On January 13, 2017, the Department of Defense (“DoD”), General Services Administration (“GSA”), and National Aeronautics and Space Administration (“NASA”) issued a final rule, effective that day, that disallows costs incurred by a contractor in connection with a Congressional investigation or inquiry into an issue that is the subject matter of a proceeding resulting in a disposition under 10 U.S.C. § 2324(k)(2). Under the rule, contractors may not be reimbursed for Congressional investigations related to certain proceedings including those (1) challenging whether the contractor complied with law or regulation, (2) brought by a whistleblower, and (3) based on qui tam actions under the False Claims Act. Although costs related to the underlying proceedings were already unallowable, this rule expands the unallowability of costs to include responding to Congressional investigations concerning the issues that are the subject matter of the proceedings.

This rule implements section 857 of the National Defense Authorization Act (“NDAA”) for Fiscal Year (“FY”) 2015. The final rule contains no substantive changes to the proposed rule, which was published on February 17, 2016. While section 857 requires compliance only by DoD, NASA, and the Coast Guard, the final rule expands coverage to all agencies subject to the FAR. The final rule is implemented at FAR 31.205-47, Costs Related to Legal and Other Proceedings.

Relevant Definitions:

Covered proceedings include those:

  • Brought by the government against a contractor for failure to comply with law or regulation;
  • Brought by an employee of a contractor or its subcontractor as a whistleblower; or
  • Brought by a third party in a False Claims Act qui tam

A disposition includes the following:

  • A conviction in the case of a criminal proceeding;
  • A determination of contractor liability in the case of a civil or administrative proceeding involving allegations of fraud or similar misconduct;
  • The imposition of a monetary penalty in a civil or administrative proceeding;
  • A final decision to debar or suspend the contractor, to rescind or void the contract, or to terminate the contract for default for failure to comply with a Federal or State statute or regulation; or
  • Consent or compromise (settlement agreement), if the contractor was likely to lose on the merits.

Congressional investigations and inquiries: must be conducted by Congress per se. Investigations by the Government Accountability Office do not qualify.

MoFo Recommendations:

As a result of this rule, contractors should do the following:

  • Segregate the costs associated with a Congressional investigation based on a pending or completed proceeding, and know that the contracting officer ought to withhold payment for those costs during the pendency of a covered proceeding. FAR 31.205-47(g) requires the segregation of cost requirements that may become unallowable.
  • Pay attention to when each investigation and proceeding beings. If a Congressional investigation pre-dates the proceeding, the costs are allowable.
  • Do not submit costs of responding to a Congressional investigation or inquiry for payment if the issues relate to a proceeding that resulted in a disposition, including settlements in which the contractor was likely to lose on the merits.
  • Keep the settlement language in mind in drafting settlement agreements, and attempt to craft the agreement in a manner in which the likelihood of success of the government or qui tam proceeding is explicitly not addressed.