ARMED SERVICES BOARD OF CONTRACT APPEALS 
Appeals of -- ) 
) 
Lockheed Martin Integrated Systems, Inc. ) 
) 
Under Contract Nos. DAAB07-03-D-B009) 
W15P7T-06-D-E405 ) 
APPEARANCES FOR THE APPELLANT: 
APPEARANCES FOR THE GOVERNMENT: 
ASBCA Nos. 59508, 59509 
Thomas A. Lemmer, Esq. 
Joshua D. Prentice, Esq. 
Dentons US LLP 
Denver, CO 
Raymond M. Saunders, Esq. 
Army Chief Trial Attorney 
Frank A. March, Esq. 
Trial Attorney 
OPINION BY ADMINISTRATIVE JUDGE O'SULLIVAN ON APPELLANT'S 
MOTIONS TO DISMISS FOR FAILURE TO STATE A CLAIM 
In ASBCA No. 59508, Lockheed Martin Integrated Systems, Inc. (LMIS) appeals 
from a contracting 
officer's final decision (COFD) asserting a $102,294,891 breach of 
contract claim against LMIS. In ASBCA No. 59509, LMIS appeals from a COFD 
asserting a similar claim under a different contract in the amount of$14,494,740 1• In both 
appeals, which have been consolidated, the Board directed the government to file the 
complaint. Appellant has moved to dismiss both complaints with prejudice for failure to 
state a claim upon which relief can be granted pursuant to Board Rule 7 and FED. R. CIV. 
P. 12(b)(6). The government opposes the motions. The Board has jurisdiction under the 
Contract Disputes Act (CDA), 41 U.S.C. §§ 7101-7109. 
1 Three related appeals, ASBCA Nos. 60079, 60080, and 60081, have also been 
consolidated but have been suspended pending the Board's decision on the 
motions to dismiss in ASBCA Nos. 59508 and 59509. 

STATEMENT OF FACTS (SOF) FOR PURPOSES OF THE MOTIONS 
The CR2 Contract 2 
1. On 31 January 2003, Army Communications-Electronics Command (CECOM) 
Acquisition Center 3 awarded LMIS Contract No. DAAB07-03-D-B009, referred to as the 
CECOM Rapid Response (CR2) contract (ASBCA No. 59508 (59508) compl. ~~ 3, 11). 
The CR2 contract was a multiple award indefinite-delivery, indefinite-quantity (ID/IQ) 
contract. It included a two-year base period and three two-year option periods. The base 
period of the contract was 31 January 2003 to 30 January 2005. It was followed by two 
option periods of 31 January 2005 to 30 January 2007 and 31 January 2007 to 30 January 
2009. (Id.~ 3) 
2. The CR2 contract was for services in support of peacetime or contingency 
operations, including transition to war, either within or outside the theater of 
operations (R4, tab 1 at 24 ). LMIS was required to provide various types of personnel 
including information technology personnel, administrative personnel, engineers, 
pilots, logisticians, machinists, mechanics, architects, analysts, supervisors, and 
managers (59508 compl. ~ 12). The CR2 contract contemplated the issuance of 
time-and-materials task orders and included on-site and/or off-site fully loaded labor 
rates for each Lockheed Martin segment and each non-Lockheed Martin subcontractor 
(id. ~~ 11, 12). 
3. The CR2 contract incorporated by reference the clause at FAR 52.232-7, 
PAYMENTS UNDER TIME-AND-MATERIALS AND LABOR-HOUR CONTRACTS (DEC 2002) 
(59508 compl. ~ 11; R4, tab 1 at 39), which provided in relevant part: 
The Government will pay the Contractor as follows 
upon the submission of invoices or vouchers approved by 
the Contracting Officer: 
(a) Hourly rate. (1) The amounts shall be computed 
by multiplying the appropriate hourly rates prescribed in 
the Schedule by the number of direct labor hours 
performed. The rates shall include wages, indirect costs, 
general and administrative expense, and profit. Fractional 
2 On a motion to dismiss for failure to state a claim, we consider the allegations of 
the complaint and documents incorporated by reference. Matcon Diamond, Inc., 
ASBCA No. 59637, 15-1BCA~36,144 at 176,408. In this appeal the complaint 
incorporates by reference the contract, audit report, and final decision. 
3 The CECOM Acquisition Center has since moved to Aberdeen Proving Ground, 
Maryland, to be a part of Army Contracting Command - Aberdeen Proving 
Ground (ACC-APG) (59508 compl. at 1 n.1). 
2 

parts of an hour shall be payable on a prorated basis. 
Vouchers may be submitted once each month (or at more 
frequent intervals, if approved by the Contracting Officer), 
to the Contracting Officer or designee. The Contractor 
shall substantiate vouchers by evidence of actual payment 
and by individual daily job timecards, or other 
substantiation approved by the Contracting Officer. 
Promptly after receipt of each substantiated voucher, the 
Government shall, except as otherwise provided in this 
contract, and subject to the terms of (e) below, pay the 
voucher as approved by the Contracting Officer. 
(b) Materials and subcontracts. (1) The Contracting 
Officer will determine allowable costs of direct materials 
in accordance with Subpart 31.2 of the Federal Acquisition 
Regulation (FAR) in effect on the date of this contract. 
Direct materials, as used in this clause, are those materials 
that enter directly into the end product or that are used or 
consumed directly in connection with the furnishing of the 
end product. 
(2) The Contractor may include reasonable and 
allocable material handling costs in the charge for material 
to the extent they are clearly excluded from the hourly rate. 
Material handling costs are comprised of indirect costs, 
including, when appropriate, general and administrative 
expense allocated to direct materials in accordance with 
the Contractor's usual accounting practices consistent with 
Subpart 31.2 of the FAR. 
(3) The Government will reimburse the Contractor 
for supplies and services purchased directly for the 
contract when the Contractor-
(i) Has made payments of cash, checks, or other 
forms of payment for these purchased supplies or services; 
or 
(ii) Will make these payments determined due-
(A) In accordance with the terms and conditions of 
a subcontract or invoice; and 
3 

(B) Ordinarily within 30 days of the submission of 
the Contractor's payment request to the Government. 
(e) Audit. At any time before final payment under 
this contract the Contracting Officer may request audit of 
the invoices or vouchers and substantiating material. Each 
payment previously made shall be subject to reduction to 
the extent of amounts, on preceding invoices or vouchers, 
that are found by the Contracting Officer not to have been 
properly payable and shall also be subject to reduction for 
overpayments or to increase for underpayments. Upon 
receipt and approval of the voucher or invoice designated 
by the Contractor as the "completion voucher" or 
"completion invoice" and substantiating material, and upon 
compliance by the Contractor with all terms of this 
contract (including, without limitation, terms relating to 
patents and the terms of (t) and (g) below) [relating to 
assignments and refunds], the Government shall promptly 
pay any balance due the Contractor. The completion 
invoice or voucher, and substantiating material, shall be 
submitted by the Contractor as promptly as practicable 
following completion of the work under this contract, but 
in no event later than 1 year (or such longer period as the 
Contracting Officer may approve in writing) from the date 
of completion. 
The S3 Contract 
4. On 2 March 2006, the ACC-APG awarded Contract No. Wl5P7T-06-D­
E405 to LMIS. This contract is referred to as the Strategic Services Sourcing (S3) 
contract. It is a multiple award ID/IQ contract with a five-year base period and one 
five-year option period. The base period of the contract was 2 March 2006 to 1 March 
2011. (ASBCA No. 59509 (59509) compl., 3) 
5. The S3 contract also called for a broad range of services to be provided in 
support of operations, including information technology, administrative, security, 
instructor, logistician, and electrician (59509 compl. , 12). The contract contains 
time-and-material, cost, and firm-fixed-priced contract line item numbers (CLINs) 
(id. , 11 ), and provides fully loaded labor rates for each category of service (id. , 12; 
59509 R4, tab 1, attach. 007). 
4 

6. The S3 contract incorporated by reference FAR 52.232- 7, PAYMENTS UNDER 
TIME-AND-MATERIALS AND LABOR-HOUR CONTRACTS (AUG 2005) (59509 R4, 
tab 1188 at 46), 4 which provided, in relevant part: 
The Government will pay the Contractor as follows upon 
the submission of invoices or vouchers approved by the 
Contracting Officer: 
(a) Hourly rate. (1) The amounts shall be computed 
by multiplying the appropriate hourly rates prescribed in 
the Schedule by the number of direct labor hours 
performed. The rates shall include wages, indirect costs, 
general and administrative expense, and profit. Fractional 
parts of an hour shall be payable on a prorated basis. 
Vouchers may be submitted once each month (or at more 
frequent intervals, if approved by the Contracting Officer), 
to the Contracting Officer or designee. The Contractor 
shall substantiate vouchers by evidence of actual payment 
and by individual daily job timecards, or other 
substantiation approved by the Contracting Officer. 
Promptly after receipt of each substantiated voucher, the 
Government shall, except as otherwise provided in this 
contract, and subject to the terms of (e) below, pay the 
voucher as approved by the Contracting Officer. 
(b) Materials and subcontracts. ( 1) The Contracting 
Officer will determine allowable costs of direct materials 
in accordance with Subpart 31.2 of the Federal Acquisition 
Regulation (FAR) in effect on the date of this contract. 
Direct materials, as used in this clause, are those materials 
that enter directly into the end product or that are used or 
consumed directly in connection with the furnishing of the 
end product. 
(2) The Contractor may include reasonable and 
allocable material handling costs in the charge for material 
to the extent they are clearly excluded from the hourly rate. 
Material handling costs are comprised of indirect costs, 
including, when appropriate, general and administrative 
4 The S3 contract also sets forth the clause in full text, with its AL TERNA TE II 
(FEB 2002) (59509 R4, tab 1188 at 57-59). 
5 

expense allocated to direct materials in accordance with 
the Contractor's usual accounting practices consistent with 
Subpart 31.2 of the FAR. 
(3) The Government will reimburse the Contractor 
for supplies and services purchased directly for the 
contract when the Contractor-
(i) Has made payments of cash, checks, or other 
forms of payment for these purchased supplies or services; 
or 
(ii) Will make these payments determined due-
(A) In accordance with the terms and conditions of 
a subcontract or invoice; and 
(B) Ordinarily within 30 days of the submission of 
the Contractor's payment request to the Government. 
( e) Audit. At any time before final payment under 
this contract the Contracting Officer may request audit of 
the invoices or vouchers and substantiating material. Each 
payment previously made shall be subject to reduction to 
the extent of amounts, on preceding invoices or vouchers, 
that are found by the Contracting Officer not to have been 
properly payable and shall also be subject to reduction for 
overpayments 
or to increase for underpayments. Upon 
receipt and approval of the voucher or invoice designated 
by the Contractor as the "completion voucher" or 
"completion invoice" and substantiating material, 
and upon 
compliance by the Contractor with all terms of this contract 
(including, without limitation, terms relating to patents and 
the terms of (t) and (g) below) [relating to assignments and 
refunds], the Government shall promptly pay any balance 
due the Contractor. The completion invoice or voucher, 
and substantiating material, shall be submitted by the 
Contractor as promptly as practicable following completion 
6 

of the work under this contract, but in no event later than 
I year (or such longer period as the 
Contracting Officer 
may approve in writing) from the date of completion. 
In relevant part, this clause is identical to that in the CR2 contract. 
The DCAA Audit 
7. On 7 January 2014, the Defense Contract Audit Agency (DCAA) initiated 
an audit ofLMIS's incurred costs for task orders issued under three ofLMIS's ID/IQ 
contracts. The audit was focused on incurred costs for fiscal year (FY) 2007. Both 
the CR2 and the S3 contract were included in this audit. (59508, 59509 compl. ii 4) 
The third contract is not relevant to this dispute. 
8. On 14 May 2014, DCAA issued Audit Report No. 6341-2007A10100043. 
The subject of the audit was LMIS's 15 August 2008 "proposal and related books and 
records for reimbursement of FY 2007 incurred direct costs and the related application 
of contractually fixed indirect rates" (59508, 59509 compl. ii 6; 59508 R4, tab 4080 at 
1 ). The purpose of the audit was "to determine allowability of direct costs for flexibly 
priced Department of Defense (DoD) contracts for the period January I, 2007 through 
December 31, 2007 (59508 R4, tab 4080 at I). 
9. In the Executive Summary, the audit report stated that 
We questioned $103,272,918 of claimed direct costs 
attributable to subcontracts and considered $173,623,920 
of additional subcontract costs to be unresolved. The 
questioned amounts represent costs claimed at the 
subcontractor level that were questioned within assist audit 
reports received 5 or as a result of the prime contractor's 
noncompliance with FAR 42.202, Assignment of Contract 
Administration, Paragraph ( 
e ), Subsection (2). These costs 
represent amounts incurred by the subcontractors and 
claimed by LMIS in its FY 2007 incurred cost submission. 
(59508 R4, tab 4080 
at 4) 
5 The assist audit reports pertain to LMIS subcontractors and are listed in Appendix I 
to the audit report. (59508 R4, tab 4080, Appendix I) 
7 

Audit Findings and Final Decision with Respect to Task Orders Issued under the CR2 Contract 
10. The audit report questioned $102,294,891 of subcontractor costs invoiced 
under the CR2 contract task orders during FY 2007 (59508 compl. ~ 6). DCAA 
questioned $18,545,038 of "claimed direct subcontract costs based on received assist 
audit support" and questioned $83,749,853 of "subcontractor costs at the prime 
contractor level" (id. ~~ 17-18). 
11. With respect to the $18,545,038 in questioned "claimed direct subcontract 
costs," the audit report describes the basis for questioning the costs as follows: 
[W]e questioned $18,545,038 of claimed direct subcontract 
costs based on received assist audit support for twenty-nine 
subcontractors under contract DAAB07-03-D-B009 (CR2). 
The support received consisted of audit reports, audit 
memorandums, or a rate agreement letter. We questioned 
costs based on (i) the detailed question [sic] costs in said 
reports, memorandums, etc.; and (ii) differences between 
the prime contractor proposed amount and the amount 
claimed in the said reports, memorandums, etc. The 
results of the audit assistance incorporated are detailed 
above by delivery order. Please see Appendix 1, for a list 
of assist audit support that we have incorporated into this 
report by reference. The itemized breakout of the 
questioned costs for each delivery order have not been 
provided due to the voluminous size; however, are 
available upon request. 
(59508 R4, tab 4080 at 13) 
12. LMIS's response, incorporated into the audit report, stated in relevant part: 
DCAA has questioned $15M aggregated from 
8 subcontractors. Of this amount, the largest single item is 
$13.9M questioned from the assist audit report from 
Blackwater. At this time, we are not privy to any specifics 
as to the nature of the questioned cost and have been 
advised by Blackwater only that their submission was 
being audited and that they are currently in the process of 
negotiating their 2007 submission rates with DCMA. 
As a result, LM cannot comment on the questioned 
subcontractor cost at this time. Pending further release of 
8 

the details or feedback from the subcontractors, we will 
perform the necessary due diligence and assess the need 
for any resultant adjustments. 
DCAA has identified $5M of variances between costs 
claimed by LM as compared to those reported by our 
subcontractors across 9 subcontractors. DCAA indicated 
they could not release to us any detailed figures of the 
claimed amounts by the subcontractors, because they are 
considered proprietary information and data not subject to 
release without the consent of the subcontractor .... 
Without insight into the values used in making this 
assessment, it is impossible to comment on the nature or 
validity of these values. DCAA also did not opine on what 
the differences may be; however, they also acknowledged 
that fiscal year timing could be a factor since the auditors 
did not have direct access to the submissions and relied 
solely on the values shown in the summary assist reports 
conducted by other DCAA offices. Based on the available 
facts, it is unreasonable to conclude that these costs are in 
any way inappropriate and unallowable. 
(59508 R4, tab 4080, app'x 4 at 5) 
13. DCAA responded as follows: 
We disagree with the contractor's reaction. In 
regards to the contractor being denied access to the 
subcontractor's audit results, DCAA is prohibited from 
disclosing the results as evidenced by the various report 
restrictions identified [at the beginning of the audit report 
DCAA noted those subcontractors who objected to release 
of the assist audits to LM on proprietary data grounds]. 
Additionally, it is the prime contractor's responsibility to 
manage its subcontracts. That responsibility includes 
negotiating access to the subcontractor's specific audit 
results that pertain to the prime contractor's ability to settle 
the claim with the Government. 
(59508 R4, tab 4080 at 14-15) 
9 

14. With respect to the $83,749,853 of questioned "subcontractor costs at the 
prime contractor level," the audit report explains: 
[W]e questioned $83, 749,853 of subcontractor costs at the 
prime contractor level based on FAR 31.201.2, 
Determining Allowability, Paragraph (a) Subsection (4), 
which states, "A cost is allowable only when the costs [sic] 
complies with Terms of the Contract". The prime 
contractor is in noncompliance with FAR 42.202, 
Assignment of Contract Administration, Paragraph ( e ), 
Subsection (2) which states, "The prime contractor is 
responsible for managing its subcontractors." Since the 
prime contractor did not properly manage its subcontracts 
in accordance with the FAR, we questioned the cost 
accordingly. The contractor failed to maintain necessary 
documents to substantiate they reviewed (i) resumes to 
assure for compliance with contract terms, and (ii) 
timesheets to assure the number of hours invoiced were 
supported. 
Further, the contractor did not provide any records 
demonstrating that they attempted to cause the 
subcontractor to prepare an adequate submission or any 
requests to the Government for assistance if the 
subcontractor refused. A literal interpretation of FAR 
42.202 requires the prime contractor to act on behalf of the 
Government and serve as both the Contracting Officer 
(CO) and the Contracting Administrative Office (CAO) for 
each subcontract that it awards under a Government 
flexibly priced contract. This includes the 
requirement for 
the prime contractor to audit their subcontracts or request 
audit assistance from the cognizant DCAA office when the 
subcontractor denies the prime contractor access to their 
records based on the confidentiality of propriety [sic] data. 
Since the Government did not have contract privy [sic] 
with the subcontractors, the Government could not force or 
compel the subcontractors to comply with the requirements 
set forth in their contract with the prime. 
10 

c. Audit Evaluation 
We evaluated subcontractor costs at the prime 
contractor level, which included evaluating the prime 
contractor's subcontract management process. This was 
completed by obtaining the prime contractor's policies and 
procedures for subcontract management in accordance 
with FAR 42.202, Assignment of Contract Administration, 
Paragraph ( e ), Subsection (2) and evaluating their 
compliance with them. Based on our review of the 
contractor's subcontract administration files we determined 
the contractor failed to maintain necessary documents to 
substantiate they reviewed (i) resumes to assure 
compliance with contract terms, and (ii) timesheets to 
assure the number of hours invoiced were supported. Due 
to their failure to comply with FAR 42.202, Assignment of 
Contract Administration, Paragraph ( e ), Subsection (2) and 
not properly manage their subcontracts to the extent of 
auditing them, we are questioning the claimed subcontract 
costs based on FAR 31.201.2, Determining Allowability, 
Paragraph (a) Subsection (4), which states, "A cost is 
allowable only when the costs [sic] complies with ... Terms 
of the Contract". 
Further, our audit evaluation determined that the 
prime contractor did not have proof of submissions or 
proof of requests for audit for any of the subcontractors we 
determined did not submit incurred cost submissions. 
Without an incurred cost submission from the 
subcontractor, the prime and DCAA are unable to audit 
their costs claimed. If the costs are not audited, we are 
unable to determine if the costs are allowable, reasonable, 
and allocable in accordance with FAR 31, Contract Cost 
Principles and Procedures. Since it is the prime 
contractor's responsibility to manage their subcontractors, 
we determined they are not properly managing 
subcontractors. Management of the subcontractors is the 
primary purpose of the LMIS Project Management Office 
(PMO) and it is the value 
added service in which they earn 
their PMO, G&A and profit. 
(59508 R4, tab 4080 at 15-16; see also 59508 compl. ~ 17) 
11 

15. LMIS's response to this portion of the audit report was extensive. With 
respect to DCAA's assertion that LMIS failed to maintain necessary documents to 
substantiate that they reviewed resumes to assure compliance with contract terms and 
timesheets to assure the number of hours invoiced were supported, LMIS stated: 
Through the course of the audit fieldwork, LM has 
provided its procedures which outline the measures taken 
by the Program Management Office to ensure oversight of 
all subcontractors to achieve delivery of all services to the 
U.S. Government (USG) on time and within budget. This 
was accomplished 
on all task orders in question, without 
exception, as demonstrated by acceptance of services 
rendered on all task orders. Further, LM has demonstrated 
its internal controls for ensuring that all costs invoiced 
were allowable, allocable and reasonable in accordance 
with the contract provisions. This was evidenced through 
supporting documentation including competitively 
awarded cost proposals, rate verifications between billings 
and contractual rates, and traceability between 
subcontractors incurred costs on the ledger and billings to 
the Government. The transaction testing for this audit 
included reviews of over forty task order contracts, fifty 
purchase orders, nearly seventy subcontractor invoices, 
procedural audits for task order management plans, as well 
as several other sampled transactions of the claimed cost. 
For all requested items, the costs were fully substantiated 
with auditable records maintained by LM. It seems DCAA 
has placed their entire argument that LM did not manage 
its subcontractors on their finding that LM did not produce 
subcontractor incurred cost claims. This finding was based 
on the final data request and response that occurred at the 
end of the audit. Additionally, it appears DCAA has 
ignored other audit evidence gathered and has erroneously 
drawn conclusions without giving due consideration to the 
full context of the circumstances in question and the steps 
taken by LM in our subcontractor management process. 
(59508 R4, tab 4080, app'x 4 at 3) 
16. With respect to DCAA's final data request regarding incurred cost 
submissions, 
LMIS quoted its response thereto: 
[We]. .. will not be able to provide the data requested. As 
discussed at the entrance conference, we acknowledge the 
12 

FAR requirements to manage our subcontractors. 
However, we do not collect incurred cost submissions from 
them. By the very nature of the incurred cost submissions, 
they often are developed at a business unit or segment 
level to substantiate indirect rates. As a result, that is not 
something we request from our subs due to the broad and 
proprietary nature of the data. Rather, we flow down the 
requirements to all applicable subcontracts and advise 
them of their responsibility to submit to DCAA all 
applicable schedules for compliance. Our management 
and due diligence over our subcontractors is related to 
their cost and performance relative to a specific program, 
as detailed in the procedures we previously provided. 
(59508 R4, tab 4080, app'x 4 at 3) LMIS further stated that there is no requirement in 
either the FAR or in the DCAA Audit Manual guidance for subcontractors to submit 
incurred cost proposals containing sensitive and proprietary business information 
directly to the prime and that industry practice, recognized by the applicable guidance, 
has been to make such submissions directly to the government for audit by DCAA. It 
concluded: 
(Id. at 4) 
DCAA has not cited any FAR provisions, contract clauses, 
precedent or case law that counters this position to provide 
the basis for why they have determined this to be 
insufficient or a basis to question 100% of the 
subcontractor costs. 
17. DCAA responded only to LMIS's disagreement that the responsibility to 
manage its subcontracts included a responsibility to cause its subcontractors to provide it 
with an incurred cost submission and to audit the costs claimed therein. As to this issue, 
DCAA cited to FAR 42.202( e )(2), which states: "The prime contractor is responsible for 
managing its subcontracts. The CAO's review of subcontracts is normally limited to 
evaluating the prime contractor's management of the subcontracts (see Part 44)," 
(Subcontracting Policies and Procedures). DCAA then noted the enumerated 
responsibilities of the CAO at FAR 42.201(a), which include the functions listed at 
FAR 42.302(a), including the responsibility to determine the allowability of costs 
suspended or disapproved, direct the suspension or disapproval of costs, and approve 
final vouchers, and concluded: 
Therefore, it was the Government's intent to require the 
prime contractor to act as both contracting officer 
13 

(CO) ... and the CAO as stated at FAR42.201, Contract 
Administrative Responsibilities, Paragraph (a). 
(59508 R4, tab 4080 at 17) Notably, the enumerated responsibilities of the government 
CO or CAO within FAR Part 42 do not involve receipt or review of incurred cost 
submissions. 
18. On 15 August 2014, the CO issued a COFD based on the audit report and 
demanded payment of$102,294,891 (59508 R4, tab 4099; compl. ,-i 7). The COFD 
stated: 
Federal Acquisition Regulation (FAR) 42.202( e )(2) 
states: "The prime contractor is responsible for managing 
its subcontractors." The audit and work of the auditor 
determined that LMIS did not properly maintain oversight 
of subcontractors including monthly reviews of costs 
incurred. This is a breach of the contractor's duty of 
performance. It was found that 46 subcontractors did not 
submit an adequate incurred cost to LMIS (prime 
contractor). In addition, LMIS did not audit, or request 
audit assistance from DCAA, on their subcontractors as a 
prime contractor must do under this contract type. 
Additionally, there are differences between the 
prime contractor proposed amounts and the amounts 
claimed elsewhere. Added to this are the assist audit 
reports on 29 subcontractors where costs are questioned by 
DCAA. This office has read the responses in the exit 
interview and concurs with the DCAA answers to the 
prime contractor's responses. This final decision is based 
on audits conducted by DCAA during its audit of costs 
charged to the contract and underlying task orders during 
Fiscal Year 2007. 
(59508 R4, tab 4099 at 1-2) Thus, the CO relied on the audit report in citing LMIS's 
alleged failure to "properly maintain oversight of subcontractors," the alleged failure of 
46 subcontractors to "submit an adequate incurred cost to LMIS (prime contractor)," and 
LMIS' s alleged failure to "audit, or request audit assistance from DCAA, on their 
subcontractors as a prime contractor must do under this contract type," as grounds for 
claiming entitlement to the $83, 749,853 in "subcontractor costs at the prime contractor 
level" questioned by DCAA. 6 The CO also adopted the audit report rationale with respect to 
6 DCAA failed to respond to LMIS' s rebuttal of the alleged failure to retain 
documentation showing it had properly substantiated its billing of subcontract 
14 

the additional $18,545,038 of subcontract costs questioned by DCAA based on assist audit 
support. 
Audit Findings and Final Decision with Respect to Task Orders Issued under the 
S3 Contract 
19. Audit Report No. 6341-2007Al0100043 found $978,026 in questioned 
costs and $24,362,355 in unresolved costs under the S3 contract task orders (59508 R4, 
tab 4080 at 20). DCAA received assist audit support for three subcontractors and 
accepted the costs as proposed, but noted that other assist audits had not been received in 
time to be incorporated into the report. The $978,026 in questioned costs was based on 
DCAA's evaluation of "subcontractor costs at the prime contractor level" under one S3 
task order. The explanation DCAA gave for questioning these costs-LMIS's "failure to 
properly manage its subcontractors"-was similar to that laid out in SOF, 14 above 
pertaining to the CR2 Contract costs that were disallowed. (Id. at 22-24). 
20. On 14 August 2014 the CO issued a COFD claiming entitlement to 
$14,494,740 (59509 compl., 7; 59509 R4, tab 1142). The COFD explanation of the 
basis for the claim, in its entirety, was: 
This letter is in reference to the audit of Lockheed Martin 
Integrated Systems FY 2007 incurred costs reflected in the 
DCAA Audit Report No. 6341-2007A10100043 and 
supersedes the letter issued on August 8, 2014. 
DCAA Audit Report 6341-2007A10100043 dated 14May 
2014, had findings against the S3 program of $978,026 in 
questioned costs and $13,516, 714 in unresolved costs. 
Individual orders were listed in the audit. The questioned 
amounts represent costs claimed at the subcontractor level, 
inclusive oflabor. 
Based on the foregoing, it is my decision that Lockheed 
Martin Integrated Systems (LMIS) is indebted to the 
United States of America for the amount(s) shown 
below-
costs, and the COFD does not mention this allegation at all as a breach or ground 
for disallowance. While the government has likely abandoned this ground for 
recovery, we do not find it necessary to decide this issue to resolve the motions to 
dismiss. 
15 

Questioned 
Unresolved 
Principle [sic] Amount of Debt 
$ 978,026 
$13,516,714 
$14,494,740 
(59509 R4, tab 1142 at 1) No explanation was provided for the variance with the audit 
report as to the amount of unresolved costs, nor was any rationale provided for 
claiming entitlement to costs that the audit categorized as unresolved. 
21. The claim to the $13,516, 714 in unresolved costs, according to the 
government's complaint, is based on the same rationale that DCAA relied on in 
questioning $978,026 in "subcontractor costs at the prime contractor level."7 
The Appeals 
22. LMIS filed a timely notice of appeal from the COFD claiming entitlement 
to $102,294,891 under the CR2 contract with the Board on 22 August 2014. The 
appeal was docketed on 25 August 2014 as ASBCA No. 59508. 
23. LMIS filed a timely notice of appeal from the COFD claiming entitlement 
to $14,494,740 under the S3 contract orders with the Board on 22 August 2014. The 
appeal was docketed on 25 August 2014 as ASBCA No. 59509. 
DECISION 
A motion to dismiss for failure to state a claim upon which relief can be granted 
is appropriate where the facts asserted in the complaint do not entitle the claimant to a 
legal remedy. Lindsay v. United States, 295 F.3d 1252, 1257 (Fed. Cir. 2002). The 
Board will grant a motion to dismiss for failure to state a claim when the complaint fails 
to allege facts plausibly suggesting (not merely consistent with) a showing of 
entitlement to relief. Cary v. United States, 552 F.3d 1373, 1376 (Fed. Cir. 2009) 
(citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 557 (2007)).8 In deciding a 
motion to dismiss for failure to state a claim, ''the court must accept well-pleaded 
7 The complaint in ASBCA No. 59509 purports to provide the explanation missing from 
the COFD: "The DCAA audit questioned 
$978,026 of subcontractor costs at the 
prime contractor level based on a determination of allowability under FAR 
31.201-2 and appellant's breach of its duties under FAR 42.202. The costs in the 
final decision, $14,494,740, were limited to the task orders where her [the CO's] 
office was the cognizant contracting office. (59509 compl. at 4 n.2 (citation 
omitted)) 
8 While the Federal Rules of Civil Procedure do not apply to proceedings before the 
Board, we may look to them for guidance, particularly in areas not addressed by 
our own rules. Dennis Anderson Constr. Corp., ASBCA Nos. 48780, 49261, 
96-1BCA~28,076 at 140,188. 
16 

factual allegations as true and must draw all reasonable inferences in favor of the 
claimant."· Kellogg Brown & Root Services, Inc. v. United States, 728 F.3d 1348, 1365 
(Fed. Cir. 2013). In this review, "[w]e decide only whether the claimant is entitled to 
offer evidence in support of its claims, not whether the claimant will ultimately 
prevail." Matcon Diamond, Inc., ASBCA No. 59637, 15-1BCA~36,144 at 176,407. 
The scope of our review is limited to considering the sufficiency of allegations set forth 
in the complaint, "matters incorporated by reference or integral to the claim, items 
subject to judicial notice, [and] matters of public record." A&D Auto Sales, Inc. v. 
United States, 748 F.3d 1142, 1147 (Fed. Cir. 2014) (citing SB CHARLES ALAN 
WRIGHT & ARTHUR R. MILLER, Federal Practice and Procedure § 1357 (3d ed. 2004)). 
For purposes of assessing whether the claim before us states a claim upon which 
relief can be granted, the primary document setting forth the claim is not the 
complaint, per se, but is either the contractor's claim or the government's claim, the 
latter asserted in a contracting officer's final decision as required by the Contract 
Disputes Act, 41 U.S.C. § 7103(a)(3). While the general rule in our appeals is that the 
appellant files the complaint, even when a government claim is involved, the Board 
recognizes that in certain cases it will facilitate the proceedings to have the government 
file the complaint. See generally Beechcraft Defense Company, ASBCA No. 59173, 
14-1BCA~35,592. Thus, in these appeals the government was directed to file the 
complaint. In analyzing the motion to dismiss for failure to state a claim upon which 
relief can be granted, we will look not only to the complaint but also to the COFD that 
actually asserts the claim. 
I. Claimed Direct Subcontractor Costs (ASBCA No. 59508 only) 
The complaint in ASBCA No. 59508 alleges that $18,545,038 of claimed 
direct subcontract costs are unallowable "based on received assist audit support for 
29 subcontractors under the Contract." The 
complaint addresses this portion of the 
government's claim in one paragraph, stating only that "DCAA questioned the costs 
based on: '(i) the detailed question cost in [audit reports, audit memorandums, and 
rate agreement letters]; and (ii) differences between the prime proposed amount and 
the amount claimed in said reports, memorandums, etc."' (59508 compl. ~ 18) 
Appellant asserts that the complaint alleges entitlement to these costs "for an 
unspecified breach of the CR2 Contract and the T &M task orders based on the results 
of assist audits performed by DCAA" (59508 app. mot. at 16). Appellant asserts that 
the government claim and complaint is devoid of any factual or legal bases supporting 
its alleged entitlement save for its vague references to "reports" and "memorandums" 
(id. at 17). Accordingly, appellant argues that the complaint fails to meet the most 
basic pleading requirements and fails to even plead the elements necessary to state a 
breach of contract claim (id.). Appellant also asserts that it cannot reasonably respond 
to such vague and ambiguous complaint allegations (id. at 16). 
17 

The government asserts that its claim for $18,545,038 is "based on the 
difference between appellant's proposed amounts and actual costs 
under the 
subcontracts." The government argues that based on the 
minimal nature of the 
requirements for a notice pleading, the government allegation that "based upon 
[undisclosed] assist audits ofLMIS' subcontractors, LMIS overbilled the government" 
is sufficient to withstand appellant's motion to dismiss. (59508 gov't resp. at 14-15) 
"[T]he Board's rules, like the Federal Rules of Civil Procedure, only require notice 
pleading." UniTech Servs. Grp., Inc., ASBCA No. 56482, 10-1BCA'il34,362 at 169,695. 
"The main purpose of pleadings under our rules is to frame and join the issues." Envtl. 
Safety Consultants, Inc., ASBCA No. 53485, 02-2 BCA 'il 31,904 at 157,612. Under a 
notice pleading standard all that 
is required is that a complaint provide the opposing party 
''with a 'fair notice of each claim and its basis."' Caldwell v. Argosy Univ., 797 F. Supp. 
2d 25, 27 (D.D.C. 2011) (citing Sparrow v. United Air Lines, Inc., 216 F.3d 1111, 1118 
(D.C. Cir. 2000)); see also United States for the Use of Argyle Cut Stone Co. v. Paschen 
Contractors, Inc., 664 F. Supp. 298, 302 (N.D. Ill. 1987) ("Notice pleading means simply 
that in order to state a claim for 
relief, the plaintiff need only notify the defendant of the 
theory behind the claims alleged and the basic grounds which support those claims."). 
In considering whether the government has adequately stated a claim for relief, 
we look to the COFD and the complaint, ifthere is one. Based on our review, the 
government's claim for direct subcontract costs fails to state a claim upon which relief 
can be granted. The complaint offers no legal theory for its claim of disallowance nor 
does it provide any allegations of fact. It states conclusorily that there were questioned 
costs and some variances that entitle the government to disallow subcontract costs. Our 
pleading standard requires factual assertions beyond bare conclusory assertions to 
entitlement. The audit report, which was incorporated into the complaint, states that 
some assist audits questioned costs but does not explain on what grounds (SOF 'il 11 ). 
It also states there were differences between amounts in LMIS's proposal and costs 
under subcontracts but provides no facts regarding these differences (id.). More 
importantly, the COFD does not cite a single actual fact, only the audit report's 
unsupported conclusions (SOF 'il 18). Neither the complaint nor the COFD contain 
sufficient factual (or legal) allegations, accepted as true, to state a claim to reliefthat is 
plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Accordingly, 
appellant's motion in ASBCA No. 59508 to dismiss the government's claim for 
$18,545,038 in direct subcontract costs is granted. 
18 

II. Subcontractor Costs at the Prime Contractor Level9 
Appellant asserts that the government's complaint in both appeals alleges that 
LMIS breached its contractual duty under FAR 42.202( e )(2) to manage its 
subcontractors, and that LMIS breached the CR2 contract by invoicing for costs that 
are unallowable under FAR 31.201-2(a)(4) (a cost "is allowable only when the cost 
complies with all of the following requirements: ... (4) Terms of the contract"). 
Further, 
the complaints allege that the Army is entitled to recover breach of contract 
damages in the amount of$83,749,853 in ASBCA No. 59508 and $14,494,740 in 
ASBCA No. 59509 for a total of $98,244,593. (59508 app. mot. at 8; 59509 app. mot. 
at 7)10• Appellant sets forth the elements of a breach of contract claim, as articulated 
by this Board and the United States Court of Appeals for the Federal Circuit, and states 
that the government has failed to allege the necessary elements to establish a breach of 
contract claim (id.). 
In particular, appellant asserts that the government has failed to allege the 
second, third, and fourth elements of a breach (the first being a valid contract between 
the parties): an obligation or duty arising out of the contract; a breach of that duty; and 
damages caused by the breach. As to the second element, an obligation or duty arising 
out of the contract, appellant states that FAR 42.202(e)(2), upon which the government 
relies for its argument that LMIS breached its duty 
to manage its subcontractors, is a 
regulation dealing only with the government's administration of contracts and is not a 
term of either the CR2 or S3 contracts, and therefore does not create any contractual 
duty on the part ofLMIS (59508 app. mot. at 9-10; 59509 app. mot. at 10). 
Furthermore, appellant argues that even if it were a part of the CR2 or S3 contracts, 
FAR 42.202(e)(2) does not impose any of the obligations asserted by the government 
to have been breached (59508 app. mot. at 10-11; 59509 app. mot. at 11-12). 
Appellant also asserts that FAR 52.232-7(a) (SOF ~~ 3, 6), not FAR 31.201-2, 
established the government's payment obligation under the CR2 and S3 contracts for 
direct labor performed by LMIS' s subcontractors, 
according to fixed hourly rates 
incorporated in the contracts (59508 app. mot. at 12-13; 59509 app. mot at 13-14). 
Because FAR 31.201-2 was not incorporated into the contract, appellant concludes, it 
could not have breached this provision. 
Finally, appellant states that the government has failed to allege any causal 
connection between the alleged breach and its claimed damages. It asserts that the 
amounts claimed as breach damages roughly equate to all amounts paid to LMIS for 
9 This term has not been explained by the government. In context, we take it to be the 
auditor's way of referring to subcontractor costs being disallowed on the basis 
of an issue with how the prime contractor performed the contract. 
10 ASBCA No. 59509, app. mot. at 7, inadvertently sets forth an incorrect number 
($14,949,740). 
19 

subcontractor labor, but there is no allegation that the services were not performed or 
that they were unacceptable. Rather, the Army accepted the benefit of the services 
performed, yet now seeks entitlement to nearly all amounts it paid for the services 
without saying how the claimed damages resulted from the alleged breach. 
(59508 app. mot. at 14-16; 59509 app. mot. at 15-16) 
The government responds that while it did allege in its complaints that appellant 
breached its duty under FAR 42.202( e )(2) to manage its subcontractors, ''the nature of the 
concern is the fact that appellant billed the government for unallowable costs because it did 
not properly manage its subcontracts." It goes on to say that this is an implied duty 
regardless of the FAR provision. (Gov't resp. at 7)11 The government states that LMIS's 
"poor management of its subcontractors led it to overbill the government," and reiterates 
that its claim arises under an inherent or implied contract obligation which FAR 
42.202(e)(2) "recognizes" (gov't resp. at 10-11). As to appellant's argument that even 
were FAR 42.202( e )(2) incorporated in the contract, it does not require a prime contractor 
to take responsibility for conducting incurred cost audits of its subcontractors, the 
government merely responds that the specific duties of the responsibility to manage 
subcontractors are varied and "may include factors such as how the prime contractor 
chooses to perform the contract, its relationships with its subcontractors, and the 
performance of those subcontractors" (gov't resp. at 11). The government does not explain 
how or why the specific contract duties it alleges LMIS did not perform are inherent duties 
of the prime contractor under the contracts involved in these appeals (or any U.S. 
Government prime contract). 
The government also argues that FAR 31.201-2 does apply to the CR2 contract 
because a significant chunk of the questioned costs, including labor costs, were billed to 
the government under the "material" part of the time-and-materials CLIN or were billed 
as other direct costs (ODCs) (gov't resp. at 12). To support this assertion, the 
government points to LMIS' s FY 2007 incurred cost submission, which the government 
asserts shows that total billing for task orders under the CR2 contract 
were $413, 721,927 
for FY 2007, but only $52,420,143 of that amount represents direct labor charges. The 
government argues that the difference represents charges for material and ODCs, the 
allowability of which is determined under FAR 31.201 pursuant to the contracts' 
respective Payment under Time-and-Materials and Labor-Hour Contracts clauses. 
(Gov't resp. at 12) The Board notes that these facts were not set forth in the COFDs or 
the government's complaints and LMIS' s FY 2007 incurred cost submission was not 
incorporated by reference into the complaints. 
With respect to the S3 contract, the government without explanation asserts that 
the claimed damages are $978,026 (59509 gov't resp. at 7). While this is the amount 
11 References to the government response include responses in both appeals unless 
otherwise noted. 
20 

questioned by DCAA, the COFD and the government's complaint in ASBCA No. 50509 
both asserted that the claimed amount was $14,494,4 70 (SOF ~ 20; 59509 compl. ~ 19). 
Appellant replies that the government's response is an attempt to rewrite the 
complaint and assert new claims over which the Board has no jurisdiction (59508, 
59509 app. reply at 2). Specifically, it refers to (1) the Army's acknowledgement that 
FAR 42.202(e)(2) is not a term of the contract and its assertion that it relies instead on 
a prime contractor's implied duty to manage its subcontracts; and (2) the Army's 
introduction of new factual matter not alleged in the complaint to argue that a sizeable 
portion of the costs billed on both contracts were billed on a cost-reimbursement basis 
as either material or other ODCs and thus subject to FAR 31.201-2 
pursuant to the 
contracts' payment clauses (see SOF ~~ 3, 6; 59508, 59509 app. reply at 5-7). 
For the 
reasons that follow, we find it unnecessary to decide whether the 
government in its briefs is asserting a new set of operative facts or simply a new legal 
theory.12 
Since the government's claim for "subcontractor costs at the prime level" depends 
on establishing LMIS's breach of a contractual duty, we begin with the elements of a 
breach of contract claim. They are: (I) a valid contract between the parties; (2) an 
obligation or duty on the part of the contractor arising out of the contract; (3) a breach of 
that duty; and ( 4) damages caused by the breach. San Carlos Irrigation & Drainage 
Dist. v. United States, 877 F.2d 957, 959 (Fed. Cir. 1989); Military Aircraft Parts, 
ASBCA No. 60009, 16-1BCA~36,388 at 177,410; Northrop Grumman Systems 
Corporation Space Systems Division, ASBCA No. 54774, 10-2 BCA ~ 34,517 at 170,237. 
The Army's complaints sufficiently allege the existence of valid contracts 
(SOF ~~ 1-6). We next consider whether the Army has sufficiently alleged the 
existence of an "obligation or duty arising out of' the contracts. The complaints allege 
as follows: 
• "The contracting officer found that appellant charged 
the government for improper costs charged to various time 
and materials task orders issued under the Contract" 
(59508, 59509 ~ 13). 
• "Appellant breached its duty under FAR 42.202( e )(2) 
to properly manage its subcontractors" (59508, 59509 ~ 
14). 
12 "The assertion of a new legal theory of recovery, when based upon the same operative 
facts as the original claim, does not constitute a new claim." Dawkins Gen. 
Contractors & Supply, Inc., ASBCA No. 48535, 03-2 BCA ~ 32,305 at 159,844 
(citing Trepte Constr. Co., ASBCA No. 38555, 90-1BCA~22,595 at 113,385-86). 
21 

• Quoting extensively from the audit report (reproduced 
in relevant part): 
Based on our [DCAA' s] review of the contractor's 
subcontract administration files we determined the 
contractor failed to maintain necessary documents to 
substantiate they reviewed (i) resumes to assure for 
compliance with contract terms, and (ii) timesheets to 
assure the number of hours invoiced were supported. Due 
to their failure to comply with FAR 42.202, Assignment of 
Contract Administration, Paragraph ( e ), Subsection (2) and 
not properly manage their subcontracts to the extent of 
auditing them, we are questioning the claimed subcontract 
costs based on FAR 31.201 [-]2, Determining Allowability, 
Paragraph (a) Subsection (4), which states, "A cost is 
allowable only when the costs [sic] complies with ... Terms 
of the Contract". 
Further, our audit evaluation determined that the prime 
contractor did not have proof of submissions or proof of 
requests for audit for any of the subcontractors we 
determined did not submit incurred cost submissions. 
Without an incurred cost submission from the 
subcontractor, the prime and DCAA are unable to audit 
their costs claimed. If the costs are not audited, we are 
unable to determine ifthe costs are allowable, reasonable, 
and allocable in accordance with FAR 31, Contract Cost 
Principles and Procedures. Since it is the prime contractor's 
responsibility to manage their subcontractors, we 
determined they are not properly managing subcontractors. 
Management of the subcontractors is the primary purpose of 
the LMIS Project Management Office (PMO) and it is the 
value added service in which they earn their PMO, G&A, 
and profit. (59508, 59509 compl. at 5, ~ 17) 
• "Based on the audit's questioned costs, appellant's FY07 
incurred cost submission overstated the actual allowable 
costs of subcontractor work under task orders by at least 
$102,294,891.00/$14,494,740.00" (59508, 59509 compl. ~ 19). 
Notably, nowhere in either complaint or COFD does the government cite to a contract 
term giving rise to a contractual obligation or duty. As the government conceded in its 
briefs, FAR 42.202 is not a term of the contract (gov't resp. at 8). 
22 

Our inquiry does not end there, however. The government asserts for the first 
time in its briefs that there 
exists an implied contractual duty for a prime contractor to 
manage its subcontracts: "The government did not allege that FAR 42.202-2( e )(2) is 
in the contract and appellant breached the contract, 13 rather that appellant breached its 
inherent duty to properly manage its subcontracts, which led to the government paying 
for unallowable costs" (gov't resp. at 7). In that one sentence, the government 
summarizes the essence of its claim, which is that LMIS' s breach of a contractual duty 
to manage its subcontractors led it to breach the contract by submitting claims for 
subcontract costs that were unallowable because LMIS breached its contractual duty to 
manage its subcontractors. Thus, ipso facto, if LMIS did not breach a duty to manage 
its subcontractors, it did not submit unallowable costs for payment, and if it did not 
submit unallowable costs for payment, it did not breach the contract. 
We now turn to the duty that LMIS is alleged to have breached. Even though 
the government has conceded that FAR 42.202 is not a term of the contract, we find it 
to be relevant to this inquiry because the audit report, the COFDs, and the complaints 
(in other words, 100 percent of the documents that articulate the government's claim in 
both appeals), all rely on FAR 42.202 in describing the duty that LMIS allegedly 
breached. 
DCAA articulated the duty in two different ways. First, the audit report contains 
the statement that "[t]he contractor failed to maintain necessary documents to 
substantiate they reviewed (i) resumes to assure for compliance with contract terms, and 
(ii) timesheets to assure the number of hours invoiced were supported" (SOF ~ 14). This 
reference is clearly to billings for subcontract direct labor hours, which were billed 
pursuant to the contracts at fixed, fully-loaded labor rates incorporated into the contracts 
(SOF ~ 2, 5). 14 
Second, the audit report states: 
Further, the contractor did not provide any records 
demonstrating that they attempted to cause the 
subcontractor to prepare an adequate submission or any 
requests to the Government for assistance if the 
subcontractor refused. A literal interpretation of FAR 
42.202 requires the prime contractor to act on behalf of the 
Government and serve as both the Contracting Officer 
(CO) and the Contracting Administrative Office (CAO) for 
each subcontract that it awards under a Government 
13 This statement is technically true, although the Army did allege that "[a ]ppellant 
breached its duty under FAR 42.202( e )(2) to properly manage its 
subcontractors" (59508, 59509 compl. ~ 14). 
14 As we have previously noted, this ground for recovery may have been abandoned. 
23 

flexibly priced contract. This includes the requirement for 
the prime contractor to audit their subcontracts or request 
audit assistance from the cognizant DCAA office when the 
subcontractor denies the prime contractor access to their 
records based on the confidentiality of propriety [sic] data. 
(SOF ~ 14) Thus the audit report clearly states that LMIS as a prime contractor had a 
duty under FAR 42.202 (under a "literal interpretation") to act in the shoes of the CO 
and CAO with respect to its subcontractors, which duty included the duty to audit its 
subcontractors or actively seek assistance from DCAA for those that might resist 
being audited by their prime contractor. This putative obligation would presumably 
apply to all billings under the contract based on actual subcontract costs incurred 
(vs. billings based on fixed hourly rates). 15 
The COFDs and complaint allegations add nothing to what is stated in the 
audit report. They simply refer to or quote from it. 
We examine first the alleged contractual duty to manage subcontractors. 
In this respect, FAR Part 42.202( e ), Secondary Delegations of Contract 
Administration (as in effect when the contracts were awarded-PAC 97-4, effective 
4 April 1998), provides that (1) COs or CAOs may request supporting 
contract 
administration from the CAO cognizant of the contractor location where the services 
are required; and (2) cautions that supporting contract administration normally should 
not be used for subcontracts since the prime is responsible for managing its 
subcontracts and the CAO's role is normally limited to evaluating the prime's 
management of the subcontracts pursuant to FAR Part 44, Subcontracting Policies 
and Procedures. FAR Part 44 focuses on the role of the ACO in reviewing and 
consenting to the award of proposed subcontracts and requires the use of the clause 
at FAR 52.244-2, SUBCONTRACTS. The August 1998 version of that clause, with 
its ALTERNATE I (AUG 1998), was incorporated in the CR2 contract by Modification 
No. P00002 on 17 September 2003 (59508 R4, tab 91), and in the S3 contract, with its 
ALTERNATE I (JAN 2006) (59509 supp. R4, tab 1188 at 46). This clause describes the 
circumstances in which a contractor is required to obtain the CO' s consent to 
15 The contracts' payment clauses in subparagraph (b) provide that: "( 1) The 
Contracting Officer will determine allowable costs of direct materials in 
accordance with Subpart 31.2 of the Federal Acquisition Regulation (FAR) in 
effect on the date of the contract" (SOF ~~ 3, 6). The CR2 contract appears to 
contain only time-and-materials and firm-fixed-price CLINs, with fixed ODC 
rates (59509 R4, tab 1 at 2-12), so it is unclear to what extent billings under 
that contract could have been based on costs incurred. The S3 contract 
contains cost, time-and-materials, and firm-fixed-price CLINs (59509 supp. R4, 
tab 1188 at 3-4). 
24 

subcontract and the information to be submitted to the CO in seeking consent; 
prohibits cost plus a percentage of cost subcontracts; requires contractors to notify the 
CO if a subcontractor's claim may result in litigation or if a lawsuit is filed by a 
subcontractor; and reserves the government's right to review the contractor's 
purchasing system. The subcontracts clause does not impose any express 
responsibility on the prime contractor to manage subcontracts after they are awarded. 
Nor do FAR Parts 42 and/or 44 impose any specific responsibilities on LMIS 
to manage its subcontractors, foremost because they were not incorporated by 
reference in either the S3 or the CR2 contract. But even if they had been, by their 
plain terms they do not impose the duties that DCAA, the CO, and the government in 
this appeal allege were breached. For instance, the alleged duty to maintain 
documents to substantiate that the contractor reviewed resumes to assure compliance 
with contract terms and timesheets to assure the number of hours invoiced were 
supported exists, but not as described by the government. The duty stems not from 
FAR 42.202(e) or any implied contract duty, but from FAR 52.232-7, the Payments 
under Time-and-Materials and Labor-Hour Contracts clause, which in subparagraph 
(a) requires the contractor to substantiate its billings by evidence of actual payment, 
individual timecards, or other approved substantiation at the time of billing, and in 
subparagraph (e) requires the contractor to submit to an audit at the CO's request at 
any time before final payment on the contract (SOF ~~ 3, 6). There is no allegation in 
these appeals that LMIS did not comply with the requirements of FAR 52.232-7 
which, we observe, does not require the contractor to maintain these kinds of 
substantiating records until DCAA is finished conducting incurred cost audits seven 
or so years after the costs were first billed and paid. 
The general records retention requirement off AR 52.215-2, AUDIT AND 
RECORDS-NEGOTIATION (JUN 1999), incorporated by reference into the CR2 
contract (59508 R4, tab 1at38) but not the S3 contract (59509 supp. R4, tab 1188), is 
set forth in subparagraph (f) of the clause and requires contractors to retain records for 
three years after final payment or any shorter or longer period required by FAR 
Subpart 4.7 or another clause of the contract. The government has not alleged that 
LMIS did not comply with any applicable records retention requirements. 
The other duty alleged by DCAA and the government generally in these 
appeals to have been breached by LMIS is a duty to cause its subcontractors to submit 
incurred cost submissions directly to LMIS for audit, and request audits from DCAA 
if the subcontractors refuse. This duty is not to be found in any express term of the 
contract; nor is it to be found in FAR Parts 42 or 44. DCAA in its audit report opined 
that "[a] literal interpretation of FAR 42.202" requires the prime contractor to act as 
both CO and CAO for each subcontract it awards and this includes the requirement to 
audit subcontracts (SOF ~ 14). DCAA alleged this duty was violated by LMIS's 
failure to produce "proof of submissions or proof of requests for audit" for 
subcontractors DCAA had determined did not submit incurred cost submissions (id.). 
25 

However, the Board's reading of FAR Part 42 reveals no requirement (literal or 
implied) that a prime contractor act as both CO and CAO with respect to its 
subcontracts. Moreover, as we noted in SOF ~ 16, the enumerated responsibilities of 
the CO and CAO in FAR Part 42 do not involve receipt or review of incurred cost 
submissions. That duty is reserved to DCAA or other cognizant audit agency by FAR 
42.201. 
Finally, we address the government's argument in its response briefthat 
our decision in Bichler Co., ASBCA No. 30680, 89-1 BCA ~ 21,320, recon. denied, 
89-2 BCA ~ 21,806, establishes the existence of a prime contractor's implied duty to 
manage its subcontracts. We reiterate here that the issue to be decided in these appeals is 
not whether a prime contractor has a generalized duty to manage its subcontracts. 
The issue is whether LMIS under the two contracts at issue in these appeals had the 
particular duties alleged by the government: to ( 1) retain documentation substantiating 
its 2007 invoices for subcontract direct labor hours; and (2) retain documentation 
showing it had caused its subcontractors to make incurred cost submissions and either 
audited those submissions or called on DCAA 
to audit those who refused to submit, so 
that the documentation could be reviewed by DCAA when it conducted its audit of 
FY 2007 incurred costs in 2014. 
Our decision in Bichler is inapposite to the 
issue presented in these appeals. 
The government cites the decision for the proposition that this Board recognizes "the 
inherent or implied duty of a prime contractor to manage its subcontractor" (gov't resp. 
at 11 ), but the decision dealt with the propriety of a termination for default under a 
default clause providing that a delay in ~elivery was excusable only if it arose from 
causes beyond the control of and without the fault of either the prime contractor or any 
of its subcontractors or suppliers. 89-1BCA~21,320 at 107,510. The Board found 
that the subcontractor was primarily responsible for the prime contractor's failure to 
deliver but, pursuant to the Default clause, this fact did not make the default excusable. 
Id. at 107 ,511. The Board then observed in its initial decision that the prime contractor 
had not established that it was 
entirely free from fault. Id. at 107,511-12. This 
observation was made within the context of the express terms of the default clause 
included in the contract and did not refer in any way to an implied duty. 
The government further asserts that in its decision on reconsideration in Bichler, 
the Board characterized appellant's conduct as a "failure to actively manage its 
subcontract" and "sloppy with respect to its obligations as a prime contractor" 
(gov't resp. at 12), but this is a surprisingly patent mischaracterization of the decision. 
The government had moved for reconsideration of the portion of the Board's decision 
sustaining the appeal as to the government's claim for return of progress payments it 
had paid directly to the subcontractor, because the government had acted in violation 
of its obligations under the plain language of the progress payments clause and the 
payments were not authorized. The Board stated in part: 
26 

[T]he facts alleged by the Government with respect to 
appellant's failure to actively manage its subcontract with 
GEM to insure that GEM was performing the contract in 
accordance with its contract with appellant...were 
considered by the Board in sustaining the Government's 
termination of the contract for default. 
However, while appellant may have been sloppy 
with respect to its obligations as a prime contractor, this 
does not relieve the Government of its obligations to 
properly issue progress payments in accordance with the 
contract terms and to administer the progress payment 
program in accordance with the regulations to insure against 
overpayments and losses. 
89-2 BCA if 21,806 at 109,706 (Emphasis added) The Bichler decision is clearly 
grounded in the express terms of the contract and provides no support for the 
government's arguments regarding inherent or implied duties. 
We hold that the government's claim for "subcontractor costs at the prime 
contractor level" fails to allege a valid duty or obligation on the part ofLMIS that 
arises from either the CR2 or the S3 contract, either express or implied, and therefore 
fails to state a claim for reliefthat is "plausible on its face." Whether the government's 
claim is characterized as one for breach of contract or for improperly billed 
unallowable costs, it depends on the government's assertion of a valid contractual duty 
that was breached by LMIS. In this case, we are presented with a claim based on a 
legal theory, originated by an auditor, that LMIS, as a prime contractor, had a 
contractual duty to retain for purposes of an incurred cost audit the same 
documentation that it used to substantiate its billings during the course of performance 
of the contract and, moreover, had a duty to initiate audits of its subcontractors' 
incurred costs and be able to prove during the course of an incurred cost audit that it 
did so. 
LMIS' s "breach" of these non-existent duties is the government's only basis for 
asserting that the subcontract costs for which it has reimbursed LMIS are unallowable 
costs. The government does not allege that LMIS did not adequately substantiate its 
billings during performance of the contract, or that the subcontract services were not 
provided to its satisfaction, or that the costs billed were not incurred by LMIS. Rather, it 
has gone forward with a claim for over $100,000,000 that is based on nothing more than 
a plainly invalid legal 
theory 
Because we find that LMIS' s motion to dismiss the government's claim for 
"subcontractor costs at the prime level" should be granted due to the government's 
27 

failure to assert a valid contractual duty that could be breached, we do not reach 
LMIS' s argument that the government has failed to allege the necessary causal 
connection between the alleged breach and the damages claimed, nor its affirmative 
defense that the government's claim accrued at the time it paid the invoices in 2007 
and is therefore barred by the Contract Disputes Act's six-year statute oflimitations. 
CONCLUSION 
We grant appellant's motions to dismiss ASBCA Nos. 59508 and 59509 for 
failure to state a claim upon which relief can be granted. The appeals are dismissed with 
prejudice. 
Dated: 20 December 2016 
I concur 
~~;!# 
Administrative Judge 
Acting Chairman 
Armed Services Board 
of Contract Appeals 
--
I concur ____ -
~CKLEFORD 
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 Nos. 59508, 59509, Appeals 
of Lockheed Martin Integrated Systems, rendered in conformance with the Board's 
Charter. 
Dated: 
28 
JEFFREY D. GARDIN 
Recorder, Armed Services 
Board of Contract Appeals