The Government Plays Gingerbread Man - You Can't Catch Me

The Government runs away to fight another day and another day.

What is this Groundhog Day?

L3 Technologies, Inc. (L3) takes the Government to task[1] for “challenging both indirect and direct costs paid to L3 on several government contracts for certain years.” During the long-drawn-out process of the litigation, “the government apparently thought better of its claims and withdrew them in toto[2] and represented it would make no further claims on the contract years in question.” L3 opposed, the dismissal seeking either summary judgment in its favor or that the Board “keep the appeals live so that it can obtain a victory that, it believes, would preclude its suffering similar government claims in other contract years.” No such luck, the Board granted the government’s motion and dismissed the appeals.

All we can hope is that someday the fox will get the gingerbread man (aka the Government) and this Groundhog Day nightmare will stop.

[1] Armed Services Board of Contract Appeals (ASBCA) Case Nos. 61811, 61813, and 61814

[2] Fancy Latin word for completely.

The DCAA Audit Methods and Findings at Issue Included

• Statistical sampling Methodology.
• Projection (extrapolation) of sample findings.[1]
• The level of documentation necessary to justify premium air travel – the contractor’s burden of proof for reasonableness.
• Is there any level of materiality that should be considered when auditing contracts?

Ok – the Board is not likely to address the last bullet but the little we can see from our “between the lines” reading in the case write-up the Board questioned some of the very small amounts before it. Additionally, significant amounts of other cost elements questioned by DCAA were resolved between DCMA and L3. The Contracting Officer Final Determinations (COFD) were:

The Passage of Time

It took the Government over two years to finally decide if it could not defend the appeals. The Board stated: “Ultimately, as admitted in a February 28, 2020 email from government counsel to L3’s attorney, the government decided that it could not defend these appeals. Thus, in a letter to L3’s Chief Financial Officer dated February 28, 2020, the cognizant administrative contracting officer wrote:”

I hereby unequivocally withdraw the Contracting Officer’s Final Decisions (“COFDs”) and demands for payment dated 28 June 2018 (ASBCA No. 61811), signed by Gladys Broyles, 29 June 2018 (ASBCA No. 60813) signed by Cheryl L. Clark, and 29 June 2018 (ASBCA No. 60814), signed by Jennings L. Summers that have been appealed to the ASBCA and assigned the respective docket numbers. A motion for dismissal of those appeals will be filed by the assigned trial attorney. The Government does not intend to re-assert the costs at issue in those disputes.

A Single Point of Light in the Wilderness – One Judge Dissents

The Judge dissented because he believed the mootness exception[2] applied and until the underlying issues with DCAA and DCMA were resolved L3, and other contractors were caught in a continuing unfortunate chain of events. The Judge points out DCAA’s main FAR references as the basis to question the cost are FAR 31.201-2, Determining allowability, and FAR 31.201-3, Determining reasonableness.

The Judge acknowledged that due to the voluminous amount of contractor data, “DCAA must use statistical analysis to perform its audits and reach its conclusions.” The Judge went on to note that DCAA has its own statistical tool called “EZ-Quant” that it uses to select a sample based on criteria and then audit the sample to determine the questioned costs in the sample, then “extrapolate” the questioned costs in the sample to the remaining costs to arrive at its conclusions on total unallowable costs. The Judge also points out that there had been “similar audit disputes between L3 and DCAA/DCMA from 2006 through 2018.” “These disputes all followed a similar path: DCAA conducts Audits challenging costs, DCMA issues COFDs implementing the DCAA Audits and demanding repayment of the challenged costs, L3 appeals the COFDs to the Board and DCMA either withdraws the COFDs or the parties settle for a nuisance amount resulting in dismissal of the appeals with prejudice.” Underlying all of this is DCAA continuing to question the same types of costs for the same reasons, and DCAA continued use of the same statistical sampling methods.

The Exception to Mootness

The Judge stated: “At the risk of stating the obvious, this repetitive cycle of DCAA Audits challenging costs, DCMA COFDs demanding repayment of the challenged costs, L3’s ASBCA appeals and DCMA’s dismissals without reaching the merits is untenable. The root cause of why DCMA first adopts DCAA’s audit results and then abandons the audits after an appeal is filed is unclear.” The way we see things, DCAA and DCMA would prefer to go on record as challenging as much of the contractor’s claimed costs as they can (keeps outsight groups off their backs) and let the Government get a settlement of some of the cost or at least cherry pick the likely winning cases. The Judge believed that if there was ever the “right circumstance” to apply the mootness exception it was this case, as the Government set up the “capable of repetition, yet evading review”[3] situation. The Judge sighted the historical record of the Government actions between 2006 and 2018 as an “ineffectual cycle” “of DCAA audits finding unallowable costs prompting DCMA final decisions demanding repayment, L3 appealing to the ASBCA and ultimately DCMA abandoning the DCAA audits leaving L3 without resolution of its defenses.”

The Burden of Proof

After exhaustive analysis, the Judge come back to the long-standing position that when a cost is challenged based on reasonableness, the burden of proof is on the contractor to present facts supporting the reasonableness of the incurred cost. The Judge pointed to the Federal Circuit: “Interpreting FAR 31.201 -3(a), the Federal Circuit recently affirmed that the contractor has the burden of proof, unaided by a presumption of reasonableness, to establish that the costs it incurred were reasonable.”[4] It came down to the Board not being able to address reasonableness without the contractor putting forward its position (facts) and the Government be allowed to challenge the contractor’s facts – the underlying factual matters must be litigated.

So, What Have We Learned?

The Gingerbread Man (in our case the Government) will continue to run away from any case it likely will loss – let the cherry picking continue. Thus the cycle continues until the fox (in this case a contractor) gets a chance to take a bite out of the Gingerbread Man.

Our Soapbox Opinion

We believe this is driven by the concept of “reasonableness” being a subjective determination which most DCAA auditor would not touch with a ten-foot pole – Audit Standards prefer objective criteria. Administrative Contracting Officer are gun shy of pushing back on anything DCAA reports. And Government attorney are just fine with a settlement.

Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and supporting contractor from contract award to contract closeout. We would be happy to be part of your team.

[1] ASBCA Case Nos. 62123, 62267, and 62268, brought by L3 challenging the disallowance of other incurred costs by the government resting in part on similar statistical extrapolation, remain pending before the Board, but stayed pending the outcome of the present appeals.

[2] The Supreme Court in Kingdomware Technologies, Inc. v. United States, 136 S. Ct. 1969 (2016) summed up the exception: “[T]his Court’s precedents recognize an exception to the mootness doctrine for a controversy that is “‘capable of repetition, yet evading review.’” Spencer v. Kemna, 523 U.S. 1, 17, 118 S.Ct. 978, 140 L.Ed.2d 43 (1998). That exception applies “only in exceptional situations,” where (1) “the challenged action [is] in its duration too short to be fully litigated prior to cessation or expiration,” and (2) “there [is] a reasonable expectation that the same complaining party [will] be subject to the same action again.” Ibid. (internal quotation marks omitted; brackets in original).

[3] “capable of repetition, yet evading review” being the underlying concept to the mootness exception.

[4] Kellogg Brown & Root Services, Inc. v. United States, 728 F.3d 1348, 1363 (Fed. Cir. 2013) (“It seems that KBR seeks a presumption that it is entitled to reimbursement simply because it incurred facilities costs. It is not.”). This Board has long so held. See Northrop Worldwide Aircraft Services, Inc., ASBCA Nos. 45216, 45877, 98-1 BCA ¶ 29,654 at 146,934 (citing Northrop Worldwide Aircraft Services, Inc., ASBCA No. 47442, 97-1 BCA ¶ 28,885).