In Raytheon Co., ASBCA No. 57743, 17-1 BCA ¶ 36724, the Armed Services Board of Contract Appeals (ASBCA) held that certain Raytheon claimed salary expenses were associated with lobbyists and, therefore, such costs were expressly unallowable and subject to penalties (this first decision is further discussed here). Raytheon moved the ASBCA for reconsideration. Recently, on reconsideration, the ASBCA upheld its decision that, notwithstanding the fact that the lobbying cost principle (FAR 31.205-22) does not name or state that salary or compensation costs are unallowable, Raytheon's claimed salary expenses to compensate lobbyists are expressly unallowable lobbying costs.

Raytheon sought reconsideration of the earlier decision, asserting that while salary expenses are "directly associated costs" of lobbying costs, salary cannot constitute expressly unallowable costs because the salary is not rendered unallowable as a "specific selected cost[]." FAR 42.709-1 permits penalties only upon costs rendered expressly unallowable under "a cost principle in the FAR, or an executive agency supplement to the FAR, that defines the allowability of specific selected costs." (emphasis added). The Raytheon salary expenses, however, are determined unallowable because the costs constitute "directly associated costs" of lobbying costs, requiring a reading of FAR 31.205-22 and FAR 31.201-6 together.

The ASBCA acknowledged that FAR 31.205-22 does not expressly state that salary and compensation costs for lobbying personnel are unallowable. However, the ASBCA reasoned that by "application of common sense" salary costs are unallowable costs associated with expressly unallowable lobbing costs even though salary or compensation is not named in FAR 31.205-22 because FAR 31.205-22 is not dispositive of allowability. Relying on FAR 31.204(d) (which provides that not every element of cost is covered in FAR 31.205 and that allowability determinations should be based on the principles and standards in FAR subpart 31.2 and the treatment of similar or related selected items), the ASBCA held that "[r]eading FAR 31.201-6(a), FAR 31.201-6(e)(2) and FAR 31.205-22(a) together, the salary costs of Raytheon's employees who engaged in proscribed lobbying activities are named and stated to be unallowable."

The ASBCA's approach is problematic. Specifically, its reliance on FAR 31.204(d) to read various portions of the FAR subpart 31.2 together (including provisions outside FAR 31.205) directly conflicts with both the definition of "expressly unallowable costs" and the regulation governing the assessment of penalties. An expressly unallowable cost is "a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable." FAR 31.001 (emphasis added). Moreover, FAR 42.709-1 permits penalties only when a contractor claims a cost that is "expressly unallowable under a cost principle in the FAR, or an executive agency supplement to the FAR, that defines the allowability of specific selected costs." (emphasis added).

The ASBCA's approach also creates uncertainty for contractors. The ASBCA, in reaching its conclusion that salaries of lobbyists are expressly unallowable costs despite the fact that FAR 31.205-22 does not state salaries are unallowable, distinguishes its prior decision (Raytheon Co., ASBCA No. 57576, 15-1 BCA ¶ 36043) that bonus and incentive compensation (BAIC) did not constitute expressly unallowable salary expenses in the context of public relations and advertising costs because "BAIC cost is an item or type of cost, but it is not specifically named and stated as unallowable under FAR 31.205-1." The ASBCA, thus, held that "[w]hile portions of 'salaries' and 'fringe benefits' are stated as unallowable, the government, as claimant, has not shown that BAIC constitutes either one." This creates uncertainty as to when the ASBCA will apply the FAR 31.204(d) framework to read various portions of the FAR subpart 31.2 together to determine costs are expressly unallowable, fostering an environment in which penalties may be assessed against contractors for a broad array of contractor costs.

This recent decision may be interpreted to expand the range of costs subject to penalties. It is therefore almost certain that the frequency with which the government assesses penalties against contractors' claimed costs will increase. Contractors need to carefully analyze their costs, especially those that may be considered to be associated with expressly unallowable costs, prior to claiming them based on the risk that a broader subset of costs may now be determined to be expressly unallowable costs subject to penalties.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.