Over the past decade, there has been a great deal of confusion about a contractor’s duty under the Truth in Negotiations Act (TINA) to disclose management plans, business strategies, budget forecasts, estimates and other judgmental projections. The Armed Services Board of Contract Appeals (ASBCA) recently attempted to resolve some of this confusion in a decision setting forth new “bright line” rules for determining just when plans and projections constitute disclosable cost or pricing data. Under these new rules, contractors are not required to disclose plans before they formally decide to act on them, and contractors generally need not disclose judgmental estimates or projections. These new rules offer contractors greater protection against defective pricing claims.
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. Contractors’ efforts to resist such claims have in the past been hampered by the lack of clear direction from the courts and agency boards of contract appeal.
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.
Second, the ASBCA articulates a two-part objective test for determining what constitutes a “management decision” that triggers the TINA disclosure obligation. Rejecting arguments that a plan or projection becomes a “management decision” as soon as a company gives it serious consideration, 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 latter ruling limits earlier cases holding that mixed fact/judgment documents must be disclosed to explain the significance of the factual data.
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.
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 ASBCA noted that in 1986 Congress created a different rule under which the disclosure obligation was triggered solely by actual execution of a plan. Concerned that contractors could circumvent the disclosure requirement simply by delaying implementation until after completion of negotiations, Congress disavowed this rule in 1987 and stated its intent that a contractor should disclose “a decision to act upon judgmental data, even though it has not been implemented.” H. Conf. Rep. No. 100-446, 100th Cong., 2d Sess. at 657 (1987). Thus, the ASBCA in Lockheed concluded that “a management decision to act, which has not been implemented, may be cost or pricing data.”
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. This is a crucial ruling, since no other tribunal has previously formulated a test for ascertaining just what decisions constitute cost or pricing data.
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. (It also suggested that an indirect relationship would suffice.) 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.”
As to the Gelac Presentation, the ASBCA found that Lockheed had contemplated further study and analysis of the proposals. The ASBCA held that “[c]irculating alternative proposals for discussion does not qualify as a management decision within the meaning of the definition of cost or pricing data.”
In linking the requirement for a management decision with the authority to approve or disapprove particular actions, the ASBCA refused to read earlier cases as holding that the disclosure obligation could be triggered in advance of a formal decision to act on a plan. The ASBCA did not regard Grumman Aerospace Corp., ASBCA No. 35185, 92-3 BCA ¶ 25,059, a previous decision which inferred that a contractor’s failure to provide a draft cost analysis report, even though not finally approved by management, constituted possible defective pricing. The Lockheed board noted that Grumman was a decision on summary judgment, a case in which the facts had not been fully developed as to whether a management decision had been made to approve the draft report, and it emphasized that Grumman “should not be read . . . as a relaxation of the regulatory requirement . . . that there be a decision.”
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.
The ASBCA’s treatment of Millipore and Grumman is notable because the Government commonly relies on these cases in asserting defective pricing claims. Since the ASBCA unequivocally rejected these cases as precedent for requiring disclosure in advance of a formal decision to act on a plan or projection, the Government should now be discouraged from asserting defective pricing claims based on non-disclosure of contemplated future plans.
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. The ASBCA explained that “it is not reasonable to say that alleged data which have assumed significance as a result of subsequent events . . . are cost or pricing data for that reason alone . . . .” This is significant because the Government often contends that subsequent events demonstrate that a decision to adopt a plan or projection was been made before agreement on price. Lockheed clearly negates this tactic.
The ASBCA rejected the Air Force’s efforts to equate judgmental estimates with factual data. Although the Air Force asserted that the Hantz Memorandum was factual, it was unable to point to any “hard material” or supporting data in it. The ASBCA found the Hantz Memorandum simply reported that Human Resources had established goals to accomplish its corporate objectives and was “devoid of facts.” It represented “pure judgment” because “it consisted of ideas, not facts or even estimates.” Moreover, the ASBCA found that the Gelac proposals to lower entry rates for clerical labor “were not factual in nature,” and it held that references to possible savings achievable from these proposals simply “were estimates based on assumptions,” which do not qualify as facts.
These rulings are important because they reaffirm the ASBCA’s earlier holding in Litton Systems, Inc., Amecom Division, ASBCA No. 36509, 92-2 BCA ¶ 24,842, at 123,939, 123,944, that a report containing merely the judgment of an industrial engineer about the estimated hours a specific task should take, without any actual labor data, was “pure judgment and is, accordingly, not data and need not be disclosed.” The ASBCA in Litton explained that “[f]actual information is discrete and quantifiable; it can be verified and audited. Estimates and judgments, by their very nature, cannot be.” Thus, the Lockheed and Litton decisions clearly establish that estimates need not be disclosed.
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. This conclusion is significant because it limits earlier cases suggesting that mixed fact/judgment documents must be 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. This rationale stemmed from two cases:
Grumman Aerospace Corp., ASBCA No. 27476, 86-3 BCA ¶ 19,091, which held that a contractor’s narrative analysis of a subcontractor’s cost proposal was disclosable because “the narrative analysis adds meaning to the raw figures and can not be said to lack factual content simply because it contains elements of judgment;” and
Texas Instruments, Inc., ASBCA No. 23678, 87-3 BCA ¶ 20,195, at 102,222, 102,275, in which the ASBCA held that a “Run Cost” based on judgmentally selected data representing the cost of a hypothetical equivalent system was “a document in which appellant disclosed the facts of its exercise of judgments and disclosed the facts represented by those judgments in a manner which served as a means for meaningfully disclosing the cost or pricing data . . . and to clearly and fully inform respondent as to their significance to the negotiation process.”
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.
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: plans as to which no decision to act has been made and judgmental estimates and projections. The decision will help contractors avoid substantial defective pricing claims. To take full advantage of the ruling, and to minimize exposure to unwarranted 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 at the appropriate time.
— Claude Goddard
Copyright © 1995 Kilcullen, Wilson & Kilcullen. All rights reserved.