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Cost Savings Applied to Segment Closing Adjustment

An appeal from the summary denial of a government claim for surplus pension assets following a contractor's sale of two business segments was affirmed by the Court of Appeals for the Federal Circuit because the Court of Federal Claims correctly determined the contractor's segment closing obligations could be satisfied by the cost savings realized by the government in the successor contracts. The government appealed the CFC's grant of summary judgment to the contractor holding original Cost Accounting Standard 413 required calculation of a segment closing adjustment based on assets and liabilities for the entire segment, including those transferred to the segment buyer ( 53 CCF 79,195). The court found the Allowable Cost and Payment clause, FAR 52.216-7, and the Credits cost principle, FAR 31.201-5, did not prohibit the contractor from satisfying its segment closing adjustment obligations via cost reductions attributable to the purchasers of its closed segments. On appeal, the government raised two issues: the trial court erred by basing the segment closing adjustments on the assets and liabilities of the entire segment, instead of only those retained by the contractor; and cost reductions provided by successor contractors are not an acceptable form of payment for a segment closing adjustment.

Reduction "or" Refund

The Federal Circuit rejected both grounds. It found original CAS 413.50 required an adjustment based on the applicable assets and liabilities of the entire segment at issue. The court looked at the language at CAS 413.50 (c)(12) and determined the use of the definite article, without other limitation as to quantity, necessarily described an entire segment. In addition, the appellate court was not persuaded by the government's argument the use of the word "refund" in the Credits cost principle required all payment to come directly from the original contractor. Specifically, FAR 31.201-5 stated repayment can occur by either "a cost reduction or a cash refund." No language in the provision required the cost reduction to be limited. Here, the contractor transferred pension assets to successor contractors that allowed the government to reap the benefits it was entitled to had the transfer never taken place, which clearly amounted to a cost reduction. In addition, the government did not adequately explain how its proposal for additional payment from the contractor avoided providing the government with a prohibited windfall.


Circuit Judge Gajarsa concurred with the majority opinion that original CAS 413.50 applied pursuant to a stipulation by the parties. However, he otherwise dissented on grounds the majority opinion obtained an outcome-driven result that ran contrary to the CASB authorizing legislation and the FAR, incorrectly interpreted statutory and regulatory texts, and was unsupported by the factual record. In particular, the dissent pointed to three "fundamental errors" in the majority opinion. First, the majority failed to interpret the regulations at issue in light of the CASB authorizing legislation, 41 USC 422, which requires that contract price adjustments "be made, where applicable, on relevant contracts between the [government] and the contractor." Second, to the degree that Section 422(h) is ambiguous, the majority "selectively misread[] interpretive regulations that give discretion in the manner of recognizing cost impacts but that explicitly require the [g]overnment and the contractor to agree on the manner selected." Finally, according to the dissent, the majority ignored changes to the Credits provision at FAR 31.201-5, as well as the plain text of the compensation for personal services cost principle at FAR 31.205-6 (j)(4), both of which could shed important light on who may provide the cost reductions at issue. ( DIRECTV Group, Inc. v. U.S., CA-FC, 56 CCF 79,737)




(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )


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