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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.