Recently we wrote about a Department of Energy Inspector General report in which an audit performed by KPMG led to a DOE Contracting Officer taking action to disallow roughly $1.3 million of General & Administrative expenses that Fluor Federal Services had billed to the Savannah River Nuclear Services joint venture (of which Fluor was the majority owner). Fluor did not agree with the findings of the audit report nor did it agree with the proposed disallowance. We opined that only time would tell whether Fluor “pays up, negotiates a smaller settlement, or takes this issue to Court.”

The thing is, the situation faced by Fluor is far from uncommon. Many contractors are facing the same choices, courtesy of government auditors and cognizant Contracting Officers who have apparently forsaken the official preference, found in the FAR, to resolve potential disputes through negotiation rather than litigation. We even wrote about the phenomenon of increasing litigation in this article.

And yet we have to acknowledge that the DOE is publishing guidance to its Contracting Officers that, if followed, will tend to reduce cost-related disputes and avoid litigation. We are talking about the April 2013 version of the DOE Acquisition Guide, especially section 31.4 (Allowability of Incurred Costs). Here’s a link to the official document.

The Guiding Principle of the document is stated clearly:

Determining the allowability of incurred costs requires understanding the five FAR requirements for reimbursement. The subject is complex. Misunderstandings can be minimized by early communication.

Did you notice that seemingly obvious—and yet profound—statement at the end of the Guiding Principle? We couldn’t agree more: Misunderstandings can be minimized by early communication!

Oh, but there’s more.

The Guide states—

The chapter also encourages Contracting Officers to be proactive in minimizing potential disputes over cost reasonableness and to communicate their view of a potentially troublesome cost’s reasonableness to their contractors in writing before the cost is incurred.

Again, advice that’s seemingly obvious and yet so important. But if it’s so obvious, then why is the advice so rarely followed? Ponder that for a second.

The Guide discusses cost reasonableness, cost allowability, and allocability. That’s good stuff and we hope COs review it in detail. But the part that caught our eye was the role of early communication and Advance Agreements in avoiding disputes. We so like the language that we are going to print it here, in full.

Disputes over an incurred cost’s reasonableness can be a source of unnecessary friction between the Government and a contractor. Once the contractor has incurred a cost in fulfilling its obligations under its contract it is understandable if the contractor is extremely reluctant to pay the cost out of its own pocket. Courts and Boards have been sympathetic to contractors’ appeals of Government decisions to disallow costs because the costs were unreasonable.

On the other hand, if the contractor knows before it incurs a cost that the cost’s reasonableness will be questioned, most disputes regarding a cost’s reasonableness can be avoided. A contractor would likely avoid incurring any cost the Government had indicated it would consider unreasonable.

Advance agreements are not always employed. And it is neither practical nor desirable to address every cost under every circumstance under cost-reimbursement contractual arrangements. There are occasions, however, where the Government is aware the contractor may be contemplating incurring certain costs that would likely lead to disputes over their reasonableness. In such situations, both parties will benefit from a statement from the Contracting Officer indicating what the Government will consider reasonable.

Those are the kind of words that come from an entity that is looking to avoid disputes and litigation. You won’t find those words in the DCMA OneBook. And more’s the pity.

Similarly, we would love to see DCMA adopt the following CO guidance—

In administering cost-reimbursement contracts and other contractual vehicles under which the Government must reimburse a contractor’s incurred costs, Contracting Officers should consider if it is prudent to specify what the Government will consider reasonable regarding a particular cost prior to the contractor’s incurring the cost. The Contracting Officer may proscribe the cost, set a ceiling on the cost, establish criteria for determining the reasonableness of the cost, or take any other action he/she deems prudent to avoid unnecessary disputes regarding the reasonableness of a potential future cost before the contractor incurs it. Contracting Officers should attempt to accomplish such understandings working with contractors, but if circumstances do not permit mutual agreement to be reached in a timely manner they should not hesitate to take unilateral action. Written communication of any ilk from a Contracting Officer to a contractor will help minimize misunderstandings over what the Government will consider reasonable.

[Emphasis added.]

May we close by offering the opinion that DCMA would do well to adopt both the philosophy and the guidance of the Department of Energy? May we respectfully suggest that it’s past time for the adversarial relationship between the Pentagon and its contractors to be replaced by a more cooperative relationship that acknowledges the partnership that is necessary for both parties to accomplish their objectives?

If DOD doesn’t start proactively issuing guidance to its COs to help prevent disputes and avoid litigation—guidance similar to the DOE language we’ve quoted here—then the tsunami of litigation will continue to swell until it inundates the courts, ultimately leaving only the attorneys on dry land.