ASBCA Delineates Boundary Between Incurred and Forecasted Costs; Appeal of Cellular Materials International, Inc., ASBCA No. 61408

Claim seeking reimbursement on unpaid promissory notes is denied. Costs that are incurred but not yet paid are reimbursable. Here the contractor argued that promissory notes given to a consultant were incurred and thus reimbursable. The board disagreed. The consultant had not yet demanded payment on the notes. Until there was a demand, there was no legal obligation to pay. Thus, the notes were merely forecasted, not incurred costs.

Background

Cellular Materials International (CMI) had a cost reimbursable contract with the government. CMI submitted indirect cost proposals for reimbursement. The Defense Contract Audit Agency questioned over $400,000 in consultant costs, oping that CMI had not provided support for those costs.

In response to the audit, CMI submitted several promissory notes given to a consultant. The notes didn’t have a payment date; they simply stated they were payable five days after demand. The consultant, who happened to be CMI’s largest shareholder, had not yet demanded payment. 

The government refused to reimburse CMI for the outstanding notes. While the FAR states that incurred, but not paid, costs are reimbursable,the government argued that costs associated with the notes had not yet been incurred. 

Legal Analysis

The board sided with the government. FAR 31.001 distinguishes between incurred and forecasted costs. While the FAR does not provide further guidance on this issue, the board reviewed the caselaw and found that to qualify as incurred, costs must be more than merely likely or probable. Liability for the costs must have attached.

Here, the notes only became payable upon demand. The consultant had held onto the notes for years and had yet to demand payment. CMI’s liability on the notes had not yet been triggered; until there was a demand, it was not legally obligated to pay. Thus, these notes were forecasted rather than incurred costs.

CMI is represented by its CEO Doug Long. The government is represented by Arthur. M. Taylor and Michael T. Patterson of the Defense Contract Management Agency.