When Black and White is Not So Black and White

In 1991, MPR, a Government contractor, negotiated at arms-length, a ten-year office space lease at reasonable, below market rental rates compared to those charged for similar facilities. Three years later, MPR, set up a related company to purchase the building. The lease cost continued the same as they were before MPR purchased the building through a related company.

The Government auditors took a position that allowable costs after the purchase was limited to the actual cost of ownership,as required under the related party provisions of FAR 31.205-36 and questioned the difference. MPR argued that the costs were reasonable at the time the lease was entered into and that the subsequent purchase of the office building did not negate that fact.

There were other issues involved in the audit of costs. During negotiations, MPR and the Government reached an oral agreement on all matters in question. MPR agreed to relinquish its position on the allowability of excessive executive compensation, patent costs and B&P costs while the contracting officer agreed to allow the full rental costs.The parties reached an oral agreement, had exchanged consideration and had a meeting of the minds on the agreement's major terms with respect to the outstanding cost issues before them. All that remained was for someone to recalculate the rates based on the agreement.

Before the oral agreement was formalized in a written agreement, the contracting officer's legal counsel advised that contracting officer lacked the authority to allow costs made unallowable by FAR 31.205-36. The contracting officer then reneged on his oral agreement and issued unilateral rates with the rental costs reduced to the actual cost of ownership. MPR appealed to the ASBCA (Armed Board of Contract Appeals).

The ASBCA ruled in favor of MPR. The Board ruled that the oral agreement was binding. The Board stated, concerning the oral agreement, that

This is not a case where the ACO violated a plain requirement of a statute or regulation. There is no plain illegality here. The ACO was authorized to exercise his judgment in interpreting the regulations to resolve the rent issue under the cost principles. The ACO's interpretation of the cost principles in light of the change in appellant's status during the course of the lease was not clearly unreasonable. Under the totality of these circumstances, therefore, the ACO acted within his authority in interpreting the regulations to resolve the doubt concerning the reasonableness of the MPR rental rates and costs and entering into the oral agreement with MPR that settled all cost issues.