Berkeley Research Group’s Government Contracts Advisory Services (GCAS) practice keeps its clients up to date on the latest regulatory developments affecting the government contracts industry. This edition of the GovCon Research Report summarizes the critical regulatory and compliance issues contractors face in the third calendar quarter of 2012. The issues are summarized by the following key subject-matter areas:

  • Lead article: “The 2010 Rate Cap Mandate: DoD Negotiation Objectives are Official”
  • Federal Acquisition Regulation (FAR) updates
  • Defense Acquisition Regulation (DFAR) updates
  • Industry topics:
    • Defense Contract Audit Agency (DCAA) Audit Guidance updates
    • Office of Federal Procurement Policy (OFPP)/Defense Procurement Acquisition Policy (DPAP) memos
  • Legal cases of interest

THE 2010 RATE CAP MANDATE: DOD NEGOTIATION OBJECTIVES ARE OFFICIAL

By Sajeev Malaveetil and Andrew Stowe

On August 24, 2012, DCAA issued a Memorandum for Regional Directors (MRD) 12-PSP-022(R), “Assisting Contracting Officers in Establishing the Negotiation Objective for Significant DoD Service Contracts.” This MRD provides guidance for implementing Section 808 of the 2012 National Defense Authorization Act (Public Law 112-81). Section 808 requires contracting officers to use Contractor FY 2010 indirect and direct labor rates as their negotiation objective for noncompetitive and noncommercial service contracts (including task and delivery orders) greater than $10 million awarded in FY 2012 and 2013. The MRD references a June 2012 Defense Procurement and Acquisition Policy (DPAP) class deviation implementing the Act and requiring that any FY 2012 or 2013 awarded contract, task, or delivery order issued for providing continuing services, non-commercial items, or non-competitively awarded products or services must have the written permission of the Secretary of the Military Department or Head of the Defense Agency in order to exceed FY 2010 indirect rates or direct labor rates. Such approval must be issued prior to contract award or order issuance.

In its MRD, the DCAA clarified that auditors should not view the directive as a rate cap or audit basis for questioning proposed rates. In addition, the MRD instructs auditors to be alert for accounting changes, subsequent to FY 2010, that may impact the use of FY 2010 actual rates, and instructs auditors to make rate information comparable, if practical.

Despite these considerations, several critical concerns continue to exist with the Department of Defense’s negotiation objectives as imposed by the 2012 Defense Authorization Act.

First, the Act fails to recognize or give consideration to the fact that a decrease in base of contracts, as the result of likely budget cuts and a potential sequester, can and will result in an increase in a Contractor’s indirect rates.

Imposing requirements to negotiate lower rates to a historical benchmark would necessitate that a Contractor either: (1) Engage in layoffs or pursue other actions necessary to proportionally reduce costs to bring FY 2012 and 2013 rates in line with the decreased business base; or (2) Require a Contractor to absorb a reduced recovery of costs to maintain its organizational capabilities (i.e., non-recovery of otherwise allocable indirect expenses).

The Act also fails to address that in many market segments direct labor costs and associated fringes have inherent escalations that are necessary to hire and retain qualified personnel. Forcing a Contractor to cut salary costs, benefits, or both to maintain historical rates would adversely impact a Contractor’s ability to maintain competitive wages. This results in a potential for a substandard Contractor work force and decreased efficiencies on Federal services contracts.

Finally, the Act provides no provision or redress for Contractors who have established Forward Pricing Rate Agreements (FPRAs) or Forward Pricing Rate Recommendations (FPRRs) with the Government, which may have factored in cost escalations or a reduction in business base. It would appear that the DoD has been asked to ignore FPRAs and FPRRs for FY 2012 and 2013 and has been advised to attempt negotiating new contract-specific rates, to the extent that the previously accepted/requested rates are higher than 2010 rates, and regardless of whether the higher rates are a reflection of estimated escalation in costs or an anticipated reduction in base.

It is recommended that Contractors consider these factors when preparing service contract proposals, forward pricing rate proposals, and proposals for direct labor rates.

To assist in negotiations, it is also recommended that Contractors prepare, in advance, justification of any FY 2012 and 2013 rates above FY 2010 rates.

Finally, Contractors should take particular note of the applicability of the Section 808 of the Defense Authorization Act to ensure that contracting officers and the DCAA do not attempt to apply or otherwise enforce the requirements of the Act on all of its contracts or, in the case of indirect rates, in the negotiation of company-wide rates. Contractors should ensure that contracts, task orders, or delivery orders to which the provisions of the Act do not apply are not subject to requirements of the Act. Contracts exempt from Section 808 include non-DoD contracts, competitive contracts, contracts for commercial items, contracts for goods, and contracts under the $10-million threshold.

KEY FAR UPDATES

Several proposed, interim, and final revisions to the Federal Acquisition Regulation have been made in the past quarter. We list select updates and a brief explanation of their potential impact below. The appendix to the report contains a complete listing of all changes this quarter.

Price Analysis Techniques (Proposed Rule)

This rule proposes to eliminate all but one adequate price competition method in determining price reasonableness at FAR 15.404-1(b)(2)(i). Under the proposed rule, only two or more responsible offerors, competing independently, submit[ing] priced offers satisfy[ing] the Government’s expressed requirements (FAR 15.403-1(c)(1)(i)) will be a basis for determining adequate price competition and, thus, a fair and reasonable price under FAR 15.404-1(b)(2)(i).

This eliminates another key provision for determining adequate price competition—FAR 15.403-1(c)(1)(ii), as it relates to price analysis. FAR 15.403-1(c)(1)(ii) defines adequate price competition as existing with only one offer, when there was a reasonable expectation based on market research or other assessment, that two or more responsible offerors, competing independently, would submit priced offers. As a point of comparison, the DFARS issued restrictions on adequate price competition for single-source awards at DFARS 215.371 for Defense Contractors, but it still allows for cost or price analysis to support a single-source offer as having adequate price competition. Also, unlike the FAR provision, the DFARS provision has both an executive override provision and an exemption for several areas of procurement, such as support of contingency, humanitarian or peacekeeping operations, or to facilitate defense against or recovery from nuclear, biological, chemical, or radiological attack.

This proposed rule attempts to establish a new definition for FAR 15.403-1(c)(1)-Adequate price competition. The new rule will apply to all agencies and will increase the burden on the contractor for other price analysis techniques under FAR 15.404-1(b)(2) to establish fair and reasonable pricing.

Changes to Time-and-Materials and Labor-Hour Contracts and Orders (Proposed Rule)

This proposed rule provides contracting officers with additional guidance addressing requirements for raising the ceiling price or otherwise changing the scope of a time-and-materials (T&M) or labor-hour (LH) contract. The rule applies to both commercial and non-commercial T&M and LH contracts and task orders under those contracts. The rule requires that changes in the general scope of a contract or order should be justified as non-competitive new work.

The language makes a distinction between the procedures to be followed in justifying and documenting a change to a contract versus a change to an order issued under a contract. Specifically, changes to the scope or ceiling price of contracts must follow the procedures set forth at FAR 6.303 which essentially require a sole-source justification for the scope or ceiling price change. Separately, for Federal Supply Schedule (FSS) orders under contracts, FAR 8.405-6 governs the justification and documentation requirements; and for multiple award task order contracts FAR 16.505(b)(2) governs the justification and documentation requirements. Regardless, the justification requirement is one of a single-source, non-competitive procurement. This restricts contracting officers from changing contracts and orders based only upon a Determinations and Findings (D&F) and forces them to address the non-competitive nature of the procurement change in scope or price ceiling. If finalized, the requirement will likely make it more difficult to issue significant scope or price ceiling changes without resorting to competitive procedures.

Reporting Executive Compensation and First-Tier Subcontract Awards (Final Rule)

This final rule has some changes from the interim rule but retains most of its basic tenets. The interim rule required that Contractors report:

  • Fourteen fields of basic subcontractor information for subcontracts with a value of $25,000 or more (e.g., DUNS, name, amount of award, date of award):
    • Includes subcontracts for commercial items and commercially available off-the-shelf items (COTS); and
    • Includes subcontracts less than the simplified acquisition threshold (as defined at FAR part 2.1 as $150,000) and in excess of $25,000.
  • The total compensation of each of the five most highly compensated executives for the Contractor’s preceding fiscal year if the Contractor meets three criteria:
    • It receives 80 percent of sales from Federal contracts, subcontracts, loans, grants, subgrants, and cooperative agreements; and
    • It receives $25 million or more in annual gross revenues from Federal contracts, subcontracts, loans, grants, subgrants, and cooperative agreements; and
    •  This information is not already available to the public under the Securities Exchange Act of 1934.
  • The total compensation of each of the five most highly compensated executives for the preceding fiscal year for each subcontractor awarded a subcontract of $25,000 in value or greater (assuming this is not already available to the public under the Securities Exchange Act of 1934) if the subcontractor meets three criteria:
    • It receives 80 percent of sales from Federal contracts, subcontracts, loans, grants, subgrants, and cooperative agreements; and
    • It receives $25 million or more in annual gross revenues from Federal contracts, subcontracts, loans, grants, subgrants, and cooperative agreements; and
    •  This information is not already available to the public under the Securities Exchange Act of 1934.

The final rule changes of note include:

  • Clarification that prime contractors must enter Transparency Act data when registering in Central Contractor Registration (CCR).
  • Revises a previous reporting exemption for classified contracts and individuals, replacing “classified contracts” with “classified information.”
  • Clarifies and loosens the definition of “first-tier subcontractor” to be those subcontracts that are “awarded directly by the Contractor for the purpose of acquiring goods or services (including construction) for performance of a prime contract.” It specifically excludes supplier agreements with vendors that benefit multiple contracts, the costs of which are normally indirect expenses.
  • Further clarifies the 80 percent and $25 million language (“the 80/25 test”) by adding “and other forms of financial assistance,” so that the 80 percent/$25 million are derived from all Federal funds received, no matter the source.
  • Adds a section to prohibit breaking up or splitting of subcontracts to a value less than $25,000 to avoid the first-tier reporting requirements.
  • Adds a section to state that the contractor is:
    • Required to report when the subcontract is awarded
    • Required to report if one of the reported data elements changes during the subcontract period of performance
    • Not required to report after the subcontract ends

For contractors, this means that a process must be put in place to monitor and document whether the contractor is exempted from reporting total executive compensation as a result of the 80/25 test or the Securities Exchange Act of 1934. For those not exempt, the top five executives’ total compensation must be reported at http://www.ccr.gov by the end of the month following contract award and annually thereafter.

Additionally, a subcontracting oversight process must be put in place to:

  • Identify first-tier subcontractors with subcontracts greater than $25,000
  • Collect the appropriate 14 basic subcontractor data points from those subcontractors
  • Determine which subcontractors are not exempted from executive compensation reporting under the 80/25 test or the Securities Exchange Act of 1934
  • Collect the top five total executive compensation data points from those subcontractors
  • Enter all the collected data at http://www.fsrs.gov
  • Continuously monitor reported subcontractor data points to ensure that any changes during the subcontract period are captured and updated at http://www.fsrs.gov

KEY DFARS UPDATES

There was minimal DFARS activity during the last quarter, with only two proposed and five final rules in total. Only one final rule was of significant note.

Reporting of Government Furnished Property (Final Rule)

The rule implements a requirement for the Contractor to report all serialized Government-furnished property in DoD’s Item Unique Identification (IUID) Registry system beginning after December 31, 2013. At this date, the Contractor must also report Contractor receipt of non-serially managed items, unless tracked as an individual item. There are several types of property exempt from the requirement, including:

  • Contractor-acquired property
  • Property under any statutory leasing authority
  • Property to which the Government has acquired a lien or title solely because of partial, advance, progress, or performance-based payments
  • Intellectual property or software
  • Real property
  • Property released for work in process

The rule also sets forth a number of data elements that the Contractor should have in their property management system.

DCAA AUDIT GUIDANCE UPDATES

The following is a summary of several key Memoranda for Regional Directors (MRDs) issued by the DCAA during the calendar quarter.

Audit Guidance – Denial of Access to Records Due to Contractor Assertion of Attorney-Work-Product Doctrine or Attorney-Client Privilege: 12-PPS-018(R) – July 25, 2012

Informs auditors that the DCAA Contract Audit Manual (CAM) section 1-504.4g has been updated to include procedures for when a Contractor asserts attorney-client privilege or attorney-work-product doctrine during the audit process. According to 1-504.4g, the assertion of attorney-client privilege or attorney-work-product doctrine is a condition that qualifies as an access to records problem, when a specific record is needed within these areas. It provides that:

  • A Contractor invoking the attorney-client privilege must show “a communication between client and counsel that; was intended to be and was in fact kept confidential and; was made for the purpose of obtaining or providing legal advice.”
  • If the Contractor invokes privilege or work-product doctrine, the Contractor should explain in writing:
    • The basis of the assertion
    • Why the contractor cannot provide the requested information or some alternative, non-privileged information that will meet the auditor’s needs
  • If the Contractor “continues to deny access and does not provide alternative, non-privileged information, the procedures in DCAAI 7640.17 (Formal Reporting Procedures for Denial of Access to Contractor’s Records) should be followed until such time as a high level Contractor executive asserts the privilege in writing.”
  • The Regional Director contact top Contractor management to explain that “even if privilege is appropriate, the contractor is still required to support how it complies with its contractual requirements using non-privileged data.”

This memo is particularly troubling in that it effectively requires the Contractor to keep two sets of records for privileged information—one set that is privileged and another set for DCAA that is redacted or edited in some manner to preserve privilege.

Also troubling is that the Contractor “must show a communication between client and counsel that was intended to be and was in fact kept confidential and was made for the purpose of obtaining legal advice.” Such communications may be privileged in and of themselves, and their production could be a waiver of the privilege.

In light of this DCAA MRD, Contractors should remain diligent and work closely with their internal or external legal counsel to maintain and restrict DCAA access to truly privileged or work-product doctrine information. It can be expected that the DCAA will push harder for such information and will likely follow Denial of Access to Records procedures if privilege is claimed and no non-privileged records are produced in support of the cost.

Audit Guidance on Access to Contractor Internal Audit Reports: 12-PPS-019(R) – August 14, 2012

This MRD provides direction for requesting and monitoring requests for Contractors’ Internal Audit Reports. The guidance is a result of recommendations from the U.S. Government Accountability Office report “Actions Needed to Improve DCAA’s Access To and Use of Defense Company Internal Audit Reports.” It recognizes that DCAA cannot have unlimited access to Internal Audit Reports but is limited to materials “relevant to its audit responsibilities.”

The guidance requires that the DCAA Contract Audit Coordinator (CAC) offices and Field Audit Offices (FAOs) at major Contractor locations establish a process and a central point of contact to obtain and monitor DCAA’s access to and use of Internal Audit reports. This process will include a request tracking mechanism and the Contractor’s disposition of requests.

If access to Internal Audit Reports is denied by the contractor, Denial of Access to Records procedures will be implemented. Should these procedures fail to convince the Contractor to turn over Internal Audit Reports, Regional Directors should review the matter and determine if a subpoena should be requested in accordance with DCAA Regulations No. 5500.5, Subpoenas of Contractor Records, dated October 10, 2006.

This audit guidance is of particular concern to the contracting community. The DCAA has, for years, requested Internal Audit Reports from Contractors. Some Contractors provide them, while others do not.In some cases, the Contractors who do not provide them are also challenged on the cost of their

Internal Audit Departments, as the government ostensibly does not receive a benefit from this cost without access to the Internal Audit Reports.

Those Contractors who do provide access to Internal Audit Reports typically find that DCAA’s requests are expansive and delve into areas that have no relation to the controls governing government contract costs.

This audit guidance will serve to further bolster DCAA’s attempts to review Internal Audit Reports (including those with little to no bearing upon controls over government contract costs), under the threat of Denial of Access to Records and DCAA subpoena authority.

Audit Guidance on the One Audit Approach – When FAOs Incorporate Audit Procedures Performed by Other FAOs without an Assist Audit Report: 12-PAS-020(R) – August 8, 2012

This MRD provides guidance on using the One Audit Approach (OAA). It provides that FAOs should consider using the OAA as the preferred method on ALL assignments where a portion of the audit needs to be performed by another office (excluding subcontractor assist portions of audits).

NEW/UPDATED DCAA AUDIT PROGRAMS

Several DCAA Audit Programs have been updated during the last quarter including:

  • Audit Program for Incurred Costs – Concurrent Auditing Major & Non-Major (Sep 2012)
  • Audit Program for Non-Major Desk Review (Jul 2012)
  • Audit Program for Incurred Costs – Post Year End Audit (Aug 2012)
  • Audit Program for Billing Audit (Sep 2012)
  • Audit Program for Budget and Planning System and Related Internal Controls (Sep 2012)
  • Audit Program for Purchasing Controls (Sep 2012)
  • Audit Program for Material Management and Accounting Systems (MMAS) Controls (Sep 2012)
  • Audit Program for Compensation Controls (Sep 2012)
  • Audit Program for Major Contractors Labor Floorchecks/Interviews (Sep 2012)
  • Evaluation of Final Vouchers (Sep 2012)
  • Audit Program for Progress Payments Based On Cost Incurred (Aug 2012)
  • Audit Program for Progress Payments Based on Percentage or Stage of Completion (Aug 2012)
  • Preaward Survey of Prospective Contractor Accounting System (Sep 2012)
  • Audit Program for Adequacy of Initial Disclosure Statement (Aug 2012)
  • Audit Program for Compliance of Initial Disclosure Statement (Aug 2012)
  • Audit Program for Revised Disclosure Statement Adequacy and Compliance (Aug 2012)
  • Audit Program for Cost Accounting Standard No. 410, Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives (Aug 2012)
  • Audit Program for CAS Impact Proposal Evaluations (Sep 2012)
  • Audit Program for Price Proposal (Sep 2012)
  • Audit Program for Audit of Forward Pricing Rate Proposals (Sep 2012)
  • Audit Program for Cost Element Review (Sep 2012)
  • Audit Program for Evaluation of Cost Realism in Price Proposals (Sep 2012)
  • Audit Program for Application of Agreed Upon Procedures (Aug 2012)
  • Audit Program for Post Award Audits (Aug 2012)

OFPP/DPAP MEMOS

OFPP Policy Letter 11-01, Performance of Inherently Governmental and Critical Functions (Final Policy Letter)

The policy letter provides additional guidance on managing the performance of inherently governmental and critical functions by:

  • Clarifying what functions are inherently governmental and must always be performed by Federal employees
  • Explaining what agencies must do when work is “closely associated” with inherently governmental functions
  • Requiring agencies to identify their “critical functions” in order to ensure they have sufficient internal capability to maintain control over functions that are core to the agency’s mission and operations
  • Outlining a series of agency management responsibilities to strengthen accountability for effective implementation of these policies

LEGAL CASES OF INTEREST

Berkeley Research Group, LLC is not a law firm, and our experts do not practice law. The summary of recent case law below is considered to be pertinent to the Government Contracts industry. The summaries do not constitute legal advice and should not be construed as such. Readers should consult with their legal counsel to determine applicable legal requirements in a specific fact situation.

False Claims Act

Randall L. Little and Joel F. Arnold v. Shell Exploration and Production Company, Shell Deepwater Development Systems, Inc., and Shell Offshore Inc., Fifth Circuit, 11-20320, July 31, 2012

The case addresses the issue of whether a federal employee, whose job is to investigate fraud, is exempt from taking qui tam actions under the False Claims Act (FCA).

In 2006, relators Little and Arnold filed two qui tam suits against Shell, alleging the company defrauded the Department of the Interior of $19 million. Both relators were auditors for the Department of the Interior’s Minerals Management Service (MMS) agency, which has since been eliminated. The facts forming the basis of the relators’ suits were discovered during audits performed by the relators and reported to their mutual supervisor as part of their job requirements.

In March 2007, the Government decided not to intervene in the cases. The cases were transferred to the Southern District of Texas, where they were consolidated per the parties’ request. In April 2011, the district court granted summary judgment to Shell on the basis that the suit was prohibited by two provisions of the FCA: (1) a provision under the heading “Actions by private persons,” describing who may bring a civil action on behalf of the United States Government; and (2) the public disclosure bar.

During appeal at the Fifth Circuit, Shell and the U.S. Government argued that Federal Government employees were not “private persons.” They also argued that allowing federal employees to be relators would be in conflict with ethical standards for Government employees, which prohibit the use of nonpublic Government information to further private interests, as well as the criminal conflict-of-interest statute. The Appellees also argued that the information provided by Little and Arnold did not pass the public-disclosure provisions of the FCA.

The Fifth Circuit found that there was no basis to except Government employees from serving as qui tam relators in a FCA action and that the text of the FCA supports the relators’ standing. The court also found that the district court used a broad conception of the public disclosure bar and remanded the district court to reconsider the public disclosure issue.

In issuing a concurring opinion, Circuit Judge Emilio M. Garza expanded on the conflict-of-interest concerns. Judge Garza noted that federal auditors are held to even a higher standard than other Government employees, as they are required to follow Generally Accepted Government Auditing Standards (GAGAS) (“The Yellow Book”), which requires Government auditors be “free both in fact and appearance from personal, external and organizational impediments to their independence.” Judge Garza acknowledged that the Fifth Circuit ruling related to the FCA implicates the mandates of GAGAS as well as the aforementioned conflict-of-interest concerns. However, Judge Garza went on to note that, as judges the courts are charged with interpreting statutes, and that the fact that the FCA, as written by Congress, gives no notice of the conflict of interest principles is a matter of political concern.

U.S. ex rel. Nyle J. Hooper v. Lockheed Martin Corporation., Ninth Circuit No. 11-55278, August 2, 2012

This case addresses the issue of whether knowingly underbidding a cost-type contract can result in a violation of the FCA.

This qui tam appeal case involves a cost plus award fee Air Force contract for software and hardware used to support space launch operations under the Range Standardization and Automation (RSA) IIA program.

The Government awarded the RSA IIA contract to Lockheed on a “best value” basis with recognition that there were risks of potential cost growth, but concluded that the risk potential was acceptable. In making its award, the Government concluded that a fair and reasonable price was obtained, without reliance on certified cost or pricing data.

Though Lockheed’s Best and Final Offer (BAFO) for the RSA IIA Request for Proposal (RFP) was for $432.7 million, the company was ultimately paid more than $900 million under the resulting contract.

The relator, Nyle J. Hooper, served as a Senior Project Engineer on the RSA IIA program prior to being involuntarily terminated in July of 2002. In his original suit, Hooper alleged that Lockheed Martin violated the FCA by knowingly underbidding the contract, failing to perform all required tests or otherwise improperly conducting required tests, and including undisclosed freeware in software deliverables that did not convey all intellectual property rights. In addition, Hooper alleged that he was wrongfully terminated as retaliation for FCA protected activity.

In its ruling, the Ninth Circuit reversed the District Court’s prior decision, which granted Lockheed’s motion for summary judgment. The Circuit Court concluded that “false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of an FCA claim ... are met.”

In its ruling, the Circuit Court remanded the district court’s dismissal of Hooper’s claim that Lockheed violated the FCA by knowingly underbidding the contract. The Circuit Court determined that FCA liability may be based on false estimates.

Federal Supply Schedule Contracts

GTSI Corporation v. Equal Employment Opportunity Commission and General Services Administration (CBCA 2718, 2719), September 14, 2012

Seeking recovery of termination costs related to an unexercised option of a delivery order issued under its IT-70 GSA Federal Supply Schedule (FSS) contract, and with uncertainty over the appropriate jurisdiction, GTSI submitted identical termination claims to both the EEOC and the GSA. The EEOC denied the claim, citing the GSA, as the agency that awarded the FSS contract, as the appropriate agency to handle the claim, while the GSA remained silent on the claim.

GTSI filed two separate appeals at the Civilian Board of Contract Appeals (CBCA) –one on the EEOC decision and another on the GSA’s lack of decision. The Board consolidated the two appeals for purposes of issuing a decision as to which agency would be the appropriate respondent to the claim. Citing the action of the ordering agency—by refusing to exercise an option—as the basis for the dispute, the Board ruled that the EEOC was the appropriate respondent for the claim and granted the GSA’s motion to dismiss its case. The ruling provides some clarity to the language at FAR 8.406-6, regarding the appropriate jurisdiction for disputes related to FSS contract delivery orders as it pertains to performance issues related to the delivery order.

Recovery of Consultant and Legal Costs – Claims

Tip Top Construction, Inc. v. Patrick R. Donahoe, Post Master General, U.S. Court of Appeals, Federal Circuit (2011-1509), September 19, 2012

In Tip Top Construction, Inc.’s appeal of an April 1, 2011, Postal Service Board of Contract Appeals (PSCBA) decision denying part of an equitable adjustment claim, the U.S. Court of Appeals for the Federal Circuit granted recovery of consultant and legal costs incurred “for the genuine purpose of materially furthering the negotiation process” of the claim.

In its April 2011 decision, the PSBCA ruled Tip Top was not entitled to recover consultant and legal costs incurred, as the costs “had nothing to do with performance of the changed work or genuine contract administration and were solely directed at trying to convince the contracting officer to accept [Tip Top’s] figure for the change and maximizing [Tip Top’s] monetary recovery.” In its appeal, Tip Top argued that the consultant and legal costs incurred for negotiating the price of the change order are recoverable as contract administration costs.

In deciding the case, the Federal Circuit made a distinction between costs incurred in connection with the administration of a contract and costs incurred in connection with the prosecution of a Contract Disputes Act (CDA) claim, the former being recoverable, but the latter not. The court concluded that costs incurred in negotiating an equitable adjustment claim are contract administration costs and, as such, “should be allowable since this negotiation process benefits the Government, regardless of whether a settlement is finally reached or whether litigation eventually occurs because the availability of the process increases the likelihood of settlement without litigation.”

The Federal Circuit held that, if a contractor incurred a cost for the purpose of furthering the negotiation process of a claim, the cost should be treated as contract administration costs and would be allowable under FAR 31.205–33 even if a CDA claim is later submitted after negotiations fail. By way of contrast, the court held that if a contractor’s purpose for incurring a cost is to promote the prosecution of a CDA claim against the Government, the cost would be unallowable under FAR 31.205–33.

IN SUMMARY

If you have questions about specific items in this publication and would like to know more about how they apply to you, please feel free to contact one of our experts. In addition, if you would like to see topics discussed in the next issue, please email them to Andrew Stowe at astowe@brg-expert.com.

Mary Karen Wills, Director
mkwills@brg-expert.com
202.480.2773

Sajeev Malaveetil, Director
smalaveetil@brg-expert.com
202.480.2724

Ryan Byrd, Principal
rbyrd@brg-expert.com
202.480.2721

Kelly Lynch, Senior Managing Consultant
klynch@brg-expert.com
202.480.2698

Andrew Stowe, Senior Managing Consultant
astowe@brg-expert.com
202.480.2695

APPENDIX

Federal Acquisition Regulation

  • Final Rules
    • Reporting Executive Compensation and First-Tier Subcontract Awards (FAR Case 2008-039), July 26, 2012
    •  Payments Under Time-and-Materials and Labor-Hour Contracts (FAR Case 2011-003), July 26, 2012
    • DARPA-New Mexico Tax Agreement (FAR Case 2012-019), July 26, 2012
    • Clarification of Standards for Computer Generation of Forms (FAR Case 2011-022), July 26, 2012
    • Technical Amendments, July 26, 2012
    • United States-Korea Free Trade Agreement (FAR Case 2012-004), September 13, 2012
    • Delete Outdated FAR Reference to the DoD Industrial Preparedness Program (FAR Case 2012-026), September 13, 2012
    • NAICS and Size Standards (FAR Case 2012-021), September 13, 2012
    • Bid Protest and Appeal Authorities (FAR Case 2012-008), September 13, 2012
  • Interim Rules
    • Extension of Sunset Date for Protests of Task and Delivery Orders (FAR Case 2012-007), July 26, 2012
  • Proposed Rules
    • Price Analysis Techniques (FAR Case 2012-018), July 10, 2012
    • Contractors Performing Private Security Functions Outside the United States (FAR Case 2011-029), July 23, 2012
    • Changes to Time-and-Materials and Labor-Hour Contracts and Orders (FAR Case 2011-025), July 26, 2012
    • Small Business Set Asides for Research and Development Contracts (FAR Case 2012-015), August 10, 2012
    • Basic Safeguarding of Contractor Information Systems (FAR Case 2011-020), August 24, 2012
    • Documenting Contractor Performance, (FAR Case 2012-009), September 6, 2012
    • Prioritizing Sources of Supplies and Services for Use by the Government-correction (FAR Case 2009-024), September 6, 2012

Defense Federal Acquisition Regulation

  • Final Rules
    • Contracting With the Canadian Commercial Corporation (DFARS Case 2011-D049), July 24, 2012
    • Inflation Adjustment of Threshold for Acquisition of Right-Hand Drive Passenger Sedans (DFARS Case 2012-D016), August 29, 2012
    • Technical Amendments, August 29, 2012
    • Reporting of Government-Furnished Property (DFARS Case 2012-D001), August 29, 2012
    • DoD Voucher Processing (DFARS Case 2011-D054), August 29, 2012
  • Proposed Rules
    • Specialty Metals Definition of “Produce” (DFARS Case 2012-D041), July 24, 2012
    • Clarification of “F” Orders in the Procurement Instrument Identification Number Structure (DFARS Case 2012-D040), August 28, 2012

Berkeley Research Group, LLC is not a CPA firm and does not provide audit, attest, or public accounting services. BRG is not a law firm and does not provide legal advice. BRG is an equal opportunity employer.