1. 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) 1 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

2. 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 dAppel & Conseil dÉtat T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011 2

3. 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

4. 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 4 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

5. Part I – Judicial style - Decisions Analysis Lexical statistical analysis - > insights into the language used in courts rulings: – Lexical worlds classification – Factorial analysis 5 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

6. Part 1- Judicial Styles: Lexical classes, GSBCA T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011 6

7. Part 1- Judicial Styles: Lexical classes, Cours administratives dappel & Conseil dEtat T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011 7

8. Part 1- Specific Judicial Styles Correspondance factorial analysis exhibits : Correlation of words within a lexical class Level of remoteness between lexical classes 8 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

9. Correlations analysis : GSBCA T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011 9

10. Correlations analysis : CAA & CE T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011 10

11. 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 pre- trial internal reports : Gvt Commissioner reports) : Pervasive accounting considerations in Federal Regulation and Public Contracts Law Case-Law in the USA 11 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

12. Part 2 - Right to "equitable adjustment" and assessment of costs USA : claims for equitable adjustment are investigated in simultaneous consideration of the contracts 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. 12 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

13. 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 13 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

14. 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 officers 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 contractors business or the contract performance; (2) Generally accepted sound business practices, arms length bargaining, and Federal and State laws and regulations; (3) The contractors responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and (4) Any significant deviations from the contractors established practices. -> Use of standards -> reference to usual practices => Necessity of interpretation of Regulation in specific cases + precedents 14 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

15. 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 15 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

16. 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. 16 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

17. 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 contractors inefficiencies 17 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

18. 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. 18 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

19. 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) 19 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

20. 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 20 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

21. Part 2 - 2. Delay-related costs Carteret Work Uniforms : -> contract performance required the use by the administrations partner of the whole factory. -> no doubt that the G&A costs were directly due to the contract performance -> Generous compensation scheme 21 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

22. 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 22 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

23. 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 23 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

24. 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) 24 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 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 25 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

26. 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 26 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

27. 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 firms 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 27 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 : 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) 28 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 : 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 29 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 : 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 30 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 : 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 31 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 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 Gvts delay 2.Gvt proximate cause of delayed performance 3.Injury 4.Non concurrent delay on the part of contractor 32 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 (1) Explicit BCAs 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 33 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

34. 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 decision- taking process No accounting considerations in Commissioner of the Gvt 34 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011

35. 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 (first- second levels administrative courts) and School of Public Administration (Conseil dEtat) 35 T. Kirat, L. Vidal –Workshop Innovation in Network Industries: Accounting, Economic and Regulatory Implications, Paris, March 16, 2011