CONTRACT DISPUTES ACT SIGNIFICANT NEW CASE LAW

1. CONTRACT DISPUTES ACT SIGNIFICANT NEW CASE LAW Presented By: Peter M. Casey Trial Attorney Defense Contract Management Agency Date: 7 March 2018

2. THE VIEWS IN THIS PRESENTATION ARE THOSE OF THE SPEAKER AND DO NOT NECESSARILY REPRESENT THE VIEWS OF THE USG, THE DEPARTMENT OF DEFENSE, OR ANY OF THEIR COMPONENTS, INCLUDING THE DEFENSE CONTRACT MANAGEMENT AGENCY

3. DEVELOPMENTS IN CDA DISPUTES • Contract Disputes Act Overview • 6-Year Statute of Limitations • FAR Cost Allowability • “Reliance” on DCAA Past Audits • Intercompany Transfers • Duty of Good Faith & Fair Dealing

4. CONTRACT DISPUTES ACT • CDA (41 USC § 7101 et seq.) governs claims arising under or relating to contract between executive agencies and contractors • Applies to contracts for government procurement of- • Property • Services • Construction/repair/maintenance of real property • Disposal of personal property

5. “CLAIM” UNDER CDA • “CLAIM” (FAR 2.101): • A “written demand or written assertion by one of the contracting parties seeking, as a matter of right for • payment of money in a sum certain, • the adjustment or interpretation of contract terms, or • other relief arising under or relating to the contract. • Claim is not a “voucher, invoice, or other routine request for payment that is not in dispute when submitted”

6. “CLAIM” UNDER CDA • ContactorClaims: • Must be submittedto ContractingOfficer and request final decision • Monetary claimsmust“certified” if seeking more than$100,000 • Six-yearstatuteof limitations • Obligation tocontinueperformance • COissuesfinal decisiontogrant/deny acontractor claimorto assertaGovernmentclaim • COFD is final and binding unless appealed • Appeals: • ASBCA/CBCA (90 days from COFD) or FCOC (12 months) • Must be “claim” and “final decision” (or deemed denial) to appeal

7. RECENT DECISIONS ON “CLAIMS” • Jurisdictional Requisites: Certification • Claim requires “signature” of authorized representative of entity. • Purported “claim” with only typewritten name inadequate; appeal dismissed. NileCo General Contracting LLC, ASBCA No. 60912, 17-1 BCA ¶ 36,862 • Document failing to contain language that “at least resemble[s] the statutory [certification] language” does not constitute curable defective certification; appeal dismissed for lack of jurisdiction. L-3 Comm’ns Integrated Sys. v. United States, 132 Fed. Cl. 325 (2017)

8. RECENT DECISIONS ON “CLAIMS” • Jurisdictional Requisites: “Sum Certain” • “Sum certain” requirement is satisfied, or not, at the time the contractor submits its claim to the CO. SFM Constructors, Inc. v. Dep’t of Veterans Affairs, CBCA 5760, 17-1 BCA ¶ 36,791 • Claim with qualifying language (e.g., “$_____at a minimum”; “approximately”; “in an amount to be decided at a hearing”) does not meet “sum certain” requirement; however, if claim is in “sum certain,” qualifying language in communication transmitting claim to CO does not vitiate claim. SFM Constructors, Inc. v. Dep’t of Veterans Affairs, CBCA 5760, 17-1 BCA ¶ 36,791 • Request to convert termination for default to termination for convenience is not a claim for money. Magwood Servs., Inc. v. Gen. Servs. Admin., CBCA 5869, 17-1 BCA ¶ 36,875.

9. Statute of Limitations DCAA 1965-2015: Celebrating 50 Years of Excellence • CDA (41 USC § 7103(a)(4)) requires Government and Contractors to submit claims within six years of the “accrual” • FAR 33.201 - Accrual means the date when all events that fix the alleged liability of either party and permit assertion of the claim were known or should have been known. For liability to be fixed, some injury must have occurred, but monetary damages need not have been incurred.

10. Statute of Limitations • Analysis to determine when accrual occurs (see Gray Personnel, Inc., ASBCA No. 54652 (August 9, 2006)): • To determine when liability is fixed, judge starts by examining the legal basis of the particular claim. • Some injury must have occurred – for monetary damages, some costs must have been incurred for liability to be fixed. • Claim accrues when “[a]ll events” that fix the alleged liability “were known or [reasonably] should have been known” - once a party is on notice that it has a potential claim, the limitations period starts to run. • Because “claim” for money damages means “sum certain,” claim will not accrue until “sum certain” is known or reasonably knowable. Kellogg Brown & Root Srvcs. v. Murphy, 823 F.3d 622 (Fed. Cir. 2016).

11. Statute of Limitations DCAA 1965-2015: Celebrating 50 Years of Excellence • Test for “accrual” does not require actual knowledge • Not dependent upon when a party subjectively understood that a claim existed, but when the party possesses sufficient information that the claim was reasonably knowable • Knowledge by any Government representative (e.g., DCAA auditor) is sufficient (probably)

12. Statute of Limitations DCAA 1965-2015: Celebrating 50 Years of Excellence Scenarios: Accrual of Government claim for unallowable/unallocable costs: • On receipt of payment voucher – e.g., unallowable costs evident from the face of an invoice (or any detailed support). “$10,000 for Johnny Walker Blue Label” • On receipt of incurred cost proposals – e.g., unallowable costs evident from the face of the ICP or any accompanying support • During audit – e.g., unallowable direct or indirect costs determinable based on information obtain in ICP audit

13. Statute of Limitations Government Claim Held to Accrue on Payment of Interim Voucher Appeal of Sparton DeLeon Springs, LLC, 17-1 BCA ¶ 36,601 (16 August 2016), motion for reconsideration denied,17-1 BCA ¶ 36,764 (18 May 2017) • Unusual facts: • Government paid interim vouchers, which included subsidiary’s direct labor costs, by January 2007 • As typical, vouchers did not include supporting documents; DCAA performs desk top review and approves for payment • K’s subsequent ICPs in January 2008, however, omitted amount equal to labor costs from direct cost schedules • DCAA first detects discrepancy during audit in September 2013 • K ignores ACO’s multiple requests for support for labor costs • ACO issues COFD in October 2015 denying labor costs for lack of adequate supporting documentation (FAR 31.201-2(d)) and demands reimbursement

14. Statute of Limitations • Contractor appeals, moves for summary judgment on ground that claims barred by statute of limitations • Board grants motion: • Claim accrued on DCAA receipt of ICPs—Government knew or should have known of discrepancy between ICPs and direct cost payments • Alternatively, claim accrued when Government received and paid interim vouchers—lack of support for labor costs just as evident then as it was at time of COFDs more than six years later • ASBCA rejected argument that decision gutted Government’s contract right under Allowable Cost and Payment Clause to audit invoices, vouchers and statements of costs; reduce by amounts found unallowable; and demand repayment of amounts paid — “at any time or times before final payment” (FAR 52.216-7(g))

15. Statute of Limitations Government moves for reconsideration based on clear error of law • Although the ICP did not include labor costs, ICP itself disclosed no reason for “discrepancy” (even if Government should have detected it). • ICPs routinely corrected, revised, supplemented. • Government reasonably could not have “known” labor costs lacked support based on mere discrepancy. • Lack of support with interim voucher disclosed no information. • Contractor had no obligation to submit supporting documents with interim voucher • Thus, Government could not have known at that time that contractor could not support the costs. Accrual cannot arise from treating “the absence of evidence [as] evidence of absence.” • Board denied reconsideration in terse order.

16. FAR Cost Allowability “Expressly Unallowable” Costs--Stock-Based Compensation Appeal of Excelis Inc., 17-1 BCA ¶ 36,708 (29 Mar 2017); Appeal of Luna Innovations, Inc., 2017 ASBCA LEXIS 444, ASBCA No. 60086 (29 Nov. 2017). • Penalties for indirect costs made ”expressly unallowable” by FAR cost principle(s) claimed in incurred costs proposals (FAR 42.709): • Penalty=amount allocable to Government Ks; double for repeat offenders • Under case law, Government “must establish that it was unreasonable under all the circumstances for a person in the contractor's position to conclude that the costs were allowable” • ACO “must waive” if cost withdrawn before audit starts; is less than $10K; of K demonstrates to the ACO’s satisfaction that K had adequate internal controls and/or resulted from excusable neglect • Stock-based compensation (FAR 31.205-6(i)): “ Compensation based on changes in the prices of corporate securities or corporate security ownership, such as . . . . “(1) Any compensation which is calculated, or valued, based on changes in the price of corporate securities is unallowable” and “(2) Any compensation represented by dividend payments or which is calculated based on dividend payments is unallowable.”

17. FAR Cost Allowability • EXCELIS • Contractor’s Long Term Incentive Plan (“LTIP”) compensation awards based on predetermined compensation award pool as adjusted by Excelis' relative Total Shareholder Return (“TSR”) ranking against several “peer contractors.” • TSR metric a measurement of company stock price increase over defined period plus dividends paid as percentage of opening price. LTIP awards increased with Excelis’ TSR ranking. • Board: LTIP awards were expressly unallowable because such awards were “based on” changes in Excelis’ securities prices and dividend payouts • Fact that awards reflected predetermined compensation award pool adjusted by performance relative to competitors did not mean they were not “based on” securities price changes • On penalty, Board also rejected arguments that it was reasonable for K to conclude that TSR compensation costs were allowable because of • Internal Gov’t “debate” • Other contractors had concluded that similar costs were allowable.

18. FAR Cost Allowability • LUNA • K issued stock options to officers and select employees as part of compensation. • In 2006, became public traded corporation and subject to GAAP requirement to expense option grants in period of award. To determine amount, K used “Black-Scholes” model, which utilizes several factors, including volatility of underlying stock • Board rejected K’s multiple arguments that stock options costs were not unallowable, ruling that share price volatility factor of Luna’s stock as used in the Black-Scholes model reflected “changes in the price of corporate securities” under FAR 31.205-6(i)) • On penalties, however, Board held that the costs were not expressly unallowable: • “Given the complexity of the circumstances, the fact that the use of the Black-­Scholes model is a question of first impression, the need to review the differential equations comprising the Black-Scholes model, and the fact that there could be a reasonable difference of opinion regarding the costs, we hold that it was not ‘unreasonable under all the circumstances’ for Luna to claim the employee stock option costs, and hold that the employee stock option costs are not expressly unallowable.”

19. FAR Cost Allowability Lobbying Costs—Salaries Appeal of Raytheon Co., 17-1 BCA ¶ 36,724 (17 Apr 2017)) • FAR 31.205-22 makes unallowable lobbying and political activity costs . “When a contractor seeks reimbursement for indirect costs, total lobbying costs shall be separately identified in the indirect cost rate proposal, and thereafter treated as other unallowable activity costs.” Further, under FAR 31.201-6(e)(2): “Salary expenses of employees who participate in activities that generate unallowable costs shall be treated as directly associated costs to the extent of the time spent on the proscribed activity…” • Raytheon claimed salaries of employees who spent part of time engaged in lobbying activities. It admitted costs were unallowable, but argued that they were not “expressly unallowable” and therefore not subject to penalty: “[O]nly expressly unallowable costs, [but] not directly associated costs, are subject to penalties.” • Board rejected argument: “The lobbying cost principle would carry little weight if salaries were not covered. …[Although] Raytheon alleges that directly associated costs differ from expressly unallowable costs and cannot be subject to penalties…[u]nder FAR 31.201-6(a), ‘[w]hen an unallowable cost is incurred, its directly associated costs are also unallowable.’ Thus, material salary expenses of employees who engage in activities that generate unallowable lobbying costs are … expressly unallowable [and] subject to penalty under FAR 42.709-l(a)(l).”

20. FAR Cost Allowability Limitations of Costs in Delivery/Task Orders InterImage, Inc. v. United States, 133 Fed. Cl. 355 (18 Jul 2017) • Base contract included standard limitation of cost (52.232-20), limitation of funds (52.232-22), and Indefinite Delivery Indefinite Quantity (52.216-18) clauses, the latter of which provides that “[a]ll delivery orders or task orders are subject to the terms and conditions of this contract.” • PCO issued series of delivery orders including Navy DFARS supp. incremental funding clauses, providing that: • This order is incrementally funded and the amount currently available for payment hereunder is limited to $[X] ...Subject to the provisions of the clause entitled "Limitations of Funds" [] of the General Provisions of the contract, no legal liability on the part of the Government for payment in excess of $[X] shall arise unless additional funds are made available and are incorporated as a modification of this order. • In connection with final payment, K sought payment that, while within base contract cost and fund limits, exceeded delivery order ceiling limitations, arguing that DO limits did not apply because the DOs did not “expressly incorporate the limitation of cost or funds clauses.” • COFC dismissed appeal. Read together, base contract and incremental funding clauses limited K to ceilings in the DOs.

21. FAR Cost Allowability Responsibility to Support Claimed Costs • FAR 31.201-2, “Determining Allowability,” subpart (d): A “contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. • Subcontractor Costs: Prime K on T&M contract had no obligation to document that it had reviewed subcontractor’s labor qualification records or time sheets. Lockheed Martin Integrated Sys., Inc., ASBCA Nos. 59508 et al., 17-BCA ¶ 36,597. • Further holding that K had no contractual duty to (i) retain documents used to substantiate its interim billings and produce in audit years later or (ii) initiate subcontractor cost audits • Consulting Costs: FAR cost principle states that, to be allowable, consulting costs “shall” be evidenced by agreements, invoices, and “consultants’ work product and related documents.” Notwithstanding mandatory language, consultant costs may be supported by other evidence (including oral testimony) when there is no written work product.Technology Systems, Inc., ASBCA No. 59577, 17-1 BCA ¶ 36,631. • Termination Costs. Denying K’s claim for costs incurred in termination for convenience: “[N]one of the claimed performance costs and settlement expenses is supported by record evidence of, in the language of FAR 31.201-2(d), "documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract"; consequently, appellant has not proven that it is entitled to any of those claimed costs or settlement expenses.” Appeal of Thorpe, 16-1 BCA 36,254.

22. Reliance on DCAA Past Audits Government Past Failure to Question Costs No Basis for Allowance Appeal of Technology Systems, Inc., 17-1 BCA ¶ 36,631 (12 Jan 2017) • TSI small contractor • DCAA did not question any costs In TSI’s FYs 2002-06 ICPs • On FY 2007 ICP, however, audit questioned several indirect and some direct costs not questioned in prior years final indirect cost rate proposal; ACO asserts Government claim • On appeal, K argues that costs should be allowed because it had “relied” on prior course of dealing with DCAA and that DCAA improperly “retroactively disallowed” costs previously allowed • Board rejected both theories: • Retroactive disallowance is species of estoppel, requiring proof of affirmative misconduct • On course of dealing, failure to question costs in past not enough; no evidence Government affirmatively “accepted” costs • DCAA’s failure to question certain costs in prior audits does not establish a common basis of understanding of what constitutes adequate support for K’s incurred costs • DCAA failure to question costs in prior years could be due to numerous causes, e.g., no audit in the prior year; costs not questioned in PY not tested

23. Intercompany Costs Intercompany Transfers at Price—No “Economic Substance” Required A-T Solutions, Inc., ASBCA No. 59338, 2017-1 B.C.A. (CCH) P36,655 • Under FAR 31.205-26(e), allowance for materials, supplies and services sold or transferred in intercompany transactions shall be on basis of costs incurred; however, allowance may be at price “if it is the established practice of the transferring division to price [such] transfers at other than cost for commercial work of the contractor” • In ATS, K supplied Army with training “kits” under cost-reimbursement contract and claimed costs at catalog price that subdivision recorded on transfer to K. Government rejected K’s demand to reimburse at price. • On appeal, Board found that K had a record of making intercompany transfers at commercial prices and therefore qualified for exception. • Board rejected Government that “price” exception did not apply because subdivision did not physically transfer “kits” to K and that transactions lacked economic substance: • “The government has failed to establish the existence of [an economic substance] requirement or … suggest [ed] how a court or Board could tell if it had been met in a particular case”. • “That the transfer may be essentially pass through in nature does not prevent its recognition.”

24. Duty of Good Faith & Fair Dealing Good Faith & Fair Dealing In Award and Performance • Parties to a government contract are under implied duty of good faith and fair dealing in performance and enforcement. "The covenant of good faith and fair dealing… include[s] the duty not to interfere with the other party's performanceand not to act so as to destroy the reasonable expectations of the other party regarding the fruits of the contract. E.g., • E.g., “Evasion of the spirit of the bargain” • E.g., Interference with or failure to cooperate in the other party's performance • Agility Public Warehouse Co. v. Mattis, 852 F.3d 1370 (2017): K contracted to supply food and non-food goods in Kuwait and Iraq. Brought claim alleging that Government breached contract and duty of good faith & fair dealing by unnecessarily delaying return of K’s trucks and failing to increase on-site food storage capabilities. Board found no breach of contract and dismissed appeal. Federal Circuit reversed: • Agreed with Board that K did not allege breach of contract; however, Board failed to consider implied duty claim: “Breach of the implied duty of good faith and fair dealing does not require a violation of an express provision in the contract.” • Undisclosed changes in contract regulations pending at time of award—”Bait & Switch”. Anham FZCO, LLC, ASBCA No. 59823 (July 20, 2017); Kelly –Ryan, Inc., ASBCA 57068 (Dec. 5, 2017)

25. Questions