Uncommon Sense for government contractors

Uncommon Sense: Heads I win, tails you lose

In an ongoing dispute involving Boeing, the U.S. Court of Appeals for the Federal Circuit recently overturned a U.S. Court of Federal Claims decision and sent the matter back to the trial court for another go. We like the Federal Circuit’s decision. Boeing’s case needs to be heard, because it’s important to Boeing and the rest of the government contracting community. Plus, the Court of Federal Claims’ initial dismissal seemed too avant-garde and goofy to us, but those aren’t technical terms and we’re not lawyers. 

For those not familiar with Boeing’s saga, the government sowed the seeds of dispute in 2005 when it “rewrote” FAR Part 30. Boeing’s suit challenges the legitimacy of FAR 30.606(a)(3), which, in Boeing’s experience and our own, produces unfavorable inequities for contractors and windfall gains for the government. This particular FAR provision arose from an opaque regulatory switcheroo, and we hope the court ultimately tosses it into the trash bin of regulatory history.

For those not familiar with FAR Part 30, it prescribes rules that the government must follow when administering contracts covered by the Cost Accounting Standards (CAS). Although contractors subject to these standards must disclose and follow their cost accounting practices consistently, they may from time to time voluntarily (unilaterally) change them. When making changes, however, the CAS statute provides that: 1) the government will not pay increased costs in the aggregate; and 2) in no case shall the government recover costs greater than the increased cost to the government, in the aggregate. In our pragmatic view, these words mean that a contractor’s cost accounting practice changes may neither harm nor unjustly enrich the government. 

Regarding Boeing, it made several cost accounting practice changes, some of which decreased costs and others that increased costs, the net of which yielded reduced costs to the government in the aggregate. Therefore, had Boeing’s changes occurred prior to 2005, the parties would have shaken hands and moved on with life. The government was unharmed and enjoyed overall reduced costs, thus benefitting taxpayers. But since Boeing’s changes occurred after 2005, the government benefits from each cost-reducing cost accounting change and also demands repayment (plus interest) for each cost-increasing change. FAR 30.606(a)(3) narrowly construes “increased costs in the aggregate” as relating only to individual changes rather than all changes effective on the same date. Accordingly, the government’s negotiation position shifted from “don’t hurt me, don’t help me” to “heads I win, tails you lose.” 

As we’ve said so many times before in Uncommon Sense, the root cause of this particular mess traces to an overly narrow (and unreasonable) interpretation of the CAS statue. FAR 30.606(a)(3) codified a myopic notion that each and every cost accounting practice change must be tediously evaluated separately, apart from any other concurrent changes. It makes no sense to us how this terrible idea became a final rule without public review and comment. In 2016, we pointed out the flaws of FAR 30.606, which sparked some curiosity (but no action) within the General Services Administration. Now that Boeing has taken a firm stand for fair play in court, the government has chosen to defend a clear inequity rather than fix it. Bizarre.

Historically, determining “increased costs in the aggregate” was not a particularly controversial exercise – but it is now, and shouldn’t be. FAR 30.606(a)(3) is a prime example of what happens when regulators “fix” something that isn’t broken without input from the party that the fix affects. We wish Boeing luck, and hope the court will make it right. 

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

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Brent Calhoon
Partner, CPA
Philadelphia regional M&A update: Q2 2020
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