The US Court of Appeals for the Federal Circuit recently reversed the US Court of Federal Claims’ (COFC) decision dismissing a contractor’s challenge to Federal Acquisition Regulation’s provisions that limit a contractor’s ability to offset cost impacts stemming from multiple cost accounting practice changes. The Boeing Co. v. United States, No. 2019-2148 (Aug. 10, 2020), available here. At the COFC, the court did not reach the merits of the challenge, and instead held that the Boeing Company (Boeing) had waived its breach of contract claim by failing to object to the validity of the regulation, FAR § 30.606 (Resolving Cost Impacts), before entering into the contract. See Boeing Co. v. United States, 143 Fed. Cl. 298, 307–15 (2019). The court also held that it lacked subject matter jurisdiction over Boeing’s illegal exaction claim because it was not based on a “money-mandating” statute. Id. at 303–07. The Federal Circuit held that Boeing did not waive its breach claim by failing to object to FAR § 30.606 prior to entering into the contract at issue, and also that the COFC had jurisdiction over the illegal exaction claim.

In 2011, Boeing made eight unilateral changes to its cost accounting practices that resulted in cost impacts to certain of its contracts with the Department of Defense (DoD). Certain of these changes resulted in increased costs to the government, while others resulted in decreased costs, with the net effect of the changes resulting in decreased government contract costs. Relying on FAR § 30.606, the government refused to offset the increased and decreased costs.

FAR § 30.606 prohibits the offsetting of increased and decreased cost impacts resulting from multiple changes in cost accounting practices. See FAR § 30.606(a)(3)(ii) (contracting officer “[s]hall not combine the cost impacts of . . . [o]ne or more unilateral changes,” “unless all of the cost impacts are increased costs to the Government.”). However, 41 U.S.C. § 1503 (Contract Price Adjustment) states that the government “may not recover costs greater than the aggregate increased cost.” 41 U.S.C. § 1503(b); see also FAR § 52.230-6 (Administration of Cost Accounting Standards) (contract clause stating that contractor agrees to repay the government for any “aggregate increased cost” paid to the contractor due to unilateral, undesirable cost accounting practice changes).

Boeing argues that it does not owe any payment to the government because there is no “aggregate increased cost” to the government. In calculating aggregate increased costs, Boeing claims that simultaneous changes to accounting practices must be considered together, with the decreased costs offsetting the increased costs. However, since FAR § 30.606 expressly prohibits offsetting costs, Boeing argues that FAR § 30.606 is unlawful “because it is counter to the CAS statute’s general rule that ‘[t]he Federal Government may not recover costs greater than the aggregate increased cost to the Federal Government.” See 41 U.S.C. § 1503(b). The COFC never reached this issue because it dismissed Boeing’s complaint on procedural grounds.

On appeal, the Federal Circuit disagreed that Boeing waived its challenge to the lawfulness of FAR § 30.606, because a pre-award objection would have been futile. The court reasoned, and the government conceded, that had Boeing raised its objection during negotiations, the government “could not lawfully have declared FAR 30.606 inapplicable in entering into the contract,” because the clause was “mandatory” and contracting officers do not have discretion in whether to apply or not to apply the clause. In reaching its conclusion, the Federal Circuit noted the importance of whether the contractor could have obtained relief prior to entering into the contract in determining whether the waiver doctrine applies. Since the DoD was required to apply FAR § 30.606 to Boeing’s contract, Boeing, therefore, did not waive its objection to the lawfulness of FAR § 30.606.

The government alternatively argued that Boeing waived its claim by failing to pursue other judicial avenues prior to entering into the contract. Namely, the government argued that Boeing should have challenged FAR § 30.606 either through a bid protest action or action under the Administrative Procedure Act. However, the Federal Circuit refused to make a decision on these arguments because the government did not meet its burden establishing waiver, specifically because the government did not assert “that Boeing would have been entitled to a ruling on the merits of its challenges . . . had it pursued either of those paths.”

As for the illegal exaction claim, the Federal Circuit also disagreed with the COFC’s conclusion that illegal exaction claims be asserted pursuant to a “money-mandating” statute for the court to have jurisdiction. The Federal Circuit explained that, to establish jurisdiction for an illegal exaction claim under the Tucker Act, 28 U.S.C. § 1491(a), “a party that has paid money over to the government and seeks its return must make a non-frivolous allegation that the government, in obtaining the money, has violated the Constitution, a statute, or a regulation.” Applying this standard, the Federal Circuit held that Boeing properly established jurisdiction for its claim based on its allegation that the government had demanded and taken payment in violation of 41 U.S.C. § 1503(b) and FAR § 52.230-6.

The remand to the COFC likely means that the government will continue to apply FAR § 30.606. However, it appears that Boeing will get the chance to assert its arguments on the merits and the COFC may be forced to grapple with the inconsistencies between the CAS statute and the FAR regulations. In the meantime, the Federal Circuit’s decision provides contractors some good news regarding applicability of the waiver doctrine, namely, that it does not apply.

This alert was republished on Westlaw Today on September 4, 2020.