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Welcome to Apogee Consulting, Inc.

Planning for CAS Compliance

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Recently a potential client lost out on a large opportunity—did not make the shortlist—because it could not certify that its cost accounting practices were compliant with CAS. It could not certify that it had submitted, or would submit, a CASB Disclosure Statement. It could not accept the CAS contract clauses that require consistency in cost accounting practices.

It couldn’t accept the CAS requirements because it had not done any of the required planning.

It lost out on a large potential opportunity because it had not committed to CAS compliance. Instead, the company was waiting to see if the contract award would be forthcoming before making the required investments of time and effort and money. The contract didn’t arrive and thus the CAS compliance project was put on hold.

Bummer for them.

Bummer for us.

But the thing is, if you are waiting for an incipient contract award to start your CAS compliance efforts, you’ve really waited far too long. Planning for CAS compliance requires at least a year’s worth of runway; sometimes as many as two or three years’ worth of runway.

Fundamentally, the problem is CAS 401. CAS 401 requires that the cost accounting practices use to prepare cost estimates must be consistent with those to be used for accounting for the contract after award, and for reporting contract costs after award. So the bottom-line is: if you haven’t figured out your cost accounting practices before the cost estimate is generated, you are very likely going to start out contract performance with a CAS 401 noncompliance.

But it’s more than that. Of course it is.

That Disclosure Statement isn’t going to write itself. And it’s not the actual typing of the words, the completion of the fields in the Word table, that is the bugaboo. Nope. The bugaboo is deciding on what the company’s cost accounting practices are, or will be. Companies that don’t have Disclosure Statements also tend not to have well-documented accounting, policies, procedures, and/or practices. Thus, it takes teams (plural) of people coming together to develop a consensus on exactly what the company’s practices are.

Think that’s easy? Nope. Just coming up with an organization structure on which to hang indirect cost pools and allocation bases can take a matter of months. I remember coming up with more than 20 different iterations at one company before we could get something that most people could agree upon. (Some stakeholders never did like the final version.) The accountants and engineers wanted something very precise, while the sales and marketing folks wanted something very flexible. And the program managers just wanted something they could manage to.

And that was just the pools and bases.

If you’ve ever thumbed-through a Disclosure Statement, you’ve realized that it takes more than the accounting folks to fill it out. It can take actuaries, and insurance folks, and manufacturing folks—just to name a few. Most parts of the company need to come together in order to get an accurate Disclosure Statement for submission; and then they need to support that submission through government reviews.

That’s a lot of work. And you really don’t want to be doing all that work at the very same time the company is preparing a large proposal for a CAS-covered opportunity. Nobody is going to have the time—or the focus—to deal with CAS matters when there is a multi-million-dollar proposal in process.

For the above reasons, plus others, a company that wants to pursue CAS-covered contract work needs to commit to the effort early, at least a year but perhaps two or three years in advance of submitting a proposal for that work.

“But what if we don’t win? Won’t all that effort and money just have been wasted?”

For that opportunity, perhaps. But not for the next opportunity or the ones after that.

Committing to CAS compliance is a step that prepares a contractor to compete on a new level, and potentially receive larger contracts. But the key word is “compete.” The company is still going to go after the work and then perform well should it receive an award.

But if the company doesn’t invest in CAS compliance, then it has little if any chance of winning those new contracts.

As one company recently learned.


Year-to-Date Update

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You may want to skip this one, as it focuses on internal stuff.

For those who have chosen to remain, I wanted to discuss how the year is going so far, and what plans have been laid for 2020.

In early January I teamed with Don Acquisition to teach a class on the FAR and DFARS for people in the UK who had no idea about what the FAR and DFARS was. All they knew was that they had received subcontracts from US defense prime contractors that included lots and lots of clauses—and apparently, they were supposed to comply with requirements found in those clauses. They thought it might be nice to understand exactly what those requirements were. Thus: a four-day class in northern England. You might think January in northern England would be pretty miserable, but you’d be wrong about that. It was great. Would return in a heartbeat.

I had never experienced Don’s approach to teaching before and I was impressed with it. Don also teaches the FAR Bootcamp®. As with most of the instructors who teach those classes, Don doesn’t like PowerPoint slides; instead, Don likes a “hands-on” approach where every student brings a laptop and connects to the internet, and researches the clauses (and their prescriptions) individually. It worked well. We quickly realized that the client was positioned to assert commerciality, so we blocked-off most of a day to discuss the what and the how of that process. As part of the training, Don had the students look up the commercial item clauses and understand just how much of the other requirements suddenly disappeared when a commercial item determination was received.

If you are looking for similar training, I cannot over recommend Don Acquisition LLC. You will not be disappointed.

Before I left for the UK I turned in a proposed article to Karen Manos, editor of the Government Contracts Cost, Accounting and Pricing Report. My article was accepted and should be published in the next 60 days. The catchy title? “Explaining the DFARS Ground and Flight Risk Clause.” As I said, catchy. It’s not for everyone. Either you are a provider of aviation-related products and services, and you have to deal with that pesky clause, or you are not a provider and have no interest in it. For those of us who have to deal with it, the amount of ignorance on the clause’s requirements (from both government contracting officer and contractor) is a bit startling. I thought I’d try my bit to rectify the situation. (For one example, did you know that clause contains its own cost allowability provisions? Yep.)

When I came back from the UK I was reminded that I have two textbooks to update for 2019. Most readers know I am the editor for two LexisNexis Accounting for Government Contracts books (The Cost Accounting Standards and The Federal Acquisition Regulation). I am just about done editing the first book, and the second one is due at the end of April.

In early April I will be speaking at the annual joint AGA/NCMA meeting in San Diego, discussing lesser-known aspects of cost reimbursement contracting. I was prompted to speak on the topic after listening to another presenter make some—how should I say?—technical errors on the topic. Yeah, technical errors. That’s it. The kind of technical errors that forced me to walk out of the room, lest I say something impolite. (I do not like to criticize other people who are making public presentations. It’s a hard thing to do and everyone who tries deserves respect. My strategy is to ask softball questions from the audience to try to get the speaker to think about what they said. Failing that, I quietly get up and exit the room. Then I walk a bit before I let out a primal scream of frustration.)

My “Financial Management of Government Contracts” class starts again in early May. That is a six-week class. I will not be there for the last week’s class, because I accepted a speaking opportunity at the next ACI Advance Forum on DCAA & DCMA Cost, Pricing, Compliance, & Audits. The conference will be held in DC in mid-June. I responded too late to get on the fun Business Systems panel; so instead I’ll be (1) leading a half-day workshop on CPSR preparation, and (2) participating on a panel discussing commercial items. I turned in my agenda for the workshop this weekend.

The year is less than three months old, but it feels like the year is a lot older than that. Reading over this blog post, I think I understand why.


Corruption is More Common Than You Think

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It’s been a long time since we’ve reporting on some juicy public contract corruption cases. As readers may recall, it’s our policy not to post to “hum-drum” mundane cases; instead, we tend to discuss only cases that have some aspect that sparks our interest (and hopefully your interest as well). But there’s been a swath of new cases recently—nothing spectacular, but certainly a lot of them. It seems that a number of individuals, and companies, are not learning from the mistakes of others in this area.

Y’all better get your act together unless you want to join the perp party.

The list of recent cases spans the spectrum from largest of the large to smaller entities, and from manufacturers to service providers. Let’s start with the largest of the large.

Airbus agreed to pay more than $3.9 billion (yes, with a “B”) to resolve allegations that it violated the Foreign Corrupt Practices Act (FCPA), the Arms Export Control Act (AECA) and its implementing regulations, the International Traffic in Arms Regulations (ITAR). According to the obligatory Dept. of Justice press release:

The FCPA charge arose out of Airbus’s scheme to offer and pay bribes to foreign officials, including Chinese officials, in order to obtain and retain business, including contracts to sell aircraft. The AECA charge stems from Airbus’s willful failure to disclose political contributions, commissions or fees to the U.S. government, as required under the ITAR, in connection with the sale or export of defense articles and defense services to the Armed Forces of a foreign country or international organization. …

… beginning in at least 2008 and continuing until at least 2015, Airbus engaged in and facilitated a scheme to offer and pay bribes to decision makers and other influencers, including to foreign officials, in order to obtain improper business advantages and to win business from both privately owned enterprises and entities that were state-owned and state-controlled. In furtherance of the corrupt bribery scheme, Airbus employees and agents, among other things, sent emails while located in the United States and participated in and provided luxury travel to foreign officials within the United States.

The admissions and court documents establish that in order to conceal and to facilitate the bribery scheme, Airbus engaged certain business partners, in part, to assist in the bribery scheme. Between approximately 2013 and 2015, Airbus engaged a business partner in China and knowingly and willfully conspired to make payments to the business partner that were intended to be used as bribes to government officials in China in connection with the approval of certain agreements in China associated with the purchase and sale of Airbus aircraft to state-owned and state-controlled airlines in China. In order to conceal the payments and to conceal its engagement of the business partner in China, Airbus did not pay the business partner directly but instead made payments to a bank account in Hong Kong in the name of a company controlled by another business partner. …

The Company’s payment to the United States will be $527 million for the FCPA and ITAR violations, and an additional €50 million (approximately $55 million) as part of a civil forfeiture agreement for the ITAR-related conduct, and the department will credit a portion of the amount the Company pays to the Parquet National Financier (PNF) in France under the Company’s agreement with the PNF. In addition, the Company has agreed to pay a $10 million penalty to the U.S. Department of State’s Directorate of Defense Trade Controls (DDTC), of which the department is crediting $5 million. In related proceedings, the Company settled with the PNF in France over bribes paid to government officials and non-governmental airline executives in China and multiple other countries and the Company has agreed to pay more than 2 billion Euros (more than approximately $2.29 billion) pursuant to the PNF agreement. As part of this coordinated global resolution, the Company also entered into a deferred prosecution agreement with the United Kingdom’s Serious Fraud Office (SFO) over bribes paid in Malaysia, Sri Lanka, Taiwan, Indonesia and Ghana, and the Company has agreed to pay approximately 990 million Euros equivalent (approximately $1.09 billion) pursuant to the SFO agreement. The PNF and SFO had investigated the Company as part of a Joint Investigative Team.

Let’s move on …

A New York man pleaded guilty to falsifying inspection reports for space parts – i.e., flight critical parts that were intended to be used by SpaceX and other aerospace/defense companies. What’s the story?

In January 2018, an internal audit by SQA Services, Inc. (SQA), at the direction of SpaceX, revealed multiple falsified source inspection reports and non-destructive testing (NDT) certifications from PMI Industries, LLC, for Falcon 9 and Falcon Heavy flight critical parts. SpaceX notified PMI of the anomalies. Source inspections and NDT are key tools used in the aerospace industry to ensure manufactured parts comply with quality and safety standards. Specifically, the signed source inspection report had a forged signature of the SQA inspector. SpaceX and SQA officials believed the signature of the inspector was photocopied and cut and pasted onto the source inspection report with a computer. …

The investigation has identified that [the individual], while an employee of PMI, falsified at least 38 source inspection reports for space vehicle parts procured by SpaceX for the construction of the Falcon 9 and Falcon Heavy series of space vehicles. The investigation has also identified at least 76 individual piece parts that were rejected during source inspection or were never inspected by SQA, then subsequently shipped to SpaceX.

A records request from SpaceX identified seven NASA space flight missions, two United States Air Force space flight missions, and one National Oceanic and Atmospheric Administration (NOAA) space flight mission that were affected by parts purchased by SpaceX from PMI.

Subsequently, SpaceX terminated its business relationship with PMI averaged approximately $200,000 per month from the business with SpaceX, as a disqualified supplier. PMI subsequently closed its operation.

That man’s wrongdoing cost his company everything. No word on how many people lost their jobs. Sure, you can argue that it was warranted. Why didn’t the company check to make sure that their Quality Assurance Engineer was—how should we say it—actually assuring quality? They assumed he was doing his job properly, and it cost them everything. Still, the lesson here is that one individual’s actions can have consequences that ripple out.

In the next story, the owner of several government contractors was sentenced to nearly five years in jail “for his role in carrying out a $3.7 million scheme to defraud at least 35 subcontractors located across the United States.” What did he do?

According to the announcement

… Neal established and controlled several companies through which he bid on and won at least 105 government contracts to provide goods and services to federal agencies including the Department of Interior, U.S. Army and U.S. Air Force. The contracts required Neal to purchase and transport rock, gravel, and other raw materials to military bases and national parks. After winning these contracts, Neal fraudulently induced subcontractors to perform the required work. But when Neal was paid by the government for his subcontractors’ work, he did not pay his subcontractors. Instead, Neal kept the money and spent it at places like casinos, nightclubs, restaurants and hotels. In total, between July 2008 and December 2017, Neal defrauded his subcontractors out of approximately $3.7 million.

The last story is about an electrical contractor who failed to comply with the Davis-Bacon Act. According to the Dept. of Labor press release—

After an investigation by the U.S. Department of Labor’s Wage and Hour Division (WHD), Vos Electric Inc. – an electrical contractor based in Green Bay, Wisconsin – has paid $221,853 in back wages and benefits to 32 employees for violating requirements of the Contract Work Hours and Safety Standards Act (CWHSSA) and the Davis-Bacon and Related Acts (DBRA). The violations occurred while the employees were working at the Savannah Harbor Expansion Project. … The U.S. Army Corps of Engineers contracted CDM Constructors Inc. as the prime contractor for the project’s dissolved oxygen injection system. In turn, CDM Constructors Inc. subcontracted Vos Electric Inc. to perform electrical work on the system. … Investigators found the employer incorrectly classified electricians as laborers and, as a result, paid them at hourly and fringe benefit rates lower than those legally required for the work they performed.

Contractors often complain that government auditors think they are all crooks. Obviously, not all contractors are crooks, but enough of them are crooks that you kind of understand where the auditors are coming from. The vast majority of compliant contractors are, unfortunately, tainted by the actions of a few.

With that being said, let’s not forget that there is corruption on the government side as well.

Such as: this former Chief of the Prosthetics and Orthotics at Walter Reed Medical Hospital.

Such as: these Department of Housing & Urban Development (HUD) employees who made “166 illegal, improper, or erroneous purchases totaling nearly $23,000.”

Such as this Dept. of State contracting officer “sentenced … to 87 months of imprisonment followed by three years of supervised release after he was convicted of 13 counts of conspiracy, bribery, honest services wire fraud and making false statements.” Apparently, the contracting officer received more than $500,000 for actions (or inactions) related to “multi-million dollar construction contracts” awarded to Turkish companies.

Thus the headline of this blog post. Corruption is not everywhere, but it’s more common that you think it is. Certainly, it’s more common than it should be.

Last Updated on Monday, 17 February 2020 07:07

The New Normal: Mergers and Acquisitions

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It was dubbed “the Last Supper.”

In 1993, then Secretary of Defense Les Aspin and his Deputy William Perry hosted the CEOs of the top defense firms and issued the ultimatum that shrinking defense budgets would require consolidation among them. That mean set off “feeding frenzy” (according to one source) in which companies competed to acquire each other, knowing that only a few companies would be left to survive the looming defense budget cuts of the Clinton administration. Within seven years “107 firms had become five,” according to another source.

That was 25+ years ago, but the recent wave of mergers and acquisitions seems very reminiscent of those times.

  • In 2015, Lockheed Martin acquired Sikorsky Aircraft from United Technologies Corporation (UTC) for $9 billion.

  • In 2015, Harris Corporation merged with Exelis, Inc., in a $4.75 billion deal. Exelis itself had been a 2011 spin-off from ITT Corporation. In 2017, the combined company spun-off its government IT business, which is now called Peraton.

  • In 2017, UTC acquired Rockwell Collins in a $30 billion deal, which created Collins Aerospace.

  • In 2018, Northrop Grumman acquired Orbital ATK for $9.2 billion. (Orbital ATK was the successor company from a 2015 merger between Orbital Sciences and Alliant Techsystems.)

  • In 2018, Harris and L3 Corporation merged to create L3 Harris Technologies. Just before the merger, L3 had sold its Vertex Aerospace business to a private equity firm for $540 million. The combined L3 Harris corporation “… will have approximately 48,000 employees and customers in over 100 countries, with an expected net revenue of $16 billion in calendar year 2018,” according to the accompanying press release.

  • In 2018, General Dynamics acquired CSRA, an IT services company, in a deal valued at $9.7 billion. CSRA was already the 39th largest defense contractor, prior to the acquisition.

  • In 2019, UTC and Raytheon Corporation announced that they would merge, creating Raytheon Technologies Corporation sometime in 2020 (depending on when regulatory approvals are received). At the time the merger was announced, the combined entity was projecting $74 billion in annual sales, making it second only to The Boeing Company and well ahead of Lockheed Martin’s annual sales of $60 billion. (The merger of Lockheed and Martin Marietta took place in 1994, just after the “last supper.”)

Also in 2019, Leidos agreed to acquire Dynetics for $1.7 billion; Parker Hannifin acquired Exotic Metals for $1.7 billion; and Pacific Architect and Engineers was acquired by a private equity firm for $1.6 billion. And Fluor Engineering announced its intention to divest itself of its Federal Servicers business.

And the activity continues in 2020. In January, Woodward and Hexcel announced “an all-stock merger of equals.” The combined entity, Woodward Hexcel, is expected to generate roughly $5 billion in sales. Not to be outdone, in January BAE Systems agreed to acquire Collin Aerospace’s GPS business for $1.9 billion and Raytheon’s Airborne Tactical Radio business for $275 million. The GPS business sale is notable because the business is headquartered in Cedar Rapids, Iowa. That was the location of the headquarters of the entity formerly known as Rockwell Collins.

With all that activity, you’d think people would be pretty good at integration, wouldn’t you? Our experience tells us you’d be wrong about that.

Everybody is anxious when an acquisition, merger, or divestiture happens. People wonder if they’ll get laid off. People wonder if the sacrifices they’ve made for their careers will be rewarded, or if they’ll have to start again. Politics is king. And thus, in too many instances the business synergies are not achieved. If studies are to be believed, the majority of such activities don’t reach their objectives. In other words, they fail.

A case in point: the recent problems at The Boeing Company have been attributed to the culture of McDonnell Douglas. Boeing and McDonnell Douglas (MDC) merged in 1997. According to this story:

In a clash of corporate cultures, where Boeing’s engineers and McDonnell Douglas’s bean-counters went head-to-head, the smaller company won out. The result was a move away from expensive, ground-breaking engineering and toward what some called a more cut-throat culture, devoted to keeping costs down and favoring upgrading older models at the expense of wholesale innovation. Only now, with the 737 indefinitely grounded, are we beginning to see the scale of its effects.

‘The fatal fault line was the McDonnell Douglas takeover,’ says Clive Irving, author of Jumbo: The Making of the Boeing 747. ‘Although Boeing was supposed to take over McDonnell Douglas, it ended up the other way around.’

In case you want more than one data point, here’s another story with the same theme. That second article asserts:

It was this MDC-dominated leadership and Board that sent Boeing into a downward spiral. MDC starved Douglas Aircraft for R&D money and relied on derivatives. During the period 1998-2003, Boeing’s R&D fell precipitously … Boeing offered derivatives of in the form of the 737-900 (not today’s more successful ER), 757-300 and 767-400, all sales duds. Boeing talked and talked and talked about new airplanes but had no action.

Thus, the lesson to be learned is that politics and self-dealing can create a culture that leads to sub-optimal outcomes. Just ask any Boeing investor.

From a compliance point of view, there are myriad details to be sorted out. Among those details are: pools, bases and indirect rates; cost accounting practices and disclosure statements; policies, procedures and practices. Restructuring cost savings proposals. Novation agreements. Determining home office functions/activities versus shared service functions/activities versus what takes place at the segment/business unit.

And business systems.

Each of the six DFARS business systems will need to be sorted out. Of all the aspects of a merger/acquisition of two large defense contractors, this may be the most important and least appreciated issue to be sorted out. Each of those six business systems has policies, procedures, and practices that determine how the entity complies with the DFARS business system adequacy criteria. Each of those six business systems is subject to audit/review by government oversight officials. Each of those six business systems can be determined to be inadequate—which leads inexorably to payment withholds. Payment withholds do not look good on the new entity’s cash flow reports.

You’d like to think that each of these large aerospace/defense companies would have a repeatable strategy, a secret formula if you will, for executing these large-scale mergers, acquisitions, and divestitures. You’d like to hope that each of these entities has a team of the best and brightest dedicated to sorting-out all the details and issues that come up, and that would assure the planned business objectives were being met.

And maybe they do!

But we wouldn’t bet on it.


Allocability of Legal Expenses

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In a recent decision, the U.S. Court of Federal Claims decided that Tolliver Group was entitled to increased costs on its firm, fixed-price contract with the U.S. Army. We discussed that decision here. What made the decision so interesting (to us, at least) was that the additional costs in question were legal expenses incurred by Tolliver in successfully defending against a relator’s qui tam suit under The False Claims Act.

In rejecting Tolliver’s initial claim for the legal expenses, the contracting officer asserted (among other things) that the expenses were not allocable to the contract. They were found to be not allocable because “they were not incurred specifically for the contract and did not provide the government with a benefit.” That got us thinking about the allocability of legal expenses.

Generally, legal expenses are treated as being indirect costs. Whether incurred by in-house counsel or external counsel, such costs are typically treated as General and Administrative (G&A) expenses. The question is: Under what circumstances may legal costs be direct costs of a contract? Neither CAS nor FAR provide any kind of guidance regarding the allocation of legal expenses. Let’s say that Tolliver consistently treated its legal expenses as being part of its G&A expense pool. How could it then request reimbursement for its costs as if they were direct costs of the Army contract without violating CAS 402? (Remember, CAS 402 requires that the same costs be treated the same way—as being either direct or indirect costs—when incurred for the same purpose in like circumstances.) Thus, to show that these particular legal expenses were direct in nature, Tolliver would have to show that the purpose and/or circumstances differed.

The Court did not address this point in its decision. So we don’t really know how Toliver would have handled the situation. Perhaps Toliver was not subject to CAS? Or perhaps it could show that all False Claim Act defense costs consistently were allocated to the contract(s) that gave rise to the litigation. Again, we do not know.

Here’s what we do know: There are legal precedents for what we imagine Tolliver’s cost accounting treatment of these legal expenses may have been.

In 1988, the ASBCA found that a protester’s legal costs incurred in defending against a protest from the losing offeror were direct costs of the contract, despite the contractor’s consistent practice of including all other legal expenses in its indirect cost pools. What appeared to persuade the Board were the findings that (1) the costs were incurred in connection with a specific contract and did not benefit any other contract, (2) because the costs did not benefit any other contract they could not be treated as indirect costs for allocation to those contracts, (3) the contractor had no choice but to defend against the bid protest, and (4) DCAA audit guidance at the time considered protest-related costs as being direct costs rather than indirect costs. (See Jana, Inc., ASBCA No 32447, Mar 11, 1988, 88–1 BCA ¶ 20,651.)

Also in 1988, the Court of Appeals (Federal Circuit) considered an ASBCA decision regarding a contractor’s inclusion of legal expenses related to litigation between two contractors in its G&A expense pool, despite that litigation relating solely to one particular subcontract. The ASBCA found that, because the legal expenses were incurred specifically for, and could be identified specifically with, the subcontract, the costs were not indirect costs of government contracts. The contractor argued that the decision to litigate was a general business decision and that all its contracts benefited to some extent from the litigation. The contractor also noted that the legal expenses had been incurred after the end of the subcontract’s period of performance. The ASBCA was not persuaded, deciding that the alleged financial benefit to other government contracts was too remote and insubstantial to justify allocation through general and administrative expenses. The Appellate Court upheld the Board’s decision. (See FMC Corp v US, US Ct of App for the Fed Cir, No 87–1423, Decision Aug 5, 1988, affg ASBCA 1987, 87–2 BCA ¶ 19,791.)

Based on those two decisions, you might conclude that the Courts have favored direct allocation of legal expenses—especially litigation expenses. But since those two decisions, the allocability of legal expenses has become somewhat muddied.

The first decision that muddied the field was Caldera v. Northrop Worldwide Aircraft Services, Inc., 192 F.3d 962 (Fed.Cir.1999). In that case, the Appellate Court held that Northrop’s litigation defense costs “were not allocable under FAR § 31.201-4” because the government did not benefit from Northrop’s defense of the [state court] lawsuitThat decision was problematic because it appeared to conflate the concepts of allocability and allowability. Nonetheless, the ASBCA cited to it when it found against a subsequent appeal brought by The Boeing Company.

Thus, the second decision was Boeing North American, Inc. v. Roche, (Fed.Cir. 2002). In that appeal, Boeing argued that that under the FAR no benefit to the government need be shown for a cost to be allocable, even if a nexus to a particular contract is necessary for a cost to be allocable. The Federal Circuit found that “Here the CAS clearly renders Rockwell's legal defense costs allocable as part of G & A expenses.” Further, the Court wrote—

Our earlier decisions [Lockheed and FMC Corp. v. US] relied on by the government as authority for the ‘benefit to the government’ theory, do not supply any support for a rule that would base the allocability of a cost on the cost's ‘benefit to the government’ as opposed to its nexus to government work. … Thus, we agree with Boeing that allocability is an accounting concept and that CAS does not require that a cost directly benefit the government's interests for the cost to be allocable. The word ‘benefit’ is used in the allocability provisions to describe the nexus required for accounting purposes between the cost and the contract to which it is allocated. The requirement of a ‘benefit’ to a government contract is not designed to permit contracting officers, the Board, or this court to embark on an amorphous inquiry into whether a particular cost sufficiently ‘benefits’ the government so that the cost should be recoverable from the government.

Therefore, in Boeing, the Court found that the litigation expenses were allocable to government contacts in general via the G&A expense allocations. That being said, the costs were still disallowed. (Cue sad trombone sound.)

Looking at the totality of the cases, we here at Apogee Consulting, Inc. – WHO ARE NOT ATTORNEYS AND ARE NOT OFFERING LEGAL ADVICE – would say that litigation expenses can be differentiated from other “normal” legal expenses and allocated to the contract or contracts that gave rise to their incurrence. Litigation costs (and other legal expenses) that are not caused by, and which do not benefit a particular contract while benefiting all contracts, may be retained in the G&A expense pool for allocation.

That’s about the best we can figure it out.

Last Updated on Tuesday, 11 February 2020 20:02

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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.