EMPLOYEE-RELATED LITIGATION AND SETTLEMENT COSTS: Summary
1. The degree of allowability of litigation costs depends on whether it is initiated by the government or a third party. When initiated by a third party, litigation costs are governed by general rules of allowability and FAR 31.205-33, “Professional and Consultant Costs”, which are generally allowable. When initiated by the government, allowability of litigation costs are governed by FAR 31.205-33 and FAR 31.205-47, “Costs Related to Legal and other Proceedings” which generally provides that such costs are unallowable unless the contractor prevails in the litigation (limiting recovery to 80% of otherwise reasonable costs). Relevant case law recognizes the reasonableness standard is a critical overlay to these cost principles. In at least two cases, legal fees were allowable in spite of an adverse judgment when it was demonstrated they were based on what a prudent business person would incur.
2. As for settlements or adverse judgments, costs of backpay for work actually performed, even if resulting from a violation of law, are clearly allowable. Costs for work not performed, along with fines and penalties are unallowable. Otherwise, the costs of paying judgments or settlements may be allowable. If it is clear that a contractor has violated the law, it is more difficult to recover resulting settlement costs than if it is less certain. Further, settlement costs and judgments are more likely to be allowable if they are compensatory rather than punitive. Accordingly, the best opportunity for recouping costs rests in early settlement, prior to judgment or damaging findings with the payment being characterized as compensatory if possible.
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