Kellogg Brown & Root Services, Inc.
Docket: ASBCA 58081
Decision date: 2016-12-02

ARMED SERVICES BOARD OF CONTRACT APPEALS 
Appeal of--
Kellogg Brown & Root Services, Inc. 
Under Contract No. N62470-04-D-4017 
APPEARANCE FOR THE APPELLANT: 
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APPEARANCES FOR THE GOVERNMENT: 
ASBCA No. 58081 
Karen L. Manos, Esq. 
Gibson Dunn & Crutcher, LLP 
Washington, DC 
Ronald J. Borro, Esq. 
Navy Chief Trial Attorney 
Russell A. Shultis, Esq. 
Matthew S. Hawkins, Esq. 
Senior Trial Attorneys 
OPINION BY ADMINISTRATIVE JUDGE D' ALESSANDRIS 
This appeal arises under Contract No. N62470-04-D-4017, also known as the 
Emergency Construction Capabilities Contract Worldwide (CONCAP III or contract), 
between the Naval Facilities Engineering Command Atlantic (NAVFAC, Navy, or 
government) and Kellogg Brown & Root Services, Inc. (KBR or appellant). KBR appeals 
from a contracting officer's 
final decision disallowing $14,707,191 of subcontractor costs 
that it incurred under various task orders issued under the contract. We possess jurisdiction 
pursuant to the Contract Disputes Act, 41 U.S.C. §§ 7101-7109. 
The government's claim consists of disallowed costs incurred under numerous 
master agreements, task orders, purchase orders, and subcontracts issued under the 
Contract. Accordingly, we consider each portion of the government's claim seriatim in the 
order presented in KBR's complaint. Only entitlement is before us. 
FINDINGS OF FACT 
I. The Emergency Construction Capabilities Contract Worldwide 
1. On 26 July 2004, NAVFAC awarded Contract No. N62470-04-D-4017, the 
CONCAP III, to KBR. CONCAP 
III required KBR to provide the supervision, equipment, 
materials, labor, travel, and all means necessary to provide an immediate response for 
civilian construction contract capability in response to natural disasters or similar events. 
(R4, tab 1 at 1, 7) Although the contract work would predominately be construction, it also 
provided that the contractor may be required to provide operations and support functions, 
including providing galley services (id.). 

2. CONCAP III was designed to respond to natural disasters, and other contingencies, 
by issuing task orders to modify the contract's broad scope of work (R4, tab 1 at 16-17; 
tr. 5/47-49). 
3. In the event of a future natural disaster, NA VFAC would be able to issue a task 
order to KBR to rapidly provide labor, material, and equipment to provide emergency 
construction and engineering services (R4, tab 1 at 7). The task orders would be subject to 
modification to add funds and by technical direction to change the scope (R4, tab 1 at 16-17; 
tr. 5/48-49, 8/18-19). 
4. Typical disaster-related tasks performed by KBR and its subcontractors included 
facility and infrastructure assessment, "dry-in" construction (repairing the building 
envelope to keep water out), "dry-out" (removing water damaged components and mold 
abatement), removal of storm debris, restoration of utilities, construction of temporary 
facilities, provision of temporary living facilities (housing, dining, laundry, and sanitary 
facilities) and general rebuild construction (tr. 6/25, 46-49). 
5. CONCAP III provided that the contracting officer's representative could issue 
technical directions to approve contractor-proposed solutions, fill in the details, and define 
an emphasis for the tasks assigned within the scope of work defined by the task order (R4, 
tab 1 at 18). 
6. The contingency environment in which CONCAP III task orders were issued, 
and the need for quick performance of work that often had a rapidly evolving and 
indefinite scope, required KBR to execute its tasks pursuant to extremely broad direction 
from the government, defined and modified on the fly through written technical directives 
and, more frequently, verbal directions and clarifications (R4, tab 1 at 7; tr. 5/47-49, 
107-08, 117; supp. R4, tab 400). KBR's project manager, Mr. ~cott Hayward testified that 
KBR would receive a telephone call instructing it to mobilize, followed by issuance of a 
broadly-worded task order that was later definitized through written technical directives 
and verbal instructions from the government (tr. 6/23-25, 31-33). 
7. By way of example, the primary task order for Hurricane Katrina recovery 
efforts was issued the day that Katrina made landfall on the Gulf Coast, and was for 
$150,000 with no scope of work beyond the brief statement: "Initial Disaster Response for 
Hurricane ... Katrina. Mobilization for initial responders." (R4, tab 57 at 298; tr. 8/12-13, 
43) This task order was supplemented with 21 modifications, eventually totaling $84.96 
million in work, 4 7 separate written technical directives, and many verbal directions and 
clarifications (R4, tabs 58-81; supp. R4, tab 512; tr. 6/57-58). 
8. The CONCAP III contract language required "unbounded flexibility," with KBR 
working "very closely and in detail with Navy procurement, planning, and program officials" 
to develop goals and planned actions "through contractor and Navy iterative discussions" 
(R4, tab 1 at 7). These iterative discussions included daily meetings, daily reports, and 
2 

additional verbal discussions with the government contracting officers both on site and at 
NA VF AC headquarters (tr. 8/9-10, 28, 78; supp. R4, tab 683 at 6558). Due to the exigent 
circumstances, this verbal direction was not always memorialized in writing (tr. 8/75, 92-95, 
5/118-19). Moreover, the precise nature of the work to be performed under the contract and 
the manner in which it was to be performed often fell to KBR's business judgment (tr. 8/37). 
9. Because the nature of the work under CONCAP III was undefined, KBR 
was generally-unable to issue firm-fixed-price subcontracts, negotiating instead fixed all-in 
labor rates for the majority of its subcontracts, an approach endorsed by NA VF AC 
(tr. 6/17-19, 66-67; supp. R4, tab 510 at4123). 
10. In awarding CONCAP III to KBR, the government evaluated KBR's ability to 
control and document its costs (tr. 5/54-55). 
11. KBR had an approved purchasing system, meaning that KBR's subcontracting 
procedures were judged to have conformed to government procurement policies 
as provided under Part 44 of the Federal Acquisition Regulation (R4, tab 1 at 35 
(FAR 52.244-2); tr. 5150). 
12. Because KBR had an approved purchasing system, it was not required to 
seek contracting officer approval before executing most types of subcontracts (R4, tab 1 at 
35-37 (FAR 52.244-2); tr. 5/50-51). 
13. CONCAP III was a Cost-Plus-Award-Fee, Indefinite-Delivery/Indefinite-Quantity 
(ID/IQ) contract, a type of cost reimbursement contract (R4, tab 1 at 7; tr. 5/47). 
14. CONCAP Ill required the contractor to maintain records sufficient to reflect all 
the costs incurred in performance of the contract and the government had a right to audit 
those records (R4, tab 1 at 24 (FAR 52.215-2); tr. 2116-18, 5/49). 
15. CONCAP III required KBR to maintain payrolls during the course of the work 
and it was also responsible for the submission of copies of payrolls by all subcontractors 
(R4, tab 1 at 24 (FAR 52.222-8)). 
16. Each payroll submitted was required to be accompanied by a "Statement of 
Compliance," signed by the subcontractor or its agent who paid or supervised the payment of 
the persons employed under the contract and also was to certify that the payroll was correct 
and complete, that each laborer had been paid, and that each laborer had been paid not less 
than the applicable wage rates and fringe benefits (R4, tab 1 at 24 (FAR 52.222-8)). 
17. CON CAP III prohibited KBR from paying any subcontractor on a 
cost-plus-a-percentage-of-cost basis (R4, tab 1 at 37 (FAR 52.244-2(h)). 
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18. CONCAP III provided that the contractor shall give the contracting officer 
prompt notice of any claim made by any subcontractor that, in the opinion of the 
contractor, may result in litigation related in any way to the contract with respect to which 
the contractor may be entitled to reimbursement from the government (R4, tab 1 at 37 
(FAR 52.244-2(i)). 
19. On 8 September 2005, by executive order, President Bush suspended the 
Davis-Bacon Act for contracts in hurricane-damaged areas of Florida, Mississippi, and 
Louisiana. On 15 September 2005, task order 17 was modified to reflect the suspension of 
the Davis-Bacon Act. (R4, tab 96 at 463-64) On 27 October 2005, the task order was 
again modified to "clarify that Davis-Bacon Act wage determinations did apply to the 
entire performance period and will continue to apply to the entire performance period of 
this task order, notwithstanding the apparent suspension per Mod 3 ( 13 SEP 2005) and 
withdrawal of the suspension, Mod 10 (14 OCT 2005)" (R4, tab 103 at 487). 
II. Relevant CONCAP III Task Orders 
20. Hurricane Ivan hit Pensacola, Florida on 16 September 2004 (tr. 6/31 ). 
21. NA VFAC issued Task Order 2 for the Hurricane Ivan response on 
17 September 2004 (R4, tab 11). 
22. Hurricane Katrina hit Louisiana and the Mississippi Gulf Coast on 29 August 
2005 (tr. 6/19). 
23. NA VFAC issued Task Order 16 for the Hurricane Katrina response on 
29 August 2005 (R4, tab 57). 
24. NA VFAC issued Task Order 17 on 30 August 2005 for the Hurricane Katrina 
response at Naval Air Station Pascagoula, Naval Air Station Gulfport, Stennis Space 
Center and other Navy installations in the Southeast Region (R4, tab 82). 
25. Task Order 19 was issued on 8 September 2005 to work on temporary mortuary 
facilities in New Orleans in coordination with United States Army Corps of Engineers in 
response to Hurricane Katrina (R4, tab 104). 
26. Task Order 20 was issued on 9 September 2005 for unwatering 
work in the New 
Orleans area (R4, tab 115). 
27. Hurricane Rita hit the Texas/Louisiana border area about 25 September 2005 
(tr. 6/44). 
28. Task Order 21 was issued on 28 September 2005 for debris removal, roof repair 
and stabilization efforts at the Naval Reserve Center in Orange, Texas (R4, tab 124). 
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29. Hurricane Wilma hit South Florida on 24 October 2005 (tr. 6/6, 45). 
30. Task Order 23 was issued on 26 October 2005 for hurricane recovery efforts in 
Key West, Florida (R4, tab 130). 
31. The Navy generally gave KBR high ratings and award fees for its performance on 
the CONCAP III contract. The Navy rated KBR's work "Outstanding" for its performance 
evaluations for task orders 02 (Hurricane Ivan response), 16 (Hurricane Katrina response), 
and 20 (Hurricane Rita response), and "Above Average" for task orders 17 (Katrina response 
at Pascagoula, Gulfport, and Stennis) and 21 (Hurricane Rita response). (App. supp. R4, 
tabs 524, 530-32, 534, 536-37) However, KBR experienced much lower ratings and fee 
awards for task orders 19 (mortuary facility) and 23 (Hurricane Wilma response at Key West) 
(app. supp. R4, tabs 533, 538 at 5027-28, 5030; supp. R4, tab 462). 
III. KBR's Contracting under CONCAP III 
32. On 12 September 2005, after task orders 2, 16, 17, 19, and 20 were issued, KBR 
issued an internal memorandum establishing contracting procedures for its Hurricane 
Katrina relief efforts under CONCAP III (supp. R4, tab 477; tr. 7/11-12). 
33. The KBR memorandum states that, "[a]ll external commitments will be reduced 
to writing and may only be executed by duly authorized Procurement personnel acting within 
their respective delegation of commitment authority" (supp. R4, tab 4 77 at 69496). 
34. The KBR memorandum states that the solicitation must provide instructions on 
how the subcontractor's pricing data should be presented (supp. R4, tab 477 at 69499). 
35. The memorandum required solicitations to include the KBR Subcontract 
General Conditions, as well as Contract Specific Special Conditions that apply to the 
contemplated award (supp. R4, tab 477 at 69499). 
36. The KBR Subcontract General Conditions are incorporated into the subcontracts 
with Commercial Marketing International, Inc., Blackmon Mooring Steamatic Catastrophe, 
Inc.'s subcontract S0015, and Kustom Industrial Fabricators (supp. R4, tab 1507 at 10227-34, 
tab 1206 at 56580-87, tab 2210 at 62678-85). 
3 7. The memorandum states that a written solicitation was required on a service 
subcontract regardless of the dollar value (R4, tab 477 at 69500). 
IV. The Audit of the CONCAP III Contract 
38. Shortly after KBR began responding to the 2005 hurricanes, DCAA commenced 
an audit ofKBR's subcontracting costs under the CONCAP III contract. In May 2007, 
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DCAA issued its first audit report, questioning $1.5 million under KBR's subcontract with 
Commercial Marketing International (app. supp. R4, tab 640). 
39. Two years later, in June 2009, NAVFAC Deputy Acquisition Director 
Kimberly Kahler issued a letter to KBR notifying it that, based upon the significant costs to be 
questioned by DCAA 
in its overall subcontract audit, NA VF AC was suspending payment of 
all invoices and award fees under the contract (supp. R4, tab 479). NA VFAC has not made 
any payments to KBR under the CONCAP III contract since June 2009 (tr. 5/79-82). 
40. In July 2009, DCAA issued a second audit report, questioning 
$24.3 million 
in subcontractor costs in addition to those previously questioned for Commercial 
Marketing International (app. supp. R4, tab 544). Shortly thereafter, in September 2009, 
DCAA issued a series of Form 1 notices disapproving $26 million in subcontract costs 
under CONCAP III (app. supp. R4, tab 546). 
41. In April 2010, NA VF AC met with KBR to discuss the disallowed costs (tr. 5/82). 
During the negotiations, KBR and NA VF AC agreed to categorize the costs as allowable, 
unallowable, allowable pending verification, and tabled for further negotiations (R4, tab 331; 
tr. 5/62-63). After the negotiations, KBR provided additional documentation, which was 
reviewed by DCAA before issuing a revised audit report in August 2010 (R4, tab 325). 
42. In September 2010, DCAA 
issued revised versions of the Form 1 notices (app. 
supp. R4, tabs 548-55). After receiving these Form 1 notices, KBR sent a letter to 
NAVFAC requesting disposition of the questioned costs discussed at the April 2010 
negotiation (app. supp. R4, tab 724). Four months later, in January 2011, Ms. Kahler 
issued a letter confirming the amounts deemed allowable, unallowable, and tabled for 
further negotiation, and requesting that KBR provide an additional analysis and 
documentation supporting the approximately $19 million in costs classified by NA V AC as 
"Tabled for Further Negotiation" (app. supp. R4, tab 726). 
43. In April 2011, KBR provided NAVFAC with additional supporting data for the 
questioned costs related to Blackmon Mooring Steamatic Catastrophe Inc. (BMS-CAT), 
LJC Defense Contracting, Environmental Chemical Corporation, BE&K, and Commercial 
Marketing International (supp. R4, tabs 2700-2829). 
44. NA VFAC did not provide this information to DCAA (tr. 4/50-51, 175-76, 5/87). 
Instead, these materials were reviewed by Kendra McMahon, a NA VF AC claims contract 
specialist who was principally responsible for drafting the final decision (tr. 41120, 162, 175-76). 
45. The draft final decision was presented to Patricia Kellihan, the Chief of 
Contracts for NA VF AC Atlantic. Ms. Kellihan testified that she signed the document 
without any substantive changes, and that she had not read the DCAA audit reports, KBR's 
responses, or the subcontracts; and had no knowledge of the day-to-day management of the 
contract or the details of any technical direction given under the contract; and conducted no 
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independent investigation of the facts or law underlying the final decision (tr. 4/161-62, 
5/68, 110, 116, 122, 132-34). By letter dated 27 February 2012, the contracting officer 
issued a final decision disallowing $14, 707, 191 of the questioned costs. KBR timely 
appealed to the Board on 16 April 2012, which was docketed as ASBCA No. 58081. 
A. BMS-CAT Master Agreement HUR004 
46. On 9 July 2005, KBR requested proposals for infrastructure dry-out 
stabilization work at various naval facilities. The request for proposals stated that 
proposals must be in accordance with the terms and conditions of the request for proposals 
and that it must strictly adhere to the proposal instructions to be considered for award. 
(Supp. R4, tab 1231 at 55728, 55730; tr. 1/49) 
4 7. The request for proposals stated that the 
awardee would be required to remove 
and discard all mold infected surfaces, cut-out mold contaminated materials, and treat any 
mold growth that did not require removal (supp. R4, tab 1231 at 55734). 
48. The request for proposals stated that labor "shall" include all burdens, benefits, 
overhead and profit (supp. R4, tab 1231 at 55736). 
49. BMS-CAT responded to the request for proposals on 18 July 2005 (supp. R4, 
tab 1232). 
50. BMS-CAT bid a fully burdened labor rate of $39.86/hour (supp. R4, tab 1235 at 
58450-51; app. supp. R4, tab 103 at 739; tr. 6/87-88). 
51. KBR also received proposals from two other offerors (supp. R4, tabs 1235, 
2712). Based on an evaluation ofBMS-CAT's labor and equipment pricing, as well as its 
technical proposal, KBR determined that BMS-CA T was the best value, and awarded it 
Master Agreement HUR004 on 23 August 2005, six days before Hurricane Katrina made 
landfall in Louisiana (supp. R4, tab 1240; app. supp. R4, tab 598). 
52. The Master Agreement provided that any services to be furnished under the 
agreement should be ordered by issuance of work releases that were to be priced "based on 
firm fixed unit rates" 
(supp. R4, tab 1236 at 58401). 
53. The Master Agreement did not identify a particular location where the 
work would be 
performed (supp. R4, tab 1236 at 58401; tr. 1/51-52). However, KBR's 
request for proposals and BMS-CA T's bid were both based upon an earlier solicitation for 
anticipated, but un-awarded, work at the Pensacola Naval Air Station (R4, tabs 1232, 2738; 
tr. 1/142, 6/84). 
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54. KBR contracted with BMS-CAT on a time-and-material basis (supp. R4, 
tab 1234 at 58441, tab 1239 at 55627, tab 1245 at 55634, tab 1251at55649, tab 1276 at 
55931; tr. 1/164-69). 
55. The CONCAP III Master Agreement HUR004 between BMS-CAT and KBR 
indicated that pricing would be provided in the work releases (app. supp. R4, tab 598 at 5688). 
56. On 31 August 2005, two days after Hurricane Katrina made landfall, KBR issued 
Work Release 1 under the Master Agreement, for infrastructure dry-out stabilization at naval 
facilities in Mississippi & Louisiana (supp. R4, tab 1241at58418-22). 
57. Work Release 1 provided that for labor rates "[a]ll burdens and benefits, 
supervision, other overhead costs and profit shall be accounted for within the hourly rates 
provided," and for equipment the rates "will include mobilization costs, maintenance and 
repair costs, overhead and profit" (supp. R4, tab 1241 at 58422). The work release provided 
that these costs should be specified on an attached pricing sheet (id). 
58. The pricing sheet referenced in Work Release 1 provided a box with 
the instruction "provide markup rate to be applied to actual costs per reciept [sic]" 
and BMS-CA T indicated that the "Equipment & Material Mark Up Rate %" was "10% 
+ 10%" (supp. R4, tab 2738 at 70162). 
59. In response to Hurricane Katrina, KBR issued subcontract Change Order 1 to Work 
Release 1 on 13 September 2005 to increase the scope of work and increase the contract value 
by $1,000,000 (supp. R4, tabs 1246, 1259). On 13 October 2005, subcontract Change Order 2 
increased the contract value by $12,500,000 (supp. R4, tab 1253). 
60. Subcontract Change Order 3 to Work Release 01 was signed on 10 November 
2005, and increased funding of Work Release 1 by $12,000,000 and added the State of 
Florida to the Master Agreement work location (supp. R4, tab 1259). Subcontract Change 
Order 4 to Work Release 01 was signed on 29 December 2005 and increased the contract 
value by $13,000,000 to $39,500,000 (supp. R4, tab 1264). Subcontract Change Order 5 to 
Work Release 01 was signed on 24 February 2006 and increased the value of the contract 
by $24,500,000 to $64,000,000 and extended the period of performance from 31 December 
2005 to 31 March 2006 (supp. R4, tab 1270). 
61. Subcontract Change Orders 3, 4, and 5 each contained a release clause stating: 
In consideration of the increased work and cost modifications 
referred to herein the Subcontractor (BMS) hereby releases 
Kellogg Brown & Root Services and the U.S. Government 
from all liability performed under this Master Agreement 
and 
subsequent work release for further equitable adjustments 
8 

attributable to such facts or circumstances associated with the 
increased costs and change in performance period. 
(Supp. R4, tab 1259 at 58431, tab 1264 at 
58434, tab 1270 at 
56337) 
62. BMS-CAT's invoices added a 21% markup to its labor and equipment costs. 
(supp. R4, tab 1276 at 55931; tr. 1/59-61). 
63. BMS-CAT's labor rate of$39.86 per hour is a blended rate for skilled 
and non-skilled labor that includes $8.72 per hour for profit and overhead (supp. R4, 
tab 2703 at 69680; tr. 1/54-55, 58-59, 6/90). 
64. Mr. Scott Hayward, KBR's program manager for CONCAP III, concluded that 
the 21 % markup on BMS-CA T's invoices was more than was provided in its contracts with 
KBR (compl. ~~ 66-68, 71; tr. 6/90-91). 
65. KBR paid BMS-CAT the 21 % markup on labor based on an oral modification of 
the contract in late November or early December 2005. KBR agreed to the amendment 
because Mr. Hayward concluded that the 21 % markup was less than BMS-CAT could have 
obtained if it had chosen to seek a contract modification (tr. 6/90-91). 
66. The destruction of infrastructure, damage to roads and bridges, shortages of 
gasoline and unavailability of labor following Katrina was dramatically different than in 
other hurricane response efforts, a point conceded by several government employees (app. 
supp. R4, tab 158; tr. 6/34-35, 88-90, 8/15-17, 104-05, 109). 
67. The Navy 
added build-back services to the project, requiring BMS-CAT to employ 
skilled tradesmen at wage rates in excess of those contemplated by the request for proposals 
and original scope of work (tr. 6/89, 7/160-61); and implemented a new mold specification 
requiring 
BMS-CAT to employ specialists at rates higher than those included in the subcontract 
(tr. 6/89-90). As the Navy recognized in an award fee evaluation "KBR was constantly 
redirected due to changing guidance relative to application of the mold specification" (app. 
supp. R4, tab 696 at 6656). 
68. Even with the additional markup for overhead and profit, BMS-CAT's 
hourly labor rate was still lower than that of the other offerors in the initial solicitation 
(tr. 6/92-95; supp. R4, tab 1308). 
69. KBR paid BMS-CAT $6,710,322 in additional markups on its labor costs 
and an additional markup of $3,739,040 on its equipment costs (supp. R4, tab 1330, 
tab E-06d, Questioned Cost; tr. 1/63-65). 
70. Mr. Hayward did not memorialize 
the oral modification to pay BMS-CAT an 
additional 21 % markup in writing because he: 
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[D]id not see the need for various reasons. We had the 
agreement and, you know, we're operating within the context 
of verbal agreement and verbal direction from the Government, 
and if we went through a formal, you know, submitting a 
Request for Proposal, and I thought that, you know, after the 
fact that sort of documentation might result in the contractor, 
BMS-CA T coming back and trying to take a larger bite. 
And so we come to what I was extremely confident was a 
reasonable settlement to the issue and saw no need to 
memorialize it, just like the Government is not seeking the need 
to memorialize many changes that they've directed in the prime 
contract. 
(Tr. 6/91-92) Additionally Mr. Hayward testified that BMS-CAT did not overtly threaten 
to walk off the job site without the oral modification to permit the 21 % markup on labor. 
Instead, Mr. Hayward testified that he could "tell from body language" that KBR might 
lose BMS-CAT as a subcontractor on the project ifKBR did not agree to pay the markup 
on labor. (Tr. 7/35) 
71. On 15 March 2006, Mr. Hayward emailed other KBR employees regarding a 
disagreement with BMS-CAT related to mold remediation. Mr. Hayward stated that "mold 
remediation is clearly in the scope of the original contract and [personal protective 
equipment] was clearly to be part of the all-in labor rate." (Supp. R4, tab 1291 at 55696) 
72. In these communications, Mr. Hayward did not mention the oral modification 
that he had entered to compensate BMS-CAT for any changed conditions, such as the mold 
specification (supp. R4, tab 1291). 
73. DCAA issued a report on 10 July 2009 questioning, among other things, 
$10,449,362 of the costs claimed by KBR related to BMS-CAT. That amount represents 
the 21 % markup that BMS-CA T applied to its labor and equipment rates. That total is 
comprised of the $6,710,322 markup on labor and the $3,739,040 markup on equipment. 
(Supp. R4, tab 2903 at 19214) 
74. DCAA issued a supplemental audit report on 19 August 2010. DCAA again 
questioned the $10,449,362 paid to BMS-CAT for the additional markup on labor and 
equipment under the master agreement. (R4, tab 325 at 1208) 
75. On 27 February 2012, the contracting officer issued her final decision 
disallowing the costs that were paid to BMS-CA T for the 21 % markup upon its labor and 
equipment rates (R4, tab 149 at 655). 
10 

76. The contracting officer found that KBR had failed in its responsibility to 
properly support its costs (R4, tab 149 (FAR 3 l.201-2(d))). 
77. Additionally, the contracting officer found that the markup created a prohibited 
cost plus percentage of cost contract (R4, tab 149 (FAR 52.244-2(g))). 
CONTENTIONS OF THE PARTIES 
The Navy asserts that KBR improperly paid BMS-CAT $10,449,362, representing a 
21 % markup for overhead and profit on BMS-CA T's labor and equipment rates under the 
master agreement (gov't br. at 52-58). The Navy asserts that the markup creates an 
improper cost-plus-percentage-of-cost subcontract, that the oral agreement asserted by 
KBR violates the terms of the CONCAP III contract, the FAR, and KBR's own 
procurement policies, and that there is no evidence of an oral modification. The Navy 
additionally asserts that the costs were not reasonable. KBR asserts that the markup on 
equipment was provided for in the subcontract and that the subcontract was orally modified 
to permit the markup on labor costs (app. br. at 17-28). 
Standard of Review 
The contracting officer's final decision disallowed many of the claimed costs based 
upon a purported failure to comply with a contract, subcontract or FAR provision. 
However, at the hearing, and in post-trial briefing, the Navy asserted that each of the costs 
also should be disallowed on the basis of reasonableness pursuant to FAR 31.201-3. This 
change in emphasis is significant because it shifts the burden of proof to KBR. 
"The government has the burden of proof in establishing that a cost is unallowable by 
operation of a specific contract provision or regulation." Kellogg Brown & Root Services, 
Inc., ASBCA No. 56358 et al., 14-1BCA~35,639 at 174,521 (citing Space Gateway 
Support, LLC, ASBCA No. 56592, 12-1 BCA ~ 34,941 at 171,792; Lockheed Martin 
Western Development Laboratories, ASBCA No. 51452, 02-1 BCA ~ 31,803 at 157, 102). 
However, the Navy is not limited in defending its case to the logic asserted in the contracting 
officer's final decision. Rather, the Board considers the action de nova. See 41 U.S.C. 
§ 7104(b)(4) (action brought before the Board proceeds de nova); Wilner v. United States, 
24 F.3d 1397, 1401-02 (Fed. Cir. 1994) (appeal to board or court from contracting officer's 
final decision is de nova). 
With regard to the Navy's cost-reasonableness challenge to KBR's invoiced amounts, 
KBR bears the burden of proof. The FAR explicitly provides that when a review of the facts 
"results in a challenge of a specific cost by the contracting officer or the contracting officer's 
representative, the burden of proof shall be upon the contractor to establish that such cost is 
reasonable." FAR 3 l.201-3(a). The Federal Circuit has interpreted this provision as 
providing the "reviewing officer or court considerable flexibility in assessing the 
reasonableness of costs." Kellogg, Brown & Root Services, Inc. v. United States, 728 F.3d 
11 

1348, 1359 (Fed. Cir. 2013). The Federal Circuit additionally noted that cost reasonableness 
"is a question of fact." Id. at 1360 (citing Gen. Dynamics Corp. v. United States, 410 F.2d 
404, 409 (Ct. Cl. 1969)). The "standard for assessing reasonableness is flexible, allowing 
[the Board] to consider many fact-intensive and context-specific factors." Id (citing 
FAR 31.201-3). Moreover, "the reasonableness of specific costs 'must be examined with 
particular care' when the costs incurred 'may not be subject to effective competitive 
constraints."' (Id. at 1359 (quoting FAR 31.201-3(a)). 
DECISION 
We first turn to the Navy's assertion that KBR's claimed subcontract costs are a 
violation of the prohibition against cost-plus-a-percentage-of-cost contracts contained in FAR 
52.244-2. A contract is a cost-plus-a-percentage-of-cost contract when (1) payment is on a 
predetermined percentage rate; (2) the predetermined rate is applied to actual performance 
costs; (3) the contractor's entitlement is uncertain at the time of contracting; and ( 4) the 
contractor's entitlement increases directly with an increase in performance costs. Urban Data 
Systems, Inc. v. United States, 699 F.2d 1147, 1150 (Fed. Cir. 1983). Obviously, the BMS­
CAT subcontract satisfies provisions one and four of the Urban Data test because the markup 
is a percentage added to the invoiced amounts of labor and materials (finding 62). Less clear 
is whether the predetermined rate is being applied to actual performance costs and whether 
the contractor's entitlement was uncertain at the time of contracting. 
Here, KBR was performing a cost-plus-award-fee contract (finding 13). The master 
agreement with BMS-CAT was a time and materials contract (finding 54). Thus, the 
situation is similar to that in Michael Weller, Inc. v. Office of Navajo and Hopi Indian 
Relocation, GSBCA Nos. 10627-NHI, 11411-NHI, 94-2 BCA ~ 26,849 at 133,612, where 
that board determined that there was not a cost-plus-a-percentage-of-cost contract where 
the appellant invoiced the government for subcontractor overhead and profit passed on to it 
by a subcontractor in a time and materials contract. Thus the contractual arrangement in 
Michael Weller differs from that in Urban Data, which provided for profit as a fixed 
percentage of cost. We interpret the holding in Michael Weller as finding that 
reimbursement of subcontractor costs on a time and materials subcontract does not satisfy 
the second prong of the Urban Data test, that a predetermined rate is applied to actual 
performance costs, because the fixed-rate, time-and-materials subcontract was not a 
cost-type contract. 
KBR asserts that the BMS-CAT master agreement was not a 
cost-plus-a-percentage-of-cost contract because the overhead and profit percentages 
were not applied to actual costs but were adjustments to a fixed hourly rate. KBR's 
argument is essentially the same as the holding in Tero Tek International, Inc., 
B-228548 (Comp. Gen. Feb. 10, 1988) 88-1CPD~132, holding that a similar 
provision that applied profit as a percentage of travel reimbursement was not a 
cost-plus-a-percentage-of cost contract. In Tero Tek, the General Accounting Office 
(GAO) held that that the contract was not a cost-plus-a-percentage-of-cost contract 
12 

because it did not satisfy provision three of the Urban Data test, that entitlement was 
uncertain at the time of contracting. 
Regardless of whether it is provision two or provision three of the Urban Data test 
that is not satisfied, the logic is the same. Taken together, Michael Weller and Tero Tek 
hold that a contract is not a cost-plus-percentage-of-cost contract where the profit 
percentage is being applied to a cost that does not vary with the performance of the 
contract. In Michael Weller it was a time and materials subcontract, while in Tero Tek, the 
GAO noted that the travel was billed at rates established with government approval. The 
BMS-CA T subcontract involved the reimbursement of subcontractor costs that increased 
with an increase in the level of performance - that is an increase in the number of labor 
hours - but where the hourly rate was fixed. Thus, we hold that the BMS-CA T subcontract 
was not an improper cost-plus-a-percentage-of-cost contract. Moreover, as KBR notes, if 
the 21 % overhead and profit were simply included in a higher hourly labor rate, there 
would be no argument that it was a cost-plus-a-percentage-of-cost contract. 
Having determined that BMS-CA T's claimed markup would not constitute 
an illegal cost-plus-percentage-of-cost contract, we tum to the question of whether the 
BMS-CA T master agreement provided for a 21 % markup on labor and equipment. The 
Navy contends that the subcontract required that labor, material, and equipment prices 
include all overhead and markup costs. KBR contends that the master agreement provided 
for markup on equipment and materials and that the master agreement was modified to 
provide for markup on labor costs. 
We first tum to the terms of the master agreement. The CONCAP III Master 
Agreement HUR004 between BMS-CA T and KBR indicated that pricing will be provided 
in the work releases (finding 55). The work release (WROl) provided that for labor rates 
"[a]ll burdens and benefits, supervision, other overhead costs and profit shall be accounted 
for within the hourly rates provided," and for equipment the rates "will include 
mobilization costs, maintenance and repair costs, overhead and profit" (finding 57). The 
work release provided that these costs should be specified on an attached pricing sheet, in 
which BMS-CAT indicated markups on equipment and material (id.). Specifically, the 
pricing sheet provided a box with the instruction "provide mark up rate to be applied to 
actual costs per [receipt]" and BMS-CAT indicated that the "Equipment & Material Mark 
Up Rate%" was "10% + 10%" (finding 58). The Navy relies instead upon language 
contained in KBR' s request for proposals, stating that equipment and labor were to be 
quoted at fully-burdened rates (finding 48). However, the Navy did not provide any 
argument that the terms of the request for proposals were incorporated into the master 
agreement, and we see no such provision. As the terms of the master agreement provide 
for a markup on equipment, but not for labor, we find that KBR is entitled to prevail on the 
equipment markup claim under master agreement HUR004. 
We next tum to KBR's assertion that master agreement HUR004 was orally 
modified to permit markup on labor costs. There is no dispute that BMS-CA T bid a 
13 

fully-burdened labor rate of $39.86 per hour (finding 50), and that the labor rate was a 
blended-rate for skilled and non-skilled labor (finding 63). In fact, Mr. Hayward 
concluded that the 21 % markup was more than was provided for under the subcontract 
(finding 64). According to the Navy, the alleged oral modification was contrary to the 
CONCAP III master contract, the FAR, and KBR's own policies. Additionally, the Navy 
asserts that there is no evidence of an oral modification of the master agreement. As 
discussed in more detail below, KBR asserts that BMS-CAT experienced changed 
conditions in performing the Hurricane Katrina response work entitling 
BMS-CA T to 
additional compensation. KBR asserts that it acted to protect the Navy by orally agreeing 
to allow a 21 % markup on labor rather than risking that BMS-CAT would walk-off the job, 
putting performance at risk, or seek an equitable adjustment that, in KBR's opinion, would 
be greater than the 21 % markup agreed to in the oral modification. 
At the hearing Mr. Hayward testified that he orally agreed with BMS-CAT to modify 
the master agreement to include the 21 % markup (finding 65). Neither party presented 
testimony from BMS-CAT to confirm 
or refute Mr. Hayward's testimony. As Mr. Hayward 
testified, the oral agreement was never reduced to writing, so there are no contemporaneous 
documents in the record to support the existence of the oral agreement (finding 70). 
We first tum to the Navy's argument that the master agreement was not orally 
modified because such a modification would be in violation of the CON CAP III contract, 
the FAR, 
and KBR's own policies (gov't hr. at 55-57). The Navy argues that an oral 
modification would violate the CON CAP III contract and the FAR because it would create a 
cost-plus-percentage of cost contract. As discussed above, we hold that the payment of 
overhead and profit as a percentage of cost for a time-and-materials subcontract does not 
create an impermissible cost-plus-percentage-of-cost contract. The Navy next asserts that 
the oral modification would violate KBR's own internal contracting procedures which 
require that "[a]ll external commitments will be reduced to writing and may only be 
executed by duly authorized Procurement personnel acting within their respective 
delegation of commitment authority" (finding 33). However, this argument fails because 
the KBR contracting procedures for Hurricane Katrina relief efforts were not incorporated 
into master agreement HUR004 applicable to this portion of the dispute (finding 36). In 
fact, master agreement HUR004 was awarded nearly a week before Hurricane Katrina made 
landfall (finding 51). Thus, the Navy has not presented any evidence that the oral contract 
violated the terms of the master contract or KBR's policies. 
The Navy additionally argues that "KBR has failed to offer sufficient evidence to prove 
that there was such an [oral] agreement" (gov't hr. at 57). However, the Navy's argument 
ignores the direct testimony of Mr. Hayward. Instead the Navy cites the fact that KBR did not 
provide notice to the Navy of a claim related to the contract which might result in litigation 
(finding 18 (FAR 52.244-2(i)), and the fact that the release language in subsequent change 
orders would have expressly applied to a claim for an equitable adjustment. The Navy's 
argument is unpersuasive because it simply assumes that which it seeks to prove. 
14 

Based upon Mr. Hayward's uncontradicted testimony, KBR and BMS-CAT orally 
modified the master agreement when the first invoices were submitted (finding 65). In 
appropriate circumstances, the oral modification of a government contract is legally binding. 
See, e.g., Raytheon Service Company, ASBCA No. 21358, 81-2 BCA i! 15,453 at 76,563. 
Because the master agreement was modified to permit the payment of the mark-up on labor, 
there would be no threat of pending litigation for which KBR would need to notify the 
contracting officer (finding 18). Two of the three waiver clauses cited by the Navy were 
signed after the date of the oral agreement, and thus would not prohibit payment of the 
markup on labor (findings 60-61, 65). The remaining waiver clause was contained in a 
modification that was executed before the oral agreement and could potentially limit KBR's 
ability to recover for markup incurred before the date of the oral modification; however, the 
waiver by its terms, applies only to "further equitable adjustments attributable to such facts or 
circumstances associated with the increased costs and change in performance period" of the 
subcontract Change Order (finding 61). However, subcontract 
Change Order 3 simply added 
funds to the work release and added Florida as a 
work location for the master agreement 
(finding 60) and is not related to the payment of markup on labor. Thus, there is no basis for 
finding that the oral agreement was prohibited by these waivers. 
The Navy's argument that KBR's action in disputing BMS-CA T's request for an 
adjustment for additional costs for personal protective gear shows that there was not an oral 
agreement to modify the master agreement for a markup on labor costs also fails (gov't 
post-hearing br. at 58). The fact that KBR rejected one proposed adjustment 
(the adjustment for personal protective gear (findings 71-72)) by informing BMS-CAT that 
it was required to submit a formal claim, but did not do so with regard to a different 
proposed adjustment (allowing markup on labor hours) is not sufficient evidence to refute 
the direct testimony of Mr. Hayward regarding the oral agreement. 
Based upon the evidence of record, and recognizing that the burden of proof was on the 
Navy, the Board finds that KBR has demonstrated that the master agreement HUR004 was orally 
modified to permit the markup of 21 %. The continued submission by BMS-CA T of invoices 
with the 21 % markup, and the continued payment of those invoices by KBR is contemporaneous 
evidence of the oral modification to permit the markup on labor. (Findings 69, 73-74) 
Pursuant to the record before us, and based on the fact that KBR had an approved 
purchasing system pursuant to FAR section 441 that did not require concurrence of a 
contracting officer (finding 11 ), we conclude that the subcontract was orally modified to 
permit the payment of a 21 % markup on labor. 
Next we turn to the question of whether KBR's costs in paying the markup on labor 
and material costs were reasonable, and whether KBR established entitlement to an 
1 The Navy does not allege that the oral modification was an action that would require the 
contracting officer's consent pursuant to FAR 44.201-l(a) and we do not see such a 
requirement in our review of CON CAP III (R4, tab 1 ). 
15 

adjustment for BMS-CAT. As noted above, KBR has the burden of establishing that its 
costs were reasonable. KBR received three quotes for disaster relief work and determined 
that BMS-CAT presented the best value based on an evaluation ofBMS-CAT's labor and 
equipment pricing, as well as its technical proposal (finding 51 ). Thus, we find that the 
equipment prices are reasonable. With regard to labor prices, the Navy asserts without any 
analysis that an equitable adjustment would have been less costly to the government than 
paying the 21 % markup on labor. However, KBR asserts that the markup was justified 
based on the cost of performing in higher Davis-Bacon Act wage rate areas, the increased 
use of higher-priced labor due to increased build-out work, and the implementation of new 
mold remediation standards. 
We hold that the price was reasonable. As noted above, the "standard for assessing 
reasonableness is flexible, allowing [the Board] to consider many fact-intensive and 
context-specific factors." Kellogg, Brown & Root Services, 728 F.3d at 1360. Here we 
agree with KBR that the destruction of infrastructure and unavailability of labor following 
Katrina was dramatically different from other hurricane response efforts (finding 66). 
Additionally, KBR presented testimony that the Navy added build-back services to the 
project, requiring BMS-CAT to employ skilled tradesmen at wage rates in excess of those 
contemplated by the request for proposals and original scope of work (finding 67); and 
implemented a new mold specification requiring BMS-CA T to employ costly specialists at 
rates higher than those included in the subcontract (id. ("KBR was constantly redirected 
due to changing guidance relative to application of the mold specification.")). 
Moreover, even with the additional markup for overhead and profit, BMS-CA T's 
hourly labor rate was lower than that of other offerors in the initial solicitation (finding 68). 
We do not find persuasive KBR's argument that an equitable adjustment was warranted 
because BMS-CA T's proposal was based on labor rates in Escambia County, Florida, but 
that BMS-CAT was required to work in new locations, with higher Davis-Bacon Act wage 
rates and higher lodging and personnel support costs because the solicitation did not provide 
a location where the work was to be performed (finding 53). However, KBR's testimony 
that the labor market disruptions were greater after Katrina than after other hurricanes is 
credible (finding 66). Accordingly we find that the labor prices in the BMS-CAT master 
agreement HUR004 were reasonable. 
B. Environmental Chemical Corporation Master Agreement 
78. KBR issued a request for proposals on 9 July 2005 for infrastructure dry-out 
stabilization at various naval facilities stating that: 
[L ]abor rates shall be based on staffing the work 12 hours per 
day, seven days per week. Rates shall be weighted to include 
any overtime. The rates are for personnel actually performing 
the work and do not include travel time to the jobsite. All 
16 

burdens and benefits, supervision, other overhead costs and 
profit shall be accounted for within the hourly rates provided. 
(Supp. R4, tab 1600 at 52414) It also stated that "[ e ]quipment rates shall be based on 
operating 12 hours per day and will include mobilization costs, maintenance and repair 
costs, overhead and profit" (id.). 
79. Environmental Chemical Corporation (ECC) submitted a bid in response 
to KBR's request for proposals on 17 September 2005. ECC bid a rate of $68/hour and 
stated that the unit rate included "Laborer Rate, Fringe, Indirect markups; G&A; 
Profit; Perdiem No Lodging-Assumed to the [sic] Warehouse at the Base; Small Tools; 
PPE [personal protective equipment]- Level C-3 change outs/day; Vehicles - Vans/pickup 
trucks; Equipment- HepaVacs, NAMs [negative air machines] 2, Air Movers, Management­
Based on a labor force of 100 people or greater, and QA/QC" (supp. R4, tab 1601 at 52452). 
80. In addition to the bid from ECC, KBR also received proposals from two other 
companies. ECC was the only bidder to submit a timely proposal, and was onsite and 
ready to begin work. (App. supp. R4, tab 231; supp. R4, tab 1823; tr. 6/132) 
81. ECC's rates compared favorably to subcontractor rates already under contract 
and the rates from other bidders, when adjusted for the additional overhead items disclosed 
in those bids, were higher than ECC's rate or close to the ECC rate with other overhead 
items still not accounted for (tr. 4/84-87, 6/132-37; supp. R4, tab 1823). 
82. On 16 September 2005, KBR awarded Master Agreement HUR015 to ECC 
(supp. R4, tab 1605). 
83. KBR issued Work Release 01 under Master Agreement HURO 15 on 
17 September 2005 for rebuild construction services and mold remediation at buildings 
located at Construction Battalion Center Gulfport, Naval Station Pascagoula, and the 
John Stennis Space Center (app. supp. R4, tab 231). 
84. On 25 September 2005, ECC sent a letter to KBR with new labor and equipment 
rates, as well as a request for a meal per diem of $17 for ECC personnel. KBR initially 
informed ECC that three meals a day would be provided on site at a charge of $26 per day 
per man. However, once ECC arrived on site, it was informed that BMS-CAT 3 was ending 
the meal plan and could not accept ECC personnel. As a result, ECC had to compensate its 
workers with a per diem and requested the difference between the continental United States 
2 Witnesses at the hearing were unable to define the term, but from context it appears to be 
negative air machines (tr. 4/91, 6/132). 
3 Although this document indicates that BMS-CA T was providing the meals at Gulfport, 
other documents in the record indicate that Commercial Marketing International was 
responsible for the dining facility at Gulfport (see finding 204). 
17 

(CO NUS) per diem rate of $43 per day and the $26 per day rate that it had accounted for in 
its bid. (Supp. R4, tab 1749) 
85. ECC incurred lodging costs once they were denied use of the public works 
warehouse (app. supp. R4, tab 709 at 6713;4 tr. 6/144-45). Despite these lodging costs, ECC 
billed, and the Navy, through KBR, compensated ECC at the fixed-hourly rate of $68 per 
hour (tr. 6/145). 
86. ECC submitted Invoice No. 9 on 20 November 2005 for $299,142.13. KBR 
rejected $2,627.46 of this amount. The full amount of the markup on equipment 
($1,808.46) was rejected by KBR because the equipment mark-up was already covered in 
unit rates. (Supp. R4, tab 1696 at 26118, 26123) 
87. DCAA issued its initial Audit Report on 10 July 2009 and questioned 
$4,956,340 of the costs paid to ECC under Master Agreement HURO 15 Work Release 01. 
DCAA questioned: 
• $4,855,344 for labor costs paid using excessive labor 
rates (awarded to highest of three bidders without 
justification; also did not solicit bids from qualified 
competitors with lower rates) based on FAR 31.201-3, 
Determining reasonab 1 eness, 
• $61,656 for unauthorized security guard costs based on 
FAR 31.201-2, Determining allowability, and 
• $39,340 for 18 percent mark-up (or profit) already included 
in the equipment rates based on FAR 31.201-2, Determining 
allowability. 
(Supp. R4, tab 2903 at 19218-19) The questioned costs were 
related to Task Orders 17 and 
23 (id. at 19219). 
88. DCAA continued to question $4,956,340 of the costs paid to ECC under Master 
Agreement HURO 15 Work Release 01 in its supplemental report, issued on 19 August 
2010 (R4, tab 325 at 1213). 
89. On 14 April 2011, over a year-a-half after the initial DCAA audit report, ECC 
submitted a labor rate build-up to NA VF AC to justify the labor rates. The rate build-up 
4 We note that app. supp. R4, tab 709 indicates that ECC received a $17 per day adjustment 
for lodging while supp. R4, tab 1749, indicates that ECC's request for $17 per day was 
an adjustment for meals and not lodging. The $17 per day was based on the difference 
between the CO NUS meal per diem of $43 per day and the previously quoted $26 per 
day charge by KBR for dining at the BMS-CAT dining facility. 
18 

included $0.15 per hour for ECC management airfare and $1.45 per hour for lodging. 
(Supp. R4, tab 504; tr. A/30-31) 
90. In the final decision, the contracting officer allowed the costs paid to ECC for 
the security guards, but disapproved $155,028.80 for labor rates, as well as $7,336.99 
related to the markup on equipment rentals. The contracting officer determined that ECC's 
labor rates were reasonable compared to its competitors but questioned 
$1.60 per hour 
($0.15 + $1.45) ofECC's labor rate for management air fare costs and lodging. (R4, 
tab 149 at 656-57) 
91. In negotiations, KBR agreed that the markup on equipment rental was incorrectly 
applied, and planned to issue a credit. KBR has compensated the government for $32,004.0 I 
of the original $39,340.00 in questioned costs, but $7,336.99 remains at issue because 
NAVFAC has not processed KBR's invoices. (R4, tab 149 at 657; tr. 4/29-30) 
92. At the hearing, DCAA auditor, Garrett Wilson, reviewed the contracting officer's 
final decision and the DCAA workpapers from the audit and disagreed with the number of 
labor hours used in the contracting officer's final decision to calculate the disallowed costs. 
Based on the DCAA workpapers, there were 155,287 hours invoiced related to Mold 
Laborers. Using 155,287 hours instead of the 96,893 hours questioned in the DCAA audit 
report and in the final decision would result in approximately $248,460 being disallowed. 
The total amount of hours invoiced by ECC is approximately 400,000 hours which would 
result in $640,000 in questioned costs attributable to unallowable labor costs of $1.60 per 
hour. (Supp. R4, tabs 1820, ElOj-lc-1 through ElOj-lc-10; tr. 4/31-34) 
DECISION 
As set forth in the findings of fact above, the only remaining issues are the 
allowability of $1.60 per hour of labor charges for management airfare and lodging, and 
$7,339.99 in markup on equipment rentals. Although the DCAA audit reports questioned 
other costs, the final decision did not support DCAA' s findings and questioned only the 
costs listed above (finding 90). As part of the discussions between the Navy and KBR, 
KBR submitted to the contracting officer a build-up of ECC's $68 per hour fixed rate for 
mold remediation workers (findings 41, 89). As part of this rate build-up, ECC indicated 
that $0.15 per hour was for ECC management airfare, and $1.45 per hour was for lodging 
(finding 89). 
The Navy asserts that management airfare is unallowable pursuant to FAR 31.205-46 
(Travel Costs), and that the lodging costs are unallowable because the bid indicated that 
the $68 rate was fully burdened and included lodging costs (finding 79). However, as KBR 
correctly notes, FAR 31.205 pertains to the allowability of selected costs for cost-type 
contracts. FAR 3 l .204(b )( 1) provides that costs in that FAR part are allowable for 
cost-reimbursement, fixed-price incentive, and price redeterminable contracts. As ECC had 
19 

a fixed-price, time-and-materials contract, these cost allowability provisions are inapplicable 
and we find for KBR with regard to the $0.15 per hour management 
airfare issue. 
Our analysis is similar for the $1.45 lodging cost issue. When ECC submitted its 
bid, it proposed a fully-burdened labor rate of $68 per hour and noted that the rate included 
"Laborer Rate, Fringe, Indirect markups; G&A; Profit; Perdiem No Lodging-Assumed to 
the [sic] Warehouse at the Base; Small Tools; PPE - Level C-3 change outs/day; Vehicles 
- Vans/pickup trucks; Equipment-HepaVacs, NAMs, Air Movers, Management-Based 
on a labor force of 100 people or greater, and QA/QC" (finding 79). The Navy questions 
the inclusion of $1.45 per hour for lodging in the rate build-up submitted after performance 
(finding 89) because ECC's bid indicated that the fixed hourly rate would not contain a 
charge for lodging (gov't post-hearing br. at 71-72). The Navy's argument fails for two 
reasons. First, ECC actually incurred lodging costs once they were denied use of the 
public works warehouse (finding 85). Thus, the fact that an after-the-fact build-up to 
explain a fixed labor rate includes lodging costs does not demonstrate that ECC charged 
prohibited costs. Second, ECC submitted a fixed-price fully burdened bid, and the final 
decision 
does not question the fixed hourly rate. How ECC internally apportions that 
hourly rate is irrelevant to the Navy, as the Navy is reimbursing at a fixed hourly rate of 
$68 per hour. (Finding 89 (the $1.45 for lodging had nothing to do with ECC's actual 
billing)) Had ECC sought an equitable adjustment, seeking an increase in the fixed hourly 
rate due to higher lodging costs, then the statement in its bid regarding lodging costs would 
be relevant to our analysis, but because ECC honored its $68 per hour fixed rate 
(with the exception of the adjustment to the meals per diem (finding 84)) we find in favor 
of KBR with regard to the lodging charge for ECC. 5 
Additionally, the Navy challenges $1.60 per hour ofECC's labor rate on 
a cost reasonableness basis pursuant to FAR 31.201-3 (gov't reply br. at 2). ("All 
ofKBR's costs at issue in this appeal have been challenged on the basis of 
reasonableness."). However, the Navy cites little if any evidence demonstrating that 
ECC's prices were not reasonable, beyond the conclusory statement that KBR did not 
document "the reasonableness of paying ECC based on labor rates including improper 
mark-ups of $1.45 for lodging and $0.15 for management airfare" (gov't br. at 72). KBR, 
on the other hand, presented direct evidence that ECC' s bid of $68 per hour was the best 
value because the other two offerors did not submit fully burdened labor rates as requested 
by KBR, and also because the rates, when adjusted for the additional overhead items 
5 At the hearing, the government presented testimony that the contracting officer's final 
decision contained an error, and that the disallowed travel and lodging charges 
should have been applied to 155,287 labor hours for mold remediation, rather than 
96,893 hours (finding 92). In post-hearing briefing, the Navy asserted that the 
disallowed costs should have been questioned as to all of the roughly 400,000 labor 
hours billed by ECC (gov't reply br. at 28-29). Since we have determined that the 
Navy failed to carry its burden in questioning the $1.60 per hour in airfare and 
lodging costs, we need not determine the applicable number of labor hours. 
20 

disclosed in the bids by the other offerors, were higher than ECC's rate or close to the ECC 
rate with other overhead items still not accounted for. (Findings 80-81) Accordingly we 
find that ECC's costs were reasonable. 
Finally, KBR acknowledges that it owes a credit of $7,336.99 to the Navy for 
disapproved costs on equipment rental (finding 91). The amount is not in dispute; 
however, the Navy has not processed KBR's invoices such that the credit can be accounted 
for (finding 39). 
C. BE&K, Inc., Master Agreement 
93. On 6 September 2005, KBR issued a request for proposals soliciting bids for 
disaster recovery efforts at U.S. Navy and Marine Corps facilities in Louisiana. The 
Statement of Work states that "materials shall be reimbursed in the amount of the actual 
cost to the subcontractor plus a proposed markup rate only" and "equipment shall be 
reimbursed at rental cost plus markup." (Supp. R4, tab 800 at 66195) 
94. BE&K, Inc. (BE&K) 
responded to KBR's request for proposals on 7 September 
2005 (supp. R4, tabs 802-09). BE&K bid a daily rate of $388.60 (or $32.38 per hour based 
on a 12 hour day) for a laborer and $544.29 (or $45.36 per hour based on a 12 hour day) 
for a carpenter (app. supp. R4, tab 2 at 52-53, 57). The subcontract did not contain 
predetermined labor rates for unanticipated labor not included in the pricing sheet but 
incidental to the scope of work (app. supp. R4, tab 2 at 52-53). 
95. KBR determined that BE&K was the only offeror with the ability to provide the 
required labor for the anticipated project, and that the other offerors' prices were 
approximately 50% higher than BE&K's prices (app. supp. R4, tab 566; tr. 6/96-97). 
96. On 8 September 2005, KBR awarded Master Agreement HUR012 to BE&K 
(supp. R4, tab 811 ). 
97. KBR issued Work Release 01 under Master Agreement HURO 12 to BE&K on 
8 September 2005. The work release was to conduct disaster recovery efforts at U.S. Navy and 
Marine Corps facilities in Louisiana, Mississippi, and Alabama. BE&K bid a markup rate of 
15% for materials. The Statement of Work indicates that "materials shall be reimbursed in the 
amount of the actual cost to the subcontractor plus a proposed markup rate only" and 
"equipment shall be reimbursed at rental cost plus markup." (App. supp. R4, tab 2 at 46-53) 
98. Shortly after award, KBR determined that the base public work maintenance 
and repair 
work originally solicited was no longer needed, and shifted BE&K's workforce 
to construction of the tent camp at Joint Reserve Base New Orleans (tr. 6/95-96). The 
originally anticipated work would have been performed pursuant to the Service Contract 
Act; however, the construction of the tent camp was subject to the Davis-Bacon Act 
(tr. 6/99-100). 
21 

99. On 1December2005, Scott Hayward emailed Bill Rigby ofBE&K about concerns 
he had with BE&K's submitted invoices. Mr. Hayward questioned the Other Direct Costs that 
BE&K invoiced for, and said that "[ d]emobilization subcontractor invoices plus markup, 
including expenses, [other direct costs], will not be reimbursed as they are not reimbursable 
per the terms of the subcontract." (Supp. R4, tab 932; tr. 3/197-98) However, at the hearing 
Mr. Hayward explained that the letter pertained to BE&K's claim for other direct costs for 
items that were included in fixed rates in the subcontract and not other direct costs for which 
there was no provision in the contract (tr. 6/127). 
100. KBR and BE&K negotiated new inclusive labor rates on 8 March 2006. The 
changes included a reduction in the daily per diem rate for meals and laundry provided 
by KBR, an increase in the daily per diem rate applied to billable man-days to address the cost 
impact of workers who did not work a full 12-hour day, and all changes associated with the 
implementation of Davis-Bacon Act rates, among other things. (Supp. R4, tabs 950, 952) 
101. The revised rates were incorporated into the contract by Change Order 5 to Work 
Release 01 under Master Agreement HUR012, signed on 5 July 2006 (supp. R4, tab 852). 
102. DCAA questioned $983,793 of costs paid to BE&K under Master Agreement 
HUR012 Work Release 01 in its initial audit report issued 10 July 2009. The questioned 
costs were related to Task Orders 16 and 23. DCAA questioned: 
• $446,371 of math errors in [KBR's] reconciliation of 
subcontract invoices to the terms of the subcontract, 
• $436,464 for daily living expenses already included in 
labor rates incurred for [Task Order] No. 16, 
• $65,127 of unsupported labor cost for [Task Order] 23, 
• $25,494 for subcontractor and equipment rental mark-up 
(or profit) incurred for [Task Order] 16, and 
• $10,337 for other direct costs plus mark-up (or profit) 
incurred for [Task Order] 16. 
(Supp. R4, tab 2903 at 19228) 
103. On 19 August 2010, DCAA issued its supplemental audit report, and continued 
to question $496, 723 in costs paid to BE&K. DCAA "originally questioned $446,3 71 for 
daily living expenses already included in labor rates incurred for [Task Order] 16. Based 
on additional documentation provided by [KBR] on April 22, 2010, [DCAA] reduced [its] 
questioned costs to $3 9 5, 795." DCAA also approved $4 3 6,464 of daily living expenses it 
had previously questioned after KBR provided reconciliations during negotiations on 22 
April 2010. DCAA continued to question "$65,127 of unsupported labor cost for [Task 
Order] 23, $25,494 for subcontractor and equipment rental mark-up (or profit) incurred for 
22 

[Task Order] 16, and $10,337 for other direct costs plus mark-up (or profit) incurred for 
[Task Order] 16." (R4, tab 325 at 1223) 
104. DCAA approved some of the costs it had originally questioned in its first audit 
report after receiving documents from KBR during negotiations (tr. 3/191, 195-96). 
105. DCAA questioned $4,827 for a 15% markup that BE&K applied to its own 
equipment (R4, tab 325 at 1225). 
106. DCAA also questioned $20,667 relating to a markup applied to costs billed by 
BE&K for a second tier subcontractor, Schoel Godwin Barnett Landscape Architects (R4, 
tab 325 at 1225-26). 
107. DCAA questioned approximately $395,000 in costs relating to math and 
reconciliation errors as a result of labor adjustments. BE&K originally proposed rates based 
on Service Contract Act wages, but after the Davis-Bacon Act wages were reinstated, BE&K 
had to re-propose its rates. BE&K had originally proposed "daily living expenses," and 
included these when the labor rates were renegotiated to include Davis-Bacon wages. (Supp. 
R4, tab 1034; tr. 3/203-05) 
108. DCAA questioned $65,127 for unsupported labor costs. These costs related to 
work performed by a second-tier subcontractor, Riverside Electricians, at a cost of 
$56,632. BE&K added a 15% markup of $8,495 to these costs. KBR provided DCAA 
with two invoices from Riverside Electricians, however, DCAA continued to question the 
costs. (R4, tab 325 at 1227; tr. 4/25-27) 
109. In the contracting officer's final decision, issued on 27 February 2012, the 
contracting officer asserted that: "DCAA reviewed a spreadsheet developed by KBR for 
the negotiations. DCAA questioned $395,765 for mathematical errors in the contractor's 
calculation of the new labor rates." (R4, tab 149 at 659) 
110. DCAA 
received additional information from KBR regarding the Davis-Bacon 
Act adjustments made by BE&K and KBR in the course of the appeal. KBR and BE&K each 
proposed new daily rates and, with the exception of the rates for carpenters, the new rate was 
determined by adopting the lower of the two proposed rates, and then making adjustments to 
the rates (app. supp. R4, tab 586; tr. 6/113-14). When the lower daily rate was proposed by 
KBR, that rate was reduced by $36 for meals provided by KBR, $8 for laundry provided by 
KBR and then increased by $21.15 for the agreed adjustment to the per diem for conversion 
to man-days (app. supp. R4, tab 586; tr. 6/115). Because the rates proposed by BE&K 
already included the meal credit, when the lower daily rate was the rate proposed by BE&K, 
the proposed rates were only adjusted for laundry and the per diem to man-day adjustment 
(app. supp. R4, tab 586; tr. 6/113-15, 116-21). 
23 

111. On cross-examination, the DCAA auditor, Mr. Wilson, testified that he had not 
attempted to seek more information from KBR regarding the calculations in the 
spreadsheet (tr. 4/62-64, 70). He also conceded that ifthe explanation above were correct, 
then there were no math errors in the spreadsheet (tr. 4/74-75). Mr. Wilson further testified 
that if the rates used the in the spreadsheet were appropriate, there would be no basis for 
questioning BE&K's costs (tr. 4/111). 
112. With regard to the carpenter labor rates, Mr. Hayward testified that there was a 
large difference of $170 per day between KBR's proposed rate and the BE&K proposed 
rate. For this rate, KBR and BE&K 
agreed to split the difference and then adjust the rate 
for laundry and per diem. (Tr. 6/117-18) 
113. The final decision additionally disallowed $8,449.78 6 for other direct costs plus 
mark-up on those costs. These costs were comprised of $36.71 representing the 15% 
markup on a $244.70 warehouse manifest; $862.66 for a $750.14 purchase at Lowe's and the 
15% markup on that purchase; and $7 ,549. 7 5 representing $6,565 in legal fees, plus the 15% 
markup on that cost. (R4, tab 149 at 658-59) The final decision allowed payment of the 
warehouse receipt because it was a separate charge by the subcontractor, but rejected the 
markup on the warehouse receipt because the contracting officer determined that the 
subcontract provided for markup only to materials and equipment (id.). The Lowe's 
purchase was rejected due to a lack of supporting documentation, and the legal fees were 
rejected because "BE&K's contract is for hurricane recovery construction repair service, it is 
not clear how attorney fees would be allocable to this contract" (id.). 
114. At the hearing, KBR introduced the Lowe's receipt as well as the testimony of 
Mr. Hayward that the Lowe's receipt was similar to the documentation provided by other 
subcontractors for material purchased on the project that was not questioned by DCAA or 
the Navy (tr. 6/128-29; app. supp. R4, tab 3). 
115. KBR presented testimony that the attorney fees were for a compliance audit of 
BE&K's worker's I-9 Employment Eligibility Verification forms to ensure that they met 
the employment requirements of the contract (tr. 6/130). Mr. Hayward testified that it was 
reasonable for BE&K to perform the added verification of the workers' documentation 
given that the workers were performing on a military facility and due to the high-visibility 
of the Hurricane Katrina recovery work (id.). 
116. The final decision disallowed $20,667 representing the 15% markup on 
services provided by Schoel Godwin Barnett Landscape Architects, a second-tier 
subcontractor to BE&K because the DCAA audit determined that the cost should have 
been billed as labor, and not material, and the subcontract does not provide for a markup on 
labor, and even if billed as material, KBR had not supported the markup as a material 
handling cost (R4, tab 149 at 659). 
6 The individual numbers do not sum to the total amount listed in the final decision. 
24 

117. The final decision rejected $4,827 for a markup on equipment rental for 
subcontractor-owned equipment (R4, tab 149 at 659). 
118. Mr. Hayward testified that that there was an internal rental rate for BE&K's 
owned equipment and that such internal rates are standard in the industry (tr. 6/130; 
app. supp. R4, tab 2 at 50). 
119. The final decision also rejected $65, 127 because BE&K did not have any backup 
to support the material costs incurred by Riverside Electricians (R4, tab 149 at 660). 
120. At the hearing, KBR presented invoices from Riverside Electricians in the 
amount of $56,632 (app. supp. R4, tab 27). 
DECISION 
BE&K was initially retained to perform public works services at Joint Reserve Base 
New Orleans; however, after this anticipated work was no longer required, BE&K's 
workers were transferred to build the Joint Reserve Base tent camp (finding 98). As a 
result, BE&K was required to comply with the Davis-Bacon Act, and incurred higher costs 
in performing its work (id.). The final decision questioned five different categories of costs 
for the work performed by BE&K: (1) math reconciliation errors; (2) other direct costs, 
plus markups; (3) markup on subcontractor labor; (4) equipment rental; and (5) sub-tier 
labor charges not supported by invoices billed as labor. We address the Navy's specific 
challenges to these issues seriatim, and then, following these discussions, we address the 
Navy's price reasonableness allegations with regard to BE&K. 
i. Math Reconciliation Errors Related to Change Order 5 
The Navy first challenges the labor rate adjustment contained in Change Order 5. 
The final decision cryptically asserts that "DCAA reviewed a spreadsheet developed by 
KBR for the negotiations. DCAA questioned $395,765 for mathematical errors in the 
contractor's calculation of the new labor rates." (Finding I 09) The dispute centers around 
adjustments to the BE&K labor rates to adjust for increased costs due to the application of 
Davis-Bacon Act wages, and also adjustments for fuel prices, meals, and laundry provided 
by KBR, and an adjustment to the per diem rate to account for the fact that some workers 
were required to be on site, but were not working 12-hour days. 
It is not necessary to detail in depth how DCAA misinterpreted the spreadsheet, 
resulting in the audit questioning $397,765. At the hearing, KBR's project manager, 
Mr. Hayward, testified that he had created the spreadsheet relied upon by the DCAA 
auditors and he provided unrefuted testimony explaining the formulae in the spreadsheet. 
Specifically, Mr. Hayward testified that the final adjusted rates in the spreadsheet were the 
rates incorporated into Change Order 5 (findings I 00-0 I) to the BE&K subcontract, and 
25 

that the rates, with the exception of the rates for carpenters, were determined by taking the 
lower of the daily rates proposed by BE&K or KBR and then making other adjustments to 
the rates. When the lower daily rate was proposed by KBR, that rate was reduced by $36 
for meals provided by KBR, $8 for laundry provided by KBR and then increased by $21.15 
for the agreed adjustment to the per diem for conversion to man-days (finding 110). 
Because the rates proposed by BE&K already included the meal credit, when the lower 
daily rate 
was the rate proposed by BE&K, the proposed rates were only adjusted for 
laundry and the per diem to man-day adjustment (id.). On cross-examination, the DCAA 
auditor, Mr. Wilson, conceded that ifthe explanation above were correct, then there were 
no math errors in the spreadsheet. Mr. Wilson further testified that ifthe rates used in the 
spreadsheet were appropriate, there would be no basis for questioning BE&K's costs 
(finding 111 ). 
With regard to the carpenter labor rates, Mr. Hayward testified that there was a large 
difference of $170 per day between KBR' s proposed rate and the BE&K proposed rate. 
For this rate, the parties agreed to split the difference and then adjust the rate for laundry 
and per diem. (Finding 112) We find the testimony of Mr. Hayward to be credible 
because it was based upon his first-hand knowledge of the negotiations between KBR and 
BE&K and his own creation of the spreadsheet. Conversely, the Navy's witnesses could 
not testify beyond their assumptions as to how the spreadsheet might have been prepared. 
Further the DCAA auditor testified that he had not attempted to seek more information 
from KBR regarding the calculations in the spreadsheet. (Finding 111) Accordingly, we 
find in favor of KBR on this issue. 
ii. Other Direct Costs, Plus Markups 
The contracting officer's final decision disallowed $8,449.78 in other direct costs, 
including claims relating to the markup on the other direct costs. Specifically, the final 
decision questioned $36. 71 representing the 15% markup on a $244. 70 warehouse manifest; 
$862.66 for a $750.14 purchase at Lowe's and the 15% markup on that purchase; and 
$7,549.75 representing $6,565 in legal fees, plus the 15% markup on that cost. (Finding 113) 
The Navy alleges that the other direct costs were not reimbursable pursuant to the terms of 
the subcontract (gov't hr. ii 188). The Navy's position apparently stemmed from DCAA's 
interpretation of an email from Mr. Hayward of KBR to BE&K stating that "[d]emobilization 
subcontractor invoices plus markup, including expenses, [other direct costs], will not be 
reimbursed as they are not reimbursable per the terms of the subcontract" (finding 99). 
Additionally, the final decision indicated that the warehouse receipt costs were questioned 
because the subcontract provides for markup only to materials and equipment (finding 113). 
KBR presented testimony from Mr. Hayward that the email relied upon by the Navy 
referred only to specific other direct costs that were already included in the BE&K rates 
(finding 99). Additionally, KBR noted that the subcontract with BE&K expressly provided 
for markup on materials and equipment (finding 97). 
26 

We find that the markup on the warehouse receipt is allowable pursuant to the terms 
of the subcontract. As the final decision notes, warehouse manifests are normally included 
in material markup. However, the final decision allowed the warehouse charge because it 
was a separate charge by the subcontractor. (Finding 113) The Navy, having determined 
that the warehouse manifest was an allowable cost, should have allowed the markup on that 
cost after recognizing that warehouse manifests were normally part of a materials cost. 
Moreover, as KBR notes, FAR 31.205-26 defines materials costs to include "such collateral 
items as inbound transportation and in-transit insurance." 
With regard to the items purchased at a Lowe's home improvement store, the final 
decision disallowed this cost due to a lack of supporting documentation (finding 113 ). At 
the hearing, KBR introduced the Lowe's receipt as well as the testimony of Mr. Hayward 
that the Lowe's receipt was similar to the documentation provided by other subcontractors 
for material purchased on the project that was not questioned by DCAA or the Navy 
(finding 114). We find that the receipt provides sufficient documentation for the claimed 
costs and related markup and find in favor of KBR with regard to this cost. 
With regard to the claim for legal services, the final decision denied these costs 
stating that "BE&K' s contract is for hurricane recovery construction repair service, it is not 
clear how attorney fees would be allocable to this contract" (finding 113). KBR presented 
testimony that the attorney fees were for a compliance audit of BE&K's worker's 1-9 
Employment Eligibility Verification forms to ensure that they met the employment 
requirements of the contract (finding 115). Mr. Hayward testified that it was reasonable for 
BE&K to perform the added verification of the workers' documentation given that the 
workers were performing on a military facility and due to the high-visibility of the 
Hurricane Katrina recovery work (id.). We hold that the attorney fees for the 1-9 
compliance audit, plus mark-up are allowable costs pursuant to FAR 31.205-33 
(Professional and consultant service costs). 
iii. Markups on Subcontractor Labor 
The Navy disallowed $20,667 representing the 15% markup on services provided by 
Schoel Godwin 
Barnett Landscape Architects, a second-tier subcontractor to BE&K that was 
billed as material under the subcontract. The final decision denied these costs because the 
DCAA audit determined that the cost should have been billed as labor, and not material, and 
the subcontract does not provide for a markup on labor, and even if billed as material, KBR 
had not supported the markup as a material handling cost. (Finding 116) KBR argues that the 
subcontract only has labor rates for anticipated labor categories, and that there was no 
predetermined labor rate for unanticipated labor not included in the pricing sheet but incidental 
to the scope of work (finding 94). KBR asserts that it is normal practice to bill such lower-tier 
subcontractor labor costs as material. KBR additionally cites to FAR 16.601(a)(2) that, while 
not applicable to KBR's prime contract, illustrates this practice, providing that "Materials 
means- ... (2) [s]ubcontracts for supplies and incidental services for which there is not a labor 
category specified in the contract." FAR 16.60l(a)(2). 
27 

We find that the subcontract did not have a labor rate for landscape architects and 
that BE&K properly charged the landscape architect costs as material and therefore that 
BE&K is entitled to its 15% markup on these costs. 
iv. Equipment Rental 
The final decision disallowed $4,827 of markup on equipment rental costs for 
subcontractor-owned equipment, holding that the subcontract did not provide for markup on 
subcontractor-owned equipment (finding 117). KBR asserts that the subcontract provides 
that that "[e]quipment shall be reimbursed at rental cost plus markup" and provided testimony 
by Mr. Hayward that there was an internal rental rate for BE&K's owned equipment and that 
such internal rates are standard in the industry (findings 97, 118). 
We agree with KBR that the subcontract does not distinguish between owned and 
rented equipment and the Navy did not present any evidence to contradict Mr. Hayward's 
testimony that it was normal practice in the construction industry to use rental rates for 
owned equipment. Accordingly, we hold that KBR is entitled to reimbursement for 
markup on BE&K-owned equipment. 
v. Sub-Tier Labor Charges Not Supported By Invoices 
The Navy additionally questioned $65, 127 comprised of a $56,632 invoice by 
Riverside Electricians and the 15% markup thereon, because the charge was not supported 
by invoices showing the labor rate charged, or certified payrolls7 (finding 119). At the 
hearing, KBR presented invoices from Riverside Electricians in the amount of $56,632 
(finding 120). As KBR has placed on the hearing record documentation of the questioned 
costs, we find that the costs are supported and hold that KBR is entitled to payment for the 
disallowed costs. 
vi. Price Reasonableness 
In addition to the specific challenges presented by the Navy to the BE&K costs 
detailed above, the Navy also asserts that the disallowed costs are all improper on a price 
reasonableness basis. However, the Navy does not cite any specific evidence challenging 
the reasonableness of these costs, instead simply asserting that the costs are unreasonable. 
Based upon the evidence presented, including KBR's testimony that BE&K was the only 
offeror able to provide the required labor, and was the lowest bidder with the prices of the 
7 Although this invoice presents the same issue as the landscape architect invoice discussed 
in Part C. iii, that is, charging a material markup on lower-tier contractor labor costs 
charged as materials, the Navy did not present that argument with regard to this cost. 
As we rejected the Navy's argument with regard to the landscape architects, we reject 
it here to the extent the Navy's pleadings can be read to assert such an argument. 
28 

two other offerors being roughly 50% higher (finding 95), the Board finds that the cited 
costs were reasonable. Thus, in summary, we find that KBR has established entitlement to 
the disallowed costs on the BE&K subcontract. 
D. LJC Defense Contracting, Inc., Master Agreement 
121. KBR issued a request for proposals for emergency repair services at Navy and 
Marine Corps facilities in Florida (supp. R4, tab 2300 at 49860). 
122. On 15 September 2005, KBR awarded Master Agreement HUR013 to LJC 
Defense Contracting, Inc. (LJC) in response to LJC's bid (supp. R4, tab 2306). 
123. On 16 September 2005, KBR issued Work Release 01 under Master 
Agreement HURO 13 for construction services at buildings located at the Navy 
Construction Battalion Center Gulfport, Naval Air Station Pascagoula and the John Stennis 
Space Center (supp. R4, tab 2313). 
124. LJC submitted Invoice No. 1 on 18 October 2005 for $757,628.80 (supp. R4, 
tab 2359). 
125. DCAA questioned $603,953 of LJC's costs because the invoiced labor costs 
didn't match the certified payroll records (R4, tab 325 at 1229; tr. 3/144). 
126. Following discussions between KBR and the Navy, the final decision 
ultimately disallowed $603,953 in labor costs. KBR conceded that $289,935 was properly 
disallowed. The final decision also noted that the government had received a credit of 
$49,524. KBR ultimately conceded that $378,320 was properly disallowed, leaving 
$225,633 at issue. (R4, tab 149 at 661-62; supp. R4, tab 2715) 
127. In preparation for her hearing testimony in this appeal, the DCAA auditor 
originally responsible for questioning LJC's costs, Linda Bettis, reviewed additional 
documentation provided by KBR and determined that "the total hours that were in the 
payroll that were submitted in 2011 [after the date of the DCAA Supplemental Audit] did, 
in fact, support that the difference between the LJC invoice[s] and the certified payroll was 
around [the amount claimed by KBR]" (tr. 3/152). 
128. Following Ms. Bettis' testimony on this point, counsel for the Navy 
represented that the parties were "essentially .. .in agreement" and that the calculations were 
"close enough" that there was no longer any dispute (tr. 3/153). 
DECISION 
In its post-hearing brief, the Navy continued to question the payment made to LJC 
because KBR failed to submit certified payrolls (gov't hr.~ 175). However, the Navy 
29 

withdrew this argument in its post-hearing response brief, referring to the statement in its 
initial brief as erroneous (gov't reply. br. at 29 n.4). Accordingly, as there is no dispute, 
we hold that KBR has established entitlement to the claimed hours. 
E. BMS-CA T, Subcontract SOO 15 
129. On 19 October 2004, KBR issued a request for proposals for infrastructure 
dry-out stabilization work at Naval Air Station Pensacola, Florida 
(supp. R4, tab 1200). 
130. In the cover letter to the request for proposals, KBR stated that all offerors 
were required to submit a time-and-material price "with All Inclusive Fixed Unit Labor 
Rates (to Include Labor, Overhead, Profit, Consumable Material, Transportation, Per 
Diem, Lodging, Meals and Miscellaneous)" (supp. R4, tab 1200 at 56714). 
131. Offerors were notified that, if they discovered any ambiguity in the request for 
proposals, they were required to discuss that issue with KBR immediately (supp. R4, 
tab 1200 at 56717; tr. 1/34). 
132. With regard to pricing of labor rates, the request for proposals stated that "[a]ll 
burdens and benefits, supervision, tools, equipment, other overhead 
costs and profit shall be 
accounted for within the combined hourly rates provided" (supp. R4, tab 1200, 56720). 
133. BMS-CAT submitted its proposal on 21 October 2004 (supp. R4, tab 1201). 
134. BMS-CAT proposed 
a labor rate of$39.86 per hour (supp. R4, tab 1201at56705). 
135. Next to the line for "Equipment & Material Markup Rate" in the "unit" column 
appears the term "10% + 10%" (supp. R4, tab 1201 at 56705). 
136. KBR received five proposals in addition to the proposal from BMS-CAT. KBR 
determined that BMS-CAT offered the best value based on technical ability, available labor 
and equipment, past performance, and price. (App. R4, tab 609 at 5746; tr. 6/202-03) 
137. Prior to award of the subcontract, KBR and BMS-CAT agreed to permit 
markup of labor costs in the proposed subcontract (tr. 6/205-06). 
138. On 26 October 2004, KBR awarded a 
time-and-materials subcontract for 
stabilization and dry-out of Corry Station and Saufley Field at Naval Air Station Pensacola, 
Florida, to BMS-CAT (supp. R4, tab 1206). 
139. The subcontract, as awarded, states in paragraph 3.4: 
The following prices are subject to a I 0% markup for overhead 
and a I 0% markup for profit. Labor rates shall be based on 
30 

staffing the work 10 productive work hours per day, six days per 
week. At the subcontractors' option work can be expanded to 12 
productive work hours per day, seven days a week at the same 
hourly rate but [must] be coordinated and approved prior to 
working the longer hours. Rates shall be weighted to include any 
overtime and are for personnel actually performing the work. All 
burdens and benefits, supervision, tools, equipment, other 
overhead costs and profit shall be accounted for within the 
combined hourly rate provided. 
(Supp. R4, tab 1206 at 56561) (Emphasis added) Below the language quoted above is a rate 
table for equipment and labor, including a rate for personnel listed at $39.86 per man hour (id.). 
140. Even with the markups included in BMS-CAT's adjusted labor rate of$48.23 
per hour ($39.86 + 21 %) their rate was lower than all but one of the other responsive 
offerors (app. supp. R4, tab 609). While one of the other offerors, submitted a slightly 
lower labor rate-$48.00 per hour-the difference was not enough to offset its higher 
equipment prices and lower technical ratings (id. at 5749, 5757, 5759, 5779; tr. 6/207). 
Another offeror also proposed a lower rate, but its proposal was not submitted in 
the required format, was ambiguous, and was nonresponsive (app. supp. R4, tab 609 at 
5750, 5756, 
5761, 5764). 
141. BMS-CAT received $644,373 from a 21% markup on $3,068,443 of 
labor charges under the subcontract with KBR (R4, tab 325 at 1243; supp. R4, tab 1229, 
Questioned Cost; tr. 1/66-67). 
142. In its 10 July 2009 audit report, DCAA questioned $644,373 of markup on 
labor costs under KBR's subcontract with BMS-CAT (supp. R4, tab 2903 at 19249). 
143. DCAA issued a supplemental audit report on 19 August 2010 in which DCAA again 
questioned 
$644,373 for the markup on labor under the subcontract (R4, tab 325 at 1243). 
144. On 27 February 2012 the contracting officer issued her final decision disallowing 
costs that were paid to BMS-CA T for the 21 % markup on its labor and finding that the markup 
created a prohibited cost plus percentage of cost contract (R4, tab 149 at 663). 
DECISION 
Separate from the BMS-CA T subcontract HUR004 pertaining to Hurricane Katrina 
relief efforts discussed above, the contracting officer's final decision also questioned 
costs 
on subcontract SOO 15, pertaining to Hurricane Ivan relief efforts in Florida. Here, the 
contracting officer's final decision disallowed $644,373 in markup on labor costs 
(finding 144). Because the terms of this subcontract differ from those of master agreement 
HUR004, we must separately determine whether the subcontract provides for a markup on 
31 

labor. As with master agreement HUR004, the KBR request for proposals specified that 
offerors should submit fully burdened rates (findings 130, 132). In addition, BMS-CA T's 
pricing sheet did not indicate that there would be a markup on labor, but included a markup 
on equipment and materials (findings 134-35). 
However, KBR presented the unrefuted testimony of Mr. Hayward that KBR and 
BMS-CA T agreed, before award of the subcontract, that markups for overhead and profit 
would apply to labor as well as to material and equipment (finding 137). Thus, the pricing 
provision of the subcontract provides that "[t]he following prices are subject to a 10% markup 
for overhead and a 10% markup for profit.... All burdens and benefits, supervision, tools, 
equipment, other overhead 
costs and profit shall be accounted for within the combined hourly 
rate provided." Below the quoted language is a table with prices for equipment and labor, 
including personnel priced at $39.86 per man hour. (Finding 139) As noted above in the 
discussion of the master agreement HUR004, unless specifically incorporated, the terms of the 
request for proposals do not control the language of the subcontract. 
The Navy argues that the sentence providing that all "burdens and benefits" shall be 
accounted for in the hourly rates controls the interpretation of the paragraph and, that the 
subcontract should be interpreted in accordance with the request for proposals that clearly 
required BMS-CAT to propose a fully-burdened labor rate (gov't br. at 53). KBR argues 
the opposite, that the first sentence, providing that 
"the following prices are subject to a 
10% markup for overhead and a 10% markup for profit" controls the interpretation of the 
subcontract, and that the last sentence should be read to provide that no markups, other 
than the 10% overhead and 10% profit, are permitted (app. br. at 48). 
Contract interpretation is a matter of law. See, e.g., ThinkQ, Inc. ASBCA No. 57732, 
13 BCA ~ 35,221 at 172,825. One canon of contract interpretation is that the contract should 
be read as a whole, harmonizing and giving meaning to all provisions. Id. (citing NVT 
Technologies, Inc. v. United States, 370 F.3d 1153, 1159 (Fed. Cir. 2004)). Here, the Navy's 
proffered interpretation of paragraph 3.4 of the subcontract renders the first sentence of the 
paragraph internally contradictory and superfluous. Conversely, the interpretation proffered by 
KBR, while certainly not a model of the draftsman's art, would allow the clauses to be read 
together and provides meaning to each part of the paragraph. Moreover, to the extent the 
clause was still ambiguous, we note that the unrebutted testimony of Mr. Hayward, that the 
parties agreed to provide a markup on labor (finding 137), supports KB R's interpretation of the 
contract provision. Mr. Hayward's testimony was based on his first-hand knowledge of the 
negotiations between KBR and BMS-CAT. In addition, the testimony explains the evolution of 
the subcontract language from the terms initially contained in the request for proposals 
(compare findings~~ 130, 132, 135 with 139), and BMS-CAT's purported failure to seek 
clarification regarding ambiguity in the proposal (finding 131 ). 
The Navy additionally argues that the markup on labor creates an impermissible 
cost-plus-percentage-of-cost contract. Although the contractual provisions of this 
subcontract differ from the master agreement discussed above, in both cases the dispute 
32 

involves KBR's payment of a 21 % markup on direct labor in a time and materials 
subcontract. For the reasons discussed in section A above, we continue to hold that the 
markup on this subcontract would not be an illegal cost-plus-percentage-of-cost contract. 
Once again, to the extent that the Navy is challenging the price reasonableness of 
BMS-CA T's billings, we find that the prices were reasonable. KBR received six offers 
in response to its request for proposals (finding 136). Even with the addition of the 21 % 
markup on labor, its prices were lower than all but one other responsive offeror, and KBR 
presented testimony that that offeror's slightly lower price did not offset its higher equipment 
rental rates and lower technical ratings (finding 140). Accordingly, we hold that KBR has 
established entitlement to the disallowed markup on labor costs for the SOO 15 subcontract. 
F. Rene Cross Construction Co., Subcontract SOOOJ 
145. The Army Corps of Engineers retained Rene Cross Construction Co. (Rene 
Cross) to repair levee breaches immediately following Hurricane Katrina. Although the 
record does not appear to be complete with regard to the contract between the Corps and 
Rene Cross, KBR asserts that performance began around September 2005 (comp I. ~ 159). 
146. The Navy subsequently issued a task order to KBR for unwatering operations in 
the New Orleans area. KBR asserts that they were directed to assume the Corps' contracts 
already in place, including the contract with Rene Cross. (Compl. ~ 160) Accordingly, 
KBR awarded subcontract SOOO 1 to Rene Cross for construction of a temporary dike and 
repair of two levees in Plaquemines Parish, Louisiana (compl. ~ 158). 
14 7. DCAA questioned, and the contracting officer's final decision ultimately 
disallowed, Rene Cross' 20% markup, in the amount of $576,276, on the costs of its 
subcontractor, Luhr Brothers (R4, tab 149 at 664-65). The contracting officer disputed 
KBR's assertion that it was required to adopt the working relationships already established 
and that Rene Cross' supervision and coordination was required to allow Luhr Brothers to 
correctly place the stone for the levee repairs (id.). 
DECISION 
In its pre-hearing brief, the Navy conceded that Rene Cross' markup costs were 
allowable (gov't pre-hearing br. at 5), and no evidence was presented regarding the claim 
at the hearing. Thus, based on the Navy's concession, the Board finds entitlement in favor 
of KBR with regard to this portion of the claim. 
G. Freedom Support Services, Inc., Master Agreement 
148. KBR issued a request for proposals for dry out stabilization work and disaster 
recovery efforts at Navy and Marine Corps facilities in Florida. The request for proposals 
33 

stated that "labor hours worked and invoiced will also be verified through submission of 
certified payrolls." (Supp. R4, tab 1900 at 26803) 
149. KBR awarded Master Agreement HUR018 to Freedom Support Services, Inc. 
(FSS) on 18 September 2005 (supp. R4, tab 1903 ). 
150. FSS was the lowest bidder (R4, tab 149 at 661; tr. 3/169-70). 
151. On 20 September 2005, KBR issued Work Release 01 under Master 
Agreement HURO 18 to FSS for $500,000 to repair housing located at Sand Hill and Navy 
Construction Battalion Center Gulfport, MS (supp. R4, tab 1912). 
152. FSS submitted its Invoice No. 1 to KBR on 24 October 2005, for work performed 
18 September 2005 through 14 October 2005, but the invoice did not include any payroll 
records (supp. R4, tab 1916 at 38490-92, tab 1919; app. supp. R4, tabs 327-29, 331-32). 
153. FSS submitted just one invoice before KBR stopped using FSS on the project 
and directed the work to LJC (tr. 6/226). 
154. On 12 December 2005, FSS submitted adjustments to the original invoice but 
with uncertified payroll information that does not show the hours each employee worked 
each day (supp. R4, tab 1919). 
155. KBR paid FSS 75% of the invoiced amount but retained 25% of the invoiced 
amount because FSS failed to submit legible invoices with certified payrolls (supp. R4, 
tab 1916 at 38488). 
156. On 2 February 2006, KBR sent a letter to FSS refusing to process the invoice 
in full until it received supporting documentation, including summary sheets, backup 
receipts, and certified payrolls (supp. R4, tab 1939). 
157. KBR sent another letter to FSS on 14 March 2007 indicating that its payment of 
$196,683 would be considered final if it didn't receive any additional documentation 
(supp. R4, tab 1943). 
158. DCAA questioned the $196,683 paid to FSS due to the lack of certified 
payrolls (supp. R4, tabs 325, 1283-84, 2903, 19291-92). The audit finding was solely due 
to the lack of certified payrolls and was not based on any finding questioning FSS' 
performance of the work (tr. 3/172-73, 5/139). 
159. In a final decision, the contracting officer agreed with DCAA and questioned 
$196,683 for the lack of supporting payroll information (R4, tabs 149, 670). 
34 

DECISION 
The Navy argues that the contract unambiguously required KBR to provide certified 
payrolls to establish compliance with the Davis-Bacon Act and that it is undisputed that FSS did 
not provide certified payrolls. Thus, the Navy argues, it was unreasonable for KBR to pay FSS 
without receipt of the certified payrolls, and it further asserts that it is unaware of any provision 
permitting it to waive the requirement for certified payrolls. (Gov't reply br. at 29) 
KBR asserts that it was unreasonable for the Navy to disallow the FSS invoice 
amount in its entirety, especially because KBR had already reduced the invoiced amount 
by 25%. KBR further argues that the contracting officer and DCAA auditor both testified 
that the disallowance was for a lack of documentation and that there were no findings that 
FSS had not actually performed the work. (App. br. at 67-68) 
It is undisputed that KBR breached the terms of the CON CAP III contract by failing to 
obtain certified payroll information from FSS, but the appropriate remedy is less clear. In 
Acme Missiles & Construction Corp., ASBCA No. 11786, 69-2 BCA 'if 8057, a contractor 
failed to provide the required payroll information. The agency withheld a portion of the 
invoiced amount and the contractor appealed that action. The Board held that that the 
"Government may retain the amount of money previously withheld provided the amount was 
reasonable in relation to [the] work or service not performed .... [T]he Government may retain 
only a reasonable amount for each incomplete item." Id. at 37,446. Moreover, the FAR 
provides at 31.201-2( d) that the "contracting officer may disallow all or part of a claimed cost 
that is inadequately supported." FAR 31.201-2( d) (emphasis added). 
In this appeal the record evidence demonstrates that FSS submitted payroll 
information, but that the payroll information was not provided in the correct format 
(finding 154). We note that FSS performed on the subcontract entirely during the period 
when the Davis-Bacon Act was suspended (finding 19). The Davis-Bacon Act was 
retroactively reinstated on the contract, but only after FSS' performance (id.). 
Additionally, KBR worked with FSS in an attempt to obtain corrected payroll information 
(findings 152, 155-57). Moreover, FSS provided payroll information, in an incorrect 
format, which distinguishes the facts here from the situation in Fireman's Fund Indemnity 
Co. v. United States, 93 Ct. Cl. 138, 144 (1941), where there was "no evidence to show 
what amount was paid the workmen." 
The DCAA audit and the final decision denied payment based solely upon the failure 
to provide the certified payroll information, and the disallowance was not based on any 
finding that the payroll information provided, although not in the correct format, was 
inaccurate (finding 158). Under these circumstances, we hold that the Navy improperly 
denied any payment of the invoice; however, there is a quantum issue to determine the 
appropriate amount of withholding. Here the contracting officer denied 100% of the amount 
invoiced, which already reflected a 25% discount from FSS' invoice. Pursuant to the 
35 

Board's holding in Acme, the withholding must be a "reasonable" amount. The reasonable 
amount is a quantum issue to be remanded to the parties. 
Separately, the Navy argues that, even if the payment is not disallowed due to FSS' 
failure to certify its payroll information, the Board should deny recovery because FSS' 
prices were not reasonable pursuant to FAR 31.201-3. We note that the FSS was the low 
bidder on the contract, and then was paid only 75% of its bid amount (findings 150, 155). 
Thus, we hold that FSS' prices under the subcontract were reasonable. 
H. Kustom Industrial Fabricators, Inc., Master Agreement 
160. KBR issued a request for proposals on 3 October 2005 for work to repair 
shingle roof damage and gutters, and to remove and replace roofs at the Navy Construction 
Battalion Center Gulfport (supp. R4, tab 2201 ). 
161. Kustom Industrial Fabricators, Inc. (Kustom) of Akron, Ohio, replied to the 
request for proposals on 5 October 2005. Kustom bid 
$10,000, plus an additional $1,000 
per person for mobilization and demobilization. (Supp. R4, tab 2202 at 62618, tabs 2203, 
2235; tr. 4/37-39). Kustom also initially proposed 
an hourly rate for roofers of $72 per 
hour (supp. R4, tab 2202 at 62618). 
162. On 7 October 2005, KBR re-solicited proposals from potential roofing 
contractors based on a "Fair Market Per Square Foot" rate that it had calculated 
based on market research and the assistance of a third-party consultant (app. supp. R4, 
tab 710 at 6967; tr. 4/36-37). 
163. On 16 October 2005, KBR awarded Master Agreement HUR025 to Kustom 
(supp. R4, tab 2210). 
164. On 20 October 2005, KBR sent an email to Kustom stating "should your 
requirements for Mob/Demob are [sic] by the person to eliminate confusion, then please 
feel free to make that amendment and adjust accordingly" (app. supp. R4, tab 710 at 6970). 
165. On or about 20 October 2005, Kustom submitted a permanent roofing pricing 
clarification that proposed prices in line with KBR's identified market rates, but revising its 
mobilization rate to $45,000 and de-mobilization 
rate to $45,000 (supp. R4, tab 2801 at 
70442-45). Kustom also proposed an hourly rate for roofers of $75.00 per hour (id.). 
166. On or about 25 October 2005, KBR issued a Procurement Summary regarding the 
competition for permanent roofing work in Gulfport, Mississippi. In the summary, KBR 
explained that, based on the bids it received for the roofing work, it decided to only pay 
accepted "fair market" rates for the work. The prices for mobilization and demobilization 
were not identified. The summary stated that "[a]ll subcontractors solicited will be paid at the 
same scale as listed in the table above with the exception of mobilization and demobilization 
36 

rates. Each subcontractor that requires these fees will be paid a one-time fee." KBR received 
several bids in excess of expected pricing from roofing contractors, so KBR asked the 
contractors to rebid. These bids were also high so a consultant came up with the "market 
rates" for the roofing work. (Supp. R4, tab 2209; tr. 4/36-37) 
167. Kustom submitted three invoices to KBR (supp. R4, tab 2271 at 32147-48). 
On 24 March 2006, Kustom submitted an invoice for mobilization costs of $45,000. 
Kustom submitted another invoice for demobilization costs of $45,000 on 20 April 2006. 
(supp. R4, tab 2235 at 27740, tab 2236 at 27742). On 19 May 2006, Kustom submitted an 
invoice for labor, materials, and equipment, in the amount of $332,970.11 (supp. R4, 
tab 2238 at 28390). Kustom billed its labor exclusively at a flat rate of $85 per hour (id. at 
28389). KBR approved $263,037.62 of the invoiced amount (id.). 
168. Kustom's 19 May 2006 invoice indicates only 11 employees were mobilized 
(supp. R4, tab 2238 at 28389-90, 8400-14). 
169. DCAA questioned $69, 000 of costs paid to Kustom under Master Agreement 
HUR025 Work Release 03 related to Task Order 17 in its 10 July 2009 audit report. The 
questioned costs were due to mobilization and demobilization fees in excess of the 
amounts originally bid. Based on Kustom's original bid of $10,000 plus $1,000 for every 
employee, KBR would have only paid Kustom $21,000 in mobilization and demobilization 
costs so DCAA questioned the difference between these amounts. (Supp. R4, tab 2903 at 
19294-95; tr. 4/35-37) 
170. DCAA continued to question $69,000 in its supplemental audit report, issued 
19 August 2010 for the same reasons (R4, tab 325 at 1286-87). The audit report noted that 
the award to Kustom was based on adequate competition (id. at 1286). 
171. The contracting officer agreed with DCAA and in the final decision 
disapproved of $69,000 of the costs paid to Kustom for demobilization and mobilization 
rates in excess of the amounts it originally bid (R4, tab 149 at 671-72). 
DECISION 
The Navy challenges KBR's invoiced amount asserting that the mobilization and 
demobilization costs were not reasonable, relying upon the FAR's cost reasonableness 
requirement FAR 31.201-2 (gov't br. at 72-73 ). In response, KBR asserts that the costs were 
reasonable because of the lower negotiated per square foot rates, the fact that KBR asked the 
contractors to quote a lump-sum mobilization and demobilization cost rather than allowing a 
per worker charge. KBR notes that the DCAA audit found that there was adequate proposal 
review. Moreover, KBR expected that there would be a larger number of workers mobilized, 
such that the fee would be small based on the total billing. (App. br. at 68-71) 
37 

Despite KBR' s reliance on the negotiation of "fair market" rates to justify the 
mobilization and demobilization charges, KBR actually negotiated a substantial price increase 
for Kustom. While KBR cites the negotiated reduction in the "market rate" per square foot 
roofing costs, the record demonstrates that Kustom billed exclusively at an hourly rate of $85 
per hour, and did not bill any labor at the negotiated per square foot rates. (Finding 167) 
Kustom initially proposed an hourly rate of $72 per hour (findings 161, 165). KBR argues that 
there is "nothing to prevent the subcontractor from proposing lower prices for some items and 
higher prices [for] others," and that KBR made its award based on the total proposed pricing, 
notjust the pricing for one element (app. br. at 71; see also findings 162, 166). However, here, 
Kustom increased its mobilization and demobilization charge by $69,000 (more than a 300% 
increase) and also increased its hourly labor rate by $13 per hour (findings 161, 
165, 167-68). 
The DCAA audit report found the award to be based upon adequate competition 
(finding 170). As the $85 per hour labor rate for roofers was not challenged in the contracting 
officer's final decision, we do not disturb it (finding 171 ). However, we note the fact that the 
hourly rate increased as evidence against the reasonableness of the dramatic increase in the 
mobilization and demobilization rates. Obviously, a contractor may elect to accept a lower 
hourly rate in exchange for a higher fixed payment. Had Kustom reduced the hourly rate and 
charged a higher fixed fee, as KBR asserts happened, KBR's reasonableness argument would 
be more credible. 
Here, Kustom increased both its hourly rate and the mobilization and 
demobilization rates. Accordingly, we hold that the charges were unreasonable. 
I. Bear Industries, Inc., Purchase Order PA-0002 
172. The U.S. Army Corps of Engineers initially retained Bear Industries, Inc. 
(Bear) by leasing property owned by Bear and filling the wetlands on their property to 
create a building site (tr. 6/211 ). 
173. On 8 September 2005 the Navy issued Task Order 19 requiring KBR to work 
with the Corps to construct a mortuary facility for victims of Hurricane Katrina. The 
facility, known as the Victim's Identification Center was to be constructed on land owned 
by Bear Industries in Carville, Louisiana. (R4, tab 104) 
17 4. Section 8 .1. 8 of KBR' s subcontract with Bear provided that: 
In the event Subcontractor contends that...(ii) there is a change 
in conditions ... for which Subcontractor is entitled to an 
adjustment compensation ... and such action is not incorporated 
in a written Change Order, Subcontractor must submit a claim 
in the manner and within the time prescribed under the disputes 
procedure provided in 8.2 below, failing which Subcontractor's 
38 

claim for an adjustment in compensation or in the time of 
performance shall be waived. 
Section 8.2 provides that the subcontractor must present its claim for adjustment to the 
KBR project manager "in writing in accordance with 8.3 below within ten (10) days after 
Subcontractor obtains knowledge of the facts giving rise to the claim. Subcontractor shall 
continue to prosecute the Sublet Work pending determination of the claim." (App. supp. 
R4, tab 65 at 610) 
175. On 8 September 2005, the Navy also issued a notice to proceed with site 
preparation work, because the site for the mortuary was not graded properly to serve as a 
base for the facility (R4, tab 104). 
176. On 9 September 2005, Bear agreed to furnish 24,000 tons ASTM 610 
limestone at a rate of $20.50 per ton for the mortuary facility (supp. R4, tab 1140). 
177. On 10 October 2005, Bear agreed to provide 50,000 tons ofbearlite at $14.50 
per ton, 24,000 tons of ASTM 610 limestone at $20.50 per ton, and 24,000 tons of material 
to compact the limestone at $12.50 per ton (supp. R4, tab 1107). 
178. Bear submitted an invoice to KBR on 28 September 2005 billing 21,060.83 
tons of ASTM 610 limestone at $20.50 per ton (supp. R4, tab 1136 at 65903). 
179. On 22 October 2005, Bear informed KBR that the cost of freight and the 
cost of fuel had increased and requested that the additional costs be allowed (supp. R4, 
tab 1143; app. supp. R4, tab 72 at 649-50). 
180. Bear submitted an invoice on 22 October 2005 that removed the 9,603.65 tons 
of limestone already laid and invoiced at $20.50 and re-invoiced the same 9,603.65 tons of 
materials at $23.16 per ton. Bear also invoiced an additional 22,326.59 tons of limestone 
at $24.20 per ton. (Supp. R4, tab 1138 at 65983) 
181. In the request for adjustment, Bear cites to an invoice from its supplier dated 
19 September 2005, applying a fuel surcharge, with a resulting increase of $2.66 per ton of 
limestone (supp. R4, tab 1143). The Bear invoice notes that material and freight both 
increased, in addition to the application of a fuel surcharge (id.). 
182. Bear invoiced KBR for $2.66 per ton more than the quoted price for 9,604 tons 
of limestone already placed, and 2,939 tons of the initial quoted 24,000 at $3.70 per ton 
more than the quote (tr. 1/74-75; supp. R4, tab 2903 at 19297). 
183. DCAA questioned $36,421 representing the difference between the adjusted 
rates used in the billings and the fixed unit rates in the original purchase order award (supp. 
R4, tab 2903 at 19295-96; R4, tab 325 at 1287-88). 
39 

184. The contracting officer disapproved $36,421 of costs paid to Bear under the theory 
that the cost for the original quantity should not have been changed because it was based on a 
fixed rate which was agreed to by KBR and Bear at time of award and Bear didn't notify KBR of 
the increase rate until after the limestone had been purchased and laid (R4, tab 149 at 672-73 ). 
DECISION 
The Navy contends that Bear is not entitled to an adjustment for the limestone that 
had already been placed at the time of the adjustment, but did not challenge the adjustment 
for the limestone placed after the date of the adjustment (gov't br. at 74). 
KBR contends that Bear was entitled to an adjustment pursuant to the terms of the 
subcontract. Specifically, section 8.1.8 of the agreement provides that: 
In the event Subcontractor contends that...(ii) there is a change 
in conditions ... for which Subcontractor is entitled to an 
adjustment compensation ... and such action is not incorporated 
in a written Change Order, Subcontractor must submit a claim 
in the manner and within the time period prescribed under the 
disputes procedure provided in 8.2 below, failing which 
Subcontractor's claim for an adjustment in compensation or in 
the time of performance shall be waived. 
(App. br. at 74) Section 8.2 provides that the subcontractor must present its claim for 
adjustment to the KBR project manager "in writing in accordance with 8.3 below within ten 
(10) days after Subcontractor obtains knowledge of the facts giving rise to the claim" 
(finding 17 4 ). It is not clear from the record when Bear first became "aware" of its increased 
costs; however, Bear's written request for an adjustment was provided to KBR on 22 October 
2005 (finding 179). In the request for adjustment, Bear cites to an invoice from its supplier 
dated 19 September 2005, applying a fuel surcharge, with a resulting increase of $2.66 per ton 
of limestone (finding 181 ). While KBR describes this as an increase due to fuel prices, the 
Bear invoice notes that material and freight both increased, in addition to the application of a 
fuel surcharge (id.) These deliveries of limestone were billed at $23 .16 per ton, rather than the 
$24.20 per ton for the later deliveries (finding 180). 
Regardless of the apportionment of the extra costs, it is clear that Bear was entitled to 
an adjustment under the terms of the subcontract- a point that DCAA and the Navy do not 
dispute with regard to the limestone provided after the date of the request for adjustment 
(finding 184). The subcontract permitted the supplier to request an adjustment after 
performance, although it appears that KBR did not enforce the time limit. Regardless, KBR 
reasonably granted the adjustment as permitted by the terms of the subcontract. Moreover, 
the recognition by DCAA and the Navy that the adjustment due to increased transportation 
costs for the majority of the limestone purchased under the subcontract was justified would be 
40 

inconsistent in these circumstances with a finding that the price was not reasonable. Thus, we 
find entitlement in favor of KBR with regard to the Bear subcontract. 
J Commercial Marketing International, Inc., Subcontract SA-00033 
185. On 4 September 2005, Carol Lloyd of NA VF AC issued Technical Direction 
002 under Task Order 16 to KBR. Technical Direction 002 instructed KBR to "provide all 
labor, materials and equipment necessary to: ... 3) Provide 2500 Man Tent Camp with 
including but not limited to; galley, port-a-lets, shower facilities." (Supp. R4, tab 1451) 
186. NA VF AC promptly changed Technical Direction 002 stating: "Change 2500 
man tent camp to 2000 man tent camp .... Also, to include galley, temporary toilet 
facilities, and necessary utilities to be used by approximately 5500 military and civilian 
forces" thus reflecting an expected total of 7 ,500 personnel. (Supp. R4, tab 1451) 
187. On 7 September 2005, KBR issued a request for proposals to Commercial 
Marketing International, Inc. (CMARK) for "all food, material, equipment and labor to 
operate the dining facilities with the capability of feeding up to 7 ,500 people/day in 
accordance with Attachment 'A."' Attachment "A" requested a pricing breakout including 
"Food & Materials" with a quantity of 2,500 units per day. In addition, the statement of 
work requested a "Lump sum weekly amount for all specified services to serve 2500 meals 
per day" with a "Unit price amount for each meal served above the first 2500." (Supp. R4, 
tab 1400 at 40012-13, 40016-17) 
188. Inresponse to the request for proposals, on 7 September 2005, CMARK submitted a 
proposal with a lump sum weekly price of $546,875 for the first 2,500 meals and $12.80 per 
person per meal for meals in excess of 2,500 meals per day ( app. supp. R4, tab 160 at 1991 ). 
189. CMARK also requested clarification about KBR's request for proposals stating 
"we still have a discrepancy on how many individual people are going to be at the camp. By 
the title of the solicitation and the statement of work, it leads us to believe that we need 
capacity for 7500 bodies to be each fed 3 times a day. Your attachment A says you would 
like pricing for 2500 bodies or 7500 total meals per day." (App. supp. R4, tab 160 at 1989) 
190. The same day, KBR clarified its requirements and CMARK confirmed the 
pricing of its initial proposal (app. supp. R4, tab 160 at 1989). 
191. CMARK' s initial proposal included all tents, utilities, and food service, with 
mobilization time of 48 hours for "cooking and serving" and mobilization time of 7 days 
for "tent setup" ( app. supp. R4, tab 160 at 1991 ). 
192. On 9 September 2005, KBR reduced the scope of the request for proposals by 
removing the requirement for CMARK to provide and construct its own tents and provide 
the utilities for the dining facilities (supp. R4, tab 1457). 
41 

193. Based on the reduced scope, CMARK submitted a second version of its proposal 
(revision 2) with a lump sum weekly price of $428,750 for the first 2,500 meals served plus 
$12.80 per person per meal for each meal served over 2,500 meals per day. This proposal 
eliminated "fixed costs" for the buildings and utilities. (Supp. R4, tab 1457; tr. 2/31-35) 
194. In revision 2, CMARK explained that: 
This proposal as requested is to create the capacity to provide 
22,500 meals per day (7500 people) while pricing it as a 
minimum of 2500 meals a day (833 people). This is a large 
spread of min to max so the number for the minimum is large. 
However, [KBR has] capacity built in to expand with no 
hesitation to what is believed to be the level of occupancy of 
the camp. 
(Supp. R4, tab 1457 at 40067) 
195. On 9 September 2005, KBR again revised the scope of work. Mr. Hayward 
informed CMARK that KBR required "a lump sum weekly price for serving THREE meals 
to 2500 people daily" (supp. R4, tab 1454). 
196. Hayward explained that he made the decision to have a daily minimum meal 
requirement of 7 ,500 because to serve a camp of 7 ,500 personnel in a two-hour period the 
infrastructure required had to accommodate 2,500 people to be seated and fed in forty 
minutes. It was Hayward's judgment to establish a "fixed price ... that captures all the fixed 
costs legitimately within that fixed rate." {Tr. 6/159-61) 
197. Mr. Hayward testified that he had experience with dining facilities in other 
contingency environments and that the dining facilities in Iraq and Afghanistan were very 
different from the facility at issue here because the facilities in Iraq and Afghanistan were 
constructed to be used for a period of years, with more elaborate facilities, that were 
planned and constructed over a much longer period of time (tr. 6/22, 155). 
198. CMARK submitted revision 3 of its proposal on 9 September 2005. The 
proposal was based on a 
minimum daily meal service of 7 ,500 meals with a lump sum 
weekly price of$874,125 for a minimum of7,500 meals, without potable water, and 
$929,250 with potable water, and a unit price of $12.80 per person per meal over 7,500 
meals per day, without 
potable water, and $13.85 with potable water (supp. R4, tab 1454). 
199. After receiving CMARK's revision 3 proposal, Hayward instructed CMARK 
to "proceed with mobilizing assets to New Orleans while [KBR's] Procurement folks work 
on getting the subcontract issued" (supp. R4, tab 1455 at 40149). 
42 

200. After instructing CMARK to mobilize assets, Hayward requested that KBR's 
procurement personnel issue a subcontract to CMARK with a not to exceed amount of 
$9,142,500. Hayward stated that the "price is fair and reasonable. We have a pricing structure 
that will ensure that we only pay for actual meals served only." (Supp. R4, tab 1454) 
201. The Navy's contract specialist, Ms. McMahon testified that, given the technical 
directive to prepare for 7,500 people, "[t]he fact that KBR decided to limit that to 2,500 when 
we looked at it at that time, we thought there was a prudent, reasonable approach to handling 
the influx of people that would be coming in and structuring the contract" (tr. 5/5-6), and the 
Navy's chief of the contracting office for the Naval Facilities Command, Mid-Atlantic, 
Ms. Kahler also testified that KBR's choice of a minimum 2,500 head-count per meal was a 
valid assumption (tr. 5178). Moreover, Ms. Kahler testified that "KBR could have easily 
written a subcontract that said 7,500 per meal and, you know, that would have been a 
valid 
basis based on our direction. So in this case KBR did, you know, say it's reasonable that 
maybe 7,500 aren't going to come per meal." (Tr. 5/75) 
202. On or about 9 September 2005, the KBR Procurement Review Board 
began reviewing the potential CMARK subcontract (supp. R4, tabs 1409, 1411, 1417). 
203. On 9 September 2005, KBR issued a Notice to Proceed to CMARK pursuant 
to the revised proposal from the same day. KBR stated that the "subcontract for this effort 
is forthcoming pending resolution of terms, conditions, pricing, and payment." (Supp. R4, 
tab 1412) 
204. On 9 September 2005, KBR recommended soliciting CMARK as a sole source 
supplier. The Sole Source justification notes that 
"competition was not sought due to the 
critical and compelling need to immediately setup a [dining facility] in New Orleans" and 
CMARK was providing the "same service in Gulfport ... the decision was made to continue 
with CMARK." (Supp. R4, tab 1411) 
205. CMARK started serving meals prepared by a caterer 
at dinner on 
13 September 2005. At the first meal, 345 people were served. (Supp. R4, tabs 1465, 
1466) Prior to this time, most of the workers at Joint Reserve Base New Orleans were 
eating Meals Ready-to-Eat (MREs) (tr. 8/15). 
206. Mr. Hayward testified that even in the first days of the contract, some of the food, 
such as salads, were prepared on site, even though the hot entrees were catered (tr. 6/177). 
207. On 16 September 2005, KBR's senior subcontract administrator, Dolores Bewley, 
requested that CMARK submit its proposal for the New Orleans dining facility with a price 
breakdown for "food, equipment, labor, overhead and profit" (app. supp. R4, tab 171). 
208. On 16 September 2005, CMARK submitted proposal revision 4 with a lump sum 
weekly price of $874,125 for a minimum of7,500 meals, without potable water, and $12.80 
43 

per person per meal over 7,500 meals per day. The price breakdown per person per day 
included: food and materials for $25.36; equipment and supplies for $12.14; labor for $4.96; 
overhead and profit for $7.49; totaling $49.95 per person per day. (App. supp. R4, tab 171) 
209. On 21 September 2005, CMARK submitted proposal revision 5. The proposal 
presented six different pricing scenarios based on headcounts from 2,500 to 7,500. The 
Labor/Workforce 
rates in the revision 5 proposals increased as the headcounts rose. The rates 
for Kitchen and Food Storage Equipment ($1,073,656), and the "Variable Prices" for 
consumables ($2.49/meal) and food ($6.38/meal) did not change as headcounts increased. 
(Supp. R4, tab 1461) 
210. Mr. Hayward emailed Lauri Paggi, the NA VF AC administrative contracting 
officer, on 21 September 2005 informing her that CMARK had not reached attendance of 2,500 
per meal in the galley yet, but it expected to soon. Mr. Hayward explained that "[t]here is a 
minimum infrastructure required for just having the capability in place to serve 7500 meals at 
each meal that is not dependent upon the actual quantity of meals served" and "the pricing 
structure remains reasonable for this start up period." (Supp. R4, tab 1460) Mr. Hayward 
additionally provided testimony that he did not believe the 2,500 number was too high based on 
the direction he had received from the Navy and the information that he had (tr. 6/185). 
211. The record does not contain a response to Mr. Hayward's email; however, two of 
the email's recipients testified that, while they did not recall responding to the email, in the 
normal course of dealing they would have responded to such a question, and if they had not 
responded, they would have expected a follow-up email from Mr. Hayward (tr. 8/63-64, 125). 
212. CMARK submitted its last proposal, revision 5 .1 on 22 September 2005. 
Revision 5.1 adjusted "the equipment amount to bring the overall total for the 2,500 head count 
to $46.96 per day ($3,521,972 monthly divided by 225,000 meals times 3 meals per day)." The 
apparent difference between revision 5 and revision 5.1 was a slight reduction in the Kitchen 
and Food Storage Costs (down from $1,073,656 to $990,806). (Supp. R4, tab 1462) 
213. CMARK did not serve meals on 23 September 2005 or 24 September 2005 as 
the tent camp was evacuated due to Hurricane Rita. CMARK resumed meal service at dinner 
25 September 2005. (Supp. R4, tab 1466 at 39982) 
214. KBR signed the Price Reasonableness Determination Form on 24 September 
2005. The memo noted that "CMARK's pricing is deemed fair and reasonable based on 
their recent award (See Subcontract SC-00031) of a dining facility in Gulfport, Mississippi.. .. 
Furthermore, CMARK's unit price at $46.96/day is in alignment with the current GSA per 
diem rate of $47 for New Orleans." (App. supp. R4, tab 176 at 2062-63) 
215. The Award Documentation Summary for the subcontract was signed by 
Betty Hayes and Sharon Steele on 7 October 2005. Under the Price Analysis, 
44 

"Comparison with Similar Item" is checked. Other categories (e.g., competition, market 
price, KBR estimate, cost analysis) are not. (Supp. R4, tab 1409) 
216. In a KBR Negotiation Memorandum, dated 7 October 2005, Ms. Bewley 
summarized the events relating to the CMARK procurement and CMARK's revisions 4, 5, 
and 5.1, as follows: 
The original proposed price was not broken out and appeared to 
be very high. The Subcontractor was then asked to breakout 
the cost. After receipt of their breakout (see proposals), the 
prices appeared to be high, particularly the food cost and the 
equipment per person. CMARK was then provided a 
spreadsheet that requested their fixed cost and variable cost, 
such as food and consumables. The prices that were provided 
averaged out to the original $49.95 per person per day. 
CMARK was then asked why the equipment cost was so high, 
at which CMARK could not provide an acceptable answer. At 
that time, CMARK was asked to go back and reduce their 
costs. It was also pointed out that KBR would not pay higher 
than the current per diem rate for Fiscal Year 2005 in that area, 
which was $47.00. CMARK claimed to be feeding the 
personnel items such as steak and eggs and other high cost food 
items. Again, CMARK was advised that KBR would not pay 
higher than the going per diem rate in the area. We also stated 
that we wanted to see a cost scale that decreased as the 
numbers in the camp increased. 
(Supp. R4, tab 1463) 
217. The Negotiation Memorandum concludes that CMARK' s "price is found to 
be fair and reasonable to both KBR" and the Navy (supp. R4, tab 1463). 
218. KBR's Procurement Review Board Pre-Award Approval Form was signed on 
10 October 2005 (supp. R4, tab 1417). 
219. On 11October2005, 32 days after the effective date of the contract, 9 September 
2005, CMARK and KBR executed a 90-day contract to establish a dining facility for a 7,500 
man camp in New Orleans, Louisiana with a not to exceed amount of $8,927,500. The 
subcontract pricing provided for a minimum of 2,500 people based on $46.96 per day, with 
bands for each additional 1,000 persons 
per day. (Supp. R4, tab 1507 at 10220-23) 
220. The CMARK subcontract contained KBR's Subcontract General Conditions, 
which included terms reserving the right to modify, descope, or terminate any subcontract 
(supp. R4, tab 1507 at 10232-33 (Section 7, Suspension and Termination)). 
45 

221. KBR' s Subcontract General Conditions included a provision "to suspend all 
or any portion of the Sublet Work." Upon any such suspension, CMARK was obligated to 
obtain terms favorable to KBR and, thereafter, to minimize the costs associated with the 
suspension. CMARK was entitled to costs associated with any such suspension. (Supp. 
R4, tab 1507 at 10232 (Section 7.1, Suspension)) 
222. Similarly, the CMARK subcontract contained a Termination for Convenience 
clause stating that KBR had the right to "terminate for convenience the Sublet Work in 
whole or, from time to time, in part, at any time by written notice to Subcontractor. Such 
notice shall specify the extent to which the performance of work is terminated and the 
effective date of such termination." CMARK was entitled to amounts due that had not been 
previously paid, but was not 
entitled to lost profits or other avoidable costs. (Supp. R4, 
tab 1507 at 10232 (Section 7.3.1, Termination for Convenience)) 
223. KBR's Subcontract General Conditions included a Changes clause reserving 
the right for KBR "to make changes 
to the Sublet Work or the manner of its performance" 
and establishing 
terms for pricing any such change in the scope of work (supp. R4, 
tab 1507 at 10233 (Section 8, Changes, Disputes, Notices)). 
224. The CMARK subcontract prohibited CMARK from making any change 
without a written change order (supp. R4, tab 1507 at 10233 (Section 8.1.1)). 
225. The CMARK subcontract 
also prohibited CMARK from subcontracting any 
portion of the contract, without KBR's prior written consent (supp. R4, tab 1507 at 10234 
(Section 9.3)). 
226. On 17 October 2005, six days after the contract was signed, KBR issued CMARK a 
Stop Work Order effective after dinner that night (supp. R4, tab 1418). The Navy had earlier 
informed KBR that KBR would no longer be performing the galley contract (tr. 6/190). 
227. CMARK' s meal count never reached 2,500 for any 1 meal at the dining facility 
(supp. R4, tab 1466 at 39982); however by technical direction 8, CMARK was also required to 
provide 150 meals 3 times per day to the Naval Support Activity East New Orleans and an 
additional 150 meals 3 times per day to the Naval Support Activity West New Orleans (supp. 
R4, tab 1459). The 300 meals 3 times per day delivered to other naval facilities are not 
included in the meal count for Joint Reserve Base New Orleans, and there is no information in 
the record regarding the number of meals actually served (rather than delivered) to the other 
naval facilities. 
228. CMARK prepared varying amounts of food at the dining facility and many of 
the hot lunch and dinner entrees were catered from Alec Naman (supp. R4, tab 1446). 
46 

229. CMARK used refrigerated storage trailers, generators, serving equipment, 
washing and cleaning equipment, dining room furnishings and certain food preparation 
equipment during the contract period (tr. 61176-78). 
230. On 2 November 2005, KBR performed an internal review of the meal counts. 
Mr. Hayward acknowledged that meal counts averaged 3,672 per day or 'just over half [the 
amount KBR] projected" (supp. R4, tab 1466 at 39980), and that paying the "entire daily 
amount" is likely to result in "problems with auditors." He also believed that CMARK 
saved money on labor because of the low meal counts (id.). 
231. Alec Naman, the caterer, invoiced CMARK approximately $50,000-$56,000 
per day for 2,500 meals (3 times a day) or approximately $20-22 per person per day. 
Naman Catering sent these invoices throughout October. (Supp. R4, tabs 1443-50) 
232. On 7 November 2005, Ms. Bewley informed Mr. Hayward that KBR would 
pay the fixed costs, but that the variable costs were subject to change based on the 
information CMARK would provide on the meals 
(supp. R4, tab 1470). 
233. Mr. Hayward recommended paying the daily "fixed" costs, and only the variable 
costs for meals actually served. He noted his opinion that CMARK experienced costs savings 
because it did not serve hot lunches and saved on labor costs because of catering, in addition 
to reduced labor costs from the Hurricane Rita evacuation. (Supp. R4, tab 1474) 
234. On 16 November 2005, Ms. Bewley recommended the following proposal to 
CMARK: paying half of CMARK' s equipment costs, all of its labor costs, and all of its 
invoiced meals (supp. R4, tab 1481). 
235. CMARK submitted revised invoices on 18 November 2005, but did not make 
any adjustment for equipment costs or variable costs (supp. R4, tab 1482). 
236. KBR informed CMARK of its proposal to only pay half ofCMARK's 
equipment costs on 22 November 2005. Ms. Bewley stated that the "equipment was not 
fully utilized due to [CMARK] catering the majority of the meals." (Supp. R4, tab 1483) 
237. In a KBR internal email dated 28 November 2005, Ms. Bewley stated that 
KBR's main issue was with CMARK's equipment 
costs as CMARK purchased the majority 
of the food from a caterer. She also stated that "it was KBR's original position to pay for 
only the actual number of meals as served, which differed drastically from the minimum 
number of meals as invoiced by CMARK." Ms. Bewley indicated that CMARK did not 
present a proposal to KBR regarding the cost dispute. (Supp. R4, tab 1486 at 40119) 
238. Mr. Hayward replied that "[t]he 
client won't have a problem with [KBR's] 
proposal of paying half the equipment." He also stated that there was a changed condition 
47 

justifying the price reduction and paying the full amount may result in "potential 
determination of some unallowable costs." (Supp. R4, tab 1486 at 40117-18) 
239. Ms. Hayes emailed CMARK on 14 December 2005 requesting information about 
CMARK's employees, as well as its catering invoices. She "[needed] this information to 
support [her] position to the government when audited next month." (Supp. R4, tab 1487) 
240. CMARK responded on 14 December 2005 and said it "paid the caterer a total 
of$1,793,353.21 during the time we were under the KBR contract at the New Orleans 
camp." CMARK's direct labor cost was $593,412 (not including on site management and 
home office administration). (Supp. R4, tab 1493) 
241. Mr. Hayward testified that he attempted to negotiate a lower price for the Navy 
on the CMARK subcontract, but found that CMARK incurred labor expenses not only to serve 
the meals, as alleged by DCAA, but also for preparing food on site, heating any catered food, 
and performing clean-up (tr. 6/177-78). Moreover, Mr. Hayward testified that, to the extent 
there were any labor savings due to the lower headcount, these costs were offset by labor costs 
for transporting the catered food from more than one and one-half hours away, delivering food 
three times per day to the Naval Support Activity, in two different locations, and extending the 
galley's hours of operation from two hours per meal service to two and a half hours per meal 
service. (Tr. 6/175-76, 186, 191, 195; supp. R4, tab 1459; app. supp. R4, tab 640 at 6280) 
242. KBR presented undisputed testimony that CMARK prepared sufficient food 
to serve 2,500 people for each meal (tr. 2/67), with the excess food donated to local 
churches and charities (tr. 6/187). 
243. CMARK eventually sued KBR seeking $2,500,000.00. The litigation 
between CMARK and KBR was settled with KBR making payment of$301,750.00. (App. 
supp. R4, tab 222) KBR did not pass this cost on to the Navy (tr. 6/196-97). 
244. On 2 September 2005, the General Services Administration (GSA) issued 
guidance allowing an increase in the per diem rates of up to 300% of the applicable per 
diem rate (Fed. Travel Reg., GSA Bulletin, FTR 05-06), and this increase was in effect 
throughout CMARK's performance period (tr. 7/134). 
245. As part of the normal annual update to per diem travel rates, the meals and 
incidentals per diem rate for New Orleans was increased from $4 7 per day to $59 per day 
(tr. 71133). 
246. In May 2007, DCAA issued its audit report with regard to the CMARK 
subcontract. In the "Results of Audit" section, DCAA concluded that KBR had failed to 
meet its responsibilities under the prime contract by issuing a subcontract with a minimum 
of 2,500 meals, 3 times per day, that was not set by technical direction from the Navy, and 
48 

by failing to have the dining facility tents ready in time and thus requiring CMARK to 
cater meals. (Supp. R4, tab 2902 at 18130) 
24 7. DCAA concluded that the CMARK subcontract was not properly awarded 
because it was not the product of a competitive process. DCAA concluded that, as a sole 
source contract, KBR was required to provide cost or pricing data, but this information was 
never provided to DCAA. DCAA further found that there was no indication that any price 
analysis had been done despite the fact that the Negotiation Memorandum and the Pricing 
Memorandum indicated the pricing analysis was based on CMARK's contract with KBR in 
El Centro and Gulfport, as well as the GSA per diem rate. DCAA never received any 
analysis comparing CMARK' s rate to the prevailing per diem rate, or any information at all 
about KBR's other subcontracts with CMARK at El Centro and Gulfport. (Tr. 2/69-71) 
248. DCAA determined the questioned costs based on the three categories of costs 
identified in the CMARK invoices. For variable food and consumable costs, DCAA 
found the average amount of meals served by taking the highest attendance of a meal each 
day. The average amount served was 1,527. DCAA questioned 39% of the labor costs 
((2,500-1,527)/2,500 = 39%) based on the average number of people served per day, 
assuming that the labor required would decrease based on the number of patrons. For 
equipment costs, DCAA used a 50% reduction as that was KBR's position in negotiations 
with CMARK.8 (Tr. 2/71-78) 
249. DCAA issued Audit Report No. 3321-2007K 17900006 on 17 May 2007 
regarding the CMARK subcontract. DCAA questioned $1,508,990 of the costs billed. 
(Supp. R4, tab 2902) 
250. Consistent with the DCAA audit report, the contracting officer's final 
decision, issued on 27 February 2012, also disapproved $1,508,990 of the costs paid to 
CMARK for the dining facility (R4, tab 149 at 676). 
251. On or about 23 May 2008, the Department of Defense, Office of the Inspector 
General concluded that KBR charged the Navy for more than 110,000 meals that were not 
served, the "meals and services" provided "should have cost $1. 7 million," and "NA VF AC 
should, at a minimum, recover fair costs and fees associated with equipment totaling 
$1,368,077" (supp. R4, tab 2901 at 11495-97). 
8 The DCAA audit report uses this pricing breakout to calculate the allowable cost for the 
contract, which is then subtracted from the net invoiced amount to calculate the total 
questioned cost. Apparently because of mobilization costs and rejected and 
withheld invoice amounts, it is not possible to calculate the questioned amount by 
cost element. (Supp. R4, tab 2902 at 18132) 
49 

DECISION 
The Navy challenges the reasonableness of the CMARK costs on a number of theories. 
First the Navy alleges that KBR unreasonably established a minimum headcount of 2,500 
people per meal (7,500 meals per day) when CMARK had initially submitted a bid with a 
lower minimum headcount of 833 people per meal (2,500 meals per day). Next the Navy 
asserts that KBR failed to perform a proper price reasonableness analysis in comparing 
CMARK's bid to the New Orleans Federal travel per diem rate because the per diem rate 
includes related taxes, tips, and incidentals that would not apply to meals eaten in a dining 
facility, and because dining facility meals should be substantially less expensive than 
restaurant meals where the customer has more extensive choices. Moreover, the Navy asserts 
that CMARK catered the meals, rather than cooking at the dining facility so the equipment 
costs were unjustified. Finally, the Navy asserts that KBR failed to exercise proper 
management of the contract by issuing a sole source contract and failing to de-scope the 
contract. (Gov't br. at 59-67) 
KBR contends that the award to CMARK was reasonable given the urgent nature of 
the request and the information provided by the Navy regarding expected headcounts. KBR 
argues that, at the time it retained CMARK, the Navy had provided an estimated headcount 
of 7,500 per meal (22,500 meals per day), so using a minimum headcount of 1/3 of the 
estimated number of troops was reasonable, and that CMARK's bid with a minimum 
headcount of 833 per meal was not considered because it did not conform with KBR's 
solicitation and occurred during the chaotic days immediately following Hurricane Katrina 
when the scope of the project was changing rapidly. KBR disputes the Navy's comparison 
of CMARK's rates to the per diem rates in effect for New Orleans because the Navy's 
analysis is based on normal market conditions and not disaster response conditions, and 
notes that travelers were authorized 300% of the normal per diem rates in the aftermath of 
Hurricane Katrina. Additionally, KBR disputes that there was any performance cost savings 
to CMARK in catering the meals rather than cooking on site because of the costs of 
transporting the meals to the site in the post-hurricane conditions and because CMARK 
prepared enough food to serve 2,500 meals for each meal period. Finally, KBR disputes that 
it failed to properly manage the subcontract because the Navy continued to believe that troop 
levels would increase. (App. hr. at 29-45) 
The Navy challenges KB R's billing on the basis of price reasonableness. Accordingly, 
KBR has the burden of establishing that its prices were reasonable. Based on the totality of 
the record, we hold that KBR has satisfied this burden. We note that "the standard for 
assessing reasonableness is flexible, allowing the [Board] to consider many fact-intensive and 
context-specific factors." Kellogg, Brown & Root, 728 F.3d at 1360. Here we are mindful of 
the urgent need for food service at Joint Reserve Base New Orleans and the conditions in 
immediate post-hurricane New Orleans. While certain ofKBR's decisions may appear 
unreasonable in hindsight, in an ex ante analysis we find the actions to be reasonable. 
50 

KBR began negotiating the CMARK subcontract beginning on 4 September 2005, 
just six days after Hurricane Katrina made landfall (finding 185). The Navy issued a 
task 
order for KBR to build a 2,000 man tent camp at Joint Reserve Base New Orleans, the scope 
of which was rapidly increased to a 7,500 man tent camp with electrical supply, heating and 
cooling, and galley capable of feeding the entire population of the tent camp (findings 
185-86). During this rapid escalation in scope, KBR issued a request for proposals to 
CMARK for "all food, material, equipment and labor to operate the dining facilities with the 
capability of feeding up to 7,500 people/day in accordance with Attachment 'A;'" however, 
attachment A requested pricing based on serving 2500 meals per day (finding 187). 
CMARK requested clarification regarding the headcount, but submitted a bid based on the 
lower estimate of 2,500 meals per day (833 people x 3 meals per day) (findings 188-89). 
Following some back-and-forth negotiations (findings 190-94), KBR clarified that it was 
requesting 2,500 meals per meal service, 3 times per day or 7 ,500 meals per day 
(finding 195). CMARK submitted a 
revised bid that was accepted and KBR issued a 
notice to proceed on 9 September 2005 (findings 198-99, 203). 
In hindsight, KBR would have saved money by contracting with CMARK on the 
basis of a minimum 2,500 meals per day rather than the 7 ,500 meals per day contained in 
the subcontract (compare findings 193 and 198). However, ex ante, all KBR knew was 
that the Navy requested construction of a 7,500 man tent camp and that the scope of the 
tent camp had quickly escalated from a 2,000 man camp to a 
7 ,500 man camp. We find 
that negotiating a contract with a minimum charge of one-third the estimated capacity of 
the camp was reasonable. See Boeing Aerospace Operations, Inc., ASBCA Nos. 46274, 
46275, 94-2 BCA ~ 26,802 at 133,282 (reasonableness determined based on circumstances 
existing at the time costs were incurred). 
Admittedly, KBR could have negotiated a lower minimum number of meals, that 
ex post, would have been more advantageous to the Navy. KBR explained that with a lower 
guaranteed number of meals, the price per meal or the fixed price would be too high relative 
to the number of meals and the project would be less cost effective (finding 196). 
Additionally Mr. Hayward explained that the 2,500 minimum per meal was a function of the 
Navy's requirement that the dining facility be able to serve 7,500 meals in a 
two-hour period. 
Mr. Hayward explained that allowing 40 minutes per meal, they would need tables and chairs 
for 2,500 people to accommodate 7 ,500 diners in a two-hour period. (Id.) 
The Navy's contract specialist, Ms. McMahon testified that 
"[t]he fact that KBR 
decided to limit that to 2,500 when we looked at it at that time, we thought there was a 
prudent, reasonable approach to handling the influx of people that would be coming in and 
structuring the contract" and the Navy's chief of the contracting office for the Naval Facilities 
Command, Mid-Atlantic, Ms. Kahler also testified that KBR's choice of a minimum 2,500 
head-count per meal was a valid assumption. Moreover, Ms. Kahler testified that "KBR 
could have easily written a subcontract that said 7,500 per meal and, you know, that would 
have been a 
valid basis based on our direction. So in this case KBR did, you know, say it's 
reasonable that maybe 7,500 aren't going to come per meal." (Finding 201) 
51 

The Navy attempts to undercut this testimony by its own witnesses, arguing that "[i]n 
contrast to the NA VF AC witnesses - who did not have experience setting up [dining 
facilities] and/or 
years of experience running [dining facilities] in Iraq and Afghanistan -
KBR has substantial experience setting-up [dining facilities] and had adopted special 
procurement policies for [dining facility] services" (gov't reply br. at 19). We reject the 
Navy's suggestion that KBR should have known better than the Navy's own procurement 
employees what the expected number of meals would be at the dining facility. As 
Mr. Hayward explained, the dining facilities in Iraq and Afghanistan were very different from 
the facility at issue here because the facilities in Iraq and Afghanistan were constructed to be 
used for a period of years, with more elaborate facilities, and were planned and constructed 
over a much longer period of time. (Finding 197) Thus, we find that KBR acted reasonably 
in setting the minimum head-count per meal. 
The Navy's challenge to the price reasonableness of the per-person per day meal cost 
of the CMARK subcontract fares no better. According to the Navy, KBR failed to perform a 
proper price evaluation for the sole-source award. The Navy asserts that the dining services 
were not a commercial item, so KBR was required pursuant to FAR 15.404 to obtain cost 
and pricing data. Additionally, the Navy asserts that KB R's comparison of the per person 
per day meal rate to the Federal travel per diem rate for New Orleans did not provide a 
proper comparison. 
KBR asserts that its retention ofCMARK was justified by the urgency ofthe Navy's 
request, and the fact that the food service was a commercial item such that cost and pricing 
data were not required. Moreover, KBR asserts that the Federal travel per diem of $47.00 per 
day for meals and incidentals was an appropriate comparison because the per diem did not 
imply workers could actually dine for $47 per person during the disaster recovery. 
As an initial point, we agree with KBR that the food service at the dining facility meets 
the definition of a "commercial item" pursuant to FAR 2-101 ("[a ]ny item, other than real 
property, that is of a type customarily used by the general public or by non-governmental 
entities for purposes other than governmental purposes"). The Navy asserts that the dining 
services were not commercial items because they were a "specialized service" without adequate 
"benchmarks to compare its costs to" (gov't br. ~ 157). However, the Navy's argument appears 
to apply the definition of a "commercially available off-the-shelf' item - a commercial item 
sold in substantial quantities and offered to the Government without modification. FAR 2.101. 
Thus, as a commercial item, certified cost and pricing data were not required (FAR 15 .403-1 (b ), 
(c)(3)(i)), and price analysis was appropriate for determining that the price was fair and 
reasonable. FAR 15.404-l(a)(2). 
The FAR describes a number of techniques for evaluating price reasonableness, and 
provides that comparison of proposed prices received in response to the solicitation and 
comparison to historical prices paid are the preferred price techniques, but "if the 
contracting officer determines that information on competitive proposed prices or previous 
52 

contract prices is not available or is insufficient to determine that the price is fair and 
reasonable, the contracting officer may use any of the remaining techniques as appropriate 
to the circumstances applicable to the acquisition." FAR 15 .404-1 (b )(3 ). 
The Navy asserts that KBR's price comparison to the Federal travel per diem rate is 
inappropriate because the per diem rate includes incidentals and is not limited to just food, 
and because KBR was providing mess-hall food, rather than cooked-to-order restaurant 
meals. The Navy additionally disputes the use of the per diem rate because CMARK 
catered much of the food served in the dining facility. The Navy also asserts that the 
proper comparison would be to the proportional meal rate, without incidentals, of $26 per 
day or the government meal rate, which is the daily rate for meals in a government dining 
facility of $8.90 per day. (Gov't br. at 65) 
The Navy's analysis completely ignores the market conditions in effect at the time 
of the contract. The market was a disaster relief situation, where essential public utilities 
were unavailable, road and bridges were impassible, and there were shortages of gasoline, 
and labor (see, e.g., finding 66). Because time was of the essence, KBR reasonably entered 
into a sole-source contract with CMARK. KBR was tasked with preparing a 7 ,500 man 
tent camp with a dining facility just six days after Hurricane Katrina made landfall, and 
began serving meals in the facility just nine days after that. Prior to this time, the 
emergency workers were living on MREs. (Finding 205) There is no evidence that there 
were commercial dining options available to accommodate the projected number of rescue 
workers at the per diem rate. 
The Navy relies upon Ms. Kahler's testimony that the comparison to the per diem 
rate was not an "apples to apples" 
comparison because eating at a government dining 
facility costs less than "going out to Chipotle" (gov't post-hearing br. at 65 (quoting 
tr. 5/93-94). However, Ms. Kahler's analysis ignores that the travel per diem was set 
before Hurricane Katrina to reflect dining costs under normal market conditions. After 
Hurricane Katrina, market conditions were drastically different. 
The GSA issued guidance allowing an increase in the per diem rates by up to 300% 
and this increase was in effect throughout CMARK's performance period (finding 244). In 
addition, the meals and incidentals per diem was increased from $4 7 per day to $59 per day 
as part of the normal annual update to the travel rates (finding 245). Thus, it is clear that 
the $4 7 per day price comparison point did not reflect the price at which an emergency 
worker could expect to dine at area restaurants. Instead that price would be up to $141 per 
day through 30 September 2005 and $177 per day effective 1 October 
2005. 
Given the emergency conditions in effect in New Orleans in early September 2005, we 
find that KBR satisfied the FAR' s price analysis requirements with regard to the daily rate 
(see findings 200, 202, 204, 207, 214-18). While the GSA per diem rate was not a perfect 
yardstick for evaluating the reasonableness of CMARK' s proposed costs, it may have been 
the best available information given the disruptions to communications, labor, utilities, and 
53 

distribution networks (finding 66). The Navy has not proposed a better source of pricing data 
that would have been available to KBR at the time. We find that the proportional meals rate, 
with or without incidentals, and the government meals rate were not appropriate benchmarks. 
However, we note that a 300% adjustment to the proportional meals rate of $26 per day 
would be $78 per day- substantially higher than the $46.96 per day in the CMARK contract. 
The Navy further asserts that KBR's subcontract with CMARK was unreasonable 
because CMARK catered most of the meals rather than preparing the meals in the dining 
facility. The Navy asserts that catering the meals resulted in excessive charges for equipment, 
labor savings with regard to food preparation, and due to the lower than expected headcount, 
savings in the food costs. KBR asserts that the Navy's task order did not require that the 
meals be prepared on site, and that much of the equipment was required for storing, heating 
and serving the food, that there were no labor cost savings or food cost savings because 
CMARK prepared enough food to serve 2,500 people for each meal. Additionally, KBR notes 
that CMARK incurred substantial costs in transporting the catered food from the remote 
preparation site, and also in delivering meals to other Navy locations. 
As an initial point, we agree with KBR that the CONCAP III master contract simply 
provided that KBR might be tasked with providing a galley (finding 1) and Task Order 16, 
Technical Direction 002 simply provided that KBR should "[p ]rovide 2500 Man Tent 
Camp with including but not limited to; galley, port-a-lets, shower facilities" (finding 185). 
The size of the tent camp was later modified, but there was no additional direction 
provided regarding the "galley" (id). Thus, CMARK's provision of catered meals did not 
violate the terms of the contract. 
With regard to the Navy's assertion that KBR's equipment costs were unreasonable 
because CMARK provided catered food, we find that this allegation was not supported by 
hearing testimony. The witnesses with personal knowledge of activities at Joint Reserve Base 
New Orleans during the relevant period testified that CMARK prepared some of the food in the 
dining facility. Admittedly, KBR did not have the tents prepared at the start of the performance 
period, but hearing testimony demonstrated that CMARK used the refrigerated storage trailers, 
generators, serving equipment, washing and cleaning equipment, dining room furnishings and 
certain food preparation equipment during the contract period. (Finding 229) Mr. Hayward 
also testified that even in the first days of the contract, some of the food, such as salads, were 
prepared on site, even though the hot entrees were catered (findings 206, 228, 231). 
The Navy was also unable to support its contention that CMARK enjoyed 
significant labor savings due to the reduced headcount. As KBR noted, DCAA's 
determination to question 39% of the labor costs assumes a linear relationship between the 
number of meals served and labor costs. KBR presented testimony from Mr. Hayward that 
KBR had attempted to negotiate a reduction in the contract costs on behalf of the Navy, but 
was unsuccessful (findings 230, 232-40). Mr. Hayward further demonstrated that CMARK 
incurred labor expenses not only to serve the meals, as alleged by DCAA, but also for 
preparing food on site, heating any catered food, and performing clean-up (finding 241). 
54 

Moreover, Mr. Hayward testified that, to the extent there were any labor savings due to the 
lower headcount, these costs were offset by labor costs for transporting the catered food 
from more than one and one-half hours away, delivering food three times per day to the 
Naval Support Activity, in two different locations, and extending the galley's hours of 
operation from two hours per meal service to two and a half hours per meal service (id.). 
The Navy's assertion that CMARK incurred reduced costs for food and consumables 
due to the lower than expected headcount was also unsupported by the evidence. KBR 
presented undisputed testimony that CMARK prepared sufficient food to serve 2,500 people 
for each meal, with the excess food donated to local churches and charities 
(finding 242). 
Accordingly, we find that CMARK's prices were reasonable with regard to the Navy's 
allegations that CMARK incurred decreased costs due to the lower headcount. 
The Navy's final challenge to the CMARK subcontract asserts that, even if 
CMARK's proposal was reasonable when the terms were set on or about 9 September 2005, 
it was unreasonable for KBR not to decrease the scope of the contract once it was obvious 
that the dining facility would not be serving 7,500 or even 2,500 people per day. KBR 
responds that it raised the issue with the Navy, but received indications that the headcount 
numbers were expected to increase. 
The record reflects that Mr. Hayward sent an email on 21 September 2005 to the 
Navy, including Ms. Paggi and Ms. Brunner, noting that the 
galley headcounts were 
significantly below the requirement of 7,500 meals 3 times per day, and that the meal count 
had not reached the 2,500 meal minimum (finding 210). The email provided that KBR still 
expected to meet the 2,500 meal contract minimum, and expressed Mr. Hayward's opinion 
that "the pricing structure remains reasonable for this start up period," 
but requesting the 
Navy's concurrence (id.) Mr. Hayward additionally provided testimony that he did not 
believe the 2,500 number was too high based on the direction he had received from the Navy 
and the information that he had (id.). The record does not include a response from the Navy 
to Mr. Hayward's email; however, two of the email's recipients testified that, while they did 
not recall responding to the email, in the normal course of dealing they would have 
responded to such a question, and if they had not responded, they would have expected a 
follow-up email from Mr. Hayward (finding 211). KBR executed the final subcontract with 
CMARK on 11 October 2005, and six days later, on 17 October 2005, KBR issued a stop 
work order to CMARK at the Navy's request (findings 219, 226). Thus, despite the fact that 
KBR had a contractual right to de-scope CMARK's contract (findings 220-24), we find that 
KBR acted reasonably. KBR reasonably sought concurrence from the Navy regarding the 
continued reasonableness of the continuing use of the 2,500 headcount per meal minimum. 
In addition, the contract was of a short duration. Had performance continued for a longer 
period of time, KBR's actions might not have been considered reasonable. 
The Navy was the party more knowledgeable about the expected headcount at the 
base and was also the party that provided the specification for the construction of a 7 ,500 
55 

man camp. Accordingly, we hold that CMARK's prices were reasonable and find 
entitlement in favor of KBR with regard to the CMARK subcontract. 
CONCLUSION 
For the foregoing reasons, the appeal is sustained in part and we return the appeal to 
the parties to negotiate quantum consistent with this decision. 
Dated: 2 December 2016 
I concur 
~-
OWEN C. WILSON 
Administrative Judge 
Armed Services Board 
of Contract Appeals 
I concur 
DA YID D' ALESSANDRIS 
Administrative Judge 
Armed Services Board 
of Contract Appeals 
I concur 
/~~ MARK N. STEMPLER RICHARD SHACKLEFORD 
Administrative Judge Administrative Judge 
Acting Chairman 
Armed Services Board 
of Contract Appeals 
56 
Vice Chairman 
Armed Services Board 
of Contract Appeals 

I certify that the foregoing is a true copy of the Opinion and Decision of the Armed 
Services Board of Contract Appeals in ASBCA No. 58081, Appeal of Kellogg Brown & 
Root Services, Inc., rendered in conformance with the Board's Charter. 
Dated: 
57 
JEFFREY D. GARDIN 
Recorder, Armed Services 
Board of Contract Appeals