Government Reliance on Waiver Argument to Keep Price Adjustment Windfall Fails

Scott Arnold

Last week, the U.S. Court of Appeals for the Federal Circuit articulated limits to the government’s ability to rely on the waiver doctrine to enforce Federal Acquisition Regulation (“FAR”) provisions of questionable legality, and, in so doing, cast doubt on the government’s “heads we win, tails you lose” approach to measuring the cost impact of simultaneous changes to a contractor’s cost accounting practices.

In The Boeing Company v. United States, 2019-2148 (Aug. 10, 2020), the Federal Circuit rejected the government’s argument that Boeing’s claim—which was based on an apparent conflict between (1) a statutory provision limiting the costs the government may recover for cost accounting practice changes to the aggregate increased cost to the government, and (2) a FAR provision under which the government’s recovery considers only the changes that increase costs to the government, and disregards changes that decrease costs to the government—was waived because Boeing did not raise the issue prior to contract award.

Background

Contractors covered by the Cost Accounting Standards (“CAS”) sometimes change their cost accounting practices. They are allowed to do this so long as they disclose the changes and cooperate with the government’s efforts to determine whether, and the extent to which, the changes increase costs to the government. If changes in cost accounting practices do increase the amount charged to the government, the government is entitled to a price adjustment to neutralize the increased costs.

In 2010, two years after award of the contract used in this test case litigation, Boeing informed the Defense Contract Management Agency (“DCMA”) of Boeing’s plans to implement several simultaneous changes to its cost accounting practices in 2011. DCMA requested a proposal to measure the cost impact of the changes. Boeing provided a proposal that reflected two changes that would increase the government’s costs by roughly $940,000 and two other changes that would save the government roughly $2,284,000. Boeing contended that because these simultaneous changes would result in net savings to the government, no price adjustment—i.e., no payment to the government—was warranted.

DCMA disagreed, based on FAR 30.606. That FAR provision, promulgated in 2005, precludes the government, when resolving cost impacts from cost accounting changes, from considering changes that will save the government money as offsets against changes that will cost the government money. DCMA accordingly issued a final decision asserting the government’s right to a price adjustment in excess of one million dollars ($940,000 plus interest).

Litigation

Boeing filed suit in the Court of Federal Claims (“COFC”), arguing that FAR 30.606 is at odds with the CAS clause in the contract, FAR 52.230, and the CAS statute, 15 U.S.C. 1503(b), which preclude the government from recovering costs greater than the aggregate cost to the government of changes to cost accounting practices. In other words, Boeing argued that a cost impact measurement rule that disregards changes resulting in savings to the government results in an unfair windfall to the government.

The COFC seemed to agree that the FAR 30.606 is inconsistent with 15 U.S.C. 1503(b), noting that the asserted inconsistency amounted to a patent ambiguity in the contract, but held that Boeing had waived the argument by not raising the issue prior to contract award.

On appeal, the Federal Circuit reversed, holding there had been no waiver. The Federal Circuit noted Boeing’s argument that FAR 30.606 was actually not in the contract, but chose not to decide whether the absence of the provision, in and of itself, could be a basis for not finding waiver. Rather, the Federal Circuit relied on the unavailability of any effective agency or judicial pre-award relief.

It observed that any complaints to the agency prior to award would have been futile. Regardless of whether FAR 30.606 was incorporated into the contract, the provision did expressly preclude the government from using cost-saving changes as offsets, and DCMA could not have realistically responded to any Boeing pre-award complaints by saying, in effect, “you are right, so we will disregard the FAR.”

The Federal Circuit also rejected the notion that judicial relief would have been feasible, noting that the issue of how to measure price adjustments is essentially one of contract administration, and therefore could not be effectively raised in a pre-award bid protest. Indeed, the issue would not be ripe until a contractor actually made cost accounting practice changes after award.

Key Takeaways

      1. The Federal Circuit did not directly address the validity of FAR 30.606. But its reversal and remand to the COFC suggests the government may be on thin ice if it continues to take a “heads we win, tails you lose” approach to measuring the impact of cost accounting practices changes. It is illogical and inequitable—and likely inconsistent with statute—to count only changes that cost the government more, and ignore those that save the government money.
      2. It is refreshing to see rejection of the waiver defense where raising an issue at the pre-award stage would have been futile, if even possible. But do not expect similar results in situations where the agency could possibly provide effective relief to a problem at the pre-award stage, or where the matter could be raised and heard in a pre-award bid protest. When in doubt, raise issues apparent in a solicitation early—before proposals are due.