The Armed Services Board of Contract Appeals (ASBCA or the Board) recently released a decision addressing the final issue of materiality in the long saga of the Raytheon accounting change case.  ASBCA No. 58068, August 9, 2016.  The Board decided materiality in Raytheon Company, Space & Airborne Systems’ favor based on a very specific set of facts—namely, the contracting officer’s (CO) absolute failure to consider the materiality criteria—so as a practical matter, the decision does not present contractors with a sweeping legal precedent for future use. 

Of far greater note to contractors generally is the Board’s decision to include an extended passage about the legitimacy of the materiality criteria as applied to voluntary accounting changes.  The Board went out of its way to question whether this particular aspect of the regulation exceeded the scope of the statute upon which it was based, but it declined to decide the issue because neither party had raised it.  Obviously, this leaves open the distinct possibility that in future cases, the government will argue that materiality need not—indeed, cannot—be considered in voluntary accounting change cases.

Raytheon Background 

To put this latest Raytheon decision in context, it is worth revisiting briefly the Board’s prior rulings in this case:

1. Simultaneous accounting changes that result in both savings and additional costs to the government could be offset against each other on contracts entered into prior to April 2005;
2. Such offsetting could not be employed for contracts subject to the 2005 revision to FAR 30.606(a)(3)—i.e., contracts entered into after April 2005;
3. Raytheon’s accounting changes were not desirable to the government;
4. The government impermissibly double counted certain costs; and finally,
5. The government was entitled to compound interest for any costs it was entitled to recover. 

The Board declined to decide the issue of materiality in its earlier decision because the double counting issue led the CO to rely on an overstated amount. 

In its most recent decision, the Board held that the CO had abused her discretion by disregarding several of the materiality factors she was required to consider.  The Board sustained Raytheon’s entire appeal, concluding that because the government failed to demonstrate that the CO’s abuse of discretion was harmless, the government could not recover the cost increase. 

Given that the recent decision upholds the entirety of Raytheon’s appeal based on materiality, there has been some suggestion in the legal press that the earlier decision’s ruling can be ignored as nothing more than dicta.  For practical purposes in negotiating with the government, we think it unlikely the Defense Contract Management Agency (DCMA) would agree with that view, as nothing in the decision suggests that the Board had second thoughts about its prior legal analysis.  The issue is one of sequencing—if the Board had been able to decide materiality first, it would have obviated the need to consider the net aggregation issue.  But, that is not how the case proceeded.  

ASBCA’s Materiality Decision 

In discussing the relevant regulations, the Board explained that materiality is an important aspect of the Cost Accounting Standards (CAS) and that the Federal Acquisition Regulation (FAR) requires a materiality determination for accounting changes based on the criteria in 48 C.F.R. § 9903.305.  The subsection lists six criteria to be considered “where appropriate” and advises that “no one criterion is necessarily determinative.”  Given these instructions, the Board noted that while one criterion could indeed outweigh the other factors and be determinative, the other criteria must still be considered in some fashion. 

The CO, however, considered Raytheon’s accounting changes to be material solely because they resulted in increased costs to the government.  The CO deemed the other criteria in the regulation inapplicable because, in her view, the determining factor was that there was an increased cost to the government.  The Board found the CO’s materiality analysis deficient, noting that merely reading the list of materiality criteria is not the same “as a fair consideration” of them.  Raytheon, ASBCA No. 58068 at 5. 

As noted above, the Board questioned the validity of any type of materiality determination for voluntary accounting changes.  The CAS statute requires contractors to agree to a price adjustment that protects the government against “any increased costs” as a result of an accounting change.  The FAR prohibits any agreement as a result of an accounting change “that will increase costs paid by the United States.”  In light of these restrictions against any increased costs to the government, the Board directly questioned whether it was proper for the FAR to provide for the payment of increased costs that are construed as “immaterial” by the contracting officer.  Although this issue clearly troubled the Board, the Board declined to analyze it because the government never raised it.  Instead, the Board assumed that the materiality requirements in FAR 30.602 and 30.604 were binding on the CO.  Raytheon, ASBCA No. 58068 at 11.

Impact for Government Contractors

It remains to be seen whether the FAR council addresses the Board’s concerns as to whether these materiality requirements belong in the FAR.  Until then, contractors should be prepared for the distinct possibility that DCMA will follow the Board’s advice and argue in future cases that, notwithstanding FAR 30.602 and 30.604, materiality cannot be considered in voluntary accounting change cases.  

© 2016 Perkins Coie LLP