Justice Muse

According to the settlement agreement, Booz Allen created and maintained indirect cost pools that included comingled costs supporting both (i) commercial and/or international contracts and (ii) government contracts and subcontracts, and, as a result, allocated indirect costs disproportionately between commercial and/or international contracts and government contracts and subcontracts, and thus were not in compliance with cost accounting standards or the FAR. In particular, the Government argued that the inappropriately allocated costs included costs identifiable as commercial and/or international costs, burdens applied to such costs (including but not limited to G&A, fringe, and intermediate cost allocations), and directly associated costs. The Government further alleges that Booz Allen submitted inaccurate and/or misleading statements regarding the methods by which it accounted for, and the nature of, indirect costs supporting its commercial and/or international business.

This is an incredibly interesting settlement because it implicates cost accounting standards and the way in which indirect costs are allocated. Under Cost Accounting Standard (“CAS”) 418, contractors must be consistent in the way that they classify costs as direct or indirect. CAS 418 also requires that contracts maintain a written statement of accounting policies and practices for classifying direct and indirect costs. CAS 418 also establishes criteria for accumulating indirect costs in homogenous indirect cost pools and provides guidance on allocating indirect cost pools to cost objective in reasonable proportion to the beneficial or causal relationships of the pooled costs to cost objectives. 

It is important to note that, in these highly technical cases, the Government often seeks to avoid bringing cases that simply turn on a fairly nuanced violation of the law: the False Claims Act is not a breach of contract statute, but rather a fraud/punitive statute. The Government generally seeks to penalize clearly reprehensible conduct, and, in some instances, in highly technical cases, the Government is faced with whether the Government prevailing theory reads more like a breach of contract claim rather than a fraud claim. It doesn’t mean that the DOJ will necessarily shy away from highly technical cases. (Of course, not!)  But, that sort of consideration, does come into the calculus when evaluating the litigation risk associated with a case. Nonetheless, that does not appear to be the case in this instance. Indeed, here, the DOJ alleges that Booz Allen blatantly violated CAS 418 and FAR by allocating costs that clearly pertained to commercial and international contracts. 

Likewise, given the nature of the allegations, I would also be interested to see the scienter evidence associated with this case. According to DOJ’s theory of the case, how long did Booz Allen know about this issue? In DOJ’s view, were the violations were so flagrant that Booz Allen’s conduct amounted to at least recklessness? 

Conversely, the Government alleges that Booz Allen submitted inaccurate and/or misleading statements about its methods. So, I’d be interested to know what government audits had previously revealed and whether the contracting officer(s) had knowledge of Booz Allen’s method of cost allocation, which would obviously negate scienter and falsity.

The link to the press release is provided here.

https://www.justice.gov/opa/pr/booz-allen-agrees-pay-37745-million-settle-false-claims-act-allegations