ASBCA Grants $253 Million Northrop Post-Retirement Benefits Claim

August 4, 2017

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Pension and other post-retirement benefit expenses have long constituted a substantial obligation on the part of contractors under cost-type contracts and are often the subject to disputes with the government as to the calculation and allowability of such costs. While court and board decisions regarding pension-related disputes have tended to be a mixed bag, the decisions have more often sided with the government. However, the Armed Services Board of Contract Appeals’ (“ASBCA” or “Board”) July 13, 2017, decision in Northrop Grumman Corp., ASBCA No. 60190, may signal a more favorable trend for contractors in connection with such issues. In this case, Northrop filed a claim for $253 million in retiree health benefits over an 11-year period from 1995 to 2006, which the Defense Contract Management Agency (“DCMA”) disallowed because Northrop used an outdated accounting practice for accruing such costs under the relevant Federal Acquisition Regulation (“FAR”) cost accounting requirements. Specifically, DCMA asserted that during the relevant time period, Northrop was required to use the accrual method under Financial Accounting Standard (“FAS”) 106 which requires that anticipated health expenses be fully accrued at the time of a retiree’s eligibility for those benefits, rather than the non-FAS 106 method used by Northrop which does not factor in the full costs until the they are incurred. As a result, the non-FAS 106 accrual method used by Northrop to calculate retirement health benefit costs began low but increased over time, thus resulting in a $253 million claim over the period for the retirement health benefits that were ultimately incurred. Accordingly, because Northrop deviated from the accrual standard under the FAR, and did not fully fund health benefit costs from the start, DCMA denied the claim, finding the costs to be unallowable because Northrop did not comply with the FAR on these calculations.

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