RGCI - The Court of Appeals Reverses The Armed Services Board in The Raytheon Case

Apparently, nothing the Board found was to the liking of the judges at the United States Court of Appeals for the Federal Circuit in Case Number 21-2304, Secretary of Defense v. Raytheon Company, Raytheon Missile Systems, decided January 3, 2023. This was the appeal from the Armed Services Board of Contract Appeals in Nos. 59435, 59436, 59437, 59438, 60056, 60057, 60058, 60059, 60060, and 60061.

The Issues:

I     Whether or not the after-hours work of employees in the Raytheon Government Relations department involved in unallowable lobbying activities should be considered in calculating the percentage of the employee’s salary that was unallowable.

II    At what point does allowable economic planning that include a potential future merger or acquisition as one of the options become unallowable planning for a merger or acquisition.

Government Relations – Lobbying

Raytheon’s policy instructed its Government Relations employees to record unallowable time only if the activity was incurred during the normal workday (Monday to Friday 8 to 5). As the Government Relations employees were salaried, they were only required to record time when an unallowable activity was performed. The Board believed the Raytheon employees were well trained and followed the policy. The Court found that the policy was the issue. The Court found that Raytheon overcharged the government because Raytheon’s policy disregarding after-hours activity. The testimony of the Raytheon employees showed that the employees consider the after-hours activities to be “a regular part of their work duties.” The Court stated: “a salary is: compensation for work performed on behalf of the company, regardless of when.” The Court also relied on the discussion related to directly associated cost at FAR 31.201-6(e)(2) which states in part: “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.”

Merger and Acquisition

Raytheon’s policy instructed its Corporate Development employees to record, as unallowable, organizational cost of merger or acquisition planning activities “after the submission of an indicative offer or the decision to go to market with offering materials.” The Court found that allowable economic planning activity does not include any activities related to a potential future merger or acquisition. Most in the GovCon community have considered allowable economic planning to include the planning associated with a potential option of a merger or acquisition as long as the decision as to whether to pursue the merger or acquisition option had not been made – this is no longer the case. The Court relied on FAR 31.205-12 providing that “[e]conomic planning costs do not include organization or reorganization costs covered by 31.205-27.” The Court went on to say that “[e]ven if it can sometimes be difficult to determine whether a specific activity generates allowable economic-planning costs or unallowable corporate-reorganization costs,” it doesn’t justify establishing “policies drawing bright lines that start the clock on unallowable time at points obviously later than the FAR permits.”

The Court Reversed and Remanded

The Court concluded the Board erred in finding that:

  • Raytheon’s policies comply with the FAR and
  • The Government had not been overcharged unallowable cost.

The Court reversed the Board’s judgment and remanded “for a determination of costs Raytheon must repay and, if necessary and appropriate, an assessment of penalties.”

Timekeeping Records

Related to both issues, the Court recognized that the lack of timekeeping records makes it difficult to calculate the cost impact. The Court goes on to state this “unfortunate consequence, however, is attributable to Raytheon’s policies [and] Raytheon, not the government, should bear the costs associated with Raytheon’s policies.” How this statement will play with the Board on the remand will be interesting to see, if not downright frightening.

Expressly Unallowable

Under both issues, the Court made it clear that the fact Raytheon may have misapplied the intent of the FAR 31 allowability provisions does not change the fact that the activities and associated cost are expressly unallowable. Meaning it is very likely penalties will be applied to what every amount is determined.


Contractors should consider requiring total time accounting for all employees include salaried indirect employees. If a challenge does come up, this will provide you with data to work with and limit the Government auditor’s ability to assume it is all unallowable. While there is not a specific requirement for timekeeping of employees that are 100% indirect, discretion may be the better part of valor here.

Contractors should review their policies to ensure that employees involved in economic planning or market planning consider and record as unallowable any effort related to working with an option that includes a potential future merger or acquisition (or divestiture). The way we believe Government auditors will view this case is that any research activities to support economic planning (FAR 31.205-12) or market planning (FAR 31.205-38(b)(4)) that could in anyway lead to a merger or acquisition are unallowable.

This is a big win for the Defense Contract Audit Agency and will likely embolden many auditors to press other FAR interpretations with little to no consideration for the cost of compliance and the materiality of the finding.

Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and supporting contractors from contract award to contract closeout. We would be happy to be part of your team.

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Written by John C. Shire, CPA

John C. Shire, CPA John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant

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Topics: Incurred Cost Proposal Submission (ICP/ICE), Government Regulations, Federal Acquisition Regulation (FAR)