Does Public Contract Law meets
Accounting ?
A Comparative Analysis of the Judge’
Assessment of Cost Pricing in Litigation on
Contract Performance (France-United
States).
Thierry Kirat
(CNRS, IRISSO-Paris Dauphine)
Laurent Vidal
(Institut André Tunc, Paris 1)
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic and
Regulatory Implications”, Paris, March 16, 2011
1
Introduction : stating the problem
• Judicial reasoning :crucial issue for sociolegal studies and
comparative law.
• Literature in both fields overlooks accounting matters in
judicial reasoning.
• Aim of the presentation: address this issue through a
comparative empirical analysis of public contract cases
before courts in France and the United States.
-> How, if any, French and American judges consider the
assessment of additional costs and additional fees claimed
by firms contracting with a public authority.
-> empirical material :administrative courts records
– USA : General Services Board of Contracts Appeals;
– France : Cours administratives d’Appel & Conseil d’État
T. Kirat, L. Vidal –Workshop
“Innovation in Network Industries:
Accounting, Economic and
Regulatory Implications”, Paris,
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Introduction: the matter
Litigation on Procurement contracts with the
Government
• Strongly regulated contracts (Public Law
Provisions)
– Performance issues
– Delays (due to contractor failures or Gvt decisions)
• Additional works
–
–
–
–
Legal/economic issues
Allocation of cost overruns in fixed-price contracts
Contract equilibrium
Assessment of additional costs
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
3
Summary
Part 1- Judicial styles: relative weight of
legal/formal considerations vs factual/economic
(including accounting) in decisions
Part 2- Computation and proof of compensatable
additional costs in contracts
Conditions of costs imputability : cost pricing
accounting policy
Delay-related costs : accounting methods
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic and
Regulatory Implications”, Paris, March 16, 2011
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Part I – Judicial style - Decisions Analysis
Lexical statistical analysis
- > insights into the language used in
courts rulings:
–Lexical worlds classification
–Factorial analysis
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
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Part 1- Judicial Styles: Lexical classes, GSBCA
Lexical classes (USA, %)
GSA auction bids;
Material events; 8,26
8,59
Price & price
renegotiation; 22,57
Performance
conditions & costs;
30,63
Legal framew ork &
precedents; 29,95
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting,
Economic and Regulatory Implications”, Paris, March 16, 2011
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Part 1- Judicial Styles: Lexical classes, Cours administratives
d’appel & Conseil d’Etat
Lexical classes (France, %)
Contract oversight;
20,84
Financial conditions
of the contract; 24,06
Legal/procedural
elements; 45,42
Technical conditions
of performance; 9,68
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic and
Regulatory Implications”, Paris, March 16, 2011
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Part 1- Specific Judicial Styles
Correspondance factorial analysis exhibits :
•
Correlation of words within a lexical class
•
Level of remoteness between lexical classes
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Regulatory Implications”, Paris, March 16, 2011
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Correlations analysis : GSBCA
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Regulatory Implications”, Paris, March 16, 2011
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Correlations analysis : CAA & CE
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Part 1
Conclusions
- Differential weight of formalist/pragmatic considerations
- Common finality : contract equilibrium (equitable
adjustment/équilibre financier du contrat)
- Specific modalities and judicial reasoning
 Lack of accounting issues in French rulings (including in pretrial internal reports : Gvt Commissioner reports) :
 Pervasive accounting considerations in Federal Regulation
and Public Contracts Law Case-Law in the USA
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic and
Regulatory Implications”, Paris, March 16, 2011
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Part 2 -
Right to "equitable adjustment" and assessment of costs
USA : claims for equitable adjustment are investigated in simultaneous
consideration of the contract’s legal and accounting dimensions
France : claims of cost compensation are investigated in a two-step
process : 1) is the claim legally valid ? 2), if it is the case: which amount
should be allocated ?
-> the American judge proceeds in a synchronous manner, judgment on
the right to compensation being considered at the same time as
judgment on the estimation of costs presented by the claimant.
-> The French administrative judge proceeds in a two steps reasoning :
a) decide on the right to compensation b) then assess the recoverable
amount.
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 1- Cost Pricing Methods
1- Cost Pricing Methods : Accounting policies in
Federal Regulation Provisions and Case-law
Federal Acquisition Regulation (FAR 31.201.3) :
Reasonability, allowability, allocability of costs
Burden of proof : on the Contractors’ shoulders
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and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 1- Cost Pricing Methods
Reasonable costs
A cost is reasonable “(a) (...) if, in its nature and amount, it does not exceed that
which would be incurred by a prudent person in the conduct of competitive
business. Reasonableness of specific costs must be examined with particular care in
connection with firms or their separate divisions that may not be subject to
effective competitive restraints. No presumption of reasonableness shall be
attached to the incurrence of costs by a contractor. If an initial review of the facts
results in a challenge of a specific cost by the contracting officer or the contracting
officer’s representative, the burden of proof shall be upon the contractor to
establish that such cost is reasonable. (b) What is reasonable depends upon a
variety of considerations and circumstances, including— (1) Whether it is the type
of cost generally recognized as ordinary and necessary for the conduct of the
contractor’s business or the contract performance; (2) Generally accepted sound
business practices, arm’s length bargaining, and Federal and State laws and
regulations; (3) The contractor’s responsibilities to the Government, other
customers, the owners of the business, employees, and the public at large; and (4)
Any significant deviations from the contractor’s established practices.”
-> Use of standards
-> reference to usual practices
=> Necessity of interpretation of Regulation in specific cases + precedents
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Part 2 - 1- Cost Pricing Methods
Methods
calculation of costs incurred (and their
eventual recovery) will be done according to
• total-cost method
• modified total-cost method
• Jury-verdict method
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Part 2 - 1- Cost Pricing Methods
1. total-cost method
….used when the appellant has not established or was unable to
establish an accounting analysis from the outset of the contract and
was unable to determine the degree to which the costs incurred
resulted from the prescribed change. Thus, the price originally
stipulated is subtracted from the total cost of execution. The difference
constitutes the cost of the required change. This method supposes that
the costs incurred by the entrepreneur were reasonable, that the
original offer was realistic and that the increase in performance costs
was in no way the responsibility of the entrepreneur…. the federal
government does not at all favor this quantification technique and
employs it only when it is the only option, for example, in the case of a
change in the contract resulting from defective specifications or various
disruptions that entail losses in efficiency, reorganization of tasks,
material losses, etc.
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and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 1- Cost Pricing Methods
2. Modified total-cost method (“should-have-cost method”)
• retrospective analysis of the contract
• includes facts for which the entrepreneur is responsible
but excludes costs for which the government is
responsible
-> reassessment of the costs in a backward-cost analysis,
-> more precise view on costs allowable/allocable to the
contract
-> Exclusion of additional costs due to contractor’s inefficiencies
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and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 1- Cost Pricing Methods
3. Jury-verdict method
• employed when judges cannot decide between two parties’ claims with
respect to the elements of proof they provide.
• Claimant must
a) demonstrate the impossibility to determine a well-grounded
amount for compensation.
b) Provide proof:
(1) that the modification of the contract was prejudicial in terms
of costs,
(2) that no other method of calculation of costs was feasible
(3) that it is possible to reasonably and equitably approach the
amount of costs incurred.
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 2. Delay-related costs
2. Delay-related costs
The problem : Overhead costs.
Imputation to a contract delayed due to Gvt
decision or failure
The solution : « Eichleay formula»
[Eichleay Corp.; ASBCA, No. 5183, 60-2 BCA
2688] (1960)
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 2. Delay-related costs
The problem : Overhead (G&A) indirect costs. -> Changes in Case-Law since 1954.
1° Carteret Work Uniforms, ASBCA No 1647,
August 20, 1954
• Incurred overhead rate – Normal overhead
rate = Excess rate during delay period
• Excess rate X Total base costs during delay =
Unabsorbed overhead period
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 2. Delay-related costs
Carteret Work Uniforms :
-> contract performance required the use by
the administration’s partner of the whole
factory.
-> no doubt that the G&A costs were directly
due to the contract performance
-> Generous compensation scheme
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and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 2. Delay-related costs
2° Allegheny Sportswear Co., ASBCA, No 4163,
March 25, 1958
• Incurred overhead rate during actual period
– Normal overhead rate for projected period
= Excess rate
• Excess rate X Contract base costs =
Unabsorbed overhead
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 2. Delay-related costs
Allegheny Sportswear Co.
-> if the rate of overhead cots is higher than
predicted, the difference is reconciled with
the basic costs in the contract to determine
the unabsorbed overhead
-> take into account actual vs predicted period
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and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 2. Delay-related costs
Limits of these accounting doctrines:
-> excessivelly tolerant
-> do not take sufficiently precise account of the
overhead due to a delayed or interrupted
contract performance
New Rule : Eichleay Corp., ASBCA No 5183, July
29, 1960
Still in use, with minor changes (FAR, DCAA, US
Court of Appeals, Court of Fed. Claims)
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 2. Delay-related costs
3° Eichleay basic formula :
•
Contract billing
/
Total billings for actual contract period X Total overhead
incurred during contract period = Overhead allocable to contract
•
Allocable overhead / Actual days of performance = Overhead allocable to
contract per day
• Daily overhead X Number of days of delays =
Unabsorbed overhead
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
25
Part 2 - 2. Delay-related costs
Eichleay Formula :
- Assessment of overhead allocable to the
contract in a normal course of performance
- Assessment of a per diem overhead
allocable to the contract
-> more precise assessment of overhead in
case of delay in performance
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 2. Delay-related costs
Eichleay : controversy between courts &
Gvt/Governmental agencies :
1° Gvt (DoD) statement in Propserv, Inc. ASBCA
N°20768, 1978:
G&A costs are relatively stable and thus due to the
entirety of the firm’s operations, and impossible to
distinguish and assign to particular tasks.
ASBCA Decision : deny the DoD statement :
“We find the “Eichleay” method employed by the
appellant to allocate these expenses as a function of
time to be particularly appropriate in cases of
suspension of work where the direct costs incurred
are minimal or nonexistent”
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
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Part 2 - 2. Delay-related costs
Eichleay : controversy between courts &
Gvt/Governmental agencies :
2° DCAA : recommended that certain
nondeductible costs, such as bad debts,
advertising, contributions and entertainment,
be excluded from the general fixed
expenditures used in the calculation of the
daily rate of fixed expenditures incurred by the
firm.
-> recommandation enforced by DOTCAB
(Department of Transportation Contract
Appeals Board)
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
28
Part 2 - 2. Delay-related costs
Eichleay : controversy between courts &
Gvt/Governmental agencies :
3° GSBCA restriction in Capital Electric, Feb 17,
1983
-> « a contractor claiming recovery of
underabsorbed overhead must also account for
the possible benefits of direct costs deferred to
later cost accounting periods that might result
in a balancing overabsorption »
-> intertemporal compensation between
overhead & direct costs
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
29
Part 2 - 2. Delay-related costs
Eichleay : controversy between courts &
Gvt/Governmental agencies :
Capital Electric Rule :
-> overruled by the US Court of Appeals (Fed.
Cir.)
-> enforced by the Court of Federal Claims for
a (short) time – then alignment with USCA
Rulings
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
30
Part 2 - 2. Delay-related costs
Eichleay : controversy between courts &
Gvt/Governmental agencies :
BCA Strategies following the Capital Electric
Rule overruling:
- Delayed work must on a critical path
- Burden of proof on claimant’ shoulders :
proof that damage suffered are the result of
disruption or delay
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
31
Part 2 - 2. Delay-related costs
Eichleay : controversy between courts &
Gvt/Governmental agencies :
Federal appeal Courts (Ct Fed. Cl. / USCA Fed Cir.)
Strategies following the Capital Electric Rule
collapse : convergence on claimant
demonstration
1. Unreasonable lenght of Gvt’s delay
2. Gvt proximate cause of delayed performance
3. Injury
4. Non concurrent delay on the part of
contractor
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
32
Part 2 - 2. Delay-related costs
Lessons (1)
• Explicit BCA’s doctrines of cost accounting
• Oftenlly overruled by federal courts
• Compromize between BCA and Federal
courts
• Law firms, lawyers, Gvt Agencies : provide
guidelines on the indirect costs issue in
delayed contracts with the Gvt
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
33
Part 2 - 2. Delay-related costs
Lessons (2)
• French Administrative Courts : cost
accounting issue = dark side of the moon
• Formalism rather than pragmatism in courts
rulings and, before all, judicial decisiontaking process
• No accounting considerations in
Commissioner of the Gvt
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
34
Conclusion
• Comparative litigation analysis: provide insights
into judicial styles and « rationality »
• American BCA judges : former « contracting
officers » trained in law, economics, and
accounting
• French Judges : trained in law faculties (firstsecond levels administrative courts) and School
of Public Administration (Conseil d’Etat)
T. Kirat, L. Vidal –Workshop “Innovation in Network Industries: Accounting, Economic
and Regulatory Implications”, Paris, March 16, 2011
35