ARMED SERVICES BOARD OF CONTRACT APPEALS 

Appeal of -- ) 

) 

Kellogg Brown & Root Services, Inc. ) 

) 

Under Contract No. DAAA09-02-D-0007 ) 

APPEARANCES FOR THE APPELLANT: 

APPEARANCES FOR THE GOVERNMENT: 

ASBCA No. 59557 

Jason N. W orkmaster, Esq. 

Raymond B. Biagini, Esq. 

Herbert L. Fenster, Esq. 

Erin B. Sheppard, Esq. 

McKenna Long & Aldridge LLP 

Washington, DC 

E. Michael Chiaparas, Esq. 

DCMA Chief Trial Attorney 

Srikanti Schaffner, Esq. 

Trial Attorney 

Defense Contract Management Agency 

Carson, CA 

OPINION BY ADMINISTRATIVE JUDGE O'SULLIVAN 

ON APPELLANT'S MOTION FOR AN ORDER DIRECTING 

THE GOVERNMENT TO FILE THE COMPLAINT 

Appellant Kellogg Brown & Root Services, Inc. (KBR) moves the Board to 

direct the government to file the complaint in this appeal. The government opposes. 

For the reasons that follow, appellant's motion is granted. The government is directed 

to file its complaint no later than 30 days from the date of this opinion. 

STATEMENT OF FACTS FOR PURPOSES OF THE MOTION 

Contract No. DAAA09-02-D-0007, known as the LOGCAP (Logistics Civil 

Augmentation Program) Support Contract, was awarded to KBR (then known as Brown 

& Root Services) on 14 December 2001 (app. supp. R4, tab 9 at 002). Pursuant to the 

contract, KBR and other contractors were tasked to provide selected services to 

commanders in support of military and non-military (humanitarian and other) operations 

(id. at 0058). The costs at issue in this appeal were incurred by KBR in its performance 

of numerous task orders issued to it under the LOGCAP contract (R4, tab 2). 

KBR was required by the contract, which incorporated Federal Acquisition 

Regulation (FAR) Clause 52.228-3, WORKERS' COMPENSATION INSURANCE (DEFENSE 
BASE ACT) (APR 1984 ), to provide workers' compensation insurance for its own 

employees and to flow down this requirement to its subcontractors (app. supp. R4, 

tab 9 at 040). Because it was responsible for ensuring that subcontractor employees 

were covered, and because the contract work was being performed in parts of the 

world where such insurance might not be easily accessible, KBR elected to provide 

Defense Base Act (DBA) insurance for its subcontractors to ensure compliance (app. 

supp. R4, tab 70, ex. A). Under this program, subcontractors provide KBR with 

estimated payroll for each subcontract enrolled into the program. A separate DBA 

policy is issued for each subcontract under the master policy. The subcontractors do 

not reimburse KBR for the premiums and do not include DBA insurance costs in their 

billings. KBR does not perform reviews of subcontractor payroll due to a lack of 

certified payroll availability, especially in the Middle East. Through 2005, KBR had 

provided insurance coverage to 94,405 subcontractor employees who were Third 

Country Nationals and 81,239 subcontractor employees who were Host Country 

Nationals. (Id. at 2298-99). 

KBR's FY 2007 incurred cost proposal was initially submitted on 30 June 2008 

(app. supp. R4, tab 91) and after several revisions, a final proposal was submitted on 

8 June 2012 (app. supp. R4, tab 102). The incurred cost proposal included the cost of 

subcontractor DBA premiums paid by KBR. 

On 9 May 2014, DCAA provided the draft results of the audit with respect to 

FY 2007 subcontractor DBA insurance to KBR via email (R4, tab 3). KBR formally 

responded to the draft results by letter dated 19 May 2014 (R4, tab 6). The audit 

report itself was finalized and issued on 30 May 2014 (R4, tab 7). 

The draft audit results and final audit report do not vary in any substantive respect 

on the issue of subcontractor DBA insurance costs. The final audit report states: 

We take no exception to the proposed premium 

rates used to calculate the subcontractor DBA insurance 

costs. During our examination of the subcontractor DBA 

insurance costs, the contractor stated it does not "true-up" 

subcontractor DBA insurance costs based on actual 

subcontractor labor. KBRSI asserts it does not have 

visibility of the subcontractors' actual payroll records. 

However, based on KBRSI's subcontractor DBA insurance 

policy, the insurance company had the rights [sic] to verify 

the subcontractors' remuneration. KBRSI was unable to 

confirm the insurance company (AIG) or insurance broker 

(Aon) verified the subcontractors' remuneration. 

2 
The contractor is in noncompliance with 

FAR 31.201-2( d) - Determining Allowability which states: 

A contractor is responsible for accounting for costs 

appropriately and for maintaining records, including 

supporting documentation, adequate to demonstrate 

that costs claimed have been incurred, are allocable 

to the contract, and comply with applicable cost 

principles in this subpart and agency supplements. 

The contracting officer may disallow all or part of a 

claimed cost that is inadequately supported. 

In addition, the contractor is in noncompliance with 

(i) FAR 31.205-19( d)(l) because it did not measure, 

assign, and allocate costs in accordance with 48 CFR 

9904.416, and (ii) CAS 416-40(b) because it did not 

allocate insurance costs to cost objectives based on the 

beneficial or causal relationship between the insurance 

costs and the benefiting or causing cost objectives. We 

separately reported this potential CAS 416 noncompliance 

in Audit Report No. 3321-2013H19200004, dated May 1, 

2013 (previously provided to your office). The resolution 

of this CAS 416 non-compliance is currently in process 

and will be processed in accordance with FAR 30.605. 

We question $33,851,898 by applying an audit 

calculated 43 percent decrement factor to the subcontractor 

DBA insurance costs of $78,725,344 proposed under GL 

Account No. 600106 - Insurance - Special Property 

Damage - Primary because the computation of 

subcontractor DBA insurance costs was not based on the 

actual subcontractor labor incurred during the year. Our 

decrement factor is based on subcontract Master 

Agreement GC02HU-VC-ML 5051 for the period October 

2006 to September 2007. 

In addition, there is an existing noncompliance 

with CAS 406.40(b), CAS 416.40(a) and (b), and 

CAS 416.50(b)(2) reported in Audit Report 

No. 3321-2007K19200001, dated April 20, 2009. The 

cited noncompliant practices relate to KBRSI immediately 

expensing DBA insurance premiums and allocating these 

expenses over open task orders (TOs) without regard to the 

3 
period of performance of the TO. The results of the Rough 

Order Magnitude (ROM) were issued under DCAA MFR 

3321-2011K49200901, dated February 3, 2012. The 

estimated impact of the noncompliant practice from Policy 

Years (PY) 2002 to 2009 is $34,422,957. The costs 

reported in this audit have not been impacted by this 

CAS 406/416 noncompliance because the CAS 406/416 

noncompliance and the resulting impact will be processed 

in accordance with FAR 30.605. 

(R4, tab 7 at 574-75) 

In the following section of the audit report, entitled "basis of Contractor's 

Cost," DCAA notes that the subcontractor DBA insurance premiums are based on 

estimated payroll of covered workers for the policy term (R4, tab 7 at 576). Further, 

DCAA notes that KBR is invoiced by the insurer quarterly based on said estimated 

payroll, and this premium amount is charged to open task orders at the time the invoice 

is received (id.). The audit report additionally notes that KBR's subcontractor DBA 

insurance costs are supported by "bordereaux" files 1 compiled using the DBA 

applications submitted by the subcontractors (id.). After the subcontractor's 

application is submitted by KBR to the broker, the broker returns a confirmation of 

coverage to KBRI who, in tum, provides it to the subcontractor (id.). Subsequently, 

the same estimated payroll amounts are used to allocate premium costs to the various 

Work Breakdown Structure (WBS) elements (id.). 

In the next section, entitled "Audit Evaluation," DCAA states that it was able 

to: (1) reconcile the proposed FY 2007 subcontractor DBA insurance cost to invoices 

received; (2) verify the installment payments made; (3) verify that KBR solicited 

adequate competitive quotes to ensure the premium was reasonable; and (4) verify that 

the proposed costs were supported by valid insurance policies (R4, tab 7 at 576). 

Finally, DCAA explains that it calculated the 43 percent decrement by 

examining one ofKBR's subcontract Master Agreements and comparing the 

"estimated DBA premium" per the Master Agreement (a premium amount calculated 

by multiplying the labor hours invoiced under the Agreement for the period October 

2006 to September 2007 by the Iraq/Kuwait premium rate) to the DBA premium 

amounts invoiced by the insurer and paid by KBR. (R4, tab 7 at 576-77) 

In its written response submitted 19 May 2014, KBR took issue with the audit 

report claim that it had not adequately accounted for the subcontractor DBA costs or 

1 According to KBR, bordereaux files list all sub-policies issued for a subcontractor's 

labor force and any changes to that labor force (R4, tab 6 at 479). 

4 
provided adequate documentation. It stated that it had provided "all pertinent 

documentation" including the paid invoices, the bordereaux files, the insurance 

policies, and the insurance renewal files, to support the premium pricing, and that 

DCAA had not questioned the cost based on lack of documentation. (R4, tab 6 at 4 79) 

KBR also disputed the allegations of CAS noncompliance, and asserted that the 

method DCAA used to calculate the 43 percent decrement was unreasonable for a 

number of reasons, including the fact that the decrement was calculated from a single 

Master Agreement yet applied to all costs incurred in FY 2007; moreover, DCAA was 

decrementing the actual total cost incurred and paid in FY 2007 using an estimate of 

payroll data from one master agreement. (Id. at 480) KBR pointed out that it had 

saved the government money by administering the DBA insurance between the 

subcontractors and the insurance carrier, as it would have been more expensive if the 

subcontractors had obtained and administered their own DBA policies (id. at 481 ). 

The record in this appeal reflects that DCAA was aware by 2007 that 

subcontractor DBA insurance premiums were based on estimated subcontract payroll 

and were not subject to retroactive adjustment based on actual subcontractor payroll 

costs. For instance, on 24 August 2007, DCAA's Gregory Hartsoe asked: 

Why are adjusting entries being made to policy 

8349311, 8 to 12 months after its coverage period closed? 

My understanding was that subcontract DBA was not 

subject to final payroll audit due to proprietary restrictions 

on subcontractor financial data. 

Additional data: Please provide the supporting premium 

calculation worksheets as previously requested. These 

worksheets should show the estimated subcontractor 

payroll and applicable premium rate applied. 

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

That is correct, however adjustments are not being made 

due to "actual payroll" submissions. Adjustments are being 

made [as] a result of amended applications correcting 

contract amounts, performance periods, possibly overlooked 

change orders, terminated contracts, etc - all for compliance 

reasons and record housekeeping. If this is a practice that 

needs to be discontinued, we need to discuss. 

5 
I am continuing to research the support behind the 

invoices, and will send you the data or updates as soon as I 

get information. 

(Id. at 23 78-79) In September 2007 this further email exchange took place between 

Mr. Hartsoe and Ms. Wilkerson: 

[DCAA:] Again, my understanding was that subcontract 

DBA policies were billed at estimated payroll amounts and 

never subsequently adjusted for actual costs incurred on 

the subcontracts. 

KBR RESPONSE: That is correct- as stated below, 

the adjustments are not for "actual payroll" but rather 

for amended applications. Examples include correcting 

contract amounts, performance periods, possibly 

overlooked change orders, terminated contracts, etc -

all for compliance reasons and record housekeeping. 

[DCAA:] Since this post close adjustment process seems 

to be a constantly recurring item, I would like detailed 

breakout of just what is being done on a recurring basis to 

cause such adjustments to be made for each quarter. 

KBR RESPONSE: Please reference reasons stated 

above -this would be on a subcontract by subcontract 

basis. New DBA applications are processed for each 

change in estimated payroll. For example, if a change 

order was issued that increased a scope of work 

requiring additional labor, the estimated payroll amount 

would increase, and the total DBA premium would have 

to be adjusted to cover these additional workers. 

Therefore, this detailed breakout would be at a change 

order level on a subcontract by subcontract basis. 

The record does not contain any indication that DCAA objected to the 

above-described quarterly adjustments to premium costs prior to the time KBR entered 

into the FY 2007 subcontractor DBA policy. Nor does the record indicate that DCAA 

objected to the clearly described practice of basing subcontractor DBA insurance 

premiums on estimated subcontractor payroll prior to the time KBR entered into the 

FY 2007 subcontractor DBA policy. In 2008, when the same DCAA auditor requested 

supporting documentation for FY 2007 subcontractor DBA insurance costs, he 

6 
specifically requested "listing of the subcontracts being covered and estimated payroll 

for the period for each" (app. supp. R4, tab 89 at 2617-18). 

KBR appeals from an administrative contracting officer's (ACO's) final 

decision, dated 26 June 2014, demanding payment of $33,851,868 in allegedly 

unallowable Defense Base Act (DBA) insurance costs billed to the government. The 

final decision sets forth the following as the sole basis for the demand: 

(R4, tab 8) 

This is my final decision asserting a Government 

claim for $33,851,868, pursuant to FAR 52.233-1, 

Disputes, due to the inclusion ofunallowable Fiscal Year 

(FY) 2007 direct costs claimed and billed to the 

Government. My decision was based on FAR 31.201-2, 

Determining Allowability, due to KBRSl's computation of 

subcontract DBA insurance costs claimed and billed under 

contract no. DAAA-09-02-D-0007. The cost billed was 

not based on actual subcontractor labor incurred during 

FY 2007. The following documents are referenced and 

relied upon in making this decision: 

(a) DCAA Audit Report No. 3321-2007K10100001 

dated May 30, 2014 

(b) KBRSl's response dated, May 19, 2014 

KBR argues that requiring the government to file the complaint in this case is 

warranted since the contracting officer's final decision only perfunctorily refers to 

FAR 31.201 and the fact that KBR' s billed subcontractor DBA insurance costs were 

not based on actual subcontractor labor, but does not provide any additional detail and 

does not specify what portions of the "referenced and relied upon" documents are 

relevant to the decision. KBR asserts that unless the government is required to file the 

complaint, it will have been excused from "having to proffer a basic legal and factual 

rationale for its demand of the significant sum at issue in this Appeal, resulting in a 

[KBR] complaint simply disagreeing with the bare-bones conclusions of the Final 

Decision and a Government answer simply denying these ... positions. Such pleadings 

would do little, if anything, to advance this Appeal." (App. mot. at 2-3) 

The government asserts in opposition to KBR's motion that: (1) the basis for 

the government's claim is evident from numerous communications that took place 

prior to the issuance of the ACO's final decision; (2) "KBR is well aware that the basis 

for the Government's claim is that KBR has failed to show that DBA premiums based 

on estimated, rather than actual subcontractor labor, are reasonable"; (3) it is KBR that 

7 
bears the burden of proving the claimed costs to be reasonable pursuant to FAR 

31.201-3(a); and (4) the facts bearing on the reasonableness of the claimed costs, i.e., 

"the information regarding the basis upon which the DBA insurance premiums were 

calculated and paid," are within KBR's possession and are not known to the ACO 

(gov't reply). 2 

DECISION 

Under the unique procedural requirements of the Contract Disputes Act (CDA), 

all claims, whether contractor or government claims, must be the subject of a 

contracting officer's final decision. 41 U.S.C. § 7103. The contractor, however, is the 

only party who may initiate proceedings at the Board, 41 U.S.C. § 7104, and Board 

Rule 6(a) requires the appellant to file the complaint in an appeal. If the contractor 

appeals from a final decision on a government claim, the contractor typically presents 

in its complaint enough information about the government claim to form a sufficient 

predicate for the government's answer and allow for adequate framing of the issues. 

Thus, the fact that the appeal involves a government claim is not enough, in and of 

itself, to justify requiring the government to file the complaint. 

In appropriate cases, the Board may exercise its discretion to require the 

government to file the complaint, if doing so will facilitate efficient resolution of the 

appeal. BAE Systems Land & Armaments Inc., ASBCA No. 59374, slip. op. 

(18 November 2014); Beechcraft Defense Co., ASBCA No. 59173, 14-1 BCA 

ii 35,592. Such situations can arise if relevant information concerning the basis for the 

claim resides with the government, not the contractor. In BAE Systems, for example, 

the contracting officer issued a "Defective Pricing Demand Letter" based on a DCAA 

audit report alleging defective pricing, but the demand letter did not purport to be a 

contracting officer's final decision. BAE filed a certified claim challenging the 

government's demanded price adjustment, and over a year later the contracting officer 

issued a final decision denying BAE' s claim. The Board granted BAE' s motion, 

noting that BAE's "claim" was more in the nature of a defense against the 

government's claim of defective pricing, and further stating: 

[T]he contracting officer's final decision does not explain 

in any depth why it rejected the contractor's arguments, 

except with occasional summary remarks. In these 

particular circumstances, proceedings would be more 

2 In addition to KBR's motion, the government's reply, and KBR's response thereto, 

KBR filed a Notice of Supplemental Authority referencing this Board's 

decision in BAE Systems, cited herein, and the government filed a reply to 

appellant's notice. All of these filings and the exhibits thereto have been 

considered by the Board in reaching its decision. 

8 
efficient if the Board could start with a government 

articulation of the basis for its determination of defective 

pricing, rather than appellant's speculation about the basis 

for the government's assertions. 

BAE Systems, slip. op. at 3 (citation omitted). In Beechcraft, the contractor appealed 

from a DCMA contracting officer's final decision finding its accounting practices 

noncompliant with Cost Accounting Standard (CAS) 402. The government 

acknowledged that the appeal involved a government claim, but argued that appellant 

was in the best position to assert facts establishing its compliance with the standard. The 

Board held that since the burden of establishing noncompliance was on the government, 

the proceedings would be facilitated by the government's filing an initial pleading setting 

forth the facts and rationale in support of its claim. 14-1 BCA at 174,395. 

In this case, the government has asserted that $33.9 million in subcontractor 

DBA insurance premium costs incurred by KBR in performing the LOGCAP contract 

are unallowable, yet it has not articulated a basis for its claim. The Board has 

examined the ACO's decision which does not explain the rationale for finding these 

costs unallowable. The final decision includes the summary sentence: "The cost 

billed was not based on actual subcontractor labor incurred during FY 2007" but does 

not explain why that fact, in the contracting officer's opinion, renders the costs 

unallowable. It is important to note the costs billed were KBR's actual incurred 

premium costs, as confirmed by the DCAA audit. 

The final decision also states that it references and relies on the DCAA audit 

report and KBR's response to that report. The Board has examined the audit report, 

which states that it is disallowing the costs based on KBR's failure to "true up" its 

subcontractor DBA insurance costs based on actual subcontractor payroll, and that this 

failure to "true-up" is a noncompliance with FAR 31.201-2( d), which requires 

contractors to maintain records sufficient to demonstrate that claimed costs have been 

incurred, are allocable to the contract, and comply with applicable cost principles. 

However, the audit report does not explain what significance, if any, actual 

subcontractor labor costs (even if such information were available to KBR) would 

have to the issue of the allowability of KBR's subcontractor DBA insurance costs, 

which were based on estimated subcontractor payroll and not subject to adjustment 

based on actual subcontractor payroll. 

The government argues that KBR is "well aware" that the basis for the 

government's claim is that "KBR has failed to show that DBA premiums based on 

estimated, rather than actual subcontractor labor, are reasonable;" that the burden is on 

a contractor to prove the reasonableness of incurred costs once challenged by the 

government; and that KBR, not the ACO, possesses the facts bearing on the issue of 

9 
reasonableness, i.e., "the information regarding the basis upon which the DBA 

insurance premiums were calculated and paid." But neither the ACO's final decision 

nor the DCAA audit report articulates a reasonableness challenge to KBR's incurred 

DBA insurance costs. To the contrary, the audit report affirmatively states that KBR 

solicited adequate competitive quotes to ensure the premium was reasonable, and the 

operative FAR provision on cost reasonableness, FAR 31.201-3, is not cited in either 

the audit report or the ACO's decision in connection with this issue. Moreover, the 

record would seem to indicate that DCAA, and therefore the government, received all 

the information it requested regarding "the basis upon which the DBA insurance 

premiums were calculated and paid." 

Finally, the government asserts that the basis for its claim is clear from "the 

communications between the parties" leading up to the issuance of the final decision 

on 26 June 2014. The Board has therefore examined all of the communications 

between the parties in the record before it. None of these communications articulates a 

basis for the government's claim. 

Simply stated, appellant should not have to speculate about the basis for the 

government's claim in its complaint. Thus, we find that proceedings in this appeal 

would be facilitated by the government's filing the initial pleading setting forth the 

basis or bases for its claim that KBR's FY 2007 subcontractor DBA insurance costs 

are unallowable. 

CONCLUSION 

The Board grants appellant's motion to direct the government to file the 

complaint in this appeal. The government is directed to file the complaint no later than 

30 days from the date of this opinion. Appellant's answer shall be due 30 days 

following receipt of the government's complaint. 

Dated: 22 January 2015 

(Signatures continued) 

10 
I concur 

Administrative Judge 

Acting Chairman 

Armed Services Board 

of Contract Appeals 

I concur 

RICHARD SHACKLEFORD 

Administrative Judge 

Vice Chairman 

Armed Services Board 

of Contract Appeals 

I certify that the foregoing is a true copy of the Opinion and Decision of the 

Armed Services Board of Contract Appeals in ASBCA No. 59557, Appeal of Kellogg 

Brown & Root Services, Inc., rendered in conformance with the Board's Charter. 

Dated: 

11 

JEFFREY D. GARDIN 

Recorder, Armed Services 

Board of Contract Appeals