FAR 15.407-1—Defective certified cost or pricing data.
Plain-English Summary
FAR 15.407-1 addresses defective certified cost or pricing data and explains what happens when cost or pricing data used in negotiations are inaccurate, incomplete, or noncurrent. It covers both pre-award and post-award situations, including the contracting officer’s duty to raise defects immediately, how the Government may adjust price after award, how offsets for understated data work, and when the Government may recover overpayments, interest, and penalties. The section also explains that the Government’s rights are preserved even if the contractor was a sole source, the contracting officer should have known of the defect, the contract was priced as a total cost agreement, or no Certificate of Current Cost or Pricing Data was submitted. In practice, this rule protects the Government from paying inflated prices based on bad data while also giving contractors a limited opportunity to correct or offset defects with properly supported information. It is a key defective pricing enforcement provision for negotiated procurements subject to certified cost or pricing data requirements.
Key Rules
Immediate notice of defects
If the contracting officer learns before price agreement that submitted certified cost or pricing data are inaccurate, incomplete, or noncurrent, the officer must immediately notify the prospective contractor. This applies whether the defect would increase or decrease price, and the officer must consider corrected data or the defect’s effect in negotiations.
Document price adjustments
When defective data are identified before award, the contracting officer must reflect in the price negotiation memorandum the adjustments made or the corrected data used. This creates a record showing how the final negotiated price was reached.
Post-award price reduction right
If defective certified cost or pricing data are discovered after award, the Government is entitled to a price adjustment, including profit or fee, for any significant amount by which the price was increased because of the defect. The contract clauses at 52.215-10 and 52.215-11 implement this right.
Scope of defective pricing liability
The Government may seek a price adjustment for defective data submitted by the contractor, a prospective subcontractor, or an actual subcontractor. The right applies even if the contractor was a sole source, the contracting officer should have known of the defect, the contract was based on a total cost agreement, or no Certificate of Current Cost or Pricing Data was submitted.
Adjustment factors and reliance
In determining the amount of the price adjustment, the contracting officer must consider when the data became reasonably available to the contractor and the extent to which the Government relied on the defective data. The adjustment is tied to the pricing impact of the defect, not merely the existence of bad data.
Offsets for understated data
The contracting officer must allow an offset for understated certified cost or pricing data submitted in support of the same pricing action, up to the amount of the Government’s claim for overstated data. The contractor must certify entitlement to the offset and prove the understated data were available before the applicable 'as of' date but were not submitted.
Offset limits and exclusions
Offsets are not allowed if the contractor knew the data were understated before the 'as of' date, or if the Government proves the price would not have increased by the offset amount even if the data had been submitted. Offsets do not have to be in the same cost category, but they must be factually supported.
Overpayment, interest, and penalties
In addition to price reduction, the Government may recover overpayments plus interest, and in certain knowing-submission cases, penalties. Overpayment exists only when payment was made for accepted supplies or services, not for contract financing, and interest is calculated using Treasury underpayment rates.
Demand letter requirements
When seeking repayment, the contracting officer must separately state the repayment amount, any penalty amount, the interest amount through a specified date, and that interest will continue to accrue. This ensures the contractor understands the basis and components of the Government’s claim.
Responsibilities
Contracting Officer
Identify and raise suspected defective data immediately before award; consider corrected data or pricing impacts in negotiations; document adjustments in the price negotiation memorandum; after award, determine whether defective data caused a significant price increase; calculate price reductions, offsets, overpayments, interest, and any penalties; obtain counsel’s advice before taking contractual penalty actions; and issue a demand letter with the required separate amounts and interest statement.
Contractor
Submit accurate, complete, and current certified cost or pricing data; promptly provide corrected data when defects are identified; support any claimed offset with facts and certification; prove that understated data were available before the applicable 'as of' date but were not submitted; and repay overpayments, interest, and penalties when required.
Prospective Subcontractor / Subcontractor
Provide accurate, complete, and current certified cost or pricing data when required; ensure data supporting prime or subcontract pricing are not defective; and be aware that defective data at the subcontract level can create Government recovery rights against the prime contract pricing action.
Government / Agency
Protect the Government’s pricing interests by enforcing defective pricing remedies, preserving contract clauses that authorize price reductions, and ensuring overpayments and interest are recovered when warranted.
Counsel
Advise the contracting officer before any contractual action concerning penalties for knowing submission of defective certified cost or pricing data.
Practical Implications
Contractors should treat certified cost or pricing data as a continuing accuracy obligation through the date of price agreement or the agreed 'as of' date; stale or incomplete data can trigger post-award claims.
Contracting officers should build a clear record of what data were relied on, what corrections were made, and how the final price was affected; weak documentation makes defective pricing cases harder to sustain.
Offsets are not automatic. Contractors must prove the understated data were available and not submitted, and the Government can defeat the offset if the price would not have increased anyway.
The Government’s recovery rights are broad and are not defeated by common defenses such as sole-source status, the contracting officer’s constructive knowledge, or the absence of a Certificate of Current Cost or Pricing Data.
Interest and penalties can materially increase exposure beyond the base price reduction, so both sides should evaluate accepted-delivery payment history, subcontract flowdown effects, and whether the submission was knowing before asserting or contesting a claim.
Official Regulatory Text
(a) If, before agreement on price, the contracting officer learns that any certified cost or pricing data submitted are inaccurate, incomplete, or noncurrent, the contracting officer shall immediately bring the matter to the attention of the prospective contractor, whether the defective data increase or decrease the contract price. The contracting officer shall consider any new data submitted to correct the deficiency, or consider the inaccuracy, incompleteness, or noncurrency of the data when negotiating the contract price. The price negotiation memorandum shall reflect the adjustments made to the data or the corrected data used to negotiate the contract price. (b) (1) If, after award, certified cost or pricing data are found to be inaccurate, incomplete, or noncurrent as of the date of final agreement on price or an earlier date agreed upon by the parties given on the contractor's or subcontractor's Certificate of Current Cost or Pricing Data, the Government is entitled to a price adjustment, including profit or fee, of any significant amount by which the price was increased because of the defective data. This entitlement is ensured by including in the contract one of the clauses prescribed in 15.408 (b) and (c) and is set forth in the clauses at 52.215-10 , Price Reduction for Defective Certified Cost or Pricing Data, and 52.215-11 , Price Reduction for Defective Certified Cost or Pricing Data-Modifications. The clauses give the Government the right to a price adjustment for defects in certified cost or pricing data submitted by the contractor, a prospective subcontractor, or an actual subcontractor. (2) In arriving at a price adjustment, the contracting officer shall consider the time by which the certified cost or pricing data became reasonably available to the contractor, and the extent to which the Government relied upon the defective data. (3) The clauses referred to in paragraph (b)(1) of this subsection recognize that the Government’s right to a price adjustment is not affected by any of the following circumstances: (i) The contractor or subcontractor was a sole source supplier or otherwise was in a superior bargaining position; (ii) The contracting officer should have known that the certified cost or pricing data in issue were defective even though the contractor or subcontractor took no affirmative action to bring the character of the data to the attention of the contracting officer; (iii) The contract was based on an agreement about the total cost of the contract and there was no agreement about the cost of each item procured under such contract; or (iv) Certified cost or pricing data were required; however, the contractor or subcontractor did not submit a Certificate of Current Cost or Pricing Data relating to the contract. (4) Subject to paragraphs (b)(5) and (6) of this subsection, the contracting officer shall allow an offset for any understated certified cost or pricing data submitted in support of price negotiations, up to the amount of the Government’s claim for overstated pricing data arising out of the same pricing action ( e.g., the initial pricing of the same contract or the pricing of the same change order). (5) An offset shall be allowed only in an amount supported by the facts and if the contractor- (i) Certifies to the contracting officer that, to the best of the contractor’s knowledge and belief, the contractor is entitled to the offset in the amount requested; and (ii) Proves that the certified cost or pricing data were available before the "as of" date specified on the Certificate of Current Cost or Pricing Data but were not submitted. Such offsets need not be in the same cost groupings ( e.g., material, direct labor, or indirect costs). (6) An offset shall not be allowed if- (i) The understated data were known by the contractor to be understated before the "as of" date specified on the Certificate of Current Cost or Pricing Data; or (ii) The Government proves that the facts demonstrate that the price would not have increased in the amount to be offset even if the available data had been submitted before the "as of" date specified on the Certificate of Current Cost or Pricing Data. (7) (i) In addition to the price adjustment, the Government is entitled to recovery of any overpayment plus interest on the overpayments. The Government is also entitled to penalty amounts on certain of these overpayments. Overpayment occurs only when payment is made for supplies or services accepted by the Government. Overpayments do not result from amounts paid for contract financing, as defined in 32.001 . (ii) In calculating the interest amount due, the contracting officer shall- (A) Determine the defective pricing amounts that have been overpaid to the contractor; (B) Consider the date of each overpayment (the date of overpayment for this interest calculation shall be the date payment was made for the related completed and accepted contract items; or for subcontract defective pricing, the date payment was made to the prime contractor, based on prime contract progress billings or deliveries, which included payments for a completed and accepted subcontract item); and (C) Apply the underpayment interest rate(s) in effect for each quarter from the time of overpayment to the time of repayment, utilizing rate(s) prescribed by the Secretary of the Treasury under 26 U.S.C. 6621(a)(2) . (iii) In arriving at the amount due for penalties on contracts where the submission of defective certified cost or pricing data was a knowing submission, the contracting officer shall obtain an amount equal to the amount of overpayment made. Before taking any contractual actions concerning penalties, the contracting officer shall obtain the advice of counsel. (iv) In the demand letter, the contracting officer shall separately include- (A) The repayment amount; (B) The penalty amount (if any); (C) The interest amount through a specified date; and (D) A statement that interest will continue to accrue until repayment is made. (c) If, after award, the contracting officer learns or suspects that the data furnished were not accurate, complete, and current, or were not adequately verified by the contractor as of the time of negotiation, the contracting officer shall request an audit to evaluate the accuracy, completeness, and currency of the data. The Government may evaluate the profit-cost relationships only if the audit reveals that the data certified by the contractor were defective. The contracting officer shall not reprice the contract solely because the profit was greater than forecast or because a contingency specified in the submission failed to materialize. (d) For each advisory audit received based on a postaward review that indicates defective pricing, the contracting officer shall make a determination as to whether or not the data submitted were defective and relied upon. Before making such a determination, the contracting officer should give the contractor an opportunity to support the accuracy, completeness, and currency of the data in question. The contracting officer shall prepare a memorandum documenting both the determination and any corrective action taken as a result. The contracting officer shall send one copy of this memorandum to the auditor and, if the contract has been assigned for administration, one copy to the administrative contracting officer (ACO). A copy of the memorandum or other notice of the contracting officer’s determination shall be provided to the contractor. When the contracting officer determines that the contractor submitted defective cost or pricing data, the contracting officer, in accordance with agency procedures, shall ensure that information relating to the contracting officer’s final determination is reported in accordance with 42.1503 (h). Agencies shall ensure updated information that changes a contracting officer’s prior final determination is reported into the FAPIIS module of Contractor Performance Assessment Reporting System (CPARS) in the event of a— (1) Contracting officer’s decision in accordance with the Contract Disputes statute; (2) Board of Contract Appeals decision; or (3) Court decision. (e) If both the contractor and subcontractor submitted, and the contractor certified, or should have certified, cost or pricing data, the Government has the right, under the clauses at 52.215-10 , Price Reduction for Defective Certified Cost or Pricing Data, and 52.215-11 , Price Reduction for Defective Certified Cost or Pricing Data-Modifications, to reduce the prime contract price if it was significantly increased because a subcontractor submitted defective data. This right applies whether these data supported subcontract cost estimates or supported firm agreements between subcontractor and contractor. (f) If Government audit discloses defective subcontractor certified cost or pricing data, the information necessary to support a reduction in prime contract and subcontract prices may be available only from the Government. To the extent necessary to secure a prime contract price reduction, the contracting officer should make this information available to the prime contractor or appropriate subcontractors, upon request. If release of the information would compromise Government security or disclose trade secrets or confidential business information, the contracting officer shall release it only under conditions that will protect it from improper disclosure. Information made available under this paragraph shall be limited to that used as the basis for the prime contract price reduction. In order to afford an opportunity for corrective action, the contracting officer should give the prime contractor reasonable advance notice before determining to reduce the prime contract price. (1) When a prime contractor includes defective subcontract data in arriving at the price but later awards the subcontract to a lower priced subcontractor (or does not subcontract for the work), any adjustment in the prime contract price due to defective subcontract data is limited to the difference (plus applicable indirect cost and profit markups) between the subcontract price used for pricing the prime contract, and either the actual subcontract price or the actual cost to the contractor, if not subcontracted, provided the data on which the actual subcontract price is based are not themselves defective. (2) Under cost-reimbursement contracts and under all fixed-price contracts except firm-fixed-price contracts and fixed-price contracts with economic price adjustment, payments to subcontractors that are higher than they would be had there been no defective subcontractor certified cost or pricing data shall be the basis for disallowance or nonrecognition of costs under the clauses prescribed in 15.408 (b) and (c). The Government has a continuing and direct financial interest in such payments that is unaffected by the initial agreement on prime contract price.