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Home News Archive Boeing Poised to Lose $271 Million in EELV Contract Payments

Boeing Poised to Lose $271 Million in EELV Contract Payments

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A December 29, 2009 story by Business Week reported that Boeing was preparing to be told by DCAA in mid-January that it is going to take a $271 million hit to its EELV program launch payments.  According to the article, DCAA was currently finishing a review that was expected to assert that not only does Boeing owe the Government a refund on $82 million in payments already received by the company, it also owed interest on that amount.  In addition, future payments of $189 million that the company “claims it is owed” may be forfeit.  The article quoted Pentagon spokesman Navy Commander Darryn James as saying via e-mail—

The Defense Contract Audit Agency is reviewing whether Boeing improperly billed the Air Force in a 2006-2008 contract for labor, management, quality control and support costs that were incurred between 1998 and 2006 in the Delta IV rocket program. Federal accounting standards require the billings take place in the year the costs were incurred.These costing issues encompass very complex and highly technical accounting matters. The agency is aggressively pursuing this issue.

To add fuel to the fire, the article also reported that the DOD Inspector General testified before Congress that the DCAA “regional manager” “overturned a draft audit conclusion that Boeing shouldn’t be paid anything because the company was in ‘potential violation of accounting standards’.”  Moreover, the article reported that the DOD IG had begun a criminal investigation against the regional manager, who has hired a lawyer.

The article also reported that, for its part, Boeing noted that “neither the GAO nor the inspector general found that Boeing acted improperly in its dealing with the government.”  Further, Dennis Muilenburg, President of Boeing’s Integrated Defense Systems unit, was reported to have said in an interview that the company is entitled to the $271 million.  According to Muilenberg, in 2006 the Air Force agreed to pay the costs associated with the Delta IV booster rocket launch services, he said. “We have a previous agreement that we believe is proper and should be honored,” Muilenburg said.

Readers of this site not only should fail to be surprised by this “news,” they should also be able to point out several errors in the Business Week story.  We first reported the DOD IG finding in late September, a full three months before Business Week got around to it.  At that time, we told our readers—

The DOD IG confirmed prior GAO findings with respect to “Contractor A, Case 2” that the audit findings were impaired because of auditor independence issues related to the Western Region Audit Manager (RAM), and that the audit working papers were insufficient to support the audit opinions. (“Contractor A” is responsible for the Evolved Expendable Launch Vehicle as well as the Delta IV rocket.) Moreover, the DOD IG confirmed that original audit opinion was changed without sufficient documentation. As a result (according to the DOD IG), the U.S. Air Force may have agreed to pay up to $271 million in unallowable costs either related to losses on other contracts or to costs incurred in prior cost accounting periods. The USAF Space and Missiles Center (SMC) agreed to suspend further payments to “Contractor A” pending resolution of the matter.

In that September article, we provided a link to the full DOD IG report.  Readers who cared to make the effort could have learned more of the details, which were provided in the report.  The report detailed issues with Boeing’s unabsorbed “Program Management and Hardware Support” (PM&HS) indirect cost pool allocated to its Delta IV EELV program, as well as deferred production costs at the Boeing/Lockheed Martin EELV joint venture known as “United Launch Alliance.”  The IG report noted that DCMA had entered into two Advance Agreements with the contractor, one of which agreed that the government found Boeing’s “Lot Accounting a compliant practice under the CAS.”  The second Advance Agreement provided that “$271,152,672 in unabsorbed PM&HS costs that were incurred prior to June 1, 2006, but were neither allocable nor payable under prior [launch] contracts, may be reimbursed by the Air Force under future contracts as a fixed-price line item.”  The second Advance Agreement called for the Air Force to make eight annual payments to Boeing of $33.9 million each.

Despite the Advance Agreements, DCAA audit reports issued in 2005 and 2006 asserted that the proposed amortization of the unabsorbed PM&HS costs represented a noncompliance with Cost Accounting Standard 406, because the costs had been incurred in prior cost accounting periods.  Alternatively, DCAA asserted that the PM&HS costs represented losses incurred on other contracts, and thus were unallowable pursuant to the cost principle at FAR 31.205-23.  Boeing refused to negotiate the Delta IV Buy III Launch Capability contract so long as the Air Force agreed with DCAA.  National security was at stake.  Having little choice in the matter, the Air Force considered giving Boeing a waiver from CAS; instead, they convened a meeting with DCMA and DCAA to identify “roadblocks” impeding successful negotiation of the contract.  (The Air Force denied that term was used.)

One of the methods suggested to break the impasse was to “walk-through” Boeing’s Lot Accounting processes.  After that meeting, the DCAA Regional Audit Manager (RAM) directed the auditor to drop allegations of noncompliance with CAS 406.  As the IG reported

According to the supervisor, lead auditor, and FAO manager, the DCAA RAM directed the auditor to omit CAS 406 compliance testing and discussion of CAS compliance from the audit of the contractor’s … proposed unabsorbed PM&HS costs. … The DCAA RAM reported to her supervisor, the Regional Director for DCAA’s Western [Region]… that CAS 406 was no longer an issue.  However, she failed to report that this determination was not supported by the results of audit procedures and that her field audit staff disagreed.

Based on the foregoing, the DOD IG concluded that the RAM had violated the independence requirements of (generally accepted) Government Auditing Standards (GAGAS), and that the DCAA audit reports could not be relied on by the Air Force for purposes of negotiating contract pricing.  Moreover, because the Air Force had entered into the Advance Agreements based on the tainted audit reports, they may be invalid.

There were more details, of course.  Among other things, there were indications that Boeing extended its definition of one “Lot” from two to 15 years.  (Though we note that the Air Force asserted in its comments that the IG report was incorrect, and that Boeing had consistently used a Lot Accounting period of 42 Common Booster Cores “regardless of time and number of missions.”)  The IG report also notes that the ULA JV had concluded that it would not utilize Boeing’s Lot Accounting practices because they neither complied with GAAP nor with CAS.

So as with many government contract cost accounting matters, the truth is both complex and hard to fathom.  Will Boeing have to concede $271 million in payments to which it believes it is contractually entitled?  We’ll look forward to the final DCAA audit report(s), and hope that they ignore any political pressure and focus solely on the facts, which (apparently) even the DOD IG seems to have gotten wrong.

This is a great example of how the facts matter, and how easy it is to allege a problem, and how hard it is to refute an allegation.  Clearly, Boeing’s entitlement to the $271 million depends on its “Lot Accounting” practices, why the PM&HS costs were not fully absorbed by prior launch contracts, and how Boeing intended to amortize its production costs under future programs (and whether it would be permitted to do so under FAR and CAS parameters).  As DCAA focuses on generating high-quality audits that DCMA contracting officers and buying commands can effectively utilize to make business decisions, we hope they will keep this example in mind.

Delta IV Launch
 

Newsflash

In March 2009, Nick Sanders’ article “Surviving Government Audits: Have the Rules of Engagement Changed?” was published in Government Contract Costs, Pricing & Accounting Reports (4 No. 2 GCCPAR P. 11). Apogee Consulting, Inc. is proud to announce that Mr. Sanders’ article was selected for reprint and publication in Thomson West’s The New Landscape of Government Contracting.  Mr. Sanders, Apogee Consulting’s Principal Consultant, joins such distinguished contributors as Professors Steven Schooner and Christopher Yukins, Luis Victorino and John Chierachella, Joseph West and Karen Manos, Joseph Barsalona and Philip Koos and Richard Meene, and several others.  The text covers a lot of ground, ranging from the American Recovery and Reinvestment Act (ARRA) to Business Ethics and Corporate Compliance, and includes several articles on the False Claim Act and the Foreign Corrupt Practices Act.  In addition, the text includes the full text of many statutory and regulatory matters affecting Government contract compliance.

 

The book may be found here.