ARMED SERVICES BOARD OF CONTRACT APPEALS 

Appeal of -- ) 

) 

Accurate Automation Corporation ) 

) 

Under Contract Nos. NOOl 78-05-C-3049 ) 

N00024-07-C-4124 ) 

APPEARANCE FOR THE APPELLANT: 

APPEARANCES FOR THE GOVERNMENT: 

ASBCA No. 59727 

Jerome S. Gabig, Esq. 

Wilmer & Lee, P.A. 

Huntsville, AL 

E. Michael Chiaparas, Esq. 

DCMA Chief Trial Attorney 

Cara A. Wulf, Esq. 

Trial Attorney 

Defense Contract Management Agency 

Boston, MA 

OPINION BY ADMINISTRATIVE JUDGE THRASHER 

PURSUANT TO RULE 12.2 

This appeal involves a government claim to recover $53,788 paid to Accurate 

Automation Corporation (AAC) for labor hours which were found to be unallowable 

by a Defense Contract Audit Agency (DCAA) audit of AAC's final indirect cost rate 

proposal for the contractor's fiscal year (CFY) 2007 (proposal). The government 

asserts the claimed unallowable costs were billed to and subsequently paid by the 

government but never paid by AAC to the employee, i.e., that AAC never incurred the 

costs. AAC asserts that the costs were deferred compensation paid to the employee in 

a later year by issuance of AAC stock. AAC elected to proceed under the Board's 

Expedited Procedure (Rule 12.2). 1 The parties elected to decide the appeal on the 

record pursuant to Board Rule 11.2 Only entitlement is at issue. The Board has 

jurisdiction over the dispute pursuant to the Contract Disputes Act (CDA) of 1978, 

41 u.s.c. §§ 7101-7109. 

1 The Contract Disputes Act, implemented by Board Rule 12.2, provides that this 

decision shall have no value as precedent, and in the absence of fraud shall be 

final and conclusive and may not be appealed or set aside. 

2 The record consists of the Rule 4 file (tabs 1-29), exs. G-1 to -4, and ex. A-1. 
SUMMARY FINDINGS OF FACT 

1. This appeal involves AAC's performance of two Navy (government) Small 

Business Innovation Research (SBIR) contracts during 2007: Contract 

No. NOOl 78-05-C-3049, awarded on 11 April 2005 and Contract No. N00024-07-C-4124, 

awarded on 11 May 2007 (contracts). Both contracts were structured as 

cost-plus-fixed-fee (CPFF) contracts. (R4, tab 1 at G-1 to -6, tab 2 at G-44 to -46) 

Additionally, both contracts incorporated by reference Federal Acquisition Regulation 

(FAR) 52.216-7, ALLOWABLE COST AND PAYMENT (DEC 2002) (R4, tab 1 at G-23, tab 2 

at G-62). 

2. AAC is a closely held corporation involved in research and design related to 

robotics, unmanned systems and plasma research (R4, tab 3 at G-110). The president 

of AAC is Mr. Robert M. Pap (R4, tab 3 at G-114). On 20 November 2012 AAC 

submitted a revised, 3 certified, incurred cost proposal and related books and records 

for reimbursement of CFY 2007 incurred costs, which included payment of Mr. Pap's 

salary4 (R4, tab 3 at G-87; ex. G-3, Ritchey decl. if 11). On 25 February 2014, ACC 

submitted a revised proposal (final proposal) to correct various omissions in the 2012 

submission (R4, tab 3 at G-84). The final proposal section requiring disclosure of the 

compensation of the five highest compensated AAC executives includes a column for 

disclosing accrual of deferred compensation. That section of the disclosure is blank, 

indicating no deferred compensation was paid to Mr. Pap during 2007. (R4, tab 19 

at G-235) 

3. DCAA's review of AAC's direct and indirect labor costs identified the 

wages paid AAC's executives to be a high risk area because a prior year audit 

(CFY 2005) had also identified management employees' wages claimed by AAC but 

that had not been paid to the employees (ex. G-1, Black decl. iii! 3, 4). Mr. Pap 

responded to DCAA's draft audit of AAC's 2005 incurred cost proposal by a letter to 

DCAA and DCMA on 13 June 2008, addressing questions about unpaid wages akin to 

3 The record is unclear when AAC submitted its initial proposal. The final DCAA 

audit refers to its review of the "revised November 20, 2012" without reference 

to the initial proposal submittal (R4, tab 3 at G-84). However, the record 

indicates that in September 2011 DCAA informed the administrative 

contracting officer (ACO) that AAC had not yet submitted an adequate 

proposal (ex. G-3, Ritchey decl. if 3). 

4 Appellant's brief correctly notes that Mr. Pap was a salaried employee, not a wage 

employee (app. br. at 12, 14; see, e.g., R4, tab 19 at G-235). However, DCAA 

often refers to the labor hours claimed and reimbursed at issue in this appeal as 

"wages," as does Mr. Pap (see, e.g., R4, tab 10 at G-195-96). The distinction 

does not substantively impact the decision in this appeal. Therefore, I will use 

the terms interchangeably. 

2 
those questioned in CFY 2007. Mr. Pap indicated there was no AAC deferred 

compensation plan in place during 2005, 2006 or 2007, stating in relevant part: 

First, but not necessarily foremost, is your characterization 

of the unpaid wages (and related fringe benefits) referred 

to in your report as "Deferred Compensation". In 

virtually every definition I can find, deferred 

compensation refers to a plan for awarding employees. 

"Deferred compensation is an arrangement in which a 

portion of an employee's income is paid out at a date after 

which that income is actually earned. Examples of 

deferred compensation include pensions, retirement plans, 

and stock options. The primary benefit of most deferred 

compensation is the deferral of tax." There can be no 

question that the accrual (but not payment) of the subject 

wages was not done under a "plan" and the employees 

were not being awarded anything. They would have 

gladly taken the payment if the company could have 

afforded the cash to pay them. 

For the above reasons, I believe no adjustments should be 

made to the 2005 cost report as originally submitted. 

Additionally, the same situation exists in the 2006 and 

2007 cost reports for the same reason-wages were 

accrued for individuals performing labor on contracts and 

those wages have not yet been paid because of lack of 

funds with which to pay them. 

(R4, tab lOat G-195-96) (emphasis in original) 

4. A review of AAC's CFY 2007 records also identified claimed labor cost 

hours that appeared to have been worked by Mr. Pap but were not paid by AAC (R4, 

tab 3 at G-88). As a result, DCAA requested that AAC provide proof of payment (R4, 

tab 17 at G-212). 

5. AAC (Mr. Pap) made several responses to DCAA's request for proof. First, 

at a conference held on 21 January 2014, Mr. Pap confirmed there was no proof of 

payment because AAC had not yet paid him (R4, tab 13 at G-204). On 20 February 

2014, during a phone call where the unpaid wage issue was discussed, Mr. Pap 

informed DCAA that the wages had been paid because the IRS required him to pay the 

wages and that he had proof of payment (ex. G-1, Black decl. i! 5). On 11 March 

3 
2014, in a meeting with DCAA and DCMA where the issue of unpaid wages was 

discussed, Mr. Pap again referenced an Internal Revenue Service (IRS) audit and 

stated that the IRS had required him to pay himself and that he had proof of such. 

DCAA requested documentation of proof of anything that would support his statement 

that the liability had been liquidated. (R4, tab 21 at G-241; ex. G-1, Black decl., 6, 

ex. G-2, Lynam decl. , 7) 

6. During the 11 March 2014 meeting, Mr. Pap, for the first time, stated that 

he had been reimbursed for his work by receiving stock in lieu of salary and that he 

would provide DCAA with proof of such payment (ex. G-1, Black decl. , 6, ex. G-2, 

Lynam decl. , 6). DCAA received the promised supporting documentation of 

payment by email on 4 April 2014 which stated "[a ]ttached [are] the stocks certificates 

provided in lieu of pay in 2007 for the two employees as well as the IRS documents 

for 2007" (R4, tab 23 at G-278; ex. G-1, Black decl., 12).5 Pertinent to this appeal, 

there were four AAC stock certificates attached (numbered certificates C-3, C-4, C-5, 

C-6); three issued to Mr. Pap (C-4, C-5, and C-6) and one issued to Mrs. Pap (C-3). 

The face of the certificates includes a place for the date of issuance and three of the 

certificates were dated 16 December 2002 (C-3, C-4, and C-5). However, a certificate 

issuing 20,000 shares to Mr. Pap was undated (C-6). (R4, tab 23 at G-280-83) Also 

attached was a document indicating Mrs. Pap transferred 2,501,000 shares to Mr. Pap 

on 6 November 2008 (R4, tab 23 at G-284). 

7. AAC's responses did not persuade DCAA and, on 27 May 2014, DCAA 

issued a Form 1 informing AAC that $53,788 of its claimed CFY 2007 incurred costs 

($20,430 in wages, $22,398 in associated overhead expenses and $10,960 of G&A 

expenses) was found to be unallowable, per FAR 52.216-7, because these costs were 

billed to and subsequently paid by the government but never paid to Mr. Pap (R4, tab 3 

at G-118-19).6 

5 The IRS documentation consisted of documents from the IRS to Mr. Pap, but did not 

include cancelled checks or bank statements to show amounts drafted from 

AAC' s accounts to pay Mr. Pap. DCAA concluded that the IRS documents 

provided were not adequate support for Mr. Pap's assertion that the wages had 

been paid. (R4, tab 21 at G-241; ex. G-1 Black decl., 6, ex. G-2, Lynam decl. 

, 7) 

6 The DCAA audit actually reviewed three AAC contracts questioning $95,863 in 

direct labor costs that were not paid. However, $75,433 of the questioned costs 

was related to Contract No. N00039-0l-C-2206 which was closed by the time 

of the audit (R4, tab 3 at G-118). This appeal only addresses questioned costs 

related to other two contracts, Contract No. NOOl 78-05-C-3049 and Contract 

No. N00024-07-C-4124. 

4 
8. AAC responded to the DCAA Form 1 by letter on 5 June 2014 through its 

legal counsel stating "there is nothing in FAR § 52.216-7 which requires an incurred 

cost to be liquidated," and "Mr. Pap's deferred compensation has been liquidated" 

through AAC stock issued to Mr. Pap (R4, tab 5 at 4). Attached to the letter from 

AAC's counsel was a sworn declaration by Mr. Pap stating, among other things, that 

as president of AAC he made the decision not to pay himself the $20,430 so that AAC 

could pay suppliers and non-officer employees by electing to take the wages as 

deferred compensation on a later date. He also stated that he was later compensated by 

the company on or about July 2008 by AAC issuing him 20,000 shares of AAC stock. 

(Id. at 7) Also attached, in support of Mr. Pap's declaration, was the same stock 

certificate submitted earlier on 4 April 2014, the undated stock certificate (C-6) 

indicating transfer of 20,000 shares of AAC stock to Mr. Pap (id. at 8). 

Final DCAA Audit 

9. DCAA issued its final report, DCAA Audit Report, No. 1211-2007A10100001, 

dated 12 June 2014, (audit report) recommending the government disallow the questioned 

costs (R4, tab 3 at G-84 ). The audit repeated its initial finding that the labor costs found 

to be unallowable were claimed by and reimbursed to AAC but not paid (incurred) by 

AAC during CFY 2007 in violation of FAR 52.216-7 (id. at G-89-90). In addition, 

DCAA's audit of AAC's books and records failed to disclose any journal entries in the 

books and records indicating a deferred compensation plan was in place during CFY 

2007 (id. at G-88-90). Likewise, DCAA's audit of AAC's books and records failed to 

disclose any journal entries in the books and records at the time of the alleged debt 

liquidation as would be expected if the wages were liquidated by stock issuance (id. 

at G-89). 

10. On 8 September 2014, the contracting officer issued a final decision 

(COFD) demanding payment in the amount of $53,788 based upon the finding in the 

audit report (R4, tab 4). AAC appealed the COFD and elected the Board's Expedited 

Procedure (Rule 12.2) on 20 November 2014.7 The parties waived a hearing and 

elected to submit the appeal on the record under Board Rule 11 on 26 January 2015 

(Bd. corr. ltr. dtd. 26 January 2015). 

7 The effective date of the Rule 12.2 election was 10 December 2014, since the notice 

of appeal was misdirected by the USPS such that the Board received it on 

8 December and the election was stayed for two days to resolve a procedural 

matter. 

5 
11. AAC submitted a second declaration on 19 March 2015 that stated in 

pertinent part: 

Rather than have Accurate Automation perish from 

insolvency, in those years when Accurate Automation was 

not cash flow positive, I took deferred compensation. 

Although I cannot be more specific about the exact date 

that Mr. Bailey (representing Accurate Automation) and 

myself entered into the deferred compensation agreement, 

it happened long before 2007. 

(Ex. A-1, Pap decl. if 3) 

DECISION 

This appeal results from Mr. Pap's decision to forego a portion of his 

compensation for hours he worked during CFY 2007. There is no dispute Mr. Pap 

worked the hours or that he was not paid in CFY 2007 for the work. However, the 

parties differ over whether Mr. Pap was ever paid (i.e., after CFY 2007) for these 

hours and, if he was, whether the form of compensation meets the requirements of 

FAR 52.216-7. The government asserts Mr. Pap was never paid for the hours in 

question despite the fact AAC billed the government under the contract and was 

reimbursed for the hours. This, the government argues, violates the provisions of 

FAR 52.216-7 rendering the cost of these hours unallowable for reimbursement under 

the contract (gov't br. at 9-11). In contrast, appellant asserts Mr. Pap was reimbursed 

for these hours in 2008 by the issuance of shares of AAC stock as deferred 

compensation (app. br. at 18-19) This, appellant argues, meets the requirements of 

FAR 52.216-7(b)(l)(i) because it is an "other form of actual payment" and 

FAR 52.216-7(b)(l)(ii) because it authorizes reimbursement when there are labor 

"costs incurred, but not necessarily paid, for" as in this case were incurred in the form 

of a deferred compensation plan (app. br. at 18-19, 24). 

FAR 31.205-6, COMPENSATION FOR PERSONAL SERVICES, addresses the 

allowability of deferred compensation plans at subparagraph (k) and requires that the 

plan exist (be awarded) prior to or during the accounting period during which the work 

is performed. FAR 31.205-6(k)(2). Appellant makes several arguments why these 

costs are allowable because there was a deferred compensation agreement in place in 

CFY 2007 and the debt under that agreement was liquidated in 2008 by the issuance of 

stock. This, appellant argues, satisfies the requirements of FAR 52.216-7 and 

FAR 31.205-6 (app. br. at 18-35). I have reviewed and considered appellant's 

arguments and find them unpersuasive; appellant has failed to meet its burden of proof 

that such a plan was in place before or during CFY 2007 or that the issuance of stock 

evidences liquidation of AA C's debt to Mr. Pap. Appellant's only evidence of such a 

6 
plan are two sworn declarations submitted by appellant after the fact and an undated 

stock certificate. The two declarations, taken together, assert Mr. Pap entered into a 

deferred compensation plan by a verbal agreement with AAC (through its deceased 

chief financial officer, Mr. Bailey)8 sometime prior to 2007 and these specific hours at 

issue were reimbursed under that plan in July 2008 by the issuance of 20,000 shares of 

AAC stock (findings 8, 11). The only evidence proffered in support of its declaration 

regarding the liquidation of the debt is an AAC stock certificate that reflects issuance 

of 20,000 shares of AAC stock to Mr. Pap (id.). However, the stock certificate is 

undated and does not indicate on the face of the document why it was issued (findings 

6, 8). Likewise, there is no other evidence that indicates the date of the stock issue or 

connects the proposed certificate with liquidation of AAC's debt to Mr. Pap. 

In addition, the record is devoid of any contemporaneous evidence of a deferred 

compensation plan existing prior to or during CFY 2007. The DCAA auditors failed 

to find any indication that such a plan existed in AAC's books and records and 

appellant has not identified any such references. Additionally, AAC's final proposal, 

submitted in 2014, included a section requiring AAC to disclose the compensation of 

its five highest paid executives. AAC did not identify in that section that any deferred 

compensation was awarded to Mr. Pap; the deferred compensation column is blank. 

(Findings 2, 9) Likewise, DCAA's review of AAC's books and records failed to 

disclose any journal entries in the books and records at the time of the asserted debt 

liquidation (issuance of the stock) that the debt was liquidated (finding 9). If such a 

plan existed in 2007, even if verbal, and was liquidated in 2008, I would expect some 

reference to it to be included in appellant's final proposal and recorded somewhere in 

appellant's books and records. 

Furthermore, Mr. Pap's own statements contradict his declarations. DCAA 

noted and raised this same issue as a result of their review of AA C's 2005 cost 

proposal. Mr. Pap responded by letter in June 2008 specifically addressing the 

existence of a deferred compensation plan and unequivocally stated there was no 

deferred compensation plan in place in 2005, 2006 or 2007 (finding 3). When DCAA 

provided him an opportunity to provide proof of payment of the costs questioned for 

the same reasons in AAC's CFY 2007 proposal, his first response in January 2014 was 

that he had not been paid yet (finding 5). Appellant would now have us believe, 

contrary to his prior statements, that a plan did exist in 2007 and he was paid in 2008. 

I do not find this credible. 

Forgiveness of Indebtedness and Forfeiture 

Appellant argues in the alternative, the logical reason that there is no record of 

liquidation of the debt in AAC's books, ifthere was no deferred compensation, is 

8 Appellant states that Mr. Bailey died in July 2011 (app. br. at 2). 

7 
because the debt was liquidated by forgiveness of the debt. If the debt was forgiven, 

the costs would comply with FAR 52.216-7 and, thus, be allowable (app. br. at 35-36). 

Appellant fails to identify any evidence to support this hypothesis and I fail to find any 

in the record. Appellant also argues that to find these costs unallowable and require 

AAC to return the money it received would constitute forfeiture because the 

government has not been prejudiced (app. br. at 36-41). I disagree, the government 

has been prejudiced by AAC billing and being reimbursed for costs it did not incur. 

Consequently, I fail to find any basis that a ruling against appellant in this appeal 

would result in forfeiture. 

CONCLUSION 

For the reasons stated, this appeal is denied. 

Dated: 6 April 2015 

Administrative Judge 

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. 59727, Appeal of Accurate 

Automation Corporation, rendered in conformance with the Board's Charter. 

Dated: 

8 

JEFFREY D. GARDIN 

Recorder, Armed Services 

Board of Contract Appeals