Sikorsky Aircraft and the Defense Department have been arguing in court for the past 17 years, over the company’s compliance with cost-accounting standards. One reason it has been running so long is the government keeps asserting violations but takes no action. For more on the importance of this case, the Federal Drive with Tom Temin spoke with Haynes Boone procurement attorney Zach Prince.
Interview transcript:
Tom Temin Sikorsky Aircraft and the Defense Department have been arguing in court for the past 17 years over the company’s compliance with cost accounting standards, CAS. One reason it’s been running so long is the government keeps asserting violations but takes no action. For more on the importance of this long-running case, we turn to Haynes Boone procurement attorney Zach Prince. Is this, like, the biggest thing since the INS law case, which might be still running after 50 years, for all I know?
Zach Prince So, Tom, the dispute has been essentially based on facts that came up in 2007. So, what happens, if you’ve got a contract that’s subject to the full cost accounting standards, you have to submit a disclosure statement. And the disclosure statement sets forth your accounting methodologies, the way that you’re accounting for costs.
Tom Temin And the way you have to account for cost is clearly delineated in regulation, correct, if you’re a defense contractor?
Zach Prince Yeah. So, if you’ve got the cost accounting standards, it sets forth standards. So, those are broad frameworks for certain categories of costs or how you have to set up your accounting. The way you implement that is somewhat up to you. It’s intentionally set up as more of a framework than very specific ‘you must do X, Y, and Z, and no other accounting is okay.’ But the reason you have a disclosure statement is so that you can tell the government this is how we account within the framework for these categories of costs. The government reviews it and then they start issuing contracts — multi-million dollars of contracts — necessarily, right? Because if you’ve got cash contracts that means they’re at least $2 million. Full CAS means you got 50-plus million dollars in CAS-covered work. So, we’re talking about huge contracts that are based on a understanding of what your accounting framework is.
Tom Temin Many years ago, before it got into dispute territory, we should say — the dispute hasn’t been going as long as I said, but the contract has — Sikorsky submitted its methodology for cost accounting and it seemed to be okay with the government?
Zach Prince Yes. So, they submitted their disclosure statement in 2007. And included in that disclosure statement are explanations of how it’s dealing with IRAD, independent research and development costs, and bid and proposal costs. Any big contractor that’s dealing with this is setting forth those methodologies. The government looks at it for adequacy. And then years later, in this case, they came back and they said, hold on a second, we think the way you’re actually doing this for IRAD and BMP, which is a CAS 420 issue, is wrong, and they demanded millions of dollars in a cost impact. The magnitude is blocked out in the decision. So we don’t know exactly the dollars, but it’s got to be millions for this dispute to be worthwhile.
Tom Temin All right, and Sikorsky, then, obviously has not agreed. And there’s the idea of post-facto discovery after acceptance of the disclosure statement is really what this dispute is all about.
Zach Prince Yeah. They made an argument that I’m extremely sympathetic to, and it’s one that a lot of big defense contractors have. And that’s, the government saw what we’re doing, right? They knew the methodology that we’re applying. They should not be allowed now, years later, after they’ve awarded millions of dollars in contracts, to say, actually, that was always wrong from the get-go. Set aside the merits of whether CAS 420 is or is not violated here. Sikorsky argued we shouldn’t have to get there because the government accepted this. We should just move on. This came up in the big Raytheon case a couple of years ago at the Federal Circuit, first at the Armed Services Board. Also, the Armed Services Board agreed in that case that the disclosure statement that Raytheon had filed had set forth how they were accounting for certain lobbying costs and other corporate organizational costs, and that that should have prevented the government from raising the challenges that it did. The circuit ignored it all. So this still hasn’t been tested at the circuit. They just set aside that issue and dealt with something else. Here, at the Court of Federal Claims, Sikorsky brought up the same argument, and the government said in 2022, they moved to dismiss on that basis. They said there’s no sound basis within the law for Sikorsky to prevent us, the government, from challenging a CAS violation based on their disclosed practices. We have the right to challenge any violation of CAS within the six-year statute of limitations, and that’s it. And this was a big decision in 2022 was that Judge Leto, at the Court of Federal Claims, denied the government’s motion to dismiss. In other words, the court said, we’re going to entertain this argument that you are, in fact, prevented from arguing that Sikorsky had an issue when you’ve accepted their disclosed practice. It didn’t say at that time that this is definitely going to win, but it did represent what we thought was potentially a sea change in what are often 100-million-plus dollar disputes that the government should not, in all fairness, come in years later and say, we knew what your practice was, but now we don’t like it and it’s too late for you to fix it because you’ve incurred these costs. But tough, you now owe us money.
Tom Temin We’re speaking with procurement attorney Zach Prince. He’s a partner at Haynes Boone. And let me just ask you about a fine-sounding distinction. And that is the government could or could not accept the methodology in the disclosure. But then later, could it find that while we are still in agreement with your methodology, you, Mr. Contractor, violated your own methodology and we’re going to challenge that cost on that basis? But that’s not what’s happening here, right?
Zach Prince No, that’s not what’s happening here. And I think even Sikorsky would agree in that situation that the government would be permitted to come in and say, you aren’t following your disclosed practice, right? You have to follow your disclosed practice. The issue that Sikorsky, I think, rightfully raised, and the court was clearly sympathetic to, was we were following our disclosed practice, and the government is saying that our disclosed practice is insufficient.
Tom Temin Interesting. And what’s also surprising to, you know, a layman in this, if you look at a company like Sikorsky, which has been a federal contractor since the founding of the first helicopter, and then you’ve got places like Raytheon, which go back decades, what could possibly be different in the way they’re accounting for contract 10,000 that they weren’t doing in contract 9,999 back to zero?
Zach Prince So, it is common practice. A large company is going to have some changes in the way that they are approaching their accounting. And they’ve decided that accounting for costs this way versus that way, this gets really arcane, is beneficial to us for different reasons that have benefits. One cost objective, there’s another cost objective. There is a lot to the accounting treatment of different costs. And when they want to change a cost accounting practice and a CAS-covered contract in particular, they have to go through a whole process for explaining to the government what the change is and why it’s beneficial to the government and why they ought to accept it. That’s not exactly what was the issue here, but there’s plenty of reasons that a company would be changing their cost accounting.
Tom Temin What is the status of this case now? And it sounds like something the entire industry should be watching. Really?
Zach Prince The industry ought to be watching this. So this case is now in discovery. And that’s where this decision that I’m bringing up today and why it’s on my mind again, came up. The government in discovery started asking about information relating to 155 separate IRAD or independent research development projects. They’ve got a contracting officer’s final decision here, though, that question costs related to two specific projects. The government seemed to be in discovery, making these sweeping requests that are wasting a lot of company resources, potentially in a phishing expedition, to find more fodder for another claim. And Sikorsky said the government ought not to be allowed to do this. The way they tried to bring this to the court’s attention, usually in discovery, and without going too far into the weeds in this kind of thing, you’d ask for a motion to essentially prevent the government from asking about these things. They asked for a motion to dismiss instead. They wanted to dismiss the government claims pertaining to anything except for the two IRAD projects that were in dispute. The problem was, that the court was grappling with, there were no claims from the government relating to anything except for those two projects. That is, the court can’t dismiss something that hasn’t been asserted. On the other hand, the government can’t ask for things pertaining to something that it hadn’t asserted either. So, Sikorsky really did win on that point. The court said, notwithstanding the government’s suggestion, that maybe there’s some sort of broader argument the government had initially brought against Sikorsky that every IRAD project is flawed somehow. That’s not actually what they asserted. The government claim, just like a contractor claim, is subject to what you actually state, right? And what the government then decides in a final decision. So, Sikorsky is still protected from these sweeping government demands for more information. And so the government has to stay focused on the claim that’s before it, for now at least, unless they want to issue a new decision on these two projects. And so we’re still working our way to an actual decision on the merits. My guess is a trial and a decision on the merits. So this is going to be percolating for years to come, I suspect.
Tom Temin Right. And by the way, the two projects you were talking about are improvements to the H60 Blackhawk and the S92 gearbox. So it can get pretty arcane what it is you’re dealing with, whatever the S92 gearbox is, but sounds like there’s some sand in that gearbox at this point.
Zach Prince That’s a good way to frame it.
Tom Temin Procurement attorney Zach Prince is a partner at Haynes Boone. As always, thanks so much.
Zach Prince Thanks for having me, Tom.
Tom Temin We’ll post this interview at federalnewsnetwork.com/federaldrive. Hear the Federal Drive on demand. Subscribe wherever you get your podcasts.
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