Defense claims against contractors have a shelf life of infinity

Even when a claim against a federal contractor is dismissed, it never dies. Like a zombie, it can rise forth and bite you. That's what a decade-plus dispute bet...

Even when a claim against a federal contractor is dismissed, it never dies. Like a zombie, it can rise forth and bite you. That’s what a decade-plus dispute between Textron and the Defense Contract Management Agency shows. For details, the Federal Drive with Tom Temin talked with Zach Prince, a partner at the law firm of Haynes Boone.

Interview transcript:

Tom Temin What could possibly occupy a company and the DCMA over 10 or 12 years? Tell us about this case.

Zach Prince One of the major problems in any accounting dispute with the government, is that the government does not usually challenge contractor accounting practices until way after the contractor has already incurred those costs and reported the costs using the practices. We’ve seen this issue come up time and time again, even where the government has reviewed and even ostensibly approved accounting practices as compliant, it still will come back years later and say, actually, we have an issue here. It doesn’t comply with the cost accounting standards or cost a liability provisions. It has a huge impact on contractors and doesn’t really leave them with much recourse. So the courts and boards of grappled with this issue, for years, trying to figure out how to resolve this inequity.

Court of federal claims last year, in a case involving Sikorsky, suggested that possibly those sorts of claims from the government would be barred on equitable principles. But in the backdrop of all of this, is the statute of limitations. The government has six years, contractors have six years too, to bring claims one against the other under the Contract Disputes Act. The question is always, when does a claim accrue? That is when does that clock start counting? And in cost cases, you typically would argue as the contractor government, you are aware of this, seven, eight plus years in advance. You waited way too long to audit. And so the case should be dismissed. The problem is, since 2014, the Federal Circuit has this rule that statute limitations issues are not jurisdictional. That is, if it’s late, It doesn’t deprive the court of the ability to hear the case. And so it means the cases have to go essentially to trial before this type of issue will be resolved. Which is exactly what happened here in this Beechcraft Defense Company case before the board.

Tom Temin In other words, you could still be outside of the statute of limitations, but it would take a court decision to establish that.

Zach Prince That’s right. After a lengthy trial, likely. So wasting everyone’s time and resources.

Tom Temin So one way or another, you’re in court.

Zach Prince That’s right. And you’ll probably win. And I think my read of this is, in this case, Beechcraft is going to win. But not before it spends a heck of a lot of money getting all the issues resolved the trial.

Tom Temin So what happened here, in this particular case? Beechcraft, I guess, is now part of Textron since this all emerged.

Zach Prince Yeah, that’s right. So this started in 2011, really started earlier than that. Beechcraft submitted its forward pricing rate proposals to [Defense Contract Audit Agency (DCAA)], which audited them and concluded in 2011 that there was really no issue. So DCMA issued an initial finding, in June 2011, that there were some potential non-compliances, but ultimately, that it was not material. So there was no need to do anything further. But wait, there’s more. Because at some point, and we don’t know when, because the record wasn’t clear before the board. Between 2011 and 2015, DCMA said, actually we need more information. We need you to put together this general dollar magnitude proposal about a cost impact from these non-compliances. Four years later, this starts picking up. The government doesn’t actually issue any decisions in this case until 2018. You’ve got a six year statute of limitations. It’s certainly seven years, at least from when the government should have, in my view based on what I’ve seen, known about this.

Tom Temin So this is something then that was bought and paid for years and years ago. And somehow the contract is still swirling around in the audit hairs of the DCMA for cost accounting.

Zach Prince That’s right. And this is not the oldest case I’ve seen in a cost accounting context. There are still some cases from 2007, 2008 kicking around.

Tom Temin Wow. We’re speaking with Zach Prince. He’s a partner at the law firm Haynes Boon. And just as an aside question here, what is the mechanism by which an agency would discover something buried deeply in a set of documents for one of a couple of hundred thousand, several hundred thousand contracts under its purview? Do they have some kind of an AI program running, combing for this stuff? Or do they hire interns to randomly revisit ancient cases?

Zach Prince No, they’ve got auditors. They’ve got auditors. So I don’t know what kicked this back up in 2015 and who looked at this and said, you know what, actually, this is a [ Cost Accounting Standards (CAS)] violation, but for whatever reason, it triggered the interest of the agency.

Tom Temin And what is the status of it now? They’re headed to court?

Zach Prince They’re headed to court. So the board, in a decision here for summary judgment from Beechcraft, looked at the definitions of claim accrual, which is when you’re going to have that time clock starting for statute limitations purposes. And they explain that the government doesn’t actually need to be fully aware of the full impact of the supposed damages for a claim to accrue or liability to be fixed, there has to be some injury. So the way they stated the tests seems very favorable to Beechcraft. As the government had these forward pricing rate proposals. They issued audit reports, several of them in 2011. Beechcraft argued the government had all the information in front of it that it had in 2015 and ’16, that should have let it know that if there was an injury, this is what it was. But the problem is that, because it is now the burden of the contractor to demonstrate that the statute of limitations bars the case, the board needs there to be absolutely no disputed facts. So the board wanted there to be all of those reports and all the data that Beechcraft says were important in the record in front of it and the meaning explained. And they hadn’t carried that burden yet.

Tom Temin Yeah, this is really the personification of red tape to the layperson looking externally at this. And so contractors then basically are under a sword of Damocles that could fall down on their heads at any time for some arbitrary reason. Hey, we found something on column seven on page 53, that bolt was incorrectly attributed to this contractor when it really went on that tailpiece. And therefore, you’re in court. What can contractors do to prevent this? Is there anything they can do to wall off that possibility at some point?

Zach Prince Not a whole lot. One thing they could do is resist accepting contracts subject to the cost accounting standards. But you really can’t do that when you want to have contracts above a certain size threshold. If you’re selling commercial items, that’s an exception. But if you’re a traditional defense contractor, cost accounting standards are going to be something in your life. You could also try to avoid having cost reimbursable contracts. But the problem is cost reimbursable contracts are very beneficial in many respects to contractors. You don’t have the risk of, say, crazy inflation or supply chains going haywire.

Tom Temin And what are some of the, if you know, some of the common cost accounting errors that could be avoided? For example, attributing a cost to the wrong part of a project or if you have several projects, it could be assigned to the wrong project, which means the government pays on one side, but on the other hand, it’s saving. I guess it all comes out in the wash. But is that the kind of error that can happen? Or just simply misstating or overstating costs?

Zach Prince It’s certainly the type of error that can happen where you misallocate costs to one contract instead of the other. Private sector instead of government or vice versa. But a lot of these disputes really come down to interpretation of arcane accounting rules, where the government’s position maybe is plausible, but so is the contractors. And arguably, the government has already known for years about how the contractor is interpreting those rules. So it’s hard to avoid these disputes.

Tom Temin And if you’re a small business. Same rules apply. And therefore, relatively speaking, your costs of going to court could be much higher.

Zach Prince Small businesses are fortunate and that’s one of the exemptions to the cost accounting standards applicability. So the challenge is, once you graduate from your sized standard and now you’re a large business. You likely don’t have the accounting setup to deal with this. I see this all the time in acquisitions, where a company that was small is now bought by a big company. They do not have the mechanisms in place to comply, but they better do it very fast.

Tom Temin And I guess, the other lesson is never throw away your paperwork, so to speak.

Zach Prince That’s always the lesson in government contracts.


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