Motions for Reconsideration of Previous Decisions

A 'motion for reconsideration' asks the judge to reconsider his/her decision in light of other facts, circumstances, or law that wasn't brought up in the original hearing on the matter.

In the context ASBCA (Armed Services Board of Contract Appeals) decisions, Rule 20 allows such motions to be filed by either party and must set forth specifically the grounds relied upon to grant the motion. Motions must be filed within 30 days of receiving the Board's decision. Opposing parties have 30 days after a motion has been filed to file any cross-motion for reconsideration. Extensions to these times are not granted.

It is well established that motions for reconsideration are not granted lightly. In order to prevail on a motion for reconsideration, a contractor or the Government must demonstrate a compelling reason for the Board to modify its original decision. There are three bases upon which the ASBCA will reconsider a previous decision:

• Newly discovered evidence
• Mistakes in finding of fact
• Errors of law.

Motions for reconsideration are not intended to provide either party, the contractor or the Government, with another chance to again argue its position that was previously raised and denied. In some decisions where motions for reconsideration have been heard, the ASBCA is highly critical of parties that try to do just that - rehash the same arguments.

The probability of success in filing motions for reconsideration are slim. A brief scan of ASBCA decisions involving motions for reconsideration during the last couple of years found none that were not denied. There was one case where the Government argued that an opinion included factual errors as well as legal errors that stemmed from the factual errors. The ASBCA agreed that its decision included one factual error but it viewed the error as immaterial in the circumstances so denied the motion for reconsideration.

Claim for Costs Incurred During Stop-Work Order Denied by the ASBCA

In December 2017, the Army awarded a contract for information technology support services to Advanced Global Resources (AGR). A few days later, the award was protested to the GAO (Government Accountability Office) so the Army issued a stop-work order (SWO) pending the outcome of the protest. After GAO denied the protest, the Army lifted the stop-work oder. AGR then filed a claim for direct costs it expended during the stop-work order period plus extended home office overhead costs.

The day after contract award, AGR entered into an employment contract with Mr. McKissick. A week later, the Army issued its stop-work order which stated, in part, that AGR was not authorized to purchase materials or services until further notified and to stake all reasonable steps to minimize incurring costs associated with the stop-work order.

Eventually the protest was denied and on March 26, 2018 the Army lifted the stop-work order and advised that AGR was free to start the process of obtaining a clearance to manage cleared personnel. It took an additional two months for AGR to receive its clearance.

During the stop-work order period, AGR continued to pay Mr. McKissick's salary even though the employment agreement allowed the company to release him, furlough him, or put him on unpaid leave. Additionally, during the stop-work order, AGR continued to pursue other opportunities, bidding on at least six requests for proposals, winning one of them.

AGR filed a claim for the direct wages paid to Mr. McKissick during the stop-work period as well as unabsorbed overhead. AGR appealed to the ASBCA. The Army asserted that AGR was not entitled to the direct costs because it failed to minimize costs during the stop work period and was not entitled to unabsorbed overhead because the performance period was not extended as a result of the order. Additionally, AGR was not on standby, not subject to a delay of indefinite duration, was not required to be able to resume work immediately at full speed and did not demonstrate that it was impractical for it to obtain replacement work.

The ASBCA sided with the Government and denied AGR's claim. You can read the full decision here.

Summary Judgments - What Are They?

In law, a summary judgment is a judgment entered by a court for one party and against another party without a full trial. Either party can request the court (e.g. the Board of Contract Appeals) for a summary judgment and often times, both parties will make cross-motions for a summary judgment.

In the context of ASBCA (Armed Services Board of Contract Appeals) and civilian agencies Boards of Contract Appeals, motions for summary judgement are evaluated under well-settled standards.

First, summary judgments are properly granted only where there is no genuine issue of material fact and the party that requests the summary judgment is entitled to judgment as a matter of law.

Second, the moving party bears the burden of establishing the absence of any genuine issue of material fact and all significant doubt over factual issues must be resolved in favor of the party opposing summary judgement.

Third, in the course of the Board's evaluation of a motion for summary judgment, its role is not to weigh the evidence and determine the truth of the matter, but rather to ascertain whether material facts are disputed and whether there exists any genuine issue for trial. A material fact is defined as one which may make a difference in the outcome of the case.

Fourth, the opposing party must assert facts sufficient to show a dispute of material fact. To ward off summary judgment, the non-moving party must do more than make mere allegations, it must assert facts sufficient to show a dispute of material fact.

Once these four standards are met, the Board can and does render summary judgments.

What is the "Election Doctrine"?

Under the Contract Disputes Act (CDA), in lieu of appealing a decision of a contracting officer to one of the Boards of Contract Appeals (e.g. ASBCA), a contractor may bring an action directly on the claim in the United States Court of Federal Claims.

Courts have consistently interpreted the CDA as providing the contractor with an either-or choice of forum. Once a contractor makes a binding election to appeal the contracting officer's final decision to a board of contract appeals or to the Court of Federal Claims however, the contractor can no longer pursue its claim in the other forum.

A contractor is deemed to have made a binding election when i) it has sought to avail itself of one forum over another and ii) that forum has the ability to exercise jurisdiction at the time the election is attempted.

A recent decision by the ASBCA (Armed Services Board of Contract Appeals) illustrates the application of the 'Election Doctrine'.

In 1987, the Army Corps of Engineers awarded a contract to Melville Energy Systems (MES) to replace boilers in buildings at McGuire Air Force Base. Two years later, in 1989, the Army terminated the contract for default for failure to complete contractually required work. In 1995, appealed the default termination to the United States Court of Federal Claims and lost its appeal. In April of this year (24 years later!) MES appealed the default termination to the ASBCA asking that it be converted to a termination for convenience. MES also asked for recovery of an alleged unpaid contract balance and other contract price adjustments.

The ASBCA didn't have to decide on the merits of the case. It dismissed the appeal based on the Election Doctrine. MES already had its day in court when it filed its initial appeal with the U.S. Court of Claims.

What is the ASBCA's Jurisdiction?

Appendix A to the DFARS (DoD FAR Supplement) contains the charter and rules for the Armed Services Board of Contract Appeals (ASBCA). Contractors considering an appeal of a contracting officers' decision should become familiar with these rules, even where an attorney has been retained. Familiarization with the rules will assist in understanding the process and the purposes for which attorney's do what they do.

The Appendix leads off with the ASBCA's charter - the things that it can do. Often times, when reading through cases, you will see comments related to 'jurisdiction'. Sometimes the Board will need to establish that they are the correct entity to hear the appeal. Sometimes they refuse appeals because they are outside of their jurisdiction.

The first part of the Charter reads as follows:

There is created the Armed Services Board of Contract Appeals which is hereby designated as the authorized representative of the Secretary of Defense, the Secretary of the Army, the Secretary of the Navy and the Secretary of the Air Force, in

• hearing
• considering and
• determining appeals

by contractors from decisions of contracting officers or their authorized representatives or other authorities on disputed questions.

These appeals may be taken

1. pursuant to the Contract Disputes Act of 1978 (41 USC Sections 7101-7109
2. pursuant to the provisions of contracts requiring the decision by the Secretary of Defense or by a Secretary of a Military Department or their duly authorized representative, or
3. pursuant to the provisions any any directive whereby the Secretary of Defense or the Secretary of a Military Department or their authorized representative has granted a right of appeal not contained in the contract or any matter consistent with the contract appeals procedure.

The Board may determine contract disputes for other departments and agencies by agreement as permitted by law. The Board shall operate under general policies established or approved by the Under Secretary of Defense responsible for acquisition and may perform other duties as directed not inconsistent with the Contract Disputes Act of 1978.

The Board shall decide the matters before it independently.

That last sentence is comforting and informative. The Board will act independently meaning they will not be coerced, manipulated, or commanded to take certain positions by powerful people within the Government or contractors.

Board Decision Becomes Treatise on FAR 31.201-3 - Reasonableness

In 2001, the Army awarded a contract to Brown & Root Services, Inc (KBR) for support services during military operations in Iraq (commonly referred to as the LOGCAP III contract). KBR. Two of KBR's subcontractors filed REA's (Requests for Equitable Adjustment) with KBR. KBR paid the subcontractors and then in turn, requested reimbursement from the Army. The Army denied the cost so KBR appealed to the ASBCA.

The ASBCA also denied the appeal because it found the KBR's actions and the resulting costs to be unreasonable.

First, KBR agreed to the validity of its subcontractor's REA after concluding that performance delays were the Government's fault. However, after examining the facts and the contract language, the Board found that it was not reasonable for KBR to conclude the the Government failed to perform the prime contract.

Second, KBR did nothing to analyze the propriety of its subcontractor's claimed costs. Although KBR recognized that its subcontractor could only seek its actual costs, it did not require evidence of actual cost before paying out a $25 million settlement. Instead of determining the actual number of delay days, KBR relied on its subcontractor's unrealistic model of estimating delay days.

This is a lengthy ASBCA decision but is highly instructive for someone trying to understand how the Board might apply the FAR 31.201-3 "reasonableness" standard.

File a Claim First, Then File Your Appeal

The ASBCA (Armed Services Board of Contract Appeals) dismissed, for lack of jurisdiction, an appeal by a contractor because there was insufficient evidence to show that the contracting officer ever received the claim.

The Board ruled that it is up to the appellant (i.e. the contractor) to demonstrate by a preponderance of the evidence that it first presented its claim to the contracting officer before appealing to the Board.

The contractor, Starwalker PR LLC, identified an email addressed to the contracting officer (and others) that referenced an attached certified claim. That email however did not provide the referenced attachment. Furthermore, the contracting officer testified under oath that she did not receive the claim.

The Government moved to dismiss the appeal for lack of jurisdiction. The contractor didn't request that the Board deny the Government's request but merely asked for a stay of proceedings to give the contracting officer time to decide the claim.

The Board granted the Government's motion to dismiss. The Board noted that the preponderance of the evidence before it did not demonstrate that the contractor had first presented its claim to the contracting officer.

Guess that's one way for the Board to get rid of its backlog. It doesn't solve the long-term problem however since the contractor can simply resubmit its claim to the contracting officer and if necessary, re-file an appeal with the ASBCA.

Deadline for Filing Appeal Could Be Extended

Under the Contract Disputes Act (CDA), a contractor has 90 days to appeal a contracting officer's final decision. The 90-day period in which to appeal a contracting officer's decision to the Board is jurisdictional and may not be waived.

But what if the contracting officer did something to lead a contractor to believe that its final decision was not so "final", that there was an offer to negotiate a resolution? Can that 90-day calendar start over?

Yes, the 90-day calendar can start over, in some cases. Its called "vitiating the finality" of the final decision (or notice of termination, or some other form of contracting officer final action).

The test for vitiation of the finality of a contracting officer's determination is whether the contractor presented evidence showing it reasonably or objectively could have concluded the contracting officer's decision was being reconsidered. In one ASBCA case, a lack of finality was found where the contracting officer met with the contractor after the issuance of the termination notice, discussed the default termination at the meeting, and requested the contractor to submit settlement alternatives in writing that were proposed at the meeting. The focus is on whether any Government actions could have reasonably led a contractor to believe that the subject matter was not yet final, thereby making an appeal to the Board unnecessary.

In another more recent case (ASBCA 61026, Aerospace Facilities Group, Inc.), after the contracting officer issued a notice of termination for default, it expressed willingness to engage the contractor to discuss the facts surrounding the termination on three separate occasions and discuss whether the contractor would deliver equipment required by the contact. This served to keep the matter open and destroyed the finality of the termination notice. The contractor was lead to believe that the Army was reconsidering the decision based on their emails and phone conversations. Ultimately the contractor filed a claim, the Government tried to get it thrown out because it was received later than 90-days after the notice of termination, but the ASBCA turned down the Government's attempt.

The best course of action is to file timely claims when appropriate. Don't let the Government's actions lead you to believe that it has stayed its final decision. The next court might not be so contractor-friendly.

Contractor Waives Its Rights to File a Claim

In 2014, the AAFES (Army and Air Force Exchange Service) awarded a contract to Team Hall Venture to operate a frozen yogurt concession at a food court on a military base. The contract period of performance was for up to ten years. The concession opened that November but had to close from time to time due to rodent infestation and flooding. About a year and a half after opening, the concession ceased operations and the contract was terminated.

As part of the termination agreement, Team Hall released AAFES from any and all obligations related to the contract and waived any claim against AAFES for monetary or other relief to the contract including any that may arise in the future.

In September 2015, about two months following termination, Team Hall presented a certified claim for $673 thousand representing lost profits for the eight years remaining on the contract. The contracting officer denied all but $30 thousand  of the $673 thousand. Team Hall appealed the contracting officer's final decision to the ASBCA (Armed Services Board of Contract Appeals).

The ASBCA denied the appeal, noting the plain language of the waiver signed by Team Hall. The ASBCA gave no credence to Team Hall's assertion that the Government slipped the language into the contract modification at a later date.

The ASBCA did not rule on the validity of the claimed amount - i.e. whether lost profits are recoverable under a contract termination. The Board didn't have to as the contractor had waived any rights to additional monies.

The full decision can be read or downloaded here.

The Importance of a Precisely Worded Final Decision

In 2014, the Army awarded a contract to a company called Protec for maintenance, inspection, and repair of fire alarm, fire suppression, and evacuation systems in Germany. In 2015, the contracting officer posted an unsatisfactory report in CPARS (Contractor Performance Assessment Reporting System) and also refused to pay some of Protec's invoices.

In 2016, Protec submitted a certified claim regarding the unsatisfactory CPARS reports and a certified claim for the unpaid invoices. In 2017, the contracting officer issued a COFD (Contracting Officer Final Decision) denying the claim for several reasons including (i) failure to maintain required professional certifications and (ii) failure to submit untimely maintenance schedules and condition reports and failed to comply with schedules, (iii) partial completion of some inspections, (iv) failure to provide a proper quality control program. The COFD concluded that the CPARS evaluation was accurate, and that the Government cannot pay invoices when the contract called for services that, even if attempted, did not comply with the performance work statement and certification requirements. The result of these failures cased any work performed by Protec to "be of no value to the Government.

Protec appealed to the ASBCA but the Government quickly moved to have the appeal dismissed for lack of jurisdiction. The Government argued that the COFD was invalid due to the fact that the COFD's basis for denying the claims purportedly was a suspicion of fraud and therefor the ASBCA lacked jurisdiction.

The ASBCA denied the motion calling the Government's position nonsense. The ASBCA stated that a suspicion of fraud was not the basis for the COFD. In fact, the COFD did not even mention fraud or a suspicion of fraud. Since the COFD was based upon rationales that the contracting officer was authorized to asset, the ASBCA has jurisdiction over the appeals.

Punitive Damages and Missed Opportunities

Have you ever wanted to sue the Government for punitive damages? If so, you better find a legal jurisdiction other than one of the Boards of Contract Appeals.

Have you ever thought that the Government's action or inaction caused your firm to lose out on opportunities? If so, you had better be prepared to show a strong nexus between the actions of the Government and the consequential damages.

In 2010, the Air Force at Eielson Air Force Base near Fairbanks Alaska contracted with Shaw Building Maintenance (Shaw) for janitorial services. The contract ended in 2013.

Nearly four years later, Shaw presented a certified claim to the contracting officer consisting of:

1. $9,045 in equipment losses
2. $2,010 in Prompt Payment Act interest
3. $408,725 for punitive damages, and
4. $1,882,002 for "missed opportunities" from contracts not obtained from third-parties, allegedly because of the Government administration of the janitorial service contract.

The Government denied the claim so Shaw appealed to the ASBCA (Armed Services Board of Contract Appeals).

The Government moved for dismissal of the punitive damages and missed opportunities claims.

Regarding the "missed opportunities" claim, the Board wrote:

... the attenuation of the connection between the government's administration of the contract and appellant's claim, essentially for monies allegedly lost under contracts that appellant did not enter with third parties, is one for a type of consequential damages that are too remote and speculative to be recovered against the government.

Consequently, the  $1.9 million "missed opportunities" claim was dismissed.

Concerning the punitive damages part of the claim, the Board wrote that it had no authority to award punitive damages. Awarding punitive damages was not part of its charter.

Consequently, the $409 thousand punitive damages claim was dismissed.

That left about $11 thousand remaining on the claim which hopefully the parties can settle on without spending too much time, effort, and money.

The Board decision can be downloaded here.

Court Orders Contracting Officer to Make a Decision

In 2011, The Navy awarded a contract to Fluor Federal Solutions (Fluor) to provide base operations support services at four Navy installations in Florida. In 2015, Fluor submitted an REA (Request for Equitable Adjustment) proposal (actually a consolidated REA of previously submitted REAs). In 2016 (seven months later), the Navy denied Fluor's REA stating that the submission was insufficient to reverse the Navy's position on previously submitted REAs. Fluor then submitted the consolidated REA as a certified claim.

The Navy then requested DCAA (Defense Contract Audit Agency) to audit the claim but told Fluor that a final decision would be issued on or before April 28th, 2017. In April however, the Navy informed Fluor that it was still waiting on the results of the DCAA audit and expected it to be completed by July 31, 2017 and a contracting officer final decision by December 1, 2017.

In September 2017, DCAA repeated requests for information that Fluor had already responded in writing the previous January and March - that it did not maintain certain records in the manner DCAA requested but expressed its willingness to answer specific questions regarding the data used to price the claim and provide DCAA an additional walk-through of the data.

Without responding to Fluor's September request, DCAA slapped a "denial of access to records" charge against Fluor on October 23, 2017. Eight days later, Fluor again repeated its assertion that it had responded to all DCAA requests and offered once again to meet with DCAA representatives. DCAA never responded to Fluor's letter.

In November 2017, the Navy notified Fluor that it was still waiting on the DCAA audit and established a new COFD (contracting officer final decision) by March 2018. Later that month, DCAA notified Fluor that it was cancelling its audit.

Fluor appealed this lack of progress to the ASBCA (Armed Services Board of Contract Appeals).

The Board noted that the Contracts Disputes Act (CDA) requires that a contracting officer issue a decision within a reasonable time taking into account such factors as the size and complexity of the claim and the adequacy of the information in support of the claim provided by the contractor. In this case, Fluor's claim is large and complex however the Navy had the information regarding the consolidated REA and claim for over two years. Given the history and number of promised COFDs and the present situation where it is unclear when the Contracting Officer will be issuing a final decision, it seems the parties have reached a stalemate which most likely will not be broken by agreement.

Accordingly, the Board directed the contracting officer issue a decision on Fluor's claim by January 31, 2018.

Calendar Days vs Work Days

Family Entertainment Services (FEI) was awarded a grounds maintenance contract for nearly 4,000 acres at Fort Campbell, Kentucky. One of the contract line items required the contractor to mow grass on a 21 day schedule. From the beginning of the contract, FEI fell behind in the mowing schedule and despite several cure notices from the Army, was unable to catch up. Ultimately, the Army deducted $82 thousand from the contract price because FEI did not meet the terms of the contract.

FEI appealed to the ASBCA on the basis that the term "day" should be defined as a work day instead, as the Army contends, a calendar day. On this basis, a 21 day schedule would equate to approximately 27 to 29 calendar days (depending upon how weekends fell) which means the Army withheld too much money. FEI asked the ASBCA to clear up the contract ambiguity.

The ASBCA has published guidance regarding ambiguities in a contract.

In resolving disputes involving contract interpretation, we begin by examining the plain language of the contract. We construe a contract "to effectuate its spirit and purpose giving reasonable meaning to all parts of the contract. the threshold question here is whether the plain language of the contract "supports only one reading or supports more than one reading and is ambiguous, as held by the Board. Ambiguity exists when contract language can reasonably be interpreted in more than one way.

Parties having a differing opinion of contract terms in not enough to show ambiguity. Rather, both interpretations must fall within a 'zone of reasonableness.

In this case, the ASBCA found that there is only one reasonable way to interpret the contract. FEI's opinion that "day" should mean "work day" is not a reasonable interpretation of the contract. The contract incorporates FAR 2.101 which defines "day" as a calendar day (unless otherwise specified in the contract). The Board found no exceptions in the contract that would lend credence to a different interpretation so denied the appeal.

The full decision can be found here.

ASBCA Reduced Its Backlog During Fiscal Year 2017

The Armed Services Board of Contract Appeals (ASBCA) recently published its annual report for fiscal year 2017. It shows that the backlog of pending cases has decreased by about 10 percent from the prior year, from 1,077 to 970 cases. During the year, 524 new cases were docketed, 47 cases were reinstated and 678 cases were dispositioned.

Of the 524 new cases, 57 percent originated from the Army and the Army Corps of Engineers. The second highest agency in terms of new cases was DCMA (Defense Contract Management Agency) coming in at 18 percent (92 new cases). This was the lowest number of new cases in the past five years for DCMA and less than half the number of cases from fiscal years 2014 and 2015.

Of the 678 dispositioned cases, 80 appeals were sustained (in whole or in part), 59 appeals were denied, while 539 cases were dismissed. Dismissed cases include those that were resolved by the parties prior to hearing, withdrawn by one of the two parties, or failure to meet the rules of the ASBCA.

The ASBCA is not necessarily the final authority in contract appeals but it has an excellent track record. Of the 139 cases sustained or denied, only eight were appealed to the U.S. Court of Appeals for the Federal Circuit (CAFC). Seven of those are still pending. The CAFC disposed of 10 appeals of ASBCA decisions during fiscal year 2017. Only one of the ASBCA decisions was reversed.

The Board's annual report did not provide statistics on how long a case takes to resolve. The quickest way to resolve contract disputes is to negotiate a fair and reasonable settlement with the contracting officer. Second quickest is to consider whether ASBCA Rule 12 proceedings (Optional Small Claims (Expedited) and Accelerated Procedures) might work. Rule 12 usually means that both parties will have to give up something in order to reach settlement. If the dispute goes to formal hearing, expect a the process to take a year or more.

Faceoff: Contract Clause vs Proposal Language

Spinitar was awarded a $165 thousand firm fixed price Army contract to install video conferencing system at Fort Shafter Flats, Hawaii. The solicitation included the clause at FAR 52.212-4 which states in subsection (k) that the contract price includes all applicable Federal, State, and local taxes and duties.

Spinitar's proposal on the other hand included a note that stated the proposed price did not include any applicable sales taxes. Hawaii's GET (general excise tax) tax reimbursement policy implemented for federal purchases will be utilized.

After the work was completed, Spinitar submitted a bill to the Army for $7,624, the amount of Hawaii GET it owed on the contract revenue.

The Army denied the claim, citing the aforementioned FAR clause. Spinitar appealed to the ASBCA (Armed Services Board of Contract Appeals).

Who do you think prevailed, the Government citing FAR 52.212-4 or Spintar citing its initial proposal?

The ASBCA denied Spinitar's appeal. The ASBCA wrote:

We reject [Spinitar's] interpretation as unreasonable. The clauses could not be more clear. They provide that any contract price adjustment for changes in mandated wage rates shall be limited to the changes in the wages, fringe benefits and accompanying changes in social security, unemployment taxes and worker's compensation insurance and shall not include any additional amounts for G&A, overhead or profit on these costs... The contract also clearly states that all Federal, state and local taxes shall be included in a contractor's bid. This state excise tax and any projected increases thereof, should have been included in [Spinitar's] bid.

Don't expect to override a contract clause by slipping contrary provisions into your price proposal.

You can read the full ASBCA decision here.

Government Claim Denied When It Couldn't Prove that Money Had Been Paid

Alaska Aerospace Corporation (AAC) is a corporation fully owned by the State of Alaska. It operates a missile test facility on Kodiak Island (Alaska) that has been used by the Missile Defense Agency (MDA) and the Air Force.

Employees of Alaska Aerospace are, in all respects, employees of the State of Alaska, and as such, receive all of the fringe benefits accruing to State employees including a defined benefit pension plan.

In it's Fiscal Year 2008 incurred cost proposal, AAC included contributions to the State's defined contribution pension plan including $302,637 in pension plan contributions that were paid by the State of Alaska on AAC's behalf. DCAA questioned the amount which the contract office then demanded payment in his COFD (Contracting Officer Final Decision). The contracting officer also demanded penalty even though DCAA audit report that questioned the amount concluded that the amount was not subject to penalty.

AAC appealed to the ASBCA (Armed Services Board of Contract Appeals).

The Government quickly retracted on its penalties argument and instead argued that it was entitled to recover that amount because the government paid that amount to AAC as reimbursement of employee pension plan contributions and AAC did not incur those charges since the State of Alaska made the contributions, not AAC.

AAC countered that it did incur those charges since AAC is a corporation run by the State of Alaska. Furthermore, AAC argued that the government is not entitled to recovery as it never paid any of the claimed amount to AAC. AAC states that the employee pension plan contributions were included at the end of FY08 in AAC's Incurred Cost Proposal and were not a part of any invoices that were paid by the government.

The Board sustained AAC's appeal on the basis that the Government could not show that it had reimbursed AAC for any of the costs. However, the Board expressed no opinion as to whether the pension plan contributions at issue in the appeal are allowable costs.

You can read the full ASBCA decision here.

Inter-divisional Transfers at Price

Materials, supplies, and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates under common control must be made on the basis of cost incurred with one exception; transfers may be made at price when it is the established practice when it is the established practice of the transferring organization to price inter-organizational transfers at other than cost for commercial work and the price of the item being transferred is based on adequate price competition, is set by law or regulation, is a commercial item, or a waiver has been granted. Additionally, the contracting officer cannot have already determined the price to be unreasonable (see FAR 31.205-26(e)).

 ATS is a Government contractor that provides counter-terrorism training services and solutions, including training related to how to identify, defuse, and evaluate IEDs (Improvised Explosive Devices). The company has two divisions involved in delivering training; one involved in training and the other involved in manufacturing training aids and devices used in the training. The training materials and equipment produced by ATS and are sold commercially including commercial sales under the GSA Schedule.

In 2009, the Army awarded a $200 million five-year CPFF (Cost Plus Fixed Fee) contract to ATS to provide training for armed forces to proactively defeat IED threats. ATS proposed that training materials and equipment produced by its sister-division would be charged to the contract at "price" based on provisions in FAR 31.215-26. In its pre-negotiation objective memorandum (POM) the Government noted that those particular costs were "realistic, fair and reasonable". Work began and ATS began billing the Government for inter-divisional materials at catalog prices.

In 2011, DCAA (Defense Contract Audit Agency) issued an audit report declaring that ATS' accounting system was inadequate, containing a "significant deficiency that is considered to be a material weakness..." DCAA found that ATS was billing materials acquired from its sister-division at "price" instead of at "cost". Turns out, DCAA was relying on an accounting technicality because ATS was not first transferring the material from one division to another before billing the Government. DCAA noted that ATS had established commerciality of its products and demonstrated a physical transfer of material goods between its two divisions, there was never an accounting entry made to reflect that transfer. Thus, DCAA (and later DCMA - Defense Contract Management Agency) did not believe that ATS satisfied the requirements of FAR 31.205-26(e)(1)(2).

Eventually, the contracting officer issued a final decision disallowing the transfer at "price". ATS appealed to the Armed Services Board of Contract Appeals (ASBCA). The ASBCA ruled in favor of ATS, calling out the Government for its failure to carry its burden of proof to justify the allowance under FAR 31.205-26(e) and secondarily ruling that ATS is entitled to recover its commercial catalog prices for training materials. Essentially, the ASBCA called nonsense, the Government claim that there must first be an accounting entry showing the transfer from one division to another before the item(s) can be billed to the Government at price.

You can read the entire ASBCA decision here.

Is a Lease Really an Intangible Asset?

Cost Accounting Standard (CAS) 404 establishes criteria for determining the acquisition costs of tangible assets which are to be capitalized. It requires contractors to capitalize the acquisition costs of tangible assets in accordance with a written policy that is reasonable and consistently applied. We have detailed the essential requirements of CAS 404 in a previous post that can be read here.

Recently, there was a decision handed down by the ASBCA (Armed Services Board of Contract Appeals) involving CAS 404 and whether the standard applied to Capital Leases. The case involved Exelis, Inc.'s failure to properly classify a building lease. Exelis recorded the lease as an "operating lease" rather than a "capital lease". Under an operating lease, a contractor simply records the rental payments as an expense (FAR 31.205-36) Under a capital lease, the present value of the lease expenses capitalized and depreciated over the life of the lease (FAR 31.205-11).

The Government took exception to Exelis' accounting for lease payments and cited the contractor for non-compliance with CAS 404. The Government calculated the impact at just over $3 million. Exelis appealed to the ASBCA who ruled that CAS 404 did not apply to capital leases as capital leases are not tangible assets but rather intangible assets. The Government appealed the ASBCA decision but lost the appeal as well. We will not go into the details of those decisions because we have covered those details in previous posts. See here and here for our coverage of the initial decision and the appeal, respectively.

Normally capitalization and depreciation issues are non-controversial. Depreciation is an allowable expense so disagreements usual hinge on useful lives. Contractors want shorter lives, the Government wants longer useful lives. The imipact is just the time value of money. However, since most contractors also claim Facilites Capital Cost of Money (FCCM) on the net book value of assets, the impact on the time value of money is a wash. The higher the book value (acquisition cost less depreciation), the more FCCM a contractor recoups.

So what is the big deal with the Exelis depreciation case? The big deal lies in Exelis' contract mix. Of the $3 million cost impact calculated by the Governement, $2.6 million applies to fixed priced contracts and the remaining $400 thousand applies to flexibly priced contracts. The Government is going to recover the $400 thousand through the settlement of indirect costs process (FAR 52.216-7). However, there is no simple contractual mechanism to recover the $2.6 million by which fixed priced contracts were overstated because Exelis applied the wrong accounting methodology to lease payments. To recover those increase costs, the Government would need to resort to TINA (Truth in Negotiation Act) and there is serious concern as to whether the Government could prevail in a TINA case.

The ASBCA decision continues to baffle us. According to the ASBCA, "...CAS 404 applies to 'Tangible Assets". The CAS defines "tangible capital asset(s)" as "asset(s) that  (have) physical substance. Thus, the plain language of the CAS provides that CAS 404 applies to tangible assets which are assets with physical substance. A lease is an intangible rather than an intangible asset because the lease itself is a legal right to use and occupy the building and does not have 'physical substance'".

Is a lease really an intangible asset as the ASBCA states? For financial reporting purposes, leases are considered liabilities. We have yet to see a case where leases are reported on financial statements as intangible assets. Would the ASBCA also say that a mortgage represents an intangible asset because there is no physical substance to the piece of paper?

Going to Court? Give it Your Best the First Time Around

Last November we highlighted an ASBCA (Armed Services Board of Contract Appeals) ruling from August 29, 2016 that CAS 404, Capitalization of Tangible Assets) does not apply to capital leases. This ruling caught us by surprise as almost everyone in Government contracting circles believed otherwise and acted on that premise in determining allowable costs (depreciation) on Government contracts. Read it here.

The Defense Contract Management Agency (DCMA) who defended the case before the Board also thought the Board was wrong and moved for a reconsideration of the Board's opinion alleging that the Board had made a "legal error". The Board denied DCMA's motion and wrote some strong wording concerning DCMA's approach to handling the original case and the motion for reconsideration. The Board wrote:

A motion for reconsideration is not the place to present arguments previously made and rejected. Where litigants have once battled for the court's decision, they should neither be required, nor without good reason permitted, to battle for it again. Motions for reconsideration do not afford litigants the opportunity to take a second bite at the apple' or to advance arguments that properly should have been presented in an earlier proceeding.

Moreover, we note that DCMA's argument regarding the interpretation of CAS 404 comprised just five and-a-half pages of its twelve-page brief in opposition to Exelis' motion to dismiss. Now DCMA has submitted a 34 page brief devoted solely to this issue. Put simply, the rulings of a board are not mere first drafts, subject to revision and reconsideration at a litigant's pleasure. The proper time for DCMA to have made these arguments was in response to Exelis' motion to dismiss, and not in a motion for reconsideration.

Notwithstanding the denial for reconsideration, the Board considered DCMA's additional arguments and found none of them to be persuasive. Those arguments were:

1. the Board misinterpreted the text of CAS 404
2. the Board incorrectly held that GAAP (Generally Accepted Accounting Principles) play no role in the interpretation of CAS 404 and
3. that the Board improperly applied the standard of review by assuming the Exelis' lease of an office building was not a capital lease.

As we stated in our previous posting, the Government can still pursue the case based on FAR and probably will. It is not unlikely however that DCMA will appeal the Board's rulings to a higher court.

Allowability of Consultant Costs Does Not Necessarily Depend Upon the Existence of "Work Product"

Earlier this month, the ASBCA (Armed Services Board of Contract Appeals) published its decision on a wide range of cost issues that were disallowed by a DCMA (Defense Contract Management Agency) administrative contracting officer (ACO). The contractor, Technology Systems, Inc. (TSI) challenged the ACO's decision, winning on some of the issues and losing on others. The decision is very informative in helping Government contractors understand and apply FAR cost principles and we will spend a few days discussing various aspects of the decision.

Today we start with the ASBCA position on what constitutes "adequate support" for professional and consultant service costs.

SMI was a consultant hired by TSI to provide it with both marketing and lobbying services. It had separate agreements with TSI for each and invoiced TSI separately for each. The contracting officer disallowed about $51,000 for the marketing services on the grounds that TSI did not provide enough documentation to permit an understanding of the work performed nor did it provide the "work products" and other itesm that the ACO believed were required in accordance with the provisions of FAR 31.205-33(f)(2) and (3).

FAR 31.205-33, Professional and consultant services costs provides that fees for services rendered are allowable only when supported by evidence of the nature and scope of the service provided and that evidence necessary to determine that work performed is proper and does not violate law or regulation shall include agreements, invoices, and work products.

That seems pretty clear, right? Not so fast. Here's what the Board ruled:

The government labors under the false impression that the FAR requires a consultant to create "work product" merely for the purposes of proving its costs. Though the FAR language in question is not as clear as we might like, it can be read - as we read it here - to impose no such requirement. Moreover, we have factually found the invoices submitted by TSI to be adequate to support a finding that TSI incurred the charged costs for SMI's marketing activities.

The government makes a superficially persuasive argument, that the FAR's statement that the evidence necessary to determine that the work is proper "shall include ... work products" and related documents, makes the provision of such documents mandatory. The problem with this interpretation of the FAR is that it does not account for the case in which such documents were never created by the consultant. Moreover, it does not account for the case where, as here, the invoices include the data that the FAR defines as work product, such as persons visited and subjects discussed. We further note, that DCAA's own audit manual reflecting the government's own interpretation of this FAR requirement, provides that "the auditor should not insist on a work product if other evidence provided is sufficient to determine the nature and scope of the actual work performed.

Thus, we conclude that FAR 31.205-33(f) may require the provision of a consultant's work product, if it exists, but is not so rigid as to require its creation when it would not otherwise be necessary for the consultant to perform its duties. To be sure, any lack of work product makes it more difficult for a contractor to prove that it incurred the costs for which it seeks compensation, and the lack of work product in an instance where the consulting work was of such a scale or scope that work product would be expected may properly subject the costs to question. As with most things, the proper amount of documentation and work product to be expected will largely depend on the scope of work performed, and we do not conclude that the FAR intended to impose "make work" upon consultants that would only lead to higher costs to the contractor which would then be imposed upon the taxpayer.

The burden of supporting professional and consultant service costs (as with any costs charged to Government contracts) is squarely on the contractor. However, if, as in this case, there is no formal work product, FAR allows for alternative evidence to support the nature and scope of the actual work performed.

The full ASBCA decision may be downloaded here.