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In its recent decision, Cellular Materials International, Inc., ASBCA No. 61408 (Dec. 27, 2021), the Armed Services Board of Contract Appeals (“ASBCA”) observed that whether a cost has been “incurred” for purposes of claiming allowable costs under FAR 52.216-7 is a fact-intensive inquiry.

Pursuant to its Government contract requirements, Cellular Materials International, Inc. (“CMI”) submitted a final indirect cost rate proposal, which claimed costs for consultant fees.  Notably, the consultant whose fees CMI claimed was also the Chair of CMI’s Board of Directors as well as CMI’s largest shareholder, owning nearly 39% of CMI shares.  The contracting officer issued a final decision disallowing the claimed consultant costs because CMI lacked “sufficient evidence of the nature and scope of the service furnished such that incurrence, allowability, [and] allocability of these costs can be determined,” and unilaterally establishing CMI’s final indirect cost rates.  On appeal, as evidence to support the allowability of the consultant cost, CMI produced promissory notes, in which CMI promised to pay the consultant five days after demand.  But although nine years had passed, the consultant never demanded payment on the notes, and CMI never paid.

CMI’s contracts incorporated FAR 52.216-7, Allowable Cost and Payment (DEC 2002), which requires contractors to submit a final indirect cost rate proposal “based on the Contractor’s actual cost experience for that period.”  The Board noted that “actual costs,” pursuant to FAR 31.001, are defined as “amounts determined on the basis of costs incurred, as distinguished from forecasted costs,” but that the FAR provides no further guidance on the issue of whether a cost has been incurred.  The ASBCA turned to Federal Circuit decisions in other contexts to hold that for a cost to be “incurred” for purposes of the Allowable Cost and Payment clause, the contractor must have a legal obligation to pay—an implicit rejection of the Government’s argument that a cost must be “actually paid.”  In this case, it was undisputed that although CMI had executed promissory notes for the purported debt, the consultant had not demanded payment since the notes were executed nine years ago.  According to the Board, CMI had no legal obligation to pay and, therefore, the consultant cost had not (yet) been incurred and could not be claimed as allowable.  Citing Federal Circuit precedent, the Board noted that even if one were to assume that there is a “near certain future prospect” of a demand for payment, that “future expense must be more than merely likely or probable to be an incurred cost.”

This decision underscores the fact-intensive inquiry that may be necessary to determine whether a cost is incurred for purposes of claiming it as allowable under FAR 52.216-7.  Importantly, when there is no legal obligation to make payment, a future expectation that a payment will be made may not be enough for a cost to be “incurred,” even if an eventual payment is likely, probable, or a “near-certain future prospect.”

 

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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 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 Amanda McDowell Amanda McDowell

Amanda H. McDowell is an associate in the Government Contracts and Health Care groups in Crowell & Moring’s Washington, D.C. office. Amanda represents contractors in litigation, regulatory, and counseling matters. Her practice focuses on False Claims Act litigation, government investigations, bid protests, and…

Amanda H. McDowell is an associate in the Government Contracts and Health Care groups in Crowell & Moring’s Washington, D.C. office. Amanda represents contractors in litigation, regulatory, and counseling matters. Her practice focuses on False Claims Act litigation, government investigations, bid protests, and state and federal regulatory compliance.