--- title: "Reaching Beyond FAR 12 Contracts: Lessons from the Appeals Court" description: Learn key lessons from ACLR v. U.S. on FAR Part 12 contracts, unapplicable terms, and record-keeping to navigate government contracting effectively. image: https://info.redstonegci.com/hubfs/RGCI%20-%20Reaching%20Beyond%20FAR%2012%20Contracts%20Lessons%20from%20the%20Appeals%20Court.png --- [ PAY INVOICE](https://redstonegci.com/invoice-payment/) [Call Us Today 256-704-9800](tel:2567049800) [info@redstonegci.com](Mailto:info@redstonegci.com) [![Redstone_Logo](https://info.redstonegci.com/hubfs/redstone%20logo%20version%201%20-%20rgb-1.png)](https://www.redstonegci.com/) # Reaching Beyond FAR 12 Contracts: Lessons from the Appeals Court [Posted by John C. Shire, CPA on Wed, Oct 9, 2024 @ 11:10 AM](https://info.redstonegci.com/blog/author/john-c-shire) - [Tweet](https://twitter.com/share) ![RGCI - Reaching Beyond FAR 12 Contracts Lessons from the Appeals Court](https://info.redstonegci.com/hs-fs/hubfs/RGCI%20-%20Reaching%20Beyond%20FAR%2012%20Contracts%20Lessons%20from%20the%20Appeals%20Court.png?width=1000&height=571&name=RGCI%20-%20Reaching%20Beyond%20FAR%2012%20Contracts%20Lessons%20from%20the%20Appeals%20Court.png) Yet another interesting case to consider from United States Court of Appeals for the Federal Circuit – [ACLR, LLC v. United States Court of Appeals 2013-1190](https://fedcircuitblog.com/wp-content/uploads/2024/04/opinion-ACLR.pdf). This case involved a couple things we do not often see addressed by the courts: - Federal Acquisition Regulations (FAR) part 12 Commercial Contract and - A contract paid on a contingency basis (i.e., the Government was going to pay the contractor a percentage of the money it recovered for the Government – *not your average government contract or payment terms*). The areas of the case I wanted to draw your attention to relate to the fact that the dispute involved a [FAR part 12](https://www.acquisition.gov/far/part-12) Commercial Contract. While the use of [FAR part 12](https://www.acquisition.gov/far/part-12) has ebbed and flowed over the years, contracting officers are still required to use market research ([FAR part 10](https://www.acquisition.gov/far/part-10)) to acquire commercial products and services whenever possible using commercial practices. ## What Raised the Hairs on the Back of My Neck? There are two areas of this case that I find concerning: - First, the Court drew in parts of the FAR that are not appliable to [FAR part 12](https://www.acquisition.gov/far/part-12) commercial contracts; and - Second, the Court opened a giant black hole – can of worms, *your choice* – when it comes to a “standard record keeping system.” ## Non-Applicable Contract Terms Throughout the case [FAR 52.212-4](https://www.acquisition.gov/far/part-52#FAR_52_212_4)(l) is used as the basis for the Government’s termination for convenience. The case then states: “[FAR 31.205-47](https://www.acquisition.gov/far/part-31#FAR_31_205_47)(f)(1) (stating ‘[c]osts . . . incurred in connection with . . . prosecution of claims or appeals against the Federal Government’ are ‘unallowable’).” It appears no one – including the judges – bothered to read the full text of [FAR 52.212-4](https://www.acquisition.gov/far/part-52#FAR_52_212_4)(l). [FAR 52.212-4](https://www.acquisition.gov/far/part-52#FAR_52_212_4)(l) provides that in determining the amount to be paid to the contractor under a termination for convenience “[t]he Contractor shall not be required to [comply with the cost accounting standards](https://redstonegci.com/consulting/government-compliance/cas-services/) or contract cost principles [i.e., [FAR part 31](https://www.acquisition.gov/far/part-31)] for this purpose.” Recently, I have had a couple of clients be requested to develop a detailed termination proposal by the contracting officer so that they could have DCAA audit the proposal for unallowable cost based on [FAR part 31](https://www.acquisition.gov/far/part-31). After extensive back and forth on the issue, the contracting officers have agreed [FAR part 31](https://www.acquisition.gov/far/part-31) does not apply. However, for the contracting officer to move forward with negotiations, the contracting officer believes he/she had to have someone review the documents and tie them back to the contractor’s books and records. They were careful to not say “audit” as [FAR 52.212-4](https://www.acquisition.gov/far/part-52#FAR_52_212_4)(l) also states this contract clause “does not give the Government any right to audit the Contractor’s records.” ## Standard Record Keeping System [FAR 52.212-4](https://www.acquisition.gov/far/part-52#FAR_52_212_4)(l) provides that in addition to a percentage of the contract price based on the work performed, the contractor can be paid for “reasonable charges the Contractor can demonstrate to the satisfaction of the Government using its standard record keeping system, have resulted from the termination.” The Court turned to the dictionary finding that “a ‘standard record keeping system’ requires ‘a regular, organized method for tracking relevant costs.’” The Court went on to use the dictionary to find a “‘standard system’ is ‘a regularly used, carefully thought-out method that involves a set of organizing and orderly procedures.’” I believe this a giant leap – a record keeping system tracks records/documentation, not costs, and the word “standard” to me simply means the system the contractor uses, not the requirement for a rigorous tracking process. Costs are tracked with an accounting system. [FAR 52.212-4](https://www.acquisition.gov/far/part-52#FAR_52_212_4) does not introduce a requirement to maintain an adequate cost accounting system as required under cost reimbursement contracts. *That said* – I do have to agree with the Court that the contractor cannot “fail to contemporaneously track and allocate its costs and then, only for purposes of litigation, dump essentially every record it can find on the court, and expect the court to sift through it and find it to be a ‘standard record keeping system.’” ## What are the Lessons Learned? If you have [FAR part 12](https://www.acquisition.gov/far/part-12) commercial contracts with the Federal Government, you need to: - [Understand your contractual requirements](https://redstonegci.com/consulting/operational-support-services/contracts-administration/); - Ensure the Government does not introduce requirements that are not in your contract; - Be able to support the percentage of contract effort you have performed throughout the period of performance; and - Maintain contemporaneous records related to reasonable charges that resulted from a termination. I am hoping (*yes – I know hope can be crushing*) that this case will not create a record keeping requirement that is simply not a requirement of commercial contracts. That said, I believe contemporaneous documentation showing the percentage of completion and explaining why any additional cost was incurred and its relation to the termination should be sufficient to meet the requirements of [FAR 52.212-4](https://www.acquisition.gov/far/part-52#FAR_52_212_4)(l). Additionally, your accounting department should start a separate file of all additional expenses related to a termination with notation and documentation of review with management at the time the expense is incurred. A reconciliation of the expenses to your financial statement accounts will also help to support you in having met the requirement for a “standard record keeping system.” Redstone GCI can assist your company with understanding contract requirements, reviewing percentage of completion documentation, and reviewing the documentation of reasonable charges related to a termination. [![Learn More About Our Contracts & Subcontracts Administration & Support](https://no-cache.hubspot.com/cta/default/203971/interactive-168873885727.png) ](https://info.redstonegci.com/hs/cta/wi/redirect?encryptedPayload=AVxigLJWMCMPLk%2Bfy%2BzkGw5ziskFguPAe268djk8cJydISVXOwrKBBCS2Q%2FZcCEneP9SPYmhIRvao1F6TmOHFihbForVcCW3rH8d%2Fq%2BRyFG4jyqqsvdipULPlPk1vnu0m%2F1x6QAepREWufFGnbinwk4z5o7tDtmZvNCisbHTJdvWNoGOgJ8cfTZHFMpid4mUiEtN1RDGbKq9O%2BdcrwpZ2rlj8FUGeFMNJT06jJpXDzI7bwJds57c9PMez9kVUxQ9&webInteractiveContentId=168873885727&portalId=203971) ### Written by [John C. Shire, CPA](https://info.redstonegci.com/blog/author/john-c-shire) ![John C. Shire, CPA](https://info.redstonegci.com/hubfs/images/Staff_/John-Shire-Redstone-Government-Consulting.png) John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant ## About Redstone GCI Redstone GCI is a consulting firm focused on fulfilling the needs of government contractors in all areas of compliance. With a singular mission to help contractors through the multiple layers of “red tape,” we allow contractors to focus on what they do best – support their mission with the U.S. Government. We are home to a group of consultants made up of GovCon industry professionals, CPAs, attorneys, and retired government audit and acquisition professionals. Our focus and knowledge of audit and compliance functions administered by DCAA and DCMA will always be at the heart of what we do. However, for the past decade, we’ve strategically grown to support other areas of the government contractor back-office with that same level of focus and expertise. We’ve added expertise in contracts management, subcontract administration, proposal pricing, various software systems, HR and employment law, property administration, manufacturing, data analytics/reporting, Grant specialists, M&A, and many other areas. When we see a trend in the needs of contractors, we act to ensure we can provide the best expertise in the market to fulfill those needs. One thing our clients can be certain of is that with the Redstone GCI Team in your corner, there is no problem too big and no issue too technical for our team to tackle. 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