DoD Issues Class Deviation to Certified Cost or Pricing Data Threshold

By: John Ford, Senior Consultant

Section 811 of the FY 2018 National Defense Authorization Act (“NDAA”) (P.L. 115-91) raised the threshold for submission of certified cost or pricing data from $750,000 to $2,000,000. The new threshold applies to contracts awarded after June 30, 2018, by Department of Defense (“DoD”) and civilian agencies. On April 13, 2018, the DoD issued Class Deviation 2018-O0012, implementing the new threshold within the department. To date, we have received no information as to how other agencies will implement the change to this threshold.

The deviation states that DoD contracting officers will start using the new threshold for contracts awarded on or after July 1, 2018. This raises two issues. First, is the applicability of the new threshold relevant to subcontracts? In this regard, we should note that the Federal Acquisition Regulation (“FAR”) uses two clauses to address the topic of subcontractors being required to submit certified cost or pricing data. These are FAR 52.215-12, Subcontractor Certified Cost or Pricing Data and FAR 52.215-13, Subcontractor Certified Cost or Pricing Data – Modifications. Both of these clauses are to be included in prime contracts when it is anticipated that the prime contractor will be required to submit certified cost or pricing data.

Thus, as a general rule, neither clause should be included in DoD prime contracts awarded after June 30, 2018 that are below the new threshold. However, if the prime contract exceeds $2,000,000 and the prime contractor is required to submit certified cost or pricing data, subcontractors would normally be expected to submit certified cost or pricing data if the subcontract is expected to exceed $750,000. The NDAA addressed this issue by raising the threshold for submission of certified cost or pricing data to $2,000,000 for subcontracts under contracts awarded after June 30, 2018. This threshold applies to the initial award of a subcontract and to modifications of subcontracts under prime contracts awarded after June 30, 2018.

However, the deviation did not address the application of the new threshold to subcontracts. Thus, if the FAR has not been amended to address this question by July 1, 2018, prime contractors may be faced with the problem of obtaining certified cost or pricing data from subcontractors concerning subcontracts that are expected to have a value in excess of $750,000 but less than $2,000,000. As for the FAR being amended to implement Section 811, FAR Case 2018-005 has been opened, but it is far from being finalized.

This brings us to the second point, which is the effect the new threshold has on existing contracts. FAR 52.215-21 covers the submission of certified cost or pricing data in regard to modifications of contracts. That clause requires the use of the cost or pricing data threshold in effect when the contract was awarded, not when the modification is being negotiated. Therefore, under this clause, if a modification is made after June 30, 2018, to a contract that was awarded before July 1, 2018, the usual rule would be that certified cost or pricing data would be required for modifications in excess of $750,000. In this regard, recall that the value of a modification to a contract is the aggregate change in the contract value. For example, if work with a value of $425,000 is added to a contract but work with a value of $350,000 is deleted from the contract, the aggregate change to the contract is $775,000. However, the net change is only $75,000. Unless an exemption applied to the modification, certified cost or pricing data would be required in this circumstance.

The NDAA permits contractors holding contracts awarded before July 1, 2018, to request that the threshold for submission of certified cost or pricing data for modifications to such contracts be adjusted to reflect the language of section 811. If such a request is made, the agency is required to modify the contract accordingly without requiring the contractor to provide the government with consideration. Unfortunately, there appears to be a drafting error in section 811.

Section 811 provides that if a contract awarded before July 1, 2018, is amended as described above, the threshold for submission of certified cost or pricing data for modifications to that contract will be $750,000 instead of the new $2,000,000 threshold. This appears to be an oversight on the part of Congress. Section 811 provides that if a contract awarded before July 1, 2018, is modified as above, the threshold for submission of certified cost or pricing data relating to a subcontract to be awarded after June 30, 2018, will be $2,000,000. Similarly, the threshold for submission of certified cost or pricing data for modifications to subcontracts entered into under contracts awarded after June 30, 2018, is $2,000,000. Finally, the threshold for modifications to subcontracts under prime contracts awarded before July 1, 2018, but that have been modified as provided by the NDAA is $2,000,000. Again, the deviation does not address these situations. Therefore, unless a separate deviation is issued, we will have to wait for the FAR Councils to amend the FAR in this regard. A review of the Conference Report on the NDAA does not explain why modifications that are made after June 30, 2018, to contracts awarded before July 1, 2018, remains at $750,000.

Pursuant to 41 U.S.C. §1502, the Cost Accounting Standards (“CAS”) apply to negotiated contracts in excess of the threshold for submission of certified cost or pricing data. Therefore, effective July 1, 2018, the threshold for CAS applicability will increase to $2,000,000. There will be no need for the CAS Board to revise its rules regarding this threshold, because the CASB’s rules state that negotiated contracts and subcontracts not in excess of the threshold for submission of certified cost or pricing data are exempt from all CAS requirements.

Although section 811 did not address the impact it has on the applicability of the CAS, the deviation does so. Specifically, the deviation changes the threshold for application of the FAR clauses and provisions dealing with the CAS (FAR 52.230-1 through 52.230-5) to $2,000,000 effective July 1, 2018. The deviation does not impact FAR 52.230-6, which is to be included in a contract when one of the other CAS clauses is included in the contract.

As the preceding discussion demonstrates, this deviation is a good first step toward timely implementation of section 811. However, there are still significant issues that need to be addressed. Further, this deviation only applies to DoD. Thus, it is possible that we will be operating under different cost or pricing data and CAS thresholds for DoD contracts and contracts awarded by non-DoD agencies until the FAR is amended.

In the meantime, if you have any questions concerning section 811 or the deviation, do not hesitate to contact a member of Cherry Bekaert’s GovCon industry group.