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Expressly Unallowable Costs and Penalties

New Federal Circuit Decision Expands Potential for Contractor Penalties

Expressly Unallowable Costs and Penalties

Background — DCAA Incurred Cost Audit Emphasis Areas

The DCAA and government contractors have battled the last few years over whether costs can be expressly unallowable–and therefore subject to penalties–even when the regulations do not state in direct terms that the cost is unallowable. On October 18, 2019, the US Court of Appeals for the Federal Circuit issued a decision in Raytheon Company vs. Secretary of Defense, that promises to heat up the battle. The decision supports the DCAA position, and will result in more costs being classified as expressly unallowable, and result in additional fines and penalties.

Expressly Unallowable Costs

Under the FAR and Cost Accounting Standards (CAS), “expressly unallowable costs” are “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; 48 CFR § 9904.405-30 (CAS 405) (emphasis added). The DCAA takes a broader position–to show a cost is expressly unallowable, the cost principle must either state in direct terms that the costs are unallowable, or leave little room for interpretation or differences of opinion as to whether the particular cost meets the allowability criteria, or that it was unreasonable, under all the circumstances, for a person in the contractor’s position to conclude that the costs were allowable. That broader interpretation results in costs being held as expressly unallowable and subject to penalties, even when the cost is not specifically stated. The DCAA position has been challenged multiple times, and the issue made to the Federal Circuit in the Raytheon case.

The Raytheon Case

During an incurred cost audit, the DCAA found Raytheon charged the Government for $220,000 of lobbyist salary costs. The DCAA considered the costs as expressly unallowable, and the contracting officer demanded that Raytheon repay the government, and assessed penalties and interest. Raytheon took the position that while lobbying costs are expressly unallowable, lobbyist salary costs are not specifically named or stated in the cost principle. Raytheon argued the lobbyist salary costs are unallowable, but not expressly unallowable, and thus not subject to penalties. The case went to the Federal Circuit, which held “an ‘expressly unallowable’ cost includes more than an explicitly stated ‘item.’ Costs unambiguously falling within a generic description of a ‘type’ of unallowable cost are also “expressly unallowable.” The Court did not analyze or further define “unambiguously falling within a generic description,” but summarily ruled that salaries are unambiguously included within the generic unallowable

Impact of Raytheon on Government Contractors

In Raytheon, the Federal Circuit supported a broader definition of expressly unallowable costs than is stated in the FAR or CAS, and defined it to include costs specifically named and stated, or “unambiguously falling within a generic description” of the unallowable cost. The ruling strengthens the DCAA position. The DCAA is likely to issue updated guidance to auditors that incorporates the Raytheon holding. Government contractors should be prepared for additional questioned costs being classified as expressly unallowable costs, and having penalties imposed. Additional future case law may give additional guidance on what “unambiguously falling within a generic description” means, but for now the impact on Government contractors is likely to be additional imposition of questionable penalties. Government contractors should carefully review costs included in their indirect pools to ensure unallowable costs are not charged.

Additional Information

If you have questions regarding expressly unallowable costs or other federal government contract issues, contact the professionals at Williamson Law Group at (301) 788-8198 for confidential and candid assistance and counsel, or e-mail our attorneys at