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Case 1:00-cv-00129-FMA

Document 86-2

Filed 06/23/2005

Page 1 of 15

Exhibit

1

Case 1:00-cv-00129-FMA

Document 86-2

Filed 06/23/2005
FILED

Page 2 of 15
ON JUNE _,
2005

ELECTRONICALLY

IN

THE

UNITED

STATES COURT OF FEDERAL CLAIMS

LOCKHEED MARTIN CORPORATION,
Plaintiff,

)

)

)

)

v.

)

No.

129C
Allegra)

)

(Judge

UNITED

STATES OF AMERICA,
)

Defendant.

)

PLAINTIFF'S

A
In

[h
and

[h
MEMORANDUM (b)[h
the are

IDENTIFYING

[h

AND SUMMARIZING LANGUAGE [h [h
No. 49691, 1999

[U)
ASBCA
LEXIS
71,

Astronautics

Corporation

erica

ASBCA

the

Armed

Services

Board of Contract

Appeals ("ASBCA")

interpreted

FAR (b).[h
changed
"his"

CAS

Reg.

03.
first

FAR

identical,

except

the

GAS

Reg.

to

"its"

in the

sentence.

A

copy of

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

GAS

and

the

contractor's

GAS

disclosure

statement.

1999

ASBCA

LEXTS

71,

*2..3.

During

performance

the

contractor

changed

its

allocation

methodology

to

one

that

failed

to

comply

with

GAS, and

the

noncompliance

resulted

in

allocations

of greater

cost to

fixed price

and cost type

contracts.

I

at

*35

The

contractor

agreed

to

an adjustment

of

its

cost

type contracts,

and

the

Government

sought

an

adjustment

under



(b)[


to

the

contractor's

fixed

price

contracts.

I
are

at

lo.
in the

The

reason

for

creating

([Qb

and

its

administrative

interpretations

outlined

decision.

I
to

at

*

17-22.

The

Board looked

to

DOD

Working

Group

Item

76-4

which,

in turn,

looked

DOD

guidance

on "Increased

Costs

Paid Under

GAS-Covered

Contracts."

I

at

*2o

22.

Working

Group

Item

76-4

provided:

Case 1:00-cv-00129-FMA

Document 86-2

Filed 06/23/2005

Page 3 of 15

should

I
Guidance
be contracts
allocation

costs

to

the

Government
to exist

considered
are less

than would

had not been

.
the
that the this

under

firm fixed

price

contracts

when

the costs

allocated to the
[h

have been allocated

the

method

of

I

at

.22[Q

The

Board

also

looked

to

CAS
stated:

Preamble accompanying

the

original

promulgation

of the



306(b)

language

Preamble M,
contractor reduced
the

Para.

2 explains
practices

need
during
the to

for

a remedy

when

the 'that

has

adopted

contract
allocation this

performance determined

his

cost allocations
process.'

below According

during

estimating

reasoning, of cost
it

had

the
at

Government
the

been aware of
negotiation
cost

new method
to

allocation

time
the

of price reduced
a

prior

upon

allocation

Accordingly,

contract

price

adjustment

from obtaining noncompliance

any contract
during

price

contract

,
award,
to

would have
contract
the

relied price.

obtain

a better

precludes
as

contractor of any

advantage

a result

CAS

.[h

at

*2728

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,

Clarence

T.

Kipps,

Jr.,

Esq. Chartered

MILLER
655 15th

& CHEVALIER
Street,

NW.,

Suite 900

Washington,
Tel:

D.C.

20005

(202) 626-5800 (202) 628-0858

Fax:

Attorney

of Record Martin Corporation

Lockheed

2

Case 1:00-cv-00129-FMA

Document 86-2

Filed 06/23/2005

Page 4 of 15

O

:
Styles,

Angela B.

Esq. Esq. Chartered

Kimberly R.

Heifetz,

MILLER & CHEVALIER
655
15th Street,

.,[

Suite

900

Washington,
Tel:

D.C.

20005

(202) 626-5800 (202) 628-0858

Fax:

David M. Christenson,

Esq.

LOCKHEED MARTIN CORPORATION
6801 Rockledge
Bethesda,
Tel:

Drive

Maryland

208 17

(301) (301)

897-6127 897-6333

Fax:

Dated:

June_, 2005

3

Case 1:00-cv-00129-FMA

Document 86-2

Filed 06/23/2005

Page 5 of 15

Exhibit

A

Case 1:00-cv-00129-FMA

Document 86-2

Filed 06/23/2005

Page 6 of 15

LEXSEE

1999

ASBCA

LEXIS

71

Appeal

--[ Astronautics

Corporation

of

America

ASBCA
Armed
Services

No.

49691

Board of Contract

Appeals

99-I

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

.[ SPECTOR
concur.

Administrative

Judge,

Acting

Chairman,

MARK

STEMPLER,

Administrative

Chairman,

COUNSEL: APPEARANCE APPEARANCES
Esq., Trial

FOR FOR

THE APPELLANT:

Stephen

D.

Knight,

Esq.,

Kirkland

&

Ellis,

Washington,

.
Steven Gruenwald,

THE GOVERNMENT:
Contract

Kelly

T.

McCracken,

Ill,

,[h

Chief

Trial

Attorney,

Attorney,

Defense

Management,

Command,

Chicago

(DLA).

OPINIONBY: OPINION:

O [h
[h
Government comply
under on 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

its

purported have claim
is

certain

accounting Act

under U.S.C.

CAS


covered 601-613,
the

subcontracts.

We

jurisdiction

Contract and

Disputes

,[h

41

amended.
nI

The Government's

before

us

entitlement

quantum.

For reasons

stated

we

sustain

appeal.

nI appeal,

On

the

eve

of

trial,

both denied

parties as

filed

summary

judgment

motions.

In

view

of our

disposition

of

the

F B
these

motions

are

moot.

OF

I.

1.

During
a

the

years

performed covered

number of
contracts

-cov
included

1986-1989

ACA

performed

a
for

number of CAS-covered
prime type
contractors

prime contracted
price

contracts

for

DOD

agencies,
Its

and

subcontracts

who
and
fixed

with

DOD

agencies.

CAS

prime
In

cost-reimbursement

contracts

contracts.

2.

accordance

with

CAS
its

requirements, accounting provided -[h

ACA
practices that

had

submitted,
for

and

the

Government
contracts

had
(app.

approved

ACA's
R4, over
tab a

disclosure 234).

statement Item
direct 4.1.0

which
of
the

disclosed
disclosure

cost

purposes
material

of these handling
at
9).

2nd

supp.

statement
L, see Part

's[h

overhead
4.2.0

was

allocated that

base

of

material

cost

(code

Indirect

Cost,

Instructions

Item

provided

ACA's

General

&

Case 1:00-cv-00129-FMA
99-1

Document 86-2
(CCH) P30,390
1999

Filed 06/23/2005
ASBCA LEXTS
* 71,

Page 7 of 15
Page 2

,A.[

Administrative and

(G&A)

cost

was
cost

allocated

over
allocated

a

base over

of
a

cost

input

(code
input

C,

Development

(IR&D)
those

was
in the

also

base
base.

of

cost

(
at its

I

9,

10). cost

ACA's
input

Independent
base,

Research

The

being

more

inclusive,

3.

In

1

included

costs

direct

material

cost

DCAA
reports costs

initiated

an

incurred-cost of
costs

audit

of

ACA
the

for

fiscal

years

1985-1989.

Based
that

upon

a review omitted

of

certain certain

overhead material

and

schedules
direct

incurred
that

costs,

and

other

should and

have

determination
indirect costs.

of material Since
costs

handling

overhead, from been.

G&A
these

were omitted
have

I
the

Government's
in the

auditor above
to

discovered

ACA

had

been

referenced disclosed
rates

allocation

bases
allocating these

for the

pursuant

method

of

these

bases,

actual

overhead

calculated

from

bases

were

materially higher
4. as

than

they should
audit

DCAA
401,

issued an

report

on had

or about acted

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

inconsistently

disclosure

statement

was

noncompliance an

with
this

CAS

pertinent

portions

of these

accounting

standards

provided

Appendix

to

opinion.

material

"potential $

1
5.

The

audit

report

also

stated

overhead,

G&A
the

and

I
and 1990
that

that

ACA's
on
the

noncompliance
all

resulted

in

excessive

charges
for fiscal

and years

over-recovery 1985-1989.
to

of

costs risk,"

ACA

contracts

and

subcontracts
to

Based
as

upon
as

government
for

exposure

auditor

estimated

impact

Government

contracts

be

much

years
7

in question.

6.

By

letter

dated

May
by

(R4,
the

tab

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

"Astro

wholly-owned subsidiary
a

ACA

in Israel
all

performed

work
the to

related

ACA's

subcontract

Hughes
to

Aircraft a

under portion

DoD
the

contract.

Instead
its

of performing
in Israel,

work

under

subcontract,

ACA
meeting

had
its

agreed

transfer offset

of

work

to

subsidiary

at

Hughes'

request,

assist

Hughes
7.

in

commercial

requirements construed,
that
it

in Israel.

ACA's

letter

of 7
the

May, reasonably

did not dispute corrected
the cost

that

these
rates

omissions
for future

constituted application, in question, contracts.

CAS
and

noncompliance. providing incurred
the costs

In

letter

ACA
the

stated cost

had

overhead
contracts

was
its

Government
to

with
for the

impact

under

ACA's was

for the firm

period
price

revising

account 22

error.

ACA

stated

there stated

no
that

impact
it

on

fixed the

By
with

letter

to

the cost

Government
impacts and

dated
that

January matter

1991, has been

ACA,

again

had

provided

Government

the

relevant

"this

corrected"

(R4,

tab

2).

8.

The

Government

was

not

satisfied

with

ACA's

response.
to

The
a
tab

DCAA
cost 4)

recommended,
statement did
so, to

inter

il
all

that

the

Administrative
contracts

Contracting
subcontracts,

Officer including

(ACO)
fixed

direct price

ACA
contracts.

submit (R4, 1991

impact

include
letter

CAS
8

covered 1991 of

and
7).

The
tab

ACO
of
cost

by

dated
dispute price

October
the issue

(R4,

tab

By

reply

to

the

Government
it

dated
its

4

December

(R4,
the

9),

ACA,

again,

did
to

not

CAS

noncompliance.
9.

However

reiterated

position

regarding

lack

impact

fixed

contracts.

By

letter

to

ACA
420.

dated Insofar bases Per agree

30
as

January
pertinent,

1992,
the

the

Government
stated

issued an
that

initial

finding of noncompliance
failure to
all

under

CAS
in

401,
the

410,

418

and

Government

's[h

include

the

questioned and

costs

appropriate

allocation clauses.

resulted

in

overstated

overhead

rates

which

affected

ACA
the

contracts

subcontracts

containing 30 days

CAS

FAR

30.602-2

'Noncompliance
with
the

with

CAS

requirements,"
initial

Government

allowed

ACA

within

which
as

to

or disagree 30.602-2

Government's

findings.

1
and required

Insofar to

pertinent, the

FAR

provided and submit
If the

that the

if

a contractor of
the

agreed

with

the

Government's on
its

initial

finding
contracts

it

was required

correct

noncompliance

impact

noncompliance with
the
initial

CAS-covered
the

subcontracts.
to

FAR
the

30.602-2(c)(1),
contractor's as follows:

(c)(3).

contractor a
final

disagreed

finding,

Government

was

.60
impact

review

position

and

make

determination

of compliance

or noncompliance.

FAR

provides

30.602-2

Noncompliance

with

CAS

requirements

(2)

If the

ACO
the

makes

a determination with and
the

of noncompliance, of
the auditor,

or

if

the

contractor
the

fails

to

furnish

the the

cost

proposal,

ACO,

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 B.C.A.

Document 86-2
(CCH) P30,390
1999

Filed 06/23/2005
ASBCA LEX1S
71,
*

Page 8 of 15
Page
3

amount not
covered by
the

to

exceed
contracts,

10

percent

of each contain

subsequent
the

payment

request,

related the

to

the

contractor's

CAS
furnished

prime
contractor.

which

appropriate

provisions,

until

proposal

has been

1. 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

ACA

had

made

corrections
action,

cost-reimbursement
that

contracts

correct

accordance
limited to

FAR

(l).[h By

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

fixed to

price

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
in

26

June

1992,

the

Government

issued

its

final

determination
stated

of noncompliance
that "the

with
in

CAS
your

401,

410,

418,

420,

accordance
establishes that

with
that

FAR
the

30.602-2(d).

The Government
in

data
that

provided overheads
inter al/a,

March]
and

response support submit
a the

clearly

costs

were not included
occurred."
all

the

appropriate

base,

were

overstated, that

determination cost impact July 1992,
to
its

CAS

noncompliances on

The Government
contracts

requested,
subcontracts.

ACA
By
letter

of

the

noncompliance

CAS

covered

and

14. the lack

dated material
its

31

ACA
fixed

provided
price

its

written for

rebuttal

to

the

Government's
stated.

findings.

Again,
that tab

it

asserted

of any
satisfied

impact

contracts the

reasons

previously

ACA
as

maintained follows (R4,

it

had

already

CAS

responsibilities

under

circumstances,

stating

in pertinent

part

23):

11.

Therefore,

Astronautics

has:

a.

Corrected

the

noncompliance

when

it

revised

the

overhead

calculation

in

May

1990.

b.

Implemented
the

a corrective

action reconciliation

plan

when
the

it

modified

the

overhead

rate rate

calculation calculation

program
to the

and

implemented
the

annual

of

amounts on the overhead

amounts on

audited

statements.

c.

Prepared

and

submitted

a

cost

impact
their
its

statement.

15.

The
at the

parties

continued
request, fiscal

to

argue

positions

at

meetings of
cost

and impact

through based

written

exchanges.

In

January

1993
contracts

DCAA,
and

ACO's
for

provided

own

estimate

on

all

of

ACA's
rates

CAS
by

covered
the

subcontracts
that

years from

1985-1990.
the did

The

DCAA
bases,

auditor

recalculated difference and applied years
the

overhead

including
rates

amounts ACA's
on
cost

had
rates

been

excluded
it

allocation

took

the

between
the

these

recalculated to

and

budgeted
all

which

assumed

not contain and (R4,

these

amounts,
for

difference through
citation

ACA's
to

incurred an

costs

CAS-covered
in the

Government

contracts

subcontracts

fiscal

1985

1990
to

obtain

estimated which
price

impact provided agreed

amount
that

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

tab

26) Notwithstanding
shall

auditor's

FAR

30.306(b),
the the contract auditor relied

in part to

noncompliance
that that

be

"measured agreed within
that to" the

by

the

difference the

between

and

the

contract any

would
or

have

been
price

absent period

noncompliance, review, her but

did not on
the the

separately incurred

analyze of

particular

contract period. 2/10).

contract auditor

under up

rather

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 were

study

in

January,
affected

1994. by

ACA's
the

position,

however,

remained
tab 35).

same
17.

the

Government's

priced
to

contracts

not adversely

matters

in issue

,[h

The
to

parties

continued
letter to

meet dated

over
8

the

next 1996,
the

several the

years

in

an

attempt

to

resolve

their

differences.

They
a

were

unable

do

so.

By
in the

ACA

March
per

ACO

issued a contracting above, plus

officer's interest

decision, in the

seeking

recovery 6,786,325

from
for

ACA
a
total

amount of$
13,260,912

6,474,587,
tab 76).

DCAA's

calculations

amount

of$

ofS

,[h

This appeal

followed.

11.

T

Evidence

at

Trial

The Government's

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

Document 86-2
(CCH) P30,390
1999

Filed 06/23/2005
ASBCA LEXIS
* 7!,

Page 9 of 15
Page 4

18.

The Government

called

three witnesses
the rates

and

none

were

offered
the

as

expert witnesses.
costs. contracts
its

The

Government
testified that the

called

the

DCAA auditor who that ACAs budgeted
overhead not
audit

performed overhead no

1989 used

audit for

which
its

uncovered under
in

excluded
price

The

auditor

he

assumed

proposals

fixed

were

impacted
rates
(tr.

by

inaccurate

data

he

had

personal
pricing

knowledge

of

how ACA,
He
had no overhead
these

fact,

prepared

budgeted
as to

1/102-03).

He
these the

did

ACA's
and

forward

rate

proposals.

personal data
to

knowledge
develop
to

how ACA
view

developed
relied

proposals
reports

whether

ACA

relied

upon
did

inaccurate
1*11]

these his

proposals.
that

He

on

audit

of other and

DCAA
historical

auditors rates

who
to

audit

proposals
rates
(tr.

support
10-1
1).

DCAA
did

information

review

ACA's

overhead

1/1

These

auditors

&.
used
cost

historical

19.

The Government
negotiated overhead
fixed rates

also price

called contracts

the

DCAA
and priced

auditor

who The
were

developed
auditor's

the

Governments

estimated on
the

impact
that

under

ACA's ACA's
2/10).

subcontracts. contracts to

estimate proceeded she

assumption of
the prices or

on

its

firm

fixed

overstated any such

made

no

separate impacted
as a

review
contract

matter with

(tr.

Nor did she make
Instead, (finding

any

analysis

of

the

extent incurred

which

overstatements incurred

the

Government.
subcontractor

she

relied

on

ACA's

costs

per

year,

whether

prime

contractor

15).

20. officer's

The Government
decision.

also

called the

the

ACO
agreed

who
with

issued

the

final analysis

determination and accepted
costs price

of noncompliance

and

the

contracting

I

essence,
there

ACO
a

DCAA's

DCAA's
the

recommendations.
material 12]

The
of by
its

ACO
budget,

also

assumed
that
(tr.

that

was

relationship

between overhead not

ACA's
rates

historical for
its

and

direct

portion
affected

and
costs

ACA's
1/147,

budgeted
148, 157,

and

proposed

fixed

contracts

A
omitted
the final 21.

[

were
at the

the

.[h He was
(tr.

familiar

with

ACA's

budgeting

methodology

time he

issued

notice

of noncompliance

1/142).

ACA
issue,

called

four
lines

fact

witnesses

and

two

expert

witnesses.

ACA's ACA's
vice

president president

testified

generally

about

the detail

corporate
the find latter that

product

and

how

budgeting
reports

was accomplished.
schedules
into to

of finance
process. In

provided
short,

more

on

using corporate budgeting product

and

describe
all

ACA's

budgeting and

he
the

testified,

and

we

's[h

methodology
line,

took

account

material
cost sales

costs, as

was not

affected

by

subject

exclusions.

For each This

ACA
be and

determined applied
to

material forecasted judgments

of
to

sales

a percentage
forecasted

of

sales

based

information. adjusted used
to
in

percentage of inventory

would
levels

view

business

develop
(finding auditors

ACA's
3)

overhead not used

rates in the

(tr.

/[
to

reports

were

above

process
pricing

1
1*13] these excluded

obtain up

material
total

cost,

upon historical which figure was
cost that the to

to

come

with

projected
rates as

material

would

be

The inaccurate
2/201).

found

by

DCAA
call

on

overhead
the auditors

(tr.

ACA's

methodology
failed to

was explained
any of

DCAA
as

who

audited

ACA's

forward

rate

proposals.

The Government

these

witnesses.

22.

ACA's

accounting 1986,

around
the cost the

November
incurred
intent to

manager generally reaffirmed ACA's budget ACA's vice president for finance directed him
subsidiary separate
that the related the

process. to

He

also

testified, direct

and

we

find

that

in or

remove

certain

cost

gathers,

including

by

its

Israeli define, result

ACA-Hughes
costs. for

Aircraft

subcontract,

from process
until the

overhead did not

computations place
in

with

better the

and
costs

reclassi remained

This a

reclassification years,

take

a

timely

fashion,

with
the

number of

DCAA

discovered

the

omissions

during

1989

audit.

23.

Appellants
to

manager of
its

contracts cost

analyzed impact.

the

ACA
of

fixed his

price

work
he

authorizations

that

were

used

by

the to

Government
their

compute
prime

claimed and

As

part

analysis,

correlated contracts

work

authorization were

numbers exempt
that

respective and

contracts prices

subcontracts. definitized

He

eliminated outside

subcontracts, the relevant

he believed

from
a

CAS,
small of any

contracts

whose

were
relied

f* 14]

time

period.

He

concluded and

only be

subset

of those

contracts for cost

upon

by

the

Government
C).

were

CAS-covered

prime

contracts

could

subject

consideration

impact

cx

A-8,

Table Mr.

24.

Appellant Group,
(tr.

called Deloitte

two expert witnesses.

Rodney
as

Mateer, expert
in

National

Partner,

Government
estimating
issues

Contracting systems and
to the this cost also

Consultant

&

Touche, Mr.

was

qualified

an
his

CAS

compliance,

CAS
appeal.

administration

3/135-36,
his

195). that

Mateer

offered

expert opinion purchase
its

on

a

number of
in

relevant

We

find

persuasive above,

opinion

ACA's
cost

practice

of estimating standards
the

materials

1985-90,
(tr.

using

of
find

sales

methodology
persuasive

complied
that a

with prime

accounting has

and

disclosure
the

statement
violations

3/136).
its

We

/1

his

opinion

contractor

responsibility

for

CAS

of

subcontractors

(tr.

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

Document 86-2
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ASBCA
LEXIS
*

Page 10 of 15
Page
5

,390

1999

71,

25.

Mr.
cost

Nelson

Shapiro,
cost

CPA,

was

qualified

as

an expert and
as cost part as

in

accounting

with

particular

expertise
(tr.

contract Mr.

accounting,

accounting
the

standards

accounting of a
the
staff,

standards and
later

administration

Shapiro

was employed
In his

by

CAS

Board Touche
on
a

1
Ross

11
in

Government
In

1971, and Mr.

was promoted
in

to
is

project

director

executive Shapiro
that

secretary. also the

1980

he joined opinion based

&

Co.

partner. relevant

He
to

retired this
if

1991

and

now

a

consultant. his

offered

expert

number of
the contract

subjects

appeal.

given

circumstances and reporting
its

and of

upon
costs, price

and

regulations, to

there

was
its

We find persuasive a CAS noncompliance
under
its

opinion
in

ACAs

accumulation
contracts,

certain fixed

ACA
contracts

was only responsible
(tr.

adjust

costs

flexibly

priced

but not under of
a

firm

3/2

-1[

7).

26.

In

support and
detail

his

opinion, of

Mr.

Shapiro

relied

upon

the

CAS

clause, the

FAR

52.230-3,
related

the to

CAS
these

regulations, provisions,

FAR
which

Subpart
are set

30.3,

number
below.

interpretations

of

the

CAS

Board and

Government

out

in

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

an

adjustment
to

of

the

contract

price

or

cost

allowance, Accounting
in

a 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 by
the

costs

i
as to the the

appropriate, or to

if the

Contractor any

Standard,
costs

follow
the

paid by
States

United with

.
161 L.

United Treasury

together
to

interest

computed

the

rate

determined

Secretary

of

pursuant

Pub.

92-

41,85

97....

(App.

2nd

supp.

R4,

tab

203

at

131-32

(emphasis

added))

n2 reviewed

The
the in

standard

CAS

clause during

in the

FAR
of these

went through
years,

a

number of
find that

revisions

during
is

CAS
each

clause

each

and

we

this

language

in

all

1
material the

We

have

respects

contained

clause.

28. follows:

The

CAS

Board's

rules

and

regulations,

FAR

30.306(b),

define

"increased

costs

paid by

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

performance

Accounting and
cost the

Standards,
contract price

i
any
fixed

price his are

contract, cost

including

a

firm

fixed

price

contract,

17]

fails

t

follow
costs

accounting
the

practice difference the

or to

comply

with
the

applicable
price

Cost agreed with
price

measured by
been agreed
to

between

contract
in

that

would
used
to

have

accounting have

practices

during be
left

contract to the

.[h
had (1980),

contractor

proposed of

accordance contract
the

The determination
and
will

the

would

been of each

agreed
case.

will

contracting

parties

depend

on

circumstances

Id

at

133

(emphasis

added))

See

also

4

.R.[



331.70

where

this

language Preamble

is

repeated

essentially

verbatim. 331.10

29.

The CAS
Insofar as

Board's
pertinent,

comments
Preamble

on

this

regulation

were published
as

under
(app.

,[ located at4
tab

CFR



(1989).

M,
of

para.

2 provided
fixed

follows

2nd

R4

supp.,

207

at

-7[Q1[

The question of adjustment
discussions paid by
the

since U.S.

1

's[h

price the

contracts]

has been
that

the

In

its

original

promulgations
fixed

Board
[h

under

a

FFP

ri

recognized
the

contract

during

accumulating

t [h
subject

of extensive increased
cost 18]

was

and

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

Document 86-2
(CCII)

Filed 06/23/2005
ASBCA LEXIS
*

Page 11 of 15
Page
6

P30,390

1999

71,

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
.

fixed

priced
price

contracts that a

constitute

a recognition been agreed
in

of
if

the

fact

that

to

at

the

outset

higher change.

than This

the

would

have

to

the

Government
paid

had

known

the

accounting

constitutes

constructive

increase

the

cost

by

the

United

States

30.

Mr.

Shapiro

also

relied

upon

two working
interpretation

group of

opinions
the

published

by

the

DOD
for

Cost

Accounting

Standards under
75-6,

Working
fixed price

Group which
contracts
(tr.

provided

DOD's

Government's

remedy
under

CAS

noncompliance

firm

3/203-05). Procurement

One such
Circular

interpretation 76-I:

was provided

Defense

Procurement

Circular

reissued under

Defense

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 the

costs

allocated

to

it

as

of a noncompliance. an increased
cost

any

part

$500,000

paid by

Government,
interest.

such

payment

constitutes

the

Government

and

must be recovered

with

(b)

T

contractor

allocates the

less cost or

to

a fixed-price practice

[h
prepared

than

would

have

been of

allocated the

to

the

contract based.

by

use of

established

disclosed

on which the negotiation

contract

was

Example:
cost

A

FFP

Ifirm

fixed

price]

proposal Cost

is

in

accordance

accounting

practices

and
either

applicable

Accounting
his

Standards.
practices results in

D
S
the contract

with

the

contractor's

contract

,[h
being requested
failed negotiations,

disclosed
the

contractor applicable
to the

noncomplies Cost

by

not following

Accounting than
[h

Standards.

T

disclosed

or by not

complying with
less costs allocated to to

noncompliance had been
the

contract the the the

appropriate and and

practices

.[h
the

,000

The contractor
if

should

be

correct correct

noncompliance noncompliance
is

properly
the

allocate

costs.

However,
firm
fixed

contractor
to as the

Government
profit profit

paid

price this

agreed

during
result

then

contractor

making
5 500,000

an

additional additional

of$
is

500,000

on
costs"

a

of

the

noncompliance. recovered with

The

"increased

paid

by

Government

and

must be

interest.

(App.

2nd

R4

supp.,

tab

1[h

at

8

tab

212

at

6087

(emphasis follows

added))

31.

DOD
W.G.

Working

Group Item 76-4 provided
Increased
1,

as

(app.

2nd R4

supp.,

tab

209): Contracts Interim Guidance,

Determining

Costs

to

the

Government

for

CAS Covered FFP

76-4, October

1976.

Background
Paragraph
costs" practices

4

CFR

331.70(b) (FFP)

of

the

CAS
as

Rules
related

and
to

Regulations

discusses
i.e.,

the

concept
to

of "increased disclosed

on

firm
or

fixed-price

contracts

noncompliances,

failure

follow

cost

accounting on an

standards.

DoD
resulted practices

guidance 30] gave
in less

"Increased

Costs

Paid

Under CAS-Covered on FFP
contracts

Contracts"

contained

in

DPC

75-6
that

example
being

of increased
to the

costs

where
have

there

was
had

a

noncompliance appropriate

costs

allocated

'[h contract than

would

been

the

been

followed.

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

Document 86-2
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Filed 06/23/2005
ASBCA
LEXIS
71,
*

Page 12 of 15
Page
7

,390

1999

Discussion increased cannot occur

In

cases
the

other than
price as

noncompliance of a

the

opinion
is

has been
increased.

expressed This
it

that

no

costs

can

unless
the

contract

FFP

contract

actually

concept
a as

adequately under
less

protect a

Government

was contemplated
or

by

PL

-37
thus

because

provides so

situation to

which
costs to

contractor
allocated

may
to

overtly

inadvertently

adjust

accounting

procedures a
windfall.

cause

be

FFP

contracts.

The contractor
in
all

may

receive

To

protect to

the

Government
the

situations that did so

where FFP when
33

contracts

are

involved
are

it

is

therefore due
to
is

necessary accounting
the that

recognize

phenomenon

occurs
in

cost

allocations

decreased of
this

changes. of such be

The

CAS

Board

4

CFR

1.70(b).

A

basic to

premise
the

paragraph
It is

that

amount
this

decrease extended

represents
to

the to
all

amount
cases

of "increased involving

costs

Government.'

logical

when

I
Guidance
the costs

premise

apply

FFP

contracts.

costs

to

the to

Government
the contracts

under
are

firm
less

fixed

p
been

contracts

should
allocated

be

considered
[h

to

exist

allocated

than

allocation

had

not been

.[h
Mr. than
if

would

have

been

the

method of

added]
testified the that the

32. price cost

Based

upon
for

the

above,

Shapiro

Government
noncompliance had

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,

ic

g
ACA's
sought
stated fixed
I.

price

contract

appropriate
in

followed.
rates, 3/205).

Under
the effect

circumstances

purported

noncompliance

resulted

overstated
fixed price

actual

overhead
(tr.

of

which
to

would
Shapiro,

allocate

[h
to

to

contemporaneously by
the

performed clause and

contracts

According under

Mr.

the

harm

be
if

remedied
a

CAS

regulations

simply
data

had

no
the

application

these
to

circumstances.
its

He

also

Government's

C

D
that

contractor

supplies
exists 3/207).

inaccurate defective

overhead pricing

on which
(the

Government
in

relies

detriment
protect the

to

negotiate

priced

contracts, interests

there
(tr.

legislation did

Truth

Negotiations

Act)

to

The

Government

not

assert

a defective

pricing claim

here.

There

appears did

to

be

no

dispute
certain costs,

that cost

under accounts had

a

number of
in

its

CAS-covered
its

prime bases
the

contracts for the

between
allocation

1986 of

and

1989

ACA
overhead,
costs

not gather and

determining

allocation

material

G&A
lR&D

IR&D
and

which

the

effect

of materially decreasing
Clearly, the cost input

bases

upon
for

which
the

these

overhead of
the

were measured,
and
rates

increasing

these
the

overhead
"total

rates.

base
as

used

calculation

G&A
(finding

did not represent finding of

activity
in

of
this

the

business

unit"
it

required of

by CAS
the

410,

420.
in

ACA
1990
it

did

not dispute
7).

DCAA's
In fact, the

CAS

noncompliance
in

respect

when

was advised

omissions
limited, that the

ACA

admitted

March
per

1992

that

there

was

CAS
this

noncompliance,
11).

albeit

and

that

had has

already

made

corrections

required under
as the

FAR

-2(c)(l
In

(finding

We

are

persuaded need

Government
whether

shown
changed

CAS
its

noncompliance accounting

circumstances. contended

view of

conclusion

we

not address

ACA

practices

also

by the Government.

I
or

A
its

as

Under

the

CAS
the also

clause
fails to

the

contractor with

agrees

to

an
cost

adjustment accounting

of

the

contract

price

or

contract

cost

if

the

contractor
a

subcontractor

comply
period

applicable

standards.

The
for the

Government Government
to as a

seeks prime

recovery

from

ACA
In

for

relevant

of time

when work
that

ACA
as a

performed

work

directly

contractor,

and

when
the

ACA
for

performed argues

subcontractor
the

under

agreements
the

which

the

Government
contractor
did

was not
and not have

a

party.

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 claims
entity here, against

The
U.S.C.


CDA
605.

makes

clear

that
is

the the

subject that the the

to

the

Act
into

are

those
contract

between with
the

the

Government

and
i.e.,

the

contractor.

41

The contractor
not
filed

entered general

the
is

Government,
jurisdiction filed

the the

prime

contractor.

With

minor exceptions
claims
v.

relevant directly

rule

that or

we

do

subcontractor See United

Government
F.2d 1541

Government
Cir.

Stales

Johnson

Controls,

Inc.,

713

(Fed.

1

not have

under

CDA
a

over

claims

directly

against

subcontractor.

General

Dynamics

Corporation,

ASBCA

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

Document 86-2
(CCH) P30,390
1999

Filed 06/23/2005
ASBCA
LEXIS
71,
*

Page 13 of 15
Page
8

No.

49339,

97-2

BCA
claim

P29,167

at

145,031 No. 31148,

Donner,

inertial

Division,

ASBCA
all

We have also adhered to this rule in the CAS had jurisdiction 87-3 BCA P20,066 over (Board
CAS-covered
prime See suggests
contracts also that

context. the

See

Systron

Government's
to

CAS
the

noncompliance determination

under

of

appellant's

but appellant Corporation,
is

had

no

right

appeal 50301,

of

CAS

noncompliance
the

under clause
for

its

subcontracts).

Aydin
the

BCA

p 29,260.

Moreover,

CAS

itself

strongly
contract

contractor
27).

responsible

noncompliance expert testimony departure from

of a subcontractor
to this effect settled

purposes
24).

of

adjustments
fails

(finding cite to

Mr.

(finding rule.

The Government

I
directly

ASBCA
also

No.
for

97-2

the

gave
that

persuasive

to

any persuasive

authority

would

warrant

this

well

We
under
the

conclude

that

in
is

these
to

circumstances, say
that a

the

Government

may

not

file

a

CAS

claim

against

a

subcontractor
the

CDA.

That

not

Government's
adjust
its

remedy
prime

is

against

the price

CAS covered subcontractor relevant CAS prime contractor
or cost as

may
under
a

violate the

CAS
covered

with

impunity. and
the

Rather,

contract

in issue,

Government
has
failed to

may
meet

the

contract

appropriate

to

the

extent

CAS

subcontractor

CAS

obligations.

lit.

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.

omissions, These

ACA

adjusted
are

its

billings here.

under

priced here

contracts are the

corrected
contracts

overhead

contracts

not
the

at

issue

The

contracts period.

issue

firm

between

ACA

and

the

Government

during

relevant

time

The Government
the contrnct price

is

bound

by

the

regulations

and

implementing
the

contract

clauses

which was

provide

the
in

parameters
all

of

adjustment.

Under

FAR
n3
the

52.230-3, contractor such

standard
to a

CAS
contract in

clause
price

which

incorporated
if

the or
its

relevant

CAS

covered

fixed-price
is

contracts,

agrees

adjustment
costs

the

contractor United

CAS

covered

subcontractor

noncompliant

"and

failure

results

any

increased

paid

by

the

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 disputes
into to a

the

applicability

number of
that

-cov
contracts

of

CAS
prime

coverage
contracts the

a

number of
the

these

contracts,

not dispute
23), so

during standard

relevant clause

time period
in the

(finding

and

does

not appear
for the

dispute

said

contained

CAS

FAR.

We

shall

presume

purposes

of

this

opinion.

7]

The nature of
Interpretations.

these

increased

costs

under

a

contractor's that

fixed-price

contract costs are

is

spelled

out

in the

FAR

30.306(b),
fails
"is

This

contract cost

provision accounting
the contract

provides standard
price the

these

increased

incurred and
that

where
the cost

contractor

to

follow by
the

the

applicable

"during
to

contract

performance"
contract price

differential

measured
the

difference

between
in

agreed
cost

and

the

that

would

have

been

agreed

to

had

contractor

proposed Preamble

accordance

with

accounting
this
v.

practices

used

during look

contract

performance."
to

CAS
into the

M

further rules

explains and
the cost the

the

nature of Perty

adjustment. Martin
the

We may
had

to

the preamble 1134, 1139

provide
Cir.

insight 1995).

CAS
M,

standards, Para. "that

regulations.

Marietta contractor

Corp.,

47

Jd[

(Fed.

Preamble performance According negotiation

2 explains reduced
his

need

for

a

remedy when below the
been
relied the

adopted during of

practices

during

contract process.'

allocations

allocation

determined

the estimating
allocation to at

to

this

reasoning,
to

had

Government would
have

aware

of
the

this

new

method
cost

cost

the

time

of

price price. a

prior a

award,

it

upon

reduced from

allocation

obtain

a

better

contract
as

Accordingly,
result

contract

price

adjustment during
did

precludes
contract

contractor

obtaining

any

contract

price

advantage

of any Here,

CAS

noncompliance
actions inactions If 32).

performance.
cost allocations

ACA's

or

not reduce

during
cost

the

performance
to

of any of

its

fixed

priced performed

CAS-covered
fixed price the

prime

contracts. (finding

anything,

's[h

omissions
is

increased
to

allocations

contemporaneously these
contracts
in

contracts

The

Government
and of
is

not

entitled

an

adjustment

under

accordance

with

relevant

CAS

contract

clause

regulations.

DOD's
(findings 30,

long standing
31).

interpretation

these

provisions with
that

is

also

consistent the

with

the

conclusion
in this appeal.

we

have

reached

This

interpretation

at

odds

offered

by

Government

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

Document 86-2
I)[h
P30,390

Filed 06/23/2005
ASBCA
LEXIS
*

Page 14 of 15
Page 9

1
the

71,

In

view

of

all

the

foregoing, firm

we

conclude
price

that

the

Government
within

has not

established

it

is

entitled

to

a

contract

price

adjustment
regulations.

under

ACA's

fixed

prime

contracts

meaning

of

the

CAS

clause

and

related

CAS

The appeal

is

sustained

as

to

ACA's

prime

contracts.

It

is

dismissed

as

to

ACA's

subcontracts.

n4

n4 and
the

The Government

also price

argues

that

it

relied

on
a

defectively cause of
action

calculated

overhead
in

rates

when
pricing

it

negotiated of

awarded
Truth
here.
in

's[h
are

fixed

contracts. that

This not
to

is

sounding

defective decision

in violation

Negotiations

Act

was

asserted

by
such

the

contracting and

officer's

in the

Government's
merits.

claim

We

without

jurisdiction

consider

a claim

pass

no

judgment
Division,

on

its

See 27802, 83-2

International

Telephone

&

Telegraph

Corporation/ElectroOptical

Products

ASBCA

No.

BCA

P

16,773.

Dated:

18

May

1999

JACK
Armed

DELMAN
Judge Services

Administrative

Board

of Contract

I

c
c

Appeals

ALAN
Acting

M.

SPECTOR
Judge

Administrative

Chairman
Services Board

Armed

of Contract

Appeals

I

MARK
Vice

N.

STEMPLER
Judge

Administrative

Chairman
Services

Armed

Board

of Contract

Appeals

APPENDIX
standards

Insofar

as

pertinent, 0]

the

cost

accounting

relied

upon

by the Government

provide

as

follows:

40 1-40

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

410-40

Fundamental

requirement.

(b)(l) cost

The

G&A
of

expense
that cost

pool of

a

business

unit

for

a

cost

accounting
a cost input

period base

shall

be

allocated

to total

final activity

objectives business

accounting

period by means
omitted].

of

representing

the

of

the

unit

exception

410-50

Techniques

for

application.

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

Document 86-2
(CCH) P30,390
1999

Filed 06/23/2005
ASBCA LEXIS
* 71,

Page 15 of 15
Page 10

***

(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
using
the

input

shall

include
are

those not

expenses of
a

which by operation
pool of

of

this

Standard and

are

excluded

from

the

expense

pool and
allocation

part

combined

G&A

expenses

other expenses

allocated

same

base.

418-40

Fundamental

Requirement.

**
(c)

Pooled

costs

shall the

be

allocated costs to

to

cost

objectives

in

reasonable

proportion

to

the

beneficial

or

causal

relationship

of

pooled

cost

objectives

[I

-50[
(a)

Techniques

for

application.

Determination
* *

of

direct

cost

and

indirect

cost

1)
(2)

*

In

accounting omitted]

for

direct

costs

a business

unit

shall

use

actual

costs

except

that

-

condition

420-50

Techniques

for

application.

(0

The

cost as

of

IR&D

and

B&P

projects

accumulated

at

a business

unit

shall

be

allocated

to

cost

objectives

follows:

1)
(2) shall

applicable]

JR&D
allocated unit to

and

B&P
to
all

cost

pools
costs

which

are

not of

allocated

under
unit

subparagraph by means
in

(
the

of

this

subsection,

be

final
its

objectives and

the

business

of

same base

used

by
. .

the

business

allocate

general

administrative

expenses

accordance

with

4 10-50]

.