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In General Atomics Aeronautical Systems, Inc., ASBCA Nos. 61633, 61731 (Feb. 8, 2023), released March 14, 2023, the Armed Services Board of Contract Appeals (ASBCA) considered, but declined to answer, the existential question of whether intracompany lease payments are “costs.”  The ASBCA denied the Government’s motion for summary judgment, finding that material facts about the contractor’s intracompany lease payments remained in dispute.  Further, the ASBCA held that because the Government failed to respond to the contractor’s affirmative defense that the Government’s claim was barred by the statute of limitations, the Government was not entitled to summary judgment.

The dispute involved a Contracting Officer’s final determination that the contractor failed to comply with Cost Accounting Standards (CAS) 405, 410, and 420.  The Government alleged that the contractor improperly excluded from its General and Administrative (G&A) expense base portions of intracompany lease payments that were in excess of the “normal costs of ownership” of the property.  The Government argued that the entire amount of the lease payments must be treated as cost input and included in the G&A base, even to the extent they were unallowable under FAR 31.205-36(b)(3), which makes allowable “[c]harges in the nature of rent” for related entities “to the extent that they do not exceed the normal costs of ownership.”  The contractor’s noncompliance, so said the Government, diminished the G&A base, resulting in an artificially high G&A rate.  The contractor countered that the excess portions of the lease payments were not “costs” and were therefore properly excluded from the G&A base.  The contractor supported its position with declarations stating that because the contractor’s parent company also controlled the landlords, the contractor’s right to occupy the rental properties was not, in fact, contingent on payment of the portions of the leases exceeding the normal cost of ownership. 

Although the CAS do not define “cost,” the Board looked to how courts have defined the term, which include the “outlay incurred in the operation of a business enterprise,” “an economic sacrifice,” a “price paid,” or something “surrendered” in order to obtain something else.  Based on the contractor’s declarations, the ASBCA held that a triable question of fact existed as to whether “the excess amounts [the contractor] paid above the cost of ownership were a price or economic sacrifice necessary to acquire and retain the leaseholds.”

Like the ASBCA’s decision in Cellular Materials International, Inc., which analyzed when a cost is “incurred,” the instant decision underscores the fact-intensive inquiry that may be necessary to determine whether certain types of payments are, in fact, “costs” for purposes of government contract cost accounting. 

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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 a partner 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…

Erin Rankin is a partner 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 Alexandra Barbee-Garrett Alexandra Barbee-Garrett

Alexandra Barbee-Garrett is an associate in Crowell & Moring’s Washington, D.C. office, where she practices in the Government Contracts Group.

Alex represents government contractors in both litigation and counseling matters. Her practice includes bid protests before the Government Accountability Office (GAO), the U.S.

Alexandra Barbee-Garrett is an associate in Crowell & Moring’s Washington, D.C. office, where she practices in the Government Contracts Group.

Alex represents government contractors in both litigation and counseling matters. Her practice includes bid protests before the Government Accountability Office (GAO), the U.S. Court of Federal Claims, and the U.S. Court of Appeals for the Federal Circuit. Alex’s practice also focuses on federal regulatory compliance, mandatory disclosures to the government, contract disputes under the Contract Disputes Act (CDA), prime-sub disputes, and False Claims Act and internal investigations.

Prior to joining Crowell & Moring, Alex was a law clerk to Judge Richard A. Hertling of the U.S. Court of Federal Claims and a government contracts associate at another large law firm. Alex graduated honors from The George Washington University Law School, where she was an articles editor of The Public Contract Law Journal. Alex won the 2015 Government Contracts Moot Court Competition and served as chair for the 2016 competition. Prior to law school, Alex worked as a health care legislative assistant for Rep. Rick Larsen (WA) in the U.S. House of Representatives. She received her B.A. in international studies and anthropology from the University of Washington.

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.

Photo of Zariah Altman Zariah Altman

Zariah helps clients with antitrust investigations, government contracts matters, including bid protests, and other complex and fast-paced disputes.

In her antitrust practice, Zariah provides counsel on a range of issues and agency actions, including investigations into company hiring practices, such as no-poach/non-solicitation. In…

Zariah helps clients with antitrust investigations, government contracts matters, including bid protests, and other complex and fast-paced disputes.

In her antitrust practice, Zariah provides counsel on a range of issues and agency actions, including investigations into company hiring practices, such as no-poach/non-solicitation. In addition, in the area of government contracts, she advises clients on agency submissions, state and federal regulatory compliance, including FOIA requests, and bid protests.

She received her J.D., cum laude, from Howard University School of Law and served as a senior articles editor for the Howard Law Journal. Zariah worked as a Henry Ramsey Dean’s Fellow for a legal writing professor and as a student attorney in Howard’s Reentry Clinic, where she represented clients with criminal records that were seeking to have their records sealed or to terminate their parole early.