Court of Federal Claims (COFC) Ruling May Shield Certain Contractors from Cost Accounting Standard (CAS) Violations

September 9, 2022

Contractors subject to full CAS must disclose their accounting practices to the government and obtain the government’s concurrence that the disclosed practices comply with CAS. Sikorsky Aircraft Corporation (Sikorsky) submitted its Disclosure Statement which, among other subjects, described how Sikorsky allocated Independent Research and Development (IR&D) and Bid and Proposal (B&P) costs to contracts. Sikorsky won several CAS-covered contracts between 2007 and 2017 which were priced based on their disclosed accounting practices.

In 2012, the Defense Contract Audit Agency (DCAA) issued a Statement of Conditions and Recommendations stating that Sikorsky’s method for Allocating IR&D and B&P costs to contract violated CAS 420. Two years later, DCAA issued the final audit report, which restated this finding.  Yet it wasn’t until December 2020 that the Contracting Officer issued their Final Decision (COFD) and demanded that Sikorsky repay all IR&D and B&P costs improperly billed to the government from 2007 through 2017.

Sikorsky appealed the COFD to the COFC claiming breach of contract on the theory that Sikorsky had disclosed its accounting practices to the government and received no objection, so the contracts awarded during this period incorporated those practices. The government moved to dismiss Sikorsky’s challenge because the contracts incorporated FAR 52.230-2 “Cost Accounting Standards” which require the contractor to agree to a price adjustment in the event of a CAS noncompliance.

However, the COFC denied the government’s motion to dismiss stating that an “open question” remains as to whether the government has waived its claim for contract adjustment based on an alleged CAS noncompliance when the government unduly delayed evaluating the contractor’s disclosed practices, and entered into contracts based upon those disclosed practices in the interim. Presumably the COFC will answer this “open question” during the course of this litigation.

Regardless of the COFC final decision, government auditors and contracting officers are now on notice that imposing liability on contractors for CAS violations years after the contracts were awarded, and in some cases, after they were completed, because they didn’t review the contractor’s disclosure statement on a timely basis, is not an appropriate business practice. As noted by the COFC, such behavior may not be consistent with the government implicit obligation of good faith and fair dealing.

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