Best Practices in Post-Award
Price Adjustments
September 27, 2016
Speakers
• John Chesbro, Sr. Director, Contracts Intelligence &
Security, BAE Systems Information Solutions, Inc.
• Andrea Vavonese , Corporate Director and Division
Counsel, Missile Defense and Protective Systems,
Northrop Grumman Mission Systems
• Daniel Chudd, Partner, Government Contracts
Litigation and Disputes, Morrison & Foerster LLP
• James Thomas, Partner, Government Contracts and
Forensics Market Leader, PricewaterhouseCoopers
Advisory Services LLC
2
Agenda
 Categories of Price Adjustments
 Authority
 Conditions
 Basis of Entitlement and Pricing Methods
 Challenges and Audit Issues
 Advice and Success Factors
3
Categories of Contract Price Adjustments
Performance
Adjustments
• Contract Change Orders / REAs
• Contract Terminations
• Value Engineering Change Proposals
• Liquidated Damages
• Limitations of Cost or Funds
• Warranty Clauses
Administrative
Adjustments
• Incentive Fee Adjustments
• Economic Price Adjustments
• Contract Closeout Provisions
Compliance
Adjustments
• Truth in Negotiation Act (Defective
Pricing )
• Cost Accounting Standards (CAS)
• FAR Cost Principles
• Most Favored Customer
Other / Special
Adjustments
• Withholding of Payment
• After-Imposed and After-Relieved
Taxes
• Adjustments for Wages
4
Performance Adjustments
5
Contract Change Orders
Authority
o Change Orders (FAR 43.2)
o Changes Clause(s) (FAR 52.243-1 through 52.243-7)
o Commercial contracts (FAR 52.212-4)
Conditions
o Changes may be needed in the requirements, timing or place of delivery
o Changes may be caused by events that are not within the control of the
contractor
o Contractors may submit a Request for Equitable Adjustment (REA) to
recover compensation for contract changes
6
Contract Change Orders - Continued
Basis of Entitlement and Pricing Methods
o Most government contracts include a changes clause, which gives the
government the unilateral right to make changes to contract work
 Gives the government the flexibility to accommodate advances in
technology and changes to the government’s needs
 Permits ordering of additional work within the general contract scope
without utilizing new funds or undertaking a new procurement
 Failure to agree to any adjustment is treated as a dispute under the
Disputes clause (FAR 52.233-1)
o Commercial contracts may be changed by “written agreement of the parties”
o Only an authorized contracting officer is empowered to direct formal
contract changes
7
Contract Change Orders - Continued
Basis of Entitlement and Pricing Methods - Continued
Government’s rights and duties
o Unilateral right to make certain written changes within the general scope of
the contract at any time
o Examples include:
 Drawings, designs or specifications
 Method of shipment or packing
 Time of performance (i.e., hours of the day, days of the week, etc.) or
overall performance schedule
 Method or manner of performance
 Place of delivery or place of performance of services
 Amount of government-furnished property
8
Contract Change Orders - Continued
Basis of Entitlement and Pricing Methods - Continued
o Contractor’s rights and duties
 Must proceed with changed work, subject to as applicable, Limitation of
Cost or Limitation of funds clauses
 Relief may include cost, delivery, schedule, fee or other compensation
 Contractors must notify the government by the time set forth in the
contract and include specific details concerning the change
o Government must respond, in writing, to the contractor’s notice by the time
set forth in the contract
9
Contract Change Orders - Continued
Calculation of REAs
The methodology used to develop the REA value depends on various factors,
including:
o Is work being added, deducted, changed or is there excusable delay?
o Is the REA being valued before the change is implemented or after a cost or
schedule variance is noticed?
 Contractor’s proposal in response to a formal bilateral change order
versus a claim for costs under a constructive change
 Estimate of costs to be incurred (or savings to be realized) versus actual
incurred costs
10
Contract Change Orders - Continued
Calculation for REAs - Continued
Four fundamental methods for establishing the value of the equitable adjustment
o Total Cost Method
 Costs in the bid price are subtracted from the actual costs of performance,
then a profit is added to the resulting amount
 Cannot be used if there is another, more reliable method available
o Modified Total Cost Method
 Adjusts the Total Cost approach findings (to both original contract bid and
costs of performance) to ensure that the resulting value does not contain any
amount for which the government is not responsible
 Favored over the Total Cost Method because it adjusts for the contractor’s
responsibilities
11
Contract Change Orders - Continued
Calculation for REAs - Continued
o Pricing of each discrete change
 Specifically identifies changes to the contract for which the government is
responsible
 Preferred method
o “Jury Verdict” Approach
 Highly flexible technique designed to permit the court to compensate the
contractor without forcing the government to pay an unfair amount
 Typically, the court creates its own detailed adjustment calculation
12
Contract Change Orders - Continued
Challenges and Audit Issues
o Constructive changes happen when contract work is changed but the
procedures of the Changes clause have not been followed
o Constructive changes may be asserted by either government or contractor,
though typically it is the contractor that asserts a constructive change
o There are two elements – the “change” in actual performance and the
government “order” or direction to undertake the change
o Contractor has a “duty to protest” constructive changes by bringing the
change to the contracting officer’s attention
Types Of Constructive Changes




Schedule acceleration
Delay/disruption
Scope of nature of work
Other
•
•
•
•
Impossibility of performance
Commercial impracticability
Faulty GFP / GFM
Defective specifications
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Contract Change Orders - Continued
Advice and Success Factors
o Distinguish general scope vs. compensable changes
o Understand CO vs other government representative authority
o Beware of “Cardinal Changes”
o Understand change order accounting requirements (See FAR 52.243-6)
o Ongoing records of estimates at completion and documentation of prechange conditions are critical
o Identify assumptions and related responsibility
o Review releases and waivers
o Understand differences between claims and REAs
o Profit rates are negotiable
14
Contract Terminations
Authority
o Termination of Contracts (FAR Part 49)
o Allowability of Termination Costs (FAR 31.205-42)
o Terminations for Commercial Items (FAR 12.403)
o Termination Clause(s) (FAR 52.249-1 through FAR 52.249-14)
Conditions
o Termination for Convenience - can occur in the absence of the contractor’s
fault or breach of contract (e.g., increase in costs to the government on cost
reimbursable contract)
o Termination for Default - contractor’s actual or anticipated failure to
perform its contractual obligations (e.g., failure to meet delivery schedule,
failure to satisfy performance criteria, etc.) A Default Termination is
typically preceded by a “show cause” or “cure notice”
15
Contract Terminations - Continued
Conditions - Continued
o Partial termination - the contractor is authorized to request an equitable
adjustment in the prices of the undelivered unterminated items of the
contract
Basis of Entitlement and Pricing Methods
o T for C settlement proposal
 Generally:
▫ Costs incurred at the time of termination,
▫ Settlement costs (part of settlement proposal and separate from
request for equitable adjustment) and
▫ A fair and reasonable profit on work performed
 Profit on settlement costs, and anticipatory profits, are not allowed
o T for D – return of progress payments and recovery of excess reprocurement
costs
16
Contract Terminations - Continued
Challenges and Audit Issues
o Identifying costs of work that has not been accepted
o Subcontract costs
o Unresolved changes
o Profit considerations (e.g., subcontracts and loss contracts)
o Contract value and funding limitations
Advice and Success Factors
o Management of subcontractor issues (e.g., terms and conditions, notification
and settlement)
o Document financial position at the time of termination
o Consider reclassifying indirect cost to direct cost
o Evaluate legal basis in a termination for default
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Value Engineering Change Proposals
Authority
o Value Engineering (FAR 48)
o Value Engineering Clause (FAR 52.248-1 through FAR 52.248-3)
Conditions
The goal of value engineering is to achieve essential functions at the lowest life
cycle cost consistent with required performance, quality, reliability and safety
o Value Engineering is the formal technique by which contractors may
 voluntarily suggest methods for performing more economically and share
in any resulting savings or
 be required to establish a program to identify and submit to the
government methods for performing more economically
 eliminate, without impairing essential functions or characteristics,
anything that increases acquisition, operation or support costs
18
Value Engineering Change Proposals - Continued
Basis of Entitlement and Pricing Methods
Two value engineering approaches (calculations)
 Voluntary - contractor uses its own resources to submit any value
engineering change proposals (VECP’s). The contract provides for
sharing of savings and for payment of the contractor’s allowable
development and implementation costs if VECP is accepted
 Mandatory - government requires a specific value engineering program
effort. The contractor must perform value engineering as required by the
government and is paid in a separately priced item of work
19
Value Engineering Change Proposals - Continued
Challenges and Audit Issues
o Change vs contract requirement
o Support for authorization to proceed
o Calculation of savings
Advice and Success Factors
o Incentivize subcontractors and suppliers to participate in identifying VECPs
o Negotiate incentives with prime contractor (if subcontract)
o Consider no cost settlements when appropriate (see FAR 48.104-4)
o Preserve ECP values as part of contract modifications
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Other Performance Adjustments
o Liquidated Damages (FAR 11.5)
o Limitations of Cost (FAR 52.232-20)
o Limitation of Funds (FAR 52.232-22)
o Warranty Clauses (FAR 52.246-17 through FAR 52.246-21)
o Extraordinary Contractual Relief (FAR Part 50)
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Compliance Adjustments
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Truth in Negotiation Act (Defective Pricing)
Authority
o Truth in Negotiations Act (10 U.S.C. § 2306a)
o False Claims Act (18 U.S.C. § 287 and 31 U.S.C. § 3729)
o Defective Certified Cost or Pricing Data (FAR 15.407-1)
o Price Reduction for Defective Certified Cost or Pricing Data (FAR 52.215-10)
Conditions
o The Truth in Negotiations Act (TINA) requires a contractor to submit certified
cost or pricing data if a procurement exceeds the TINA threshold
o Contractors may be required to provide a certification that cost or pricing data
is current, complete and accurate for a proposal
o Defective pricing results from a contractor failing to comply with TINA
23
Truth in Negotiation Act (Defective Pricing) Continued
Basis of Entitlement and Pricing Methods
o If certified cost or pricing data are found to be inaccurate, incomplete or
noncurrent as of the date of final agreement, the government is entitled to a
price adjustment
o Correction of defective pricing typically includes consideration of the
omitted data to determine the effect that data would have had on
negotiations.
o Calculations for adjustment:
 Price-adjustment base line (includes disclosures)
 Revised price using accurate, complete and current data
 Offsets and special considerations
 Interest
24
Truth in Negotiation Act (Defective Pricing) Continued
Challenges and Audit Issues
o Defective pricing may be identified in post award, estimating system,
purchasing system and other audits
o Use of data for pricing vs. disclosure
o Estimates vs. facts
o Defenses
o Subcontractor issues
Advice and Success Factors
o Understand and document the applicability of TINA
o Proper subcontract flow-down and indemnification clauses
o Document and disclose factual and verifiable information
o Assess reliance by government
o Beware of limitations on offsets
o Establish accurate baseline for price adjustments
25
Cost Accounting Standards
Authority
o Cost Accounting Standards (41 U.S.C. § 1502)
o Cost Accounting Standards Administration (FAR 30.6)
o Administration of Cost Accounting Standards (FAR 52.230-6)
Conditions
Price adjustments may be applicable for non-compliance in the pricing of a
contract or during contract performance
26
Cost Accounting Standards - Continued
Basis of Entitlement and Pricing Methods
o Price adjustments apply to affected contracts under FAR Part 30
o Pricing methods

Non-compliance based on original price

Required, desirable and unilateral changes based on estimate to complete
at time of change
Challenges and Audit Issues
o “Affected” contracts
o Multiple changes
o Calculation of offsets
Advice and Success Factors
o Understand and document the applicability of CAS
o Advance agreements require special review (FAR 31.109)
o Adhere to disclosure and notification requirements (FAR 52.230-6)
27
FAR Cost Principles
Authority
o Allowable Costs under Defense Contracts (10 U.S.C § 2324)
o Contracting by Negotiation (FAR Part 15)
o Proposal Analysis Techniques - Cost analysis (FAR 15.404-1(c), FAR 31.1)
Conditions
o Original pricing
o Change orders
o Terminations
28
FAR Cost Principles – Continued
Basis of Entitlement and Pricing Methods
o Organizational considerations – commercial (FAR 31.2), educational
institutions (FAR 31.3), state, local and Indian governments (FAR 31.6) and
nonprofit organizations (FAR 31.7)
o Instructions for Submitting Cost/Price Proposals When Cost or Pricing Data
Are Required (FAR 15.408 Table 15-2)
o Allowable Cost and Payment (FAR 52.216-7)
o Requirements for Certified Cost or Pricing Data and Data Other Than
Certified Cost or Pricing Data (FAR 52.215-20)
o Contract Modifications (FAR Part 43)
29
FAR Cost Principles – Continued
Challenges and Audit Issues
o Applicability to firm fixed price contracts and change orders
o Record requirements
o Penalties for expressly unallowable costs (FAR 42.709)
o Incurred cost submissions (FAR 52.216-7(d))
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FAR Cost Principles – Continued
Advice and Success Factors
o Appropriate disclosures for gray areas
o Anticipate cost-based change orders
o Review allowability of major transactions
o Update record retention procedures
o Don’t overlook recoverability of home office costs, cost of money and certain
taxes
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Most Favored Customer
Authority
o Federal Supply Schedule Contracting - Evaluation of offers without access to
transactional data (GSAM 538.270-1)
o Price Reductions Clause (GSAR 552.238-75)
Conditions
o Most Favored Customer (MFC) seeks to ensure that the contracting
authority receives at least as favorable pricing as other customers making
similar purchases
Basis of Entitlement and Pricing Methods
o The Price Reductions Clause (PRC): the contract pricing-discount
relationship with the MFC must be maintained
o Calculation - Once the MFC category is identified, the government will
generally negotiate a discount that is equal to, or better than, the discount
given the MFC
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Most Favored Customer - Continued
Challenges and Audit Issues
o Basis of award and discount structure
o Documentation of negotiation
o Adequacy of sales records
Advice and Success Factors
o Beware of non standard MFC provisions
o Accurate pricing and discount representations
o Minimize special sales tracking and administrative requirements
o Establish ongoing monitoring
o Transactional Data Reporting (TDR) pilot program
33
Administrative and Other
Adjustments
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Administrative and Other Adjustments
o Incentive Fee Adjustments (FAR 16.4)
o Economic Price Adjustments (FAR 52.216-2 through FAR 52.216-4)
o Contract Closeout Provisions (FAR 52.216-7)
o Withholding of Payment

Price or Fee Adjustment for Illegal or Improper Activity (FAR 52.203-10)

Contractor Business Systems (DFARS 252.242-7005)
o After-Imposed and After-Relieved Taxes (FAR 52.229-3, FAR 52.229-4 and
FAR 52.229-6)
o Adjustments for Wages (FAR 52.222-43 and FAR 52.222-44)
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John Chesbro, Sr. Director, Contracts Intelligence
& Security, BAE Systems Information Solutions,
Inc.
John Chesbro joined BAE Systems in 2008 and is currently the Sr. Director, Contracts, Global,
Intelligence and Security Sector. He has over 30 years of government and commercial contracts,
finance, compliance and business management experience. John was a mentor in the inaugural
NCMA Contract Management Leadership Development Program. Prior to joining BAE Systems, he
served in a variety of positions with increasing responsibility in large global organizations including
General Dynamics, Veridian and EMC. He also served as a Contracts Analyst with the U.S. Army
prior to entering private industry in 1986.
36
Andrea T. Vavonese, Corporate Director and
Division Counsel, Missile Defense and Protective
Systems, Northrop Grumman Mission Systems
Andrea T. Vavonese is Corporate Director and Division Counsel for Northrop Grumman’s Missile Defense and Protective
Systems Division within the Mission Systems Sector. She provides legal advice and counsel to her business partners on a wide
range of matters, including international and domestic government and commercial transactions, business development, litigation,
investigations, intellectual property, employment, ethics and compliance.
Ms. Vavonese previously served as Corporate Counsel supporting the Health and Communications Divisions for Northrop
Grumman’s heritage Information Systems sector. Prior to joining Northrop Grumman in February 2015, Ms. Vavonese served as
Senior Counsel at Akin Gump Strauss Hauer & Feld, LLP, where she focused her practice on government contracting and
commercial litigation. In her 14 years at Akin, Andrea served as primary counsel to government contracting firms, advising on
procurement, contract negotiations, protection of intellectual property, changes and equitable adjustments, dispute resolution and
compliance. From 2002-2006, Andrea served as Litigation Counsel at VeriSign, Inc., where she defended and prosecuted lawsuits,
conducted internal investigations, and managed responses to subpoenas for the company and its subsidiaries worldwide.
Andrea received her B.S. in accounting from the State University of New York at Geneseo, where she currently is active on its
alumni committee, and her law degree from the Catholic University of America. Andrea is committed to supporting the needs of
children, serving as Vice Chairperson of the Board for the National Council for Adoption, an adoption advocacy and education
organization, and as Secretary of the Board of Developmental Connections, an organization that assists families with children with
developmental disorders.
37
Daniel Chudd, Partner, Government Contracts
Litigation and Disputes, Morrison & Foerster LLP
Daniel Chudd is a government contracts attorney with significant experience in government contracts litigation and dispute
resolution and avoidance. Dan's interest in government contracts was sparked during his clerkship with Judge Mary Ellen Coster
Williams of the U.S. Court of Federal Claims. That experience, combined with his in-depth industry knowledge, has made Dan an
effective advocate for his clients. In addition, a secondment with a major defense contractor gave Dan valuable insight into the
everyday challenges facing government contractors. He draws upon these experiences to develop creative and strategically sound
approaches to the myriad issues that his clients face.
Litigation Experience
One of Dan's favorite aspects of government contracts litigation is the variety of different disputes and forums in which he has been
able to practice. Dan routinely represents clients in bid protests before the government Accountability Office (GAO) and the U.S.
Court of Federal Claims. He also represents clients in qui tam False Claims Act matters at the district court and appellate levels.
Dan has also appeared before federal and state courts, administrative bodies, and the Civilian and Armed Services Boards of
Contract Appeals. The subjects of these disputes have ranged from contract claims and termination disputes with a government
customer to contractor and subcontractor disputes.
Dan is admitted to practice in the District of Columbia and the state of Virginia and before the United States Courts of Appeals for
the Federal Circuit and the Fourth Circuit, the United States District Court for the Eastern District of Virginia, and the United
States Court of Federal Claims. Dan also holds an active security clearance and has experience with Special Access Programs.
Counseling and Investigations
In addition to representing clients in litigation, Dan regularly counsels clients on pre-litigation and dispute avoidance matters,
contract changes, and requests for equitable adjustment. He advises clients on matters related to the Federal Acquisition
Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS), as well as the Truth in Negotiations Act
(TINA), Procurement Integrity Act (PIA), and other legal and ethical obligations. Dan also counsels clients on a number of
cybersecurity and data security issues that impact government contractors. In addition, Dan represents clients in internal
investigations related to government contracts matters
38
James W. Thomas, Partner, Government
Contracts and Forensics Market Leader,
PricewaterhouseCoopers Advisory Services LLC
James W. Thomas is a Partner in the McLean, Virginia office of PricewaterhouseCoopers Advisory Services LLC. With 30 years
of consulting experience, he has responsibility for delivering advisory services in areas such as compliance, finance effectiveness,
operations, technology, human capital, due diligence, investigations and disputes. He is a frequent speaker at industry events, a
subject matter expert in government contracting and an author of many industry publications.
Mr. Thomas provides advice to clients on the requirements of government contracts including the Federal Acquisition Regulation
and Cost Accounting Standards. He provides expert accounting services to law firms representing clients involved in government
contract disputes such as quantification of damages, defective pricing, cost recovery claims, labor charging, purchase price disputes
and other accounting matters. He has provided expert testimony in cases involving cost disputes and bid protests.
Mr. Thomas conducts training seminars for the public on government contracting topics including contract costs, internal auditing
and financial accounting considerations. He is a member of the American Institute of Certified Public Accountants and associate
member of the American Bar Association.
Mr. Thomas has authored many publications for PricewaterhouseCoopers LLP, Thomson Reuters, Aviation Week, Wiley,
American Bar Association, Aspen, West and others on government contracting topics including:
Mergers and acquisitions
Compliance effectiveness
Cost Accounting Standards
Biotechnology
Litigation and disputes
Program management
GSA contracting
Aerospace and Defense
39
Questions?
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