Raytheon Co. won a $52 million victory in a dispute before the Armed Services Board of Contract Appeals that breaks new ground in cost accounting standards for government contracts.
A team of lawyers from Arnold & Porter led by Paul Pompeo represented Raytheon in fighting a claim by the Defense Contract Management Agency that Raytheon owed the government $40.7 million plus $12 million in interest.
At issue: Raytheon’s pension plan for its salaried employees and how the company calculated the amount of contributions necessary to meet the plan’s present and future obligations.
In 2004, Raytheon implemented changes to its calculation method, after winning the blessing of the Defense Contract Management Agency. The agency in 2003 determined that the change resulted in “no increased cost in aggregate to the Government. Accordingly, cost/price adjustments (to any Government contracts) are not deemed necessary.”
Raytheon contracts at the time included the Patriot missile program.
As a result of the accounting change, Raytheon’s pension costs initially declined. The trouble began in 2007, when a Defense Contract Audit Agency report “considered the impact of the decreased cost on the fixed-price contracts to be an increased cost to the government,” according to the March 31 opinion by Administrative Law Judge Monroe Freeman Jr.
The audit agency said Raytheon would get a $40 million “windfall” because the existing contracts would end before the higher pension costs kicked in. Those higher costs “will be allocated to future contracts and Raytheon will have the opportunity to recover those costs through the initial pricing.”
But Freeman called this concern “entirely speculative as to future pension fund performance and future contracts.” And he noted that the government got a windfall too – on Raytheon’s flexibility-priced contracts, which as a result of the accounting change wound up costing $57 million less than the government anticipated.
Administrative law judges Mark Stempler and Eunice Thomas concurred.
“This decision resolves an age-old controversy involving [cost accounting standards] cost impacts that transcends the facts of this case and will affect all contractors," said Pompeo.