Uncommon Sense | Reasonableness is a big word

Not a day goes by in our practice without at least one robust discussion concerning the concept of reasonableness. It’s a big five syllable word with a broad, squishy definition: “sound judgment, fairness.” Its vastness creates room for everyone to have an opinion, which, ironically, creates much unreasonable havoc in the government contract audit and oversight community.

As a regulatory concept, reasonableness is an important adjective that modifies costs and prices. It’s there to provide permission, rather than restriction. In the context of costs, it provides latitude for government contractors to conduct their business the way they do business. A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Under this construct, what’s reasonable is a much bigger field than what’s unreasonable, as illustrated in the graphic.

It’s up to contractors to demonstrate cost reasonableness. Contemporaneous documentation is best (but not required) and, in our experience, a rare artifact. A short, simple explanation of what they did and why, or why they needed one thing instead of another, is meant to be enough. Then, the burden shifts to the government to demonstrate that a cost is unreasonable. That’s a high bar. There is no regulatory concept of more or less reasonable. There is only reasonable or unreasonable.

Far too often, government overseers simply allege that something is unreasonable without investigating important facts and circumstances and without proving anything. This squarely and unfairly shifts the burden back to the contractor who just proved that what they did was reasonable, except now they must also prove that what they did was not unreasonable. At this point, auditors absolve themselves of responsibility and leave a mess for the Contracting Officer to sort out. We know how that generally goes, as we explained here and here. In this sport, Monday morning quarterbacks can change the game.

We would all benefit from greater respect for the regulatory concept of reasonableness and from a healthy, curious exchange to find out more. Contractors could put themselves in the shoes of the government. Government could put themselves in the shoes of the contractor. We would start asking open, honest questions, and discover that most contractors do the best they can with what they have at the time. The concept of reasonableness creates a vast gray area for contractors to get things done under a wide variety of facts and circumstances. The boundaries represent the point at which unreasonable becomes clear, so they should be easy to spot and prove. Yet the government seldom does, choosing instead merely to supplant its judgment in place of the contractor’s.

Repeatedly, the courts rebuke this and confirm that reasonableness must be evaluated on a case-by-case basis, giving wide discretion to contractors in consideration of all of the relevant circumstances existing at that time. We don’t need litigation to broker good business decisions. Getting to reasonableness comes down to this: be aware that what a contractor sees as reasonable, and what the government sees as reasonable, can be very different. But different perspectives does not make one superior to the other. To get to heart of reasonableness, examine and appreciate the all of the circumstances under which a cost was incurred.

Brent Calhoon
Partner, CPA
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