Kellogg Brown & Root Services, Inc.
Docket: ASBCA 59557
Decision date: 2015-01-22

ARMED SERVICES BOARD OF CONTRACT APPEALS 
Appeal of -- ) 
) 
Kellogg Brown & Root Services, Inc. ) 
) 
Under Contract No. DAAA09-02-D-0007 ) 
APPEARANCES FOR THE APPELLANT: 
APPEARANCES FOR THE GOVERNMENT: 
ASBCA No. 59557 
Jason N. W orkmaster, Esq. 
Raymond B. Biagini, Esq. 
Herbert L. Fenster, Esq. 
Erin B. Sheppard, Esq. 
McKenna Long & Aldridge LLP 
Washington, DC 
E. Michael Chiaparas, Esq. 
DCMA Chief Trial Attorney 
Srikanti Schaffner, Esq. 
Trial Attorney 
Defense Contract Management Agency 
Carson, CA 
OPINION BY ADMINISTRATIVE JUDGE O'SULLIVAN 
ON APPELLANT'S MOTION FOR AN ORDER DIRECTING 
THE GOVERNMENT TO FILE THE COMPLAINT 
Appellant Kellogg Brown & Root Services, Inc. (KBR) moves the Board to 
direct the government to file the complaint in this appeal. The government opposes. 
For the reasons that follow, appellant's motion is granted. The government is directed 
to file its complaint no later than 30 days from the date of this opinion. 
STATEMENT OF FACTS FOR PURPOSES OF THE MOTION 
Contract No. DAAA09-02-D-0007, known as the 
LOGCAP (Logistics Civil 
Augmentation Program) Support Contract, was awarded to KBR (then known as Brown 
& Root Services) on 14 December 2001 (app. supp. R4, tab 9 at 002). Pursuant to the 
contract, KBR and other contractors were tasked to provide selected services to 
commanders in support of military and non-military (humanitarian and other) operations 
(id. at 0058). The costs at issue in this appeal were incurred by KBR in its performance 
of numerous task orders issued to it under the LOGCAP contract (R4, tab 2). 
KBR was required by the contract, which incorporated Federal Acquisition 
Regulation (FAR) Clause 52.228-3, WORKERS' COMPENSATION INSURANCE (DEFENSE 

BASE ACT) (APR 1984 ), to provide workers' compensation insurance for its own 
employees and to flow down this requirement to its subcontractors (app. supp. R4, 
tab 9 at 040). Because it was responsible for ensuring that subcontractor employees 
were covered, and because the contract work was being performed in parts of the 
world where such insurance might not be easily accessible, KBR elected to provide 
Defense Base Act (DBA) insurance for its subcontractors to ensure compliance (app. 
supp. R4, tab 70, ex. A). Under this program, subcontractors provide KBR with 
estimated payroll for each subcontract enrolled into the program. A separate 
DBA 
policy is issued for each subcontract under the master policy. The subcontractors do 
not reimburse KBR for the premiums and do not include DBA insurance costs in their 
billings. KBR does not perform reviews of subcontractor payroll due to a lack of 
certified payroll availability, especially in the Middle East. Through 2005, KBR had 
provided insurance coverage to 94,405 subcontractor employees who were Third 
Country Nationals and 81,239 subcontractor employees who were Host Country 
Nationals. (Id. at 2298-99). 
KBR's FY 2007 incurred cost proposal was initially submitted on 30 June 2008 
(app. supp. R4, tab 91) and after several revisions, a final proposal was submitted on 
8 June 2012 (app. supp. R4, tab 102). The incurred cost proposal included the cost of 
subcontractor DBA premiums paid by KBR. 
On 9 May 2014, DCAA provided the draft results of the audit with respect to 
FY 2007 subcontractor DBA insurance to KBR via email (R4, tab 3). KBR formally 
responded to the draft results by letter dated 19 May 2014 (R4, tab 6). The audit 
report itself was finalized and issued on 30 May 2014 (R4, tab 7). 
The draft audit results and final audit report do not vary in any substantive respect 
on the issue of subcontractor DBA insurance costs. The final audit report states: 
We take no exception to the proposed premium 
rates used to calculate the subcontractor DBA insurance 
costs. During our examination of the subcontractor DBA 
insurance costs, the contractor stated it does not "true-up" 
subcontractor DBA insurance costs based on actual 
subcontractor labor. KBRSI asserts it does not have 
visibility of the subcontractors' actual payroll records. 
However, based on KBRSI's subcontractor DBA insurance 
policy, the insurance company had the rights [sic] to verify 
the subcontractors' remuneration. KBRSI was unable to 
confirm the insurance company (AIG) or insurance broker 
(Aon) verified the subcontractors' remuneration. 
2 

The contractor is in noncompliance with 
FAR 31.201-2( d) - Determining Allowability which states: 
A contractor is responsible for accounting for costs 
appropriately and for maintaining records, including 
supporting documentation, adequate to demonstrate 
that costs claimed have been incurred, are allocable 
to the contract, and comply with applicable cost 
principles in this subpart and agency supplements. 
The contracting officer may disallow all or part of a 
claimed cost that is inadequately supported. 
In addition, the contractor is in noncompliance with 
(i) FAR 31.205-19( d)(l) because it did not measure, 
assign, and allocate costs in accordance with 48 CFR 
9904.416, and (ii) CAS 416-40(b) because it did not 
allocate insurance costs to cost objectives based on the 
beneficial or causal relationship between the insurance 
costs and the benefiting or causing cost objectives. We 
separately reported this potential CAS 416 noncompliance 
in Audit Report No. 3321-2013H19200004, dated May 1, 
2013 (previously provided to your office). The resolution 
of this CAS 416 non-compliance is currently in process 
and will be processed in accordance with FAR 30.605. 
We question $33,851,898 by applying an audit 
calculated 43 percent decrement factor to the subcontractor 
DBA insurance costs of $78,725,344 proposed under GL 
Account No. 600106 - Insurance - Special Property 
Damage - Primary because the computation of 
subcontractor DBA insurance costs was not based on the 
actual subcontractor labor incurred during the year. Our 
decrement 
factor is based on subcontract Master 
Agreement GC02HU-VC-ML 5051 for the period October 
2006 to September 2007. 
In addition, there is an existing noncompliance 
with CAS 406.40(b), CAS 416.40(a) and (b), and 
CAS 416.50(b)(2) reported in Audit Report 
No. 3321-2007K19200001, dated April 20, 2009. The 
cited noncompliant practices relate to KBRSI immediately 
expensing DBA insurance premiums and allocating these 
expenses over open task orders (TOs) without regard to the 
3 

period of performance of the TO. The results of the Rough 
Order Magnitude (ROM) were issued under DCAA MFR 
3321-2011K49200901, dated February 3, 2012. The 
estimated impact of the noncompliant practice from Policy 
Years (PY) 2002 to 2009 is $34,422,957. The costs 
reported in this audit have not been impacted by this 
CAS 406/416 noncompliance because the CAS 406/416 
noncompliance and the resulting impact will be processed 
in accordance with FAR 30.605. 
(R4, tab 7 at 574-75) 
In the following section of the audit report, entitled "basis of Contractor's 
Cost," DCAA notes that the subcontractor DBA insurance premiums are based on 
estimated payroll of covered workers for the policy term (R4, tab 7 at 576). Further, 
DCAA notes that KBR is invoiced by the insurer quarterly based on said estimated 
payroll, and this premium amount is charged to open task orders at the time the invoice 
is received (id.). The audit report additionally notes that KBR's subcontractor DBA 
insurance costs are supported by "bordereaux" files 1 compiled using the DBA 
applications submitted by the subcontractors (id.). After the subcontractor's 
application is submitted by KBR to the broker, the broker returns a confirmation of 
coverage to KBRI who, in tum, provides it to the subcontractor (id.). Subsequently, 
the same estimated payroll amounts are used to allocate premium costs to the various 
Work Breakdown Structure (WBS) elements (id.). 
In the next section, entitled "Audit Evaluation," DCAA states that it was able 
to: (1) reconcile the proposed FY 2007 subcontractor DBA insurance cost to invoices 
received; (2) verify the installment payments made; (3) verify that KBR solicited 
adequate competitive quotes to ensure the premium was reasonable; and (4) verify that 
the proposed costs were supported by valid insurance policies (R4, tab 7 at 576). 
Finally, DCAA explains that it calculated the 43 percent decrement by 
examining one ofKBR's subcontract Master Agreements and comparing the 
"estimated DBA premium" per the Master Agreement (a premium amount calculated 
by multiplying the labor hours invoiced under the Agreement for the period October 
2006 to September 2007 by the Iraq/Kuwait premium rate) to the DBA premium 
amounts invoiced by the insurer and paid by KBR. (R4, tab 7 at 576-77) 
In its written response submitted 19 May 2014, KBR took issue with the audit 
report claim that it had not adequately accounted for the subcontractor DBA costs or 
1 According to KBR, bordereaux files list all sub-policies issued for a subcontractor's 
labor force and any changes to that labor force (R4, tab 6 at 479). 
4 

provided adequate documentation. It stated that it had provided "all pertinent 
documentation" including the paid invoices, the bordereaux files, the insurance 
policies, 
and the insurance renewal files, to support the premium pricing, and that 
DCAA had not questioned the cost based on lack of documentation. (R4, tab 6 at 4 79) 
KBR also disputed the allegations of CAS noncompliance, and asserted that the 
method DCAA used to calculate the 43 percent decrement was unreasonable for a 
number of reasons, including the fact that the decrement was calculated from a single 
Master Agreement yet applied to all costs incurred in FY 2007; moreover, DCAA was 
decrementing the actual total cost incurred and paid in FY 2007 using an estimate of 
payroll data from one master agreement. (Id. at 480) KBR pointed out that it had 
saved the government money by administering the DBA insurance between the 
subcontractors and the insurance carrier, as it would have been more expensive if the 
subcontractors had obtained and administered their own DBA policies (id. at 481 ). 
The record in this appeal reflects that DCAA was aware by 2007 that 
subcontractor DBA insurance premiums were based on estimated subcontract payroll 
and were not subject to retroactive adjustment based on actual subcontractor payroll 
costs. For instance, on 24 August 
2007, DCAA's Gregory Hartsoe asked: 
Why are adjusting entries being made to policy 
8349311, 8 to 12 months after its coverage period closed? 
My understanding was that subcontract DBA was not 
subject to final payroll audit due to proprietary restrictions 
on subcontractor financial data. 
Additional data: Please provide the supporting premium 
calculation worksheets as previously requested. These 
worksheets should show the estimated subcontractor 
payroll and applicable premium rate applied. 
(Id. at 2379-80) KBR's Erin Wilkerson responded on 28 August 2007: 
That is correct, however adjustments are not being made 
due to "actual payroll" submissions. Adjustments are being 
made [as] a 
result of amended applications correcting 
contract amounts, performance periods, possibly overlooked 
change orders, terminated contracts, etc - all for compliance 
reasons and record housekeeping. If this is a practice that 
needs to be discontinued, we need to discuss. 
5 

I am continuing to research the support behind the 
invoices, and will send you the data or updates as soon as I 
get information. 
(Id. at 23 78-79) In September 2007 this further email exchange took place between 
Mr. Hartsoe and Ms. Wilkerson: 
[DCAA:] Again, my understanding was that subcontract 
DBA policies were billed at estimated payroll amounts and 
never subsequently adjusted for actual costs incurred on 
the subcontracts. 
KBR RESPONSE: That is correct- as stated below, 
the adjustments are not for "actual payroll" but rather 
for amended applications. Examples include correcting 
contract amounts, performance periods, possibly 
overlooked change orders, terminated contracts, etc -
all for compliance reasons and record housekeeping. 
[DCAA:] Since this post close adjustment process seems 
to be a constantly recurring item, I would like detailed 
breakout of just what is being done on a recurring basis to 
cause such adjustments to be made for each quarter. 
KBR RESPONSE: Please reference reasons stated 
above -this would be on a subcontract by subcontract 
basis. New DBA applications are processed for each 
change in estimated payroll. For example, if a change 
order was issued that increased a scope of work 
requiring additional labor, the estimated payroll amount 
would increase, and the total DBA premium would have 
to be adjusted to cover these additional workers. 
Therefore, this detailed breakout would be at a change 
order level on a subcontract by subcontract basis. 
The record does not contain any indication that DCAA objected to the 
above-described quarterly adjustments to premium costs prior to the time KBR entered 
into the FY 2007 subcontractor DBA policy. Nor does the record indicate that DCAA 
objected to the clearly described practice of basing subcontractor DBA insurance 
premiums on estimated subcontractor payroll prior to the time KBR entered into the 
FY 2007 subcontractor DBA policy. In 2008, when the same DCAA auditor requested 
supporting documentation for FY 2007 subcontractor DBA insurance costs, he 
6 

specifically requested "listing of the subcontracts being covered and estimated payroll 
for the period for each" (app. supp. R4, tab 89 at 2617-18). 
KBR appeals from an administrative contracting officer's (ACO's) final 
decision, dated 26 June 2014, demanding payment of $33,851,868 in allegedly 
unallowable Defense Base Act (DBA) insurance costs billed to the government. The 
final decision sets forth the following as the sole basis for the demand: 
(R4, tab 8) 
This is my final decision asserting a Government 
claim for $33,851,868, pursuant to FAR 52.233-1, 
Disputes, due to the inclusion ofunallowable Fiscal Year 
(FY) 2007 direct costs claimed and 
billed to the 
Government. My decision was based on FAR 31.201-2, 
Determining Allowability, due to KBRSl's computation of 
subcontract DBA insurance costs claimed and billed under 
contract no. DAAA-09-02-D-0007. The cost billed was 
not based on actual subcontractor labor incurred during 
FY 2007. The following documents are referenced and 
relied upon in making this decision: 
(a) DCAA Audit Report No. 3321-2007K10100001 
dated May 30, 2014 
(b) KBRSl's response dated, May 19, 2014 
KBR argues that requiring the government to file the complaint in this case is 
warranted since the contracting officer's final decision only perfunctorily refers to 
FAR 31.201 and the fact that KBR' s billed subcontractor DBA insurance costs were 
not based on actual subcontractor labor, but does not provide any additional detail and 
does not specify what portions of the "referenced and relied upon" documents are 
relevant to the decision. KBR asserts that unless the government is required to file the 
complaint, it will have been excused from "having to proffer a basic legal and factual 
rationale for its demand of the significant sum at issue in this Appeal, resulting in a 
[KBR] complaint simply disagreeing with the bare-bones conclusions of the Final 
Decision and a Government answer simply denying these ... positions. Such pleadings 
would do little, if anything, to advance this Appeal." (App. mot. at 2-3) 
The government asserts in opposition to KBR's motion that: (1) the basis for 
the government's claim is evident from numerous communications that took place 
prior to the issuance of the ACO's final decision; (2) "KBR is well aware that the basis 
for the Government's claim is that KBR has failed to show that DBA premiums based 
on estimated, rather than actual subcontractor labor, are reasonable"; (3) it is KBR that 
7 

bears the burden of proving the claimed costs to be reasonable pursuant to FAR 
31.201-3(a); and (4) the facts bearing on the reasonableness of the claimed costs, i.e., 
"the information regarding the basis upon which the DBA insurance premiums were 
calculated and paid," are within KBR's possession and are not known to the ACO 
(gov't reply). 2 
DECISION 
Under the unique procedural requirements of the Contract Disputes Act (CDA), 
all claims, whether contractor or government claims, must be the subject of a 
contracting officer's final decision. 41 U.S.C. § 7103. The contractor, however, is the 
only party who may initiate proceedings 
at the Board, 41 U.S.C. § 7104, and Board 
Rule 
6(a) requires the appellant to file the complaint in an appeal. If the contractor 
appeals from a final decision on a government claim, the contractor typically presents 
in its complaint enough information about the government claim to form a sufficient 
predicate for the government's answer and allow for adequate framing of the issues. 
Thus, the fact that the appeal involves a government claim is not enough, in and of 
itself, to justify requiring the government to file the complaint. 
In appropriate cases, the Board may exercise its discretion to require the 
government to file the complaint, if doing so will facilitate efficient resolution of the 
appeal. BAE Systems Land & Armaments Inc., ASBCA No. 59374, slip. op. 
(18 November 2014); Beechcraft Defense Co., ASBCA No. 59173, 14-1 BCA 
ii 35,592. Such situations can arise if relevant information concerning the basis for the 
claim resides with the government, not the contractor. In BAE Systems, for example, 
the contracting officer issued a "Defective Pricing Demand Letter" based on a DCAA 
audit report alleging defective pricing, but the demand letter did not purport to be a 
contracting officer's final decision. BAE filed a certified claim challenging the 
government's demanded price adjustment, and over a year later the contracting officer 
issued a final decision denying BAE' s claim. The Board granted BAE' s motion, 
noting that BAE's "claim" was more in the nature of a defense against the 
government's claim of defective pricing, and further stating: 
[T]he contracting officer's final decision does not explain 
in any depth why it rejected the contractor's arguments, 
except with occasional summary remarks. In these 
particular circumstances, proceedings would be more 
2 In addition to KBR's motion, the government's reply, and KBR's response thereto, 
KBR filed a Notice of Supplemental Authority referencing this Board's 
decision in BAE Systems, cited herein, and the government filed a reply to 
appellant's notice. All of these filings and the exhibits thereto have been 
considered by the Board in reaching its decision. 
8 

efficient if the Board could start with a government 
articulation of the basis for its determination of defective 
pricing, rather than appellant's speculation about the basis 
for the government's assertions. 
BAE Systems, slip. op. at 3 (citation omitted). In Beechcraft, the contractor appealed 
from a DCMA contracting officer's final decision finding its accounting practices 
noncompliant with Cost Accounting Standard (CAS) 402. The government 
acknowledged that the appeal involved a government claim, but argued that appellant 
was in the best position to assert facts establishing its compliance with the standard. The 
Board held that since the burden of establishing noncompliance was on the government, 
the proceedings would be facilitated by the government's filing an initial pleading setting 
forth the facts and rationale in support of its claim. 14-1 BCA at 174,395. 
In this case, the government has asserted that $33.9 million in subcontractor 
DBA insurance premium costs incurred by KBR in performing the LOGCAP contract 
are unallowable, yet it has not articulated a basis for its claim. The Board has 
examined the ACO's decision which does not explain the rationale for finding these 
costs unallowable. The final decision includes the summary sentence: "The cost 
billed 
was not based on actual subcontractor labor incurred during FY 2007" but does 
not explain why that fact, in the contracting officer's opinion, renders the costs 
unallowable. It is important to note the costs billed were KBR's actual incurred 
premium costs, as confirmed by the DCAA audit. 
The final decision also states that it references and relies on the DCAA audit 
report and KBR's response to that report. The Board has examined the audit report, 
which states that it is disallowing the costs based on KBR's failure to "true up" its 
subcontractor DBA insurance costs based on actual subcontractor payroll, and that this 
failure to "true-up" is a noncompliance with FAR 31.201-2( d), which requires 
contractors to maintain records sufficient to demonstrate that claimed costs have been 
incurred, are allocable to the contract, and comply with applicable cost principles. 
However, the audit report does not 
explain what significance, if any, actual 
subcontractor labor costs (even if such information were available to KBR) would 
have to the issue of the allowability of KBR's subcontractor DBA insurance costs, 
which were based on estimated subcontractor payroll and not subject to adjustment 
based on actual subcontractor payroll. 
The government argues that KBR is "well aware" that the basis for the 
government's claim is that "KBR has failed to show that DBA premiums based on 
estimated, rather than actual subcontractor labor, are reasonable;" that the burden is on 
a contractor to prove the reasonableness of incurred costs once challenged by the 
government; and that KBR, not the ACO, possesses the facts bearing on the issue of 
9 

reasonableness, i.e., "the information regarding the basis upon which the DBA 
insurance premiums were calculated and paid." But neither the ACO's final decision 
nor the DCAA audit report articulates a reasonableness challenge to KBR's incurred 
DBA insurance costs. To the contrary, the audit report affirmatively states that KBR 
solicited adequate competitive quotes to ensure the premium was reasonable, and the 
operative FAR provision on cost reasonableness, FAR 31.201-3, is not cited in either 
the audit report or the ACO's decision in connection with this issue. Moreover, the 
record would seem to indicate that DCAA, and therefore the government, received all 
the information it requested regarding "the basis upon which the DBA insurance 
premiums were calculated and paid." 
Finally, the government asserts that the basis for its claim is clear from "the 
communications between the parties" leading up to the issuance of the final decision 
on 26 June 2014. The Board has therefore examined all of the communications 
between the parties in the record before it. None of these communications articulates a 
basis for the government's claim. 
Simply stated, appellant should not have to speculate about the basis for the 
government's claim in its complaint. Thus, we find that proceedings in this appeal 
would be facilitated by the government's filing the initial pleading setting forth the 
basis or bases for its claim that KBR's FY 2007 subcontractor DBA insurance costs 
are unallowable. 
CONCLUSION 
The Board grants appellant's motion to direct the government to file the 
complaint in this appeal. The government is directed to file the complaint no later than 
30 days from the date of this opinion. Appellant's answer shall be due 30 days 
following receipt of the government's complaint. 
Dated: 22 January 2015 
(Signatures continued) 
10 

I concur 
Administrative Judge 
Acting Chairman 
Armed Services Board 
of Contract Appeals 
I concur 
RICHARD SHACKLEFORD 
Administrative 
Judge 
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. 59557, Appeal of Kellogg 
Brown & Root Services, Inc., rendered in conformance with the Board's Charter. 
Dated: 
11 
JEFFREY D. GARDIN 
Recorder, Armed Services 
Board of Contract Appeals