By way of background, the contractor (SRI) sought to recover costs incurred to maintain a standby Letter of Credit (LOC) issued by a bank to guarantee its ability to repay long-term debt. The Government argued that the costs were unallowable under FAR 31.205-20 (Interest and Financing Costs) as long term financing. SRI argued that the costs are allowable because they are similar to bonding costs allowable under FAR 31.205-4, and alternatively, as administrative costs of short-term borrowings for working capital allowable under FAR 31.205-27(a)(3).
The ASBCA sided with SRI. The Board concluded that the LOC costs are allowable for three reasons:
- FAR 31.205-20 is inapplicable to disallow the LOC costs because SRI treated the full amount of its long-term bond debt as part of its "current liabilities", not as "long-term" liabilities and the Government failed to show this treatment is inappropriate.
- Paying an annual fee (the LOC costs) for a one-year bank LOC for the purpose of collateralizing or guaranteeing its ability to repay the full amount of its long-term debt in the short-term (one year) qualifies as administrative costs for short-term borrowing for working capital allowable under FAR 31.205-27(a)(3).
- The LOC costs in dispute are not fixed and upfront costs and are therefore different in kind from the typical costs of financing.