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Government Owed Compounded Interest for CAS Violation

The denial of a government claim for excess pension contributions following a contractor's closing of business segments was reversed by the Court of Appeals for the Federal Circuit because the contractor violated Cost Accounting Standards 413.50(c)(12) by not making timely and proper segment closing adjustments, and the government's costs increased as a result. The government appealed from a reconsideration decision by the Armed Services Board of Contract Appeals (08-1 BCA 33,859), which held on summary judgment that the contractor's potential violation of CAS 413 had not caused the government to pay increased costs and therefore did not require the contractor to pay interest on money it owed the government. The ASBCA had previously held the contractor owed the government interest, compounded daily, in accordance with the CAS statute (41 USC 422(h)) and CAS clause (FAR 52.230-2) for the contractor's failure to make timely current period adjustments of pension costs as of the date of segment closing, as required by CAS 413.50 (c)(12) (07-2 BCA 33,655).

Open Contracts

The court disagreed with the ASBCA's reconsideration decision. Undisputed facts in the record showed the contractor did not make the required segment closing adjustments for the two segments until several years after the segments closed. It was clear, therefore, that the contractor violated CAS 413 and the board was incorrect to conclude the record required development to decide the CAS-compliance issue. The board also incorrectly concluded the contractor's CAS violation did not cause the government to pay increased costs. While it was true the government's overpayment of pension costs to the contractor occurred before the segment closings and therefore were not the result of a CAS violation, the government had open contracts with the contractor during the period in which the segments closed, and it made payments on those contracts that would have been lower had the contractor complied with CAS 413 by crediting those contracts. The court reasoned that while CAS 413 looks to past contracts in measuring the amount of the required segment closing adjustment, the adjustment itself is implemented through contracts open during the period in which the segment is closed (see Allegheny Teledyne Inc., et al. v. U.S., 47 CCF 78,020). Thus, CAS 413.50 (c)(12) contemplates adjustment to all contracts that are open during the period of the segment closing. It was on these open contracts that the government paid increased costs.


The government's adjustment for the contractor's failure to comply with CAS 413 included compound interest because relevant statutes and case law, and the CAS contract clause provided for interest to be calculated in this manner. The contractor argued it owed only simple interest. However, 41 USC 422(h)(4) sets out the appropriate interest rate calculation for CAS violations by referencing 26 USC 6621, which requires interest owed the government to be compounded daily. The court's precedent also required compounding interest from the date of the contractor's violation. The contractor further argued the Truth in Negotiations Act (PL 99-500) also refers to 6621, but the statute is implemented in the Federal Acquisition Regulation at FAR 52.215-10 as a simple interest requirement. The critical distinction, however, is that FAR 52.215-10(d) expressly refers to simple interest while the CAS clause at FAR 52.230-2(a)(5) makes no statement as to the type of interest. FAR 52.230-2(a)(5), which serves as the basis for the interest award, simply implements 422(h)(4), which in turn points to 6621. Also, FAR 52.230-2(a)(5) essentially mimics the statutory language, which indicates it was intended to create the same interest liability contemplated by the statute --interest with daily compounding. (Gates v. Raytheon, CA-FC, 53 CCF 79,168)




(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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