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BP Business Economic Loss Claim Appeal 2017-486: Professional Services Methodology Applied to Computer Design Company

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The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms

Claimant provides computer design services in Metairie, Louisiana. The Settlement Program denied this Claim on the basis that Claimant fails the V-Shaped Revenue Pattern because Claimant failed to provide sufficient documentation to meet the second or third prongs of the Decline-Only test. Claimant appeals, arguing that the Settlement Program improperly applied Policy 495’s Professional Services Methodology to this Claim.
Here the Settlement Program determined that financials were not properly matched. Policy 495 sets forth several specialized methodologies, e.g., the “Professional Services Methodology,” for claims involving specific industries that present matching problems which cannot be corrected using Annual Variable Margin (“AVM”) methodology and instead require specialized treatment. Policy 495 identifies a series of NAICS codes to which the Professional Services Methodology will be applied, absent certain case-specific exceptions.
The NAICS code which the Settlement Program applied to Claimant — 541519 (Computer Design) falls within the Professional Services Methodology. Claimant regularly records revenue in the months following when services are provided. By application of the Professional Services Methodology, the Settlement Program reallocated
revenue to the months when the associated services were provided based on the case summary information provided by Claimant. Upon application of the Professional Services Methodology, the Settlement Program found that Claimant’s financial data fail to meet the revenue pattern requirements of Exhibit 4B’s V-Shaped Revenue Pattern Tests.
Claimant does not dispute that it has failed to provide documentation sufficient to meet the second and third prongs of the Decline-Only Test. The second prong requires that a Claimant submit objective, third-party documentation showing that factors outside of Claimant’s control prevented the recovery of revenues in 2011. The third prong of the Decline-Only Test — i.e., the “Customer Mix Test” –requires that Claimant show a 10% decline in the share of total revenue generated by customers
in Zones A-C during any 3-month time period from May-December 2010 as compared to the same period in 2009. The only relevant inquiry on appeal, then, is whether Claimant has shown that its financial data meet one of the V-Shaped Revenue Pattern Tests in Exhibit 4B.
Claimant asserts that it sends monthly invoices to all clients for the corresponding services performed (i.e. revenue earned) within 30 – 31 days of such invoice and subsequently receives payment in the same month invoices are rendered, i.e. the month after services are performed. Also the Claimant records revenue on the cash basis of accounting (i.e. when revenue is received). Accordingly, any given revenue amount recorded on the P&L reflects services performed within 30 – 31 days,
at most, says Claimant. As stated above, Policy 495 includes various industry-specific economic loss frameworks, including the AVM methodology, also, according to Claimant, referred to as the “Short Earnings Cycle” methodology. AVM utilizes the claimant’s contemporaneously recorded revenue and allows revenue  adjustments/allocation only in the event of accounting “errors.” Claimant contends that though Policy 495 does not explicitly define a “Short Earnings Cycle,” recent Appeal Panel decisions (and the corresponding analyses performed by the Settlement Program) indicate that a short earnings cycle is typically synonymous with a monthly earnings cycle. Alternatively, Claimant contends that the Professional Services methodology is designed for claimants with “considerable” timing differences between the month for which revenue is recorded on the monthly Profit & Loss Statements and the month(s) during which services were performed to generate such revenue. This framework allows for revenue adjustments/allocations based on several allocation methods (i.e. straight-line time-entry records, etc.).
Claimant asserts that although Policy 495 does not explicitly define “considerable” timing differences, various examples included in Policy 495 and recent Appeal Panel decisions (and the corresponding analyses performed by the Settlement Program) indicate that considerable timing differences represents time periods of greater than one month. Claimant declares that because the Claimant is on the cash-basis of accounting, Claimant invoices its clients on a monthly basis for the corresponding revenue earned in the preceding month, and subsequently receives and records revenue in the same month invoices are rendered. Thus, the Claimant operates within a “Short Earnings Cycle.” Accordingly, contends Claimant, the appropriate economic framework for this Claimant is the AVM methodology. Moreover, because the Claimant operates within a short earnings cycle, there are no “considerable” timing differences between the month when revenue is recorded on the Claimant’s monthly P&L
statements relative to the month when services were performed to earn such revenue. Accordingly, asserts Claimant, the application of the Professional Services methodology is clearly inappropriate and improper for this Claimant. Claimant refers to Appeal Panel Decision 2016-1129 which relates to a claimant that “invoices customers on a monthly basis for revenue earned in the preceding month and recognizes revenue when cash is received… Most of the claimant’s customers remit payment within 30-45 days of the invoice.” Such circumstances, says Claimant, are almost identical to those specific to the Claimant in this appeal.
In processing the claim referenced in Appeal Panel Decision 2016-1129, the Settlement Program stated: “Although this claim was classified under a Professional Services NAICS code, the DWH Accountant has adopted the Annual Variable Margin methodology. Based on our understanding of the Claimant’s business, the types of engagements performed, and the claimant’s periodic billing, DWH accountant determined revenue recognized to be a fair indicator the claimant’s business operations and therefore, the AVM methodology was applied.” Despite the proper application of AVM for the claimant referenced in Appeal Panel Decision #2016-1129 the
Settlement Program, according to Claimant, incorrectly applied the Professional Services framework of Policy 495 to this claim. Thus, asserts Claimant, in doing so, the Settlement Program contradicted its own processing of claims with similar, if not identical, billing procedures and revenue recognition, opposed prior rulings of the DWH Appeals Panel, and utilized revenue for causation purposes which was not the best indicator of the Claimant’s business operations.
However, Claimant in Appeal Panel Decision 2016-1129 is a land management consulting business in which the Claimant invoices customers on a monthly basis for revenues earned in the preceding month and recognizes revenue when cash is received. The Claimant’s engagements in that appeal are short term in nature (less than 30 days long). The Claimant earns revenue by charging an hourly rate to clients for home management services or, in some cases, is compensated with a percentage of income generated from the land being managed, which is also invoiced monthly. Most of the Claimant’s customers remit payment within 30-45 days of the invoice.
The Claimant in the present appeal provides services lasting 7 to 30 days, depending on the job. Revenue is recognized on a cash basis of accounting in which jobs are invoiced at completion and payments are received within 30-31 days. As the Claimant records revenue in the month(s) subsequent to work being performed, in order to achieve sufficient matching, DWH Accountant applied the Professional Services Methodology per Policy 495. Policy 495 provides that: “…a claimant with a given NAICS code will not automatically be assigned to a given methodology by virtue of the NAICS code if, in the judgment of the Claims Administrator’s office, there are factors that indicate that revenues and expenses would be more sufficiently matched by applying an alternative methodology. As a result, some businesses within a certain three-digit NAICS Subsection may be treated under a different methodology from others in the same Subsection.”
Here the DWH Accountant exercised professional judgment and applied the Professional Services Methodology per Policy 495. There is no abuse of that discretion here and for all of the reasons stated above Claimant’s appeal is denied.

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