Interim Rule Amends the FAR "Legal" Cost Principle

The FAR Committees issued an interim rule last week amending the Federal Acquisition Regulation (FAR) to address the allowability of legal costs incurred by a contractor (or a subcontractor) related to a whistleblower proceeding commenced by the submission of a complaint of reprisal by the contractor (or subcontractor) employee under applicable whistleblower statutes (e.g. 10 USC 2409).

This interim regulation was required to implement a provision in the National Defense authorization Act (NDAA) for FY 2013. According to the promulgation comments, this rule would only affect a contractor or subcontractor if a contractor or subcontractor employee commenced a proceeding by submitting a whistleblower complaint and that complaint resulted in  imposition of a monetary penalty or an order to take corrective action.

This interim rule changes section (b) and (b)(2) of FAR 31.205-47, Costs related to legal and other proceedings as follows. We have underscored the added verbiage.

(b) In accordance with 41 U.S.C. 4310 and 10 U.S.C 2324(k), costs incurred in connection with any proceeding brought by a Federal, State, local, or foreign government, or by a contractor or subcontractor employee submitting a whistleblower complaint of reprisal in accordance with 41.U.S.C. 4712 or 10 U.S.C. 2409, for violation of, or a failure to comply with law or regulation by the contractor (including its agents or employees), or costs incurred in connection with any proceeding brought by a third party in the name of the United States under the False Claims Act, 31 U.S.C. 3730, are unallowable if the result is - 

(2) In a civil or administrative proceeding, either a finding or contractor liability where the proceeding involves an allegation of fraud or similar misconduct; or imposition of a monetary penalty, or an order issued by the agency head to the contractor or subcontractor to take corrective action under 41 U.S.C. 4712 or 10 U.S.C. 2409, where the proceeding does not involve an allegation of fraud or similar misconduct;

In a whistleblower suit, the allowability of legal costs is dependent upon the outcome of the case. For this reason, contractors should segregate legal costs associated with whistleblower suits and hold them in abeyance until such time as the outcome is known.