Termination Settlement Expenses Disallowed Because They Were Not Reasonable

Sometimes the Government finds it  necessary to terminate contracts for convenience. When they do, contractors are entitled to reimbursement for certain costs related to the terminated contract including a special category called 'settlement expenses'. Settlement expenses (see FAR 31.205-42(g)) include accounting legal, clerical and similar costs reasonably necessary for the preparation and presentation, including supporting data, of settlement claims to the contracting officer and the termination and settlement of subcontracts. Settlement expenses also include reasonable costs for the storage, transportation, protection, and disposition of property acquired or produced for the contract as well as indirect costs related to salary and wages incurred as settlement expenses (e.g. payroll taxes, fringe benefits, occupancy costs, and immediate supervision costs).

Historically, the section on settlement expenses in a termination settlement proposal has been a fertile field for questioned cost by Government oversight. Contractors seem to have a propensity to load up this area of costs with scant supporting evidence. Sometimes contractors forget about the overarching cost principle of reasonableness. In addition to allowability criteria, as settlement expenses explicitly are, the costs must also be reasonable (see FAR 31.201-3). ALKAI Consultants LLc (ALKAI) was one of those contractors who learned the hard way.

ALKAI had a contract that was terminated for convenience. In its settlement proposal, it claimed $126 thousand in settlement expenses. The Government only wanted to pay ALKAI $27 thousand so ALKAI filed a claim with the ASBCA (Armed Services Board of Contract Appeals) for the difference (as well as for other cost elements).

Claimed settlement expenses included third party consultant and legal expenses, ALKAI employee wages, and estimated future costs. No one had an issue with the third part consultant and legal expenses. Concerning employee wages, the Board ruled that incurring costs to prepare a narrative requeisted by the contracting officer was reasonable in principle. It also found that claiming $77 thousand for this work was unreasonable. The Board allowed just $6 thousand. The Board also found that ALKAI had provided no back-up for future estimated cost being incurred subsequent to submission at any time. Therefore it disallowed another $10,500.

In this case, the ASBCA applied a reasonableness criteria based on what they believed was the intrinsic value of the services being performed. The full text of the ASBCA case can be read or downloaded here.