July 8, 2015

ASBCA Issues Sweeping Decision on Cost Impacts for Changes in Cost Accounting Practices Involving Government Contracts

Arnold & Porter Advisory

The Armed Services Board of Contract Appeals (ASBCA) rendered a decision in Raytheon Co., Space & Airborne Sys, ASBCA Nos. 57801 et al. (May 7, 2015)1 in which it made precedential holdings on a number of issues involving cost impacts resulting from changes in cost accounting practices under US government contracts, including multiple changes made effective on the same day.

The Government is Prohibited From Double Counting:

The ASBCA held that the Government's long-standing practice of including decreases on fixed price contracts as an increased cost and adding that to increases on flexibly priced contracts to determine a cost impact violates the CAS statute. Despite the Government's reliance on CAS regulation 9903.306(b), which calls for measuring increased costs on fixed price contracts as the difference between the contract price agreed to and the contract price that would have been agreed to in the context of a noncompliance or a failure to follow a disclosed practice, the ASBCA held that it "runs afoul of the prohibition in [the CAS statute]" on recovering greater than the aggregate increased cost to the government. The ASBCA described the government's practice as "the very definition of a windfall."

Offsetting Multiple Changes in Cost Accounting Practices:

  • Relying on and expanding the underlying rationale of its recent decision in The Boeing Company, ASBCA No. 57549, 13 BCA ¶ 35,437, the ASBCA held that contractors could "offset" increased costs paid as a result of changes in cost accounting practices against decreased costs paid for other changes in cost accounting practices made effective the same date, where the changes were made prior to a 2005 amendment to the Federal Acquisition Regulation (FAR) at new section 30.606(a)(3)(ii) prohibiting that practice. The ASBCA expanded on the Boeing rationale by explaining that the pre-existing practice of the Government was to allow such offsets.
  • For changes in cost accounting practices after the FAR change, the ASBCA held that the FAR provision was valid and applicable. The ASBCA held that the Cost Accounting Standards (CAS) Board's exclusive authority under the CAS statute only applies to the institution of regulations that govern the "measurement, assignment and allocation of costs to contracts." The ASBCA also held that the CAS Board acquiesced in the issuance of FAR 30.606, because the Administrator of the Office of Federal Procurement Policy (OFPP), who was also the Chair of the CAS Board, was aware of the FAR initiative to address the issues in 2002 and endorsed that action; a later OFPP Administrator abandoned the CAS Board's own effort to implement regulations on the subject; and in the ten years since FAR 30.606's existence, neither the OFPP Administrator nor the CAS Board has ever attempted to rescind FAR 30.606(a)(3)(ii).
  • For multiple changes in cost accounting practices that simultaneously affect contracts both before and after the FAR change, the ASBCA held that affected contracts predating the FAR change are subject to the Boeing standard, while affected contracts entered into after the FAR change are subject to FAR 30.606.

Desirable Changes:

  • The ASBCA held that the determination of whether a change is desirable, and therefore not subject to the restriction on increased costs paid, is discretionary and must be subject to an assessment of whether the Contracting Officer abused his or her discretion. The ASBCA cited a standard that includes demonstration that the Contracting Officer acted in bad faith - and found no bad faith.
  • The ASBCA also held that its statement in Lockheed Martin Corp., ASBCA No. 53822, 07-2 BCA ¶ 33,614, aff'd, Donely v. Lockheed Martin Corp., 608 F.3d 1348 (Fed. Cir. 2010) that "an increase in costs alone was not a sufficient basis for determining that the changed practices were not desirable and that the relevant factors for assessing desirability 'may include' the extent of active government involvement in, and support for, the decision to institute the changed practices; the degree to which the changed practice increased the accuracy and precision of the cost measurement, assignment and/or allocation process; the degree to which the changed practice increased the visibility, management and/or controllability of the cost in question; and, any other short or long term benefit to the government" was merely dicta.


  • Citing the CAS statute and Gates v. Raytheon Co. 584 F.3d 1062, 1070 (Fed. Cir. 2009), the ASBCA held that compound daily interest applies to changes in cost accounting practices.
  • The ASBCA also held, however, that the calculation of interest should not run as if the entirety of the cost impact occurred on the first day of the change implementation.


  • In light of the improper double counting, which would reduce the alleged cost impacts in half, the ASBCA declined to rule on the question of materiality.

30 Percent Increment:

  • The ASBCA also declined to decide whether the government's increase of the alleged cost impact by 30% for one of the changes was appropriate, due to its conclusion that material facts were in dispute.

This case is a follow-on to Raytheon Co., Space & Airborne Sys. ASBCA Nos. 57801 et. al, 13 BCA ¶ 35,319, wherein the ASBCA denied three of the consolidated government claims based on the statute of limitations. With the current decision, the ASBCA has ruled in Raytheon's favor in four of six consolidated government claims, and has reduced the quantum in the remaining two by half, with final resolution of those subject to a trial on materiality and the 30% increment. The author of this Advisory represented Raytheon in these matters.

  1. The decision was not made public until July 8 2015.

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