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  • Question

    Even if FAR 52.242-3 was inadvertently not included in the contract clause section of a contract, if the contract was a cost reimbursable contract valued over $500K, wouldn't the penalty at FAR 42.709 still apply for costs claimed under that contract that were detemined to be expressly unallowable? Would the mere omission of a clause deny the Government its right to assess a penalty if all other conditions for doing so were in effect.


    Answer

    Background
    G.L. Christian and associates v. US (375 U.S. 954, 84 S. Ct. 444, 11 L. Ed.2d 314 (1963)), is a 1963 United States Federal Acquisition Regulation (FAR) court case which has become known as the Christian Doctrine. The case held that standard clauses established by regulations are to be considered included in every Federal Contract, because the regulations in question implement Public Law. This was true even in those cases where the clause in question was inadvertently omitted by the Government Contracting Officer.

    In 1993, the U.S. Court of Appeals for the Federal Circuit (Federal Circuit), through its rulings in General Engineering & Machine Works v. O'Keefe, 991 F.2d 775 (Fed. Cir. 1993), and, S.J. Amoroso Const. Co. v. United States, 12 F.3d 1072, 1075 (Fed. Cir. 1993) modified the application of the Christian Doctrine to include only mandatory clauses which express a “significant or deeply-ingrained strand of public procurement policy.”


    Therefore, the test for whether or not the clause in question (FAR 52.242-3, Penalties for Unallowable Costs) should be considered present in the contract consists of two basic criteria:

    1)  Is the clause a mandatory clause for the type of contract awarded?
     
    2)  Does the clause meet the requirement of a “significant or deeply-ingrained strand of public procurement policy”?

    Analysis

    As shown in the original question above, the affected contract is Cost Reimbursable and FAR 52.242-3 was inadvertently omitted from the contract. The question uses the $500,000 threshold; however, the existing threshold is $700,000. It is assumed that the question is being addressed for a contract that exceeds the current threshold of $700,000 or that the $500,000 threshold applies to an older contract; otherwise the clause would not be applicable. Additionally, the question states that the clause was omitted, which is being interpreted for purposes of this discussion as entirely omitted and not incorporated by reference, as is allowed by the FAR.
     
    42.709-6 -- Contract Clause.
    Use the clause at 52.242-3, Penalties for Unallowable Costs, in all solicitations and contracts over $700,000 except fixed-price contracts without cost incentives or any firm-fixed-price contract for the purchase of commercial items. Generally, covered contracts are those which contain one of the clauses at 52.216-7, 52.216-16, or 52.216-17, or a similar clause from an executive agency’s supplement to the FAR.
     
    As shown in FAR 42.709-6 above, the requirements of 52.242-3 cover all contracts other than FFP (without cost incentives) and FFP for commercial items, and, additionally the FAR Clause Matrix lists FAR 52.242-3 as Required when Applicable. Again, for purposes of this question the assumption is that the threshold is met ($700k) or that the prior threshold ($500k) applies. Therefore, based on the paragraph above, the mandatory clause criterion from the background section is assumed to be met.
     
    The second criterion from the background section can be interpreted more subjectively; however the idea can be made expressed using: 1) general notions present in procurement regulations and, 2) the existing precedents found in the actual case law related to the Christian Doctrine.
     
    Because Government contracts are, at their core, issued on behalf of the taxpayer population, certain overarching principles regarding the public good must always apply. When contracts specify that all contract costs shall be reimbursed, the public nature of the contract requires that restrictions be imposed on those areas that are considered by the public to be unacceptable. (Expressly unallowable) In other words, the idea that certain costs are specifically forbidden from being present in Government reimbursed costs is widely and deeply held within the populace, and, worthy of being penalized when they are included.
     
    Additionally, in General Engineering & Machine Works v. O'Keefe, the Court specifically addressed the spending of Government (taxpayer) money as follows:
     
    “….by requiring separate cost pools deters such double payments and thus discourages the unnecessary and wasteful spending of government money. This purpose is sufficiently ingrained in public procurement policy to properly trigger use of the Christian Doctrine. Christian, 320 F.2d at 355 ("[T]he general policy against subjecting the Government to liability for unearned profits on military contracts is strong and important.").”
     
    Because expressly unallowable costs are usually equated with being wasteful and/or unnecessary, the Boards or the Court may "read in the clause". Discouraging these costs in Contractor claims by using appropriate penalties can be interpreted as sufficiently ingrained in public policy, and therefore the probability is high that the Board or Court would decide that the clause should be read into the contract. Thus, 52.242-3 could be logically be considered present in the contract and penalties can be imposed by the Contracting Officer.


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