On June 10, 2010, the United States Court of Appeals, Federal Circuit, affirmed an Armed Services Board of Contract Appeals decision in favor of Lockheed Martin Corporation over the Air Force. Donley v. Lockheed Martin Corporation, 2010 WL 2302741 (C.A.Fed.).

In question was a Lockheed Martin challenge to a government claim asserted against the airplane manufacturer for costs negotiated in a “rephasing” of the F-22 fighter aircraft. The dispute was whether the government is entitled to recover a portion of the negotiated price increase on the ground that it resulted from a change in Lockheed’s accounting practices.

The contract included FAR Cost Accounting Standards (“CAS”) provisions which prescribe the manner in which a contractor may alter its accounting practices and the contractor’s responsibilities when it makes such an accounting change. 41 U.S.C. Section 422(h). If an accounting change results in increased costs because expenses previously accounted as indirect are now directly charged to the government contract, the contractor is required to agree to a contract price adjustment over all of the contractor’s affected CAS-covered contracts and subcontracts.

The Court of Appeals affirmed the Armed Services Board of Contract Appeals decision in favor of Lockheed Martin. Lockheed disclosed its new accounting practices to the Air Force’s negotiating team, and the negotiations were a “repricing” action and unusually comprehensive. The F-22 contract was not an “affected contract” requiring renegotiation. Costs were not estimated under one accounting practice but reported under another. Additional accounting costs were not tacked on to the contract estimate; the parties created a wholly new cost estimate incorporating all of the additional expenses.

Contact government contracts attorney Karen Hindson for more information.