               ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of --                                )
                                            )
Allison Transmission, Inc.                  )      ASBCA No. 59204
                                            )
Under Contract No. DAAE07-99-C-N031         )

APPEARANCES FOR THE APPELLANT:                     Scott E. Pickens, Esq.
                                                   William M. Jack, Esq.
                                                    Barnes & Thornburg LLP
                                                    Washington, DC

APPEARANCES FOR THE GOVERNMENT:                    E. Michael Chiaparas, Esq.
                                                    DCMA Chief Trial Attorney
                                                   Arthur M. Taylor, Esq.
                                                   Samuel W. Morris, Esq.
                                                    Trial Attorneys
                                                    Defense Contract Management Agency
                                                    Manassas, VA

                OPINION BY ADMINISTRATIVE JUDGE DELMAN
                      PURSUANT TO BOARD RULE 12.2

       In this appeal Allison Transmission, Inc., (appellant or Allison) disputes the
government's entitlement to compound interest on an acknowledged liability to pay
increased costs arising out of a voluntary cost accounting change. Appellant elected to
prosecute the appeal under Board Rule 12.2, 1 Expedited Procedures, and both parties
have agreed to waive oral hearing and to submit their positions on the record. 2 The
Board has jurisdiction under the Contract Disputes Act (CDA), 41 U.S.C. §§ 7101-7109.




1
  The Contract Disputes Act, implemented by Board Rule 12.2, provides that this
       decision shall have no value as precedent, and in the absence of fraud shall be
       final and conclusive and may not be appealed or set aside.
2
  Allison's record submission is entitled "APPELLANT'S MOTION FOR JUDGMENT
       AND MEMORANDUM IN SUPPORT." The government's record submission is
       entitled "GOVERNMENT'S CROSS MOTION FOR SUMMARY
       JUDGMENT." Notwithstanding these captions, this appeal is being adjudicated
       on the record at the parties' request pursuant to Board Rule 11.
                            SUMMARY FINDINGS OF FACT

       1. Contract No. DAAE07-99-C-N031 (Contract N03 l) was awarded by the
U.S. Army Tank Automotive Command (government) to Allison on 12 July 1999. This
contract contains the following CAS-related contract clauses in the FAR which are
incorporated by reference at Section I of the contract: FAR 52.230-2, COST
ACCOUNTING STANDARDS (APR 1998); FAR 52.230-3, DISCLOSURE AND CONSISTENCY
OF COST ACCOUNTING PRACTICES (APR 1998); and FAR 52.230-6, ADMINISTRATION OF
COST ACCOUNTING STANDARDS (APR 1996). 3 (R4, tab 1)

       2. By letter dated 30 April 2007, Allison submitted to the Defense Contract
Management Agency (DCMA) a notification of a change to its cost accounting practices,
effective 1 January 2008. The change eliminated Allison's Engineering Cost Center
Group 4C, previously disclosed in Allison's CAS Disclosure Statement. Allison advised
the government as follows:

               The departments within this cost center group [4C] will
               become part of burden center group 4 Y and will no longer
               write time tickets to be charged direct. The functions
               currently being performed in 4C are to be allocated over the
               remaining cost center groups based on charge-out labor.

Appellant requested the "concurrence" of the DCMA Administrative Contracting Officer
(ACO) with the change. The ACO signed his name on the concurrence line of this letter
on 30 May 2007. (App. supp. R4, tab 14; gov't reply br., ex. G-8, Stout decl. if 3)

        3. By letter to the ACO dated 9 October 2008, Allison submitted to DCMA a cost
impact proposal related to the cost accounting practice change. Allison determined that
as a result of the change, the government paid increased costs in the amount of
$599,019.79. (App. supp. R4, tab 15)

       4. On 25 March 2010 the Defense Contract Audit Agency (DCAA) issued a
memorandum to the ACO returning the impact proposal to appellant for failing to follow
the prescribed format (gov't mot., ex. G-4). Allison was so advised by letter of that same
date (gov't mot., ex. G-5).


3
    The parties have stipulated that the April 1998 CAS clause cited herein is the
        controlling CAS clause in this appeal, and that the 2012 CAS clause cited by
        appellant in its motion is not materially different insofar as pertinent here. The
        parties have also stipulated that FAR Subpart 30.6, effective 8 April 2005, may be
        consulted and used by the Board as appropriate. (App. reply, attach. 1,
        Stipulation)

                                             2
        5. By letter to DCMA dated 15 April 2010, Allison resubmitted its cost impact
proposal related to this cost accounting practice change. Again, Allison determined that
as a result of the change the government paid increased costs in the amount of
$599,019.79. (App. supp. R4, tab 16)

        6. By memorandum to the ACO dated 17 January 2013, DCAA provided a Rough
Order of Magnitude (ROM) estimate on the cost impact to the government resulting from
the cost accounting practice change. DCAA described the change as a unilateral change.
The ROM covered the cost impact to one prime contract between Allison and the
government, Contract N031, and two subcontracts awarded to Allison by prime
contractor General Dynamics (projects "P920" and "P929"). DCAA concluded that
Allison overstated the cost impact by $443,904.79, and therefore the total increased costs
paid by the government were $155,115.00. DCAA linked the overstated cost impact
figure to several errors committed by Allison in its cost impact calculation methodology.
(R4, tab 2)

       7. By letter to appellant dated 7 March 2013, the ACO stated that "ATI owes a net
overstatement amount of$155,115.00." The ACO also stated that, "[i]n accordance with
FAR 52.230-2(a)(5), interest will be applicable to the final negotiated amount."
(R4, tab 3)

       8. By letter to the ACO dated 12 March 2013, Allison agreed to pay the
government the principal amount of $155,115. With respect to interest, appellant stated:
"The interest shall start to accumulate 30 days from the receipt of the demand letter ....
ATI has not received a demand letter so the estimated interest would be $0."
(R4, tab 4)

        9. By letter to Allison dated 27 September 2013, the ACO advised that she had
"privity" over Contract N031, but not over the two subcontracts. Based upon revised
calculations, the ACO agreed to settle Contract N031 for $165,424. 4 Again, the ACO
stated, "[i]n accordance with FAR 52.230-2(a)(5), interest will be applicable to the final
negotiated amount." (R4, tab 5)

       10. By letter to the ACO dated 11 October 2013, Allison agreed to pay the
principal amount of $165,424. With respect to interest, appellant stated as follows:

                2. ATI will pay interest on the $165,424 starting on
                   October 1, 2013 in the amount of $408.38. This
                   calculation is based on the interest starting to accumulate


4
    This upward adjustment is attributable to the removal of the subcontracts "P920" and
         "P929" from the original cost impact calculation.

                                               3
                   effective October I, 2013 until October 31, 2013 when we
                   anticipate payment would be made.

Allison attached a 2009 letter from an ACO on an unrelated 2004 cost accounting change
in support of its position on interest. (R4, tab 6)

       11. On 23 December 2013, the ACO issued a contracting officer's final decision
(COFD) to Allison, asserting a government claim of$199,101.00, inclusive of interest to
the date of the decision, for the cost impact to the government resulting from Allison's
cost accounting practice change. The COFD identified Contract N03 l as the
representative contract. The government's claim of$199,101.00 was comprised of the
principal amount of $165,424.00, plus compound interest in the amount of $33,676.62
covering the period of time between the estimated government overpayment of the
increased costs (30 June 2008), through the date of the final decision. (R4, tabs 7-8)

       12. Insofar as pertinent, the COFD stated:

              Even if a unilateral change is otherwise acceptable, increased
              costs to the government as a result of not consistently
              following the prior practice in contracts awarded under the
              prior practice are to be recovered by the government, with
              compound interest. While making no determination in this
              final decision as to the ultimate CAS compliance or
              non-compliance of the change, recovery as above is
              appropriate in any event.

(R4, tab 7 at 2)

       13. By letter to the ACO dated 17 January 2014, Allison requested that the ACO
rescind her 23 December 2013 COFD. Among other things, Allison stated that the
government had no legal basis to assess any interest:

              Absent a CAS noncompliance, the Government should
              review our previous communications under FAR
              52.230-2(a)(4) that requires the Contractor and the
              Government to negotiate and agree to an equitable adjustment
              as provided in the Changes clause of the contract. Because
              there is no CAS noncompliance associated with this
              accounting change, there is therefore no legal basis for the
              assessment of interest.

(R4, tab 9 at 1)



                                            4
     14. By letter to Allison dated 3 February 2014, the ACO refused to rescind the
COFD (R4, tab 10).

        15. Appellant timely appealed the COFD to this Board by notice dated 7 March
2014.

        16. The following Title 41 statutory provisions govern this appeal:

              § 1502. Cost accounting standards



                     (f) IMPLEMENTING REGULA TIONS.-The Board shall
              prescribe regulations for the implementation of cost
              accounting standards prescribed or interpreted under this
              section. The regulations shall be incorporated into the Federal
              Acquisition Regulation and shall require contractors and
              subcontractors as a condition of contracting with the Federal
              Government to-

                     ( 1) disclose in writing their cost accounting
                  practices ... ; and

                     (2) agree to a contract price adjustment, with interest,
                 for any increased costs paid to the contractor or
                 subcontractor by the Federal Government because of a
                 change in the contractor's or subcontractor's cost
                 accounting practices or a failure by the contractor or
                 subcontractor to comply with applicable cost accounting
                 standards.



              § 1503. Contract price adjustment



                     (b) AMOUNT OF ADJUSTMENT .-A contract price
              adjustment undertaken under section 1502(f)(2) of this title
              shall be made, where applicable, on relevant contracts
              between the Federal Government and the contractor that are
              subject to the cost accounting standards so as to protect the
              Federal Government from payment, in the aggregate, of


                                              5
            increased costs, as defined by the Cost Accounting Standards
            Board ....

                   (c) INTEREST.-The interest rate applicable to the
            contract price adjustment is the annual rate of interest
            established under section 6621 of the Internal Revenue Code
            of 1986 (26 U.S.C. 6621) for the period. Interest accrues
            from the time payments of the increased costs were made to
            the contractor or subcontractor to the time the Federal
            Government receives full compensation for the price
            adjustment. [Emphasis added]

     17. The following provisions of the CAS clause, FAR 52.230-2, COST
ACCOUNTING STANDARDS (APR 1998) pertain to this appeal:

                 COST ACCOUNTING STANDARDS (APR 1998)

                   (a) Unless the contract is exempt under 48 CFR
            9903.201-1and9903.201-2, the provisions of 48 CFR Part
            9903 are incorporated herein by reference and the Contractor,
            in connection with this contract, shall-



                    (4)(i) Agree to an equitable adjustment as provided in
            the Changes clause of this contract if the contract cost is
            affected by a change which, pursuant to subparagraph (a)(3)
            of this clause, the Contractor is required to make to the
            Contractor's established cost accounting practices.

                    (ii) Negotiate with the Contracting Officer to
            determine the terms and conditions under which a change
            may be made to a cost accounting practice, other than a
            change made under other provisions of subparagraph (a)(4) of
            this clause; provided that no agreement may be made under
            this provision that will increase costs paid by the United
            States.

                    (iii) When the parties agree to a change to a cost
            accounting practice, other than a change under subdivision
            (a)(4)(i) of this clause, negotiate an equitable adjustment as
            provided in the Changes clause of this contract.



                                           6
                      (5) Agree to an adjustment of the contract price or cost
              allowance, as appropriate, if the Contractor or a subcontractor
              fails to comply with an applicable Cost Accounting Standard,
              or to follow any cost accounting practice consistently and
              such failure results in any increased costs paid by the United
              States. Such adjustment shall provide for recovery of the
              increased costs to the United States, together with interest
              thereon computed at the annual rate established under section
              6621 of the Internal Revenue Code of 1986 (26 U.S.C. 6621)
              for such period, from the time the payment by the United
              States was made to the time the adjustment is effected. In no
              case shall the Government recover costs greater than the
              increased cost to the Government, in the aggregate, on the
              relevant contracts subject to the price adjustment, unless the
              Contractor made a change in its cost accounting practices of
              which it was aware or should have been aware at the time of
              price negotiations and which it failed to disclose to the
              Government.

                                        DECISION

        Under Section 1502(f)(2) of the CAS statute, Congress unequivocally expressed
its intent that as a condition of contracting with the government, the CAS
clause/regulation provide that a contractor agree to a contract price adjustment, "with
interest, for any increased costs paid to the contractor... because of a change in the
contractor's cost accounting practices."

        There is no question that appellant initiated a change in its cost accounting
practices here and agreed to pay a contract price adjustment for the increased costs paid
by the government, consistent with the statute. As per the plain terms of the statute,
interest must also be included on these increased costs. Section 1503(c) of the statute
spells out the interest to be paid by the contractor. This interest has been held to be
compound interest. See Gates v. Raytheon Co., 584 F.3d 1062 (Fed. Cir. 2009),
rehearing and rehearing en bane denied, 636 F.3d 1363 (Fed. Cir. 2011) (contractor
liable for compound interest on CAS noncompliance). The CAS statute makes no
distinction between the treatment of a contract price adjustment for increased costs paid
due to a CAS noncompliance, and a contract price adjustment for increased costs paid
due to a cost accounting change of the type here. Both are subject to the same statutory
interest provision. As the former requires assessment of compound interest, so must the
latter.

      Appellant contends, however, that the government erred in processing this change
under CAS clause FAR 52.230-2(a)(5) because it involved neither a CAS noncompliance


                                             7
nor a failure to follow any cost accounting practice consistently. 5 According to appellant,
the ACO should have processed this change under CAS clause FAR 52.230-2(a)(4)(ii)
and (iii), which subsections provide for the negotiation of terms and conditions of the
change, the parties' agreement to the change and an equitable adjustment under the
Changes clause of the contract, and do not provide for the payment of interest.

        In any event, assuming, arguendo, that the ACO selected the "wrong" subsection
of the CAS clause to process this contract price adjustment, it is nevertheless clear that
this contract price adjustment for increased costs paid by the government due to this
contractor-initiated cost accounting change is subject to interest under the CAS statute,
and as concluded above, this interest must be compound interest. Congress
unequivocally expressed its intent to mandate interest and the amount of that interest
under these circumstances, and this controls the result here. See Raytheon, 584 F.3d at
1071-72 n.12 ("The intentions of the CAS Board in promulgating the CAS clause are
clearly influenced by the authorizing statute, and we look to§ 422(h)(4) [now Section
1503(c)] as part of this interpretation of the regulation that is incorporated into the
contracts at issue."); see generally Chevron US.A., Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837, 842-43 (1984) (court must give effect to the unambiguous
expressed intent of Congress); Coalition ofNew York State Career Schools, Inc. v. Riley,
129 F.3d 276, 279 (2nd Cir. 1997) (where plain language of statute speaks directly to the
issue, regulations must give effect to the unambiguously expressed Congressional
intent.).

       Accordingly, it is the decision of the undersigned, pursuant to Board Rule 12.2,
that appellant is obligated to pay compound interest on the increased costs paid by the
government due to the subject cost accounting change. 6




5
    Given the fact that appellant timely notified the government of this cost accounting
         change, see FAR 30.603-2(c)(l)(2), it also appears that this contract price
         adjustment does not precisely fit under FAR 52.230-2(a)(5).
6
    This Rule 12.2 decision does not address whether the specific compound interest
         amount in the COFD was accurately calculated. The Board expects the parties to
         reach agreement on the interest amount due and owing, consistent with this
         decision, based upon the appropriate math and the documentation necessary and
         available to make the appropriate calculation.

                                             8
      ASBCA No. 59204 is denied.

      Dated: 17 July 2014




                                        \         JA     DELMAN
                                            '~---A.a~inistrative Judge
                                                  Armed Services Board
                                                  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. 59204, Appeal of Allison
Transmission, Inc., rendered in conformance with the Board's Charter.

      Dated:



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




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