                ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of --                                   )
                                               )
Northrop Grumman Corporation                   )     ASBCA No. 60190
                                               )
Under Contract No. N68936-05-C-0059            )

APPEARANCES FOR THE APPELLANT:                       Terry L. Albertson, Esq.
                                                     Stephen J. McBrady, Esq.
                                                      Crowell & Moring LLP
                                                      Washington, DC

APPEARANCES FOR THE GOVERNMENT:                      E. Michael Chiaparas, Esq.
                                                      DCMA Chief Trial Attorney
                                                     Robert L. Duecaster, Esq.
                                                      Trial Attorney
                                                      Defense Contract Management Agency
                                                      Chantilly, VA

               OPINION BY ADMINISTRATIVE JUDGE PEACOCK
           ON THE GOVERNMENT'S MOTION FOR RECONSIDERATION

       The government has moved for reconsideration of our opinion in Northrop
Grumman Corporation, ASBCA No. 60190, 17-1 BCA ~ 36,800 (hereinafter referenced
as "quantum decision"). 1 In its Motion for Reconsideration (Motion), the government
continues to maintain that Northrop Grumman Corporation (NGC) should have incurred,
and in fact was required "by operation of law" to "incur" $253 million more than the
Post-Retirement Benefits (PRB) costs actually incurred by its PRB Plan during the
pre-transition years, commensurately increasing the costs of its flexibly-priced contracts,
including major weapons systems purchased from NGC. Because appellant failed to
incur/accrue, assign, and fund or claim the amount disallowed in the pre-transition years,
the government, without any factual support or proof, alleges that the unfunded,
disallowed amount was "incurred by operation of law," somehow was included in the
"transition obligation" and that appellant has been "claiming" the disallowed costs as part
of the annual amortization of that obligation since 2007 in the "post-transition" years.
The government primarily relies on alleged "inconsistencies" among the quantum
decision and earlier "Entitlement Phase" decisions. Northrop Grumman Corporation,
ASBCA No. 57625, 14-1BCA~35,501, aff'd on recon., 14-1BCA~35,743 (hereinafter
the "entitlement decisions"). It asserts that the holdings of the entitlement decisions


1
    The government motion also requests that this appeal be referred to the Board's Senior
         Deciding Group. The Board's Chairman has denied that request.
became the "law of the case" which the Board failed to follow in the quantum decision.
Briefing related to the motion was concluded on 15 November 2017. 2

         Upon reconsideration, we affirm the quantum decision. There are no
inconsistencies among the quantum decision and the Board's earlier entitlement
decisions. The government's assertions that the Board contradicted the "law of the case,"
i.e., the entitlement decisions, are based on the government's untimely raised and
unreasonable "interpretation" of the entitlement decisions. Moreover, the government has
ignored the quantum remedy for noncompliance established in FAR 31.201-2(c). In
addition, it has misapplied fundamental concepts of cost "incurrence" and "disallowance."

       The government's initial brief supporting its Motion focused on what it
alleges are differences in the purported "philosophy" and "intent" of the quantum
decision vis-a-vis the entitlement decisions. 3 The "philosophy" and "intent" of a Board
decision are best derived from its language. The basic holding of the entitlement
decisions was that appellant failed to comply with the FAS 106 PRB cost accrual
methodology in the pre-transition years. The quantum decision addressed the monetary
consequences of that noncompliance. In particular, nothing in the entitlement decisions
considered, much less condoned, the central premise of the government's quantum
position, i.e., that NGC was required to, and thus actually did, "incur" $253 million
more PRB costs "by operation of law" in the pre-transition period and that, somehow in

2
  The Board's previous entitlement decision "conclude[d] that FAR 31.205-6(o)
       supports the government's disallowance of unfunded [PRB] costs" and
       remand[ ed the appeal] to the parties to determine quantum." Northrop
       Grumman, 14-1BCA~35,501 at 174,025, ajf'd on recon., Northrop Grumman,
        14-1BCA~35,743. After the parties were unable to resolve quantum, the
       Board heard "the 'quantum phase' of the parties' disputes regarding
       a government disallowance, totaling $253,361,512, of [PRB] costs associated
       with the 'transition' of [appellant] from its 'pre-transition' accrual methodology
       to the methodology prescribed in FAR 31.205-6(0)." Northrop Grumman,
        17-1BCA~36,800 at 179,363. The Board held there that the government's
       disallowance of this sum was incorrect, and "that the government suffered no
       damages as a consequence of appellant's use of the DEFRA methodology during
       the pre-transition years." This was because the contractor had "specifically and
       expressly executed a 'negative' Plan amendment" in 2006 which "ensured that
       NGC would never incur the costs disallowed and effectively mooted allowability
       issues associated with the transition obligation and the change in NGC's cost
       accounting practices related to PRB costs." Id. at 179,372. Familiarity with
       these decisions is presumed.
3 Presumably, the government refers to the alleged "philosophy" and "intent" of the two

       judges participating in the "entitlement decisions" who retired before issuance of
       the "quantum" decision. The third judge participated in all decisions.

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a manner never detailed or proved, the government-fabricated "costs" thus "incurred"
found their way into the transition obligation to be amortized in the post-transition years.

        On 12 October 2017, the government filed a "Reply in Support of the
 Government's Motion for Reconsideration" (gov't reply), wherein the government
 alleged that the entitlement decisions definitively held that the disallowed costs were
 included in the "transition obligation." To the Board's knowledge, this is the first
 instance where government counsel expressed such an interpretation of the entitlement
decisions from the filing of the quantum appeal in September 2015 to October 2017.
When notified by the gov't reply of its "interpretation," the Board issued an Order
seeking additional briefing and answers to a series of questions to the parties for further
clarification on 17 October 2017. In accordance with the schedule prescribed in the
Board's 17 October 2017 Order, the government filed its response on 1November2017
(gov't answers) and appellant on 15 November 2017. We have reviewed the parties'
respective responses. Among other things, the Board specifically asked the government
where its current pivotal interpretation of the Board's entitlement decisions was asserted
in the post-hearing quantum briefs. The answer, as appellant succinctly emphasizes, is
"nowhere." We consider that the late-asserted issue and "interpretation" has been
waived by the government. Moreover, ifthe Board had reached such a critical
conclusion in the entitlement decisions, it would have effectively disposed of the central
and dispositive issue of the entire quantum phase of the proceedings. There would have
been no need for the quantum phase ifthe Board's entitlement holding resolved all
issues associated with the computation of the "transition obligation." As the government
admits, '"theoretically" there would not have been any need to prepare and proffer at trial
the government's expert opinion expressing for the first time the government's "cost
incurrence by operation of law" theory, nor any need for further evidence, argumentation
and briefing of those issues. (Gov't answers at 4) Indeed, the matter would have been
resolvable by summary judgment disposing of the quantum phase issues without more
than two years of litigation centered on the composition of the transition obligation. The
only "inconsistency" is between the government's position advocated by counsel for the
first two years of this litigation and its "interpretation" first advanced in October 2017 in
the gov't reply, supplementing its Motion.

        Not only is the government's late-asserted interpretation untimely, it is also
patently unreasonable. Again, boiled down to its essence, the government now
maintains that the entire quantum phase "theoretically" was superfluous and
unnecessary. To the contrary, the entitlement decisions consistently emphasized the
lack of critical quantum details in the entitlement record that would be required to
intelligently evaluate issues associated with the "transition obligation." The entitlement
decisions expressly acknowledged that these did not address NGC's argument that, as a
result of the PRB plan change in 2006, the disallowed costs "will not be incurred and as
such, the government has no reason to disallow them." The entitlement decisions,
noting the paucity of quantum details generally, also expressly and specifically stated


                                             3
that the Board required "a better developed record to address" whether the costs had
been incurred or would be incurred and claimed in the post-transition years as part of
the amortized "transition obligation." Thus, the quantum phase proceedings.

        All "quantum" issues were before the Board in the "Quantum Phase" proceedings.
Among other things, the entitlement decisions do not address, much less express approval
of, the quantum details supporting the government's computation and extraordinary
"disallowance" of unincurred, unclaimed and unreimbursed costs. All details regarding
the quantum consequences of noncompliance with the FAS 106 methodology and
computation of any government remedy were remanded to the parties. There is no
inconsistency among the decisions.

        In fact, a principle mandate of the entitlement decisions required the parties
to evaluate in the quantum phase whether the $253 million was included in the
transition obligation or eliminated by the 2006 Plan amendment. Perforce, ifthe
Entitlement panel had adopted the government's position regarding the "incurrence" of
those costs "by operation of law" in the pre-transition years there would have been no
need for quantum phase proceedings. The entitlement decisions essentially instructed
the parties to resolve a primarily actuarial question requiring them to delve into the
details of the computation of the ''transition obligation" and the consequences of the
2006 PRB Plan amendment. Only appellant constructively responded to that primary
directive and issue. Appellant provided the only persuasive evidence, including expert,
testimony conclusively establishing as a fact that the Plan did not include any pre-
transition year PRB costs, calculated pursuant to the FAS 106 methodology, in the
transition obligation. The government failed to sustain its burden of proving otherwise.
The Board at the time of the entitlement decisions had never even been presented with
the government's "cost incurrence by operation oflaw" theory, much less a cogent
explanation of how such "costs" found their way into NGC's transition obligation.
Obviously, it could have drawn no definitive conclusions regarding the government's
theories that had never been developed until the quantum phase proceedings.

         The gravamen of this dispute has always been whether the government was
damaged, i.e., in the words, of FAR 31.201-2(c) whether the contractor claimed
(or the government paid) any disallowable "excess" PRB costs as a consequence of
appellant's noncompliance. The ultimate overriding fact is that the government did not
pay any "excess." It cannot overcome that basic fact that there was no "excess" by
parsing through the entitlement decisions trying to find "inconsistencies," actual or
implied in the supposed "philosophy and intent" of those decisions. The Board
emphasized that it had virtually no quantum facts and left all quantum issues to be
decided on a full record. The pertinent "law of the case" is that the entitlement
decisions specifically and expressly refrained from drawing any quantum conclusions
until it had a fully-developed record. The quantum phase proceedings clearly
established that the contractor did not claim any excess. The government attempts to


                                           4
absolve itself of this failure of proof by focusing on alleged "inconsistencies" between
the entitlement decisions and the quantum decision. There are no such inconsistencies.
The thrust of those decisions was always to leave the ultimate quantum questions open
for full examination and scrutiny on a fully developed quantum record. The entitlement
decisions contained no pre-judgment of quantum or any quantum-related issue. Any
reading of the language of those decisions to the contrary is simply disingenuous and
incorrect. Even ifthe entitlement decisions somehow could reasonably be construed to
be inconsistent, it does not change the fundamental fact that the contractor has never
claimed, and will never seek reimbursement of the costs and the government has never
and will never pay the amount disallowed. Regardless of any possible inconsistency,
fundamental fairness requires that those quantum phase conclusions would necessarily
be dispositive and controlling.

        The government position disregards, and is also inconsistent with, the
FAR-prescribed remedy for noncompliance. The government has declined to address
the Board's discussion of the overall status and quantum impact ofFAR 3 l.201-2(c) on
cost allowability generally. As emphasized in the "quantum decision," the latter
provision places the current dispute in context and perspective. It provides the
government with a general remedy in the event of a non-compliance with more specific
cost principles. The government arguments fail to meaningfully consider that remedy.
Only the "excess" is unallowable. There are no "excess" NGC PRB costs to disallow in
this case.

        One express mention of an arguably "quantum-focused" issue in the "entitlement
decisions" occurred in the Board's discussion of a "ceiling" on allowability of PRB
costs in its reconsideration of the entitlement decisions. However, the Board merely
observed that there was no express mention of a "ceiling" in FAR 31.205-6(o). The
Board expressed no opinion on the impact of FAR 31.201-2(c) on the quantum
consequences of non-compliance and the limits of the government remedy reflected in
the latter provision. FAR 31.205-6(o) must be analyzed and interpreted in the overall
context of the cost allowability provisions generally. The interrelation of that provision
with FAR 31.202-2(c) is critical. The "ceiling" is created by reading the two provisions
together. The former establishes allowability criteria and the latter prescribes the
government's "quantum" remedy for noncompliance therewith.

       The government has not challenged the Board's discussion of cost incurrence
by the contractor except to reassert its central contention that appellant "incurred" the
$253 million "by operation of law" regardless of what the contemporaneous
documentation reflects. The most persuasive evidence and indicia of cost incurrence
are contemporaneously-submitted incurred cost and forward pricing proposals for the
pre-transition period, none of which contained any portion of the $253 million
"disallowed." During that period, there was never any contention that appellant had
actually "incurred" the "disallowed" "costs" in question. The government ignores not


                                             5
only NGC's Plan, but all the contemporary core cost/pricing/payment related
documentation and even its own FAR-prescribed remedy, to calculate and assert this
disallowance. The "government "disallowed" costs that were never incurred, never
claimed and never reimbursed. The government developed its current theoretical
construct in 2015 during the prosecution of the quantum phase appeal divorced from the
reality of all contemporaneous cost incurrence documentation and related cost
submissions 10-20 years earlier.

        The concept of cost incurrence "by operation of law" in a government contract
accounting "allowability" context is indeed novel, extraordinary, unique and
unprecedented. The government has failed to adduce even one analogous case
supporting its position. The government contemporaneously exercised common sense
during the pre-transition years and knowingly, willingly, declined to challenge
appellant's accounting for its claimed PRB costs that resulted in lower costs to the
government during the pre-transition years. The "common sense" government position
in this regard in the pre-transition years comported with FAR 31.201-2(c). The
government now ignores its own regulatory remedy. In doing so it has created an
extraordinary new category of costs, incurred not by the contractor's own accounting
measurement, accrual or assignment methodology, but allegedly "required" to be
incurred by "operation oflaw," without regard to NGC's accounting procedures. To
the contrary, the operative "law" in this case is the common remedy prescribed for
noncompliance in FAR 31.201-2(c ). The government's duty is to evaluate costs
actually incurred and claimed by the contractor under the pertinent cost principle for
compliance. If non-compliant, any "excess" is unallowable, not costs that were never
incurred or claimed by the contractor.

        The sole government defense of its "cost incurrence by operation of law" theory
is based on general platitudes to the effect that laws and regulations often require the
incurrence of costs. There is nothing particularly remarkable about that basic truism
in the abstract. But the question in the specific context of a government contract
cost "disallowance" dispute is whether the government was damaged, injured, harmed,
i.e., whether it was charged and paid any "excess" as a consequence of noncompliance
with a cost principle. Here the regulation itself provides the remedy for the regulatory
noncompliance. FAR Part 31.201-2(c) provides an express remedy for the FAR
Part 31.205-6(0) noncompliance. Again, the government's theoretical constructs wholly
ignore that remedy because the government was never damaged and never has paid any
"excess" as a consequence of the noncompliance. The government's position only
makes sense ifthe contractor sought to incur in the future (via the transition obligation
in this case) and seek reimbursement (via amortization of the transition obligation in the
"post-transition" years) of costs that properly should have been measured, accrued,
assigned (and funded in this case) in previous accounting periods. NGC did no such
thing as detailed in the "quantum decision," as a consequence of the 2006 Plan
amendment and calculation of the transition obligation.


                                            6
        A primary purpose of the exercise of computing the transition obligation was to
reconcile the non-compliant DEFRA methodology with the FAS 106 methodology.
Because the DEFRA methodology required the incurrence of less costs in the
pre-transition years than the FAS 106 methodology, the difference could have been
carried forward into the transition obligation in the reconciliation process for
amortization in the post-transition years. Thus, the reasonable government concern was
not that the costs had been "incurred" in the past, i.e., the pre-transition years, but that
they might be incurred in the future post-transition years. If appellant had carried
forward such costs into the "transition obligation," they would.first be incurred in the
future via the amortized annual payments, i.e., during the post-transition years. Unless
the costs were included in the transition obligation, they never would be incurred, much
less claimed, at any time. Computation of the transition obligation did not occur until
2006. The government disregards the actual facts of how that obligation was computed.
In particular, it has failed to analyze appellant's PRB plan, ignores the 2006 Plan
amendment, and has failed to rebut appellant's proof of the impact of that amendment
on the calculation of the transition obligation.

        The term "disallowance" presupposes that the contractor has sought an
"allowance" for the cost in question, i.e., it has included those costs in contemporaneous
cost-related filings and claimed, charged or been reimbursed for said costs. Here, the
government has "disallowed" costs for which the contractor has never sought an
"allowance." The contractor has not and will never claim the costs in dispute here for
the reasons detailed in the underlying opinion. The "excess," if any, is to be derived
from cost/pricing, payment, and reimbursement submissions, including incurred cost
data transmitted to the government from the contractor. There is no mention in any of
these foundational, core documents that appellant ever incurred the costs in dispute,
much less claimed their reimbursement. There was no "excess" to disallow, given our
factual conclusion, unrebutted by any government evidence, that any "excess" was
not included in the transition obligation or otherwise amortized in the post-transition
years. Here, the "excess" which is the subject of the government "disallowance"
consists solely of phantom costs the government "created" in accordance with its
theoretical construct that the costs were required to be incurred. Therefore, they
were incurred "by operation oflaw." The government then "disallows" the "excess"
government-fabricated "costs" that were never charged by the contractor nor paid by
the government. The alleged "excess" that the government has disallowed was
wholly-manufactured by the government in its creation of a heretofore unprecedented,
in government contract accounting/allowability practice, category of costs that were
"required" to be "incurred" by the contractor "by operation oflaw."

       We also reemphasize that the "required by operation of law" theory advocated by
the government in this appeal is unreasonable per se because it shortsightedly would
"require" NGC to use the FAS 106 calculation and charge the government $253 million


                                             7
more than NGC actually charged the government using the DEFRA methodology
during the pre-transition years. Such a position is patently devoid of common sense.
The government benefited by buying weapons systems and other major systems at a
commensurately lower cost to the extent that the $253 million thus saved would have
been allocable to appellant's flexibly-priced contracts. In essence, the government
interpretation discourages, rather than encourages contractors to institute cost saving
measures. Our quantum decision recognized that some contractors maximize cost
saving measures and increase their price/cost competitiveness rather than be penalized
for not incurring and claiming the maximum amount allowed by regulation.

         The Board's general mention of "damages" and "injury" in the quantum decision
were a response to the government's extraordinary quantum theory that ignored basic
concepts of cost "incurrence," and "disallowance" as well as the FAR Part 31 remedy
for noncompliance. The Board was attempting to determine how (if at all) the
government was actually damaged or injured by the noncompliance absent inclusion
of the costs in question in an incurred cost or forward pricing proposal that could
serve as the basis for any "disallowance." E.g., Servidone Constr. v. United States,
931 F.2d 860, 861 (Fed. Cir. 1991) (a claimant under the CDA must prove liability,
causation, and injury to recover). In effect, FAR 31.201-2(c) by regulation imposes an
analogous rule in cost disallowance disputes to prove damages. We remain at a loss to
understand how the government was damaged or injured by the cost savings accruing to
it as a consequence of the contractor's use of the DEFRA methodology during the
pre-transition years. In any event, it is clear beyond cavil on a fully developed
quantitative record that appellant never has and never will incur and claim the
disallowed costs and the government never has and never will pay any "excess"
resulting from the noncompliance. The government failed to prove otherwise. The
entitlement decisions did not short circuit the requirement that the government was
required to prove its quantum damages.

      Having reconsidered our decision, it is affirmed.

      Dated: 9 January 2018


                                                 Administrative Judge
                                                 Armed Services Board
                                                 of Contract Appeals
(Signatures continued)




                                           8
 I concur                                      I concur



 RICHARD SHACKLEFORD
 Administrative Judge
                                              ~A~
                                               Administrative Judge
 Acting Chairman                               Acting Vice Chairman
 Armed Services Board                          Armed Services Board
 of Contract Appeals                           of Contract Appeals




     I certify that the foregoing is a true copy of the Opinion and Decision of the
Armed Services Board of Contract Appeals in ASBCA No. 60190, Appeal of Northrop
Grumman Corporation, rendered in conformance with the Board's Charter.

      Dated:



                                               JEFFREY D. GARDIN
                                               Recorder, Armed Services
                                               Board of Contract Appeals




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