Charged with a CAS Noncompliance? No Worry - Good Chance the Contracting Officer Will Ignore It

The Defense Contract Audit Agency (DCAA) is responsible for testing contractor compliance with Cost Accounting Standards (CAS) and report any noncompliances to the cognizant contracting officer, usually someone from the Defense Contract Management Agency (DCMA) to resolve the potential noncompliances.

FAR (Federal Acquisition Regulations) Part 30, Cost Accounting Standards Administration, contains the regulations on what should happen after issuance of CAS noncompliance reports. The Department of Defense, Office of Inspector General (DoD-IG) initiated an audit to see how well contracting officers were complying with these regulations. Its report was issued last week.

The IG selected 27 DCAA audit reports addressing noncompliances with CAS 403 (Allocation of Home Office Expenses to Segments), CAS 410 (Allocation of Business Unit G&A to Final Cost Objectives), and CAS 418 (Allocation of Direct and Indirect Costs) to determine whether contracting officers' actions taken in response to the 27 reports complied with FAR 30.6 (and DoD Instruction 7640.2, Policy for Follow-up on Contract Audit Reports).

The results, from a taxpayer's perspective, were disappointing. The IG found

• 12 instances in which contracting officers did not issue a Notice of Potential Noncompliance within 15 days, 
• 16 instances when contracting officers failed to complete all actions on the reported noncompliances within 12 months,
• 3 instances in which contracting officer did not have adequate documentation or rationale for determining that the DCAA reported noncompliances were immaterial,
• 8 instances in which contracting officers did not obtain a legal review of their CAS determination (as required by DCMA guidance)

As a result, correction of reported CAS noncompliances was delayed and contractors were inappropriately reimbursed for additional costs resulting from the noncompliances.

The IG recommendations included more training (of course, more training is the IG's solution to every problem) and more effective controls to ensure contracting officer compliance with the regulations. DCMA, of course, concurred with the recommendations, and why wouldn't they? Those recommendations are extremely benign.

You can read the entire IG report here.

You Go First. No, You Go First.

Last December, a DCMA (Defense Contract Management Agency) contracting officer (CO) issued a final decision to Beechcraft Defense Company (BDC) alleging that BDC was noncompliant with CAS (Cost Accounting Standard) 402 from 2006 to present. The final decision asserted a government claim for $5.9 million, including interest.

In February of this year, BDC appealed the final decision to the ASBCA (Armed Services Board of Contract Appeals). Subsequently, BDC filed a motion arguing that since the appeal involved a Government claim, the Government was in a better position to file the complaint and that the proceeding would be facilitated by the Government's filing of the initial pleading setting forth the full rationale for the assertion of its claim.

The Government responded that while it recognized the appeal involved a Government claim, the appellant, BDC, was in the best position to assert the facts that would establish a compliant accounting practice.

BDC did not agree with the Government. BDC stated:

Directing the Government to file the complaint would facilitate these proceedings because it would establish the factual and legal allegations underlying the Government's position from the outset, rather than having Beechcraft draft a complaint that speculates about the grounds for the Government's claim, and which may include information that is not relevant to the dispute.

When it comes to CAS Noncompliance, the Burden of Proving Noncompliance is upon the Government.

The ASBCA agreed with BDC. The Board stated that the Government's response evidences a basic misunderstanding concerning the alleged CAS violations. "It appears the government believes that it is appellant's burden to establish that its accounting system is CAS compliant. The law is otherwise. The burden of proving noncompliance is upon the government".

In its decision, the Board ruled as follows:

In the circumstances of this appeal, we conclude that the proceedings would be facilitated by the government setting forth in an initial pleading, the facts and rationale for its CO's decision finding that Beechcraft was noncompliant with CAS 402 and the position the government is taking before this Board. We do not deem this requirement to be onerous. The government should be fully conversant with its own claim.

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.

Dual Noncompliances

It is possible for a single contract issue to be noncompliant with both the Federal Acquisition Regulations (FAR) and similar provisions in the Cost Accounting Standards (CAS). For example costs dealing with pensions (CAS 412 and 413), insurance (CAS 415), and Independent Research and Development (CAS 420) all have counterparts in FAR. Similarly, the CAS Standard on Accounting for Unallowable Costs (CAS 405) has a parallel in FAR 31.201-6, Accounting for Unallowable Costs.

The Government will always process noncompliances that violate both FAR and similar provisions in CAS, as CAS noncompliances under the Cost Accounting Standards clause 52.230-2(a)(5). This clause requires contractors to (i) correct the noncompliant practice,  (ii) to pay the Government back for any resulting cost impact, and (iii) pay the Government interest on any overpayment that resulted from the noncompliance.

CAS is tougher than FAR when noncompliances are disclosed. A FAR noncompliance does not require corrective actions nor does it allow the Government to recover interest on any overpayments that resulted from the noncompliance (although penalties for unallowable costs may apply).