Bold claim: a landmark Federal Circuit ruling shakes up how far government settlements can reach, redefining the power of contracting officers to decide costs in the future. But here’s where it gets controversial: the court says old, long-standing settlements may not guarantee future cost treatment if they don’t fit the exact requirements of the Federal Acquisition Regulation. This decision, Pratt v. Sec’y of Def. (No. 2023-1337; Fed. Cir. Dec. 5, 2025), rejects an expansive view of advance-agreement-like settlements and places fresh limits on a contracting officer’s authority to resolve cost disputes prospectively.
Overview of the decision
The Federal Circuit invalidated a years-old cost accounting settlement between the government and Pratt & Whitney, ruling that the parties could not agree on the future treatment of costs in a way that diverges from the FAR. The ruling came even though the Drag Agreement had settled disputed claims and even though there was a strong public policy favoring settlement enforcement. The court emphasizes that, when a future-cost arrangement resembles an advance agreement under FAR 31.109, it must meet its precise terms, including being in writing, being incorporated into current and future contracts, and stating its duration. Absent these elements, a future-cost agreement may be invalid.
What changed for contracting officers
Previously, a cognizant administrative contracting officer could manage cost issues across the government and authorize broad, forward-looking agreements. The Pratt decision clarifies that the FAR, not broad practice, governs the contracting officer’s authority to fix future cost treatment. If an agreement lacks the required elements of FAR 31.109, it cannot bind the government and may be struck down, even if supported by consideration and even if it resolves disputed claims. The court recognized the public interest in enforcing settlements but held that the source of authority for those settlements is the FAR, and the FAR’s limitations prevail.
The Pratt case in context
Pratt manufactured engines for government and commercial customers. In the 1990s, the government alleged CAS (Cost Accounting Standards) violations and improper cost shifting. A 2006 settlement included two parts: (1) a monetary payment in exchange for a broad release and related terms, and (2) the Drag Agreement outlining future cost treatment, tied to the concept of an advance agreement under FAR 31.109. The Drag Agreement also did not clearly specify duration or incorporate into contracts, which created legal vulnerability.
In 2013, after Pratt’s appeal to the ASBCA, the government argued the Drag Agreement failed to meet FAR 31.109 and was unenforceable. The ASBCA found the Drag Agreement enforceable despite not satisfying all FAR 31.109 requirements, citing that FAR 31.109 is not the only mechanism to resolve future-cost disputes and that settlements deserve enforcement. The Federal Circuit reversed, determining the Drag Agreement invalid because it did not satisfy FAR 31.109’s terms, despite the presence of consideration and a dispute resolution basis.
Five implications for settlements and advance agreements
1) Stricter scrutiny of forward-looking settlements: Contractors should reassess current and pending agreements to see if they conform to FAR 31.109. The government may revisit older deals or reinterpret them as compliant with the FAR, increasing uncertainty.
2) Emphasize compliance with FAR 31.109: In settlements addressing future costs, ensure the advance agreement is in writing, signed by both sides, incorporated into current and future contracts, and includes duration. Plan early on how to embed such terms across multiple contracts.
3) Pressure to litigate may rise: If potential future liabilities loom large, parties might prefer litigation to settlements, since final, binding resolution by Boards of Contract Appeals or courts provides a conclusive outcome.
4) Potential policy remedies: The industry and government may push for statutory or regulatory changes to clarify contracting officers’ authority, possibly removing or revising the incorporation requirement to enable more effective settlements.
5) Pratt’s narrow scope or evolving interpretations: It remains unclear whether this ruling would differ with a single, well-drafted agreement (absent explicit FAR 31.109 references) or if mass-incorporation into federal contracts would alter the outcome.
What this means for you
If you’re involved in government cost disputes, treat forward-looking settlements with caution. Review any past or pending agreements for explicit incorporation into contracts, duration statements, and clear linkage to FAR 31.109. Engage counsel to evaluate whether your arrangements could be impacted by this decision and explore strategies to align future settlements with the FAR while preserving enforceability.
Want to know how your organization should adapt to this shift? Reach out to discuss risk assessments, potential contract amendments, and practical steps to align with the updated standards.
How would you interpret the Pratt ruling in your own contracting practice? Do you believe the FAR should be amended to simplify forward-looking settlements, or should courts maintain strict adherence to its precise terms? Share your thoughts in the comments.
