Fines and Penalties - Part I

There is a FAR cost principle that addresses fines, penalties, and mischarging costs (see FAR 31.205-15). The "fines and penalties" part of this cost principle goes way back to 1940 and the "mischarging costs" portion was added in 1989.

The "fines and penalties" section of this cost principle provides that cost of fines and penalties resulting from violations of, or failure of the contractor to comply with Federal, State, local, or foreign laws and regulations, are unallowable except

• when incurred as a result of compliance with specific terms and conditions of the contract or 
• written instructions from the contracting officer. 

One would think that is fairly straight-forward however there have been a number of appeals over the years. Often times, the Government takes a position that any costs resulting from a contractor's violation of a law or regulation are in the nature of a fine or penalty. Is a payment made to an employee to settle an EEO claim a fine or penalty, or something else? The Government will usually argue that it is in the nature of a fine or penalty. But not necessarily.

There was a board case back in 1968 that illustrates this distinction. McDonnell Douglas had to pay additional workers compensation to the family of a worker killed on the job. California levied the additional workers compensation payments in order to penalize the employer for serious and willful misconduct.

The Board of Contract Appeals decided that the payments were awarded as the result of the serious and willful misconduct of the employer but not because of the violation of any law or regulation. Therefore, this cost principle was not applicable and the Government lost.

In another case, the Government used this cost principle to question payments that a contractor made to two job applicants who the EEOC (Equal Employee Opportunity Commission) found reasonable cause to believe that they had been discriminated against. The ASBCA found the cost allowable because the Government had not proved that the contractor had, in fact, discriminated against the applicants or otherwise violated any laws.

Tomorrow we will look at the "mischarging" element of this cost principle.