In a recent decision, Raytheon Company, Space & Airborne Systems, the Armed Services Board of Contract Appeals (ASCBA) Nos. 57801, 57803 and 58068, the ASBCA addressed an array of issues relating to contractor liability under the Cost Accounting Standards (CAS) for voluntary changes to cost accounting practices. The decision is consistent with certain previous decisions, but broke new ground on others. The decision largely is not helpful to contractors. Thus, when assessing whether to make a voluntary change in cost accounting under the CAS, contractors need to consider the impact this decision will have on the financial justification for the change.
The most important aspects of the ASBCA’s decision are:
- A contractor may offset the impacts of simultaneous cost accounting practice changes to the extent that the cost impacts arise under contracts and subcontracts executed prior to April 8, 2005. After that date, FAR § 30.606 bars offsetting the impacts of simultaneous changes. This holding follows The Boeing Company, ASBCA Nos. 57549, 57563, 13 BCA ¶ 35,427. This means that, for any contract or subcontract executed on or after April 8, 2005, the government may recover increased costs and contractors must absorb their increased costs.
- When a change in practice moves costs from firm, fixed-price (FFP) contracts to flexibly priced contracts, the government may only recover its increased costs under the flexibly priced contracts because contract costs increase. The government may not recover its increased costs under FFP contracts that exist because contract costs decreased. Permitting the government to recover both violates the limitation on government recovery for a change in practice to the aggregate increased costs. This is important because it resolves this issue and should prevent further government overreaching when recovering increased costs.
- The government has broad discretion when classifying a change as a desirable change. The government may conclude that a change is not desirable based upon the change’s cost impact or based upon any of the other factors set out in 48 C.F.R. § 9903.305. The ASBCA, however, did not rule on whether the administrative contracting officer (ACO) must show consideration of all factors in 48 C.F.R. § 9903.305, even though the decision to accept or deny a change as desirable may be based on one factor. The ASBCA also noted that no evidence had been presented that the ACO had “acted in bad faith or violated a law or regulation.” Thus, the decision creates a high burden for contractors to overcome when arguing that the ACO incorrectly refused to label a change in practice as a desirable change.
- The standard for materiality of the cost impact of a voluntary cost accounting change is whether there areany increased costs because the CAS statute prohibits the government paying “any” increased costs. When increased costs exist, the ACO has discretion under the materiality criteria in 48 C.F.R. § 9903.305 to determine whether the amount of money at issue is significant enough for it to be worthwhile to recover. The practical effect of this ruling is that materiality is a discretionary ACO decision that will be very difficult to overturn.