(From time to time, we have discussed cases that address the allowability of common costs of doing business. In a recent decision, the Court ruled legal costs incurred in defending a wrongful termination was unallowable because the government contract in question did not "benefit" from these costs. Since this case was decided two things have happened: (1) we are seeing a significant increase of auditors questioning costs of both consultants and lawyers as well as in-house effort related to efforts the auditors are claiming does not "benefit" the government and (2) in almost unprecedented numbers, we are seeing a deluge of commentaries on this case by government specialists who, without exception, are criticizing the decision. In the light of this "hot topic", we have summarized the case and presented a summary of a sample of commentaries we have read.)

In Caldera V Northrup Worldwide Services, Inc the contractor fired three employees working on a government cost type contract who subsequently filed a civil suit alleging they were wrongfully terminated because they refused to fraudulently bill the government. A jury found in their favor and awarded them $1.8 million in damages. When the contractor included the legal costs in defending this case in their G&A pool the government disallowed them asserting the results of the civil suit made the costs unallowable. The contractor appealed the decision claiming the defense of the wrongful termination was a prudent business decision and the costs were both allowable and allocable to the contract as a cost of doing business. The Appeals Board agreed with the contractor and found reasonable legal costs associated with defending itself against a wrongful termination to be both allowable costs for the overall operation of the business and an allocable cost of the contract since such costs are a necessary part of performing the contract.

The Government appealed the decision and the Federal Court reversed the Board decision. The Court’s reasoning for disallowing the legal costs were:

Citing FAR 31.201-4 and two prominent cases, Lockheed Aircraft Corp v. United States and FMC v. United States, the contractor failed to show that there was a "benefit" to the government for the legal costs.

The original board decision erred in failing to consider the outcome of the civil case, stating that there can be no benefit to the government in a contractor’s defense of a wrongful termination lawsuit where the contractor is found to have retaliated against the employees for refusing to defraud the government.

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