Historically, a principal concern in noncompetitive contracting situations has been how to ensure that the prices proposed by contractors are fair and reasonable. Recognizing this risk, the Congress enacted the Truth in Negotiations Act in 1962. The act represents the government’s key safeguard against inflated contract prices on noncompetitive contracts. The act requires contractors and subcontractors to provide the government with cost or pricing data supporting their proposed prices and to certify that the data are accurate, complete, and current. If the government later discovers that the contractor submitted data that were not accurate, complete, and current, the act allows the government to pursue remedies, such as a reduction in the contract price. Interest and penalties can also be assessed under certain conditions. These provisions are designed to give the government the information it needs to ensure fair and reasonable contract prices. The negotiation process with certified cost or pricing data can be lengthy, and the documentation requirements for both sides can be extensive. The process starts when the contractor provides estimated costs for subcontracts and materials along with a detailed breakdown of the work to be performed, including estimated manufacturing labor costs, engineering costs, tooling costs, and other direct costs for each segment of the work. As figure 1 shows, DOD contracting officers then review these data along with price analysts from the Defense Contract Management Agency and auditors from the Defense Contract Audit Agency. The government and the contractor then negotiate cost elements to settle on a price. Once this is done, the contractor certifies the data as accurate, complete, and current. DOD may conduct an audit after the contract’s award. When enacted in 1962, the Truth in Negotiations Act did not include an explanation of what constituted an “exceptional case” and it has never been amended to define that term. Up until 1995, the Federal Acquisition Regulation (the implementing regulation) largely mirrored the Truth in Negotiations Act. The waiver provision in the Federal Acquisition Regulation was amended in 1995 to allow contracting officers to waive data when sufficient information was available to determine a fair and reasonable price. However, the regulation still provided little guidance on the circumstances that would warrant a waiver in a particular case. The first sentence of the current provision states that the “head of the contracting activity . . . may, without power of delegation, waive the requirement for submission of cost or pricing data in exceptional cases.”The waiver provision also states that the head of the contracting activity “may consider waiving the requirement if the price can be determined to be fair and reasonable without submission of cost or pricing data.” Aside from stating that a waiver may be considered in this situation, the regulation provides no further guidance on the circumstances that would warrant a waiver. Finally, the regulation includes no other guidance to help agency officials weigh the potential risks and benefits of granting a waiver in a particular case, as opposed to obtaining certified data. The conferees agree that the term “exceptional circumstances” requires more than the belief that it may be possible to determine the contract price to be fair and reasonable without the submission of certified cost and pricing data. For example, a waiver may be appropriate in circumstances where it is possible to determine price reasonableness without cost or pricing data and the contracting officer determines that it would not be possible to enter into a contract with a particular contractor in the absence of a waiver. In response to these concerns, DOD was directed in 1998 to work with appropriate executive branch officials to clarify situations in which an exceptional case waiver may be granted. According to DOD, no actions have been taken to clarify when waivers should be granted. Using DOD’s contract database, we identified 20 waivers valued at more than $5 million each in fiscal year 2000. The total value of these waivers was about $4.4 billion. As table 1 shows, six buying organizations approved these waivers. Five of the contracts included waivers that covered multiple-year purchases. Six waivers that we identified involved large, complicated acquisitions, which combined represented about 94 percent of the dollar value of the waivers we reviewed. (See table 2.) We could not assess the extent to which waivers are being used at DOD because DOD’s contract database is unreliable. However, for the contract actions we examined, we were able to verify data by reviewing the actual contracts and supporting documents. Contract pricing or waiver documents for all of the cases we reviewed stated that sufficient information was available to determine the price to be fair and reasonable without the submission of cost or pricing data and did not cite other circumstances to justify the waivers. This justification complies with the Federal Acquisition Regulation. In three cases, our review found that other factors strongly influenced the decision to waive certified cost or pricing data. These involved purchases for crashworthy fuel systems and combat vehicle track as well as a foreign military sale of F-16 fighter aircraft to Greece. In the crashworthy fuel system purchase, the company’s business model requires the company to sell its products at catalog prices rather than use a traditional government approach based on certified cost or pricing data, which the company never provides. This unique supplier also developed all of its products and maintains a production base exclusively at the company’s expense. In the case of the purchase of combat vehicles track, the company’s commercial accounting system did not segregate unallowable costs from its overhead accounts, and the company did not want to run the risk of government claims and possible damage to its reputation because of the inadvertent failure to exclude such costs from government proposals. As a result, the company would not provide certified data. The Army and the company agreed to reduce general and administrative costs allocated to this buy by 25 percent to compensate for possible unallowable costs. Finally, in the F-16 sale, two approaches were considered. The first called for accepting the price offered by the contractor during a competition between different aircraft types. The second called for traditional negotiations based on the certification of cost or pricing data. The contractor objected to providing certified data, arguing that adequate price competition had occurred. As a compromise, the Air Force waived the certification requirement but obtained and analyzed pricing data from the contractor. Contracting officers responsible for the 20 waivers we reviewed used a variety of techniques and approaches—sometimes a combination of several—to determine whether prices were fair and reasonable. Many of the contracting officers conducted a price analysis. Under a price analysis, the contracting officer reviews the proposed price for the contract without a breakdown of supporting costs. In 11 cases, the contracting officers compared contractors’ proposed prices with prices that had been negotiated previously for the same systems with certified data. In some cases, if a significant amount of time had elapsed since the previous price had been established, the contracting officers adjusted the price to account for inflation and quantity changes. In four cases, contracting officers conducted more thorough analyses using the contractors’ cost data, but the contractors were not required to certify the data as accurate, complete, or current. Under a cost analysis, the contracting officer reviews a breakdown of supporting costs in terms of materials, labor, and various overhead accounts. Such a breakdown, for example, could list various prices for materials as well as anticipated hours and rates for labor. In five cases, a variety of other pricing techniques were employed, including the use of regression analyses, learning curves, and parametric estimates. Table 3 summarizes primary techniques employed on each of the 20 waivers we reviewed. The government was at a higher risk of inflated pricing in situations where there was a lot of uncertainty about the data used to support analyses and a lower risk in situations where there was less uncertainty. Factors that increased uncertainty included changes in the design of the weapon system since a previous purchase, changes in the processes or equipment used to produce the system, or even changes in the amount being ordered by the government. More indirect factors contributing to uncertainty include mergers and acquisitions, cost-cutting measures, or changes in relationships with subcontractors. All of these things can significantly affect the costs of a product. The practice of relying on previously certified data that are fairly old also increased risk—principally because it increased the potential for more uncertainty. In several cases we reviewed, the data relied on were 2 to 3 years old. At times, contracting officers took action to make up for the uncertainties associated with the time elapsed, such as adjusting the price to account for inflation. However, the contracting officers still could not be assured that all other conditions—such as production processes, business processes, subcontractor relationships— affecting the purchase remained the same. One case we identified, the Navy’s purchase of spare parts for Orion radar systems, was particularly risky—not only because the contracting officer relied on 7-year-old data, but the data had never been certified. We also identified factors and practices that helped to minimize risk. Of course, relying on data that were certified fairly recently for systems where conditions had not changed lowered the risk to the government. This occurred in several cases that we reviewed. In other cases, contracting officers employed pricing experts from the Defense Contract Management Agency and the Defense Contract Audit Agency to help them analyze costs and/or prices. Such officials lent substantial expertise and experience to the negotiation process by performing audits and reviews of the contractor’s purchasing systems, estimating systems, overhead rates, and operations in general. In some cases, government and contractor personnel worked collaboratively and effectively within integrated product teams to analyze costs and prices. In doing so, they shared and used the same data to come to a consensus on issues affecting contract price. This arrangement also served to minimize the development of adversarial relationships between the contractor and the government. Another factor that could lower risk is the contractor’s having sound estimating and purchasing systems—ones approved by government organizations. Such systems are integral to producing credible proposals. Nearly all of the contractors in the cases that we reviewed had such systems, and in a few cases, allowed government representatives direct access to the data within the systems. Specific examples highlighting risk factors are provided in the figure below. DOD’s guidance on the waiver process is not adequate.