• Penalties for Expressly Unallowable Costs - The ASBCA Reconsiders and Ups the Ante for Contractors
  • February 14, 2012 | Authors: John W. Chierichella; Alexander W. Major
  • Law Firm: Sheppard, Mullin, Richter & Hampton LLP - Washington Office
  • Under FAR 42.709-1, penalties for expressly unallowable costs are to be waived when the expressly “unallowable costs under this proposal” are less than $10,000. Although there are other bases for the waiver of the penalties, those other bases are discretionary. The $10,000 exclusion is mandatory.

    In Thomas Assoc., Inc., ASBCA No. 57126, May 17, 2011, 11-1 BCA ¶ 34,764, the ASBCA considered an appeal from the imposition of penalties for five expressly unallowable “cost items”. One item involved costs of $44,959, which was in excess of the $10,000 exclusion and thus ineligible for the mandatory waiver. Each of the other four cost items involved costs of less than $10,000. Although the total expressly unallowable costs included in the indirect cost proposal exceeded $10,000, the Board considered the four cost items individually and held that the Contracting Officer was required to waive the penalty for each of the expressly unallowable cost items that was less than $10,000.

    Not for long.

    The Government moved for reconsideration of the Board's decision and introduced on reconsideration, for the first time, the FAR/DFARS case file relating to the drafting of FAR 42.709-5. Relying on that newly adduced administrative history, to which the Appellant did not object, the Board concluded that waiver applies only when the expressly unallowable costs, in the aggregate, are less than $10,000. Thomas Assoc., Inc., ASBCA No. 57126, Oct 18, 2011, 11-2 BCA ¶ 34,858. The Board was persuaded by the drafting history, which specifically addressed the issue and added to the final rule parenthetical language linking the waiver to expressly unallowable costs of $10,000 or less allocable to the contracts in question. The Board noted that FAR 42.709-1, which establishes the basic penalty rule, speaks in the singular to any “indirect cost” that is expressly unallowable. By contrast, FAR 42.709-5, which establishes the waiver, speaks in the plural, dispensing with the penalty when “the amount of the unallowable costs under the proposal . . . is $10,000 or less.”

    The result of the Board’s decision on reconsideration is obvious - “little things mean a lot.” A few relatively minor inadvertent errors can and will trigger penalties. Moreover, the penalties attach to the submission of the final indirect cost proposal unless the proposal is withdrawn before the initiation of the proposal audit, even if Uncle Sam never pays the costs. Contractors apparently will no longer be able to count on a “free pass” for individual cost errors at or below the $10,000 threshold if, in the aggregate, they exceed that threshold. The cost of minor mistakes just went up. Caveat venditor.