Who's on first - do contracting officers decide the merits of employment discrimination cases filed against government contractors after Boeing v. Roche?

Army Lawyer, Oct, 2003 by Gregory R. Bockin

On 3 March 2002, the government advised XYZ that for the expenses to be allocable, (90) XYZ must demonstrate how the defense and settlement of a wrongful termination lawsuit, predicated on sexual harassment, benefited the government. (91)

On 6 March 2002, Ms. M, a government cost and price analyst, requested that the Defense Contract Audit Agency (DCAA) audit XYZ's legal and settlement expenses in relation to this claim. That audit revealed the following expenses:

Legal Fees:         $100,000
Settlement Costs:     39,000
Court Costs:            1000
Total:              $140,000

The DCAA audit revealed that the legal and settlement costs that XYZ proposed as a direct charge to the contract were accumulated and charged to the G&A expense pool and allocated to all contracts for fiscal years 1997 through 2001. XYZ denied that it charged the settlement amount of $40,000 to G&A. (92)

On 4 April 2002, the CO issued a final decision demanding the $100,000 in legal fees that XYZ charged to G&A during fiscal years 1997 through 2001. The letter further stated that the government could not reimburse XYZ for its settlement costs ($39,000) and court costs ($1000), unless XYZ shows that the sexual harassment allegations have "very little likelihood of Success." (93)

The government and XYZ were clearly at an impasse at the time of their last communication on 26 April 2002. XYZ saw the expenses as compensable and the government did not. The president of XYZ sent an invoice for the settlement fees to the government. XYZ filed a complaint with the ASBCA on 5 August 2002, claiming reimbursement for legal fees and settlement costs associated with the sexual harassment claims of a former employee. The government responded that it would not reimburse XYZ until it meets the burden of proof under the case law, the FAR, and the CAS. (94) As the contract attorney, you tell the CO that you will study the issue, and get back to her.

Based on the foregoing analysis, assume the Boeing II standard applies in this hypothetical case. Therefore, XYZ must prove that Ms. B's lawsuit had "very little likelihood of success" in order to establish that its legal fees are allowable. (95) First, the CO would consider allocability. As CAFC noted, "[a]llocability is an accounting concept involving the relationship between incurred costs and the activities or cost objectives (e.g. contracts) to which those costs are charged." (96) The CAFC further explained that "[p]roper allocation of costs by a contractor is important because it may be necessary for the contractor to allocate costs among several government contracts or between government and non-government activities." (97)

The CAFC added that "[t]he concept of cost allocability concerns whether a particular cost can be recovered from the government in whole or in part. Cost allocability here is to be determined under the CAS, 4 C.F.R. Parts 403,410." (98) The concept of allocability addresses whether a sufficient nexus exists between the cost and a government contract. (99) Although a cost may be allocable to a contract, the cost is not necessarily allowable. In Boeing II, the CAFC agreed that costs might be assignable and allocable under the CAS (100) but not allowable under the FAR. (101)