Tuesday, June 24, 2014

Stonewall and earn $500 million

Back in 1996, based on a DCAA (Defense Contract Audit Agency) audit report, a DCMA (Defense Contract Management Agency) contracting officer determined that Pratt Whitney was in noncompliance with several CAS (Cost Accounting Standards) requirements. The impact of that noncompliance between 1984 and 1995 was $260 million. Essentially, the case dealt with the composition of costs in the indirect expense allocation base. The larger the allocation base, the lower the indirect rate.

Subsequently, the Government made a demand against Pratt Whitney for the increased costs. Pratt Whitney appealed the decision to the ASBCA (Armed Services Board of Contract Appeals). The ASBCA decided in favor of Pratt Whitney in 2001. The Government appealed the ASBCA decision to the U.S. Court of Appeals. In 2003, the court vacated the ASBCA decision and remanded the case back to ASBCA for a determination of damages.

In 2003, the Government updated its impact to include years up to 2002. The cost impact at that point had risen from $260 million to $755 million. In 2006, a contract management official from DCMA settled the whole mess for $283 million.

Then came the hotline call to the DoD Inspector General (DoD-IG). The complainant alleged that there was pressure from the highest levels of DCAA and DCMA to settle the litigation for an amount that was agreeable to the contractor (Pratt Whitney) rather than an amount that was fair to the taxpayers.

After an eight year investigation, the DoD-IG was unable to substantiate the allegation but it did find a host of other problems. The DoD-IG obtained and analyzed DCAA and DCMA legal, negotiation, and settlement files and documents, obtained and analyzed relevant e-mail communications relating to negotiation and settlement, reviewed applicable laws, regulations, DoD Instructions, DCMA instructions, and DCAA policies, and conducted interviews with DCAA and DCMA personnel. Even though the DoD-IG concluded that actions taken by various Government officials to explore the feasibility of an administrative settlement with Pratt Whitney in lieu of continued litigation did not constitute pressure to settle for $500 million less than what the Government determined had been overbilled, it found plenty of problems in the settlement process. Seems like the Government just wanted to settle, no matter the cost. It had people doing things they were not qualified to do - like DCAA weighing in on "litigative risks".

Don't like the Government's position on something? Just wait them out. Everyone vested in the dispute will leave/retire and their successors will not like their inheritance.

You can read the entire DoD-IG report here.

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