Federal Circuit Revives Key Case Addressing Contractor’s Ability to Include Offsets in Measurement of CAS Change Impacts

The source of this issue is the inconsistency between CAS and FAR. The CAS statute mandates, for covered contracts, compliance with cost accounting standards for “estimating, accumulating, and reporting costs in connection with the pricing and administration of, and settlement of disputes concerning, all negotiated prime contract and subcontract procurements” with the Government. 41 U.S.C. § 1502(b)(1)(B). CAS § 9903.201-4 requires contractors to comply with the CAS statute, its implementing regulations, and the CAS. When a change in a contractor’s accounting practice results in increased costs in the “aggregate” to be paid by the Government, the CAS statute calls for a price adjustment to the contract. 41 U.S.C. § 1503(b)). Notably, the statute further provides that the price adjustment “may not result in a windfall” for either the contractor or the Government unless the contractor should have been aware of the change at the time of price negotiation and failed to disclose the change. The CAS statute clearly states that, except in narrow circumstances, the Government may not recover costs greater than the “aggregate” increased cost to the Government.

In view of the CAS statute’s prohibition against windfalls, contractors had historically offset accounting changes that increased the cost to the Government with simultaneous changes that decreased the cost to the Government. This practice changed in 2005 when the FAR Council promulgated FAR 30.606 (Resolving Cost Impacts). FAR 30.606(a)(3)(ii) prohibits, among other things, the contracting officer from combining the cost impacts of one or more unilateral change, unless all of the cost impacts are increased costs to Government. Thus, the 2005 regulatory change permits the Government to add up and aggregate all the unilateral changes that increase the costs to the Government and prohibits offsetting these cost increases with any cost savings the Government may realize from other unilateral accounting changes. The Armed Services Board of Contract Appeals (ASBCA) unfortunately has agreed with the FAR rules issued in 2005, holding that the FAR Council, in this circumstance, could promulgate rules interpreting CAS.¹ The Federal Circuit’s decision will now position the issue for the COFC, which does not adopt Board rulings as precedent.  

The facts underlying this Federal Circuit decision provide important context. In January 2011, one of the Contractor’s business segments simultaneously implemented eight cost accounting changes. Two of those changes increased the Government’s costs by approximately $1 million, but the impact of all eight changes decreased the Government’s costs by nearly $1.5 million. The Contractor and the Government were unable to agree upon a contract price adjustment to account for these changes. The Contractor took the position that no price adjustment was necessary because there was no “aggregate increased cost” to the Government. The Defense Contract Management Agency (DCMA), however, took the position that the Contractor owed the Government approximately $1 million because of the two accounting changes that increased costs and issued a final decision to this effect. The final decision failed to consider the more than $2 million in savings the Government enjoyed from the six other accounting changes and, therefore, declined to offset the savings. In December 2017, the Contractor filed suit in the COFC alleging (1) breach of contract because the Government’s application of FAR 30.606 violated the CAS statute, and, in the alternative, (2) the Government’s demand for payment was an illegal exaction.

With respect to breach of contract, the COFC found that the Contractor had waived its right to challenge DCMA’s decision, since the conflict between the CAS statute and the FAR was apparent at the time the Contractor signed the contract, i.e., it was a patent ambiguity. According to the COFC, the ambiguity required the Contractor to “seek clarification, before award, of the conflict it saw between the CAS statute, the CAS clause, and FAR 30.606.” The COFC also rejected on jurisdictional grounds the Contractor’s claim that the Government’s demand for payment amounted to an illegal exaction. The COFC found that the Contractor failed to show that the CAS statute was a money-mandating statute, which it held was required under the Tucker Act to establish jurisdiction for its illegal exaction claim. The Contractor appealed the COFC’s decision to the Federal Circuit.   

On August 10, 2020, the Federal Circuit reversed and remanded the COFC’s decision.²  On the Contractor’s primary claim, the Federal Circuit held that “there was no waiver here because the government has not shown that the Contractor bypassed an avenue of relief on the merits from the agency.” In other words, DCMA itself could not provide the Contractor relief, since contracting officers are not afforded discretion with respect to applying FAR 30.606—adherence to the clause is mandatory. The Government argued that the Contractor could have sought relief under the APA or a bid protest during contract formation. The Federal Circuit rejected these arguments, finding that the CAS statute expressly (1) provides that resolution of disputes over price adjustments must take place under the Contract Disputes Act (which would require the Contractor to have a contract), and (2) excludes coverage under the APA’s judicial review provisions. Thus, the Federal Circuit concluded that any bid protest would have been futile and was not required.

The Federal Circuit also reversed the COFC’s finding on the Contractor’s illegal exaction claim. The Federal Circuit distinguished between three types of claims under the Tucker Act: contractual claims, illegal exaction claims, and money-mandating statute claims. Here, the Contractor had asserted a viable illegal exaction claim because the Contractor “alleged that the government has demanded and taken [the Contractor’s] money in violation of a statute.” Thus, the Government’s demand that the Contractor pay it approximately $1 million and the Contractor’s allegation that this demand was illegal under the CAS statute was sufficient to give rise to Tucker Act jurisdiction and the Contractor did not have to rely on a money-mandating statute for jurisdiction.

Having reversed the trial court on the both the issue of waiver and the need for a money-mandating statute, the Federal Circuit remanded the case to the COFC. Now we will have to await a decision from the COFC on the underlying merits of the Contractor’s claim—namely whether FAR 30.606(a)(3)(ii) illegally prohibits contractors from offsetting cost-increasing changes with cost-savings changes when a contractor makes multiple simultaneous unilateral changes to its accounting practices. Stay tuned.

^{1 Raytheon Co., Space & Airborne Sys., ASBCA No. 57801, 15-1 BCA ¶ 36,024.}

^{2 The Boeing Co. v. U.S., Fed. Cir., No. 2019-2148 (Aug. 10, 2020).}