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ASBCA holds no implied duty to audit subcontractors

Contractor escapes having to reimburse over $116 million to Government


The U.S. Army asserted that Lockheed Martin Integrated Systems, Inc. (LMIS), had breached two contracts by not properly managing its subcontractors. For the breach of the CR2 contract, the Army claimed $102,294,891 in damages; for the S3 contract, the Army claimed $14,494,740.

The CR2 contract was awarded by the Communications-Electronics Command (CECOM) in 2003 and concerned providing services in the areas of information technology, administration, engineering, logistics, architects, and repairs.

The S3 contract was awarded by the Army Contracting Command at Aberdeen Proving Ground (ACC-APG) in 2006 and concerned providing services in support of operations in similar areas as the CR2 contract.

DCAA audits LMIS

In 2014, the Defense Contract Audit Agency (DCAA) issued its audit report asserting that LMIS had not properly managed its subcontractors. DCAA maintained that a prime contractor must perform the duties of a contracting officer (CO) and a contracting administrative office (COA) for each subcontract that it awards under a flexibly priced contract. The DCCA maintained that these duties included auditing the subcontracts or requesting that DCAA audit the subcontracts. Because of the failure of LMIS to audit its subcontractors or request that DCAA audit its subcontractors, the DCAA identified damages of over $116 million to the government.

Demand for payment and appeal

Relying upon the DCAA audit report, the CO demanded that LMIS pay over $116 million in damages. LMIS promptly appealed this decision to the Armed Services Board of Contract Appeals (ASBCA).

Conclusions of the ASBCA

The DCAA asserted that LMIS, as a government contractor, had an implied duty to audit its subcontractors under FAR § 42.201(a). But the ASBCA found no actual or implied duty to audit subcontractors under Parts 42 or 44 of the Federal Acquisition Regulation (FAR), although it did affirm that section does require the prime contractor to manage the subcontractors. (In other words, managing subcontractors does not require auditing subcontractors.)

Thus, LMIS was not responsible for having to pay the government more than $116 million.

Background about the DCAA

Before 1965, each U.S. military branch had separate contract audit functions and regulations. In 1962, Secretary of Defense Robert S. McNamara instituted the Project 60 to study whether defense contracts could be centrally managed and audited. As a result of the study, the DCAA was established on July 1, 1965.

The DCAA provides audit and financial advisory services to the Department of Defense (DoD) and other federal entities responsible for acquisition and contract administration and operates under direction of the Under Secretary of Defense (C/CFO), who acts as the comptroller of the DoD and its chief financial officer.

Background about the ASBCA

More than 50 years old, ASBCA decides post-award contract disputes between government contractors and the DoD, the National Aeronautics and Space Administration, the Central Intelligence Agency, and other entities with whom the ASBCA has entered into agreements to provide services. The ASBCA functions under the Contract Disputes Act. Most of the disputes involve contracting officer final decisions (COFDs) or the failure of COs to issue such decisions.

Lessons Learned from this decision

1. To paraphrase the colloquialism “It ain’t over till the fat lady sings,” your government contract may not be over until DCAA has done its audit. So be aware of the DCAA and don’t be surprised if its auditors show up.

2. Always talk to your lawyers if you get a demand letter from your CO. In this case, LMIS had a team of knowledgeable government contracting lawyers who were able to articulate an excellent defense of the contractor before the ASBCA.

Some other pointers from the DCAA

As with most other government agencies, the DCAA knows that it can prevent more violations than it can identify and “punish.” So it really does try to keep contractors out of trouble. In visiting their website to prepare this blog post, I gleaned a useful list of common deficiencies that trigger DCAA audits of prime contractors:

  • Failing to determine costs on a monthly basis (at least) and making monthly (at least) records of those costs.
  • Failing to segregate direct and indirect costs.
  • Improper timekeeping.
  • Failing to exclude unallowable costs.
  • Failing to include appropriate contract clauses in subcontracts.
  • Failing to ensure that subcontractor billing is accurate and compliant with the terms of the subcontract.
  • Failing to obtain an adequate incurred-cost submission from the subcontractor.

For more information, see Appeal of Lockheed Martin Integrated Systems, Inc., ASBCA No. 59508, decided December 20, 2016.

Items on this web page are general in nature. They cannot—and should not—replace consultation with a competent legal professional. Nothing on this web page should be considered rendering legal advice.

© 2017



© 2017

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Sunday, 20 May 2018

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