In 1984, Steve Jobs introduced the Macintosh personal computer to the United States, Arnold Schwarzenegger hit the silver screen as The Terminator, and Pratt & Whitney began its now four-decade-long fight with the Defense Contract Management Agency (DCMA). The battle continues, as the Federal Circuit’s latest decision in what may be the longest-enduring cost‑accounting dispute in the history of government contracts—Secretary of Defense v. Pratt & Whitney, 160 F.4th 1224 (Fed. Cir. 2025)—still has not resolved the underlying Cost Accounting Standards (CAS) issues.[i] The decision, however, may have broader consequences for the entire government contract community, calling into question the stability of negotiated settlements, the limits of contracting officer (CO) authority, and the risks contractors face when the government later decides an agreement was “illegal” from the start. In this blog, PilieroMazza explores how the Federal Circuit’s decision may impact the CO’s authority to settle claims and what that means for your bottom line.
The Decision May Narrow CO Authority to Bind the Government
Without getting into 40+ years of backstory, the highlight is that the Federal Circuit’s most recent decision concludes that the 2006 Accounting Practices Agreement (APA) between Pratt & Whitney and DCMA—intended to resolve both retrospective and prospective cost‑allocation issues—was invalid because it did not comply with the procedural requirements of FAR 31.109.
Specifically, the Federal Circuit held the APA unenforceable because it was not incorporated into contracts and did not state its duration, as required by FAR 31.109, despite being:
- negotiated by the Divisional Administrative Contracting Officer (DACO);
- approved by the DACO’s supervisor;
- supported by consideration; and
- accompanied by a DCAA disposition notice explaining why the agreed‑upon treatment was equitable.
This holding suggests that any agreement addressing future cost treatment is automatically an “advance agreement,” meaning it must strictly comply with FAR 31.109’s procedural requirements. This is a dramatic shift as, historically, contractors and COs alike relied on negotiated resolutions like the APA to address prospective cost issues without treating them as formal advance agreements under FAR 31.109.
The Decision Underscores that Contractors Bear the Risk of Government Mistakes in Contract Formation
The court reaffirmed a harsh reality for government contractors: if a CO exceeds their authority—even if they do so by mistake—the government is not bound, but the contractor is. The ASBCA warned that this approach would make advance agreements “illusory,” but the Federal Circuit disagreed. Contractors must now assume that any procedural defect, even very minor ones, may allow the government to repudiate its obligations years later, even if the contractor already performed or paid consideration.
The Decision Undermines Confidence in Settlement Agreements
The Federal Circuit acknowledged the “strong public interest in enforcing settlements,” especially in complex disputes. Still, it nevertheless invalidated the APA based solely on procedural noncompliance with FAR 31.109. This creates a troubling precedent, as existing advance agreements may be vulnerable to challenge if they contain even minor FAR deviations, contractors may hesitate to enter into settlements involving prospective cost treatment, and agencies may be reluctant to negotiate advance agreements and cost-related settlements for fear they will later be deemed invalid.
Key Takeaways
Given the implications of Pratt & Whitney, contractors should take the following proactive steps to protect themselves:
- Treat any prospective cost agreement as a FAR 31.109 advance agreement and ensure compliance by incorporating it into current and future contracts, including applicability and duration statements, as well as affirmative documentation of the CO’s authority to enter into the agreement.
- Conduct a risk review of existing advance agreements to identify any agreements that may be vulnerable to challenge based on procedural defects, and work with legal counsel to determine the best steps to protect those agreements.
- Always thoroughly document the government’s intent. This advice is evergreen—Federal Circuit decision or not, it is always critical to ensure you are diligent about creating and retaining contemporaneous documentation of the CO’s statements and the government’s intent. In this context, if the government later tries to disavow a settlement agreement, having that documentation is key.
- Consider alternative negotiation strategies that minimize your exposure like separating retrospective settlements from prospective cost treatment. Your legal counsel can help advise you with strategies that you can use, provided the government agrees to try to reduce risk.
- Prepare for increased litigation risk. There is some concern that this decision may embolden agencies to revisit longstanding agreements. If you have an agreement in place that could be at risk, it is critical that you engage counsel early to assess that risk and come up with a plan so you are not caught unaware.
Should you have any questions or concerns about your company’s settlement agreements as the dust from this Federal Circuit decision settles, please contact Lauren Brier, Josie Farinelli, or another member of PilieroMazza’s REAs, Claims, and Appeals or Government Contracts practice groups.
[i] The Federal Circuit’s decision did not resolve the CAS 418 issue, stating that it lacked jurisdiction to do so because the ASBCA had not yet issued a final decision on quantum. As such, this blog does not address this point of contention between the parties to the appeal.
