The Armed Service Board of Contract Appeals (“ASBCA”), in its recent decisions, continues to back away from its previous definition of expressly unallowable costs. In previous decisions, the ASBCA only found expressly unallowable costs when the cost was unallowable in all circumstances under the Federal Acquisition Regulation (“FAR”) § 31.205. In recent decisions, the ASBCA has applied penalties for expressly unallowable costs if the cost was unallowable under FAR § 31.205 in the contractor’s specific circumstances. These decisions suggest that contractors must be even more vigilant against claiming costs unallowable under FAR § 31.205 in order to avoid increased FAR penalties under flexibly priced contracts and CAS 405 noncompliances under firm, fixed priced contracts.

In the most recent example, Raytheon Co., ASBCA No. 57742, 2017 WL 1740026 (Apr. 17, 2017), the government claimed that certain costs, such as employment costs for lobbyists, were unallowable under FAR § 31.205 and, therefore, expressly unallowable. Raytheon appealed, asserting that the costs were allowable. Even if the costs were not allowable, Raytheon claimed that the costs were not expressly unallowable, and thus not subject to penalty. The ASBCA agreed with Raytheon regarding private aircraft costs, consulting costs and development of M&A database costs because FAR § 31.205 does not identify such costs as unallowable. The ASBCA, however, found compensation costs for employed lobbyists to be unallowable and, therefore, expressly unallowable. Thus, what was largely a win for Raytheon creates concern because of the ASBCA’s rigid interpretation of what are expressly unallowable costs. Instead of finding expressly unallowable costs only when costs are unallowable in all circumstances, the ASBCA applied penalties to costs that were unallowable under FAR § 31.205 in Raytheon’s circumstances.

This strict interpretation of expressly unallowable costs is consistent with another recent ASBCA decision. In Exelis Inc., ASBCA No. 58966, 2017 WL 1355015 (Mar. 29, 2017), the ASBCA disallowed compensation paid under Exelis’ long-term incentive plan. While compensation is not unallowable in all circumstances, the ASBCA held that the compensation was expressly unallowable in this circumstance because the compensation was based upon changes in the price of corporate securities and unallowable under FAR § 31.206-6(i)(1). Thus, the ASBCA allowed penalties to be applied to this “expressly unallowable cost.”

Although the ASBCA has not officially overturned previous decisions, it seems to have altered its interpretation of “expressly unallowable costs.” This recent ASBCA interpretation of “expressly unallowable costs” is troubling for contractors because it expands the circumstances under which costs may be expressly unallowable, resulting in more FAR penalties relating to flexibly-priced contracts and CAS 405 noncompliances under firm, fixed priced contracts.