An Analysis of ASPR Section XV by Cost Principle

• Author: Captain (P) Glenn E. Monroe
• Pages: 04

The pnrmples povernzng allowability of contract costs are set forth tn Section XV of the Armed Sewices Pro. enrement Regulation. Captain Monroe i e ~ t e w ~ thirty.

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of the cost p,+neiples and releuant case law to dis-eowrwhat d e s of interpretalion m e lzkely to befollowedby the Armed Semices Board of Contract Appeals and the Court of Claims considering contractor cost mm-bursernent claims.

The article opens ictth a brief reuieu, of basic aecounting concepts necessary to an understanding of cost allowabzlzty cn government contracting Thereofter Captain .Monroe breaks the eosi pniieiples down znto three proups.

The fwst proup, general operatzonal espenses. is subdivided i,ito on-poinp busmess ezpevses, employee costs, and costs of niatenals. The seeand p~oupincludes espen-dztsres directed at seeudnp and at perjorminp a poz'ern-ment contract The tkzrd ond last 1s a rnzseellaneozcs category eonststing of znterest expense and other finan-eta1 costs. and professional and consultant senmzee costs

Captain Monroe notes that cawt aod board decisions tend to be adiceably eoiiservatwe. or favorable to the powrnment. as to some cost pnnciples, and disttnctly liberal, 01

favorable to contractors, as to otherpnnciples. In afew of the liberal deetsmis the plazn language of the

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other governmental agency.

*'JAGC U S Army Instructor. Contract Law Divialon, The Judge Advocate General's School. Charlotfesr~lle, Virginia B A , 196i. lIuskingum College: 1966-57, La Sarbanne. and 1958-69. Allmnee Francaiae. Paris, France, J.D , 1974. Ohia State University School af Law, LL.M candidate. 1978, Universif) of Virginia School of Law Member of the Bars of Ohio, the United State8 Court of Mihfai? Appeala. rhe United Stntei Tar Court. the United State& Court ai Clamn and the L'nifed States Supreme Court Captam Monroe ha8 preumusly published articles on proiuremenl law in THE ARMY LAWYER. Feh 1977. at 4; id July 1977 ar 1, id Mar 1978. at 36, and id July 1978 at 7

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emf pnneipiez mvoiwd has npparvnfly her,, disregarded by the dreisionmakrrs

The author e0,ieludes that the Armed Srn,tcrs Board of Covtrucf Appeals probabiy is syrnpnfiirtic toaard co+ tiaclor elaims based upon ordtriary on-going his

urtieulnte mors clrady the palieg eansideroltons u,idri-lz,ing their decim3,s

1. INTRODUCTION

   Notwithstanding the obvious importance impsrted by its title, Contract Cost Principles and Procedures, Section XV of the Armed Servieea Procurement Regulation [hereinafter cited as ASPR Section XVI has been accorded infrequent scholarly attention.' And the

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   19781 ANALYSIS OF ASPR SECTION XV

   principles outlined in the Section, although generally understandable, are not arranged in a manner conducive to easy assimilation. The goal of this article is to respond to both problems by reviewing, aceording to expenditure classifcation, contract appeals board and, in B few instances, Court of Claims decisions in the area.

   In addition to structuring the ASPR Section XV information in a more readable form, the study demonstrates varging approaches to interpretation of ASPR 5 16205 cost principle language according to expenditure category. From these observations it will be possible to develop general guidelines for predicting board and Court of Claims reaction to the requirements under the ASPR cost principles. Indeed, the category into which an expenditure falls may prove to be a more reiiable indicator of administrative board and judicial determination than the actual warding of the applicable east provision!

   This failure to adhere strictly to the generally clear wording of the ASPR 5 15-206 provisions is an obvious source of difficulty for anyone endeavoring to discover the current development of the law. By segregating the ASPR Section XV cost principles according to coat category and outlining the probable rationale underlying the treatment afforded ease8 involving these categories, the task of accurately predicting the outcome of e081 principle litigation will be' simplified. The approach, therefore, ia to first divide the ASPR 0 l&2Ob cost provisions into major groups. These groups are subdivided; the subdivisions are further broken dawn and considered by examining each cost principle (e.g., advertising costs) placed aithin the category. The cost principle examination consists of an explanation of the requirements imposed by the regulation followed by a consideration of the more important, as well as representative, decisions in which the principle is discussed.

   Before examining the 5 16205 individual principles, however, it is necessary to review some basic cost accounting concepts. This preliminary task can best be accomplished by considering some of the general concepts found in Part 2 of ASPR Seetion XV. Included in this section of the article are a review of accounting terms,* a note on the application of cost principles, and a discussion of the

   fundamental prerequisites to cost recovery in government eantraeting.

   After this foundation ie constructed, the ASPR 5 1&205 prinei-pies are examined according to this classification scheme: general operational expenses (subdivided as follows: an-gaing business ex-penses, employee cost8, and costs of material); expenditures directed at securing or performing a government contraet (subdivided as follows: costs directed at securing a government contraet and costs directly related to performance of a specific government eon-tract); and costs related to 8everd categories (subdivided as follows: interest and other financial costa and professional and consultant service costs). The last classification 8erve8 as a vehicle to explore the validity of a Nk developed after consideration of other cost principles. A summary of the significant paints developed in this article is presented in the conclusion

   11. BASIC ASPR COST ALLOWABILITY COKCEPTS

   ASPR 3 16400, "Scope of Section," introducer the cost allowability material: "This Section contains general cost principles and procedures for the pricing of contracts and contract modifications whenever cost analysis is performed (see 3-807.2), and for the determination, negotiation or allowance of costs when such action is reqmred by a contract clause."

   The 5 3-807.28 reference concerns the revien of eoSt or pricing

   Cmlrart Corlr - An Inlradurtion THE ARHY LAWYER. Feb. 1877. st 4 Iheremaf-

   19781 LYALYSIS OF MPR SECTION XV

   data submitted pursuant to the Truth in Negotiations Aet.'And, as suggested in the foregoing quotation, the emt principles have appli-

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   cation to all east reimbursement contracts,E price redetermination and incentive price revision government convenience termination and pricing changes and other contract mndifi-

   19781 MALYSlS OF ASPR SECTIOS XV

   cations.5 Such broad coverage demonstrates the frequency of application and, therefore, the signiiiieance of the Cast principles section.

   Because the ASPR Section XY material is SO important, careful consideration of its specific requirements is clearly warranted. ASPR B 1&201.1, Composition of Total Coet, informs that "[tlhe total cost of a contract is the Bum of the allowable direct and indirect costs allocable to the contract, incurred or tu be incurred, less any allocable credits" (emphasis supplied).g The question now centers on the meaning of "allanable."

   ASPR B 16201.2, Factors Affecting Alhability of Costs, lists several tests, all of which must be considered. They are: "reasonableness, allocability, standards promulgated by the Cost Accounting Standards Board, if applicable, atherwise, generally ae-cepted accounting principles and practices appropriate to the particular circumstances, and any limitations or exclusions set forth in this Part 2. . ." (most notably, the B 16-206 cost principle).'O

   sThe entire text of ASPR E 16.201.1 is

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   Before examining these criteria it is important to note the re- C o l b shall be alloued to rhr e&it that the) am reaeonable (see 16-201.81. allocable (see 15-201 4). and deterrnrnsd Io be nllaanble inof the orher factors set forth m 15-101 2 and 14.205 These criteria appl! to a11 of the ieleered items of coir which follor IASPR d 15-104 Cost Principleel. notsrthstandirg thst parfie~lai guidance 1% provided in ianneciion unh certain specific ~ k m i for empham OTclarity (omphasa supplied)

   Thus. it should be abundantlv clear that cost allawabilitv dmendc

   quirement of ASPR 5 15-204(b):

   upon satisfaction of all the enumerated tests. As fundamental as this requirement ir, it is often curiously overlooked in board deei-siona concerning cost allowability imues.

   However, the Armed Services Board of Contract Appeal8 (ASBCA) has recognized this mandate in ~everal decisions. For example, it was determined in General Dynamics Corporatwn that if an expenditure were prohibited under a cost principle (ASPR 5 lE-205), questions of allocability and reasonablenem are not even relevant.'l Furthennore, if not in accordance with the contractor's consistent accounting praciiees. costs are not necessarily allowable. even if in harmony with the ASPR B lL20.E tost prin~iples.'~

   Even

   prior approval of a contractor's atcounting system does not guarantee reimbursement." Therefore, notwithstanding the apparent finality and conclusivenew of the language in the ASPR 5 15-206 cost pronouncements. it is essential to keep in mind that the contractor must also meet the other ASPR B 16-201.2 criteria. What requirements, then, are imposed by these other criteria?

   ASPR 5 15-201.8, definition of...