ARMED SERVICES BOARD OF CONTRACTAPPEALS Appeal of

-- ) ) Kellogg Brown 

### & Root Services, Inc. ) ) Under ContractNo. DAAA09-02-D-0007 )

APPEARANCES FORTHE APPELLANT:

APPEARANCES FORTHE GOVERNMENT: ASBCA No. 59557

Jason N. Workmaster, Esq. Raymond B. Biagini, Esq. Herbert L. Fenster, Esq. Erin B. Sheppard, Esq.

McKenna Long & Aldridge LLP Washington, DC

E. Michael Chiaparas, Esq.

DCMA ChiefTrial Attorney Srikanti Schaffner, Esq.

Trial Attorney Defense Contract Management Agency Carson, CA

OPINION BYADMINISTRATIVE JUDGE O'SULLIVAN ON APPELLANT'S MOTION FORAN ORDERDIRECTING THE GOVERNMENT TO FILE THE COMPLAINT Appellant Kellogg Brown & Root Services, Inc. (KBR) moves the Board to direct the government to file the complaint in this appeal. The government opposes. Forthe reasons that follow, appellant's motion is granted. The government is directed to file its complaintno laterthan 30 days from the date ofthis opinion.

STATEMENT OF FACTS FORPURPOSES OF THE MOTION

ContractNo. DAAA09-02-D-0007, known as the LOGCAP (Logistics Civil Augmentation Program) Support Contract, was awardedto KBR (then known as Brown & Root Services) on 14 December2001 (app. supp. R4, tab 9 at 002). Pursuant to the contract, KBR and other contractors were tasked to provide selected services to commanders in support ofmilitary and non-military (humanitarian and other) operations (id. at 0058). The costs at issue in this appeal were incurred by KBRin its performance ofnumerous task orders issued to it underthe LOGCAP contract (R4, tab 2).

KBRwas required by the contract, which incorporated Federal Acquisition Regulation (FAR) Clause 52.228-3, WORKERS' COMPENSATION INSURANCE (DEFENSEBASEACT) (APR 1984), to provide workers' compensation insurance for its own employees and to flow down this requirement to its subcontractors (app. supp. R4, tab 9 at 040). Because it was responsible for ensuring that subcontractor employees
were covered, and because the contractwork was being performed in parts ofthe world where such insurance might not be easily accessible, KBR elected to provide Defense Base Act (DBA) insurance for its subcontractors to ensure compliance (app. supp. R4, tab 70, ex. A). Under this program, subcontractors provide KBR with estimated payroll for each subcontract enrolled into the program. A separate DBA policy is issued for each subcontractunder the masterpolicy. The subcontractors do not reimburse KBR for the premiums and do not include DBA insurance costs in their billings. KBR does not perform reviews ofsubcontractorpayroll due to a lack of certifiedpayroll availability, especially in the Middle East. Through 2005, KBRhad provided insurance coverage to 94,405 subcontractor employees who were Third Country Nationals and 81,239 subcontractor employees who were Host Country Nationals. (Id. at 2298-99).
KBR's FY2007 incurred costproposal was initially submitted on 30 June 2008 (app. supp. R4, tab 91) and after several revisions, a final proposal was submitted on 8June 2012 (app. supp. R4, tab 102). The incurred costproposal includedthe cost of subcontractorDBA premiums paidby KBR.
On 9 May 2014, DCAAprovided the draft results ofthe audit with respect to FY 2007 subcontractor DBA insurance to KBRvia email (R4, tab 3). KBR formally responded to the draft results by letter dated 19 May 2014 (R4, tab 6). The audit report itselfwas finalized and issued on 30 May 2014 (R4, tab 7).
The draft audit results and final audit report do not vary in any substantive respect on the issue ofsubcontractorDBA insurance costs. The final audit report states:
We take no exception to the proposed premium rates used to calculate the subcontractor DBA insurance costs. During our examination ofthe subcontractor DBA insurance costs, the contractor stated it does not "true-up" subcontractorDBA insurance costs based on actual subcontractor labor. KBRSI asserts it does not have visibility ofthe subcontractors' actual payroll records. However, based on KBRSI's subcontractorDBA insurance policy, the insurance company had the rights [sic] to verify the subcontractors' remuneration. KBRSI was unable to confirm the insurance company (AIG) or insurance broker (Aon) verified the subcontractors' remuneration.

2The contractor is in noncompliance with FAR 31.201-2(d)

- Determining Allowability which states:

A contractor is responsiblefor accounting for costs appropriatelyand for maintainingrecords, including supportingdocumentation, adequate to demonstrate that costs claimedhave been incurred, are allocable to the contract, andcomplywith applicable cost principles in this subpartandagencysupplements. The contractingofficer maydisallow all orpartof a claimedcost that is inadequately supported.

In addition, the contractor is in noncompliance with (i) FAR 31.205-19(d)(l) because it did not measure, assign, and allocate costs in accordance with 48 CFR 9904.416, and (ii) CAS 416-40(b) because it did not allocate insurance costs to cost objectives based on the beneficial or causal relationship between the insurance costs and the benefiting or causing cost objectives. We separately reported this potential CAS 416 noncompliance in Audit ReportNo. 3321-2013H19200004, dated May 1, 2013 (previously provided to your office). The resolution ofthis CAS 416 non-compliance is currently in process and will be processed in accordance with FAR 30.605.

We question $33,851,898 by applying an audit calculated 43 percent decrement factor to the subcontractor DBA insurance costs of$78,725,344 proposed under GL AccountNo. 600106

- Insurance

- Special Property Damage

- Primary because the computation of subcontractorDBA insurance costs was not based on the actual subcontractor labor incurred during the year. Our decrement factor is based on subcontract Master Agreement GC02HU-VC-ML 5051 for the period October 2006 to September 2007.

In addition, there is an existing noncompliance with CAS 406.40(b), CAS 416.40(a) and (b), and CAS 416.50(b)(2) reported in Audit Report No. 3321-2007K19200001, dated April 20, 2009. The cited noncompliant practices relate to KBRSI immediately expensing DBA insurance premiums and allocatingthese expenses over open task orders (TOs) without regard to the

3period ofperformance ofthe TO. The results ofthe Rough OrderMagnitude (ROM) were issued under DCAA MFR 3321-2011K49200901, dated February 3, 2012. The estimated impact ofthe noncompliantpractice from Policy Years (PY) 2002 to 2009 is $34,422,957. The costs reported in this audit have not been impacted by this CAS 406/416 noncompliance because the CAS 406/416 noncompliance and the resulting impactwill be processed in accordance with FAR 30.605. (R4, tab 7 at 574-75)

In the following section ofthe auditreport, entitled "basis ofContractor's Cost," DCAAnotes thatthe subcontractor DBA insurance premiums are based on estimated payroll ofcovered workers for the policy term (R4, tab 7 at 576). Further, DCAA notes that KBR is invoiced by the insurerquarterly based on said estimated payroll, and this premium amount is chargedto open task orders at the time the invoice is received (id.). The audit report additionally notes that KBR's subcontractor DBA insurance costs are supported by "bordereaux" files 1compiled using the DBA applications submitted by the subcontractors (id.). Afterthe subcontractor's application is submittedby KBRto the broker, the brokerreturns a confirmation of coverage to KBRI who, in tum, provides it to the subcontractor (id.). Subsequently, the same estimated payroll amounts are usedto allocate premium costs to the various WorkBreakdown Structure (WBS) elements (id.).

In the next section, entitled "AuditEvaluation," DCAA states that it was able to: (1) reconcile the proposed FY 2007 subcontractorDBA insurance cost to invoices received; (2) verify the installment payments made; (3) verify that KBR solicited adequate competitive quotes to ensure the premium was reasonable; and (4) verify that the proposed costs were supported by valid insurance policies (R4, tab 7 at 576). Finally, DCAA explains that it calculated the 43 percent decrement by examining one ofKBR's subcontractMaster Agreements and comparing the "estimatedDBApremium"perthe MasterAgreement (apremium amount calculated by multiplyingthe labor hours invoiced under the Agreement for the period October 2006 to September 2007 by the Iraq/Kuwaitpremiumrate) to the DBApremium amounts invoiced by the insurer and paidby KBR. (R4, tab 7 at 576-77)

In its written response submitted 19 May 2014, KBRtook issue with the audit report claim that it had not adequately accounted for the subcontractor DBA costs or

1 Accordingto KBR, bordereaux files list all sub-policies issued for a subcontractor's labor force and any changes to that labor force (R4, tab 6 at 479).

4provided adequate documentation. Itstatedthat it had provided "all pertinent documentation" including the paid invoices, the bordereaux files, the insurance policies, and the insurance renewal files, to support the premiumpricing, and that DCAAhad not questioned the cost based on lack ofdocumentation. (R4, tab 6 at 479) KBR also disputed the allegations ofCAS noncompliance, and asserted that the method DCAA used to calculate the 43 percent decrement was unreasonable for a number ofreasons, including the fact that the decrement was calculated from a single MasterAgreement yet applied to all costs incurred in FY 2007; moreover, DCAA was decrementing the actualtotal cost incurred and paid in FY 2007 using an estimate of payroll data from one master agreement. 

### (Id. at 480) KBRpointed out that it had savedthe government money by administering the DBA insurance between the subcontractors and the insurance carrier, as it would have been more expensive ifthe subcontractors had obtained and administered their own DBApolicies 

### (id. at 481).

The record in this appeal reflects that DCAA was aware by 2007 that subcontractor DBA insurancepremiums were based on estimated subcontractpayroll and were not subjectto retroactive adjustment based on actual subcontractorpayroll costs. For instance, on 24 August 2007, DCAA's Gregory Hartsoe asked: Why are adjusting entries being made topolicy 8349311, 8to 12 months after its coverage period closed? My understanding was that subcontractDBAwas not subjectto final payroll audit due to proprietary restrictions
on subcontractor financial data.

Additional data: Please provide the supportingpremium calculationworksheets as previously requested. These worksheets should show the estimated subcontractor payroll and applicable premiumrate applied. 

### (Id. at 2379-80) KBR's Erin Wilkerson responded on 28 August 2007:

That is correct, however adjustments are not being made due to "actualpayroll" submissions. Adjustments are being made [as] a result ofamended applications correcting contract amounts, performanceperiods, possibly overlooked change orders, terminated contracts, etc

- all for compliance
reasons and record housekeeping. Ifthis is a practice that needs to be discontinued, we need to discuss.



### 5I am continuing to research the supportbehind the invoices, and will send you the data or updates as soon as I get information.
(Id. at 2378-79) In September 2007 this further email exchange tookplace between Mr. Hartsoe andMs. Wilkerson:
[DCAA:] Again, my understanding was that subcontract DBApolicies were billed at estimatedpayroll amounts and
never subsequently adjusted for actual costs incurred on the subcontracts.



### KBRRESPONSE: Thatis correct- as stated below, the adjustments are notfor "actual payroll" but rather for amended applications. Examples include correcting contractamounts, performance periods, possibly overlooked change orders, terminated contracts, etc

- all for compliance reasons and record housekeeping.
[DCAA:] Since this post close adjustmentprocess seems to be a constantly recurring item, I would like detailed breakout of justwhat is being done on a recurring basis to
cause such adjustments to be made for each quarter.


### KBRRESPONSE: Please reference reasons stated above -thiswould be on a subcontract by subcontract basis. New DBA applications areprocessed for each changein estimated payroll. Forexample, ifa change orderwasissued thatincreased a scope ofwork requiring additional labor,the estimated payroll amount would increase, and the total DBA premiumwould have to be adjusted to coverthese additionalworkers. Therefore,this detailed breakoutwould be ata change orderlevel on a subcontractby subcontractbasis.

Therecord does not contain any indication that DCAA objected to the above-described quarterly adjustments to premium costs priorto the time KBR entered into the FY2007 subcontractorDBApolicy. Nor does the record indicate that DCAA objectedto the clearly describedpractice ofbasing subcontractorDBA insurance premiums on estimated subcontractorpayroll priorto the time KBR entered into the FY2007 subcontractor DBApolicy. In 2008, when the same DCAA auditorrequested supporting documentation for FY 2007 subcontractor DBA insurance costs, he

6specifically requested "listing ofthe subcontracts being covered and estimatedpayroll for the period for each" (app. supp. R4, tab 89 at 2617-18).

KBR appeals from an administrative contracting officer's (ACO's) final decision, dated 26 June 2014, demanding payment of$33,851,868 in allegedly unallowable Defense BaseAct (DBA) insurance costs billed to the government. The final decision sets forth the following as the sole basis for the demand:

(R4, tab 8) This is my final decision asserting a Government claim for $33,851,868, pursuant to FAR 52.233-1, Disputes, due tothe inclusion ofunallowableFiscal Year (FY) 2007 direct costs claimed and billed to the Government. My decision was based on FAR 31.201-2, Determining Allowability, due to KBRSl's computation of subcontract DBA insurance costs claimed and billed under contract no. DAAA-09-02-D-0007. The cost billed was not based on actual subcontractor labor incurred during FY2007. The following documents are referenced and relied upon in making this decision: (a) DCAA Audit Report No. 3321-2007K10100001 dated May 30, 2014 (b) KBRSl's response dated, May 19, 2014

KBR argues that requiring the governmentto file the complaint in this case is warranted since the contracting officer's final decision onlyperfunctorily refers to FAR 31.201 and the fact that KBR's billed subcontractor DBA insurance costs were not based on actual subcontractor labor, but does notprovide any additional detail and does not specify whatportions ofthe "referenced andrelied upon" documents are relevantto the decision. KBR asserts that unless the government is required to file the complaint, it will have been excused from "havingto proffer a basic legal and factual rationale for its demand ofthe significant sum at issue in this Appeal, resulting in a [KBR] complaint simply disagreeing with the bare-bones conclusions ofthe Final Decision and a Government answer simply denying these

...positions. Such pleadings would do little, ifanything, to advance this Appeal." (App. mot. at 2-3)
The government asserts in oppositionto KBR's motion that: (1) the basis for the government's claim is evident from numerous communications that took place priorto the issuance ofthe ACO's final decision; (2) "KBRis well aware that the basis for the Government's claim is that KBRhas failed to showthat DBApremiums based
on estimated, rather than actual subcontractor labor, are reasonable"; (3) it is KBRthat

7bears the burden ofprovingthe claimed costs to bereasonable pursuant to FAR 31.201-3(a); and (4) the facts bearing onthe reasonableness ofthe claimed costs, i.e., "the information regarding the basis upon which the DBA insurance premiums were calculated andpaid," are within KBR's possession and are not known to the ACO (gov'treply).2

DECISION

Underthe unique procedural requirements ofthe Contract Disputes Act (CDA), all claims, whether contractor or government claims, must be the subject ofa contracting officer's final decision. 41 U.S.C. § 7103. The contractor, however, is the onlyparty who may initiate proceedings at the Board, 41 U.S.C. § 7104, and Board Rule 6(a) requires the appellantto file the complaint in an appeal. Ifthe contractor appeals from a final decision on a government claim, the contractortypically presents in its complaint enough information about the government claim to form a sufficient predicate for the government's answer and allow for adequate framing ofthe issues. Thus, the fact thatthe appeal involves a government claim is not enough, in and of itself, tojustifyrequiringthe government to file the complaint.

In appropriate cases, the Board may exercise its discretion to require the governmentto file the complaint, ifdoing so will facilitate efficient resolution ofthe appeal. BAESystemsLand& ArmamentsInc., ASBCANo. 59374, slip. op. (18 November2014); BeechcraftDefense Co., ASBCANo. 59173, 14-1 BCA 

### ii 35,592. Such situations can arise ifrelevant information concerning the basis for the claimresides with the government, notthe contractor. InBAESystems, for example, the contracting officerissued a "Defective Pricing Demand Letter" based on a DCAA auditreport alleging defective pricing, butthe demand letter did not purportto be a contracting officer's final decision. BAE filed a certified claim challenging the government's demandedprice adjustment, and over a year later the contracting officer issued a final decision denying BAE's claim. The Board granted BAE's motion, notingthat BAE's "claim" was more in the nature ofa defense against the government's claim ofdefective pricing, and further stating:
[T]he contracting officer's final decision does not explain in any depth why it rejectedthe contractor's arguments, exceptwith occasional summary remarks. In these particular circumstances, proceedings wouldbe more

2 In addition to KBR's motion, the government's reply, and KBR's response thereto, KBRfiled a Notice ofSupplemental Authority referencing this Board's decision in BAESystems, cited herein, and the government filed a reply to appellant's notice. All ofthese filings and the exhibits thereto have been considered by the Board in reaching its decision.

8efficient ifthe Board could start with a government articulation ofthe basis for its determination ofdefective pricing, ratherthan appellant's speculation about the basis for the government's assertions.



### BAESystems, slip. op. at 3 (citation omitted). In

### Beechcraft, the contractor appealed from a DCMA contracting officer's final decision finding its accounting practices noncompliantwith CostAccounting Standard (CAS) 402. The government acknowledged that the appeal involved a government claim, but argued that appellant
was in the bestposition to assert facts establishing its compliance with the standard. The Boardheld that since the burden ofestablishing noncompliance was on the government, the proceedings wouldbe facilitated by the government's filing an initialpleading setting forth the facts and rationale in support ofits claim. 14-1 BCA at 174,395.

In this case, the government has asserted that $33.9 million in subcontractor DBA insurancepremium costs incurred by KBR in performing the LOGCAP contract are unallowable, yet it has not articulated a basis for its claim. The Board has examined the ACO's decision which does not explain the rationale for finding these costs unallowable. The final decision includes the summary sentence: "The cost billed was notbased on actual subcontractor labor incurred during FY 2007" but does not explain why that fact, in the contracting officer's opinion, renders the costs unallowable. Itis importantto note the costs billed were KBR's actual incurred premium costs, as confirmed by the DCAA audit.

The final decision also states that it references and relies on the DCAA audit report and KBR's response to that report. The Boardhas examined the audit report, which states that it is disallowing the costs based on KBR's failure to "true up" its subcontractorDBA insurance costs based on actual subcontractorpayroll, and that this failure to "true-up" is a noncompliance with FAR 31.201-2(d), which requires contractors to maintain records sufficient to demonstrate that claimed costs have been incurred, are allocable to the contract, and comply with applicable cost principles.
However, the audit report does not explain what significance, ifany, actual subcontractor labor costs (even ifsuch information were available to KBR) would have to the issue ofthe allowability ofKBR's subcontractor DBA insurance costs, which were based on estimated subcontractor payroll and not subject to adjustment based on actual subcontractorpayroll.
The government argues that KBRis "well aware" that the basis for the government's claim is that "KBRhas failed to showthat DBApremiums based on estimated, rather than actual subcontractor labor, are reasonable;" thatthe burden is on a contractorto prove the reasonableness ofincurred costs once challenged by the government; and that KBR, not the ACO, possesses the facts bearing on the issue of

9reasonableness, i.e., "the information regarding the basis upon which the DBA insurancepremiums were calculated and paid." Butneither the ACO's final decision
northe DCAA auditreport articulates a reasonableness challenge to KBR's incurred DBA insurance costs. To the contrary, the audit report affirmatively states that KBR solicited adequate competitive quotes to ensure the premium was reasonable, and the operative FARprovision on cost reasonableness, FAR 31.201-3, is not cited in either the audit report or the ACO's decision in connection with this issue. Moreover, the record would seem to indicate that DCAA, and therefore the government, received all the information it requested regarding "the basis upon which the DBA insurance premiums were calculated and paid." Finally, the government asserts thatthe basis for its claim is clear from "the communications betweentheparties" leading up to the issuance ofthe final decision
on 26 June 2014. The Boardhas therefore examined all ofthe communications between the parties in the record before it. None ofthese communications articulates a basis for the government's claim. Simply stated, appellant should not have to speculate about the basis for the government's claim in its complaint. Thus, we find thatproceedings in this appeal would be facilitated by the government's filing the initial pleading setting forth the basis orbases for its claim that KBR's FY 2007 subcontractor DBA insurance costs
are unallowable.

CONCLUSION

The Board grants appellant's motion to direct the governmentto file the complaint in this appeal. The government is directed to file the complaint no laterthan 30 days from the date ofthis opinion. Appellant's answer shall be due 30 days following receipt ofthe government's complaint.

Dated: 22 January 2015

(Signatures continued)

10I concur

Administrative Judge Acting Chairman Armed Services Board ofContractAppeals I concur

RICHARD SHACKLEFORD Administrative Judge Vice Chairman Armed Services Board ofContract Appeals

I certify that the foregoing is a true copy ofthe Opinion and Decision ofthe Armed Services Board ofContractAppeals in ASBCA No. 59557, Appeal ofKellogg Brown & Root Services, Inc., rendered in conformance with the Board's Charter.

Dated:

11 JEFFREY D. GARDIN Recorder, Armed Services Board ofContract Appeals