Free Memorandum - District Court of Federal Claims - federal

Case 1:00-cv-00129-FMA

Document 87

Filed 07/01/2005

Page 1 of 3

ELECTRONICALLY FILED ON JULY 1, 2005 IN THE UNITED STATES COURT OF FEDERAL CLAIMS

LOCKHEED MARTIN CORPORATION, ) ) Plaintiff, ) ) v. ) ) UNITED STATES OF AMERICA, ) ) Defendant. )

No. 00-129C (Judge Allegra)

PLAINTIFF'S MEMORANDUM IDENTIFYING AND SUMMARIZING A DECISION INTERPRETING THE LANGUAGE IN CAS 9903.306(B) In Astronautics Corporation of America, ASBCA No. 49691, 1999 ASBCA LEXIS 71, the Armed Services Board of Contract Appeals ("ASBCA") interpreted FAR 30.306(b). CAS Reg. 9903.306(b) and FAR 30.306(b) are identical, except the CAS Reg. changed "his" to "its" in the first sentence. A copy of the decision is attached hereto as Exhibit A. In Astronautics, the contractor had estimated the costs and negotiated the fixed prices on the basis of a cost allocation methodology that complied with CAS and the contractor's CAS disclosure statement. 1999 ASBCA LEXIS 71, *2-3. During performance the contractor changed its allocation methodology to one that failed to comply with CAS, and the noncompliance resulted in allocations of greater cost to fixed price and cost type contracts. Id. at *3-5. The contractor agreed to an adjustment of its cost type contracts, and the Government sought an adjustment under § 306(b) to the contractor's fixed price contracts. Id. at *4-10. The reason for creating § 306(b) and its administrative interpretations are outlined in the decision. Id. at *17-22. The Board looked to DOD Working Group Item 76-4 which, in turn, looked to DOD guidance on "Increased Costs Paid Under CAS-Covered Contracts." Id. at *2022. Working Group Item 76-4 provided:

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Guidance Increased costs to the Government under firm fixed price contracts should be considered to exist when the costs allocated to the contracts are less than would have been allocated if the method of allocation had not been changed. Id. at *21-22. The Board also looked to the CAS Preamble accompanying the original promulgation of the § 306(b) language that stated: Preamble M, Para. 2 explains the need for a remedy when the contractor has adopted practices during contract performance `that reduced his cost allocations below the allocation determined during the estimating process.' According to this reasoning, had the Government been aware of this new method of cost allocation at the time of price negotiation prior to award, it would have relied upon the reduced cost allocation to obtain a better contract price. Accordingly, a contract price adjustment precludes the contractor from obtaining any contract price advantage as a result of any CAS noncompliance during contract performance. Id. at *27-28. The Board held the contractor's noncompliance in Astronautics "did not reduce cost allocations during the performance of any of its fixed priced CAS-covered prime contracts" and, therefore, the Government was not entitled to an adjustment of those fixed price contracts under § 306(b). Id. at *28. Respectfully submitted, s/Clarence T. Kipps _________________________________ Clarence T. Kipps, Jr., Esq. MILLER & CHEVALIER Chartered 655 15th Street, N.W., Suite 900 Washington, D.C. 20005 Tel: (202) 626-5800 Fax: (202) 628-0858 Attorney of Record Lockheed Martin Corporation

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Of Counsel: Angela B. Styles, Esq. Kimberly R. Heifetz, Esq. MILLER & CHEVALIER Chartered 655 15th Street, N.W., Suite 900 Washington, D.C. 20005 Tel: (202) 626-5800 Fax: (202) 628-0858 David M. Christenson, Esq. LOCKHEED MARTIN CORPORATION 6801 Rockledge Drive Bethesda, Maryland 20817 Tel: (301) 897-6127 Fax: (301) 897-6333 Dated: July 1, 2005

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Case 1:00-cv-00129-FMA

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Exhibit

A

Case 1:00-cv-00129-FMA

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LEXSEE

1999

ASBCA LEXIS
Corporation

71

Appeal

of-- Astronautics

of

America

ASBCA
Armed
Services

No.49691

Board of Contract

Appeals

99-1

B.C.A.

(CCH)

P30,390

1999

ASBCA LEXIS

71

May

18,

1999

CONTRACT:
JUDGES:

Under

All

CAS-Covered

Contracts

JACK DELMAN,
N.

Administrative Judge,

Judge. Vice

ALAN

M.

SPECTOR

Administrative

Judge,

Acting

Chairman,

MARK

STEMPLER,

Administrative

Chairman,

concur.

COUNSEL: APPEARANCE APPEARANCES
Esq., Trial

FOR THE APPELLANT:

Stephen

D.

Knight,

Esq.,

Kirkland

&

Ellis,

Washington,

.
Steven Gruenwald,

FOR THE GOVERNMENT:
Defense Contract

Kelly

T.

McCracken,

III,

Esq.,

Chief

Trial

Attorney,

Attorney,

Management,

Command,

Chicago

(DLA).

OPINIONBY: OPINION:

O [h
[h
Government comply
under with
the

DELMAN

[h [h
from Astronautics standards Corporation of

The
failure to

seeks

$13,260,912
cost

America
contracts as

("ACA")
and

based

upon
acts.

its

purported have claim
is

certain

accounting Act For

under U.S.C.

CAS
§ §

covered 601-613,
the

subcontr

We

jurisdiction

Contract and

Disputes

(CDA), 1[
reasons
stated

amended. The Government's
ni

before

us on

entitlement

quantum.

we

sustain

appeal.

nI

On

the

eve

of

trial,

both denied

parties as

filed

summary

judgment

motions.

In

view

of our

disposition

of the

performed covered

F B1
appeal,
these

motions

are

moot.

[h

I.

I.

During a

the years

ACA

performed

a
for

number of CAS-covered
prime type contractors and

prime contracted
price

contracts

for

DOD

agencies,
Its

and

number of CAS-covered
contracts

subcontracts

who
fixed

with

DOD

agencies.

CAS

prime
In

included

cost-reimbursement

contracts

contracts.

2.

accordance

with

CAS
its

requirements, accounting provided -[h

ACA
practices that

had

submitted,
for

and

the

Government
contracts

had

approved

ACA's
R4, over
tab

disclosure 234). of

statement Item
direct 4.1.0

which
of
the

disclosed
disclosure

cost

purposes
material

of these handling
at 9).

(app.

2nd

supp.

statement
L,

ACA's

overhead
4.2.0

was

allocated that

a base General

material

cost

(code

see

Part

Indirect

Cost,

Instructions

Item

provided

's[h

&

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99-1 B.C.A.

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Filed 07/01/2005
* 71,

Page 3 of 11
Page 2

ASBCA LEXIS

Administrative

(G&A)

cost

was
cost

allocated

over
allocated

a

base over

of

cost

input of

(code
input

C,

i[

Development
included

(IR&D)
those

was
in the

also

a base
base.

cost

(
its

I

at 9,

10). cost

ACA's
input

Independent
base,

Research

The

being

more

inclusive,

costs

direct

material

cost

3. certain certain

In

1989,

DCAA
reports costs

initiated

an

incurred-cost of
costs

audit

of

ACA
the

for

fiscal

years

1985-1989.

Based
that

upon

a review omitted
the

of

overhead material of

and

schedules
direct

incurred
that

costs,

Government's been
in

auditor above
to

discovered

ACA

had
for

and

other

should and

have

the

referenced disclosed
rates

allocation

bases

determination
indirect costs.

material costs

handling

overhead, from been.

G&A
these

IR&D,
the

pursuant

method

of

allocating

these

Since

were omitted
have on had

bases,

actual

overhead

calculated

from

these

bases

were

materially higher
4. as

than

they should
audit

DCAA
401,

issued an

report

or

about

13

August

1990 with
cost

which
its

identified

this

problem. and
are

DCAA
in in

contended

that

a

result

of these 410,

omissions, 418, 420.

ACA
The

acted

inconsistently

disclosure

statement standards

was

noncompliance an

with
this

CAS

pertinent

portions

of these

accounting

provided

Appendix

to

opinion.

5.

The

audit

report

also

stated

that

's[h
on
the

noncompliance

resulted

in

excessive

charges
for fiscal

and

over-recovery

of

material
"potential

overhead,

G&A
the

and

IR&D
and

costs
risk,'

all

ACA

contracts

and

subcontracts
to

years 1985-1989.
to

Based
as

upon
as

government
for

exposure

auditor

estimated

impact

Government

contracts

be

much

$ 15,043,146

years 7

in question.

6.

By

letter

dated

May

1990
that

(R4, tab
the

1),

ACA
a

replied
It

to

a

DCAA
that

draft the

report

which were

provided
the that the result

the

above

findings.

In

short,

ACA

did

not dispute
to

omissions Limited,"

occurred.

stated

omissions of

of an

exclusion

of

amounts
to

invoiced

ACA
with

by "Astro Hughes
to

wholly-owned subsidiary
a

ACA

in Israel
all

performed

work
the
to

related

ACA's

subcontract

Aircraft

under

DoD
the

contract.

Instead of performing
its

work

under

subcontract,

ACA

had
its

agreed

transfer offset

a portion

of

work

to

subsidiary

in Israel,

at

Hughes'

request,

assist

Hughes
7.

in

meeting
letter In

commercial

requirements construed,
that
it

in Israel.

's[h
the
costs

of 7
the

May, reasonably

did

not dispute
the cost

that

these
rates for

omissions
for the future

constituted application, in question, contracts.

CAS
and

noncompliance. providing incurred

letter

ACA
the the

stated

had

corrected

overhead
contracts

was
its

Government
to

with
for

cost impact

under

's[h

period
price

revising

account 22

error.

ACA

stated

there stated

was no
that

impact
it

on

firm

fixed the

By

letter

to

the cost

Government
impacts and

dated
that

January matter

1991, has been

ACA,

again

had

provided

Government

with the

relevant

"this

corrected"

(R4,

tab

2).

8.

The Government

was not

satisfied

with

ACA's

response.
to

The
a
tab

DCAA
4)

recommended,
statement did
so, to

inter

a/ia,
all

that

the covered 1991 of

Administrative
contracts

Contracting subcontracts, reply
to the

Officer including

(ACO)
fixed

direct price

ACA

submit (R4, 1991

cost

impact

include
letter

CAS
the

and
7).

contracts.

The
tab

ACO
9),

by

dated

8 October
issue

(R4,

tab

By

Government
it

dated
its

4

December

(R4, the

ACA,
cost

again, to

did not dispute fixed
price

CAS

noncompliance.

However

reiterated

position

regarding

lack

of

impact finding
to
all

contracts.

9.

By

letter

to

ACA
420.

dated
Insofar

30
as

January
pertinent, in

1992,
the

the

Government
stated

issued an
that

initial

of noncompliance include
the

under

CAS
in

401,
the

410,418
appropriate

and

Government

ACA's

failure

questioned and

costs

allocation clauses. to

bases Per agree

resulted

overstated

overhead

rates

which

affected

ACA
the

contracts

subcontracts

containing 30 days
10.

CAS

FAR

30.602-2

"Noncompliance
the

with

CAS

requirements,"
findings.

Government

allowed

ACA

within Insofar
to

which
as

or disagree with 30.602-2

Government's

initial

pertinent, the

FAR

provided and

that the

if a

contractor of
the

agreed

with

the Government's on
its

initial

finding
contracts

it

was required
and
subcontracts. to

correct

FAR
the

1),[h )(3
contractor's as follows: position

noncompliance

submit
If the

impact

noncompliance with the
initial

CAS-covered
the

contractor
a final

disagreed

finding,

Government

was

required

review

and

make

determination

of compliance

or noncompliance.

FAR

(d)(2)[h
30.602-2

provides

Noncompliance

with

CAS

requirements

(2)

If the

ACO
the

makes

a

determination
the

of noncompliance, of
the auditor,

or

if the

contractor
the

fails

to

furnish

the
the

cost

impact

proposal,

ACO,

with and

assistance

shall

determine

cost

impact

of

noncompliance

on

contracts

subcontracts

containing

CAS

clauses.

The

ACO may

withhold

an

Case 1:00-cv-00129-FMA
99-1 R.C.A.

Document 87-2
(CCH) P30,390
1999

Filed 07/01/2005
*

Page 4 of 11
Page
3

ASBCA LEXIS

71,

amount not
covered

to

exceed
contracts,

10

percent

of each

subsequent
the

payment

request,

related the

to

the

contractor's

CAS
furnished

prime
contractor.

which contain

appropriate

provisions,

until

proposal

has been

by

the

I By
findings.

letter

to

the

Government
that certain

dated
costs

3

March

1992

(R4,

tab

14),

ACA
in rates,

replied

to

the

Government's overhead with
its

initial

ACA
this

reiterated to

were

not properly
to

gathered these

reporting
in

certain

rates,

and

that

had

made

corrections
action,

cost-reimbursement
that

contracts

correct

accordance
limited to

FAR

1).[h By
fixed
to price

ACA

taking
contracts.

we

find

ACA acknowledged

CAS

noncompliance,

albeit

cost-reimbursement

12. contracts
its

In

its

3

March
affected

letter,

ACA
these

reiterated

its

strong objection
stated that the
it

to

the

Government's separately

finding

that

ACA's

were
price

by

the noncompliance. budget

ACA

used

developed excluded,

budget and

figures the

negotiate had

fixed

contracts,

that

figures

contained

costs

that

ACA

had

Government

not been

prejudiced.

13.

By

letter

to

ACA
and

dated 420,
in

26 June

1992,

the

Government

issued

its

final

determination
stated

of noncompliance
that "the

with
in

CAS
your

401,

410,

418,

accordance
establishes that

with
that

FAR
the

30.602-2(d).

The Government
in the

data
that

provided overheads
inter alia,

][h
and
that

response support submit dated

clearly

costs

were not included
occurred."
all

appropriate

base,

were

overstated,

a determination
the cost

CAS

noncompliances on

The Government
contracts

requested,
subcontracts.

ACA
By

impact 1992,
to
its

of

the

noncompliance provided
written for

CAS

covered

and

14. the lack

letter

31

July

ACA

its

rebuttal

to

the

Government's
stated.

of any
satisfied

material
its

impact

ix

findings.

Again,
that tab

it

asserted

price

contracts the

reasons

previously
in

ACA
as

maintained follows (R4,

it

had

already

CAS

responsibilities

under

circumstances,

stating

pertinent

part

23):

11.

Therefore,

Astronautics

has:

a.

Corrected

the noncompliance

when

it

revised

the

overhead

calculation

in

May

1990.

b.

Implemented

a

corrective

action
reconciliation

plan

when

it

modified on

the

overhead

rate rate

calculation calculation

program
to

and

implemented
the

the annual statements.

of the

amounts

the overhead

the

amounts on

audited

c.

Prepared

and

submitted

a

cost

impact
their
its

statement. and impact
In

15.

The
at

parties

continued
request, fiscal

to

argue

positions

at

meetings of
cost

through based

written

exchanges. of

January

1993
contracts

DCAA,
and
that

the

's[h
for

provided

own

estimate

on

all

ACA's
rates

CAS

covered
the

subcontracts had
rates

years from

1985-1990.
the did

The

DCAA
bases,

auditor took
the

recalculated difference and

overhead

by including
rates

amounts ACA's on
cost

been

excluded
it

allocation

between
the

these

recalculated to

and

budgeted
all

which

assumed

not contain and (R4,

these

amounts,
for

applied years 1985 the

difference 1990
to

ACA's
to

incurred an

costs

CAS-covered
in the

Government

contracts

subcontracts

fiscal

through
citation

obtain

estimated

impact provided agreed

amount
that

of$ 6,474,587.
a
contractor's price

tab

26) Notwithstanding
shall

auditor's the

FAR

30.306(b),
the the contract

which
price

in part to

noncompliance
that that

be

"measured agreed within
that to" the

by

difference
the

between

and

the

contract any

would
or

have

been
price

absent period

noncompliance, review, her but

auditor
relied

did not

separately incurred

analyze of

particular

contract period. 2/10).

contract auditor

under up

rather

on

the the

costs

ACA
at

during
the

the

The

testified

she

came

with

best

estimate

based

upon

information

she had

time

(tr.

16. the

ACA
-

submitted

a

more comprehensive
fixed

cost

impact

study

in

January,
affected

1994.

ACA's
the

position,

however,

remained
35).

same
17.

the

Government's

priced
to

contracts

were not adversely
the next 1996,
the several the

by

matters

in issue

(R4, tab
differences.

The
to

parties so.

continued
letter to

meet over
dated
8

years

in

an

attempt

to

resolve

their

They
a

were unable
recovery 6,786,325

do

By
in

ACA

March
per

ACO

issued a contracting above,
plus

officer's interest

decision, in the

seeking

from
for

ACA
a
total

the

amount of$ 6,474,587,
(R4,
tab 76).

DCAA's

calculations

amount

of$

of$ 13,260,912

This appeal

followed.

II.

T

Evidence

at

Trial

The Government's

Case 1:00-cv-00129-FMA
99-1 B.C.A.

Document 87-2
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Filed 07/01/2005
ASBCA LEXIS
71, *

Page 5 of 11
Page 4

18.

The Government
auditor

called

three witnesses
the rates

and

none

were

offered
the

as

expert

witnesses.

The Government
testified that the

called

the

DCAA
that

who

performed overhead no

1989 used

audit for

which
its

uncovered under

excluded
price

costs. contracts

The

auditor

he

assumed

's[h
audit

budgeted he had

proposals

fixed

were

impacted
(tr.

by

inaccurate

overhead not

data

personal
pricing

knowledge
proposals.

of

's[h
and of other and

forward

rate

how ACA, in fact, prepared its budgeted rates He had no personal knowledge as to how ACA
overhead these data
to

1/102-03).

He

did

developed
relied

these
the audit

proposals
reports

whether

ACA

relied

upon
did

inaccurate

DCAA
historical

auditors rates

who
to

information

[

develop
to

these
his

proposals. view
that

He

on

audit

proposals
rates
(tr.

support

DCAA

used

historical

review

's[h DCAA

overhead

1/110-Il).
the

These

auditors

did not f[Ql[Q
cost

19.

The Government
negotiated overhead
fixed rates

also price

called contracts

the

auditor

who
The
were

developed
auditor's

Governments
proceeded no

estimated

impact
that

under

ACA's ACA's
2/10).

and

subcontracts. contracts to

estimate she

on

the

assumption of
the

on

its

firm

fixed

priced of
the

overstated any such

made

separate impacted

review contract

matter with

(tr.

Nor did she make
Instead, (finding

any

analysis on

extent incurred

which

overstatements incurred

prices

the

Government.
subcontractor

she

relied

's[h

costs

per

year,

whether

as

a prime

contractor

or

15).

20. officer's

The

Government
In

also

called the

the

ACO who
agreed with

issued

the

final analysis

determination

of noncompliance

and

the

contracting

decision.

essence,
there

ACO
and

DCAA's

and

accepted
costs price

DCAA's
the

recommendations.
material 12]

The
of
its

ACO

also

assumed
that

that

was a

relationship

between overhead not

ACA's
rates

historical
its

and

direct

portion
affected

budget, omitted
the

and
costs

ACA's
1/147,

budgeted
148, 157,

proposed

for

fixed

contracts

were
at

A
final 21.

by
he

the

(

158).

He was
1/142).

familiar

with

ACA's

notice

of noncompliance

(

budgeting

methodology

the time

issued

ACA

called

four
lines

fact

witnesses

and

two

expert

witnesses.

ACA's ACA's

president president

testified

generally provided
short,

about

the detail

corporate
the find latter that

product
issue,

and

how

budgeting
reports

was accomplished.
schedules
into to

vice

of finance
process. In affected

more

on

using corporate budgeting product

and

describe
all

ACA's

budgeting and

he
the

testified,

and

we

ACA's

methodology
line,

took

account
material

material cost sales to

costs, sales as

was not

by

subject

exclusions. information. adjusted used
to
in

For each

ACA
be and

determined applied
to

of
to

a percentage forecasted projected
rates as

of

sales

based

upon

historical

This percentage

would
levels

forecasted judgments

obtain up

material
total

cost,

which
cost

figure that

was
be

view

of inventory

business

come

with

material

would

develop
(finding auditors

ACA's
3)

overhead not used

rates
in

(tr.

2//l49-50, process pricing

176-77). The

inaccurate

found

by

DCAA
call

on

the overhead
to the auditors

reports

were

the

above

(

2/201).

ACA's

methodology
failed to

was explained

DCAA
as

who

audited

ACA's

forward

rate

proposals.

The Government

any of these

witnesses.

22.

ACA's November
incurred
intent

accounting 1986,

around
the cost the

by

its

I
define, result
its

manager generally reaffirmed ACA's vice president for finance
subsidiary separate
that the related to the

's[h
directed

budget

process. to

He

also

testified, direct

and

we

find

that

in or

him

remove

certain

cost

gathers,

including

ACA-Hughes
these
costs. for

Aircraft

subcontract,

from

overhead

computations place
in

with

to

better the

and
costs

reclassif remained

This a

reclassification

process
until

did not take

a

timely

fashion,

with
the

excluded

number of

years,

the

DCAA

discovered

the

omissions

during

1989

audit.

23.

Appellant's
to

manager of

contracts cost

analyzed impact.

the

ACA
of

fixed

price

work
he

authorizations

that

were

used

by

the to

Government
their

compute
prime

claimed and

As

part

his

analysis,

correlated contracts

work
he

authorization believed

numbers

respective and

contracts prices

subcontracts. definitized

He

eliminated outside

subcontracts, the

were exempt from
that

CAS,
small

contracts

whose

were

relevant

time

period.

He

concluded and

only be

a

subset

of those

contracts for cost

relied

upon
(ex.

by

the

Government
G).

were

CAS-covered

prime

contracts

could

subject

of any consideration
24.

impact

A-8,

Table Mr.

Appellant Group,
(tr.

called Deloitte

two expert witnesses.

Rodney
as

Mateer, expert expert
in

National

Partner,

Government
estimating
issues

Contracting systems and
to the this cost also

Consultant

& Touche,
195). that

was

qualified

an
his

CAS

compliance,

CAS
appeal. of
find sales

administration

3/135-36,
his

Mr.

Mateer

offered

opinion purchase
its

on a number of
materials
in

relevant using

We

find

persuasive above,

opinion

ACA's
cost

practice

of estimating standards
the

1985-90,
(tr.

methodology
persuasive 3/15
8).

complied
that a

with prime

accounting has

and

disclosure
the

statement
violations

3/136).
its

We

his

opinion

contractor

responsibility

for

CAS

of

subcontractors

(

Case 1:00-cv-00129-FMA
99-1 B.C.A.

Document 87-2
I[Q)[ P30,390
1999

Filed 07/01/2005
ASBCA LEXIS
71, *

Page 6 of 11
Page
5

25. contract

Mr.
cost

Nelson

Shapiro,
cost

CPA,

was

qualified

as

an and
as

expert
cost part as

in

accounting

with

particular

expertise
(tr.

in

Government
In

accounting,

accounting
the

standards

accounting of a
the
staff,

standards and
later retired this
if

administration

3/194-95).

1971, and Mr.

Mr.

Shapiro

was employed
In his

by

CAS

Board

15]

was promoted
in

to
is

project

director

executive Shapiro
that

secretary. also

1980

he joined

Touche
on a

Ross

& Co.

partner.

He
to

1991

and

now

a

consultant. his

offered

expert opinion and of based

number of
the

subjects

relevant
regulations,

appeal.

given

the circumstances and reporting
its

upon
costs, price

contract

and

there

was
its

We find persuasive a CAS noncompliance
under
its

opinion
in

ACA's

accumulation
contracts,

certain fixed

ACA
contracts

was only
(tr.

responsible

to

adjust

costs

flexibly

priced

but not under of a

firm

3/216-17).
the

26.

In

support and

his

opinion,

Mr.

Shapiro

relied

upon

CAS

clause, the

FAR

52.230-3,
related

the to

CAS
these

regulations, provisions,

FAR
which

Subpart
are set

30.3,

number of
below.

interpretations

of

the

CAS

Board and

Government

out

in detail

27.

The

CAS

clause,

FAR
in

52.230-3,

states

in

relevant

part:

n2

(a)

The
*

contractor,

connection

with

this

contract

shall:

*
Agree
to

(5) or a

an

adjustment
to

of

the

contract

price

or

cost

allowance, Accounting
in

subcontractor accounting adjustment thereon Stat

fails

comply

with

an

applicable such of
failure the

Cost

cost

practice shall

consistently

and recovery

results

Such

provide
at

for

increased

costs

i
as to the the

appropriate, or to

if

the

Contractor any

Standard,
costs

follow

paid
States

[h the United
together
to

.
161 L.

United Treasury

with Pub. 92-

interest

computed

the

rate

determined

by

the Secretary

of

pursuant

41,85

97....

(App.

2nd

supp.

R4,

tab

203

at

1 1-32

(emphasis

added))

n2 reviewed

The
the
in

standard

CAS

clause

in

the

FAR

went through
years,

a

number of
find that

revisions

during
is

1985-1990.
all

We

have

CAS
each

clause

during

each

of these

and

we

this

language

in

material

respects

contained

clause.

28, follows:

The

CAS

Board's

rules

and

regulations,

FAR

30.306(b),

define

"increased

costs

paid

by the United

States"

as

30.306

Interpretations.

In the

determining following

the

amounts

of increased apply:

costs

in the

clauses

at

52.230-3,

Cost

Accounting

Standards,..

considerations

d
(b) to the that

If the

contractor

under

contract

nerformance

Accounting and
cost the

Standards, contract
price

i
any

fixed

price his are

contract, cost

including

a

firm

fixed to

price

contract,

fails

t

follow
costs

accounting

practice the

or

comply

with
the

applicable
price

Cost

measured been

that

would
used
to

have during be

ar

by
to

difference
the

between

contract
in

ar
with
price

accounting have been

practices

contract to the

.[h
had (1980), where published
as

contractor

proposed

accordance

The determination
and
will

of the contract on
the

would

agreed
case.

will

left

contracting

parties

depend

circumstances

of each

(

at

133

(emphasis

added))

See

also

4 C.F.R.

§

331.70

this

language Preamble

is

repeated located
tab

essentially

verbatim.

29.

The CAS
Insofar as

Board's
pertinent,

comments
Preamble

on

this

regulation

were

under
(app.

M,

at4
at

CFR

§

331.10

(1989).

M,
of

para.

2 provided
fixed

follows

2nd

R4

,[h
the that

207

10870-71):

The question of adjustment
discussions paid [h
the

's[h

price the

contracts]

has been

since U.S.

1972. under
a

In

its

original

promulgations
fixed

Board recognized
[h

FFP

l[l

contract

during

the

accumulating

t [h
was
and

subject of extensive increased
cost

[

181

Case 1:00-cv-00129-FMA
99-I B.C.A.

Document 87-2
(CCH)

Filed 07/01/2005
71, *

Page 7 of 11
Page 6

,390

1999

ASBCA LEXIS

p
during
the price

the

contractor estimating

adopted

practices

that

reduced

his

cost

allocations

below

the

allocation

determined

the

.[h
concerning
is

added]

The

Board's requirements agreed about
to
at

fixed

priced
price

contracts that

constitute

a

recognition agreed
to

of
if the cost

the

fact

that

the

outset

higher change.

than This

the

would

have

been

Government
paid

had

known

the

accounting

constitutes

a constructive

increase

in the

by

the

United

States
.

30.

Mr.

Shapiro

also

relied

Working
fixed price

Group which
contracts
(tr.

provided

upon two working group opinions published by the DOD's of the Government's interpretation remedy One
such
interpretation 76-1:

DOD
for

Cost

Accounting

Standards under firm

CAS

noncompliance

3/203-05). Procurement

was provided

under

Defense

Procurement

Circular 75-6,

reissued

under

Defense

Circular

Increased

Costs

Paid

Under

CAS-Covered

Contracts

There

are

two

major

aspects

of"increased

costs

paid"

as

interpreted

under

the

CAS

clause..,

by the

CASB A

regulations

(a)

contractor

as

the

result 19]
is

of a paid

failure

to

follow

his

disclosed than

or established

accounting
at the

practices

used

during
contract

negotiations

more during

performance

was contemplated

time

the

was

negotiated.

Example: a
result

a

CPFF

plus
If to
all

fixed or

fee]

CAS
of

contract this

has $ 500,000
is

additional

costs

allocated

to

it

as

of

a

noncompliance. increased
cost

any

part

$500,000

paid

by

the

Government,
interest.

such

payment

constitutes

an

the

Government

and

must be recovered

with

(b)

T

contractor

allocates

less

cost

to

a

fixed-price practice

[h
prepared

than

would

have

been of

allocated the contract

to

the

contract

by

use of the established

or disclosed

on which

the

negotiation

was

based.

Example:
cost

A

FFP

fixed and
either

price]

proposal Cost

is

in

accordance

accounting

practices

applicable

Accounting
his

Standards.
practices results

D
or

with

the

contractor's

contract not

,[h
with being be requested
failed negotiations,

disclosed the

contractor applicable
to the

noncomplies Cost

Accounting than
[h

contract the the

p[
and and an

by

not following

Standards.

T

disclosed

by

complying
less costs

noncompliance had been
the

practices

.[h
the

in $

.000
the

allocated to to

The contractor
if

should

correct correct

noncompliance noncompliance
is

properly the

allocate

costs.

However,
firm
fixed

contractor
to as

Government
profit profit

paid

price this

agreed

during
result

then

the contractor

making

additional additional

of$
is

500,000

on
costs"

contract
the

a

of

the

noncompliance. recovered with

The $ 500,000
interest.

"increased

paid by

Government

and

must be

(App.

2nd

R4

supp.,

tab

211

at

8

tab

212

at

6087

(emphasis
as

added))

31.

DOD

Working

Group Item 76-4 provided
Increased
I,

follows

(app.

2nd

R4

supp.,

tab 209): Interim Guidance,

Determining

W.G.

76-4, October

1

Costs

to

the

Government

for

CAS

Covered

FFP Contracts

Background
Paragraph
costs" practices

4

CFR

33

1.70(b)

of

the

CAS
as

Rules
related

and
to

Regulations

discusses
i.e.,

the

concept
to

of"increased disclosed

on

firm
or

fixed-price

(FFP)

contracts

noncompliances,

failure

follow

cost

accounting on an

standards.

DoD
resulted practices
in

guidance 30] gave
less

"Increased

Costs

Paid

Under

CAS-Covered
contracts

Contracts"

contained

in

DPC

75-6
that

example
being

of increased
to the

costs

on FFP
contract

where
have

there

was
had

a

noncompliance

costs

allocated

FFP

than

would

been

the appropriate

been

followed.

Case 1:00-cv-00129-FMA
99-1 B.C.A.

Document 87-2
I[Q)[ P30,390
1999

Filed 07/01/2005
ASBCA LEXIS
71,
*

Page 8 of 11
Page 7

Discussion

1
other than
price

In

cases
the

noncompliance of
a

the

opinion
is

has been
increased.

expressed

that

no

increased cannot

costs

can

occur

unless
the

contract
as

FFP contract

actually

This concept
it

adequately under
less

protect

Government

was contemplated
or

by PL 9 1-379, because
adjust

provides so

a
as

situation to

which
costs to

a be

contractor
allocated

may
to

overtly

inadvertently

accounting

procedures
a windfall.

cause

FFP

contracts.

The contractor
in
all

may

thus receive

To
necessary

protect to

the

Government
the

situations that

where FFP when
33

contracts

are

involved
are

it

is

therefore due
to
is

recognize

phenomenon

occurs
in

cost

allocations

decreased of
this

accounting
the that

changes.

The

CAS

Board did so

4

CFR

1.70(b).

A

basic to

premise
the

paragraph
It is

that

amount of such
this

decrease extended

represents the
to

amount of
cases

increased

costs

Government.'

logical

when

I
Guidance
the costs

premise

be

apply

to

all

involving

FFP

contracts.

costs

to

the to

Government
the contracts

under
are

firm
less

fixed

price

contracts

should
allocated

be
[h

considered
the

to

exist

allocated

allocation

had

not been

.[h
Mr. than
if

than

would

have

been

method of

added]
testified the that

32. price

Based

upon
for

the

above,

Shapiro

the

Government
noncompliance

is

entitled

to

an

adjustment

under

its

fixed

contracts to the fixed

CAS

noncompliance

when

contractor's practices

during

contract
the

performance of be

allocates this to case,

k
also

g
's[h
sought
stated fixed
1.

price

contract

appropriate
in

had

been

followed.
rates,

Under
the effect

circumstances

purported

noncompliance

resulted

overstated
fixed price

actual

overhead
(tr.

of

which
to

would
Shapiro,

allocate

[h
to

to

contemporaneously

performed clause and

contracts

3/205). no
the

According under

Mr.

the

harm He

be
if

remedied

by

the

CAS
exists

regulations

simply data on

had

application

these
to

circumstances.
its

Government's

C

D
that

a contractor

supplies

inaccurate defective

overhead
pricing

which
(the

Government
in

relies

detriment
protect the

to

negotiate

priced

contracts, interests

there

legislation

Truth

Negotiations

Act)

to

(tr.

3/207).

The Government

did not

assert

a defective

pricing claim

here.

There

appears

to

be

no dispute
certain costs,

that cost

under accounts had

a

number of
in

its

CAS-covered
its

prime bases

contracts
for the

between

1
of
calculation

and

1989

ACA
overhead,
costs

did not gather

determining

allocation

allocation

material

G&A
IR&D

and

IR&D
and did

which

the

effect

of materially decreasing
Clearly, the cost input

the bases base

upon
for

which these overhead
the

were measured,
and
rates

increasing

these
the

overhead
"total

rates.

used

of the

G&A

not represent

activity
in

of

the

business

unit"
it

as

required of

by
the

CAS

410,420.
in

ACA
1990
it

did

not dispute (finding already
7).

DCAA's
in fact, the

finding of

CAS
in

noncompliance

this there

respect when

was advised

omissions
limited, that the

ACA

admitted

March
per

1992

that

was

CAS
this

noncompliance,

made

corrections

required under
as the also

FAR

-2(c[Q)
I
view

(finding

1 We

albeit

and

that

had has

are

persuaded need

Government
whether

shown
changed

CAS
its

noncompliance accounting

circumstances. contended

of

conclusion

we

not address

ACA

practices

by the Government.

I
or

A
its

as

Under

the

CAS

clause
fails to

the

contractor with

agrees

to

an

adjustment accounting

of

the

contract

price

or

contract

cost

if

the contractor a recovery

subcontractor

comply
period

applicable

cost

standards.

The
for the

Government Government
to as

seeks

from

ACA I

for

the relevant
also

of time

when work
that

ACA
as

performed

work

directly

a prime

contractor, a party.

and

when
the

ACA
for

performed argues

a subcontractor the

under

agreements
the

which

the

Government
contractor did

was not
and not have

essence,
directly

Government
any

under

CDA
its

it

may

bypass

Government
though the

prime

hold
privity

ACA

liable

CAS

noncompliance
subcontracts.

under

subcontracts

even

Government

of contract

with

ACA

under

these

The
U.S.C.
§

CDA
605.

makes

clear

that
is

the the

claims
entity here,

subject that the

to

the Act
into rule
is

are

those contract

between with
the

the

Government

and
i.e.,

the

contractor.

41

The contractor

entered general

the that

Government,
jurisdiction filed

the the

prime

contractor.

With

minor exceptions
claims
v.

not relevant
filed directly

we do

not have

under

CDA

over

subcontractor See United

against the
frols,

Government
F.2d 1541

or

Government
Cir.

claims

directly

against

a subcontractor.

States

Johnson Con

Inc.,

713

(Fed.

1983)

General

Dynamics

Corporation,

ASBCA

Case 1:00-cv-00129-FMA
99-1 B.C.A.

Document 87-2
(CCH) P30,390
1999

Filed 07/01/2005
ASBCA LEXIS
71,
*

Page 9 of 11
Page
8

No. 49339,

97-2

BCA
claim

,[h
BCA
expert

P29,167

at

145,031. No. 31148,

Inertial

Division,

ASBCA
all

87-3

We have BCA P

also

adhered

to

this

rule

in the

CAS
over

context. the

See

Systron

20,066

(Board
contracts also that

had

jurisdiction

Government's
to

CAS
the

noncompliance determination

under

of

appellant's

CAS-covered
its

prime See suggests

but appellant Corporation,
is

had

no

right

appeal

of

CAS

noncompliance
the

under clause
for

subcontracts).

Aydin

ASBCA
Mateer
also

No. 50301,97-2
for the

P 29,260.

Moreover, of
a

CAS

itself

strongly
contract

the contractor
(finding 27).

responsible

noncompliance testimony from

subcontractor
this effect settled

purposes
24).

of

adjustments
fails to cite

Mr.

gave
that

persuasive

to

(finding rule.

The Government

to

any persuasive

authority

id[h

warrant

departure

this

well

We
under
the

conclude

that

in
is

these
to

circumstances, say
that a

the

Government

may

not

file

a

CDA.

That

not

CAS
cost

covered

subcontractor contractor
to the

may
under

violate the

CAS claim directly against a subcontractor CAS with impunity. Rather, the
contract covered
in issue,

Governments
adjust
its

remedy
prime

is

against

the price

relevant or

CAS
as

prime

and

the

Government
has
failed to

may
meet

the

contract

appropriate

extent

a

CAS

subcontractor

CAS

obligations.

I
here.

A
There

as

is

no
its

dispute
flexibly
in

that

once

the

Government
to reflect fixed

discovered
the price

the

relevant actual

cost

account
rates. the

omissions, These

ACA adjusted
are

its

billings

under

priced here

contracts are the

corrected
contracts

overhead

contracts

not
the

at

issue

The

contracts period.

issue

firm

between

ACA and

Government

during

relevant

time

The Government
the

is

bound

by

the

regulations

and

implementing
the

contract

clauses

which was

provide

the

parameters
in all

of

contract covered

price

adjustment.

Under

FAR
n3
the

52.230-3, contractor such

standard
to a

CAS

clause
price

which

incorporated
if the

the or
its

relevant

CAS

fixed-price
is

contracts,

agrees

contract
in

adjustment
costs

contractor

CAS

covered

subcontractor

noncompliant

and

failure

results

any increased

paid

by the United

States."

n3
rests. that
it

The

Government

failed

to

introduce

into

evidence

any of
to

the

dozens

of

contracts

upon
it

which
does

its

claim

While
entered

ACA
into to

disputes a

the

applicability

of

CAS
prime

coverage
contracts the

a

number of these
the

contracts,

not dispute
23),

number of CAS-covered
that said contracts

during standard

relevant clause

time
in the

period

(finding

and

does

not appear
for the

dispute

contained

CAS

FAR.

We

shall

so

presume

purposes

of

this

opinion.

The

nature of these

increased

costs

under

a

contractor's that

fixed-price

contract
costs are

is

spelled

out

in

FAR

30.306(b),
fails "is to to

Interpretations.

This contract
cost

provision

provides standard
price the

these

increased

incurred and
that

where the contractor
the

follow

the

applicable

accounting
the

"during
to

contract

performance" contract
price

cost

differential

measured
the

by the difference
contractor

between
in

contract with

agreed
cost

and

the

that

would

have

been

agreed

had

proposed

into

CAS Preamble M the CAS standards,
M,
Para. "that to this 2

f
rules
it

accordance

accounting of
this

practices

used

during look

contract

performance."
to

explains and
the

the

nature

adjustment. Martin

We may
Corp., had

to

the

preamble 1134, 1139

provide
Cir.

insight 1995).

regulations.

Perry

v.

Marietta

47 F.3d

(Fed.

Preamble performance According negotiation

explains
his

need

for

a

remedy when below
been
relied the the

the contractor
allocation

adopted during of

practices the

during

contract process."

reduced

cost the

allocations

determined
this

estimating
allocation

reasoning,
to

had

Government would
have

aware

of
the

new

method
cost

cost

at the

time of
contract as

price price. a

prior

award,

upon

reduced from

allocation

to

obtain

a

better

Accordingly,
result

a

contract

price

adjustment during did

precludes contract

contractor

obtaining

any

contract

price

advantage

of

any

CAS

noncompliance
actions or inactions If 32).

performance.
cost allocations

Here,

's[h
contracts

not reduce

during
cost

the

performance
to

of any

of

its

fixed

priced performed

CAS-covered
fixed price the

prime

contracts. (finding

anything.

ACA's

omissions
is

increased
to

allocations

contemporaneously these contracts
in

The Government
and
regulations.

not

entitled

an

adjustment

under

accordance

with

relevant

CAS

contract

clause

D's
(findings 30,

long standing
31).

interpretation
is

of these
at

provisions
that

is

also

consistent the

with

the

conclusion
in this appeal.

we

have

reached

This

interpretation

odds

with

offered

by

Government

Case 1:00-cv-00129-FMA
99-1 B.C.A.

Document 87-2
(CCH) P30,390
1999

Filed 07/01/2005
ASBCA LEXIS
71,
*

Page 10 of 11
Page 9

In

view

of

all

the

foregoing, firm

we

conclude
price

that

the

Government
within the

has not established

it

is

entitled

to

a contract

price

adjustment
regulations.

under

ACAs

fixed

prime

contracts

meaning

of the

CAS

clause

and

related

CAS

The appeal

is

sustained

as

to

's[h

prime

contracts.

It

is

dismissed

as

to

's[h

subcontracts.

n4

n4 and
the

The

Government
fixed

also price

argues

that

it

relied

on
a

defectively of
action

calculated sounding

overhead
in

rates

when
pricing

it

negotiated of

awarded ACA's
Truth
here. in

contracts. that

This

is

cause

defective decision

in violation

Negotiations

Act

was not
to

asserted

by

the contracting a claim and

officers pass no

in the

Government's
merits.

claim

We

are

without

jurisdiction

consider

such

judgment
Division,

on

its

See 83-2

International

Telephone

&

Telegraph

Corporation/ElectroOptical

Products

ASBCA

No. 27802,

BCA

p 16,773.

Dated:

18

May

1999

JACK Armed

DELMAN
Judge Services

Administrative

Board

of Contract

I

c

Appeals

ALAN
Acting

M.

SPECTOR
Judge

Administrative

Chairman
Services

Armed

Board

of Contract

I

c

Appeals

MARK
Vice

N.

STEMPLER
Judge

Administrative

Chairman
Services

Armed

Board

of Contract

Appeals

APPENDIX
Government

Insofar

as

pertinent,

the

cost

accounting

standards

relied

upon

by

the

provide

as

follows:

401-40

Fundamental

requirement.

(a)

A

contractor's practices

practices

used
in

in

estimating and

costs

in pricing costs.

a

proposal

shall

be

consistent

with

his

cost

accounting

used

accumulating

reporting

4 10-40

Fundamental

requirement.

)[Q
cost

The

G&A
of

expense
that cost

pool of a business accounting

unit

for

a

cost

accounting
a

period base

shall

be

allocated

to total

final activity

objectives

period by means
omitted].

of

cost

input

representing

the

of the business

unit

exception

410-50

Techniques

for

application.

Case 1:00-cv-00129-FMA
99-1 B.C.A.

Document 87-2
(CCH)

Filed 07/01/2005
ASBCA LEXIS
71, *

Page 11 of 11
Page 10

,390

1999

(d) that

The
cost

cost input

input

base

used

to

allocate the total

the

G&A

expense
the

pool

shall unit.

include

all

significant

elements

of

which

represent

activity

of

business

***
Cost include
are

1[

input

shall

those not

expenses of
a

which

by operation
pool of

of

this

Standard and

are

excluded expenses

from

the

G&A
using

expense
the

pool and
allocation

part

combined

G&A

expenses

other

allocated

same

base.

418-40

Fundamental

Requirement.

(c)

Pooled

costs

shall

be

allocated costs to

to

cost

objectives

in

reasonable

proportion

to

the

beneficial

or causal

relationship

of the pooled

cost

objectives

418-50

Techniques

for

application.

(a)

Determination
* * *

of

direct

cost

and

indirect

cost

I)
(2)

...

In

accounting omitted]

for

direct

costs

a business

unit

shall

use

actual

costs

except

that

-

condition

420-50

Techniques

for

application.

(Q

The

cost as

of

I
and
to allocate

and

B&P

projects

accumulated

at a

business

unit

shall

be

allocated

to

cost

objectives

follows:

(1)

(2) shall

R
unit

applicable]

B&P
all

cost final
its

[Q1[
costs

which
objectives

are

not of

allocated

under
unit

subparagraph

(00)
the

of

this

subsection, used

be

allocated to

the

business

by means
in

of

same base

by
.

the

business

general

and

administrative

expenses

accordance

with

410-50]