved.

• Develop procedures for informing company negotiators of decisions to act on plans/projections. A negotiator’s ignorance of cost or pricing data generally does not relieve the company of defective pricing liability.

• If projections are based on factual data not previously disclosed, segregate this data and disclose it.

When in doubt, disclose. TINA is a disclosure rule, and disclosing will prevent defective claims and assertions.