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Excessive Pension Plan Contributions?

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I used to joke that, at many aerospace/defense contractors, employees are not actually the most important priority. Instead, the supplement executive retirement plan is the most important priority. It was a joke, folks.

But then Northrop Grumman started to litigate government disallowances of its pension plan contributions.

The [Northrop Grumman Supplemental Executive Retirement] Pension Plans are designed to provide supplemental retirement benefits, paid after retirement, to a select group of Northrop Grumman’s executives and other key employees or highly compensated employees whose retirement benefits exceed those permitted under Northrop Grumman’s qualified pension plans, to encourage these employees to continue providing services to Northrop Grumman until their retirement.

(Internal citations and footnotes omitted.)

How does Northrop Grumman calculate the executives’ supplemental retirement plan benefits? Well, it varies (because there are a number of plans)—but one factor that crosses all plans is the participants’ Final Average Earnings (FAE). The plan calculates the FAE for each individual, then applies a percentage factor to that FAE to calculate the pension plan contribution amount. The number of years of service is also factored-in, but that’s not especially relevant to this discussion.

Critically, when calculating the FAE, “The FAE does not exclude compensation that was in excess of the FAR 31.205-6(p) compensation limitation in effect at the time the plan participant earned the compensation (bonus and salary).” Thus, the FAE includes compensation made unallowable by 31.205-6(p).

The amount of the participants’ supplement executive retirement plan benefits is based, at least in part, on unallowable compensation.

Is this a concern? Northrop Grumman didn’t think so. The company argued that—

… the pension costs here are allowable pursuant to FAR 31.205-6(j)(1) as they meet both CAS 412 and 413, which are referenced in that FAR provision, and that ‘the cost limitations and exclusions set forth in paragraph (j)(1)(i) and in paragraphs (j)(2) through (j)(6)’ do not apply to the pension costs at issue here. According to appellant, the compensation cap set forth in FAR 31.205-6(p) has no application because (1) it does not expressly state that it applies to defined benefit pension plans, and (2) FAR 31.205-6(p)(2)(ii) states the cap represents ‘the ‘sole statutory limitation’ on allowable senior executive . . . compensation’. Appellant also argues that the pension costs are not directly associated costs under FAR 31.201-6(a) because the pension costs were not ‘generated solely’ as a result of unallowable compensation (salary and bonus) and the government cannot establish that the pension costs would not have been incurred but for the incurrence of the participant’s compensation.

(Internal citations omitted.)

The government, for its part, begged to differ with Northrop Grumman, which is why the matter wound up before the ASBCA.

As summarized by the Board, the government’s position was—

… although the Pension Costs themselves may not be subject to the FAR 31.205-6(p) compensation cap, the cap nonetheless applies to the underlying bonus and salary utilized in the Retirement Benefit Formulas’ compensation factor. The government notes that FAR 31.205-6(p)(2)(ii) expressly disallowed senior executive compensation in excess of the benchmark compensation amount determined applicable for the contractor fiscal year by the Administrator of the Office of Federal Procurement Policy (OFPP). According to the government, the pension costs here are unallowable as directly associated costs of unallowable compensation pursuant to FAR 31.201-6 and are unreasonable because they are derived from unallowable compensation. The linchpin connecting both arguments is the proposition that the Retirement Benefit Formulas utilized to determine pension costs include as one factor a plan participant’s FAE computed utilizing compensation that exceeded the FAR 31.205-6(p) limitation in effect at the time the plan participant earned the compensation.

(Internal quotations and citations omitted.)

Northrop’s arguments were unavailing. The Board ruled that pension contributions that were based on unallowable compensation were, themselves, unallowable. The Board wrote:

Northrop Grumman drafted its pension plan such that a portion of it (the portion the government seeks to disallow) is paid based upon executive salary that exceeds the statutory cap. To put it another way, if Northrop Grumman were not paying a salary above the statutory cap, it would not have paid the challenged portions of the pensions at issue. …

At bottom, it is the amount of the pension cost - determined in part by compensation that exceeds the cap - that would not have been incurred but for incurrence of the participant’s compensation exceeding the cap. In that manner, the challenged pension costs were generated by Northrop Grumman’s inclusion in its pension formula of amounts that exceeded the cap. As the government notes, it was Northrop Grumman that created the Retirement Benefit Formula for determining pension benefits. Northrop Grumman was free to structure it in such a way that its formula did not include amounts above the applicable compensation cap. The fact that Northrop Grumman chose to include costs above the cap does not justify its now seeking reimbursement from the government for pension costs that were determined based upon the excess costs. Clearly, the additional pension cost for which appellant requests reimbursement would not have been incurred had appellant not paid its pensioners compensation that exceeded the cap.

At the end of the day, the Board cited to its previous 2020 DynCorp decision, which also disallowed certain severance costs when they were based on compensation that exceeded the FAR ceilings. We didn’t care for that decision—and we explained why in our article. However, this decision seems far less tortuous to us.

Any other compensation that is based on unallowable compensation is, itself, unallowable. That’s the rule—whether you like it or not.


Flawed Audits and Disallowed Temp Labor Costs: Another Dispute at Hanford

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Washington River Protection Solutions LLC (WRPS) was awarded a Tank Operations Contract (TOC) by the Department of Energy for performance at the Hanford Site. You know about the Hanford Site, right? We’ve written about the Site before—we’ve written a surprising number of articles about compliance issues there, involving many different contractors.

WRPS is “an Amentum-led” company. Which means (we think) that WRPS is managed by Amentum, even though many other companies may be involved in performance of TOC work. Amentum is the name of a company that used to be called AECOM. During its history, AECOM acquired URS, which had acquired EG&G, Westinghouse Government Services, Lear Siegler, Washington Group International (formerly known as Morrison Kundsen), and Apptis. AECOM also acquired DynCorp International and Pacific Architects and Engineers (PAE) at various points in time. So, basically, Amentum is a massive conglomerate with multiple subsidiaries and business that have very long government contracting pedigrees.

In other words, WRPS knows the ins and outs of government contracting. Thus, when DOE demanded it repay costs found to be unallowable, WRPS hired itself some attorneys and appealed the decision to the Civilian Board of Contract Appeals (CBCA).

WRPS started performing the TOC in 2008. During its performance, WRPS used a practice of augmenting staff by hiring “contracted labor resources (CLRs).” “CLRs are individuals hired through staff augmentation subcontractors to perform a specific scope of work or to fill in for missing personnel on a temporary basis under the direct supervision of a WRPS employee.”

From the Board’s findings of fact:

WRPS competes different labor categories among staff augmentation contractors and enters into blanket master agreements (BMAs) that contain labor categories and rates. Once BMAs are established, CLRs can be hired quickly, and WRPS does not incur the training or separation costs that it would for a full-time employee, costs estimated to be between $28,000 and $38,000. CLRs also allow WRPS to accomplish tasks when budget funds are available and to downsize quickly without additional cost when budget funds are not available. It also allowed WRPS to obtain the services of contractors who would not take a full-time position. WRPS hired 1224 CLRs in the first ten years of the contract, as compared to the average 4300 full-time WRPS employees. Very few of these CLRs worked full-time during any given year, and few worked more than five years as a CLR. WRPS spent nine percent of its staffing dollars paying for CLRs.

(Internal citations omitted, as will be the case in all block quotes used.)

In February, 2020—nearly eight years after WRPS had started contract performance—the DOE issued a Notice of Intent to Disallow Costs to the company. DOE intended to disallow more than $6 Million for a variety of reasons. To our way of thinking, DOE threw a bunch of spaghetti at a wall to see which issue would stick. The disallowance was based on an audit report prepared by the DOE Richland Finance Office.

As the Board wrote—

In the audit, DOE Finance examined the compensation records for forty-one individuals hired as CLRs by WRPS that it had ‘judgmentally selected, seeking CLRs that had worked for WRPS for three or more years consecutively. DOE Finance identified numerous concerns with the employment and compensation for thirteen of these individuals, including concerns that WRPS did not have effective controls to ensure that CLRs met minimum qualifications and that several CLRs were paid rates higher than the rates agreed to on the subcontract through which they were hired. DOE Finance was also concerned that none of the forty-one CLRs had been subject to a ‘make versus buy’ analysis to determine whether it was less expensive to hire a new WRPS employee rather than filling the requirement with a CLR. DOE Finance did not provide a dollar figure that matched the $6 million amount in the notice of disallowance; instead, DOE Finance recommended a settlement range between $5.75 million and $8 million.

In August 2020, WRPS provided a response to both the audit report and an explanation of the reasonableness of the dollars expended for the thirteen individuals that were the focus of the DOE audit.

Okay. Let’s stop right there. Notice the lack of specificity of the purported audit findings. Notice the lack of a sum certain. What kind of audit recommends a “settlement range” rather than express a sum certain finding? Answer: no audit we ever heard of. At least no audit that complies with GAGAS.

On December 10, 2020, DOE issued a contracting officer’s decision in which DOE disallowed $6,025,069 because the costs were unreasonable.


Okay. But notice that WRPS had, in its view, already supported the reasonableness of the disputed costs. And notice that the Contracting Officer’s Final Decision was a specific sum certain, rather than a range.

How did anybody get from a “settlement range” to $6,025,069? The Board answered that question as follows:

DOE calculated this amount by identifying specific costs to be disallowed for thirteen individuals for four different reasons. For five individuals, DOE identified a ‘high’ and ‘low’ amount that were disallowed and averaged the figures. The sum of the amounts calculated for the thirteen individuals was $3,012,534. DOE multiplied this figure by two to derive the final amount disallowed. DOE applied this so-called ‘2x’ factor because DOE, in its review, found other instances of the same issues identified for the thirteen individuals, and the factor would account for what DOE believed was ‘excessive pass-through’ of subcontracting costs related to CLRs.

Do we even have to articulate how we feel about that so-called “methodology”?

Averages. A 2x “factor” to address an issue not even found in the COFD. Are you kidding us? This is audit malpractice, as clear as the sun in the sky or the radioactive waste in the ground at Hanford. Auditors who participated in this debacle, and their supervisors who approved it, should be—at the very minimum—educated in how to conduct audits and reach conclusions based on evidence.


According to the Board—

DOE brought challenges to specific costs that can be grouped into four categories:

1. The hourly rates paid to seven individuals exceeded the hourly rates that they would have received purportedly as WRPS full-time equivalents (FTE).

2. The hourly rates paid to three individuals exceeded the rates set forth in the BMAs competed among the staff augmentation subcontractors.

3. Seven individuals purportedly did not meet the qualification requirements set forth in the BMA for their positions.

4. The hourly rate paid to two individuals was increased ‘overnight’ with purportedly no reason for the increase.

The Board discussed each of the four issues within its decision. For the most part, the Board dismissed the DOE’s non-specific concerns and, instead, accepted WRPS’s analysis as sufficient evidence to support a finding that the CLR costs were, indeed, reasonable. For example, the Board wrote—

We find no merit in DOE’s challenge based upon what the individuals would have been paid if hired as full-time WRPS employees. The problems with DOE’s analysis on this point are myriad—the analysis fails to account for the hours these individuals worked, is based upon an analysis of 2018 rates, but applied across all years of the contract, and fails to account for the years of experience that many of these individuals possessed.

You can and should read the analyses within the decision; the link is provided above.

With respect to the “2x factor” the Board wrote:

The specific amounts that DOE challenged for the thirteen individuals totaled $3 million. Because DOE had identified other individuals with qualifications or other issues, DOE doubled the amount sought to capture them. DOE sought to be conservative in applying this 2x factor. As the DOE auditor explained, it was not proper to extrapolate because DOE had selected the original forty-one individuals to be audited based upon tenure rather than sampling the entire pool. DOE sought to capture other issues, like excessive pass-through, which the DOE auditor acknowledged had not been quantified.

(Emphasis added.)

The foregoing describes gamesmanship, not auditing.

The Board did not castigate DOE for its approach. Instead, the Board wrote:

While we appreciate that DOE was attempting to approximate the costs of other problems it identified with its application of the ‘2x factor,’ this approach does not comport with the FAR requirement that the contracting officer identify a ‘specific cost’ that was challenged on reasonableness. FAR 31.201-3.

At the end of the day, the $6 Million sought by DOE was not upheld. Instead, WRPS was required to pay $80,275 (plus interest).

Why sanctions weren’t sought—and imposed—on the DOE for its methodology, a methodology that smacks of a lack of good faith and fair dealing, remains a mystery to this blog author.

Last Updated on Tuesday, 15 August 2023 08:51

Raytheon at the Federal Circuit

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Hello. It’s been a while. For those who’ve asked where I’ve been, the truth is I’ve been where I always am, right here behind the monitor. I’ve been busy—too busy to update this blog—and there hasn’t been much I’ve wanted to say. It’s been a weird time in government contract cost accounting and compliance.

But today I want to talk about the January, 2023, decision at the Court of Appeals (Federal Circuit) in the matter of Secretary of Defense v. Raytheon Co. It’s a puzzling opinion and I’ve been letting it marinate for a while. Keep in mind that nobody over here is an attorney, so our opinions—such as they are—should be taken with a large grain of salt. If you want cogent legal advice, pay for it.


I wrote about the original 2021 decisions at the ASBCA here on this blog. There was a lot to write about, and it took me four (4!) separate articles to do so. Here’s a link to the first article, from April, 2021.

To recap:

There were myriad issues at both the Raytheon Home Office and at the Raytheon Missile Systems (RMS) segment. There were allegations of violations of CAS 405. There were allegations that expressly unallowable costs had been claimed. There were allegations of insufficient supporting documentation. In total, the government sought roughly $15 million. The ASBCA sustained substantially all of Raytheon’s appeals of various Contracting Officer Final Decisions. It was a big victory.

The government appealed two (of the many) issues to the Federal Circuit. Both issues were Home Office issues. One issue dealt with “Corporate Development” costs and the other issue dealt with “Government Relations” costs. The ASBCA’s decisions on both issues were reversed by the Federal Circuit.

Let’s discuss.

Corporate Development

According to the original ASBCA decision—

Raytheon’s Corporate Development department was responsible for working with its business units in strategic development and growth opportunities, including strategic analysis of a business’ capabilities to market its products and services to the government and function in government work. Where there were gaps in business’ capabilities, Corporate Development would work with them to determine the right ways to fill the gaps, either through, inter alia, internal investment, research and development, licensing of intellectual property (IP), partnerships or acquisitions. This process was known as ‘gap analysis.’ Working with Raytheon’s businesses on M&A and divestitures was not Corporate Development’s primary role but was part of its work to find strategic growth initiatives.

Corporate Development made proposals for acquisitions or divestitures to the Acquisition Council which, in 2007 and 2008, consisted of senior Raytheon leaders, including the Chief Executive Officer, Chief Financial Officer, General Counsel and Vice President of Corporate Development. Raytheon declared its intentions regarding potential acquisitions and divestitures through the Acquisition Council. Corporate Development did not know which route Raytheon was going to follow until after the Acquisition Council made its decision. Occasionally, even after an Acquisition Council decision, Raytheon would change course based upon information developed during the acquisition or divestiture process.

(Internal citations omitted.)

In other words, one of Corporate Development’s role was Mergers, Acquisitions, and Divestitures—i.e., external activities that would “fill the gaps” between current company capabilities and what the experts believed the government was going to want and/or need in the future. Reminder: the cost principle at FAR 31.205-27 (“Organization Costs”) makes that stuff unallowable. (“… expenditures in connection with (1) planning or executing the organization or reorganization of the corporate structure of a business, including mergers and acquisitions, (2) resisting or planning to resist the reorganization of the corporate structure of a business or a change in the controlling interest in the ownership of a business … are unallowable.”)

Raytheon had policies and procedures to help its people distinguish between allowable economic planning costs and unallowable M&A activities. Consistent with its records and policies, Raytheon self-disallowed 50 percent and claimed the other 50 percent as being allowable non-M&A activities. DCAA disagreed and asserted that 100% of all Corporate Development costs were unallowable. The CACO agreed with DCAA and told Raytheon that not only were the costs unallowable, they were expressly unallowable—meaning that Raytheon owed the government penalties and interest. The CACO threw in a CAS 405 noncompliance, as well.

On appeal, the Board found that the Government had not met its burden, writing—

DCMA has not carried its burden to prove by a preponderance of the evidence that the amount of unallowable hours withdrawn by Raytheon’s personnel, which is supported by documentation and credible witness testimony (see, e.g., findings 41-45, 57-58, 60), from its CY 2007 and 2008 incurred cost proposals was inaccurate, nor that any of the included Corporate Development costs were unallowable, let alone expressly unallowable and subject to penalties. Thus, DCMA has also not met its burden to prove that Raytheon violated CAS 405 regarding those costs.

The Federal Circuit disagreed with that position, finding that “ample evidence before the Board established that at least some of Raytheon’s ‘allowable’ pre-decision salary costs related to planning mergers, acquisitions, or divestitures.” The Federal Circuit concluded—

Because the Board erred as a matter of law in concluding that Raytheon’s corporate-development policies were consistent with the FAR, its factual determination that the government was not charged for unallowable costs because Raytheon’s employees complied with those policies is also legally incorrect. We therefore reverse the Board’s conclusion and remand for the Board to determine the amount of unallowable costs improperly charged to the government. We again recognize that Raytheon’s policies make this a difficult task, but we reiterate our view that Raytheon should shoulder the burden its policies created.

Our Thoughts

The Federal Circuit essentially ruled that the Government didn’t have to prove anything. Simply finding that Raytheon’s policies and procedures led to the incurrence of expressly unallowable costs was sufficient to prevail. The fact that the Government was unable to quantify the amount of expressly unallowable labor costs stemmed from Raytheon’s policies, apparently.

Left unstated in the Appellate decision was the fact that Raytheon had already self-disallowed 50 percent of its Corporate Development costs. DCAA (and the Contracting Officer) asserted that 100% was unallowable—an assertion that was contradicted by testimony. So what is the correct amount to disallow? The Federal Circuit was silent on that, remanding to the Board to make that finding. Presumably, the right value is somewhere between 50 and 100 percent.

At the end of the day, Raytheon published a “bright-line” to aid its employees in accurate timekeeping. The ASBCA found the line to be reasonable, but the Federal Circuit disagreed. According to the Federal Circuit, simply identifying M&A targets—whether or not an offer was ever made or due diligence ever initiated—was itself unallowable. Okay. We get that.

In that regard, you could craft an analogy to FAR 31.205-47 (“Legal and Other Proceedings”). When does a legal proceeding start? Does it start when the claim or appeal is filed, or when a demand letter is received? Or does it start before the official “proceedings” start. We have long grappled with that question. Given the Raytheon decision, we suggest that unallowable costs associated with legal proceedings likely start before that time; perhaps at the moment somebody says “we’re going to court on this one.”

Something to think about?

Government Relations

The term “Government Relations” encompasses a number of activities, but prominent among them is lobbyingi.e., the effort to influence senior military officers and Congress folks to fund programs that are important to the contractor. FAR 31.205-22 makes lobbying and other political activity costs unallowable, but provides exceptions for certain specified activities. Among the exceptions is the effort to provide Congress with technical and factual information related to performance of one or more of the contractor’s contracts.

In a similar fashion to how it handled unallowable Corporate Development costs, Raytheon self-disallowed lobbying expenses. However, its methodology relied on labor records. In the original ASBCA decision, the Board found that—

For the lobbying cost withdrawal calculation, Raytheon established a ratio of unallowable hours worked by the Government Relations employees to their total hours worked. The ratio’s numerator was the total number of unallowable hours reported by the lobbyists. The denominator was the total number of work hours available during a given year to the employees who reported unallowable hours, based upon a 40-hour work week less vacation and holidays. Dividing the numerator by the denominator yielded a percentage—the lobbying disallowance factor. Raytheon applied this factor to what it deemed to be Government Relations’ recoverable expenses (including the salary and fringe benefits paid to its lobbyists and their administrative staff) to determine the costs associated with unallowable lobbying activities under FAR 31.205-22.

The problem with the above, according to the Federal Circuit, was that Raytheon failed to account for all lobbying hours expended by its employees. Both the numerator and denominator were inaccurate—they were both undercounted by the labor hours that Raytheon employees failed to record. (Though the Federal Circuit elided any mention of the problem with the denominator.)

Total-time accounting is popular among Government contractors—though proper treatment of uncompensated overtime is tricky. The point here is that there is no regulatory requirement that mandates total-time accounting; in particular, Raytheon eschewed it for many years—perhaps decades—requiring instead that its employees only record a 40-hour work week. That position, though accepted by the ASBCA, proved to be Raytheon’s undoing at the Federal Circuit.

Once again, though the Board found the Government had failed to carry its burden, the Federal Circuit disagreed, asserting that, because some labor hours were unrecorded, and that those unrecorded hours were lobbying and therefore unallowable. The Federal Circuit opined that “Raytheon, by ignoring after-hours lobbying, must have charged the government for unallowable lobbying costs.”

The Federal Circuit opinion added—

Raytheon’s time-paid accounting is a fiction that necessarily overcharges the government when it ignores time spent working on unallowable activities after regular business hours. Raytheon’s lobbyists worked on unallowable activities after-hours, and their salaries necessarily compensated them for that time. Raytheon’s policies ignoring after-hours time resulted in the government reimbursing Raytheon for unallowable costs.

Our Thoughts

We would have liked to see the Federal Circuit align its opinion with the requirements of CAS 405 and FAR 31.201-6 (“Accounting for Unallowable Costs”). It is unsurprising that no mention was made of those requirements, because they might have undercut the legal position espoused by the Federal Circuit.

(e)(2) Salary expenses of employees who participate in activities that generate unallowable costs shall be treated as directly associated costs to the extent of the time spent on the proscribed activity, provided the costs are material in accordance with paragraph (e)(1) of this subsection (except when such salary expenses are, themselves, unallowable). The time spent in proscribed activities should be compared to total time spent on company activities to determine if the costs are material. Time spent by employees outside the normal working hours should not be considered except when it is evident that an employee engages so frequently in company activities during periods outside normal working hours as to indicate that such activities are a part of the employee’s regular duties.

(Emphasis added.)

In our view, a materiality analysis needed to be made by the Government. It might be based on interviews of personnel engaged in lobbying, or else by requiring employees to keep logs of after-hours efforts. Because no materiality analysis was performed, nobody knows whether Raytheon was required to record the unallowable lobbying costs of its employees who were engaged in after-hours efforts.

But none of that mattered to the Federal Circuit. Eschewing facts once again, the Judges preferred their own legal theory in which compensation covered both the standard 40 hours/week and after-hours efforts. In other words, the more total hours worked, the more employees should have been compensated. As a popular commercial once said: “That’s not how this works. That’s not how any of this works.”

We think that the Federal Circuit opinion conflates hourly and salaried compensation—a distinction clearly made by CAS 405 and the cost principle quoted above. As such, we would assert a legal error was made. But what do we know?


We don’t really care for this decision. However, unless Raytheon appeals to SCOTUS and the decision is overturned there (highly unlikely) it is the official interpretation. This decision deals with two issues—unallowable M&A activity and unallowable lobbying activity. Accordingly, it’s limited to those two areas. But the lesson is clear: when employees are engaging in unallowable activities, they need to record ALL time worked. Period. (We think legal proceedings are worth considering in this light as well as the other two areas specifically covered.)

Last Updated on Thursday, 15 June 2023 11:48

Government Accounting Rules are Boring and Stupid, Unless Violating Them Costs You $377 Million

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We’ve all been there. We’ve all been in meetings where our management team rolls their eyes and taps their fingers with impatience as we try—once again—to explain some CAS requirement that prevents them from doing what they want to do.

“But CAS 402,” we say. Or we try to. Because talking about CAS to non-accountants (especially engineers) is like banging your head against a wall. Afterwards, you wonder why you even bother. Still, they pay us, right? They pay us and we try to deliver our best advice. We try to add value.

But they so very rarely listen to us.

How do we live with the frustration?

Well, speaking for myself, I repeat over and over that I’m an advisor. I give advice. I give recommendations. I give recommendations to the people that have the authority to act on my recommendations, or not. My job is to advise them; what they do with that advice is on their shoulders, not mine.

Even more recently, I have redefined my job function. I used to say my job is risk management and litigation avoidance. Which is true! But I can’t manage risks if I don’t have the authority to do so—right? So, instead, now I define my job as “I read stuff almost nobody else in America wants to read. I read books, articles, and court cases on topics that would put 99% of you to sleep. I read this stuff; then I tell you what it says. That’s what I do. And you pay me well for that job.”

You pay me well for reading arcane quasi-legal accounting stuff and then advising you about the best course of action based on what I read. I advise you and I make recommendations, all grounded in what I’ve read and thought about. I do a lot of critical thinking. All that informs my recommendations, which management too often ignores because it keeps them from doing what they want to do. They roll their eyes and (metaphorically) pat me on the top of my head; they tell me that they’ll accept the risks involved.

Which is a weird position because almost none of them have the knowledge or expertise to actually assess the risks involved—the probability of occurrence or the likely consequences if the risk materializes. They don’t really know, but they’re willing to accept the risk.

(Note: we have discussed risk management extensively on this website. Do a keyword search and you’ll see a plethora of articles on the topic. Not that anyone ever acts on those articles. Sigh. Writing blog articles that are never acted upon is not unlike giving advice that is ignored. But I digress. Forgive me.)

Telling us they accept the risk is fine. That’s management’s job, I guess. They pay us so well to ignore so much of what we tell them. My paychecks all clear and I assume yours do as well. So … what’s the issue here, really?

The issue is that sometimes—just sometimes—we are right in a big way. The risk materializes and the consequences are devastating. We get to be right, even though we would much rather not have been.

Today we are discussing the recent False Claims settlement by Booz Allen Hamilton. We are going to discuss details of the Settlement Agreement, which is found via a link to a .pdf file at the bottom of the DoJ press release.

It’s been a decade since we last mentioned Booz Allen Hamilton (Booz Allen) on this site. In 2012, the company had a local business unit suspended by the Air Force for improper conduct. Okay; it was a few bad apples—or so we thought. But if you read subsequent articles on the company, articles that related a similar pattern of improper conduct at yet another business unit, we started to wonder how many bad apples it took to spoil the entire company (ethically speaking).

Coincidentally, at about that time (starting in 2011), Booz Allen started to engage in a pattern of alleged accounting manipulations that ended in one of the Top 5 largest FCA settlements of which we’ve ever heard. $377,453,150. Call it $377.5 Million. With $69.8 Million going to the qui tam relator (whistleblower).

How do you like them apples now?

To be clear, Booz Allen denied all allegations; the Settlement Agreement expressly stated that the company was not admitting any guilt. Still … $377.5 Million. That’s a heckuva lot of money to fork over for something one denies ever happened.

What did Booz Allen do that was so heinous? It violated the requirements of the Cost Accounting Standards.

You know, the stuff that only a few of us ever read? Yeah, those Cost Accounting Standards.

According to the Department of Justice and the Settlement Agreement, Booz Allen (allegedly) engaged in the following practices:

  1. Contrary to the Cost Accounting Standards (“CAS”) and the Federal Acquisition Regulation (“FAR”), Booz Allen allocated indirect costs that supported Booz Allen’s commercial and/or international businesses to Government contracts and subcontracts that should have been allocated to commercial and/or international contracts or should have been treated as unallowable costs, including but not limited to: costs identifiable as commercial and/or international costs using the criteria reflected in the spreadsheet exchanged between the parties as of the Effective Date of this Agreement, burdens applied to such costs (including but not limited to G&A, fringe, and intermediate cost allocations), and directly associated costs (as that term is defined in FAR 31.001 and FAR 31.201-6).

  1. Booz Allen created and maintained indirect cost pools that included commingled costs supporting both (i) commercial and/or international contracts and (ii) Government contracts and subcontracts, and by virtue of such commingling allocated indirect costs disproportionately between commercial and/or international contracts and Government contracts and subcontracts, and thus were not in compliance with the CAS or FAR, including but not limited to the homogeneity and proportionality requirements in CAS 418 and the allocability requirements in FAR 31.201-4.

  1. Booz Allen used costs and cost rates that included indirect costs supporting Booz Allen’s commercial and/or international businesses to seek inflated payments and reimbursements under its Government contracts and subcontracts, and failed to disclose current, accurate, and complete cost or pricing data related to such costs resulting in inflated prices for Government contracts and subcontracts.

  1. Booz Allen submitted inaccurate and/or misleading statements (including but not limited to in its CAS Disclosure Statements) regarding the methods by which it accounted for, and the nature of, indirect costs supporting its commercial and/or international businesses.

  1. Booz Allen shifted employees and work relating to its commercial and/or international businesses between Responsibility Centers in violation of the requirements of the FAR and CAS, thereby creating and maintaining indirect cost pools that were not in compliance with FAR or CAS resulting in misallocations of indirect costs to government contracts.

(Emphasis added, of course.)

The DoJ summarized the foregoing allegations as follows—

… from approximately 2011 to 2021, Booz Allen improperly charged costs to its government contracts and subcontracts that instead should have been billed to its commercial and international contracts. In particular, the government alleged that Booz Allen improperly allocated indirect costs associated with its commercial and international business to its government contracts and subcontracts that either had no relationship to those contracts and subcontracts or were allocated to those contracts and subcontracts in disproportionate amounts. The government further alleged that Booz Allen failed to disclose to the government the methods by which it accounted for costs supporting its commercial and international businesses. As a result, Booz Allen obtained reimbursement from the government for the costs of commercial activities that provided no benefit to the United States.

Okay. There’s a lot to unpack in the allegations. There are violations of multiple FAR cost principles. There is a violation of CAS 418. There are allegations that the Disclosure Statement was “inaccurate and/or misleading” and that the company violated the Truthful Cost or Pricing Data Act (“TINA”) by failing to disclose the truth during price negotiations. So … yeah. Not so great from a government contract cost accounting and compliance viewpoint.

Reminder: the cost principle at 31.201-4 (“Allocability”) requires that indirect costs other than G&A expenses must be allocated to final cost objectives (let’s call them “contracts” but they need not be) “in reasonable proportion to the benefits received.”

Further reminder: CAS 418 (“Allocation of Direct and Indirect Costs”) requires (among other things) that “indirect costs shall be accumulated in pools which are homogeneous” and that “pooled costs shall be allocated to cost objectives in reasonable proportion to the beneficial or causal relationship of the pooled costs to cost objectives ….” There’s a lot more to that Standard, but you can read the rest yourself. You also may want to type “Sikorsky” into this site’s keyword search feature to see how Sikorsky dealt with an allegation of non-compliance with the requirements of CAS 418. There was also a relevant legal decision or two in the matter of AMC General, LLC. I mean, only if you want to put in the work. Unless you do this for a living, you probably won’t want to.

Of course, the requirements of CAS 418 only apply to fully CAS-covered contracts. But for the other contracts, the contracts that are not subject to Full CAS Coverage, see the requirements of FAR 31.201-4.

The point is that, while CAS 418 expressly requires indirect cost pool homogeneity, FAR 31.201-4 basically requires the same thing.

So, what is “homogeneity?”

According to CAS 418-50(b)—

(1) An indirect cost pool is homogeneous if each significant activity whose costs are included therein has the same or a similar beneficial or causal relationship to cost objectives as the other activities whose costs are included in the cost pool. It is also homogeneous if the allocation of the costs of the activities included in the cost pool result in an allocation to cost objectives which is not materially different from the allocation that would result if the costs of the activities were allocated separately.

(2) An indirect cost pool is not homogeneous if the costs of all significant activities in the cost pool do not have the same or a similar beneficial or causal relationship to cost objectives and, if the costs were allocated separately, the resulting allocation would be materially different. The determination of materiality shall be made using the criteria provided in 9903.305.

As has been pointed out by people wiser than I am, the CAS 418 homogeneity rules establish two criteria: (1) each significant activity in the pool has the same or a similar beneficial or causal relationship to the cost objectives in the allocation base, and (2) allocation of the costs of the activities in the pool is not materially different than would be the case if those costs were disaggregated and allocated to the cost objectives in the allocation base separately. Compliance with either of the two criteria is sufficient to lead to a determination that the indirect cost pool is homogeneous.

As Terry L. Albertson and Linda S. Bruggeman, attorneys in the Government Contracts Practice Group of Crowell & Moring LLP, wrote in 2006: “… to establish that a pool is not homogeneous, the Government must prove both that the activities in the pool do not have a similar relationship to the activities in the base and that a different allocation of costs would produce a materially different result.” (Emphasis in original.)

Apparently, given the willingness of Booz Allen to settle the allegations made by the relator and the Government, somebody was prepared to make just that showing.

So, the next time somebody in management rolls their eyes or taps their fingers when you try to explain CAS or FAR requirements to them, or the next time somebody with authority tells you they are willing to “accept the risk,” then remember this settlement. Ask them if they truly understand the risks, including the probabilities and possible consequences.

Then if they nod, pat you on your head, and send you back to your office that’s filled with compliance-related books, you can go with pride, secure in the knowledge that you have done your best.

Last Updated on Thursday, 10 August 2023 14:01

Oh, Boeing! What’s Happened to You?

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Hello! Well, hasn’t this just been the year? Over on this side of the monitor, in the past three months I’ve had both COVID and RSV. (Courtesy of my son’s high school.) But I’m through both now—and looking forward to next year.

Speaking of challenging years, though, let’s talk about The Boeing Company. Boeing Defense has had a very challenging year, a year that follows previous challenging years. In fact, Boeing as a company has had a challenging past few years and its stock price has reflected those challenges. The company’s stock price hit a high of just under $441 per share on March 1, 2019. In contrast, on December 16, 2022—less than four years later—the stock price stood at $185 per share. That’s a drop of nearly 60 percent.

That’s not the end of the story. In 2020, the company was paying shareholders a dividend of about $2.00 per share. Then dividends were suspended. In 2021, Boeing paid shareholders nothing. The story was the same for 2022.

Sucks to be a shareholder in The Boeing Company, right?

You know, we’ve made that point before. Oh, yes—we have!

For example, in a 2018 article, we wrote—

And what about big versus small contractors? If the Pentagon is going to award contracts based on the amount of investment that contractors are willing to make, then only the largest of contractors will win awards. The smaller contractors will be locked out of the ‘pay for play’ competitions.

To sum up these thoughts, it seems that certain larger contractors are willing to pay to play in long-term Pentagon contracts, betting that they will earn back developmental losses over the lives of the programs. They may be right; but we remember the story of that DOE contractor, whose program investments turned out to be larger than it ever dreamed of.

The point was (and still is): making a known investment to win a major program only works if your investment stays the same size as you first predicted. Should circumstances change and your initial investment prediction becomes “overtaken by events” then your initial Return on Investment (ROI) analysis is thrown in the trash can. At that point, you and your shareholders are well and truly screwed because you are now locked into a fixed-price (or FPIF) development program that you must deliver, regardless of supplier programs and regardless of COVID impacts and regardless of inflationary impacts on your budgeted costs. You must deliver, regardless of what it costs you.

If you don’t deliver, you will be Terminated for Default.

You have to deliver no matter what it costs; if you have schedule slips and subcontractor issues and technical issues that you thought you could solve (but which turned out to be tougher problems than your engineers predicted) and if you have ridiculous cost growth in materials and labor—and if you have labor shortages because your people are leaving in droves because you don’t pay them well or maybe they’re sick of a toxic (or inept) management culture—and if your cash-cow commercial side of your business tanks at the same time you need a cash infusion to cover your program losses … well, then. You just might be The Boeing Company.

Talk about grabbing a tiger by the tail!

In 2022, the tiger bit Boeing.

What do we mean?

Under Shadow of Financial Losses, Boeing Makes Sweeping Changes to Defense Biz (Breaking Defense, 11/17/2022)

The changes, including halving business divisions, come as Boeing’s defense sector [BDS] finds itself at a crossroads, with new leadership contending with systemic financial issues tied to its large number of fixed-price contracts with the US government. …

BDS has racked up about $4.4 billion in losses so far this year on fixed-price programs, primarily driven by the KC-46 tanker and the VC-25B programs (the latter effort better known as the next-generation Air Force One), but also including the T-7A Red Hawk trainer, MQ-25 tanker drone and Commercial Crew program with NASA.

Boeing Reorganizes Defense Business After Financial Troubles (Air & Space Forces Magazine, 11/17/22)

Boeing has faced companywide losses, including in its commercial sector. Its defense business has been a significant drag on the company’s recent financial performance following losses incurred on fixed-price government contracts. In October, Boeing reported a loss of $3.3 billion in the third quarter of 2023, with its defense business $2.8 billion in the red. …

The KC-46 and VC-25B, which will become the new Air Force One, have been a significant financial drag for Boeing. The KC-46 program lost $1.2 billion, and the VC-25B program lost $766 million in the third quarter. The KC-46 has been troubled from the start, problems in its refueling system requiring a revamp and leading to delays. The VC-25B program was priced too cheaply, according to Boeing, making it a loss generator for the company. Supply chain issues and labor shortages have increased problems.

Boeing Reorganizes Defense Division After Third-Quarter Losses (Aviation Week, 11/17/2022)

Boeing’s Defense, Space and Security (BDS) division announced an organizational streamlining on Nov. 17 as the $26.5 billion business unit seeks a return to growth and to curtail mounting losses on fixed-price development programs. … Boeing also announced the restructuring three weeks after BDS reported a 20% reduction in quarterly revenues and a $2.8 billion reach-forward loss on five fixed-price development programs. Those same programs have accounted for $11.5 billion in reach-forward losses overall since 2014.

But in addition to the impacts to shareholders, there are more subtle and perhaps far-reaching impacts from Boeing’s management mistakes. Richard Aboulafia discussed those impacts in a recent editorial at Aviation Week.

He wrote that Boeing’s current situation “is not good for the long-term health of the U.S. aerospace industry, the broader U.S. economy or the aerospace workforce. But one overlooked consequence of Boeing’s woes is the possible impact on U.S. defense.” He cites three potential impacts to the United States’ national security posture, as follows:

First, BDS execution problems mean the U.S. military services will have to keep using older, less reliable systems that are costly to operate. With KC-46 and T-7 delays, even the oldest KC-135 tankers and T-38 trainers will soldier on well past 60 years of age. Pentagon efforts to procure interim or supplemental systems—an Air Force/Navy trainer or the Air Force’s KC-Y tanker—are uncertain.

Second, an industrial base decision might have been made for the Pentagon, whether it wants one or not. BDS losses reflect low bids on relatively low-tech programs; it is not clear whether Boeing can hope to bid on new programs that require more advanced engineering, particularly if past performance is a key selection factor. … Boeing could also be disadvantaged by Pentagon concerns about the company’s in-house design capabilities. Boeing’s 2015 Long-Range Strike Bomber loss to Northrop Grumman in part reflected Air Force concerns about Boeing’s strategy of relying on Lockheed Martin for much of the design work. Relying on Saab for much of the T-7 design may be viewed as a risky tactic, too. … The Air Force’s Next-Generation Air Dominance program looms large over this. If it excludes Boeing, and if the Navy’s F/A-XX either stalls or excludes Boeing, we can assume there are now two competitors for new fixed-wing military contracts, not three. The Defense Department does not want less competition for future programs and has signaled opposition to mergers resulting in that outcome, but it might have to live with that reality anyway.

Finally, the nation’s ability to design large aircraft must be considered. The C-17 fleet is wearing out at a rate faster than expected, and the C-5M is getting quite old, too. Given the relevance of strategic airlifters for operations in the Pacific, the Pentagon will need to start funding a new program sometime in the next 10 years. … Calhoun’s new jetliner deferral means Boeing design teams will not hire new talent, resulting in smaller numbers and a much older demographic by the 2030s. We cannot rule out mass layoffs of these engineers, either. In the late 1980s and early 1990s, the C-17 program was plagued by serious overruns and delays, largely because McDonnell Douglas’s aircraft design teams were in a state of atrophy. Boeing is at risk of entering that phase and perhaps an even worse one.

So … is there a lesson or two that might be learned here?

Well, yeah. First of all, beware fixed-price (or FPIF) development contracts. We’ve sounded that warning before. (See this 2018 article.) Just … don’t.

Second, let’s talk about workforce decisions. As Aboulafia’s editorial noted, without a strong engineering workforce, you don’t get new products. You don’t get innovation. You don’t get clean-sheet anything. Somewhere along the line, The Boeing Company stopped being a engineering company and started being a for-profit company run by the business folks. (That’s not just our outsiders’ opinion. See Flying Blind: The 737 MAX Tragedy and the Fall of Boeing, by Peter Robison.)

You’d like to think that as older folks depart, they would be replaced by a cadre of young engineers, trained in the latest and greatest design tools. New blood, fresh energy, buzzing with ideas for the future. But where do those folks come from?

They don’t come from St. Louis.

No offense to St. Louis! But it’s not especially known for its depth of engineering talent. Not a lot of engineering schools in the area, compared to, say, Southern California. Which is where BDS’s headquarters used to be, before it moved to the St. Louis area in 1997. (We should note that the HQ moved from Hazelwood to Washington, D.C. in 2016, but that didn’t impact the engineering staff.)

  • In November, 2015, the final C-17 left Boeing’s Long Beach, CA, facility and 2,500 people were laid-off. Per a 2019 article, the C-17 plants in Wardlow “remain largely vacant.”

  • In 2016, Boeing moved 500 (unspecified) positions from Huntington Beach, CA to Hazelwood as part of a “facilities consolidation.”

  • In December of that same year, Boeing announced that 2,400 jobs would be leaving its Huntington Beach, CA, facility over the next four years (with some going to other Southern California facilities). Importantly, Boeing’s Huntington Beach campus “spread across some 28 buildings on 178 acres, include[d] a design and research center focused on space access, networked systems, cybersecurity, unmanned underwater vehicles and advanced manufacturing, along with key programs in the highly classified Phantom Works program.” In other words, exactly the engineering talent you would want to retain. However, Boeing was prepared for attrition. A company spokesperson was quoted as saying: “Most [job losses] would come from attrition. Some people will decide they don’t want to move and will leave the company. Some number will be layoffs. All will receive separation assistance.”

  • In 2021, Boeing announced that 150 “supply-chain related jobs” would be moving from California and Washington State to Texas.

In summary, Boeing made several decisions over the past twenty years that negatively impacted its critical engineering workforce. Seemingly driven by a need to cut costs, it made a decision to move away from its traditional facilities—places where the company had been for decades—and consolidate to less traditional areas. Critically, it consolidated in areas that didn’t have the same robust engineering talent feeders.

We get it. It’s popular to hate on California. It’s super-regulated. It’s practically a Socialist Paradise. It’s one of the most expensive places in the US to live, with high taxes imposed on both individuals and corporations. Most of those less-than-charitable accusations are true (to some extent). And yet … where is Cal-Tech located? Where is the Jet Propulsion Laboratory located? Where is Edwards Airforce Base located?

According to the 2023 graduate school rankings by U.S. News & World Report, four of the top ten engineering schools in the United States are located in California, as are six of the top twenty. Washington University in St. Louis is #48; Missouri University of Science and Technology (Rolla) is #92. Good schools, for sure! Yet …. We think you get the point.

The fact of the matter is that most people like living in Southern California. They like only dealing with snow when they choose to deal with it by driving an hour or two into the mountains. They like being able to walk on the beach if they want to, or to surf in the Pacific Ocean during January. They like living in close proximity to culture. They like it where they live and many of them don’t want to move away. They won’t move away if their jobs move; instead, they’ll find another job in a competitor.

You ever been to El Segundo? Northrop, Boeing, Raytheon Tech, Lockheed Martin – all with facilities located within two or three miles of each other’s. Sure, it’s not the same now as it was back in the day—but it’s still there, still an aerospace/defense engineering hub. The point is: if their job moves away, many people—including some of your high-potential, highly knowledgeable and experienced engineers—can just change employers without having to relocate from the West Coast to the Midwest. In fact, the better they are, the easier it will be to job-hop instead of relocate.

The question becomes: Do you put your facilities where costs are lower … or do you put them where the talent is? What’s the correct answer for the financial statements? What’s the correct answer for the future of your company?

In our view—and in the view of others—Boeing sold its future for short-term corporate profits long ago. What we are seeing now are the consequences of that decision. Unfortunately, that decision also seems to have had consequences for the national security posture of the United States.

Last Updated on Tuesday, 20 December 2022 13:51

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Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.