ASBCA 59577

ARMED SERVICES BOARD OF CONTRACT APPEALS Appeal of -- ) ) Technology Systems, Inc. ) ASBCA No. 59577 ) Under Contract Nos. N00039-07-C-0006 ) N00014-07-C-0236 ) N00014-07-C-0340 ) N41756-05-C-4775 ) APPEARANCE FOR THE APPELLANT: Mr. Charles J. Benton President/Owner APPEARANCES FOR THE GOVERNMENT: E. Michael Chiaparas, Esq. DCMA Chief Trial Attorney Debra E. Berg, Esq. Trial Attorney Defense Contract Management Agency Boston, MA OPINION BY ADMINISTRATIVE JUDGE PROUTY This appeal, brought by Technology Systems, Inc. (TSI), challenges the final decision of the Defense Contract Management Agency (DCMA) administrative contracting officer (ACO) to follow the recommendation of the Defense Contract Audit Agency (DCAA) and disallow certain expenses used to calculate its indirect cost rates for fiscal year (FY) 2007 as well as some direct costs. In addition to certain cost-specific arguments, TSI argues, in general, that the disallowed expenses had not been questioned by prior DCAA audits and that it relied upon this to its detriment because it did not preserve what DCAA would have considered to be necessary evidence for the FY 2007 costs in question. The amount in dispute is the $159,303 that the government seeks to recoup from TSI after finding the already-paid costs to be unsupported. Judge Clarke heard this appeal and, for reasons detailed in his dissenting opinion and discussed further below, is of the view that TSI is entitled to significant relief through an application of the retroactive disallowance doctrine and as a result of the government's past course of conduct, and that it is due some other relief for different reasons. Though not unsympathetic to TSI, we respectfully disagree with our colleague and deny portions of the appeal that he would sustain (although also granting it in part): the DCMA- challenged costs were largely not allowable and, without more, an auditor's failure to challenge a cost in one audit does not require application of the principle of retroactive disallowance nor does it constitute a course of conduct precluding the government from disallowing the costs in subsequent audits. FINDINGS OF FACT TSI is a small technology business that, while operational, 1 conducted research and development of software systems relating to new ways. for ship navigation (tr. 2/227). TSI employed approximately 20 people (tr. 21193), including three executives: Mr. Charles Benton, chief technology officer, president and sole owner (tr. 2/229-30); Mr. Maxwell Fletcher, chief financial officer (CFO) (tr. 2/117); and Mr. Thomas Zysk, chief operating officer (COO) (tr. 2173, 76, 102). Mr. Benton started TSI in 1985 and it began contracting with the government in 1987 (tr. 2/230). During the time relevant to this appeal, TSI had four cost-plus-fixed-fee (CPFF) contracts for research and development with the Navy: Contract Nos. N00039-07-C-0006 (0006), N00014-07-C-0236 (0236), N00014-07-C-0340 (0340), and N41756-05-C-4775 (4775)2 (R4, tabs 1-3, 16 at 268, tab 17 at 269). These contracts contained standard clauses from the Federal Acquisition Regulation (FAR) that governed the payment of their costs by the government. 3 In a typical CPFF contract, subject to the standard FAR clauses included here, the government compensates a contractor for two types of costs: direct and indirect. FAR 52.216-7(b ). Direct costs, as suggested by the name, are those costs directly incurred for performing task orders on a contract. See FAR 2.101, Definitions, Direct Costs. Indirect costs are overhead costs that the company incurs during the time of contract performance that cannot be allocated to a single "cost objective." FAR 31.203(b). They are allocated to the contract on a pro rata basis, based upon the direct costs incurred during the base time period, typically the contractor's fiscal year. 4 FAR 31.203(b)-(g); see also 1 TSI ceased operations in August 2014, but continued to exist "on paper" to permit this litigation (tr.