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In Ology Bioservices, Inc., ASBCA No. 62633 (May 20, 2021), the Armed Services Board of Contract Appeals (the Board) held that the Government could not assess a penalty on the contractor’s fiscal year (FY) 2013 compensation costs for being expressly unallowable when the Government delayed publishing the compensation cap for FY 2013 by more than three years.

Ology’s FY 2013 final indirect cost rate proposal included executive compensation costs totaling almost $3 million.  At the time Ology submitted its claim, its FY 2013 CEO compensation was above the allowable compensation cap for FY 2012, but the Office of Federal Procurement Policy (OFPP) had not published the compensation cap for FY 2013.  OFPP eventually set the FY 2013 cap in 2016. The contracting officer (CO) disallowed the costs above the FY 2012 cap, and also assessed a penalty on those costs as allegedly expressly unallowable.  The contractor accepted the disallowance, but disputed the CO’s right to levy a penalty because no FY 2013 cap was in place at the time it submitted its final indirect cost rate proposal.  The Government argued that the FY 2012 cap remained binding on the contractor’s FY 2013 costs and, as a result, it was entitled to a penalty for FY 2013 for costs above the FY 2012 cap.

The Board held that the Government could not apply the FY 2012 cap to the contractor’s FY 2013 costs, because the OFPP was required to revise the cap on an annual basis.  The Allowable Cost and Payment clause, FAR 52.216-7, requires a contractor to submit its final indirect cost rate proposal within six months of the end of its FY and certify that its proposal does not include any expressly unallowable costs.  Certification requires the contractor to know the compensation cap for that year.  Although OFPP “eventually met the statutory directive” to establish a FY 2013 cap, the Board stated “it did so long after it would provide guidance to contractors, at least those who complied with their contracts by submitting timely indirect cost rate proposals.”

This decision serves as a check on the Government’s attempt to assess penalties for purportedly expressly unallowable costs.  Importantly, a cost is not expressly unallowable unless it is just that: “specifically named and stated to be unallowable.”  FAR 31.001.  Moreover, the decision underscores the importance of adhering to administrative obligations and deadlines for both the contractor and the Government.  The Board noted that if it allowed the FY 2012 cap to apply to the contractor’s 2013 claim, it would have the “odd effect of placing contractors who complied with their deadlines in a worse position than a contractor who waited” to submit their proposals.  The Board recognized that contractors cannot be unduly penalized by the Government’s own delay.

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Photo of Steve McBrady Steve McBrady

Steve McBrady is a partner and co-chair of Crowell & Moring’s Government Contracts Group. He also serves as a member of the firm’s Finance and Strategic Growth Committees, where he has played a leading role in expanding client service offerings throughout the U.S.…

Steve McBrady is a partner and co-chair of Crowell & Moring’s Government Contracts Group. He also serves as a member of the firm’s Finance and Strategic Growth Committees, where he has played a leading role in expanding client service offerings throughout the U.S., Europe, Asia, and the Middle East.

In recent years, Steve has received the National Law Journal’s “Winning Litigator” award as a lawyer who has “tackled some of the most widely watched cases of the year,” as well as the “D.C. Trailblazer” award, recognizing lawyers who have “made significant marks on the practice.” In 2018, he was named “Government Contracts MVP” by Law360.

Photo of Nicole Owren-Wiest Nicole Owren-Wiest

Nicole Owren-Wiest is a partner and member of the Steering Committee of Crowell & Moring’s Government Contracts Group in the firm’s Washington, D.C. office. Nicole is nationally ranked by Chambers USA in Government Contracts and a recognized leader in two of the most…

Nicole Owren-Wiest is a partner and member of the Steering Committee of Crowell & Moring’s Government Contracts Group in the firm’s Washington, D.C. office. Nicole is nationally ranked by Chambers USA in Government Contracts and a recognized leader in two of the most complex areas in government contracting: accounting, cost, and pricing, and intellectual property/data rights. With over 20 years’ experience, Nicole has a broad counseling and dispute-resolution practice and leads the Group’s cost accounting practice, which focuses on helping clients navigate the government’s complex cost and pricing rules, including the FAR Part 31 cost principles, the Cost Accounting Standards (CAS), and Truth in Negotiations Act/Truthful Cost or Pricing Data (defective pricing).

Photo of Skye Mathieson Skye Mathieson

Skye Mathieson is a counsel in the Government Contracts Group in Crowell & Moring’s Washington, D.C. office. He works with and advises clients from diverse industries on a wide array of matters, including contract performance disputes (CDA claims and equitable adjustments), cost allowability…

Skye Mathieson is a counsel in the Government Contracts Group in Crowell & Moring’s Washington, D.C. office. He works with and advises clients from diverse industries on a wide array of matters, including contract performance disputes (CDA claims and equitable adjustments), cost allowability issues, defective pricing, fiscal law questions, prime-sub disputes, bid protests, internal investigations, and responding to DCAA audits. Prior to joining Crowell & Moring, Skye spent several years as a trial attorney at the procurement litigation division of the Air Force Headquarters for Legal Operations, where he pioneered the seminal “Laguna Defense” that is now widely raised and litigated at the Boards of Contract Appeals.

Photo of Erin Rankin Erin Rankin

Erin Rankin is counsel in the Government Contracts Group and is experienced in resolving government contract disputes with a particular focus on cost allowability, cost accounting issues, and DCAA audit findings. Erin also advises clients on all aspects of FAR and DFARS compliance…

Erin Rankin is counsel in the Government Contracts Group and is experienced in resolving government contract disputes with a particular focus on cost allowability, cost accounting issues, and DCAA audit findings. Erin also advises clients on all aspects of FAR and DFARS compliance in connection with the administration, performance, and closing out of government contracts. Erin has extensive experience representing government contractors before the Boards of Contract Appeals, defending companies against False Claims Act allegations, conducting internal investigations, and advocating for clients in mandatory disclosures and suspension and debarment proceedings.

Photo of Catherine Shames Catherine Shames

Catherine O. Shames is an associate in the Washington, D.C. office of Crowell & Moring, where she is a member of the firm’s Government Contracts Group.

Catherine’s government contracts practice focuses on contract claims/disputes under the Contract Disputes Act (CDA), prime-sub disputes, transactional…

Catherine O. Shames is an associate in the Washington, D.C. office of Crowell & Moring, where she is a member of the firm’s Government Contracts Group.

Catherine’s government contracts practice focuses on contract claims/disputes under the Contract Disputes Act (CDA), prime-sub disputes, transactional due diligence, internal investigations, and disclosures under the Mandatory Disclosure Rule. She also assists contractors with cost allowability issues and responding to DCAA audits.