United States: COFC Decision On Offsetting Impact Of Cost Accounting Practice Changes Paves The Way For Pre-Award Protests

Last Updated: June 14 2019
Article by Paul E. Pompeo and Sonia Tabriz

The Boeing Company v. United States, Civil No. 17-1969C (May 29, 2019) reveals the Court of Federal Claims' (COFC) interpretation of the Cost Accounting Standards (CAS) statute as primarily benefiting the government, and directs contractors challenging the Federal Acquisition Regulation (FAR) 30.606(a)(3)(ii) prohibition on offsetting the impact of simultaneous cost accounting practice changes to raise those challenges in a pre-award protest or risk waiver. Importantly, the court's decision could have broad implications, requiring contractors to protest the applicability and interpretation of any extra-contractual FAR provisions—not just those involving the CAS statute—that expound upon a FAR Part 52 contract clause.

Adopting a novel theory rooted in the US Constitution, The Boeing Company (Boeing) filed an action under the Contract Disputes Act (CDA) alleging that the FAR 30.606 offset prohibition is an "illegal exaction" in violation of the CAS statute, which specifically prohibits windfalls to the government resulting from changes to a contractor's cost accounting practices. Boeing also claimed that FAR 30.606 was "extra-contractual" and therefore, should not preclude Boeing from offsetting changes that increase costs to the government from those that decrease costs. The COFC dismissed Boeing's constitutional claim for lack of subject matter jurisdiction and concluded that Boeing had effectively waived its contract claims upon failing to raise them in a pre-award protest or during negotiations with the government.

The History of FAR 30.606

The long-accepted practice for determining the cost impact of multiple changes in cost accounting practices was to offset negative impacts against any positive benefit to the government. Thus, offsetting cost impacts could result in a reduced or no contract adjustment. Effective April 8, 2005, the FAR Council promulgated FAR 30.606 to address cost impacts under the CAS. FAR 30.606(a)(3)(ii) provides that, when a contractor implements multiple changes at once, the government "[s]hall not combine the cost impacts" of those changes "unless all of the cost impacts are increased costs to the Government." In other words, if a contractor implements more than one cost accounting practice change and any one of those changes yields decreased costs to the government, the contractor is not permitted to offset the decreased costs against any increased costs when calculating the cost impact and resultant payment due the government.

The Armed Services Board of Contract Appeals (ASBCA) waded into the subject of offsetting both before and after the FAR 30.606 offset prohibition took effect. In The Boeing Company, ASBCA No. 57549, 13 BCA ¶ 35427, the ASBCA confirmed that contractors could offset decreased costs to the government against increased costs for other, simultaneous cost accounting practice changes for contracts entered into before the 2005 amendment. The ASBCA concluded that the regulations were previously silent on the subject, and that the practice was to offset. As to those contracts entered into after FAR 30.606(a)(3)(ii) took effect, the ASBCA upheld the validity of the offsetting prohibition. In Raytheon Company, Space & Airborne Systems, ASBCA No. 5781, 15-1 BCA ¶ 36024, the contractor argued, among other things, that FAR 30.606(a)(3)(ii) is invalid because it infringes on the CAS Board's exclusive authority to prescribe and interpret cost accounting standards. The ASBCA rejected this argument, characterizing the offsetting prohibition as "more in the nature of contract administration or a policy determination than an accounting issue." Ultimately, the ASBCA resolved all of the issues affecting contracts entered into after April 8, 2005 on other grounds; thus, under the law of the Federal Circuit, that portion of the Raytheon decision on the validity of FAR 30.606(a)(3)(i) would be non-precedential dicta. See, e.g., Nat'l Am. Ins. Co. v. US, 498 F.3d 1301, 1305 (Fed. Cir. 2007)

Boeing's Most Recent Challenge

Taking note of the ASBCA's position on FAR 30.606(a)(3)(ii), Boeing launched an innovative, constitutional challenge before the COFC, alongside numerous contract claims, contesting its inability to offset simultaneous cost accounting practice changes as memorialized in a contracting officer's final decision on a government claim and the government's rejection of Boeing's claim.

The CAS Statute Benefits the Government, Not Contractors

Boeing first alleged that the government's application of FAR 30.606 constituted an illegal exaction in violation of the US Constitution—specifically, the Due Process Clause of the Fifth Amendment, which prohibits the deprivation of property without due process of law. An illegal exaction arises when money is "improperly paid, exacted or taken from the claimant in contravention of the Constitution, a statute, or a regulation." Norman v. United States, 429 F.3d 1081, 1095 (Fed. Cir. 2005). According to Boeing, FAR 30.606(a)(ii)(3) violates the CAS statute, codified in relevant part at 41 U.S.C. § 1503(b), which provides that when a contractor changes its cost accounting practices, "[t]he Federal Government may not recover costs greater than the aggregate increased cost to the Federal Government."

The government successfully moved to dismiss Boeing's constitutional claim on jurisdictional grounds. According to the COFC, there is no rule barring illegal exaction claims accompanying contract claims under the CDA. Nevertheless, the COFC concluded that it had no subject matter jurisdiction over the illegal exaction claim because Boeing failed to establish that its claim was based upon a "money-mandating statute," as Federal Circuit precedent required. The court rejected Boeing's characterization of the CAS statute as mandating the return of windfalls reaped by the government and concluded that there is "no right to bring a claim for monetary damages expressly contained in the statute."

To the contrary, the COFC held that the CAS statute "primarily protects the government," and not contractors. Thus, while a contractor is permitted to challenge the government's compliance with the CAS statute, it cannot assert an illegal exaction in connection with the CAS statute under the US Constitution.

Are Protests the New Frontier for FAR 30.606 Challenges and Beyond?

Boeing's numerous contract claims were also unsuccessful. According to Boeing, FAR 30.606 was "extra-contractual" because it was not incorporated into its contract either in full text or by reference. Thus, Boeing argued that it should not be bound by the offset prohibition. In response, the government raised the affirmative defense of waiver and argued that Boeing cannot challenge the legality of FAR 30.606(a)(3)(ii) years after entering into and performing under the subject contract. The COFC denied Boeing's claims on this basis.

The COFC stated that Boeing is no stranger to FAR 30.606, having launched numerous challenges to the offset prohibition in the past. The court cited these challenges, as well as Boeing's innumerable contracts subject to FAR 30.606(a)(3)(ii), as evidencing Boeing's actual and constructive knowledge of the provision's applicability. Boeing responded that the contract was at best ambiguous, because it included a reference to the CAS statute, which Boeing reads as contrary to FAR 30.606. The COFC was unpersuaded, characterizing any such ambiguity as patent—i.e., a facial inconsistency requiring Boeing to pursue a "pre-award protest or negotiation with the government, before its contracts were awarded." Having not done so, the court held that Boeing's later contract claims were foreclosed as a matter of law.

This holding is significant, and suggests that protests may be the appropriate mechanism for adjudicating conflicts between the CAS statute and the FAR 30.606(a)(3)(ii) prohibition on offsetting the impact of simultaneous cost accounting practice changes. The COFC was disinclined to permit a sophisticated contractor like Boeing to "change the pricing framework for its contract, years after the competition for that contract ended." As a consequence, all contractors now run the risk of waiving the right to challenge applicability of FAR 30.606 if such challenges are not first raised before contract award.

Additionally, the COFC decision presents the potential for a disturbing, broader application. As discussed above, the court cited Boeing's awareness of FAR 30.606, along with fifty-year-old case law presuming that contractors have constructive knowledge of procurement regulations, as a basis for its holding that Boeing was bound to challenge the FAR 30.606(a)(3)(ii) offset prohibition in a protest or during negotiations before award. That holding could apply with equal force to any provision in the FAR that purports to interpret or implement a FAR Part 52 contract clause. Thus, what might ordinarily have been the subject of a dispute under the CDA, may now be waived absent the filing of a pre-award protest.

It remains to be seen whether Boeing will appeal this decision to the Federal Circuit for further consideration of these potentially far-reaching implications.

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