With another round of incurred cost submissions (ICSs) due from contractors in June, the Contract Disputes Act (CDA) Statute of Limitations (SOL) will bar Government claims for unallowable costs and any penalties associated with expressly unallowable costs. Costs from contractor fiscal year 2007 are at risk.
Most government contractors follow the calendar year as its fiscal year.Pursuant to Federal Acquisition Regulation (FAR) 52.216-7(d)(2)(i), Allowable Cost and Payment, contractors must submit a final indirect cost rate proposal (the ICS) within the six-month period following the expiration of each fiscal year. Thus, for most government contractors, the ICS is due by June 30. The proposal “shall be based on the Contractor’s actual cost experience for that period,” i.e., the fiscal year just ended six months prior. Generally filed electronically, the ICS consists of schedules of spreadsheets providing detail of all of the contractor’s expenses and contract actions. The ICS is a statement of the types and amounts of allowable costs incurred and charged to government contracts.
The Government has a notorious backlog of outstanding audits on contractors’ ICSs.1 This is widely reported in the press and discussed among industry. It is not unusual to learn of open years dating back to contractor FY 2005. The CDA SOL, however, provides that the Government must assert claims within six years of claim accrual.2 A claim accrues on “the date when all events, that fix the alleged liability of … the Government … and permit assertion of the claim, were known or should have been known. For liability to be fixed, some injury must have occurred.”3 In the seminal case of Raytheon Co., ASBCA Nos.57576, 57679, 13-1 BCA ¶ 35209, the Armed Services Board of Contract Appeals held that Raytheon’s submission of its ICS established claim accrual. Hence, the Government had six years from submission of the ICS to file a claim asserting, in that case, that costs were expressly unallowable, and seeking penalties under FAR 52.242-3, Penalties for Unallowable Costs. This is because the ICS identifies all elements for accrual of a Government claim of unallowable costs: the types of costs the contractor has included as allowable (the liability being cost allowability) and an amount charged (an injury). The Board held that the Government’s claims of unallowable costs for certain years were untimely, and, therefore, barred as void.
Undoubtedly, the Defense Contract Audit Agency (DCAA) will be scrambling to finish audit reports, or may simply abandon the process and hastily prepare non-audit memoranda, leaving Administrative Contracting Officers (ACOs) to their own devices in rushing to settle incurred costs. Some ACOs might issue preemptive claims on the fifth year and 364th day. Contractors should be wary of Government strong-arm tactics and should seek out counsel in managing and mitigating pending negotiations and Contracting Officer Final Decisions, the latter of which will set the wheels of litigation in motion.