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Proposed Rule Would Require TWO Incurred Cost Submissions

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The 2017 National Defense Authorization Act (NDAA), also known as Public Law 114-328, required the Department of Defense to change the way it managed contractor IR&D and B&P expenses. Section 824 required:

  • Contractor IR&D expenses allocated to DoD contracts must be reported separately from other contractor indirect expenses

  • The current limitations found in the DFARS IR&D/B&P cost principle, that limits allowable costs to those found to be of interest to the DoD (via one of seven possible avenues) were eliminated in favor of “a CEO determination that IR&D expenses will advance the needs of DoD for future technology and advanced capability.”

  • Existing DFARS cost principle language governing B&P cost allowability, which seemed to imply that contractor B&P expenses must also be of interest to DoD, was revised to eliminate that requirement

  • In addition, contractor B&P expenses allocated to DoD contracts must be reported separately from other contractor indirect expenses.

  • The DCAA must revise its Annual Report to Congress format to provide—

    • a summary, set forth separately by dollar amount and percentage, of indirect costs for independent research and development incurred by contractors in the previous fiscal year

    • a summary, set forth separately by dollar amount and percentage, of indirect costs for bid and proposal costs incurred by contractors in the previous fiscal year

Link to the 2017 NDAA language here.


Regulations prescribed under subsection (a) may not include provisions that would infringe on the independence of a contractor to choose which technologies to pursue in its independent research and development program if the chief executive officer of the contractor determines that expenditures will advance the needs of the Department of Defense for future technology and advanced capability as transmitted pursuant to subsection (c)(3)(A).

Now, in 2021, the DAR Council has promulgated a proposed rule to implement the 2017 NDAA requirements. Let’s look at it. The proposed rule—

  • Adds language at DFARS 231.205-18(c) to require contractor CEOs to determine that IR&D expenditures will advance the needs of DoD for future technology and advanced capability.

  • Adds a requirement for major contractors to include a statement in their submission to the Defense Technical Information Center (DTIC) that the CEO of the contractor has made the determination required by 10 U.S.C. 2372. This statement serves as evidence for DoD, when determining whether IR&D costs are allowable. The proposed rule notes that major contractors are already required to upload IR&D activities in DTIC in order to provide DoD with information on the progress of these activities; so this rule adds a requirement for those major contractors to include a statement in the DTIC input that the CEO determination has been made.

  • Since the list of seven activities of potential interest to DoD was deleted, the requirement for the DCMA ACO to compare the IR&D activities uploaded in DTIC to the list of seven IR&D activities of potential interest to DoD no longer exists. Therefore, DFARS 242.771-3(a) is proposed to be modified to remove DCMA responsibilities for determining if an activity is of potential interest to DoD.

  • Adds language to clarify that IR&D and B&P costs will be reported independently from other incurred indirect costs in a new paragraph at DFARS 231.205-18(c)(iv).

  • Decouples IR&D and B&P by stating “IR&D and B&P” instead of “IR&D/B&P” throughout the text. However, for the purposes of calculating the threshold that requires major contractors to submit IR&D activities and statements regarding the CEO determinations in DTIC, the rule does not change the calculation, which combines IR&D and B&P, to ensure the definition of “major contractor” remains the same.

  • DFARS 242.771-3(c)(1) is proposed to be modified to change the content of the communication from DoD to contractors from the “planned or expected DoD future needs” to the “planned or expected needs of DoD for future technology and advanced capability.” In addition, the responsibilities of the Office of the Under Secretary of Defense for Research and Engineering are expanded to include providing on the DTIC website communities of interest on DoD's future needs. An email address for additional information is also provided.

Importantly, the proposed rule adds a contract clause at DFARS 252.242-70XX, Independent Research and Development and Bid and Proposal Incurred Costs, which requires all contractors with noncommercial awards exceeding the simplified acquisition threshold to provide an incurred cost submission of IR&D and B&P costs for the prior Government fiscal year to a website for DCAA to access.

We’ve thought about that final requirement. Why couldn’t the DAR Council just modify the Allowable Cost and Payment contract clause (52.216-7) to require an additional schedule in the contractor’s annual proposal to establish final billing rates? After all, there are already about two hundred zillion schedules; what’s one more? But then we realized that many defense contractors don’t have any cost-reimbursable or T&M contracts; they are 100% FFP contractors—especially the smaller subcontractors. If the DAR Council simply modified the 52.216-7 clause, then many defense contractors wouldn’t be reporting their IR&D and B&P expenditures. Thus, the new contract clause makes a kind of sense, given Congressional direction.

If implemented as a final rule, the proposed language will require almost all defense contractors to submit an incurred cost submission. Some will be submitting their final billing rate proposals (which are not incurred cost submissions, but whatever) as they have always done. Now they will have an additional (real) incurred cost submission to submit for their B&P and IR&D project expense detail. So they will have two annual submissions to make. Other defense contractors, who have not had to submit anything before, will now have to submit one—the B&P and IR&D incurred cost submission.

Fun times ahead!

And what will DCAA do with the new submissions they receive? According to the Public Law and the proposed rule, they will have to aggregate the data and report summary-level statistics to Congress each year. Will the auditors want to use those submissions as audit leads? Well, they’re not supposed to—but we’ll have to see. Historically, DCAA as an agency has a rather poor record of resisting temptation to use information received for one thing as an audit lead for something else. But we can be optimistic, right?

Another thing that occurs to us is that there will need to be a standard submission format. If DCAA lets contractors do their own thing, then they’ll have trouble aggregating the data they receive. The current language of the (draft) contract clause is fairly permissive. It states—

… the Contractor shall—

(1) Report to [website TBD] a consolidated spreadsheet of all independent research and development (IR&D) and bid and proposal (B&P) costs incurred by the Contractor during performance of any DoD contract in the previous fiscal year, beginning October 1 through September 30; and

(2) Submit this report no later than December 31 of each year.

(b) IR&D and B&P incurred costs shall be reported separately and shall be reported by costs attributable to—

(1) The Department of Defense (non-foreign military sales);

(2) Foreign military sales; and

(3) Other.

We’re going out on a limb here, and will bet the existing permissive language becomes more prescriptive when the rule is finalized. The proposed clause language is also ambiguous, conflating the government fiscal year with a contractor fiscal year. Finally, the proposed language requires submission by 31 December but the (for a calendar year contractor), final costs won’t be known for at least six months after that date. We’ll also bet some of those details are caught in the final rule. At least, we hope they will be. You can help make that happen by submitting comments, which are due by not later than 29 November. The address for submission of comments is found in the proposed rule.

In summary, there are going to be a lot of defense contractors who now have to submit the new IR&D and B&P incurred costs reports. Many of them will have never submitted an incurred cost report before. We predict confusion. And perhaps more work for government contract accounting consultants.


Statute of Limitations, Again

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In 2020, Triple Canopy appealed several Contracting Officer’s Final Decisions (COFDs) to the ASBCA. The dispute involved an interpretation of the contract clause 52.229-6 (“TAXES-FOREIGN FIXED-PRICE CONTRACTS”, June 2003) as it applied to Triple Canopy’s work in Afghanistan. The ASBCA denied Triple Canopy’s appeals, finding them time-barred by the Contract Disputes Act’s Statute of Limitations.1

We’ve written a lot about the CDA Statute of Limitations here on this blog. In our layperson’s view, the appellate forums (fora?) have applied the rules of claim accrual inconsistently. We’ve been told that our viewpoint is wrong by people who’ve been to law school, passed the bar, and get paid tremendously huge hourly rates to help contractors in court. However, we remain convinced that the rules are not clear, not implemented via bright-line standards, and thus remain a source of confusion for the contracting parties.

Our position is: if the rules of CDA claim accrual are so clear and evenly interpreted, then show us the textbook that lays the rules out for all to see. (Note: if you know of such a textbook, please send us an email. We want to buy it.)

Our point of view regarding this issue seemingly was bolstered by a recent decision by the Court of Appeals, Federal Circuit, a decision that reversed the ASBCA’s Triple Canopy decision, calling it an error “as a matter of law.” Which to us, means that the ASBCA Judges didn’t interpret the CDA Statute of Limitations correctly.

So what did the ASBA Judges get wrong?

According to the Appellate Court, the matter turned on when Triple Canopy’s claim had accrued. The government argued, and the ASBCA found, that the claim accrued when Triple Canopy “was legally obligated to pay the [Afghan government tax] assessment.” That was when the company knew, or should have known, that it had suffered an injury. According to the ASBCA, “The fact that the final amount could change does not matter, nor does the fact that actual payment had not yet occurred.”

However, Triple Canopy had argued, and the Appellate Court agreed, that the claim accrued when the company had exhausted its appeal rights (to the Afghan government). In support of its argument, Triple Canopy had pointed to paragraph (i) of the 52.229-6 clause, which states that the contractor must ““take all reasonable action to obtain exemption from or refund of any taxes or duties.” In other words, the ASBCA found that clause to give the contractor discretion in pursuing a tax reduction (since the contract was FFP), but the Appellate Court found that there was no discretion involved.

The Appellate Court wrote—

We agree with Triple Canopy that, because it was seeking reimbursement of the GIRA assessment pursuant to the Foreign Tax Clause, it had to comply with paragraph (i)’s requirement that it ‘take all reasonable action’ to obtain ‘exemption’ from the assessment. This meant appealing the assessment. In the circumstances of this case, we thus view the appeal to GIRA as a ‘mandatory preclaim procedure’ that had to be completed in order for Triple Canopy’s claims to accrue and the CDA limitations period to begin to run.

To sum this up, we have to say that if the learned Administrative Judges of the ASBCA are getting the CDA Statue of Limitations wrong, then what hope do any of us laypeople have?

1 Because the ASBCA is now issuing decisions as .pdf files, we have difficulty linking to them. See ASBCA Nos. 61415, 61416, 61417, 61418, 61419, 61420, May 20, 2020.


Business Systems – The Narrative

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Hi there, readers. It’s been awhile, hasn’t it? Truth be told, I basically took off the month of July. No consulting work, no blog. Why? Because I needed to! And I could.

And—speaking frankly once again—I don’t know how productive I will be the rest of this year, in terms of blog output. If I see something that compels me to write an article, then I will. But if nothing calls to me, then I’ll be doing other things.

You may want to adjust your expectations accordingly.

Now, on to the topic at hand: the business system narrative.

As you may know, we’ve been deeply involved in business system audits and/or reviews since the beginning. We now have roughly a full decade of experience with pretty much all of the six systems—building them, evaluating them, supporting them through governmental testing. What we’ve experienced in that decade is that the government’s approach to system audits/reviews has evolved over that timeframe.

Before going further, we perhaps should clarify that there are six business systems. DCAA is the lead agency for Accounting, Estimating, and Material Management/Accounting (MMAS), while DCMA is the lead agency for Purchasing, Property, and Earned Value (EVMS). DCAA audits business systems while DCMA reviews business systems. Regardless of who takes the lead, it is always a DCMA contracting officer that makes the final determination of system adequacy.

DCMA’s approach to reviewing EVMS has evolved in the sense that it’s gotten more automated—or, as DCMA calls it—more “data-driven.” A contractor is expected to provide the DCMA EVM specialists with various datasets, which are analyzed and evaluated for anomalies. To a large extent, once a contractor has passed the basics (e.g., adequate system description), it lives or dies by the data it provides. Here’s a link to a DCMA EVMS website, in case you want to dive in a bit deeper.

DCAA has evolved its audits of both Accounting and Estimating systems by requiring contractors to provide a system “narrative” for review. The narrative is the basis of what DCAA audits. The narrative is in addition to a system description and a formal walkthrough slide deck. It’s kind of duplicative, at least in our view, but your auditor will likely tell you that the narrative is your company’s “assertion” that will be tested.

The auditor may request that you or a knowledgeable company executive sign-off on the narrative. This request is a bit controversial. Some of the larger contractors have pushed back on that request, at the recommendation of their attorneys. They argue that there is nothing in FAR or DFARS that require such a sign-off, and they believe that having an executive sign the narrative exposes the company and/or the executive to downstream litigation risk, should there be an (inadvertent) error in the narrative.

We disagree and recommend that the narrative be signed if the auditors request it. In our view, if the company has done its diligence (as we would expect it to do) and the narrative is accurate, then the risk the attorneys worry about is minimal. In our view, the better relations with the auditors who are looking at your business system is worth the minimal risk involved.

The entire concept of a business system narrative seems a bit weird to us, frankly. If the company has a robust system description, and its walk-through package is detailed, then we really don’t see what value is added by a narrative. Still, DCAA will expect one.

Another concern we have is that the narrative is really the auditor’s job to prepare, not the contractor’s responsibility. The narrative should not be a contractor assertion; it should be a working paper prepared by the auditor in order to document the auditor’s understanding of the business system being audited. In support of our position, we note that the DCAA Contract Audit Manual (at 5-106e) states:

Once the auditor has gained an adequate understanding of the contractor's business system and applicable sub-systems it should be documented in the audit working papers and related permanent files. This documentation will typically take the form of system flowcharts, narrative descriptions, and copies of relevant documents and reports.

Thus, in our view, having the contractor prepare the narrative is basically asking the contractor to prepare the auditor’s working papers. By no means is this unheard of! However, when we add the narrative’s perceived lack of value to the audit to the fact that the contractor is basically being asked to do the auditor’s job, we find the concept of a system narrative just rubs us the wrong way.

But don’t let our feelings in the matter stop you from doing what makes sense in the context of your audit. If your auditor expects a narrative, it’s almost certainly in your best interest to provide one.

As we noted, we are aware of DCAA system narrative templates for both Accounting and Estimating systems. As far as we know, there is not a similar template for MMAS. Maybe one is one the way? We don’t know.

Looking at the Estimating System narrative template, there are two options available to a contractor. One option is tied explicitly to the DFARS system adequacy criteria, and the other option focuses on cost elements rather than adequacy criteria. There is no right template; there is only the one that works best for your company. Either one works.

If you’ve done your job with your system description and related command media, and if you’ve done your job identifying work flows and related internal controls, then preparing the narrative (and the walk-through slide deck) should be relatively painless. Of course, if your company has slacked-off (or if this is your first business system audit/review), then you’ll have a fair amount of work ahead of you.

Business system audits and/or reviews are a critical part of being a government contractor. It’s important to invest sufficient time and resources into documenting your systems and supporting them through audit. If you make the smart investments, you’ll find that you do well in the inevitable governmental oversight activities.

Last Updated on Wednesday, 04 August 2021 04:57

Time Charging Problems Haunt Northrop Grumman for Years

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In 2013, Northrop Grumman Mission Systems identified that certain employees stationed in OCONUS locations had perhaps mischarged some of their time between 2010 and 2013. For example, it was alleged that some employees charged labor hours to government contracts for time spent on recreational activities such as attending movies. Upon discovery of the issues, the company “took disciplinary action against those who we found acted improperly and violated company policy, and we took corrective action to strengthen our time-charging processes even further. We cooperated with the government as it investigated the issues over the following years.” (See this article.)

Upon discovering its time charging problems, Northrop hired outside attorneys (who likely hired forensic accounting consultants) to investigate. Normally, such investigations do more than simply quantify the amount of the problem; they also look at internal controls to see where they may have failed, and they attempt to identify those employees responsible for the alleged wrongdoing and the control breakdowns. Such investigations are never cheap. In this case, it appears that Northrop Grumman incurred roughly $15 million over a four-year period related to this matter.

Think that’s a lot of shareholder money? Well, Northrop’s “support” of the government investigation involved “collecting more than 25 million records from employees in the United States, and overseas, producing over 1.3 million pages of documents, and interviewing over 100 employees.” Such efforts do not come cheaply.

In 2018, Northrop and the government entered into a settlement agreement, in which the company agreed to pay $30 million, in addition to $1.65 million in burdened labor costs it had already refunded to its US Air Force customer. The DoJ press release headline understates the settlement amount because it omits the $4.2 million paid to the U.S. Attorney’s Office of the Southern District of California (as explained in the first article.) So: $31.65 million would be the settlement amount—an amount that does not include the cost of hiring outside attorneys and consultants to investigate the problem and reach a settlement.

Flash forward to 2020—seven years after the initial wrongdoing was reported to the government—and Northrop’s DCMA contracting officer issued a Final Decision in which he “determined that from FY 2012 to 2016 NGMS had included expressly unallowable legal costs of more than $15 million related to the BACN criminal matter in its final indirect cost proposals. Of this amount, $10,120,681 had been allocated to covered contracts and had been reimbursed through interim billings. He assessed a penalty in this amount, plus interest of $1,432,201, for a total claim amount of $11,552,882.”

Note that this amount was in addition to the $31.65 million that Northrop Grumman had already agreed to pay through its False Claims Act settlement.

The CO determined that Northrop’s costs were expressly unallowable under the 31.205-15 cost principle, which states that—

Costs incurred in connection with, or related to, the mischarging of costs on Government contracts are unallowable when the costs are caused by, or result from, alteration or destruction of records, or other false or improper charging or recording of costs. Such costs include those incurred to measure or otherwise determine the magnitude of the improper charging, and costs incurred to remedy or correct the mischarging, such as costs to rescreen and reconstruct records.

(Emphasis added.)

In addition, the CO found that the costs would also be unallowable under the cost principle at 31.205-47 (Legal Proceedings).

You may be wondering why Northrop claimed the costs in the first place. The answer is that the costs may have been allowable when incurred, but only became unallowable at a subsequent point in time. This is why the issue of allowability is so challenging: costs may be retroactively unallowable, based on what the contractor learns and how it interacts with the government.

For example, if you were to locate and read the FAR Council’s promulgating comments on 31.205-15, you’d learn that the cost principle does not make the normal operation of a contractor’s internal control system unallowable. The cost of evaluating internal controls and assessing whether transactions violated those controls is entirely allowable. Even when the outcome of such evaluations is a disclosure to the government under the contract clause 52.203-13 (“Contractor Code of Business Ethics and Conduct”), all the costs of getting to that disclosure (and supporting that disclosure through government review) are still normal operations and 100% allowable. (Despite what certain DCAA auditors may assert.)

It is only when the matter moves into the legal arena that the costs become unallowable. For example, if the government files a suit under the False Claims Act and the company enters into settlement agreement discussions, then those costs become unallowable from that point forward. And if the company enters into a settlement agreement, then it needs to look backwards at the costs it has incurred, and stratify those costs between allowable internal controls analyses and unallowable litigation support. Apparently, Northrop didn’t do that in this situation, leading to the COFD.

The requirement to assess allowability retroactively is especially important when, as in this case, the settlement agreement expressly addressed the issue, and stated—

Within 90 days of the Effective Date of this Agreement, NGSC shall identify and repay by adjustment to future claims for payment or otherwise any Unallowable Costs included in payments previously sought by NGSC or any of its subsidiaries or affiliates from the United States. NGSC agrees that the United States, at a minimum, shall be entitled to recoup from NGSC any overpayment plus applicable interest and penalties as a result of the inclusion of such Unallowable Costs on previously-submitted requests for payment . . .

So here we are, in 2021, dealing with costs incurred between 2012 and 2016, related to alleged wrongdoing that took place between 2010 and 2013—wrongdoing that was the subject of an FCA settlement agreement in 2018. Lovely to see justice more forward so swiftly, isn’t it?

Northrop appealed the COFD and, in its appeal, made a motion for summary judgment. In June, the ASBCA denied that motion. (ASBCA No. 62596, June 21, 2021.) The denial took only 11 pages.

At this point, the parties look to be moving towards a trial on the merits. However, given the Board’s quick dismissal of Northrop’s arguments, we suspect it’s more likely that the next Board decision we’ll be seeing is a statement that the dispute has been settled and is being dismissed with predjudice.

This story is, unfortunately, a great example of how time charging problems can expand into a full-blown False Claims Act litigation matter. It also provides some insight into how government accounting and compliance folks ought to be looking at the costs incurred in evaluating internal control failures and supporting outside counsel.

As with so many of the blog articles on this website, the objective is to provide readers with lessons learned by other contractors, so that the readers can avoid similar situations. And, perhaps, save themselves a few million dollars in the process.

Last Updated on Wednesday, 15 September 2021 17:09

Equity and Contract Disputes

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Equity and Contract Disputes


Companies considering entering into a contractual relationship with the U.S. Government might think they are entering into a relationship based on mutual good will. They may think they are entering into a partnership with their government customers, a partnership based on the mutual goal of having work performed and a need met. Sadly, too often that is not the case.

Too often, government contractors are surprised to learn that somebody on the government side doesn’t like them, or has an intent to harm them (usually financially). Too often, government contractors are surprised to learn that auditors may take credit for “questioning” costs that the contractor believes to be legitimate business expenses—perhaps years after the costs were incurred. Too often, contracting officers who are supposed to be independent, and who are supposed to resolve contractual disputes before they ripen into litigation, essentially rubber stamp those audit findings (for one reason or another) and dare the contractor to take them to court—knowing that the expense and time associated with litigation virtually guarantees that the biased decision will be accepted, and the money paid.

And far too often, when a contracting officer final decision is appealed in accordance with the contract’s Disputes clause, the courts rule against the contractor on a procedural technicality—effectively jettisoning notions of equity in favor of administrative procedures.

Is that always the case? No, clearly not. But it happens sufficiently often that contractors entering the Federal government acquisition environment should be aware of the risk. They should be aware that they may become targets for overzealous auditors and poorly trained and/or biased contracting officers. They should be aware that the courts in which they will be forced to pursue litigation—should they wish to—may not be serving justice so much as administrative procedures.

Some Thoughts from Others

  • Equity’s role within the courts ‘is to prevent the law from adhering too rigidly to its own rules and principles when those rules and principles produce injustice’.” – Aristotle’s Ethics, from Allan Beever’s Aristotle on Equity, Law, and Justice (Cambridge University Press, 2004)

  • When the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals.”Lynch v. United States, 22 U.S. at 579

  • Extortion – “The obtaining of property from another induced by wrongful use of actual or threatened force, violence, or fear, or under the color of official right.” – Black’s Law Dictionary 6th Ed. (Emphasis added)

The Presumption of Good Faith

The current doctrine of the contract dispute appeal forums presumes government employees always act in good faith, a presumption that can only be overcome by “well nigh irrefragable proof” which, for obvious reasons, is nearly impossible to provide. Another legal practitioner wrote of this difficult hurdle, “[w]henever a contractor pleads a violation of good faith duties, DOJ [Department of Justice] argues that the allegation is essentially that the government acted in bad faith, which (they argue) requires ironclad proof of intentional misconduct targeted at the contractor, which is almost always impossible to demonstrate.”1

The Contract Disputes Act (CDA) of 1978, codified at 41 U.S.C. 71, established the rules for pursuing claims against the Federal government. It is relatively prescriptive, as befits a limited waiver of sovereign immunity. Contractors must follow the rules exactly or risk having their claims dismissed by the courts. The CDA also provided remedies against fraudulent claims asserted by contractors. At 41 U.S.C. 7103(c)(2), the statute states:

(2) Liability of contractor.—If a contractor is unable to support any part of the contractor's claim and it is determined that the inability is attributable to a misrepresentation of fact or fraud by the contractor, then the contractor is liable to the Federal Government for an amount equal to the unsupported part of the claim plus all of the Federal Government's costs attributable to reviewing the unsupported part of the claim. Liability under this paragraph shall be determined within 6 years of the commission of the misrepresentation of fact or fraud.

Importantly, no such provision exists with respect to claims first asserted by the Federal government that require a contractor to appeal to an agency board or to the Court of Federal Claims. While the contractor’s claim must be grounded in a good faith belief in its accuracy, any government claim is not subject to those same requirements.

What’s good for the goose is emphatically not good for the gander.

Recent Board Decisions Viewed in Light of Equity

  1. Quimba Software

Quimba Software was a small, innovative, software development contractor that made the mistake of accepting a cost-reimbursement contract from the Department of Defense. Its treatment at the hands of the Court of Federal Claims (as affirmed by the Federal Circuit) is illustrative of how a company may run afoul of auditors, contracting officers and, ultimately, the courts.

The 2015 Gibson Dunn Year-End Government Contracts Litigation Update2 discussed the Quimba situation thusly:

Quimba Software, Inc. entered into a cost-plus-fixed-fee contract with the Air Force. Co-owner Robert Dourandish signed the contract in his capacity as one of the company’s officers. After the completion of contract performance, the Air Force disputed the allowability of certain costs, and the contracting officer issued a final decision seeking the recovery of approximately $92,000 from the contractor.

Quimba Software challenged the Government’s claim in a lawsuit initiated in the Court of Federal Claims. Dourandish separately filed suit against the Air Force in the same venue in his individual capacity, alleging breach of contract and interference with his constitutional right to seek federal contracts. The Court of Federal Claims dismissed the Dourandish action for lack of subject matter jurisdiction. The Federal Circuit affirmed the dismissal on the basis that Dourandish, as an owner of Quimba Software, was not a party to the contract between the company and the Air Force. Therefore, the court had no jurisdiction under the Tucker Act to adjudicate his suit.

Meanwhile, at the ASBCA, Quimba’s appeal of the contracting officer final decision was dismissed as being moot.3 Quoting from the decision—

Following discovery in this appeal, the ACO rescinded the demand for repayment, and released the government claim. The government moves to dismiss the appeal as moot. Quimba opposes, arguing chiefly that the issue of government bad faith remains. …

Quimba's main argument is that, while the final audit report was issued in 2008, the government waited until December 2013, after expiration of the Contract Disputes Act statute of limitations, 41 U.S.C. § 7103(a)(4)(A), to issue the final decision. Quimba tells us that, ‘[i]n issuing the [final decision] after the expiration of [the statute of limitations], the Government deliberately, and with premeditation, is forcing frivolous and baseless litigation on Quimba since ... Quimba had no choice but to litigate - or accept an unjust determination’. Quimba adds that it is entitled to discovery to support its allegations of government bad faith.

The Board declined to permit Quimba to pursue discovery that it asserted would have supported its bad faith argument, writing “While Quimba stresses that Combat Support ‘includes an exception for Bad Faith behavior’, there is no prima facie showing, and no evidence of such conduct, here. We again follow ‘the presumption, unrebutted here, that contracting officials act in good faith.’

But Quimba persevered. After six long years of battle, another judge at the Court of Federal Claims found that the government’s position, as established by contracting officer final decision and (revised) counter-claim for an additional $50,000, was erroneous. The Court found for Quimba on a Motion for Summary Judgment, writing that “This Court finds that the deferred compensation costs are deductible under section 404 of the IRC and its accompanying regulations, and therefore, allowable under FAR 31.205-6(b)(2)(i).”

The Court did not discuss the auditors’ role or contracting officer’s role in this debacle. As is almost always the case, the government actors were presumed to have acted in good faith. The quality of the government’s initial finding (and subsequent modification of that original finding during litigation to add another $50,000) was accepted as being made in good faith, despite Quimba’s assertion that discovery might prove otherwise.

Quimba’s eventual victory was small consolation to the firm’s founders. The company had declared bankruptcy long before.

At least Raytheon—one of the largest defense contractors in the world—had the resources to litigate without filing bankruptcy.

  1. Raytheon

A recent ASBCA decision4 involved more than 100 pages of findings of fact and related decisions covering multiple areas of cost allowability and allocability. The short summary is that government auditors identified many questioned costs and those audit findings were sustained by several contracting officers—and Raytheon appealed.

The various contracting officers’ final decisions seemed to virtually rubber-stamp questionable DCAA audit findings. And by “questionable” we mean: the audit procedures appeared to represent significant departures from GAGAS requirements. They seemed to lack much (if any) pretense of objectivity. Instead, they seemed to be speculative—we could say fictitious—findings intended to provide the contracting officer with ammunition to extract from Raytheon as much cash as possible. (As we will quote below, at points the auditors’ testimony literally stated that.) Some of the audit findings were described by the Board as being speculations without supporting evidence; I would assert that was a charitable characterization.

For example, an auditor changed her findings from questioning a portion of Raytheon’s government relations costs to questioning 100% of such costs. When questioned under oath, “[the auditor] based her ultimate conclusion that all of cost center 90206’s costs should be disallowed on the fact that she did not find documentation ‘either way’ on whether the costs were allowable or not, or claimed or not.”

In another example, Raytheon provided evidence to its contracting officer in support of the allowability of claimed patent costs; however, the contracting officer declined to review that information because of concerns about the looming statute of limitations. In other words, the contracting officer was more concerned about protecting the government’s litigation position than getting to the right decision.

In another example, when explaining to the Board how DCAA developed its questioned cost position on premium airfares, the auditor stated “Because we were just trying to determine -- when we were doing the audit, we were just trying to determine a reasonable amount. We understand these are negotiations, so we were just trying to give the government some kind of platform to, kind of, base where they should start at.”

In other words, the auditors viewed their role as providing government negotiators (and litigators) with “some kind of platform” on which to base a position. This is classic gamesmanship. Had the roles been reversed, and had Raytheon presented its claims based on such tactics, we would not be surprised to learn that it would be facing legal consequences. The Board of Appeals did not address the apparent lack of good faith in the government’s positions.

Raytheon faced a choice, as all government contractors face in similar situations: they can try to negotiate a lower amount (i.e., engage in horse-trading) or they can appeal. Appeals are expensive and can take years. At a minimum, Raytheon was required to pay its attorneys quite a bit of money (all unallowable) in order to prevail. At least Raytheon is a multi-billion-dollar entity with deep pockets—unlike Quimba Software.

  1. L3 Technologies

In March the ASBCA dismissed L3’s appeal of several contracting officer final decisions that sought more than $11 million in various questioned direct and indirect costs.5 While recognizing that L3 “has been to the Board quite often in recent years as a consequence of COFDs stemming from incurred cost audits” and that “none of these appeals has led to a decision on the merits” (because the contracting officer rescinded the COFDs during the litigation)—the Board continued to permit the government to engage in behavior that (from the view of a layperson) seems quite evocative of the term “extortion.”

The dissenting opinion discussed the cycle of what might be characterized as extortive behavior, noting that—

In its opposition to DCMA’s motion to dismiss, L3 summarizes similar audit disputes between L3 and DCAA/DCMA from 2006 through 2018.These disputes all followed a similar path: DCAA conducts Audits challenging costs, DCMA issues COFDs implementing the DCAA Audits and demanding repayment of the challenged costs, L3 appeals the COFDs to the Board and DCMA either withdraws the COFDs or the parties settle for a nuisance amount resulting in dismissal of the appeals with prejudice. The disputes involved in this decision followed a similar path but remain unresolved. There are several similar appeals that have been stayed pending resolution of the appeals in ASBCA Nos. 61811, 61813 and 61814.

The dissenting opinion was on the right course, but it fell short because it did not take the final leap to the right conclusion. L3 Technologies’ appeal should have been heard in order to serve the principle of equity. The Board should have explored whether the DCAA and DCMA behaviors of repeating a wrongdoing until L3 gave up—essentially a war of attrition if not rising to the level of extortion—constituted bad faith.

The three examples above serve as warnings to companies considering entering the government contracting environment. Be advised: you are not partnering with your government customers. There is a chance that you may find yourself in the crosshairs of an auditor or a contracting officer. And if you take your case to the courts expecting justice, don’t be surprised if you lose on a technicality.

1 A Twice-Told Tale: The Strangely Repeated Story of “Bad Faith” in Government Contracts, Fredrick W. Claybrook, Jr., The National Quarterly Review of the United States Court of Appeals for the Federal Circuit (2014).

3 ASBCA No. 59197, 5/13/2019. Citations omitted from all quotes.

4 Raytheon Company and Raytheon Missile Systems, ASBCA Nos. 59435, 59436, 59437, 59438, 60056, 60057, 60058, 60059, 60060, 60061 (Feb. 2021). Motion for Reconsideration denied.

5 L3 Technologies, ASBCA Nos. 61811, 61813, 61814, March 2, 2021. Internal citations omitted from quotes.

Last Updated on Friday, 23 July 2021 07:04

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Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.