Another CDA Statute of Limitations Case, Another Contractor Victory. Written by Nick Sanders

Transcription

1 In the recent past, we have written lessthanflattering analyses of certain decisions issued by Judges of the Armed Services Board of Contract Appeals (ASBCA) decisions that involved the Statute of Limitations (SoL) associated with the Contract Disputes Act (CDA). We re sure that nobody over at the ASBCA cares a whit about our opinion of their decisions. After all, we are not attorneys and it should be crystal clear that we don t understand all the intricacies and nuances of The Law. But still. We can read and we can reason and we have opinions that at least some people take the trouble to read. So when we were somewhat critical about Judge Delman s decision in the matter of Lockheed Martin s alleged CAS noncompliance regarding its accounting for Independent Research and Development (IR&D) costs, we thought we were raising some reasonable points (for a layperson, anyway). And when we called Judge Delman s subsequent decision in the matter of the allowability Raytheon s executive incentive compensation plans a halfaloaf, not a full loaf of a victory for contractors, we thought we were discussing relevant and onpoint issues that few other sources were discussing. And now we are back with another ASBCA decision by another Judge (Judge Melnick) on another CDA SoL case filed by the Raytheon Company, in which Raytheon cleaned the government s clock. (Pending appeal, of course.) 1 / 5

2 Oh yeah, we don t have too many strident laypersontype criticisms to level at this case. You all really, really need to go read it right now. The decision was issued January 28, 2013 but was held for 30 days to give the parties an opportunity to review and redact; consequently, it was published at the end of February. In case you re too lazy to go find and read it (even though we gave you a link to click on), we ll recap it for you. We take the trouble to do this because we know our readership. Here goes: Raytheon Missile Systems (RMS), one of the operating businesses of The Raytheon Company, disclosed to the Government its cost accounting practice of excluding certain subcontract costs (called Major Subcontracts ) from the application of full indirect rate burdens. The disclosure was made at the end of 1998, to be effective January 1, Subsequently, on June 18, 1999, RMS submitted an amended CAS Disclosure Statement in which it disclosed that the group of Major Subcontracts would be expanded, so that more subcontracts would qualify for that special reduced indirect rate burdening. Even though RMS disclosed the revised cost accounting practice in midjune, the practice was to be retroactively effective as of January 1, On May 14, 1999, NAVAIR awarded RMS a letter contract to remanufacture Tomahawk missiles. RMS submitted a cost proposal to definitize that letter contract on July 20, That definitization proposal was submitted about one month after submission of the revised Disclosure Statement; consequently, RMS should have applied the revised Major Subcontract burdening practice in its cost proposal to NAVAIR. Allegedly, RMS failed to apply its reduced indirect rate burdens to the Lockheed Martin subcontract costs included in its proposal. The contract price was negotiated and agreedupon on August 4, 1999, and nothing was said of the potential noncompliance with disclosed cost accounting practices at the time even though a DOD pricing analyst reviewed the proposal in detail (including the application of indirect rates to proposed subcontract costs). About six years later (in 2005), the same DCMA price analyst performed a second review of RMS 1999 pricing data. This time around, the price analyst noted that RMS failed to burden its proposed Lockheed Martin subcontract costs with its reduced Major Subcontract indirect rates. In April, 2006, DCAA issued a draft condition statement alleging that RMS proposal deviated from RMS disclosed cost accounting practices, and that the deviation led to a significant increase in contract price. RMS replied in July, 2006, stating that it did not concur and that the alleged noncompliance [with disclosed cost accounting practices] had no cost impact. DCAA issued its final audit report on September 22, 2006 seven years and one month after the contract price had been agreedupon. 2 / 5

3 RMS Divisional Administrative Contracting Officer (DACO) issued an Initial Determination of CAS noncompliance on October 13, Discussions ensued. Eventually, on May 14, 2009, RMS communicated its final calculations regarding the cost impact of the alleged noncompliance. DCAA evaluated RMS analysis and declared it to be inadequate in a report issued June 28, Yes, you read that correctly: DCAA took more than two years to determine that RMS cost impact analysis was inadequate. Unfortunately for contractors everywhere, that audit duration (and ultimate result) is far from unusual in the current audit environment. The alleged inadequacy of RMS analysis did not prevent the DACO from issuing a Contracting Officer s Final Decision on November 29, 2011, demanding $10,157,000 plus $6,885,884 in accrued interest. RMS appealed to the ASBCA. To recap, in 2011 the government demanded that RMS pay $17 million, based on an alleged failure to follow disclosed cost accounting practices that took place in That s a duration of 12 years between events giving rise to the alleged liability and the assertion of a claim for damages. As we ve discussed many times before, the CDA SoL contemplates a duration of not more than six years. Seems like an easy call for the Judge to make. And indeed, such seemed to be the case. Judge Melnick dismissed the Government s claim as being untimely and therefore invalid. The appeal was dismissed for lack of jurisdiction, meaning that Raytheon Missile Systems owed the Government nothing. Yay, RMS. (Pending appeal.) Judge Melnick made the following points in his decision that we want to bring to your attention. 3 / 5

4 The Government contended that RMS had the burden of proving that the Government s claim was untimely. Judge Melnick disagreed, writing By advocating in response to Raytheon s motion that its decision is valid the government is effectively the proponent of our jurisdiction and therefore bears the burden of proving it under these circumstances. Judge Melnick discussed when the CDA SoL timeclock began to run in this case, writing The events fixing liability should have been known when they occurred unless then can be reasonably found to have been either concealed or inherently unknowable at that time. The CDA SoL timeclock began to run in this dispute in Judge Melnick wrote, Raytheon disclosed sufficient facts to the government in 1999 to conclude it [the Government] should have known about the claim at that time. Accordingly, to the extent the government now claims the expanded special burden was effective on 1 January 1999, and that the Lockheed Martin subcontract should have received special burden under that expanded definition, Raytheon gave it all the information necessary to know of that claim in Judge Melnick wrote, claim accrual does not turn upon what a party subjectively understood; it objectively turns on what facts are reasonably knowable. The Government argued that what the price analyst knew was irrelevant, and that only the DACO s personal knowledge mattered with respect to starting the SoL timeclock. (Echoing the position taken by Judge Delman in his Lockheed Martin decision.) Judge Melnick rejected that argument, writing The government fails to cite any authority supporting the proposition that claim accrual is based only upon the knowledge of the individual clothed by a contracting party with authority to assert the claim. If that were the case, then both contractors and the government could suspend accrual by internally compartmentalizing relevant information and insulating senior decision makers from it for as long as they choose. Nothing in FAR , which commences accrual of a claim when the events fixing alleged liability were known or should have been known by a party, contemplates permitting such gamesmanship. Claim accrual is not suspended simply 4 / 5

5 because the government may have been delayed appreciating the implications of what Raytheon had disclosed, or in funneling to the individual authorized to act upon the claim all of the information relevant to it. As if he realized that he was disagreeing with another sitting ASBCA Judge, Judge Melnick wrote Accrual of a contracting party's claim is not suspended until it performs an audit or other financial analysis to determine the amount of its damages. Damages need not have actually been calculated for a claim to accrue. The fact of an injury must simply be knowable. The fact the government waited until 2006 to declare in an audit report that these earlier materials provided that notice is irrelevant. Delay by a contracting party assessing the information available to it does not suspend the accrual of its claim. These facts distinguish this appeal from Lockheed Martin Corp., where we held the government was not notified of overbillings until a DCAA draft audit discovered them. Additionally, in the absence of misconduct by Raytheon rising to the level of trickery, once the claim accrued and the limitations period began to run, subsequent communications between Raytheon and the government about the claim's merits and magnitude did nothing to toll it. There is no evidence of trickery here. To sum this up, Judge Melnick s decision with its concise refutation of all government arguments as to why their claim for damages should be heard 12 years after the events that fixed the alleged liability took place seemed to signal a return to a more bright line test of CDA SoL claim accrual. Assuming that other ASBCA Judges find Judge Melnick s reasoning more persuasive that Judge Delman s reasoning, the two major Contracts Disputes Act fora (the ASBCA and the U.S. Court of Federal Claims) may be narrowing their interpretative differences regarding SoL claim accrual. Which is good news for contractors everywhere. 5 / 5