COSTS, PRICING & ACCOUNTING REPORT

Transcription

1 GOVERNMENT CONTRACT COSTS, PRICING & ACCOUNTING REPORT MARCH 2013 VOLUME 8 ISSUE 2 FEATURE ARTICLE 10 BBP 2.0 First Glimpse What Does This Mean For Contractors? Bill Walter and Mark Burroughs 1 In November 2012, Frank Kendall, the undersecretary of defense for acquisition, technology and logistics, issued a First Glimpse memorandum on Better Buying Power 2.0; Continuing the Pursuit of Greater Efficiency and Productivity in Defense Spending. 2 Contractors are working to determine how this will impact their business processes. This article is intended to put this in context of the view towards how the focus of increased reliance on cost will impact pricing in the near future. In staying with the current practice of using numeric codes to track generations of software tools, Kendall's memo is intended to be the next significant update to the initial Better Buying Power (BBP) concept issued in late 2010 by Ashton Carter. 3 BBP is aimed at obtaining greater efficiency and productivity in defense spending. The chart below compares the summary priorities of the initial BBP and the new BBP 2.0. Note that the original BBP priority Target Affordability and Control Cost Growth is broken into two separate priorities under BBP 2.0. One of the most significant differences between the two versions is a priority aimed at improving the acquisition workforce. IN THIS ISSUE: FEATURE ARTICLE 10 BBP 2.0 First Glimpse What Does This Mean For Contractors?... 1 Bill Walter and Mark Burroughs 11 Case Note: Space Gateway Support, LLC... 7 Richard C. Johnson and Richard H. Snyder CASES OF SPECIAL NOTE Karen L. Manos 12 GSA Schedule CO Must Decide Disputes Involving Schedule Contract Provision Interpretation Contractor's Lack Of Notice Of Assignment Did Not A ect Claim Validity COFC Holds That Taxes Clause Was Not Indemni cation Clause Defective Pricing Appeal Sustained Because Government Failed To Show Undisclosed Data A ected Contract Price Statute Of Limitations Partially Bars Government Cost Disallowance Claim Government CAS Noncompliance Claim Barred By Statute Of Limitations DEVELOPMENTS Karen L. Manos 18 In Brief Bill Walter, CPA, is a partner at Dixon Hughes Goodman and leads the Government Contractor Consulting Services group. Mark Burroughs, CPA, is a partner at Dixon Hughes Goodman and brings over 20 years of experience to the firm's Government Contractor Consulting Services group. Mat #

2 GOVERNMENT CONTRACT COSTS, PRICING & ACCOUNTING REPORT MARCH 2013 VOLUME 8 ISSUE 2 ENDNOTES: 2 September 14, 2010 Memorandum from Dr. Ashton Carter on Better Buying Power: Guidance for Obtaining Greater Efficiency and Productivity in Defense Spending. 3 November 13, 2012 Memorandum from Frank Kendall on Better Buying Power 2.0: Continuing the Pursuit for Greater Efficiency and Productivity in Defense Spending. 4 FAR Defense AT&L, Jan. Feb. 2013, p DOD News Briefing on Better Buying Power 2.0 with Deputy Secretary Carter and Undersecretary Kendall from the Pentagon, Nov. 13, Yogi Berra. 8 BBP 2.0 informational briefing with Focus Areas/Initiatives, November 13, 2012 Memorandum for Defense Acquisition Workforce. 9 FAR; Definition of Cost or Pricing Data, Final Rule 75 Fed. Reg (Aug. 30, 2010). 10 PSC helping find reference see article at st-2007/government-expands-efforts-to-ensurepricing-is-fair-and-reasonable.html Fed. Reg (Jan. 30, 2012). 12 Federal Acquisition Reform Act of 1996, P.L , 110 Stat Federal Acquisition Streamlining Act of 1994, P.L , 108 Stat S.Rep. 1884, 87th Cong., 2nd Sess., reprinted in 1962 U.S.C.C.A.N. 2476, Act of September 10, 1962, P.L (f), and subsequently codified as amended at 10 USCA 2306a. 16 National Defense Authorization Act for Fiscal Year 1991, P.L U.S. Congress Office of Technology Assessment, Redesigning Defense: planning the Transition to the Future U.S. Defense Industrial Base, pp , FAR (b)(1). 19 FAR (c)(3). 20 Results of studies performed by ADPA, Carnegie Commission, Defense Science Board Task Force, and Coopers & Lybrand/TASC between 1992 and Case Note: Space Gateway Support, LLC Richard C. Johnson and Richard H. Snyder 1 Readers of this publication in the past have sometimes winced at some of the appellate decisions on Government contract issues. But throughout, contractors and the bar have placed confidence in the professionalism, knowledge and scholarship of opinions of the Armed Service Board of Contract Appeals. It is a shock, then, to discover the opinion of a single ASBCA member in the APPEALS OFF SPACE GATEWAY SUPPORT, LLC, A.S.B.C.A. No , 2013 WL (Armed Serv. B.C.A. 2013) (SGS) case. 2 Beginning in 1998, Space Gateway Support LLC performed support services for NASA at a number of installations. NASA directed SGS to acquire certain laboratory equipment to replace existing equipment. The parties disagreed as to SGS' right under the Government Property (Cost Type) clause, Federal Acquisition Regulation , to receive a modest profit on the equipment purchases. SGS asserted Contract Disputes Act claims in approximately May 2006, in the total amount of $121,000. The parties agreed to resolve the matter under ASBCA Rule 11, Submission Without a Hearing, a provision normally invoked for smaller claims. Some six years later, a single Board judge issued a 235-page opinion denying the claim. The two other panel members concurred in the denial of relief, but not in the opinion. Of this ponderous effort, eight pages were required to state the facts of the case. The next 151 pages comprised a recitation of regulatory history from the Revolutionary War to the present, focusing on Government provision of facili- 1 Richard Johnson is a member and Richard Snyder is an associate in the law firm of Smith Pachter McWhorter PLC. K 2013 Thomson Reuters 7

3 MARCH 2013 VOLUME 8 ISSUE2 GOVERNMENT CONTRACT COSTS, PRICING & ACCOUNTING REPORT ties to contractors. Although this discourse was at times interesting and might well qualify as a scholarly contribution, it was largely irrelevant, and was certainly unnecessary to the result. The remaining 76 pages contained the body of the opinion, a large portion of which consisted of a rehash of the regulatory history already so compulsively detailed. Embedded in this latter section, however, was the extremely troubling legal opinion of this single board member. The writer of the opinion asserted that the body of FAR regulations not clauses are as binding on contractors as if they were included as clauses, and are, in effect, the same as clauses. He varied this refrain at a number of points in the document. For example, Procurement regulations, such as the FAR, therefore are no longer considered guideposts or instructions that must be expressly set forth in a contract to be binding on a contractor. Rather, for nearly half a century, the FAR and other procurement regulations have been deemed to have the force and effect of law if validly authorized and not inconsistent with any statute, and are the law which governs the award and interpretation of a contract as fully as if made a part of the contract. 3 The writer cites a number of prior U.S. Court of Claims decisions, chief among them Schoenbrod v. U. S., 187 Ct. Cl. 627, 410 F.2d 400 (1969), and SCM Corp. v. U. S., 227 Ct. Cl. 12, 645 F.2d 893, 28 Cont. Cas. Fed. (CCH) P (1981). 4 Neither decision supports the idea that the regulatory provisions of the FAR are incorporated in contracts as clauses. In Schoenbrod, the Government Accountability Office found that an awarded contract was illegal because the agency had violated the regulations mandating competition. The Court of Claims upheld the GAO and agency decisions, stating that the award was a violation of both the Federal procurement Regulation and the Department of the Interior Manual, and there was no breach of contract when defendant rescinded the contract, since it was initially invalid. 187 Ct. Cl., at 632, 634. In SCM, the Court of Claims affirmed an ASBCA decision denying payment to a fixedprice incentive contractor where the contractor refused to permit audit of its incurred costs. The right to audit was conferred by the Audit clause of the contract, and the Court interpreted the clause in light of the applicable Armed Services Procurement Regulation provisions, concluding that nothing in the contract entitles the contractor to... payment without an unrestricted audit. 227 Ct. Cl., at The SGS opinion writer next made the unremarkable statement that a provision of the then-current FAR 5 prohibiting contracting officers from executing contracts granting contractors profit or fee... upon the costs of facilities was unauthorized. Assuming that the equipment at issued constituted facilities, 6 this statement alone could have sufficed as the entire opinion, saving a substantial number of trees and probably hundreds of thousands of taxpayer dollars. However, instead of relying on the lack of authority to execute such a contract, the writer again asserts that as a matter of law, we must deem the requirements of FAR (c) applicable to SGS and its contract. 7 The writer next addresses the Chris Berg line of decisions, which holds that the Government's own regulations may at times be held to bind the Government. 8 Reasoning that FAR was enacted for the benefit of contractors as well as the Government, the writer stretches Chris Berg by asserting that it supports the incorporation of FAR regulatory provisions as clauses binding on contractors: SGS is not free to avail itself of the benefits provided by FAR , e.g., NASA's supply of equipment and other facilities needed to perform its contract, and ignore the parameters established in the regulation for its receipt of such benefits. SGS cannot cherry-pick the 8 K 2013 Thomson Reuters

4 GOVERNMENT CONTRACT COSTS, PRICING & ACCOUNTING REPORT MARCH 2013 VOLUME 8 ISSUE 2 parameters for supply of facilities it is willing to have govern NASA's furnishing to it of facilities... FAR , which benefits SGS, must be deemed a term of SGS's contract even though not set forth therein. Chris Berg and its progeny have nothing to do with incorporating FAR regulations as clauses in contracts. In Chris Berg, the Government suspected a bid mistake, which the contractor agreed had occurred, but the Government refused to allow the plaintiff to reform its bid, despite an ASPR provision sanctioning reformation in such circumstances. The Court of Claims held that the ASPR provisions on mistaken bids were written for the protection of bidders, and thus enforced the provision against the Government by reforming the contract to reflect what the plaintiff's bid would have been but for its mistake. 9 The SGS writer's final effort turns the Christian doctrine on its head by arguing that FAR represents a deeply engrained strand of federal procurement policy, and hence must be deemed to be incorporated as a clause of the SGS contract, despite the fact that the parties did not include it: we [sic] conclude that the prohibition on profit or fee set forth in FAR (c) is incorporated in SGS's contract by the Christian doctrine set forth by the Court of Claims nearly 50 years ago... We [sic] rely upon the doctrine here as an alternative ruling because the doctrine remains binding precedent... and this is one of those rare instances of a significant procurement policy spanning 95 years of our nation's history... In G.L. Christian & Assocs. v. United States... the Court of Claims held that a significant or deeply engrained strand of public procurement policy is to be considered to be included in a contract by operation of law... While Christian involved a standard clause which was mandated by regulation to be included in certain government contract,... application of the Christian doctrine does not depend upon whether there has been an intentional or inadvertent omission of a mandatory contract clause, but upon whether procurement policies are being avoided or evaded (deliberately or negligently) by lesser officials. 10 K 2013 Thomson Reuters After summarizing regulatory history regarding payment for facilities, the writer concludes that FAR (3)(c) thus reflects a significant and deeply ingrained strand of public procurement policy sufficient to require incorporation of the profit and fee bar as a matter of law. That this is a misuse of the Christian doctrine requires little discussion. The Christian doctrine applies only in situations in which the omission of a specific contract provision would constitute a violation of law. See Christian, 160 Ct. Cl. at 12. No case has ever held that the Christian doctrine incorporates a regulatory provision in a Government contract as if it were a contract clause. See Id. (insertion of Termination for Convenience clause); S.J. Amoroso Const. Co., Inc. v. U.S., 12 F.3d 1072, 39 Cont. Cas. Fed. (CCH) P (Fed. Cir. 1993) (insertion of proper Buy American Act clause) 11 ; General Engineering & Mach. Works v. O'Keefe, 991 F.2d 775, 38 Cont. Cas. Fed. (CCH) P (Fed. Cir. 1993) (insertion of material handling clause preventing the contract from becoming an impermissible cost-plus-percentage-of-cost arrangement and double payments). In Aydin Corp. v. Widnall, 61 F.3d 1571, 40 Cont. Cas. Fed. (CCH) P (Fed. Cir. 1995), the Court of Appeals for the Federal Circuit held that the ASBCA erred when it incorporated the cost principles of FAR pt. 31 into the contract to determine the appropriateness of Aydin Corp.'s decision to expense independent research and development costs in the years that the costs were incurred. Id. Rejecting the Board's reasoning for doing this, the Court stated that The contract did not impliedly incorporate FAR Part 31. The Progress Payments clause expressly incorporated only FAR , 48 C.F.R (1987), which is unrelated to the depreciation and expensing of capital assets. The [contract] also contains FAR entitled Supplemental Cost Principles... FAR however does not incorporate 9

5 MARCH 2013 VOLUME 8 ISSUE2 GOVERNMENT CONTRACT COSTS, PRICING & ACCOUNTING REPORT FAR Part 31 in toto into the [contract]. It simply states, that when Subpart 31.2 applies, the CO must also follow Subpart of the applicable Department of Defense Supplement. FAR Part 31, therefore, does not govern the treatment of Aydin's radar costs. Id. at 1580, fn. 2 (emphasis in original). Lastly, the writer seems to have struggled, perhaps during the entire six years he worked with the opinion, with the fact that the strand of deeply engrained public procurement policy to which he refers was eliminated from the FAR in 2007 as part of the major pt. 45 rewrite. Not daunted, the writer explains that the prohibition survived in a different form, having migrated to FAR (c)(3), which continues to bar receipt of profit or fee. The cited provision is part of the guidance to COs, and states merely that the contracting officer shall exclude from the pre-negotiation cost objective fee or profit on equipment purchases on contractor acquired equipment to be charged directly to the contract. 12 Pre-negotiation cost objectives are not prohibitions of cost or profit allowance, but are merely items of precatory guidance to contract negotiators. Since the opinion in SGS is not an opinion of the ASBCA, but represents only the views of one board member, and since those views depart so significantly from accepted Government contracts precedent, it is to be hoped that the Board will not authorize its inclusion in its official published decisions. ENDNOTES: 2 The two other panel members refused to sign the opinion in this Rule 11 case, concurring only in the result denying the appeal. Such a public snub of a Board judge appears unprecedented in Board jurisprudence, but compelling reasons existed for the other panel members to do so here. 3 Slip Op., p I address the two other cited cases below, Chris Berg, Inc. v. U. S., 192 Ct. Cl. 176, 426 F.2d 314 (1970), and G. L. Christian and Associates v. U. S., 160 Ct. Cl. 1, 312 F.2d 418 (1963). 5 FAR (c). 6 In the revision of FAR pt. 45 in 2007, the regulators dropped the definition of facilities in FAR That earlier definition suggested that facilities were limited to equipment items used by a contractor for production, maintenance, research, development, or testing, which might not encompass the work being performed by SGS for NASA, such that the equipment involved might not be facilities at all. 7 Slip Op, at Slip Op., at Chris Berg, Inc. v. U. S., 192 Ct. Cl. 176, 426 F.2d 314 (1970); see also Cessna Aircraft Co. v. Dalton, 126 F.3d 1442, 41 Cont. Cas. Fed. (CCH) P (Fed. Cir. 1997) ( The primary intent of a statute or regulation must be to protect or benefit a class of persons in order for that class to be able to bring suit against the government for violating the statute or regulation. We have stated that if government officials make a contract they are not authorized to make, in violation of a law enacted for the contractor's protection, the contractor is not bound by estoppel, acquiescence, or failure to protest. However, if the primary intended beneficiary of a statute or regulation is the government, then a private party cannot complain about the government's failure to comply with that statute or regulation, even if that party derives some incidental benefit from compliance with it. (citations omitted)); Applied Devices Corp. v. U. S., 219 Ct. Cl. 109, 591 F.2d 635, 25 Cont. Cas. Fed. (CCH) P (1979) (holding that where a contract is written in violation of a provision of law enacted for the contractor's protection... [t]he contractor... can obtain reformation and is not bound by his estoppel, acquiescence, and even failure to protest ); American Elec. Contracting Corp. v. U. S., 217 Ct. Cl. 338, 579 F.2d 602, 24 Cont. Cas. Fed. (CCH) P (1978) (holding that an ASPR qualified products clause was intended for the benefit of the Government and subcontractors, but not for the prime contractor, and thus the prime contractor had no right to seek additional compensation for the Government's failure to comply with the provision); Todd Construction, L.P. v. U.S., 94 Fed. Cl. 100 (2010), aff'd, 656 F.3d 1306 (Fed. Cir. 2011) (finding that a FAR provision and agency procedures governing performance evaluations were 10 K 2013 Thomson Reuters

6 GOVERNMENT CONTRACT COSTS, PRICING & ACCOUNTING REPORT MARCH 2013 VOLUME 8 ISSUE 2 for the benefit of both the contractors and the Government, and therefore contractors possess rights capable of enforcement if the regulation is violated ). The Todd court also stated that we do not suggest that the... regulation should be read into the contracts. Rather, the regulation applies of its own force and directly governs the parties' performance under the contracts. Id. at 1314, n Slip Op., at The Federal Circuit stated that [a]pplication of the Christian doctrine turns not on whether the clause was intentionally or inadvertently omitted, but on whether procurement policies are being avoided or evaded (deliberately or negligently) by lesser officials... The Christian doctrine guard[s] the dominant legislative policy against ad hoc encroachment or dispensation by the executive and prevents hobbl[ing] the very policies which the appointed rule-makers consider significant enough to call for... mandatory regulation. Id. (citations omitted). 12 Slip Op., at 229. CASES OF SPECIAL NOTE Karen L. Manos 12 GSA Schedule CO Must Decide Disputes Involving Schedule Contract Provision Interpretation The U.S. Court of Appeals for the Federal Circuit held in Sharp Electronics Corp. v. McHugh, 2013 WL (Fed. Cir. 2013), that only the General Services Administration contracting officer may resolve disputes that, in whole or in part, involve interpretation of disputed Federal Supply Schedule contract provisions. The dispute arose out of a claim submitted by Sharp Electronics Corp. for premature discontinuance fees as a result of the Army's failure to exercise the entirety of the last option year. Sharp submitted its claim to the ordering agency CO, and appealed the CO's deemed denial to the Armed Services Board of Contract K 2013 Thomson Reuters Appeals. The ASBCA sua sponte raised the issue of its jurisdiction to decide the appeal in light of Federal Acquisition Regulation , which allocates authority among the GSA schedule contract CO and agency ordering COs for resolving disputes involving schedule contracts. Before it was revised in 2002, the FAR required that all disputes arising under or relating to a schedule contract had to be resolved by the GSA schedule contract CO. Effective July 29, 2002, the FAR was amended to authorize the ordering agency CO to decide disputes relating to performance of an order under a schedule contract. Although Sharp and the Army agreed that the ordering activity CO was the appropriate one to resolve the dispute in this case, the ASBCA concluded that the claim should have been submitted to the GSA schedule contract CO, and, therefore, dismissed the appeal for lack of jurisdiction. Sharp appealed the dismissal to the Federal Circuit. The Federal Circuit's decision acknowledges that the 2002 amendment has created jurisdictional uncertainties when disputes involve performance of an order, but require interpretation of the schedule contract terms. Nevertheless, the Federal Circuit found that FAR creates a bright-line rule all disputes requiring interpretation of the schedule contract go to the schedule CO, even if those disputes also require interpretation of the order, or involve issues of performance under the order. Accordingly, because Sharp submitted its claim to the ordering activity CO instead of the GSA schedule contract CO, the Federal Circuit held that the ASBCA lacked jurisdiction over the appeal. 13 Contractor's Lack Of Notice Of Assignment Did Not A ect Claim Validity Reversing the U.S. Court of Federal Claims, 11