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  3. |To Be, or Not to Be: The ASBCA Holds that a Cost is Not “Incurred” Without a Legal Obligation to Pay

To Be, or Not to Be: The ASBCA Holds that a Cost is Not “Incurred” Without a Legal Obligation to Pay

Client Alert | 2 min read | 01.18.22

In its recent decision, Cellular Materials International, Inc., ASBCA No. 61408 (Dec. 27, 2021), the Armed Services Board of Contract Appeals (“ASBCA”) observed that whether a cost has been “incurred” for purposes of claiming allowable costs under FAR 52.216-7 is a fact-intensive inquiry.

Pursuant to its Government contract requirements, Cellular Materials International, Inc. (“CMI”) submitted a final indirect cost rate proposal, which claimed costs for consultant fees.  Notably, the consultant whose fees CMI claimed was also the Chair of CMI’s Board of Directors as well as CMI’s largest shareholder, owning nearly 39% of CMI shares.  The contracting officer issued a final decision disallowing the claimed consultant costs because CMI lacked “sufficient evidence of the nature and scope of the service furnished such that incurrence, allowability, [and] allocability of these costs can be determined,” and unilaterally establishing CMI’s final indirect cost rates.  On appeal, as evidence to support the allowability of the consultant cost, CMI produced promissory notes, in which CMI promised to pay the consultant five days after demand.  But although nine years had passed, the consultant never demanded payment on the notes, and CMI never paid.

CMI’s contracts incorporated FAR 52.216-7, Allowable Cost and Payment (DEC 2002), which requires contractors to submit a final indirect cost rate proposal “based on the Contractor’s actual cost experience for that period.”  The Board noted that “actual costs,” pursuant to FAR 31.001, are defined as “amounts determined on the basis of costs incurred, as distinguished from forecasted costs,” but that the FAR provides no further guidance on the issue of whether a cost has been incurred.  The ASBCA turned to Federal Circuit decisions in other contexts to hold that for a cost to be “incurred” for purposes of the Allowable Cost and Payment clause, the contractor must have a legal obligation to pay—an implicit rejection of the Government’s argument that a cost must be “actually paid.”  In this case, it was undisputed that although CMI had executed promissory notes for the purported debt, the consultant had not demanded payment since the notes were executed nine years ago.  According to the Board, CMI had no legal obligation to pay and, therefore, the consultant cost had not (yet) been incurred and could not be claimed as allowable.  Citing Federal Circuit precedent, the Board noted that even if one were to assume that there is a “near certain future prospect” of a demand for payment, that “future expense must be more than merely likely or probable to be an incurred cost.”

This decision underscores the fact-intensive inquiry that may be necessary to determine whether a cost is incurred for purposes of claiming it as allowable under FAR 52.216-7.  Importantly, when there is no legal obligation to make payment, a future expectation that a payment will be made may not be enough for a cost to be “incurred,” even if an eventual payment is likely, probable, or a “near-certain future prospect.”

Insights

Client Alert | 3 min read | 03.28.24

UK Government Seeks to Loosen Third Party Litigation Funding Regulation

On 19 March 2024, the Government followed through on a promise from the Ministry of Justice to introduce draft legislation to reverse the effect of  R (on the application of PACCAR Inc & Ors) v Competition Appeal Tribunal & Ors [2023] UKSC 28.  The effect of this ruling was discussed in our prior alert and follow on commentary discussing its effect on group competition litigation and initial government reform proposals. Should the bill pass, agreements to provide third party funding to litigation or advocacy services in England will no longer be required to comply with the Damages-Based Agreements Regulations 2013 (“DBA Regulations”) to be enforceable....