Government Contracts Decision Finding Disallowance of PRB Costs Was Improper Affirmed
Monday, December 23, 2019

Decision Finding Disallowance of PRB Costs Was Improper Affirmed

By Government Contracts Editorial Staff

The Court of Appeals for the Federal Circuit affirmed a decision by the Armed Services Board of Contract Appeals finding the government’s disallowance of the contractor’s post-retirement benefit costs was improper because the contractor’s negative PRB plan amendment effectively eliminated its transition obligation so that the costs would never be charged to the government. In the quantum phase of the appeal (17-1 BCA ¶36,800), the parties disputed the government’s disallowance of PRB costs associated with the period before the contractor switched from the accrual method established by the Deficit Reduction Act of 1984 to the method set out in Statement of Financial Accounting Standard 106. FAR 31.205-6(o), Compensation for personal services, required use of FAS 106 to determine allowable PRB costs.

Benefited the Government. When the contractor switched its accrual method, it was required to calculate its “transition obligation”—the difference between the PRB costs that would have accrued had the contractor adopted the FAR 106 method earlier and the PRB costs that accrued due to its continued use of the DEFRA method. The contractor also adopted a “negative” PRB plan amendment that capped its future contributions independent of future healthcare cost increases. The board found that the negative amendment saved $307 million from the contractor’s future PRB plan obligations and FAS 106 required the contractor to exclude these savings from its transition obligation calculations. The board also found the government’s disallowance was inconsistent with FAR 31.201-2(c), which limits unallowable costs to costs “in excess of the amount that would have resulted from practices consistent with [FAR Subpart 31.2]. According to the board, the PRB costs the contractor calculated using the DEFRA method did not exceed the amount the contractor could have claimed if had used the FAS 106 method. Combined with the contractor’s negative amendment to its PRB plans, this resulted in “no excess to disallow.” The court agreed and concluded undisputed facts supported the board’s finding that the negative PRB plan amendment effectively eliminated the contractor’s transition obligation. (Secretary of Defense v. Northrop Grumman Corp., CA-FC, 63 CCF ¶81,799)

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