ARMED SERVICES BOARD OF CONTRACT APPEALS 
Appeals of -- ) 
) 
Raytheon Company ) 
) 
Under Contract Nos. FA8807-06-C-0004 ) 
NOOO 19-06-C-03 l 0 ) 
APPEARANCES FOR THE APPELLANT: 
APPEARANCES FOR THE GOVERNMENT: 
ASBCA Nos. 57576, 57679, 58290 
Paul E. Pompeo, Esq. 
Lauren J. Schlanger, Esq. 
Arnold & Porter LLP 
Washington, DC 
E. Michael Chiaparas, Esq. 
DCMA Chief Trial Attorney 
Kathleen P. Malone, Esq. 
Stephen R. Dooley, Esq. 
Alexander M. Healy, Esq. 
Trial Attorneys 
Defense Contract Management Agency 
Boston, MA 
OPINION BY ADMINISTRATIVE JUDGE DELMAN 
ON CROSS-MOTIONS FOR SUMMARY JUDGMENT 
In these appeals Raytheon Company (Raytheon or appellant)' disputes the 
government's monetary claims for Cost Accounting Standards (CAS) and Federal 
Acquisition Regulation (FAR) violations. Under ASBCA No. 57576, the government 
contends that Raytheon failed to identify and exclude 
from its cost submissions the costs 
of bonus and incentive compensation (BAIC) for those persons engaged in activities that 
generate unallowable costs·under the following cost principles: FAR 31.205-1, -22, -27, 
and -47, and that are "expressly i.:mallowable" under these principles. 2 Under ASBCA 
Nos. 57679 and 58290, the government contends that Raytheon failed to identify and 
exclude from its cost submissions 
the costs of certain stock awards to employees under its 
long-term performance plan (L TPP) that are "expressly unallowable" under 
1 These appeals relate to the practices of Raytheon's corporate home office. 
2 In Raytheon Company, ASBCA Nos. 57576, 57679, 13 BCA ~ 35,209, we held that 
under ASBCA No. 57576, the government's claim for increased costs and 
penalty for CY 2002 was untimely; the government's claim for increased costs 
and penalty for CY 2003 was untimely; and the government's claim for 
increased costs for CY 2004 was untimely. 

FAR 3 l .205-6(i). Both parties have filed motions for summary judgment, each 
contending that it is entitled to judgment as a matter of law. Except as provided herein, 
we have jurisdiction under the Contract Disputes Act (CDA), 41 U.S.C. §§ 7101-7109. 3 
RELEVANT STATUTES, COST ACCOUNTING ST AND ARDS, REGULATIONS 
AND COST PRINCIPLES FOR ALL APPEALS 
1. Pursuant to 41 U.S.C. § 1502(f), as implemented by FAR regulation and 
contract clause (e.g., FAR 52.230-2), the government may recover a contract price 
adjustment with interest for increased costs paid by the government due to a 
contractor's failure to comply with applicable cost accounting standards. 
2. Insofar as pertinent, CAS 405 provides as follows: 
9904.405 Accounting for unallowable costs. 
9904.405-20 Purpose. 
(a) The purpose of this Cost Accounting Standard 
is to facilitate the negotiation, audit, administration and 
settlement of contracts by establishing guidelines covering: 
( 1) Identification of costs specifically described as 
unallowable, at the time such costs first become defined or 
authoritatively designated as unallowable, and 
(2) The cost accounting treatment to be accorded 
such identified unallowable costs in order to promote the 
consistent application of sound cost accounting principles 
covering all incurred costs .... 
3 Appellant's motion for summary judgment also contends that the government did not 
properly assert a claim under the CDA that BAIC costs paid to persons engaged 
in Contribution type activity, FAR 31.205-8, were expressly unallowable, and 
therefore the Board is without jurisdiction over this portion of the government's 
claim (mot. at 50-53). 
2 

9904.405-30 Definitions. 
(a) The following are definitions of terms which are 
prominent in this Standard. Other terms defined elsewhere 
in this part 99 shall have the meanings ascribed to them in 
those definitions unless paragraph (b) of this subsection, 
requires otherwise. 
( 1) Directly associated cost means any cost which 
is generated solely as a result of the incurrence of another 
cost, and which would not have been incurred had the 
other cost not been incurred. 
(2) Expressly unallowable cost means a 
particular item or type of cost which, under the express 
provisions of an applicable law, regulation, or contract, 
is specifically named and stated to be unallowable. 
( 4) Unallowable cost means any cost which, under the 
provisions of any pertinent law, regulation, or contract, cannot 
be included in prices, cost reimbursements, or settlements 
under a Government contract to which it is allocable. 
9904.405-40 Fundamental requirement. 
(a) Costs expressly unallowable or mutually 
agreed to be unallowable, including costs mutually 
agreed to be unallowable directly associated costs, shall 
be identified and excluded from any billing, claim, or 
proposal applicable to a Government contract. 
[Emphasis added] 
3. With respect to "expressly unallowable" costs, the CAS 405 Preamble states, 
in pertinent part, as follows: 
The Board, in its definition of an "expressly unallowable 
cost" has used the word "expressly" in the broad dictionary 
sense-that which is in direct or unmistakable terms. 
[Emphasis added] 
3 

38 Fed. Reg. 24195-97 (Sept. 6, 1973). 
4. Insofar as pertinent, FAR 31.001 states as follows: 
31.001 Definitions. 
As used in this part-
"Compensation for personal services" means all 
remuneration paid currently or accrued, in whatever form 
and whether paid immediately or deferred, for services 
rendered by employees to the contractor. 
"Expressly unallowable cost" means a particular 
item or type of cost which under the express provisions of 
an applicable law, regulation, or contract, is specifically 
named and stated to be unallowable. [Emphasis added] 
5. FAR 31.201-6 implements CAS 405 as follows: 
31.201-6 Accounting for unallowable costs. 
(a) Costs that are expressly unallowable or 
mutually agreed to be unallowable, including mutually 
agreed to be unallowable directly associated costs, shall be 
identified and excluded from any billing, claim, or 
proposal applicable to a Government contract. A directly 
associated cost is any cost that is generated solely as a 
result of incurring another cost, and that would not 
have been incurred had the other cost not been 
incurred. When an unallowable cost is incurred, its 
directly associated costs are also unallowable. 
[Emphasis added] 
( c )( 1) The practices for accounting for and 
presentation of unallowable costs must be those described 
in 48 CFR 9904.405, Accounting for Unallowable Costs. 
4 

( e )(I) In determining the materiality of a directly 
associated cost, consideration should be given to the 
significance of 
(i) the actual dollar amount, 
(ii) the cumulative effect of all directly associated 
costs in a cost pool, and 
(iii) the ultimate effect on the cost of Government 
contracts. 
(2) Salary expenses of employees who participate 
in activities that generate unallowable costs shall be treated 
as directly associated costs to the extent of the time spent 
on the proscribed activity, provided the costs are material 
in accordance with subparagraph ( e )(I) above (except 
when such salary expenses are, themselves, unallowable ). 
The time spent in proscribed activities should be compared 
to total time spent on company activities to determine if 
the costs are material. 
6. Title 10 U.S.C. § 2324 provides for assessment of penalty against contractors 
under certain circumstances. Subsection (b) provides, in pertinent part, as follows: 
§ 2324. Allowable costs under defense contracts 
(b) Penalty for violation of cost principle.-(1) 
If the head of the agency determines that a cost submitted 
by a contractor in its proposal for settlement is expressly 
unallowable under a cost principle referred to in 
subsection (a) that defines the allowability of specific 
selected costs, the head of the agency shall assess a penalty 
against the contractor in an amount equal to--
(A) the amount of the disallowed cost allocated to 
covered contracts for which a proposal for settlement of 
indirect costs has been submitted; plus 
5 

(B) interest (to be computed based on provisions in 
the Federal Acquisition Regulation) to compensate the 
United States for the use of any funds which a contractor 
has been paid in excess of the amount to which the 
contractor was entitled. [Emphasis added] 
7. FAR 42.709 implements 10 U.S.C. § 2324 as follows: 
42. 709 Scope. 
(a) This section implements I 0 U.S.C. 2324(a) 
through (d) and 41 U.S.C. 256(a) through (d). It covers the 
assessment of penalties against contractors which include 
unallowable indirect costs in-
(I) Final indirect cost rate proposals; or 
(2) The final statement of costs incurred or estimated 
to be incurred under a fixed-price incentive contract. 
(b) This section applies to all contracts in excess of 
$550,000, except fixed-price contracts without cost 
incentives or any firm-fixed-price contracts for the 
purchase of commercial items. 
42. 709-1 General. 
(a) The following penalties apply to contracts 
covered by this section: 
(1) If the indirect cost is expressly unallowable 
under a cost principle in the FAR, or an executive agency 
supplement to the FAR, that defines the allowability of 
specific selected costs, the penalty is equal to-
(i) The amount of the disallowed costs allocated to 
contracts that are subject to this section for which an 
indirect cost proposal has been submitted; plus 
(ii) Interest on the paid portion, if any, of the 
disallowance. 
6 

42. 709-3 Assessing the penalty. 
Unless a waiver is granted pursuant to 42. 709-5, the 
cognizant 
contracting officer shall-
(a) Assess the penalty in 42.709-l(a)(l), when the 
submitted cost is expressly unallowable under a cost 
principle in the FAR or an executive agency supplement 
that defines the allowability of specific selected costs .... 
[Emphasis added] 
8. The FAR cost principles related to the government's monetary 
claim herein include the following: 
31.204 Application of principles and procedures. 
( d) ... When more than one subsection in 31.205 is 
relevant to a contractor cost, the cost shall be apportioned 
among the applicable subsections, and the determination of 
allowability of each portion shall be based on the guidance 
contained in the applicable subsection. When a cost, to 
which more than one subsection in 31.205 is relevant, 
cannot be apportioned, the determination of allowability 
shall be based on the guidance contained in the subsection 
that most specifically deals with, or best captures the 
essential nature of, the cost at issue. 
31.205-1 Public relations and advertising costs. 
( c) Public relations and advertising costs include 
the costs of media time and space, purchased services 
performed by outside organizations, as well as the 
applicable portion of salaries, travel, and fringe 
benefits of employees engaged in the functions and 
activities identified in paragraphs (a) and (b) of this 
subsection. [Emphasis added] 
7 

(f) Unallowable public relations and advertising 
costs include the following: 
( 1) All public relations and advertising costs, other 
than those specified in paragraphs ( d) and ( e) of this 
subsection, whose primary purpose is to promote the sale 
of products or services by stimulating interest in a product 
or product line (except for those costs made allowable 
under 31.205-38(b )(5), or by disseminating messages 
calling favorable attention to the contractor for purposes of 
enhancing the company image to sell the company's 
products or services. 
31.205-6 Compensation for personal services. 
(a) General. Compensation for personal services is 
allowable subject to the following general criteria and 
additional requirements contained in other parts of this cost 
principle: 
(5) Costs that are unallowable under other 
paragraphs of this Subpart 31.2 are not allowable 
under this subsection 31.205-6 solely on the basis that 
they constitute compensation for personal services. 
[Emphasis added] 
(f) Bonuses and incentive compensation. (1) 
Bonuses and incentive compensation are allowable 
provided the-
(i) Awards are paid or accrued under an agreement 
entered into in good faith between the contractor and the 
employees before the services are rendered or pursuant to 
an established plan or policy followed by the contractor so 
consistently as to imply, in effect, an agreement to make 
such payment; and 
8 

(ii) Basis for the award is supported. 
(2) When the bonus and incentive compensation 
payments are deferred, the costs are subject to the 
requirements of paragraphs (f)(l) and (k) of this subsection. 
(i) Compensation based on changes in the prices of 
corporate securities or corporate security ownership, such 
as stock options, stock appreciation rights, phantom stock 
plans, and junior stock conversions. 
(1) Any compensation which is calculated, or 
valued, based on changes in the price of corporate 
securities is unallowable. [Emphasis added] 
(2) Any compensation represented by dividend 
payments or which is calculated based on dividend 
payments is unallowable. 
(m) Fringe benefits. (1) Fringe benefits are 
allowances and services provided by the contractor to its 
employees as compensation in addition to regular wages 
and salaries. Fringe benefits include, but are not limited to, 
the cost of vacations, sick leave, holidays, military leave, 
employee insurance, and supplemental unemployment 
benefit plans .... 
31.205-22 Lobbying and political activity costs. 
(a) Costs associated with the following activities 
are unallowable [emphasis added]: 
( 1) Attempts to influence the outcomes of any 
Federal State, or local election, referendum, initiative, or 
similar procedure, ... 
(2) Establishing, administering, contributing to, or 
paying the expenses of a political party, campaign, political 
9 

action committee, or other organization established for the 
purpose of influencing the outcomes of elections; 
(3) Any attempt to influence-
(i) The introduction of Federal, state, or local 
legislation; or 
(ii) The enactment or modification of any pending 
Federal, state, or local legislation through communication 
with any member or employee of the Congress or state 
legislature (including efforts to influence state or local 
officials to engage in similar lobbying activity), or with 
any government official or employee in connection with a 
decision to sign or veto enrolled legislation; 
( 4) Any attempt to influence-
(i) The introduction of Federal, state, or local 
legislation; or 
(ii) The enactment or modification of any pending 
Federal, state, or local legislation by preparing, distributing 
or using publicity or propaganda, or by urging members of 
the general public or any segment thereof to contribute to 
or participate in any mass demonstration, march, rally, 
fund raising drive, lobbying campaign or letter writing or 
telephone campaign; 
( 5) Legislative liaison activities, ... 
(6) Costs incurred in attempting to improperly 
influence (see 3 .40 I), either directly or indirectly, an 
employee or officer of the Executive branch of the Federal 
Government to give consideration to or act regarding a 
regulatory or contract matter. 
31.205-27 Organization costs. 
(a) Except as provided in paragraph (b) of this 
subsection, expenditures in connection with [emphasis 
added]-
IO 

( 1) planning or executing the organization or 
reorganization of the corporate structure of a business, 
including mergers and acquisitions, 
(2) resisting or planning to resist the reorganization 
of the corporate structure of a business or a change in the 
controlling interest in the ownership of a business, and-
(3) raising capital (net worth plus long term 
liabilities), are unallowable. Such expenditures include but 
are not limited to incorporation fees and costs of attorneys 
accountants, brokers, promoters and organizers, 
management consultants and investment counselors, 
whether or not employees of the contractor. Unallowable 
"reorganization" costs include the cost of any change in the 
contractor's financial structure, excluding administrative 
costs of short-term borrowings for working capital, 
resulting in alterations in the rights and interests of security 
holders, whether or not additional capital is raised. 
9. With respect to unallowable costs incurred in certain legal proceedings, 
IO U.S.C. § 2324(k)(6)(B) provides as follows: 
(k) Proceeding costs not allowable.-
(6) In this subsection: 
(B) The term "costs", with respect to a proceeding-
(i) means all costs incurred by a contractor, 
whether before or after the commencement of any such 
proceeding; and 
(ii) includes-
(I) administrative and clerical expenses; 
(II) the cost of legal services, including legal 
services performed by an employee of the contractor; 
11 

(Ill) the cost of the services of accountants and 
consultants retained by the contractor; and 
(IV) the pay of directors, officers, and 
employees of the contractor for time devoted by such 
directors, officers, and employees to such proceeding. 
[Emphasis added] 
I 0. Insofar as pertinent, FAR 31.205-4 7 implements the above statute as 
follows: 
31.205-47 Costs related to legal and other proceedings. 
(a) Definitions. As used in this subpart-
"Costs" include, but are not limited to, 
administrative and clerical expenses; the costs of legal 
services, whether performed by in-house or private 
counsel; the costs of the services of accountants, 
consultants, or others retained by the contractor to assist it; 
costs of employees, officers, and directors; and any 
similar costs incurred before, during, and after 
commencement of a judicial or administrative proceeding 
which bears a direct relationship to the proceeding. 
[Emphasis added] 
ASBCA No. 57576 
ST A TEMENT OF FACTS (SOF) FOR PURPOSES OF THE CROSS-MOTIONS 
11. Insofar as pertinent, Raytheon's incentive compensation plans include the 
"performance sharing program" (PS or PSP), the "results-based incentives" (RBI) 
program, the restricted stock award program and the long-term performance plan 
(L TPP), formerly known as the long term achievement plan (L TAP) (app. mot., ex. I 
at 3). Costs under the LTPP are at issue in ASBCA Nos. 57679 and 59290. 
12. According to the government, the primary purpose behind granting of 
BAIC to employees is to reward employees for doing their jobs well, which would 
include activities that generate unallowable costs (gov't opp'n and cross-mot. at 
35-50). According to Raytheon, BAIC is granted for many reasons, including the need 
to retain employees and to reward them for overall company performance through 
achievement of defined metrics (app. reply and opp'n at 15-16.). 
12 

13. The PSP is an annual cash incentive program. Raytheon employees who 
are eligible for and enrolled in the PSP generally include employees whose business or 
location participate and who are not participating in another program, such as the RBI 
program or a sales incentive or similar program, unless specifically allowed by the 
terms of that plan. (App. mot., ex. 4 at 4412) (Statement ofUncontroverted Material 
Facts (SUMF), ifif 2, 4) 
14. Raytheon's RBI program is an annual cash incentive program for corporate 
employees at senior and executive levels. Participation in the program generally is 
limited to employees in certain pay grades, though Raytheon's senior management 
may approve other key contributors for participation based upon their impact to 
Raytheon's business. (App. mot., ex. 5, Raytheon Policy No. 0211-RP, if 5.2 at 2813 
(Jan. 23, 2009)). 
15. On 27 March 1991, Raytheon established a stock plan to govern the award 
of restricted stock units to company employees (app. mot., ex. 7). On 30 November 
1992, Raytheon and the government executed an Advance Agreement on the 
Allowability of Costs of Raytheon Company Restricted Stock Awards under which the 
government agreed to "recognize as allowable cost[ s] the restricted stock awards made 
in 1991 and subsequent awards made from the Plan from time to time" (ASBCA 
No. 57576 (57576), app. supp. R4, tab 201 at 2). 
16. On 6 March 2000, Raytheon provided a briefing to the DCAA on 
Raytheon's "Total Compensation Program," which discussed the company's different 
bonus compensation plans, including the RBI program, the PS program and the L TPP 
(app. mot., ex. 3). 
17. By memorandum dated 14 December 2000 to the government's Defense 
Corporate Executive (DCE), the Defense Contract Audit Agency (DCAA) provided 
comments and recommendations regarding the allowability and reasonableness of a 
revision to Raytheon's bonus incentive plans for CY 2000. DCAA stated: "[I]f 
Raytheon provides an award in excess of the maximum award amount, it would not be 
in compliance with their established policy and these additional costs would be 
considered unallowable per FAR 3 l .205-6(f)." (App. mot., ex. 12 at 53217) 
18. Effective 1 February 2001, Raytheon established its 2001 Stock Plan "to 
encourage ownership of Stock by key employees ... and to provide additional incentive for 
them to promote the success of the Company's business" (57576, app. supp. R4, tab 202, 
Art. II, if 2). On 30 April 2002, Raytheon and the government executed a memorandum 
of understanding regarding allocation methodology, continuing the allocation 
methodology under the 1992 Advance Agreement (57576, app. supp. R4, tab 203). 
19. By report dated 27 September 2002, DCAA issued an audit report regarding 
Raytheon's proposed CY 2000 RBI/PS enhancement. The report stated "The purpose of 
13 

our engagement was to provide comments and recommendations regarding the overall 
allowability and reasonableness of the enhancement plan for government costing 
purposes." (App. mot., ex. 13 at 4 731) The DCAA report concluded: "[W]e take no 
exception to the CY 2000 RBI/PS enhancement costs paid to segments" (id. at 4 732). 
20. By memorandum for the record dated 29 September 2003, the DCAA 
reported on its audit of appellant's CY 2002 bonus costs, specifically, the award of 
RBI/PS payments to Administrative and Services (A&S) employees for CY 2002. 
Insofar as pertinent, the memorandum stated as follows: 
We examined and verified that the corporate office 
met the criteria set forth in the CY 2002 RBI and PS bonus 
plans. We reconciled with the claimed amounts to the 
books and records. Additionally, we verified the initial 
and actual targets approved by the Management 
Development and Compensation Committee (MDCC) 
Board of Directors (BOD) and verified metric 
computations based on actual targets achieved. The costs 
are determined to be allowable per FAR 3 
l .205-6(f), 
Bonuses and incentive compensation. 
(App. mot., ex. 14 at 7862) 
21. The DCAA also audited Raytheon's CY 2003 RBI and PS bonus payments 
to A&S employees. By memorandum for record dated 29 September 2004, DCAA 
concluded, similar to the above, as follows: 
We examined and verified that the corporate office met 
the criteria set forth in the CY 2003 RBI and PS bonus plans. 
We reconciled the claimed amount to the books and records. 
Additionally, we verified the initial and actual targets 
approved by the Management Development and 
Compensation Committee (MDCC) of the Board of Directors 
(BOD) and verified metric computations based on actual 
targets achieved. The costs are determined to be allowable per 
FAR 3 
l .205-6(f), Bonuses and Incentive Compensation. 
(App. mot., ex. 15 at 10769) 
22. The DCAA also audited Raytheon's CY 2004 RBI and PS bonus payments 
to A&S employees. By memorandum for record, dated 30 January 2006, the DCAA 
provided as follows: 
14 

We examined requested support for the $27,582,167 
RBI and PS bonus expenses paid out for CY 2004 for 
A&S. Auditor met with contractor representative 
Mr. Charles Vilandre to reconcile the claimed amount to 
the books and records. We verified that what was paid out 
did not exceed what was authorized by the Management 
Development and Compensation Committee of the Board 
of Directors. No exceptions were noted. 
In addition, no examination was deemed necessary 
regarding Other Incentive Awards as the costs were similar 
to prior years and overall considered to be immaterial. 
(App. mot., ex. 16 at 17079) 
23. In May 2004, Raytheon submitted to the government a forward pricing rate 
brochure (FPRB) for years 2004 through 2008 that, inter alia, included Raytheon's 
proposed annual restricted stock plan for the "Home Office Allocation" (i.e., the 
corporate office) as an expense for cost accounting years 2004 through 2008, which 
brochure was updated on 22 September 2004. The DCAA examined and issued audit 
reports on both submissions. With respect to the May submission, by audit report 
dated 23 August 2004, the DCAA questioned certain costs but otherwise concluded: 
"[W]e consider the forecast to be acceptable as a basis for negotiation of forward 
pricing rates" (ASBCA No. 58290 (58290), app. supp. R4, tab 205 at 17213). With 
respect to the September update, by audit report dated 7 January 2005 the DCAA also 
questioned certain costs but otherwise concluded: "The proposal is acceptable for 
negotiation of a fair and reasonable price" (id., tab 206 at 18010). 
24. On 19 July 2004, the DCAA issued an audit report on Raytheon's 
long-term incentive compensation plans. This examination was undertaken "to assure 
that Raytheon's Long-Term Incentive Plans are reasonable, compliant with applicable 
laws and regulations, and that the proposed Long-Term Incentive Plan costs are 
acceptable as a basis to negotiate a fair and reasonable contract price." (58290, app. 
supp. R4, tab 203 at 1) The audit report concluded that "[T]he Long-Term Incentive 
Plan compensation system and related internal control policies and procedures of the 
contractor are adequate" (id. at 2). 
25. On 28 February 2005, the DCAA issued an audit report of Raytheon's CY 
2003 overheard 
cost submission (app. mot., ex. 17). The DCAA concluded that, except 
for specific objections noted in the audit report not relevant here, "the contractor's 
proposed indirect costs are acceptable as adjusted by our examination" (id. at 8798). 
15 

The Government Asserts Noncompliance with CAS 405 
26. By email dated 30 November 2006, a government auditor informed 
Raytheon "that Bonus and Restricted Stock awards are compensation/fringe type costs 
and that these type of costs (like at the Raytheon segments) should be proportionately 
withdrawn along with unallowable labor" (57576, R4, tab 3). 
27. On 24 September 2007, the DCAA 
issued an audit report relating to CYs 
2002-2005 that stated that appellant's failure to withdraw from its incurred cost 
submissions a proportionate share of its costs of bonuses, restricted stock, and other 
compensation costs paid to employees engaged in "expressly unallowable activities" 
under FAR 31.205-1, Public relations and advertising costs; FAR 31.205-22, Lobbying 
and political activity costs; FAR 31.205-27, Organization costs; and FAR 31.205-4 7, 
Costs related to legal and other proceedings, was a violation of FAR 31.201-6( a) and 
CAS 405.40(a) (57576, R4, tab 8 at G-41-44). 
28. By email to DCMA on 2 
January 2008, Raytheon advised the government 
as follows: 
[T]he Company is already withdrawing approximately 
19% of cost center 90206 as part of the routine Lobbying 
withdrawal.. .. [T]he Company withdraws a portion of all 
expenses in that cost center as mutually agreed 
unallowable directly associated costs. This is done as a 
specific calculation relating to the activities in that 
department as a whole and is not related to an incentive 
compensation analysis. 
(Gov't mot., ex. 21) 
29. On 30 May 2008, the corporate administrative contracting officer (CACO) 
issued to appellant an initial determination of noncompliance (IDN) under CAS 405 
for CYs 2002-2005, and requested a formal response. The CACO stated as follows: 
You may consider this letter to be notice of my 
initial finding of noncompliance with CAS 405-40(a) and 
FAR 31.20 l-6(a) with respect to its treatment of certain 
compensation costs for employees engaged in expressly 
unallowable activities. Raytheon failed to withdraw bonus, 
restricted stock, and other incentive compensation for 
employees engaged in expressly unallowable activities 
from its incurred cost submissions. CAS 405-40(a) and 
FAR 31.201-6(a) state in part that "Costs that are expressly 
unallowable ... shall be identified and excluded from any 
16 

billing, claim, or proposal applicable to a government 
contract." 
Raytheon Company, Corporate Home Office, 
withdraws labor and a portion of fringe expenses for 
employees engaged in expressly unallowable advertising, 
lobbying, organization, and legal activities. However, they 
do not withdraw the applicable portion of bonus, restricted 
stock, and other incentive compensation in connection with 
these expressly unallowable activities. 
(57576, R4, tab 11 at G-97) 
30. On 10 June 2008, the DCAA issued an audit report on appellant's CY 2006 
incurred cost submission, concluding that Raytheon was noncompliant with CAS 
405-40(a) and FAR 31.201-6(a) for the same reasons stated above (57576, R4, tab 12). 
On 27 June 2008, the CACO amended the IDN to include CY 2006 amounts (57576, 
R4, tab 13). 
31. By letter dated 14 May 20 I 0, the CACO issued to Raytheon a final 
determination of noncompliance (FDN) under CAS 405-40(a). This notice, in 
pertinent part, provided as follows: 
Based on my review of the foregoing mentioned 
information, I find that Raytheon Company, Corporate 
Home Office, is in noncompliance with CAS 405-40(a) 
with respect to its treatment of certain compensation costs 
for employees engaged in expressly unallowable activities. 
This estimating and accumulating noncompliance impacts 
all CAS-covered (both Fixed Price and Flexibly Priced) 
contracts and subcontracts for the period of 2002 through 
2008. Accordingly, and as required by FAR 30.605(c), 
you are requested to provide a general dollar magnitude 
(GDM) proposal within 60 days of this letter. The GDM 
proposal shall be calculated in accordance with paragraph 
( d) of this section. In addition, if you have additional 
information which has not been considered relative to this 
issue, you may provide it. 
(57576, R4, tab 15 at G-130) Raytheon responded by letter dated 2 July 2010, 
expressing disagreement with the CACO's conclusions (57576, R4, tab 16). 
32. In response to the CACO's request for a GDM proposal, Raytheon by letter 
dated I October 20 I 0, submitted a proposal to the government, using what it called the 
17 

"fringe delta" method. Under the "fringe delta" method Raytheon recalculated the 
standard fringe benefit, using not only the fringe benefits costs paid to employees 
engaged in the unallowable activities in question, but also including bonus and incentive 
compensation costs. The result was a higher fringe benefit rate. The difference between 
Raytheon's standard fringe benefit rate and the higher recalculated fringe benefit rate was 
what Raytheon called the "fringe delta." This fringe delta was then multiplied by each 
employee's charges for the year (labor rate multiplied by labor hours charged). (SUMF 
i1110; 57576, R4, tab 17 at G-141) 
33. The government was of the opinion that appellant's "fringe delta" 
computation was not a proper GDM proposal for CAS purposes, and requested that 
Raytheon submit an alternative calculation. In response, Raytheon submitted a 
calculation using the "discrete" method of computation. Under this method, for each 
employee engaged in the "unallowable activity" during the relevant time period, 
Raytheon identified the percentage of that employee's time dedicated to the 
aforementioned activities. Raytheon multiplied the amount of that employee's 
bonuses and incentive compensation by the percentage of that employee's time 
dedicated to the "unallowable activity" to arrive at the final calculation. (SUMF 
i1112) 
34. In preparing its calculations, Raytheon submitted data from the four 
Raytheon cost 
centers applicable to the four FAR cost principles the government cited 
in its FDN: (i) Advertising & Public Relations; (ii) Lobbying/Government 
Relations/PAC; (iii) Strategic/Business Development; and (iv) Legal. However, 
Raytheon also included in its calculations a fifth cost 
center related to activities for 
community relations and charitable donations (Contributions). The Contributions cost 
center, 90054, is part of the "Corporate Affairs and Communications'' cost group that 
also includes the cost for advertising and public relations. (SUMF i1i1113-14) 
35. The unallowability of BAIC costs in connection with persons engaged in 
activities related to Contributions, see FAR 31.205-8, was not mentioned in the DCAA 
reports or in the government's IDN or FDN. 
36. On 10 January 2011, the CACO issued a final decision (COFD), citing the 
DCAA 
reports and finding that Raytheon was noncompliant with CAS 405-40(a) 
because it did not withdraw/exclude the costs of BAIC awards paid to corporate 
employees engaged in activities under FAR 31.205-1, FAR 31.205-22, FAR 
31.205-27, and FAR 31.205-47. The COFD stated that these BAIC costs were 
"expressly unallowable" under these four cost principles, and that noncompliance 
resulted in the payment of increased costs by the government on CAS-covered, 
fixed-price and flexibly-priced contracts during the CY 2002 through 2009 cost 
accounting periods, using two such representative contracts for this purpose. (57576, 
R4, tab 20 at G-149) 
18 

37. Using the "discrete" quantum methodology that Raytheon provided, which 
included costs from the Contributions center, the CACO identified $11, 176,482 as the 
total amount of bonus and incentive compensation costs not withdrawn/excluded from 
Raytheon's CAS-covered, fixed-price and flexibly-priced contracts during the 
CY 2002 through 2009 cost accounting periods (57576, R4, tab 20, attach. I, table B). 
38. In the COFD, the CACO did not assert that appellant failed to exclude BAIC 
costs for those engaged in activities under FAR 31.205-8, Contributions. The only mention 
of "contributions" is in attachment I, "TABLE A: INCENTIVE COMPENSATION 
NOT WITHDRAWN AS EXPRESSLY UNALLOWABLE UNDER FAR 31.205-1, 
FAR 31.205-22, FAR 31.205-27 AND FAR 3 1.205-4 7" wherein one quantum element is 
labeled "contributions" (57576, R4, tab 20, attach. I, table A). 
39. The COFD also included interest on the increased costs claimed, in the 
amount of $2,889,334, for a total claimed equitable adjustment of $14,065,816 (57576, 
R4, tab 20). In addition, the COFD demanded a penalty under FAR 42.709 and under 
contract clause FAR 52.242-3, Penalties for Unallowable Costs, in the amount of 
$5,030,543, and added simple interest in the amount of $916,219 in accordance with 
FAR 52.242-3( d)(2). The COFD demanded the total sum of $20,012,578. (Id. at 
G-152, attach. II at G-157) 
40. Raytheon timely appealed the COFD to this Board. The appeal was 
docketed under ASBCA No. 57576. 
Jurisdiction 
DECISION 
ASBCA No. 57576 
Raytheon 
contends that the government has not asserted a claim against it for 
the failure to exclude BAIC costs for those persons engaged in activities to support the 
administration of corporate contributions, FAR 31.205-8, and hence the Board has no 
jurisdiction over this matter. 
It is well settled that a condition precedent to our jurisdiction under the CDA is 
the assertion of a proper claim by one of the contracting parties. When the claimant is 
the contractor, the claim must be submitted to the CO for decision. 41 U.S.C. 
§ 7103(a)(l). When the claimant is the government, as is the case here, the CO must 
assert 
the claim in the form of a final decision issued to the contractor. 41 U.S.C. 
§ 7103(a)(3). A claimant must provide 
adequate notice of the basis and amount of its 
claim. H.L. Smith, Inc. v. Dalton, 49 F.3d 1563, 1565 (Fed. Cir. 1995); Contract 
Cleaning Maintenance, Inc. v. United States, 811F.2d586, 592 (Fed. Cir. 1987). 
19 

We have reviewed the COFD, the document that asserted the government's 
claim here. The 
body of the COFD asserted claims for increased costs paid by the 
government attributable to appellant's failure to exclude BAIC costs paid to those 
persons engaged in activities under FAR 31.205-1, -22, -27, -4 7. It did not assert any 
claim for increased costs paid by the government attributable to appellant's failure to 
exclude BAIC costs paid to those persons engaged in activities under FAR 31.205-8, 
nor did it mention anything about the BAIC costs of employees engaged in the 
activities of corporate contributions. Nor was this purported "claim" mentioned in the 
IDN orFDN. 
According to the government, it included these costs in its COFD quantum 
computation because appellant's cost impact analysis included these costs. Appellant 
contends that this inclusion was "inadvertent"; the government contends the inclusion 
was "deliberate." However, this dispute has no bearing on the jurisdictional issue. In 
the final analysis, the record shows that the government did not assert, and provide 
adequate notice of a claim for exclusion of BAIC costs for those persons engaged in 
"Contributions" type activities under FAR 31.205-8. Since the government failed to 
properly assert this claim against Raytheon, it must be eliminated from the 
government's quantum calculation in the COFD. 
Consistent with the foregoing, ASBCA No. 57576 is dismissed, in part, for lack 
of jurisdiction. 
Guiding Legal Principles 
Both parties have filed motions for summary judgment. It is well settled that in 
order to obtain summary judgment, a party must show there are no material facts in 
dispute and that it is entitled to judgment as a matter of law. Mingus Constructors, Inc. v. 
United States, 812 F.2d 1387, 1390 (Fed. Cir. 1987). All reasonable factual inferences 
must be drawn in favor of the nonmoving party. M Maropakis Carpentry, Inc. v. United 
States, 609 F.3d 1323, 1327 (Fed. Cir. 2010). Our task is not to weigh competing 
evidence and resolve disputes, but only to determine whether disputed material facts 
exist. John C. Grimberg Co., ASBCA No. 51693, 99-2 BCA ~ 30,572 at 150,969. 
Whether interpreting statutes, CAS or procurement regulations, we seek an 
interpretation consistent with the plain terms provided; it is not our prerogative to 
insert additional words or phrases to alter an otherwise plain and clear meaning. 
Tesoro Hawaii Corp. v. United States, 405 F.3d 1339, 1346 (Fed. Cir. 2005). 
Northrop Grumman Corp., ASBCA No. 57625, 14-1 BCA ii 35,501, recon. denied, 
14-1BCAii35,743. A party's use of unpublished material to support interpretation is 
not relevant: "The CAS standards, like any other regulation, must be interpreted based 
on public authorities." Sikorsky Aircraft Corp. v. United States, 773 F.3d 1315, 1323 
(Fed. Cir. 2014). The government has the burden to show CAS noncompliance. Id. 
20 

The government also has the burden to show that costs are unallowable. Parsons-UXB 
Joint Venture, ASBCA No. 56481, 13 BCA ii 35,378 at 173,598. 
Whether BAIC Cost is "Expressly Unallowable" Under the Cost Principles 
FAR 31.205-1 
An "expressly unallowable" cost, by the plain terms of the definition, must be 
an item of cost or a type of cost that is specifically named and stated as unallowable by 
law, regulation or contract (SOF ii 2). BAIC cost is an item or type of cost, but it is not 
specifically named and stated as unallowable under FAR 31.205-1. While portions of 
"salaries" and "fringe benefits" are stated as unallowable under this cost principle, the 
government, as claimant, has not shown that BAIC constitutes either one. BAIC and 
salary are different types of compensation. Salary is fixed compensation. See NEW 
OXFORD AMERICAN DICTIONARY (3d ed. 2010) (salary is "a fixed regular payment, 
typically paid on a monthly or biweekly basis but often expressed as an annual sum"). 
BAIC, indisputably, is not fixed compensation. Also, under FAR 31.205-6, 
Compensation for personal services, "salary" and "bonuses" are identified as different 
types of compensation. See FAR 31.205-6(p )(2)(i) ("Compensation means the total 
amount of wages, salary, bonuses, deferred compensation ... ") (emphasis added). 
Nor has the government shown that BAIC cost constitutes "fringe benefits." 
According to FAR 31.205-6(m)( 1 ): "Fringe benefits are allowances and services 
provided by the contractor to its employees as compensation in addition to regular 
wages and salaries" (SOF ii 8). BAIC cost is not an allowance or a service. BAIC and 
fringe benefits are also addressed separately by the Compensation cost principle. 
Compare FAR 3 l .205-6(f) and FAR 3 l .205-6(m) (SOF ii 8).4 
We believe that appellant's BAIC costs are not expressly unallowable under this 
cost principle. Accordingly, the government has not established a violation of CAS 
405 and has not established its entitlement to a penalty for the failure to exclude 
"expressly unallowable" costs. We grant summary judgment to appellant on this issue. 
FAR 31.205-22 
This cost principle makes unallowable these costs "associated with'" certain 
lobbying and political activity. Neither "BAIC" cost nor "compensation" cost is 
specifically named and stated as unallowable under this cost principle, nor are such 
costs identified as unallowable in any direct or unmistakable terms. 
4 In a letter to the government, Raytheon once characterized BAIC cost as a "fringe 
benefit" type of cost (57576, R4, tab 14 at 123), but such a characterization 
does not trump the plain language of FAR 3 l .205-6(m)( I). 
21 

In support of its position under this lobbying principle, the government cites to 
an email from Raytheon to DCMA dated 2 January 2008, and related deposition 
testimony, stating that for CY 2005 Raytheon withdrew "a portion of all expenses in 
that cost center [Cong. Affairs 90206] as mutually agreed unallowable directly 
associated costs," of which BAIC cost apparently was a part (SOF ii 28). However, we 
believe that Raytheon's treatment of these costs, for whatever reason, cannot negate 
the clear language of CAS 405 and the implementing regulations that guide us in 
determining whether costs are expressly unallowable under a cost principle. 
We conclude that appellant's BAIC costs for those persons engaged in this 
activity are not expressly unallowable under FAR 31.205-22. Accordingly, the 
government has not established a violation of CAS 405 and has not established its 
entitlement to a penalty for failure to exclude expressly unallowable costs. We grant 
summary judgment to appellant on this issue. 
FAR 31.205-27 
Similar to FAR 31.205-22, this cost principle renders unallowable those costs 
"in connection with" certain organization-type activity. Our conclusion is also the 
same. Neither "BAIC" cost nor "compensation" cost is specifically named and stated 
as unallowable under this regulation, nor are these costs otherwise identified in any 
direct or unmistakable terms. 
We conclude that appellant's BAIC costs for those persons engaged in this 
activity are not expressly unallowable under this cost principle. Accordingly, the 
government has not established a violation of CAS 405, and has not established 
entitlement to a penalty for failure to exclude expressly unallowable costs. We grant 
summary judgment to appellant on this issue. 
FAR31.205-47 
Subsection (k) of 10 U.S.C. § 2324, which was added as a result of the Major 
Fraud Act of 1988, Pub. L. No. 100-700, 102 Stat. 4636, provides, at subsection 
(k)(6)(B), that unallowable costs-relating to the legal proceedings defined by the 
clause-mean "all costs incurred by a contractor," including "the pay of directors, 
officers, and employees" for the time devoted to the questioned proceeding (emphasis 
added) (SOF ii 9). Clearly, BAIC costs are "pay" type costs under this definition. 
The FAR interim rule, implementing this statutory change, gave expression to 
this Congressional mandate by rendering unallowable "all elements of compensation, 
related costs and expenses of employees, officers and directors." FAC 84-44, Item III, 
54 Fed. Reg. 13022. The final FAR rule, with which we deal here, more generally 
rendered unallowable the "costs of employees, officers and directors." FAC 90-3, Item 
25, 55 Fed. Reg. 52782, 52794. In explanation of the final rule, the FAR framers 
22 

stated: "The definition of costs in the interim rule at 31.205-47(a) has been clarified to 
describe only general categories of costs, rather than particular types of costs within 
the category." (Id.) There is nothing in these remarks or otherwise in the record to 
suggest that the FAR framers intended to retreat from the broadly defined cost 
exclusions of the interim FAR rule, or to otherwise limit the broadly defined cost 
exclusions in the statute. 
Given the plain wording of the statute and the implementing regulatory cost 
principle, it is unreasonable under all circumstances to conclude that appellant's BAIC 
costs with respect to the defined proceedings are allowable. See General Dynamics 
Corp., ASBCA No. 49372, 02-2 BCA ~ 31,888 at 157,570. 
There can be no question that the plain and unequivocal language of the statute, as 
implemented by FAR 31.205-4 7, trumps the general allowability provision of 
FAR 31.205-6(f). Nor do Raytheon's arguments of "internal government debate" over 
the allowability of these BAIC costs, and of the views of a different CACO vis-a-vis 
another defense contractor (app. mot. at 41-50) serve to negate this plain meaning. 
Under CAS 405(a)(2) an "expressly unallowable" cost is a "particular item or 
type of cost" that is "specifically named and stated to be unallowable" under the 
"express provisions of law, regulation or contract." We have carefully considered all 
of appellant's arguments, but we believe Raytheon's bonus and incentive 
compensation costs are a type of cost (a "pay" cost) that is specifically named and 
stated to be unallowable under the express provisions of law and regulation. These 
costs are "expressly unallowable" costs. We grant summary judgment to the 
government on entitlement on this issue. 5 
Whether BAIC Cost is Otherwise Unallowable Under the Cost Principles 
FAR 31.205-1 
FAR 31.205-1 (f)(l) identifies unallowable "public relations and advertising 
costs," but that term is further defined in FAR 31.205-l(c). Insofar as pertinent, FAR 
31.205-1 ( c) defines "public relations and advertising costs," as including the 
applicable portion of "salaries" and "fringe benefits" of those employees engaged in 
the functions and activities identified in paragraphs (a) and (b) of the cost principle. 
Notably, the cost principle does not use the term "BAIC" cost or the broader 
term "compensation'', which would include BAIC cost. See FAR 31.001. The framers 
of the cost principles were presumably well aware of the concept of "compensation" 
and its various components. See generally FAR 31.205-6. If they wished to render 
5 With respect to the government's recovery of its damages, see "Appellant's 
Defenses" infra. 
23 

unallowable the applicable portion of any "compensation" here they could have said 
so. Indeed, they did say so in other contexts. See FAR 3 l .205-6(i) ("Compensation 
based on changes in the prices of corporate securities ... "; also subsection 
FAR 3l.205-6(i)(1) "Any compensation. .. ") (emphasis added) (SOF ii 8). They did not 
say so here. 
We must presume that the FAR framers' choice of language when addressing 
unallowable labor cost under this cost principle was knowing and deliberate. With 
respect to the terms they did use-"salaries" and "fringe benefits"-the government has 
not shown that BAIC cost is equivalent to, or subsumed under either. 
However, these BAIC costs may be unallowable on another basis, that is, as a 
"directly associated cost" (DAC) to unallowable salary cost. See FAR 31.20 l-6(a) (when 
unallowable cost incurred, its DAC also unallowable) (SOF ii 5). Under this provision, a 
DAC is a cost "generated solely as a result" of another cost and "would not have been 
incurred had the other cost not been incurred" (id). Whether appellant's BAIC costs meet 
these requirements, however, is a material, factual dispute between the parties (SOF ii 12). 
Based upon the foregoing, we do not grant summary judgment to either party 
regarding the allowability of appellant's BAIC costs for those engaged in unallowable cost 
activity under FAR 31.205-1. 
FAR 31.205-22 
We believe appellant's BAIC costs of those engaged in lobbying activities 
under FAR 31.205-22(a) are unallowable under this cost principle. 
Under FAR 3 l.205-22(a), this cost principle broadly makes unallowable the 
costs "associated with" certain lobbying and political activity. It is self-evident that a 
basic element of a contractor's lobbying costs is the compensation paid to those who 
perform lobbying activities. Such compensation is reasonably "associated with" 
lobbying activity so as to be unallowable under this cost principle. This includes 
BAIC cost. 
Raytheon argues that based upon FAR 3 1.204( d), we must defer 
to FAR 
3 l.205-6(f), the subsection that most specifically deals with the allowability of BAIC 
costs and under which appellant's BAIC costs are allowable (SOF ii 8). We do not 
agree. Appellant fails to read, and give reasonable meaning to FAR 31.205-6 in its 
entirety. FAR 3 l.205-6(a), General, states that "Compensation for personal services is 
allowable subject to the following general criteria and additional requirements 
contained in other parts of the cost principle." One such criterion and requirement 
is found in FAR 3 l.205-6(a)(5), stating that "Costs that are unallowable under other 
paragraphs of this Subpart 31.2 are not allowable under this subsection 31.205-6 
solely on the basis that they constitute compensation for personal services." (SOF ii 8) 
24 

(Emphasis added) We believe FAR 31.205-22 is one such paragraph under Subpart 
31.2. 
We believe appellant's BAIC costs attributable to employees engaged in 
lobbying activities under FAR 31.205-22(a) are unallowable. We grant summary 
judgment on entitlement to the government on this issue. 
FAR 31.205-27 
We believe appellant's BAIC costs attributable to employees engaged in 
organization-type activities under FAR 31.205-27(a) are unallowable. 
Under FAR 31.205-27(a), this cost principle broadly makes unallowable 
contractor "expenditures in connection with" certain organization-type activity. As 
above, we believe that a basic element of a contractor's organization-type activity cost 
is the compensation paid to those who perform these activities. Such compensation is 
reasonably "in connection with" this activity so as to be unallowable under this cost 
principle. This includes BAIC cost. 
In addition, subsection (a)(3) of this cost principle renders unallowable a 
contractor's costs of personnel, such as attorneys, accountants, etc., performing the 
defined activities "whether or not employees of the contractor." A contractor's costs of 
such employees reasonably include the compensation costs of these employees. 
For reasons stated herein and above, appellant's BAIC costs attributable to 
employees engaged in organization-type activities under FAR 31.205-27(a) are 
unallowable. We grant summary judgment to the government on entitlement on this 
issue. 
ASBCA Nos. 57679, 58290 
STATEMENT OF FACTS (SOF) FOR PURPOSES OF THE CROSS-MOTIONS 
41. Raytheon's L TPP is a form of deferred compensation and is a component 
of Raytheon's 2001 Stock Plan. Raytheon adopted the L TPP in 2003. Participation in 
the L TPP is limited to key business leaders nominated annually by Raytheon's senior 
management. (SUMF ~~ 41-43) 
42. Insofar as pertinent to these appeals, under the L TPP Raytheon granted a 
target number of stock shares to L TPP participants at the beginning of a three-year 
performance cycle. Participants could earn shares in addition to those granted based 
upon achievement of specified levels of company performance, or metrics, over this 
three-year period. Conversely, participants would not earn the shares initially granted 
to them in the event these metrics were not achieved. (SUMF ~~ 44-46) 
25 

43. For the three-year performance cycle beginning in 2004, appellant's metrics 
were known as "Free Cash Flow" (FCF) and "Total Shareholder Return" (TSR) (SUMF 
ii 124). The government's claim under these appeals refers to the TSR metric only. 
44. Under the TSR metric, Raytheon compared the compounded annual return 
of its shareholders to the compounded annual return of the shareholders of each of 
ten Raytheon competitors. In the LTPP cycles that are the subject of these appeals, 
i.e., 2004-2006, 2005-2007, 2006-2008, and 2007-2009, Raytheon employed the 
following formula to calculate the TSR metric for Raytheon and as well as the TSR 
metric for each of these ten peer companies: 
Ending Stock Price + 3 Years Dividends 
Beginning Stock Price 
(SUMF iii! 126-27) 
45. Raytheon ranked its calculated TSR metric with the calculated TSR metric 
of each of its ten competitors, i.e., Raytheon could be ranked anywhere from # 1 to # 11 
in this ranking. Generally, the higher Raytheon's ranking within the group, the larger 
the share award multiplier that was attached to that ranking. (SUMF iii! 129-30) 
46. In December 2003 and January 2004, Raytheon briefed the government 
with respect to the LTPP. Insofar as pertinent, the December 2003 briefing charts 
provided as follows: 
Long-term Performance Plan 
Key Aspects 
• 3-year performance goals 
will be established at 
beginning of each 3-year performance cycle 
[REDACTED REDACTED REDACTED REDACTED 
REDACTED REDACTED REDACTED REDACTED 
REDACTED] based on total shareholder return (TSR) 
versus peers [Footnote omitted] 
• Actual number of shares earned and awarded 
dependent on degree of performance goal attainment 
[REDACTED REDACTED REDACTED REDACTED 
REDACTED REDACTED REDACTED REDACTED 
26 

REDACTED REDACTED REDACTED REDACTED 
REDACTED] 
• Performance cycles overlap as a new 3-year cycle is 
initiated each year 
(App. mot., ex. 11) It appears that these charts did not contain the TSR formula above. 
4 7. The January 2004 briefing chart was similar in all material respects to the 
above chart (58290, app. supp. R4, tab 200). The government did not express an opinion 
as to the allowability of the costs generated by the TSR metric at or around this time. 
48. In 2004, the DCAA audited Raytheon's LTPP. The government 
auditor 
was of the view that appellant's costs for share awards arising from the TSR metric 
were allowable under FAR 3 
l .205-6(i). Her opinion was documented in an audit work 
paper in part as follows: 
[T]he L TPP costs are allowable because the shares granted 
are based on the stock price versus the company's peers and 
not strictly on the change [sic] stock price .... [S]ince the 
grant of L TPP shares is not dependent on a change in price 
of Raytheon stock, the amount is allowable. 
(App. mot., ex. 44 at G-55) The record does not show that Raytheon was privy to this 
work paper at or around the time it was prepared, or that Raytheon was otherwise 
advised in writing of this auditor's opinion. 
49. The audit report issued as a result of this audit work, dated 19 July 2004, 
concluded that Raytheon's "long-term incentive plan compensation system and related 
internal control policies and procedures of the contractor are adequate" (58290, app. 
supp. R4, tab 203 at 2). The audit report did not expressly allow the awarded share 
costs resulting from the TSR metric calculation, nor does it appear 
that the audit report 
mentioned this metric at all. 
50. By Supplemental Report on Audit of CY 2006 Incurred Costs, dated 
27 June 2008, the DCAA questioned costs of restricted stock due to noncompliance 
with CAS 415 (not CAS 405) and FAR 31.205-6(i) "because future payments cannot 
be measured with reasonable accuracy" (57679, R4, tab 1, at 2). Insofar as pertinent 
here, the DCAA also concluded that 
"costs incurred for the TSR metric of Raytheon's 
L TPP are not allowable per FAR 3 l .205-6(i) because the number of shares awarded is 
dependent on the change in the price of Raytheon's stock." The report also noted: 
"The questioned cost is not subject to penalty." (Id. at 22) 
27 

51. On 17 July 2008, DCAA issued an audit report reiterating its conclusion that 
Raytheon's accounting for L TPP costs violated CAS 415 on the ground that the amount of 
future payments could not be measured with reasonable accuracy (57679, R4, tab 2 at 2). 
The CACO subsequently issued an FDN under CAS 415 (57679, R4, tab 5), but later 
determined that the cost impact of the violation was immaterial (57679, R4, tab 7). 
Insofar as pertinent here, this audit report also stated that appellant's TSR-related costs 
were unallowable per FAR 3 l .205-6(i) "because the number of shares awarded is 
dependent on the change in the price of Raytheon stock" (57679, R4, tab 2 at 6). 
52. The government did not issue an IDN or FDN with respect to CAS 405 at 
this time. 
53. By letter to Raytheon dated 2 June 2011, the CACO issued a COFD, 
asserting that the costs of the TSR portion of Raytheon's LTPP were expressly 
unallowable under FAR 3 
l .205-6(i) because the TSR formula "shows that the stock 
award to a TSR participant is arrived at by determining the change in stock price" 
(57679, R4, tab 8 at 2-3). Insofar as pertinent, the CACO asserted a claim under the 
Allowable Cost 
clause of a representative contract to recover the expressly 
unallowable costs for CY s 2004-2006 in the amount of $1,316, 183, plus penalty and 
interest, for a total of $2,993, 127. The CACO did not assert a claim for payment or for 
compound interest under CAS 405.6 In addition, the CACO asserted a claim for 
expressly unallowable "dividend equivalent" costs for CYs 2005-2006, plus penalty 
and interest, in the amount of $662,922. (Id. at 5) 
54. Raytheon timely appealed this COFD by notice of appeal dated 7 July 
2011. Raytheon appealed the COFD decision as it pertained to the TSR claim; it did 
not appeal the decision as it pertained to the government's "dividend equivalent" 
claim. The appeal was docketed as ASBCA No. 57679. 
55. On 13 February 2012, pursuant to FAR 30.605(b), the CACO issued an ION 
under CAS 405, stating that the "costs of the Total Shareholder Return (TSR) portion of 
the L TPP are expressly unallowable under FAR Subpart 3l.205-6(i)(1) because they are 
based on changes in the price of corporate securities" (58290, R4, tab 8). 
56. On 25 May 2012 the CACO issued a second COFD, which questioned the 
TSR metric portion of appellant's share costs from Raytheon's 2005-2007, 2006-2008, 
and 2007-2009 L TPPs that had been included in the company's CY 2005-2009 incurred 
cost proposals, and added 
penalties and interest under FAR 42.709, demanding a total of 
6 In its explanation to the Board, the government stated that because this COFD '"does 
not identify CAS 405 as the basis of the government's monetary claim' the 
Government is not currently seeking CAS damages for this final decision 
alone" Ut. resp. to Bd. order dtd. 25 January 2015 at 6). 
28 

$3,397 ,53 7. This COFD determined that the TSR costs were expressly unallowable, 
were subject to penalty and were in noncompliance with CAS 405. (58290, R4, tab 10 at 
1, 2, 6) 
57. Raytheon timely appealed this decision. The appeal was docketed as 
ASBCA No. 58290, and was consolidated with ASBCA Nos. 57576 and 57679. 
DECISION 
ASBCA Nos. 57679, 58290 
It is undisputed that under the L TPP for purposes of granting share awards, 
Raytheon used the following formula to generate a "TSR metric" figure for Raytheon 
and for each of ten peer companies: 
Ending Stock Price + 3 Year Dividends 
Beginning Stock Price 
Raytheon ranked its calculated Total Shareholder Retum/TSR metric with the 
calculated TSR metric of each of the ten peer companies; generally, a higher Raytheon 
ranking among the group resulted in the award of additional shares to its employees; a 
lower relative ranking resulted in the award of fewer shares. 
The plain language of the cost principle, FAR 3 l .205-6(i), provides that "any 
compensation" that is "calculated" or "valued" based upon "changes in the price of 
corporate securities" is unallowable (SOF ~ 8). Appellant's L TPP share awards are a 
type of "compensation." This compensation is calculated or valued based upon 
''changes in the price of corporate securities" through use of the above formula and the 
respective rankings related thereto. Accordingly, we believe this type of compensation 
is specifically named and stated as unallowable under the express provisions of this 
cost principle. 
Appellant argues, however, that it had reasonable grounds to believe that these 
costs were allowable. For example, appellant contends that FAR 3 l .205-6(i) does not 
expressly list "TSR" as an example of the type of compensation it purports to identify 
as unallowable (app. mot. at 58). However, subsection (i), is entitled in part: 
·'Compensation based on changes in the prices of corporate securities," and the TSR 
metric calculation clearly and unmistakably falls into that category. That the caption 
of the cost principle goes on to give examples of such plans does not limit the 
regulation to the examples provided. 
Appellant also tenders as support for its position the opinion of a DCAA auditor 
who opined in an audit work paper that these share award costs were allowable under 
FAR 3 l .205-6(i) (SOF ~ 48). However, we are unaware of any audit report, 
29 

memorandum or other writing of record sent to appellant at or around that time that 
substantiates this auditor's opinion. We also believe the auditor misread the cost 
principle. Contrary to the auditor's opinion, in order to be unallowable the award of 
shares need not be solely dependent upon the change in price of Raytheon stock (SOF 
~ 48). Rather, the plain language of the cost principle more broadly renders unallowable 
any compensation that is "calculated" or "valued" based upon "changes in the price of 
corporate securities." The subject compensation clearly and expressly falls under this 
proscription. 
Appellant also points to the government's failure to tell Raytheon that it 
believed the TSR would generate unallowable costs after being briefed on the new 
program in late 2003 and early 2004 (mot. at 69; SOF ~ 46). However, the 
government was under no legal obligation to advise Raytheon of its position at such a 
briefing. That the government failed to "get back" to Raytheon on the matter 'was not 
an admission of allowability, nor a reasonable basis for appellant to conclude that the 
costs would be viewed as allowable in the future. 
Appellant also offers up evidence of internal debate amongst government 
personnel with respect to the allowability of these costs, e.g., "[T]here was repeated 
consultation and conversation and consternation" (mot. at 65). However, such 
extrinsic evidence cannot trump the plain language of the cost principle. 
We have reviewed all of appellant's contentions, but believe there can be no 
reasonable difference of opinion regarding these TSR costs. We believe it would be 
unreasonable under all circumstances to conclude that these costs were allowable. See 
General Dynamics, 02-2 BCA ~ 31,888 at 157,570. 
For reasons stated, we believe that appellant's TSR share award costs under the 
L TPP constitute compensation costs that are "expressly unallowable" under 
FAR 
3 l .205-6(i). Accordingly, we sustain the government's claim on entitlement 
under the COFD 
dated 2 June 2011 and the COFD 
dated 25 May 2012 (see n.5 
regarding first COFD). We grant the government summary judgment on entitlement 
on these claims. 7 
Appellant's Defenses 
Raytheon contends, citing Litton Systems, Inc. v. United States, 449 F.2d 392 (Ct. 
Cl. 1971 ), that the government is barred as a matter of law from recovering any 
costs/damages on its claims. According to appellant, given the government's consistent 
approval of and/or acquiescence to the subject BAIC and TSR metric costs, it was barred 
from disallowing those costs prior to the issuance of an authoritative notice that such 
7 With respect to whether the government may recover its damages, see Appellant's 
Defenses, infra. 
30 

costs were no longer allowable. Appellant posits that the government's 2011 final 
decisions on the BAIC costs (SOF ii 36) and TSR costs (SOF ii 53) were the first such 
government notices, and hence any costs incurred prior to these dates are not recoverable. 
The above principle is commonly known as the "retroactive disallowance" 
principle. The government does not dispute the principle, but contends that it has no 
bearing on the government's monetary claims under the facts of record. 
We have applied the retroactive disallowance principle to bar recovery of 
government claims. Lockheed Martin Western Development Laboratories, ASBCA 
No. 51452, 02-1BCAii31,803. However, its application is largely fact-dependent. In 
these appeals, there are material factual disputes of record that need to be addressed to 
determine whether this principle is applicable here, including but not limited to, 
whether or not the government, with knowledge, consistently approved the subject 
BAIC and TSR metric costs; and if so, when the government first put appellant on 
reasonable notice that said costs were unallowable. Given these material fact disputes, 
we decline to award summary judgment to either party on this defense. See Peat, 
Marwick, Mitchell & Co., ASBCA No. 29847, 86-2 BCA ii 18,915 at 95,400. 8 
To the extent appellant also invokes equitable estoppel principles against the 
government here, we recently set out the test to prove equitable estoppel against the 
government in Northrop Grumman, 14-1 BCA ii 35,501 at 174,023, recon. denied., 
14-1 BCAii35,743: 
Equitable estoppel requires a showing of: 1) misleading 
conduct leading another to reasonably infer that rights will 
not be asserted against it; 2) reliance on this conduct; and 
3) material prejudice as a result of this reliance. When 
estoppel is asserted against the government, a showing of 
affirmative misconduct is required in addition to these 
elements. [Citations omitted] 
We further held that this added requirement of affirmative misconduct contemplates 
government misconduct "of a nature more compelling than the conduct that would 
otherwise apply against a private party. See, e.g., RGW Communications, 05-2 BCA 
32,972 at 163,336 (referencing deliberate lies; a pattern of false promises, or 
8 Since we decline to award summary judgment to either party on appellant's defense, 
there is no reason to discuss quantum at this time, assuming, arguendo, that the 
Board decides to hear quantum. We also note that the parties dispute the proper 
calculation of quantum including, but not limited to, the extent to which certain 
fixed-price contracts should be considered in determining cost impact for any 
CAS violation. 
31 

intentional deception as examples of affirmative misconduct)." Northrop Grumman, 
14-1BCAif35,501at174,024. 
Based upon the foregoing, we believe that Raytheon has failed to adduce any 
evidence to support a finding of affirmative misconduct by the goveft\!11ent here. 
Hence, Raytheon has failed to adduce evidence necessary to support its estoppel 
defense as a matter of law. We grant summary judgment to the government on 
appellant's defense of equitable estoppel. 
CONCLUSION 
The parties' motions for summary judgment are granted in part and denied in · 
part consistent with this opinion. Under ASBCA No. 57576, the appeal is dismissed, 
in part, for lack of jurisdiction consistent with this opinion. 
Dated: 26 June 2015 
I concur 
~~ 
Administrative Judge 
Acting Chairman 
Armed Services Board 
of Contract Appeals 
32 
Administrative Judge 
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 Nos. 57576, 57679, 58290, 
Appeals of Raytheon Company, rendered in conformance with the Board's Charter. 
Dated: 
33 
JEFFREY D. GARDIN 
Recorder, Armed Services 
Board of Contract Appeals