Problems with the T&M Contract Type – Part 1
The Time and Materials (T&M) contract type is the “least preferred” type of contract awarded by the Federal government. To emphasize how few T&M contract awards the Federal government wants to see, before making any T&M contract award the Contracting Officer must make a determination and finding (D&F) that no other contract type (including cost-plus) is suitable for the contract award. (See FAR 16.601(d).) T&M contracts are tough to work with (and tough to write about) because applicable requirements differ by the award circumstances. For example, whether the award is made for a commercial item or a noncommercial item, or whether or not the award is made pursuant to competition, affect the applicable FAR/DFARS provisions and clauses—and thus also dictate the contract payment terms.
The T&M contract type is the least preferred because it is the hardest to manage for both Government and contractor. That assertion may be counter-intuitive for some readers. How can something so simple that’s used every day (i.e., number of hours x fixed billing rate = amount billed) be so hard to manage? But indeed, readers, such is the case. We will be exploring some of the problems with the T&M contract type in this article.
The first question to be addressed is, “What is a T&M contract type?” Many individuals can’t accurately answer that question. In fact, the FAR has different answers to that question, depending on which Part you’re looking at.
Some individuals (including DCAA auditors) categorize T&M contracts under “flexibly priced” contract types, along with cost-reimbursement types, because the final price isn’t known until all hours have been billed and any indirect costs allocated to the Materials portion have been finalized. Other individuals lean more toward categorizing T&M contracts under “fixed-price” arrangements, because the cost per billed labor hour is fixed and not subject to change if the contractor’s labor or labor overhead costs change.
FAR Part 16 states that T&M contract types are neither cost-plus nor fixed-price. Instead, they are a third category of contract types called “Time-and-Materials,” and they have their own FAR section at 16.6. Yet, FAR 30.6 (and the related 52.230-6 CAS Administration contract clause) requires that, when a T&M contract is included in a cost impact proposal, it must be broken into its constituent components, such that the “T” portion is included in the fixed-price section of the analysis while the “M” portion is included in the flexibly priced section.
The fact of the matter is that a T&M contract type is neither flexibly priced nor is it firm-priced. It’s not a hybrid type, either. Instead, it is its own type. The folks who feel compelled to look at the world in terms of black and white have a problem with this; but they are clearly wrong. While in some cases it may be helpful to think of the contract in terms of a fixed-price per labor hour plus cost-reimbursable non-labor costs, that’s about as far as it should go. Knowing management of fixed-price contracts won’t get you where you need to go on T&M types, nor will knowing management of cost-plus types. Instead, you need to develop an expertise in managing T&M contracts—and subcontracts, too.
The confusion over T&M contract type has been exacerbated by regulatory revisions. Historically, T&M contracts have been treated as delivery contracts, with the deliverable being labor hours. In other words, the contractor was required to deliver labor hours (and ancillary material) and there was no specified contractual outcome associated with those hours. Accordingly, payments of T&M contract billings were delivery payments, not interim payments. A payment meant that the Government had inspected and accepted the hours billed, and had no recourse when it turned out that not all billed hours were of equal productivity. This situation led to problems (particularly in the IT system implementation realm) where contractors had delivered 100% of the specified labor hours without completing the contemplated work. That was a problem for the Government, since it didn’t obtain what it wanted, but need to pay the contractor regardless. Consequently, the FAR was revised in the mid-2000’s to clarify that T&M payments were interim payments, not payments for partial deliveries. That revision was ill-advised, because it required revisions to a host of other provisions and clauses
For a good example of what we mean, take a look at this recent final FAR revision (issued July 26, 2012). It attempted to “harmonize” differing requirements for submitting final invoices with respect to T&M contract types. As the FAR Councils wrote—
FAR clause 52.232-7 provides for monthly invoicing and submission of the completion voucher no later than one year from the date of work completion. These provisions are in conflict with the corresponding provisions of FAR clause 52.216-7, which is invoked under a time-and-materials contract. FAR clause 52.216-7 provides for invoicing on a bi-weekly basis for large businesses, and more frequent invoicing for small businesses, and the submission of the completion voucher no later than 120 days after completion of work.
Thus, the final rule clarifies that the invoicing requirements of 52.232-7 apply to the fixed-price-per-hour “T” portion of the contract, but not to the reimbursable “M” portion, which is covered by the requirements of 52.216-7. (Readers should recall that, among other things, 52.216-7 requires submission of a final annual indirect cost rate proposal for audit and subsequent negotiation of final indirect rates. If you are a smaller business and only have one or two T&M contracts—with all others being FFP—then it seems absurd to go through this process. It seems even more absurd to be subject to the requirements of 52.216-7 if the amount of reimbursable “M” costs is immaterial in comparison to the “T” amounts.)
The foregoing example is just one of the myriad issues and inconsistencies created by the rule-makers, when they decided to make T&M contract payments interim payments, instead of payments for partial deliveries.
Another problem with the T&M contract type is increasing the hours being acquired, when it turns out the original amount ordered was insufficient to meet the Government’s needs. This is a problem because FAR 16.601(d)(2) requires that every T&M contract must include “a ceiling price that the contractor exceeds at its own risk”—and the CO must “document the contract file to justify the reasons for and amount of any subsequent change.” In contrast, while a cost-reimbursement type contract contains an estimated cost and fee, the estimated cost amount can (and frequently is) increased for changes that are within the originally contemplated contract scope of work.
On July 26, 2012, a proposed rule was published for public comment that would make it harder for COs to justify any increases to the original amount of ordered labor hours. If implemented as drafted, then any increase to ordered hours would need to be justified (by the CO) as “non-competitive new work.” In other words, instead of increasing the contract price to permit the contractor to deliver (and bill) additional labor hours, the correct approach is to recompete the additional work.
In another admission that their previous rule-making was ill-advised, the FAR Councils wrote—
FAR 16.601(d) has also been amended to make it clear that a D&F is required for T&M orders. This FAR change will clarify that a T&M D&F is required for each non-commercial item T&M order under a part 16 indefinite-delivery indefinite-quantity (IDIQ) contract. This change is necessary both to keep part 16 parallel with part 8 (which requires a D&F for each part 8 T&M order) and to clarify an unintended lack of clarity in the 2006 FAR changes that rewrote much of the T&M policies in the FAR (see FAC 2005-15, published in the Federal Register at 71 FR 74656 on December 12, 2006). Currently, only part 12 includes a direct requirement for T&M orders to be authorized by a T&M D&F, but this applies only to commercial items. This FAR case is adding a clarification to part 8 to repeat that policy to ensure that part 8 T&M orders are also each authorized by a T&M D&F. With this case, part 16 is also being changed to explicitly require T&M D&Fs for orders.
It should be clear that the T&M contract type is a difficult one for both the Government and the Prime Contractor. In the next Part of this analysis, we’ll take a look at subcontracts under T&M prime contracts. Readers, you ain’t seen nothin’ yet.
Reporting Executive Compensation and First-Tier Subcontract Awards
In July, 2010, FAC 2005-44 implemented FAR Case 2008-039 on an interim basis. We told you about the interim rule in this pithy blog article. As we told you, the interim rule had two fundamental requirements:
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Prime contractors will need to report “executive compensation” (see 31.205-6(p) for limitations on the allowability of executive compensation) for its five most highly compensated executives. In addition, the prime will need to report the compensation for the top five most highly compensated executives of its first-tier subcontractors.
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Prime contractors will need to report all first-tier subcontract awards valued in excess of $25,000.
Contractors that were required to comply with the new rule included those that—
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Received 80 percent or more of its annual gross revenues from Federal contracts (and subcontracts), loans, grants (and subgrants) and cooperative agreements in the preceding fiscal year; and
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Received $25,000,000 or more in annual gross revenues from Federal contracts (and subcontracts), loans, grants (and subgrants) and cooperative agreements in the preceding fiscal year; and
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The public does not have access to information about the compensation of the executives through periodic reports filed under section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a), 78o(d)) or section 6104 of the Internal Revenue Code of 1986.
We opined on the interim rule as follows—
First, most of the larger contractors will be exempted from the compensation reporting requirements because they already publish executive compensation information to the Securities & Exchange Commission. Second, some of the commercial contractors will be exempted from the compensation reporting requirements because they don’t receive more than 80 percent of their revenue from the Federal government. Finally, the very smallest contractors will be exempted from the compensation reporting requirements because they receive less than $25 million in annual Federal revenue. Those exemptions are going to reduce significantly the number of entities for whom exemption compensation information will need to be reported. That will leave the requirement to report first-tier subcontract awards, which will be borne by the prime contractors. And they should be able to handle the additional reporting requirements. We hope.
Well, FAC 2005-60, just published on July 26, 2012, implemented the final rule on this topic. The final rule contains some changes from the interim rule. Readers should note that any contract that contains the interim (July 2010) 52.204-10 contract clause language is supposed to be modified (“on a bilateral basis”) to update the clause to this July 2012 revision.
The rule-makers had to deal with a number of negative public comments, most of which complained about things over which the rule-makers had little discretion. Readers, when there is a statute requirement, the FAR Councils pretty much have to implement it. That said, the rule-makers seemed to relish using what discretion they had to implement the statutory requirement on commercial item contracts and classified contracts. We’re just sayin’.
The final rule applies to all contracts valued at $25,000 or more. Period.
The first-tier subcontract reporting requirement applies to “first-tier subcontracts,” as defined by the provision/clause language at 52.204-10 (July 2012 version). The definition of “first-tier subcontract,” for purposes of complying with this rule, is—
First-tier subcontract means a subcontract awarded directly by the Contractor for the purpose of acquiring supplies or services (including construction) for performance of a prime contract. It does not include the Contractor's supplier agreements with vendors, such as long-term arrangements for materials or supplies that benefit multiple contracts and/or the costs of which are normally applied to a Contractor's general and administrative expenses or indirect costs.
The executive compensation reporting requirement is the same as for the interim rule. No changes there.
Prime contractors have one month after award to report their first-tier subcontract awards. They must report the same data items as were listed in the interim rule. No changes there.
As with the interim rule, prime contractors must also report executive compensation of their first-tier subcontractors. No changes there. However, the final rule provides that—
The [Prime] Contractor is required to report information on a first-tier subcontract covered by paragraph (d) when the subcontract is awarded. Continued reporting on the same subcontract is not required unless one of the reported data elements changes during the performance of the subcontract. The Contractor is not required to make further reports after the first-tier subcontract expires.
So our opinion of this reporting requirement hasn’t really changed. This is going to add a little bit of work to the Supply Chain Management personnel in the Prime Contractors. There will be some rough patches during implementation, because some smaller companies won’t easily accept that they need to provide the required compensation data. But there’s a statute and a FAR provision/clause that supports the requirement.
So kvetch all you want, you still have to comply. And so do your first-tier subcontractors.
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Sequestration in the News
We are not going to breathlessly issue alert bulletins about the progress—or lack thereof—of the looming doomsday scenario known as “sequestration”. (We have the Aerospace Industries Association to do that for us.) We are, however, going to publish interesting pieces that seem to have implications for Government contractors.
But make no mistake, sequestration is looming and events leading up to its cataclysmic impacts are unfolding like scenes in a slow-motion multi-car collision. You know: you can see one car hit another, who then hits another, and so on—all in slow motion so that you can tell your car inevitably will be smashed … and there’s not a damn thing you can do about it. Sequestration is like that. We can all see the events unfolding with inevitability and there’s not a damn thing we can do about it, except hope that sanity breaks out in Congress before the collision chain starts.
So we’re not going to report on the events leading up to sequestration, which either will or will not happen. If sequestration is avoided, then great. But if not, then expect doomsday.
The Defense Department is reportedly “not planning” for four possible scenarios:
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Congress inserts language into a continuing resolution that delays sequestration another year or two when there is a less-heated political environment, but the government implements the first and perhaps second year of cuts, which some refer to as the ‘mini-sequester.’
Lockheed Martin and some other defense contractors have warned the Obama Administration that they might be forced—by the requirements of the WARN Act—to issue potential lay-off notices to their workforces 60 days in advance of sequestration—i.e., just before the November elections. (Real subtle, right?)
Echoing that line, the DefCon Hill blog reported that a Defense Department official testified before the House Armed Services Committee that anywhere from 89,000 to 200,000 civilian DOD employees would be laid-off under sequestration—and that they would receive their lay-off notices in early November. Congress critters complained that the Pentagon has failed to plan for sequestration, and passed a law “that would require the Obama Administration to explain how the sequestration would take effect.”
Hey, we can explain how sequestration would take effect! How about: “Like dropping a nuclear bomb on the Pentagon.” Does that draw a sufficient picture for our Congress men and women who created this disaster by failing to reach a compromise in this election year?
Finally, the Department of Labor has weighed into the fray, issuing its opinion that the WARN Act will not—repeat, not—require advance lay-off notices to be issued in November.
The Ares Blog over at Aviation Week & Space Technology has some choice words about the on-going sequestration “battles”. The authors wrote—
The ‘uncertainty’ about sequester that has so bothered the defense industry is being turned back on it by the Obama administration, which argues, hey, how are you going to know what people to warn you’ll lay off if you don’t know what your business will look like after the dust settles? (To which House lawmakers have said: This is why we need the Pentagon to do a comprehensive study of the after-effects! And the vortex continues to spin.)
But even though Oates wrote it would be ‘inconsistent’ with the law for a Lockheed Martin to issue tens of thousands of layoff warnings, the note doesn’t seem to indicate whether that is actually illegal. Lockheed and the other brand-name firms could well send anything they want to their employees, up to and including potential layoff warnings, just to try to goose voters into goosing politicians to resolve the sequester. …
Not to be outdone, the Defense Industry Daily wrote—
[The Labor Department] argue that while ‘it is currently known that sequestration may occur, it is also known that efforts are being made to avoid sequestration.’ It is a bizarre line of reasoning given that executing sequestration next January is currently signed law. Perhaps knowing this, the Dept of Labor also argues that because DoD hasn’t announced which contracts would be affected, potential layoffs are speculative.
One doesn’t need a crystal ball, nor detailed planning, to foresee that sequestration will have a devastating impact on the Federal government and its contractors. Civilian employees of the Defense Department—as well as employees of all major prime contractors—should expect to receive WARN Act lay-off notices in November. That doesn’t mean people will be laid-off, of course. But it does mean that the stakes will become very, very clear for voters and politicians alike.
Readers should also note that Apogee Consulting, Inc. does termination settlement proposals pretty damn well. You might want to keep our e-mail address and telephone number handy, come January, 2013.
Court of Claims Continues Clarification of Contract Dispute Act Statute of Limitations
We have had quite a bit to say about the Statute of Limitations (SoL) embedded in the Contract Disputes Act (CDA). Why? Because the CDA SoL currently may be the single most critical area of dispute between the Government and its contractors.
Perhaps our most comprehensive discussion of the topic is right here. In that blog article, we wrote—
… the truth is that not every aspect of the CDA’s SoL has been litigated. In particular, nobody knows for sure when the SoL starts running with respect to a contractor’s final indirect rate proposals (aka ‘incurred cost submissions’). Does the six-year clock start running when the contractor’s fiscal year ends, or when it submits its certified proposal roughly six months later? Or does it start running when the proposal is determined to be adequate for audit? Or perhaps when the audit starts? Or maybe when the audit report is drafted? Or maybe when the audit report is issued? Or what about when the cognizant Administrative Contracting Officer receives the audit report? Nobody knows the answer to those questions because the courts haven’t squarely addressed the issue and given the contracting parties a ‘bright line’ answer.
So in the meantime, parties with unresolved disputes file claims with either the ASBCA or the Court of Federal Claims. The lawyers are busy these days; very busy indeed.
In that same blog article, we discussed the application of the CDA SoL to the ginormous backlog of uncompleted final indirect rate proposals created by DCAA’s inability to conduct GAGAS-compliant audits without spending more time on performing “risk assessments” and documenting discussions in the audit working papers than, say, conducting audits of contractors’ costs. (There was a whole ‘nother set of blog article on that particular festering sinkhole of malfeasance.) We opined—
… the official DCAA position is that they have not aged the 24,000 unaudited contractor proposals for final indirect cost rates that are in its possession. But nobody should worry, because ‘few’ of them are going to exceed the six-year CDA SoL.
… perhaps one reason that DCAA and DCMA and DOD are not too worried about the SoL is because they think the courts are going to rule that the six-year clock doesn’t start running until after DCAA issues its audit report. In that case, why worry? If DCAA takes 70 years to get around to questioning some contractor costs and recommending some final indirect cost rates to be used to close contracts (which will, hypothetically, be disputed by the contractor), then they think the courts will hear the matter. And if they’re wrong, then all the DCAA and DCMA and DOD SES policy-makers will be long, long, long retired by that time. It will be somebody else’s problem to deal with.
(Emphasis in original.)
We are pleased to report that two recent decisions by the U.S. Court of Federal Claims continued the (uneven) trend of whittling away at the Government’s excuses/defenses, and clarified a very critical point that we had listed as unresolved in our articles on the topic. The first decision, regarding Sikorsky Aircraft, addressed Government motions for partial summary judgment on two of Sikorsky’s affirmative defenses. The two affirmative defenses regarding the Government’s claim for $80 million in indirect costs that were allocated in a manner alleged to be noncompliant with the requirements of the Cost Accounting Standards (CAS) were: (1) that the Government’s claim was time-barred by the CDA SoL, and (2) that the Government’s claim was barred by the doctrine of “accord and satisfaction”. We are more interested in Judge Lettow’s discussion of Sikorsky’s first affirmative defense (the CDA SoL argument), so that’s what we will focus on.
Sikorsky first notified the Government of its intention to change its cost accounting practices via a revised Disclosure Statement, submitted in August 1998 and timed to take effect on January 1, 1999. The Disclosure Statement was audited by DCAA and determined to be “adequate”.
Sikorsky and Government personnel held continued discussions regarding the cost impact to the Government from Sikorsky’s change in cost accounting practice. (It was clear that Sikorsky disclosed a cost impact to future contract costs during those meetings.) In April 1999 (four months after Sikorsky implemented its new cost accounting practice), DCAA asserted that the revised practice was noncompliant with CAS 418 and resulted in the Government paying increased costs on affected contracts. The final audit report was issued in July, 1999. That audit report concluded that there was no noncompliance with CAS 418 based on the immaterial amount of increased costs on Sikorsky’s contracts in 1999. However, DCAA advised that this situation should be reassessed in the future.
Sikorsky submitted a formal cost impact proposal in February, 2000, that showed a net benefit (i.e., net cost decrease) to the Government between 1999 and 2003. But the cognizant Federal Administrative Officer (CFAO) changed and DCAA started a second audit on Sikorsky’s changed cost accounting practices. As Judge Lettow wrote—
A little over a year later, on August 22, 2002, DCAA began preparing a second compliance review of Sikorsky’s accounting change. … The second audit took an inordinate two years and two months to complete and was finally issued on October 29, 2004. … The audit found that Sikorsky’s changed accounting practice was ‘in potential noncompliance’ with CAS 418 … noting that a fully compliant accounting practice could ‘result[ in an] allocation [to government contracts that] may be materially different,’ … The audit did not ascertain the materiality of the potential noncompliance because ‘it would be difficult or nearly impossible for the auditor to determine’ certain aspects of Sikorsky’s costs.
In 2006, Sikorsky made several additional changes to cost accounting practice, many related to the implementation of a new accounting system, and it ceased allocating costs in the manner that DCAA had alleged was noncompliant with CAS 418. Sikorsky asserted that it had struck a deal with the Government to resolve the alleged CAS noncompliance by making the change. However, in April, 2007, the CFAO began proceedings to recover costs that Sikorsky allegedly owed the Government, stemming from its 1999 change to cost accounting practice. The CFAO wrote to Sikorsky that, although it had ceased its noncompliant practice, the matter still needed to be resolved in accordance with FAR procedures.
In November 2008, the CFAO issued a final determination “pursuant to FAR 30.605(b)(3)(ii)” that Sikorsky was in noncompliance with CAS 418 for the period 1999 to 2005. A Contracting Officer’s Final Decision (and a claim for $80 million) was issued in December, 2008, more than ten years after Sikorsky first notified the Government of its cost accounting practice change and a hair under ten years after Sikorsky had first implemented that changed cost accounting practice.
Sikorsky cried shenanigans and said the Government’s claim was time-barred by the CDA SoL. The Government moved to have that affirmative defense stricken because a claim does not accrue until the completion of administrative procedures. In other words, the Government argued that the Statute of Limitations did not start running until the CFAO had issued his final determination of CAS noncompliance. The Government relied on a Supreme Court decision (Crown Coat, 1967) for its position.
However, Judge Lettow found that the Contract Disputes Act of 1978 superseded the administrative procedures regime established by the Supreme Court in 1967. In addition, Judge Lettow wrote—
The rationale behind Crown Coat was superseded by the CDA for a second reason: the CDA gives the government complete control over when it may assert a claim. The government, just like a contractor, is not required to wait on a board of contract appeals. … And while the government may have its own internal review procedures that it must follow prior to submitting a claim, nothing in the CDA mandates such procedures, nor can such procedures delay accrual of a claim. … Even if Crown Coat were to apply to this case, which it does not, there is nothing in the contracts between Sikorsky and the government that would delay the accrual of the government’s claim. …
The government misconstrues these provisions. They do not address when a claim accrues. They do not require negotiation before a claim could arise. They only confirm that a failure to agree is a dispute that falls within the ambit of the CDA. As such, the provisions make plain the two alternatives available when a noncompliance occurs: if the contractor agrees with the resulting adjustment, it must pay; if the contractor does not agree, it must defend against a claim.
Turning to the more detailed provisions set out in FAR § 52.230-6, these do not constitute a set of conditions that must be satisfied prior to filing suit. … The contract clauses alone, for example, do not explain when or how the CFAO should issue a determination of noncompliance, see FAR § 52.230-6(b)(4), when or under what circumstances the CFAO should request a cost-impact proposal, see FAR § 52.230-6(c), or what the CFAO should do if the contractor does submit a cost impact showing a loss to the government. Implicitly, a coherent whole could be derived from these contractual provisions — but only by reference to the machinery at FAR Part 30. Nonetheless, an agency’s self-imposed, internal regulations are invisible for claim accrual purposes because they are not part of the contract. See Commodities Export, 972 F.2d at 1271. Thus, the clauses at FAR § 52.230, viewed in vacuo as they must be, do not serve as a set of preconditions to filing suit that would serve to delay the statute of limitations.
Furthermore, a delayed accrual rule would be incompatible with the intended functioning of CAS administration. … FAR § 52.230-6(b)(4) requires a contractor to submit changes to correct a CAS noncompliance within 60 days of receiving a determination of noncompliance. Likewise, FAR § 52.230-6(c) requires a contractor, if asked, to submit an estimate of the cost impact of a noncompliance within a time set by the CFAO. If the contractor fails to do either within the appropriate time, then FAR § 52.230-6(j) permits the government’s contracting officer to issue a final decision. If a government claim were to accrue only at this point, then the CFAO could delay the statute of limitations indefinitely simply by refraining from issuing a determination of noncompliance or from requesting a cost impact. ‘This court cannot, however, permit a single party to postpone unilaterally and indefinitely the running of the statute of limitations.’ …
Here, the legal basis for the government’s claim is Sikorsky’s alleged noncompliance with CAS 418. For a CAS 418 noncompliance claim to accrue, two conditions must be met. First, there must be a violation of CAS 418, which requires both that an indirect cost pool of a contractor contain costs that ‘do not have the same or a similar beneficial or causal relationship to cost objectives’ and that, ‘if the costs were allocated separately, the resulting allocation would be materially different.’ FAR § 9904.418-50(b)(2); see Sikorsky, 102 Fed. Cl. at 59-60. Second, the government must have actual or constructive notice of the CAS 418 violation. …
[However] … genuine disputes of material fact exist related to the accrual of the government’s claim. The government’s motion to dismiss Sikorsky’s affirmative defense based upon the statute of limitations must be denied.
(Emphasis added.)
Okay, the above quote was long and maybe you did a “TL;DR”. (We think all that stuff is important, but what do we know?) In that case, readers, we have a happy solution for you. The respected attorneys at Wiley Rein have written a great summary of the decision for you! They wrote—
… the Court of Federal Claims (COFC) held that an agency's administrative processes, even those set forth in the Federal Acquisition Regulation (FAR), do not delay accrual of a Government claim. Instead, accrual is governed by the definition in FAR 33.201, which focuses on whether the facts that ‘fix the alleged liability’ of the contractor or Government ‘were known or should have been known,’ regardless of agency administrative processes.
They concluded as follows—
Sikorsky adds to the growing body of cases addressing the accrual of Government claims and, in particular, Government claims relating to accounting issues. In light of the significant backlog in DCAA audits and resulting delays in processing accounting changes and other matters, more Government claims could face timeliness issues. … Under Sikorsky, the fact that the FAR sets out administrative processes for addressing an alleged CAS violation is not, in itself, relevant.
(Emphasis added.)
So maybe, just maybe, DCAA’s inability to perform audits in a timely manner is going to result in Government claims for disallowed costs being kicked-out by the Courts, because they are time-barred under the CDA SoL.
But we are not done yet, readers. Remember when we told you there were two recent decisions? Yes, in addition to the helpful Sikorsky decision recounted (at length) above, we have another Raytheon decision to tell you about.
Readers may recall our recent discussion of the Raytheon’s $25 million CDA SoL victory. The Government submitted a motion for reconsideration, arguing that “a statute of limitations does not begin to run against the United States until a right granted by FAR to audit plaintiff’s claim is completed, citing 48 C.F.R. 31.201-2.”
First, the cite to FAR 31.201-2 puzzled the Judge Hodges, who wrote, “This section of FAR cost accounting standards [sic] does not mention audits at all, unless defendant meant to suggest that its requirement that a contractor maintain records to support the allowability of its costs requires an audit by implication.”
The Judge described the Government’s argument as follows—
… the court erred in stating that the Government needed no new information to determine the nature of its claim after signing a 1999 advance agreement with Raytheon. An audit is necessary for the Government to have “knowledge” of a claim for purposes of the statute of limitations, according to defendant. See 48 C.F.R. § 33.201 (defining claim accrual for government contracts as ‘the date when all events’ fixing liability and permitting assertion of a claim ‘were known or should have been known’).
Judge Hodges didn’t buy the Government’s argument, writing—
This court ruled that the statute of limitations begins to run when information that equates to knowledge of a potential claim becomes available to the Government; defendant urges that only completion of an audit of plaintiff’s claim can provide it sufficient evidence and proof of facts necessary for a trial of the claim – the statute of limitations begins to run then. In this case, information defendant obtained in 1999 put it on notice of a potential claim against Raytheon. Then, defendant had a basis for seeking more information to support the claim, and it did so.
Defendant also argues that the court erred in disregarding its allegations that the 2004 agreement between the parties was a result of mutual mistake, unilateral mistake, or material misrepresentation. Defendant made these allegations in response to plaintiff’s claim of accord and satisfaction arising from the same 2004 agreement. [However] Having ruled that the court lacked jurisdiction to hear the contracting officer’s decision in the form of a counterclaim because the statute of limitations had run, we could not consider issues raised by later pleadings of either party.
(Emphasis added.)
The Court of Federal Claims has recently issued two decisions that clearly state that the completion (or lack thereof) of administrative procedures and the completion (or lack thereof) of DCAA audits do not operate to toll the CDA SoL. Instead, what matters is when the Government had (or should have had) knowledge that it had a claim to file. The Government cannot delay filing its claim pending completion of paperwork, completion of a DCAA audit, obtaining necessary reviews and approvals, and other similar “self-imposed, internal regulations” that are “invisible” for claim accrual purposes.
DCAA and DCMA: You have been warned.
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