| Allowability
of Legal Settlement Expense
Scenario
Two companies are competing government contractors.
Company A is a client of CB&H. Company A entered into employment
negotiations with its competitor’s director of marketing.
Eventually, this individual became an employee of CB&H’s
client. The client paid this professional a percentage of sales
generated, which was the same agreement the individual had with
his/her prior employer.
After the director of marketing joined the CB&H
client, its competitor sued both the individual and the client,
alleging that they conspired to deprive the competitor of business.
To support this claim, the competitor asserted that the director
of marketing marketed our client’s services while still an
employed by the competitor. Eventually, our client settled with
the other company and paid a relatively small percentage of the
amount claimed as damages. When our client submitted its incurred
cost proposal for the year in which the suit and settlement had
occurred, DCAA took the initial position that the settlement costs
and the attorney fees incurred were unallowable. This was based
upon the presumption that the settlement amount was a debt owed
by the director of marketing.
CB&H Action Steps
When we became involved in this matter, we obtained
copies of the complaint filed in the lawsuit and the settlement
agreement. Our review of these documents clearly demonstrated that
our client was more than a nominal defendant in the lawsuit and
had substantial exposure to an adverse judgment. Therefore, the
settlement amount was an expense of the company and not the payment
of a debt owed by the individual. We then examined the FAR cost
principles that would be applicable to this situation. This examination
disclosed that there is no cost principle that specifically addresses
settlement costs of the kind in issue. Because settlement costs
are not made unallowable by the cost principles, it was determined
that their allowability would be determined by the general cost
principles of allocability and reasonableness. We then examined
ASBCA decisions to determine how the Board viewed costs of this
nature. Those decisions revealed that the Board treats these costs
as necessary business expenses and considers them allowable in the
absence of clear evidence of contractor misconduct. Because there
was no evidence of misconduct on the part of our client, we concluded
the settlement costs were allowable.
Attorney fees are governed by FAR 31.205-33
and are generally considered to be allowable to the extent that
they are reasonable. In this case the attorney hours expended were
reasonable and the hourly rate was consistent with the rate charged
by similar law firms in the area. Accordingly, the attorney fees
were considered reasonable.
Based upon the foregoing, we prepared a letter
to DCAA outlining our position. As attachments to that letter, we
included copies of the lawsuit and the settlement agreement. After
reviewing our submission, DCAA agreed that the costs were allowable
without further discussion.
Results
When dealing with DCAA, contractors have to establish
the allowability of costs. Therefore, thorough familiarity with
the FAR cost principles and an understanding of the way they have
been interpreted is essential. Additionally, contractors must possess
sufficient documentary evidence to support the allowability of costs
claimed.
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