New Rules on Airfare Costs and Accounting for Post-Retirement Benefits; and Government Defective Pricing Claims Time-Barred By CDA’s Statute of Limitations
Newly issued cost allowability rules on airfare and post retirement benefits (“PRBs”) will impact contractor cash flow. Moreover, an ASBCA decision finding government claims time-barred under the Contract Disputes Act’s (“CDA”) statute of limitations creates a tool for managing defective pricing exposure.
I. New Rule for Allowability of Airfare Adopts Standard of Lowest Priced Airfare Available to the Contractor
Effective January 11, 2010, the new rule on recovery of airfare costs (74 Fed. Reg. 65,612 (December 10, 2009)) will resolve an ambiguity in the current rule. The ambiguity exists in the requirement that airfare be “the lowest customary standard, coach, or equivalent airfare offered during normal business hours.” See FAR § 31.205-46(b). This has been interpreted to mean either the lowest priced airfare available to the contractor or the lowest priced airfare available to the general public.
The new rule provides that airfare costs, in general, only are allowable to the extent the costs do not exceed “the lowest priced airfare available to the contractor.” In adopting this standard, as opposed to the lowest priced airfare available to the general public, the FAR Councils noted that “[i]t is not prudent to allow the costs of the lowest priced airfares available to the general public when contractors have obtained lower priced airfares as a result of direct negotiation.” Thus, under the new rule, when contractors have obtained discounted airfare prices not available to the general public, airfare only is allowable for the discounted prices. For all other situations, airfare only is allowable for the lowest prices available to the general public.
When adopting the new rule, the FAR Councils provided further guidance on recovery of airfare, noting that:
- Increased costs for refundable, versus non-refundable, airfare generally are unallowable; and
- Contractors should appropriately and reasonably apply existing travel policies and procedures when scheduling travel, including airfare.
Contractors, therefore, should update policies and procedures to reflect both the new limit of the lowest priced airfare available to the contractor and that increased costs for refundable tickets are unallowable. Contractors also should ensure that travel policies and procedures are followed when scheduling travel.
Moreover, contractors should anticipate increased focus by Defense Contract Audit Agency (“DCAA”) and other government auditors on both allowability of airfare and contractor policies and procedures for scheduling travel.
II. New Rule for PRBs Permits Reimbursement for IRC 419 and 419A Amount
Effective January 11, 2010, the new rule on PRBs costs (74 Fed. Reg. 65,608 (December 10, 2009)) will permit alternate accounting practices for accrued PRBs costs. Under current regulations, contractors must measure these costs based on the requirements of FAS 106. Current regulations create potential inequities because contractors must measure PRBs costs under FAS 106 for government contract reimbursement, but must measure these same costs under Section 419 and 419A of the Internal Revenue Code (“IRC”) for tax deductibility purposes.
The new rule allows contractors to measure accrued PRBs costs for government contract reimbursement under either FAS 106 or IRC 419 and 419A. When IRC 419 and 419A yield a greater cost than FAS 106, the new rule increases reimbursement because contractors now can fund the entire tax deductible amount without having a portion disallowed because it did not meet the FAR’s measurement criteria.
III. Government Defective Pricing Claims Barred By CDA’s Statute of Limitations Based on Audit Findings
A common problem regarding defective pricing is a significant gap of time between the pricing action and an audit conclusion, and then between the audit findings and any resolution. These time gaps create financial uncertainty for contractors that has been difficult to assess and manage. The Armed Services Board of Contract Appeals’ (the “Board”) decision in McDonnell Douglas Services, Inc., ASBCA No. 56568, 2009 WL 4774620, provides a means to limit this uncertainty by holding that a government defective pricing claim asserted more than six years after the release of certain audit results is time-barred.
In McDonnell Douglas, DCAA issued preliminary audit findings, and a recommended downward price adjustment, more than six years before the government asserted its subcontractor defective pricing claims. DCAA, however, issued its final audit findings, and a final recommended price adjustment, less than six years before the government’s claims. The only difference, both in basis for questioning costs and amount questioned, between the preliminary and final findings, was inclusion of an increased amount for prime contractor overhead rates and profit.
In finding the government claims under the CDA time-barred, the Board rejected government arguments that: (A) the government did not know the sum certain of the alleged liability until the final audit report; and (B) the CDA’s statute of limitations should be interpreted “more liberally when a government claim is involved than when a contractor’s claim is involved.” The Board held that although the statute of limitations requires that some liability be fixed, “there is no requirement that a sum certain be established.” The Board also held that the statute of limitations, in general, “do[es] not distinguish between government claims and contractor claims.”
Contractors, therefore, can challenge defective pricing claims as time-barred under the CDA’s statute of limitations when claims are asserted more than six years after release of draft audit results that find defective pricing liability and an amount due the government. Should this decision remain valid, contractors will be able to better assess what liability might exist because of unresolved audit findings of defective pricing issues.
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