Customizing the Use of TINA (Truth in Negotiation Act) in DoD

Abstract

Wang, Rendon, Champion, Ellen, and Walk (hereafter Wang et al., 2016) identify the incentive problem that is characterized as a moral hazard in the Department of Defense (DoD) current use of the Truth in Negotiation Act (TINA). One of the examples they concentrated on was the ineffective use of TINA in the context of firm-fixed-price (FFP) contracts. Specifically, a contractor under an FFP contract that is subject to TINA has the following negative incentive: The fear of being held accountable for any significant unfavorable cost discrepancy (i.e., the actual incurred cost is significantly below the ex-ante cost estimate negotiated with the DoD as the basis for contract fixed-price) would strongly motivate the contractor to shirk (i.e., reduce cost-saving effort) or even engage in cost padding (e.g., by opportunistically incurring or allocating more costs to the government contracts). Such behavior leads to deadweight welfare loss that is ultimately borne by taxpayers. This study extends Wang et al. (2016) to a broader scope and greater depth. In particular, we propose to customize the use (or disuse) of TINA in the DoD for various contracting scenarios involving specific acquisition category (ACAT I through III), stage of the cycle (Milestones A, B, and C), and contract type. The bottom line is we don't believe the TINA policy should be prescribed via a one-size-fits-all approach; rather, the use or disuse of TINA should be customized to various situations. We continue to employ an economics-based, incentive-centric approach that focuses on investigation of agents (i.e., DoD contractors) incentives under various settings. Then we generate our policy recommendation through with and without TINA comparison. TINA is a federal acquisition regulation, which goes beyond the DoD and the DoN. We expect that significant cost savings can be generated for the DoD and the DoN, as well as other federal government agencies, by providing such a framework described above.