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Not Necessary to Include Repriced Contract in Impact Analysis

A ruling denying the government an adjustment for a contractor's changed accounting practices was affirmed by the Court of Appeals for the Federal Circuit because the contract, which was repriced and rephased after the contractor implemented the new practices, was not an "affected contract" that should have been included in the cost impact analysis of the changed practices. The dispute arose from a cost-plus-award-fee contract for the development of the F-22 fighter aircraft, which the parties renegotiated to accommodate an expected funding shortfall. During the negotiations for repricing and rephasing the contract, the government analyzed the contractor's cost accounting practices and recommended extensive changes. The contractor complied and, as required, reflected the changed accounting practices in an amended disclosure statement. The government subsequently asserted a claim for a price adjustment based on a Defense Contract Audit Agency audit report that concluded the changes increased the government's total costs. The government argued the impact of the contractor's changed accounting practices should have been included in the contractor's cost impact study because the F-22 contract was an "affected contract," as that term is used in FAR 30.602-3 and the contract clause at FAR 52.230-2.

"Fully Integrated" Costs

The Armed Services Board of Contract Appeals disagreed, however, and concluded the parties attempted "to accurately determine the cost of the entire program and 'rebaseline' the contract to ensure compliance with budgetary constraints" (07-2 BCA 33,614). Therefore, according to the ASBCA, the F-22 contract was not an affected contract within the meaning of the applicable regulations and was not required to be included in the contractor's cost impact study. On appeal, the government argued the contract was "affected" by the contractor's accounting changes because the repricing of the contract did not constitute an entirely new agreement but only a modification of the existing contract. Under the FAR, however, the critical inquiry for an "affected contract" is not whether there is an entirely new contract, but whether costs were estimated under one accounting practice but reported under another, which was not the case here. As the ASBCA found, the additional accounting costs were "fully integrated and factored into the price of the entire contract as rephased," so that all expenses reported under the new accounting practices were also estimated under those practices. Thus, as a result of the renegotiation, the parties created a wholly new cost estimate incorporating all of the additional expenses. Because these costs were consistently estimated and accrued, the F-22 contract was not an affected contract. (Donley v. Lockheed Martin Corp., CA-FC, 54 CCF 79,355)




(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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