Contractor’s motion for summary judgment in appeal contesting penalty for expressly unallowable costs is granted. The government assessed a penalty against the contractor for seeking expressly unallowable executive compensation costs for FY 2013. The board found that the penalty was unwarranted. The board reasoned that federal statues required the government to set an annual cap on executive compensation. Here, however, when the contractor submitted its FY 2013 cost proposal, the government had not set a cap for 2013. In fact, the government did not set a 2013 cap until 2016. Because there was no cap on executive compensation at the time the contractor submitted its proposal, the government could not impose a penalty for exceeding that cap.
Ology Bioservices, Inc. had four cost reimbursement contracts with the government. The contracts included FAR 52.242-3, which provides the assessment of a penalty for costs submitted by a contractor that are expressly unallowable under the FAR’s cost principles. To recover costs, the contract required Ology to submit an indirect cost rate proposal within six months of the end of a fiscal year.
Ology submitted its cost proposal for FY 2013 in June 2014. After a DCAA audit and negotiations between the parties, the Defense Contract Management Agency issued a final decision finding that Ology’s 2013 proposal exceeded the cap on executive compensation. Specifically, the cap on executive compensation for 2013 was $980,796. Ology sought reimbursement for over $2.7 million in compensation paid to its CEO. DCMA determined that Ology had exceeded the 2013 cap by $1,749,890. DCMA assessed a $1.1 million penalty against Ology. The company appealed the penalty to the ASBCA.
Federal statute, 10 U.S.C. § 2324, identifies specific costs that are unallowable. In 2013, when Ology submitted the cost proposal at issue, the statue prohibited reimbursement of employee compensation above an annual cap establishing by the Office of Federal Procurement Policy (OFPP). For several years, OFPP had established the annual cap between February and May of the year in question. Thus, for instance, the cap for FY 2005 would have been established sometime between February and May 2005.
But after 2010, OFPP began setting the compensation cap later and later. So, the FY 2011 cap was set in April 2012. The FY 2012 was set in December 2013. And the FY 2013 cap—the one at issue in this case—was set in March 2016.
This delay created a conundrum for Ology’s 2013 executive compensation. As noted, Ology submitted its FY 2013 cost proposal in 2014. At that time, however, the government had not set the cap for FY 2013. In fact, the government would not set the FY 2013 until 2016. Ology did not dispute that its executive compensation was above the FY 2013 cap. Nevertheless, the company argued that because there was no cap in effect when it submitted its 2013 proposal, it should not be penalized for submitting expressly unallowable costs.
The government agreed that it could not assess a penalty for FY 2013 based on a cap that was not established until 2016. But the government contended that it was entitled to assess a penalty based on the FY 2012 cap. Indeed, the government contended that the FY 2012 cap published in the Federal Register explicitly stated that it applied to “costs incurred on all contracts, after January 1, 2012 and in subsequent contractor FYs, unless and until revised by OFPP.” Thus, the government claimed, the FY 2012 governed until the government revised the cap in 2016.
The board reasoned that federal statute required OFPP to set a new compensation cap for each fiscal year and to base that cap on the most recent year for which data is available. While the statute did not specify a date by which OFPP must establish a cap, the board found it reasoned to infer that Congress did not intend OFPP to have unlimited time to update the cap or to apply outdated caps for years on end. Indeed, the FAR requires contractors to certify their costs within six months of the end of the fiscal year. To do this, they would have to know the cap from that year. From this, the board inferred that the OFPP was required to adjust the cap annually.
In this case, while OFPP eventually established the FY 2013 cap, it did so long after it would provide any guidance to contractors. The board rejected the government’s contention that the FY 2012 cap applied to 2013 costs. The board reasoned that applying the FY 2012 cap would have the odd effect of placing contractors that complied their deadlines for costs submissions in a worse position than those who waited until 2016 to submit their proposals. Moreover, this dispute involved compensation paid in 2013, so the FY 2013 cap, not the 2012 cap, should apply.
Because there was no FY 2013 cap in existence when Ology submitted its 2013 cost proposal, the government could not meet its burden in proving that Ology included expressly unallowable costs in its proposal. Accordingly, the government could not establish that a penalty for the excessive executive compensation was warranted.
Ology is represented by Richard B. O’Keefe Jr., Gary S. Ward, and Nicole E. Giles of Wiley Rein LLP. The government is represented by Arthur M. Taylor, and Patrick B. Grant of the Defense Contract Management Agency.
