Government Contracts Penalties and Interest for Unallowable Costs Affirmed
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Monday, October 1, 2018

Penalties and Interest for Unallowable Costs Affirmed

By Government Contracts Editorial Staff

Reconsideration of a decision sustaining the assessment, and non-waiver, of penalties and interest concerning lobbying costs was denied by the Armed Services Board of Contract Appeals because the board did not err in concluding costs associated with the contractor’s lobbying activities were expressly unallowable. The contractor argued the board’s decision (17-1 BCA ¶36,724) was faulty because directly associated costs, such as salary expenses, differed from expressly unallowable costs, such as lobbying costs, and were not themselves expressly unallowable. It also contended FAR 42.709-1(a)(1)’s penalty provisions applied only to indirect costs that were expressly unallowable under the cost principles in FAR 31.205, not to FAR 31.201-6, Accounting for unallowable costs, which treats as directly associated costs certain “[s]alary expenses of employees who participate in activities that generate unallowable costs.” However, FAR 42.709-1(a)(1) does not limit its coverage to cost items listed in FAR 31.205, and the Court of Appeals for the Federal Circuit has held that FAR 31.205 “does not cover every element of cost. Failure to include any item of cost does not imply that it is either allowable or unallowable” (46 CCF ¶77,930). Moreover, FAR 31.205-6(a)(5) refers to FAR Subpart 31.2 as a whole, stating that “[c]osts that are unallowable under other paragraphs of this Subpart 31.2 are not allowable under this subsection … solely on the basis that they constitute compensation for personal services.”

Proscribed Lobbying.While FAR 31.205-22, Lobbying and political activity costs, does not specify compensation or salary as unallowable costs, pursuant to FAR 31.204(c), this is not dispositive of allowability. Therefore, reading FAR 31.201-6(a), FAR 31.201-6(e)(2), and FAR 31.205-22(a) together, the salary costs of the contractor’s employees who engaged in proscribed lobbying activities were expressly unallowable and subject to a penalty under FAR 42.709-1(a)(1). There also was no merit to the contractor’s argument the board’s decision could not be reconciled with an earlier decision (15-1 BCA ¶36,043), which concluded the contractor’s bonus and incentive compensation costs were not expressly unallowable lobbying costs. The earlier decision did not address lobbying salary costs, distinguished salaries from BAIC costs, and reasoned BAIC costs were not expressly unallowable under FAR 31.205-22 but were unallowable under that cost principle as compensation associated with unallowable lobbying activity. (Raytheon Co., ASBCA, ¶95,563).

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