ASBCA Curbs Attempted Decrement Of T&M Contract Based On Indirect Cost Rate Issues

• Jurisdiction: United States,Federal
• Law Firm: Arnold & Porter
• Subject Matter: Accounting and Audit, Government, Public Sector, Audit, Government Contracts, Procurement & PPP
• Author: Ms Amanda J. Sherwood
• Published date: 03 October 2023

The U.S. government's audit and contract adjustment rights are not without limits; they are governed by contractual and regulatory authorities. Applying this legal principle, the Armed Services Board of Contract Appeals (ASBCA) recently agreed with a contractor that the government lacked the authority to reduce fixed-rate labor hour charges under a time-and-materials (T&M) contract based on indirect cost rate issues. This case, as well as a recent Civilian Board of Contract Appeals case discussed in our Sept. 18 advisory,¹illustrate that contractors should understand the scope of audit and adjustment provisions in their contracts (and in the Federal Acquisition Regulation (FAR) generally – the Boards will read in applicable clauses as a matter of law regardless of whether they appear in the contract) and be prepared to challenge government actions that surpass their bounds.

The appeal of Allard Nazarian Group, Inc. dba Granite State Manufacturing (ASBCA Nos. 62413, 62414)²involved two contracting officer final decisions and demands for payment arising from the contractor's alleged failure to submit final indirect cost rate proposals for fiscal years 2009 to 2014. The contracting officer applied either a 16% or a 20% decrement to all invoices the contractor submitted during that period, including the contractor's direct, fixed-price labor costs under four T&M contracts. The contractor appealed the government's claim for reimbursement to the ASBCA and, in a motion for partial summary judgment, argued that the contracting officer's application of the decrement to direct labor hour charges under a T&M contract had no regulatory basis. The ASBCA agreed.

All four contracts included FAR 52.232-7, Payment under Time-and-Material and Labor-Hour Contracts, which requires payment of the hourly rate specified in the contract multiplied by the direct labor hours performed, and reimbursement for material costs that includes certain allocable indirect costs. Although only one of the four contracts included FAR 52.216-7, Allowable Cost and Payment, which governs the process for reimbursing costs and setting final indirect cost rates, the ASBCA held that all four contracts contained the clause under the Christian doctrine,³because FAR 16.307(a) requires the clause be included in T&M contracts.

This ruling reminds contractors of the importance of understanding the regulatory structure of the FAR, which mandates the inclusion and operation of certain clauses for certain...