Contractor Can’t Convince Board to Dismiss Government Complaint Seeking Penalty for Claiming Expressly Unallowable Costs; Appeal of Northrop Grumman Mission Systems, ASBCA No. 62596

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Contractor’s motion to dismiss government’s complaint is denied. The government assessed a penalty against the contractor for claiming expressly unallowable costs. The contractor appealed the penalty to the ASBCA. The government filed a complaint in the appeal asserting that the contractor had claimed unallowable costs in violation of two FAR provisions. The contractor alleged the government had to apportion the costs between the two FAR provisions. The board rejected this argument as non-sensical, reasoning that any responsibility to apportion costs between FAR provisions applies only to allowable costs, not to unallowable costs. The contractor also alleged that the government had failed to state claims for release and waiver. But the board found that those claims were not really stand-alone theories but rather arguments that the contractor had no defense to the unallowable costs claims. The government was entitled to assert these theories in its complaint.

Northrop Grumman had a contract with the Air Force for work on a base in Abu Dhabi. In February 2013, Northrop Grumman disclosed that some its employees may have mischarged the government for portions of their time. Northrop Grumman hired outside counsel to investigate its charging practices.

While the investigation was ongoing, Northrop Grumman submitted final indirect cost proposals for the Defense Contract Audit Agency. Those proposals included the legal costs from counsel investigating the charging practice in Abu Dhabi. Following an inquiry from DCAA, Northrop Grumman agreed to treat the legal costs as unallowable an to remove them from its cost proposals.

In 2018, Northrop Grumman entered a settlement agreement with the government to resolve criminal and civil matters arising from the Abu Dhabi billing. As part of the settlement, Northrop Grumman agreed that its employees had billed the government for “golfing, skiing, visiting local amusement parks, partying at local clubs, going out to eat or drink, and going to local malls.” Northrop Grumman paid the government $30 million to settle the cases.

In 2020, the DCMA determined that for 2012 to 2016 indirect costs proposals, Northrop Grumman had included expressly unallowable legal fees related to the Abu Dhabi investigation. DCMA assessed a penalty plus interest against Northrop Grumman for $11.5 million.

Northrop Grumman appealed the penalty to the ASBCA. On appeal, the government filed a four count, 62 page complaint. Northrop Grumman moved to dismiss the complaint for lack of jurisdiction and failure to state a claim.

In Count I of the complaint, the government alleged that Northrop Grumman had sought expressly unallowable costs in violation of FAR 31.205-15(b). That FAR provision states that costs incurred to determine the magnitude of improper charging are unallowable. In Count II, the government alleged as an alternative theory that Northrop Grumman had claimed expressly unallowable costs in violation of FAR 31.205-47, which states that costs related to legal proceedings are unallowable.

In its motion to dismiss, Northrop Grumman argued the because the government had pleaded that costs were expressly unallowable under two FAR provisions—31.205-15 and 31.204-47— the government first had to determine whether costs could be apportioned between those cost principles. In support of this argument, Northrop Grumman cited FAR 31.204(d), which states that when one or more FAR subsections is relevant to a contractor costs, the cost shall be apportioned between applicable subsections.

The board rejected this argument. As an initial matter, FAR 31.204(d) did not mention any responsibility on the part of the government to apportion costs. Rather, that section places the responsibility for proper accounting on the contractor. What’s more, the board reasoned, even if it were to find that FAR 31.204(d) placed some responsibility on the government, that section only applies to costs that are recoverable. Here, the government was alleging the costs were unallowable. It would be nonsensical to require the government to apportion costs between subsections that both provide the cost is unallowable. FAR 31.204(d) did not apply to the appeal.

Next, Northrop Grumman alleged that the government had to dismiss Count II because DCMA had only claimed in its final decision that the claimed costs were unallowable under FAR 31.205-47, not that they “expressly” unallowable. The board noted that Northrop Grumman was essentially contending that the claim should be dismissed “for want of an adverb.”

The board reasoned that even if the final decision had not explicitly stated that the legal costs were not expressly unallowable under FAR 31.205-47, the count was still likely viable as a slightly different legal theory. The CDA does not require rigid adherence to the exact structure of the original claim. A claimant may venture beyond the legal theories asserted in an original claim so long as they arise from the same operative facts. The board reasoned that DCMA had made a non-frivolous argument that Count II relied on the same facts as Count I. Nevertheless, the board determined it did not need to decide the issue at this point. It was not clear that there was realistic scenario where DCMA could lose on Count I and prevail on Count II. The board concluded it would only rule on its jurisdiction over Count II if necessary later in the litigation.

In Counts III and IV, the government asserted theories of release and waiver. Essentially, the government argued that Northrop Grumman’s appeal was barred by the settlement agreement from the criminal case, which required the company to identify and pay the government for unallowable costs. Northrop Grumman alleged that the board lacked jurisdiction over these counts because the settlement agreement was not a CDA contract.

The board, however, reasoned that while the release and waiver theories were styled as separate accounts, they were not stand-alone legal theories. Rather, they were arguments as to why DCMA was entitled to prevail on Count I. They were, in essence, attempts to show that Northrop Grumman lacked a defense. DCMA was entitled to raise these arguments in its complaint.

Northrop Grumman is represented by Thomas A. Lemmer and Joseph G. Martinez of Dentons US LLP. The government is represented by Arthur M. Taylor, Patrick B. Grant, and Samuel W. Morris of the Defense Contract Management Agency.