United States: ASBCA Continues To Apply The Expressly Unallowable Cost Standard In An Unworkable Way

Recently, in Raytheon Co., ASBCA Nos. 57576, et al (June 26, 2015), the ASBCA confirmed that a narrow reading of the term "expressly unallowable" costs is appropriate under the CAS and FAR. The Board reaffirmed previous holdings that expressly unallowable costs "must be an item of cost or a type of cost that is specifically named and stated as unallowable by law, regulation or contract" and must be "unallowable in direct and unmistakable terms." Notably, this decision removes any doubt that DCAA was wrong when recently it issued overreaching guidance to its Regional Directors instructing auditors how to liberally (and incorrectly) identify expressly unallowable costs, which we discussed in a previous alert. Accordingly, contractors should adamantly contest DCAA assertions and/or DCMA findings of penalties for any costs that are not explicitly listed as unallowable in FAR Part 31. However, the ASBCA misapplied the definition of expressly unallowable costs, reaching incorrect and troubling conclusions.

Unfortunately, the Raytheon decision does nothing to resolve the long-standing dispute between contractors and the government regarding the proper application of expressly unallowable penalties. Specifically, while the Board acknowledged that a cost is only subject to penalty if it is "specifically named and stated to be unallowable," the Board then found that certain bonus and incentive costs where an employee billed time to unallowable legal activity and long term compensation costs that include a Total Shareholder Return (TSR) element, both which are not expressly referenced anywhere in the FAR, are expressly unallowable. Thus, contractors will be left guessing at whether the government will consider particular costs to be expressly unallowable even if they are not specifically named in the FAR.

In Raytheon, the government claimed that Raytheon had violated CAS 405 by failing to identify and exclude from billings the costs of bonus and incentive compensation for employees engaged in activities generating unallowable costs under: FAR 31.205-1, public relations and advertising costs; FAR 31.205-22, lobbying and political activity costs; FAR 31.205-27, organization costs; and FAR 31.205-47, legal costs. A brief summary of each finding is described below.

  • FAR 31.205-1—Public Relations and Advertising Costs. The government alleged that certain bonus and incentive compensation costs were expressly unallowable under FAR 31.205-1 because the costs were the equivalent of "salaries" and "fringe benefits," which are expressly stated to be unallowable in FAR 31.205-1 when such costs are associated with public relations and advertising. The Board held that the bonus and incentive compensation costs were not expressly unallowable costs subject to penalty because bonus and incentive compensation costs are neither salary nor fringe benefits and bonus and incentive compensation was not specifically named and stated as unallowable under FAR 31.205-1.
  • FAR 31.205-22—Lobby and Political Activity Costs. The government argued that bonus and incentive compensation associated with lobbying and political activity was expressly unallowable under FAR 31.205-22. The Board again held that because FAR 31.205-22 does not specifically name or state bonus and incentive compensation or compensation as unallowable in any direct or unmistakable terms, the costs were not expressly unallowable.
  • FAR 31.205-27—Organization Costs. The government argued that the language included in FAR 31.205-27, which states that costs incurred "in connection with" certain organization-type activity, made bonus and incentive compensation costs associated with organization costs expressly unallowable. The Board disagreed and held that the costs were not expressly unallowable under FAR 31.205-27 because neither bonus and incentive compensation nor compensation was specifically named and stated as unallowable under this regulation.
  • FAR 31.205-47—Legal Costs. The government argued that bonus and incentive compensation was expressly unallowable under FAR 31.205-47 as legal costs incurred by a contractor for "the pay of directors, officers, and employees" (emphasis added) for the time devoted to the questioned legal proceedings. More specifically, the government argued that Raytheon should have removed from its incurred cost submissions a portion of employee bonus and incentive compensation equal to the amount of unallowable labor claimed for employees that billed time for unallowable legal activities. In this instance, the Board agreed with the government and held that a portion of bonus and incentive compensation costs were expressly unallowable under this regulation because, based on the regulatory history, "pay" includes "all elements of compensation-related costs and expenses of employees, officers and directors," which includes bonuses and incentive compensation. We disagree with this holding, however, contractors should be prepared for government assertions that a portion of bonus and incentive compensation costs are unallowable where employees bill time to unallowable legal activity and also earn a bonus during that same year.

The Board also held that certain compensation costs including a TSR element were expressly unallowable under FAR 31.205-6(i), Compensation Based on Changes in the Prices of Corporate Securities, even though FAR 31.205-6(i) contains no reference to TSR related compensation. The Board is wrong—not only are these costs not expressly unallowable, they are, in fact, allowable. Historically, both contractors and the government have treated such costs as allowable because long term incentive compensation with a TSR element is performance-based compensation and is not based on changes in the prices of corporate securities. While the Board generally reached the correct conclusion regarding the narrow definition of expressly unallowable costs, the Board incorrectly applied its standard under both FAR 31.205-47 and 31.205-6(i).

In response to the Board's narrow reading of expressly unallowable costs, contractors should aggressively contest DCAA or DCMA determinations of expressly unallowable costs that are not specifically named and stated as unallowable and otherwise identified in the Cost Principle in any direct or unmistakable terms. With regard to the Board's holding on compensation costs including a TSR element, it remains to be seen whether this decision will be appealed to the Court of Appeals for the Federal Circuit. In the meantime, contractors should remove from incurred cost submissions compensation costs with a TSR element to avoid a penalty assessment.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
25 Oct 2018, Other, New York, United States

Once again, Dentons is proud to bring together insurance industry leaders, lawyers and regulators for a full-day examination of the most current issues.

26 Oct 2018, Other, New York, United States

Selling your company may be the most important and complicated transaction of your life. To achieve an optimal outcome, you need to get educated.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions