In a case of first impression, the Armed Services Board of Contract Appeals (ASBCA) recently held that a contracting officer abused her discretion by failing to consider the materiality criteria in the Cost Accounting Standards (CAS) regulations at 48 C.F.R. § 9903.305. Raytheon Co., Space & Airborne Sys., ASBCA No. 58068, 16-1 BCA ¶ ___ (Aug. 9, 2016). The ASBCA held that this failure was a violation of FAR 30.602’s mandate to assess the materiality of a cost impact under the CAS regulations. The contractor argued that while the Contracting Officer had not acted in bad faith, her failure to apply the terms of the materiality rule amounted to an abuse of discretion. The ASBCA agreed, ruling that application of discretion does not extend to disregarding applicable regulations. This decision was the third in a series of high-profile decisions involving multiple changes in cost accounting practices.

Under the FAR, contracting officers are obligated to consider the materiality of a proposed unilateral accounting change, and undertake no contract adjustments if the amount at issue (cost impact) is immaterial. FAR 30.602(c)(1). To determine materiality, the FAR requires the contracting officer to apply the materiality definition set forth in the CAS regulations at 48 C.F.R. § 9903.305. This definition includes six factors that, if applicable, must be applied to the determination of materiality. In this case, the ASBCA held that the contracting officer did nothing more than find that the cost impact was material merely because there was a cost impact, and that she was incorrect in disregarding the criteria as inapplicable.

The ASBCA considered two of the criteria as examples. Regarding § 9903.305 (b), which calls for consideration of “[t]he amount of contract cost compared with the amount under consideration,” the ASBCA held that the contracting officer should have compared the value of the cost impact to the Raytheon business’s US$3 billion of annual contract base. Alternatively, the contracting officer should have considered the cost impact in comparison to the sheer number of contracts, i.e., had she spread the amount across an assumed 1,000 contracts, the amount would have been as little as US$36 per contract per year. As another example, the ASBCA considered the factor at § 9903.305(f), which requires consideration of “[t]he cost of administrative processing of the price adjustment.” The ASBCA held that the contracting officer should have considered the cost, not only of contract administration, but of the attorneys, auditors, and their supervisors, implying that the contracting officer should have considered the probable cost of litigation. The ASBCA held that the amount was likely immaterial in that regard, particularly when balanced against the small annual cost per contract.

An Open Door to Offsets

One of the CAS materiality rule's factors, § 9903.305(e), states that a contracting officer assessing materiality must consider whether cumulative impacts “[t]end to offset one another.” Although the ASBCA did not analyze this provision, the facts show that the overall decrease in cost to the Government on one change in cost accounting practice more than offset the total increased costs of the two other changes in cost accounting practice that were made to the CAS Disclosure Statement. An offset under these facts would have left an impact of zero, presumably another basis for the contracting officer to have found the cost immaterial and end the cost impact process. This is particularly important in light of a prior decision in this series of cases where the ASBCA held that the prohibition in FAR 30.606(g)(3)(ii)(A) of offsetting cost impacts showing increased costs to the Government against cost impacts for other cost accounting practice changes showing decreased costs to the Government was valid. Raytheon Co., Space & Airborne Sys., ASBCA Nos. 57801 et al., 15-1 BCA ¶ 36,024. Moreover, the ASBCA’s final decision, which sustained the appeal in Raytheon’s favor based entirely on the issue of materiality rendered that portion of the 2015 decision on the question of the validity of FAR 30.606(g)(3)(ii)(A) unnecessary to the decision—hence; under the law of the Federal Circuit, it is nothing more than dicta, and non-precedential. See, e.g., National American Ins. Co. v. U.S., 498 F.3d 1301, 1305 (Fed. Cir. 2007) (defining dicta).

Broad-Ranging Effect

This decision has broad impact for Government Contractors. Heretofore, the Government has given short shrift to contractor assertions that cost impacts are immaterial. Contracting Officers will now have to consider and justify any conclusions of materiality in light of the six factors in the CAS regulations. Even the first factor, which is consideration of the “absolute dollar amount involved” requires consideration of proportionality, because the regulation further provides that “[t]he larger the dollar amount, the more likely that it will be material;” so, conversely, the smaller the dollar amount the less likely that it will be material. Importantly, contractors will not have to allege and meet the high standard of proof required to show that an official acted in bad faith. Rather, the failure of a contracting official to apply the plain language of these rules amounts to an abuse of discretion without any implication of intentional or bad faith actions.

This case is a follow-on to Raytheon Co., Space & Airborne Sys., ASBCA Nos. 57801, et al., 13 BCA ¶ 35,319, wherein the ASBCA denied three of the consolidated government claims based on the statute of limitations, and Raytheon Co., Space & Airborne Sys., ASBCA Nos. 57801 et al. 15-1 BCA ¶ 36,024 wherein the ASBCA denied one government claim based on the pre-2005 concept of offsetting, and that all of the claims were overstated due to government double counting. Additionally, the ASBCA found in that case that the contracting officer had not abused discretion in finding that the changes were not desirable, and concluded that the post-2005 prohibition on offsetting was valid. The authors of this Advisory represented Raytheon in these matters.