ARMED SERVICES BOARD OF CONTRACTAPPEALS Appeal of

-- Kellogg Brown & Root Services, Inc.

Under ContractNo. DAAA09-02-D-0007

APPEARANCES FORTHE APPELLANT:

APPEARANCES FORTHE GOVERNMENT: ) ) ) ) ) ASBCANo. 58175

Jason N. Workmaster, Esq. Raymond B. Biagini, Esq. Alejandro L. Sarria, Esq. PatrickJ. Stanton, Esq.

Covington & Burling LLP Washington, DC

E. Michael Chiaparas, Esq.

DCMA ChiefTrial Attorney CarolMatsunaga, Esq.

SeniorTrial Attorney Defense ContractManagementAgency Carson, CA

OPINIONBYADMINISTRATIVE JUDGE SCOTT Kellogg Brown & Root Services, Inc. (KBR) appealed underthe Contract Disputes Act (CDA), 41 U.S.C. §§ 7101-7109, from the contracting officer's (CO's) final decision denying its claim for subcontractor costs and asserting an $11,483,487 claim against it for subcontractor costs the governmentpaidto KBRunder a task order (TO) issued underthe subject indefinite-delivery, indefinite-quantity (IDIQ) contractwiththe U.S. Army for logistical support. Previously, the Board denied KBR's motion for summaryjudgment that the government's claimwas time-barred by the CDA's six-year statute oflimitations and we granted the government's cross-motion for summaryjudgmentthat its claim was not time-barred, after a hearing on the motions. KelloggBrown &RootServices, Inc., ASBCA No. 58175, 15-1BCA135,988 (KBR IV). We denied KBR's motion for reconsideration as untimely. KelloggBrown &RootServices, Inc., ASBCANo. 58175, 15-1 BCA

## ,r 36,075. Thereafter, the Board conducted a hearing on entitlement and quantum. Forthe reasons that follow, we deny the appeal.FINDINGS OF FACT

The Contract, Task OrderNo. 59, and Regulations

1. Effective 14 December2001, the U.S. Army awarded the subject IDIQ contractto Brown & Root Servicespursuant to the Army's Logistics Civil Augmentation Program (LOGCAP). The contract (hereafter sometimes the "LOGCAPIII" contract) was a negotiated services type. It required KBR, among otherthings, toprovide combat services support, including dining facility 

### (DFAC) services, for overseas contingency operations. 1 TOs could be issued on a firm-fixed-price or cost-reimbursementbasis. On 1August 2003 the contract
was novatedto KBR, a subsidiary ofKellogg Brown & Root, Inc.2 (R4, tab 1 at 1; compl. and
answer

## 1 103)
2. The contract incorporated by reference the Federal Acquisition Regulation (FAR) 52.216-7, ALLOWABLE COST AND PAYMENT (MAR 2000) clause (R4, tab 1at 36), which provides in part: (a) Invoicing. The Government shall make payments to the Contractorwhen requested as workprogresses
...in amounts determinedtobe allowable by the [CO] in accordancewith Subpart 31.2 ofthe [FAR] in effect on the date ofthis contract[41andthe terms ofthis contract..

.. (b) Reimbursingcosts. (1) Forthe purpose of reimbursing allowable costs

...the term "costs" includes only-

(ii) When the Contractor is not delinquent in paying costs ofcontract performance in the ordinary course of business, costs incurred, butnot necessarilypaid, for-
(A) Supplies and services purchased directly for the contract and associated financing paymentsto subcontractors, providedpayments will be made1 A "contingency operation"refers to a military operation as defined inFAR2.101. 2 Therecord includes otheriterations ofthe contractor's name. Forease we use "KBR." 3 Support for this and other fact findings, regarding facts the parties have not disputed, is also found in theparties' motionpapers, cited in the Board's Statement ofFacts in KBR IV. Citations tothe motion papers are notrepeated here. 4 In this decision we apply the regulations in effect upon the date ofcontract award.

2(1) In accordancewith theterms and conditions ofa subcontract or invoice

.... 3. Thereferenced FAR Subpart 31.2 provides in part:
31.201-2 Determining allowability.
(a) The factors to be considered in determining whether
a cost is allowable include the following:
(1) Reasonableness.
(2) Allocability.
(3) Standards promulgated bythe CAS [Cost Accounting Standards] Board, ifapplicable; otherwise, generally accepted accountingprinciples and practices appropriate tothe particular circumstances.
(4) Terms ofthe contract. (5) Any limitations set forth in this subpart.

(d) A contractoris responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimedhave been incurred, are allocable to the contract, and comply with applicable costprinciples in this subpart and agency supplements. The [CO] may disallow all orpart ofa claimed cost which is inadequately supported.
31.201-3 Determining reasonableness.
(a) A cost is reasonable if, in its nature and amount, it does not exceedthat which would be incurred by a prudent person in the conduct ofcompetitive business

.... No presumption ofreasonableness shall be attached to the incurrence ofcosts by a contractor. Ifan initial review ofthe facts results in a challenge ofa specific costby the [CO] or

3the [CO's] representative, the burden ofproofshall be upon the contractorto establish that such cost is reasonable. (b) What is reasonable depends upon a variety of considerations and circumstances, including-
(1) Whether it is the type ofcost generally recognized
as ordinary and necessary for the conduct ofthe contractor's business orthe contractperformance; (2) Generally accepted soundbusiness practices, arm's-lengthbargaining, and Federal and State laws and regulations; (3) The contractor's responsibilities to the Government, other customers, the owners ofthe business, employees, and the public at large; and (4) Any significant deviations from the contractor's established practices.

4. The contract also incorporatedby reference the FAR 52.232-17, INTEREST (JUN 1996) clause (R4, tab 1 at 37), which provides in part: (a)

...[A]ll amounts that becomepayable bythe Contractorto the Governmentunderthis corttract.

..shall bear simple interest from the date due until paidunless paidwithin 30 days ofbecoming due. The interest rate shall bethe interestrate establishedby the Secretary ofthe Treasury as provided in Section 12 ofthe [CDA], which is applicable to the period in which the amount becomes due

..., andthen at the rate applicable for each six-monthperiod as fixed bythe Secretary until the amount is paid. (b) Amounts shall be due at the earliest ofthe following dates: (1) The date fixed underthis contract. (2) The date ofthe first written demand for payment consistentwiththis contract..

..

45. The LOGCAP III contract's Statement ofWork (SOW), attachment 001 to the contract, provided underparagraph 7.0, Government Directives and Applicable Documents:
7.1 General. The Contractor is obligated to follow and adhere to the Governing directives and applicable documents
as listed in the contract and the SOW. Supplements or amendments tothose documents shall be consideredto be in full force and effect upon receipt by the Contractor, except when such document is deemedto cause an increase or decrease in the cost ofcontractperformance. In such event, the Contractor shall inform the [CO] in writing priorto implementation ofsuch supplement or change. Ifapplicable, a negotiated change in contractprice shall be made to the mutual satisfaction ofboth the Contractor and Governmentprior to implementation ofthe change. (Bd. ex. 1at 28)

6. Attachment 002 to the contract, section H, Special ContractRequirementscontinued, provides in part at section H-13 Management:

The [CO] is the only authorized official who shall increase, decrease, or alter the scope ofworkto beperformed, and any orders orinstructions interpreted by the contractor as impacting the scope or cost ofthe contract.
The contractor shall comply, and shall ensure that all deployed employees, subcontractors, subcontractors['] employees, invitees and agents comply with pertinent Service and Department ofDefense directives, policies and procedures

.... (Bd. ex. 2 at 1)

7. Effective 13 June 2003 the Army issued cost-plus-award-fee TO No. 59 to KBR, for logistics and life support services necessary to support Operation Iraqi Freedom (OIF). The performanceperiod, as extended, expired on 30 April 2005. (R4, tab 2) Theprocuring contracting officer (PCO) from the Army's Support Command in Rock Island, Illinois (ASC), delegated administrative contracting officer (ACO) authority tothe Defense Contract ManagementAgency's (DCMA's) Command-San Antonio, which sub-delegatedthe authority to DCMAMiddle East. Underthe sub-delegation, the ACOwas to be co-located withthe contractor and to be its singlepoint ofcontact for all contract administration requirements under the SOW and othermission-relatedtasks. The delegated authority

5excludedtaking any action that involved changing the TO's value or the contract's performance period. (Supp. R4, tab 200 at 1, tab 201 at 1)

Site H-3, Subcontracting, Letters ofTechnical Direction, Modification No. 14

8. SOW, Change 5, incorporated into TO No. 59 by Modification (Mod.) No. 06, effective 3 October 2003, required KBRto provide DFAC services at over 25 Iraqi sites, including Qaiyara Mosul West, site H-3. The SOW, paragraph 1.0, providedthat services for each site were specified "in accordance with the site population." (R4, tab 3 at 63) For site H-3 the SOW specified a minimum of5,200 personnel. Under SOWparagraph 1.4, unless otherwise specified, all SOW increases, decreases or modifications were to be directed by the ACO. (R4, tab 3 at 55, 63, 95, see tab 4 at 106) Underparagraph H.8.1 of SOW Change 5, KBRwas to: [P]rovide, emplace, operate and maintain food service facilities, provide food service management operations to accommodate the base camp population, serving 4 meals per day IAW applicable Army regulations and the command's meal cycle for the area. (R4, tab 3 at 97) SOW Change 6 VI0.2 to TO No. 59, dated 3November 2003, reflected headcounts for DFAC purposes at site H-3 at two levels, 4,300 and 2,200, for a total of6,500 (app. supp. R4, tab 31 at 1522).

9. KBR first subcontracted for DFAC services at site H-3 with The Event Source. In early 2004, KBR solicitedbids for a replacement subcontract. (App. supp. R4, tab 29, subtabs B, C, see tab 100 at 2477, notes 1, 11) KBR and GulfCatering Co. (GCC) executed SubcontractNo. SK00425 (SK425) on 8February 2004. Itwas dated 5 February 2004 and effective on 14 February 2004. (R4, tab 4 at 101, 105, tab 17 at 421) Under the subcontract GCC was to prepare and serve an estimated 5,400 meals permeal period (fourper day) at site H-3. The performance period ended on 13 February 2005. The subcontracthad fixed monthly prices for the DFAC facility, daily laborrates, and monthlyprices for equipment at total estimated not-to-exceed (NTE) prices based upon the 5,400headcount. (R4, tab 4 at 105-06) If quantities were to "increase ordecrease for a sustained period," the charges could be adjusted within 10 days' notice by eitherparty (id. at 103). The subcontract stated:
NOTE: [GCC] will invoice and be paid for Actual Headcount only. The Projected Headcount section on the "Projected Daily Headcount Sheet and Actual Headcount" attachment is for planning and preparationpurposes only.

6The incorporated form entitled "Projected Daily Headcount Sheet and Actual Headcount" MUST be completed on a daily basis

.... Under a Subsistence Prime Vendor (SPY) program, GCC was to eliminate food costs on 5 April 2004. (Id.)

10. BG CarterHam, USA, who was the Commander, Headquarters, TaskForce Olympia, Mosul, Iraq, sent a memorandum dated 9 February 2004 to the Commander ofthe Combined Joint TaskForce 7, BG Scott West, USA, who was the director oflogistics for the combinedtask force, withtheater-level responsibility for all logistics operations in Iraq. BG West was responsible for oversight ofthe LOGCAP planning cell. (R4, tab 5 at 118; tr. 1/18, see tr. 1/33) BG Ham sought approval to increase headcount-based LOGCAP services at base camp H-1 and to decrease them at other sites, including H-3, due to population shifts from OIF 1to OIF 2 (R4, tab 5 at 118-19). The memorandum included headcounts that reflected the shifts. Except for H-1, the headcounts at each ofthe H sites, including H-3, were reduced. For H-3, the headcount was reduced from 6,500 to 1,422, a reduction of5,078-the largestreduction ofall ofthe H sites.5 The memorandum stated thatthe headcount generated by OIF 2 was "still not 100%"(id. at 118), and there could be adjustments at H-1 and H-2. There was no mention ofany anticipated adjustment atH-3. The memorandum statedthatthe cost impact wouldbe minimal as the request was to readjustresources, notto create additional requirements.

11. Effective 4 January 2004, stated to be in conformance with FAR Subpart 1.6, DCMA Iraq appointed Lt Col Russell J. Blaine, USAF,6 as a CO, to assume the duties ofan ACOunderFAR42.302 (with an irrelevant exception) and a DCMA Directive (supp. R4, tab 202). FAR 1.602-l(a), uponwhich KBRrelies, provides that COs may bindthe government onlyto the extent oftheir delegated authority. FAR42.302 lists numerous contract administration functions ofanAC0. 7 As one example, FAR42.302(a)(67) includes supporting the program, product andproject offices regardingprogramreviews, program status andprogramperformance. LtCol Blaine arrived in Iraq on4 January 2004. He served as the ACO and Commander, DCMANorthern Iraq and reportedto BG West. (Tr. 1/17-18)

12. KBRhas placedthe meaning ofcontract "value" at issue (see finding 7). In Lt Col Blaine's experience, the "value" ofa contract varies depending upon contract type. Firm-fixed-price contracts have a stated dollarvalue; cost-reimbursementcontracts have an

5 KBR contended in its claim that, at this time, the numberwas 5,400, not 6,500 (R4, tab 17 at 421), but 6,500 was a combined figure (see finding 8). 6 Lt Col Blaine retired from the Air Force in June 2009 andworked in the private sector as of the hearing (tr. 1/8, 15). 7 FAR42.302 refers to a "CAO" (contract administration office). See FAR42.301.

7estimated contract value-Le.,the estimated cost to perform the work; and negotiated contracts can be in a negotiated amountplus an award fee. TO No. 59 had a negotiated value ofapproximately $3 billion, plus 2 "incremental leaps," while Lt Col Blaine was the ACO. (Tr. 1/27) We accept Lt Col Blaine's assessment ofthe "value" ofTO No. 59 while he was the ACO.

13. By email of 17 February 2004, Lt Col Blaine sent "LETTEROF TECHNICAL DIRECTION 04-59-CJTF7-03, (H Site Planning Figures)" dated 15 February 2004, signed by him on 17 February (hereafter "February LOTD"), to James Ray, KBR's Director of Contracting, located at its Regional Support Office in Baghdad, Iraq. The email was copied to others, including U.S. Army MAJ Ramona McCaa. Under a six-month assignment beginning in November2003 MAJ McCaa served as the field ACO for the H sites. She was stationed at the Mosul Airfield in Iraq (after about a month's introductory period in Kuwait). (R4, tab 5 at 114; tr. 1/25, 28, 62, 75, 79)

14. The February LOTD referred to the LOGCAP III contract, TO No. 59 and BG Ham's 9 February 2004 memorandum, which it appended. The LOTD statedthat, in accordance with that memorandum, "KBRis requested to use the following planning figures for sites Hl through HS until further notice" (R4, tab 5 at 114) (emphasis added). The figures werethe same as those in BG Ham's memorandum, including 1,422 for site H-3. The LOTD statedthat:
The effect ofthis request is to change H 1from a site receiving SOWpara 8.20 services to a site entitled to SOW 8.0 services. Please begin providing para 8.0 level services to Site HI, and appropriately adjust the levels ofpopulation-based service dedicatedto sites H2-H5.l81 (R4, tab 5 at 114) The February LOTD stated thatthe governmentbelieved it was within the contract's scope; the cost impact should be minimal as services were "reallocated from shrinking sites" (id.); and KBRwas to submit, within five days, the increase or decrease in its original estimated cost, a schedule leading to the successful conclusion ofthe effort, proposedperformance criteria, and suggested changes to the SOW necessitated by the effort. The LOTD stated that KBRwas to contactLtCol Blaine for contractual questions. There is no evidence that KBRever contacted Lt Col Blaine with questions; or suggested that the February LOTD was not within TO No. 59's scope or changed its value; or that KBR submitted any increase or decrease in its estimated costs orproposed changes to the

8 The SOW Change 5 did nothave aparagraph 8.0 or 8.20. Accordingto Lt Col Blaine, the information was likely pulled from a planning document that the government had been working on with KBR (R4, tab 3 at97-98; tr. 1/48-49). Subsequently, Mod. No. 14 did contain those paragraphs (see finding 36).

8SOW as a result ofthe LOTD; or that KBRcontemporaneously questioned Lt Col Blaine's authority to issue the LOTD.

15. LOTDs were the vehicles the government frequently used to provide direction, includingplanning data, to KBR for in-scope contractrequirements. They were fairly commonly used under IDIQ contracts to adjust the level ofservice expected orprovided. LtCol Blaine testifiedthat, as ACO, he was authorized to issue LOTDs. (Tr. 1/26, 31) He could issue direction within the contract's scope but could not modify that scope. Formal modifications had to come from the PCO. (Tr. 1/47, 67)

16. Once Lt Col Blaine issued an LOTD, his ACOs in the field "worked these issues" for him (tr. 1/34). His expectation was that an LOTD would be carried out, unless there were questions. As he described it, "thatwas the precedent. Thatwas the way that we worked. In orderto achieve a lot ofthe things we were achieving that was the structure that
we used." (Tr. 1/35) The LOTD would issue and it would be executed unless there were questions. Ifthere were questions or challenges, he was in almost daily contact with his ACOs, including MAJ McCaa, and believed he would have heard somethingthrough the LOGCAP cell orthe ACO involved. He also had very close daily contactwith KBR, including with James Ray, Craig McGuiness, and JohnReddy. He did not recall anyone from KBR asking him about the implementation ofthe February LOTD. (Tr. 1/35-36, 67-68, 82-83)

17. As Lt Col Blaine described:

We also had a KBRplanning cell, a leadership echelon, at Camp Victory who we met with daily. Mr. James Ray, Mr. Craig McGuiness, we met with them daily and had many, many discussion[s] on
...the issues, the challenges of performing the work that was on contract, as well as the emerging requirements that we were reviewing, primarily driven from the transition from [OIF 1to OIF 2]. (Tr. 1/25) There was a lot ofconcern about the transition from OIF 1to OIF 2. According to Lt Col Blaine, BG West had mentionedthat it was "likely to be the most challenging logistical
maneuver in military history" (tr. 1/28). In Lt Col Blaine's view,
[The February LOTD] would not have caught [KBR] cold. This would have been provided to likely James Ray based upon what was weeks, perhaps months, ofpreparatory discussions aboutthis.
And it would have [been] shared with them that, based upon the likelihood bed-down concept ofthe incoming unit,

9(Tr. 1/30) there would be some increases in feeding data at certain sites and some decrement at others.

18. MAJ McCaatestifiedthat when she receivedthe February LOTD, she gave a copy to Gerald Warner, who was KBR's project manager for the Mosul area (see, e.g., R4, tab 17 at 447; tr. 1/84, 88, 2/62). MAJ McCaa discussed food quality at the DFAC sites with Mr. Warner but never discussed headcounts with him. She visited site H-3 but not too often due to the dangers oftravelling in the violent conditions then prevalent in Iraq. (See tr. 1/82)
19. Executing LOTDs was Mr. Warner's "numberone priority" (tr. 2/65). His testimony about whether he received the February LOTD was equivocal, buthe ultimately testified that he was sure thathe had received it (tr. 2/65-66, 69). This is supported by MAJ McCaa'stestimony that he asked herwhen the LOTD was to become effective-i.e., when the headcounts were going to decrease or increase-andthat she believes she told him that "wehave to wait until we get further clarification [from LtCol Blaine]" (tr. 1/86). Mr. Warner testified that she did not get backto him on this issue before he left in May 2004. There is no testimony orother evidence that Mr. Warner ever attempted to follow up with MAJ McCaa orthat he inquired ofLtCol Blaine aboutthe FebruaryLOTD,
as it directed regarding questions.

20. KBR's DFAC operations team used a requisition package to transmitheadcount informationpertaining to subcontractrequirements. 

### It would include the subcontract scope ofwork, which would include the headcount requirement. (Tr. 2/95) Mr. Warner was not aware ofany KBRrequisitionpackage issued to its procurement department directing them to use the 1,422 figure for site H-3 (tr. 2/67-68). Mr. Warnerwas not involved with KBR's subcontracts but he attributed the lack ofa requisitionpackage from KBRto its still being in the process ofdetermining whatpath to take. In testimony apparently based upon hearsay, which weakened its import, he stated thatthere were a lot ofdifferent sources of information about the status ofsite H-3, once listed as an enduring site, and who would be located there. This involved different changing numbers, includingthe new number 1,422. (Tr. 2/68-71)

21. Mr. Warnerhad no question aboutthe validity ofthe February LOTD. Hejust sought clarification. He neverreceived any direction from the governmentto provide for a different headcount at site H-3 than 1,422. (Tr. 2/70-71) When asked by government counsel whether KBR "could simply disregard the direction ofthe LOTD without consulting withthe government," Mr. Warnerresponded: "No, ma'am, absolutely not" (tr. 2/73).

1022. By email of22 February 2004, Roy I. Maggard II, identified as "Area Operations Manager, H Sites" for KBR's LOGCAP III contract9 and located at the same Mosul Airfield
as MAJ Mccaauntil July 2004 (tr. 1/93, 2/76-77), asked her:
[C]an you send me the LTD's from Dectill now orjust any that are outstanding. Withthat I will start tracking on [them and] ensuringthey get accomplished and will keep you more informed ofthe status on each. (R4, tab 17 at 444) MAJ McCaa testified that she gave Mr. Maggard "the LOTDS that I had," but she did not provide him with the February LOTD (tr. 1/92). Her allegedreasoning was:
A I did not give him [the February LOTD] because in my opinion they already had it. Q Andwhy did youthinkthey already had it?

A Because from the email I had

...James Ray was on there. Q And who is James Ray?

A

...He works for KBR. So, he would give things down to Gerald Warner.
And Gerald would discuss it and say, well, Ireceived this. Is this true? (Tr. 1/92-93) In context, we inferthat the email MAJ McCaareferred to was Lt Col Blaine's February LOTD to Mr. Ray and others. MAJ McCaa'stestimony concerningherreason for not providingthe February LOTD to Mr. Maggard in response to his request for outstanding LOTDs was not particularly persuasive and differs from herpriortestimony that she gave the February LOTD to Mr. Warner directly (finding 18). Regardless, she also pointed outthat she hadreferenced the February LOTD in LOTDs she had issuedherself, such as a 23 February 2004 LOTD to Mr. Warner (finding 24; app. supp. R4, tab 43 at 1896; tr. 1/99).
23. Mr. Maggard'sjob as KBR's operations manager for the H sites was to track KBR's requirements and services. He had no responsibility for subcontracts. Hisjob did not relate specifically to headcounts buthe received headcount information from time to time, including from any type ofgovernment change that issued and from working with the camp mayor. (Tr. 2/77-78, 82, 84) The term "mayor"referred to a camp's commander. Camp

9 Mr. Maggardhad a "Halliburton.com" email address.

11commanders were not COs and had no authority to modify contract requirements or to direct KBR. (Tr. 1/32, 41-43, 100-01) Mr. Maggard acknowledged contemporaneous receipt of the February LOTD, albeit apparently not from MAJ McCaa (tr. 2/79, 81). Thereafter, on a routine site visitto H-3 with MAJ McCaa and others, while there was no discussion about specific headcounts, Mr. Maggard recalled, in testimony reflecting double hearsay, to which
we give little weight, that some governmentpersonnel told the camp mayorthat they had heardthat headcounts were increasing rather than decreasing (tr. 2/79-80). Like Mr. Warner, Mr. Maggard was not aware ofany KBRrequisition package issued to its procurement department directing them to use the 1,422 figure for site H-3. He never asked MAJ McCaa ifthe February LOTD had been rescinded. Although he did not recall discussing the matter with her, Mr. Maggard did not recall having any concerns about whetherthe February LOTD should be followed regarding revising the headcounts at the H sites. While he was in Mosul,
no KBR official mentioned to him that there was any question about whetherthe February LOTD was defective. (Tr. 2/82-83, 85)

24. MAJ McCaa issued a subsequent LOTD dated 23 February 2004 to Mr. Warner providing that, in accordance with LtCol Blaine'sFebruary LOTD, KBRwas to use the statedplanning figures for site H-1 until further notice (app. supp. R4, tab 43 at 1896). The figures were the same as in the FebruaryLOTD. MAJ McCaa's LOTD added that "[s]pecifically, KBR is authorizedto provide, install and operate and maintain an additional food service facility for Hl" (id.). MAJ McCaa did not intend for this LOTD to rescind the February LOTD. It was to clarify the February LOTD. Mr. Warnernever inquired ofher abouther 23 February 2004 LOTD. (Tr. 1/87)

25. DCAA's Iraq Branch Office (IBO) issued a Memorandum for Distribution dated 25 February 2004 onthe subject "EarlyAlert on [KBR] DFAC Subcontracting Practices Relatingto [LOGCAP III]." The distribution list covered several DCMA and otheroffices, and included Lt Col Blaine. The memorandum's focus was upon KBR's use offixed-price subcontracts andbilling methodologies that might not be in the government'sbest interests. (App. supp. R4, tab 44)

26. In response to DCAA's concerns about subcontractpricing (below), in early 2004 KBR sent Charles Carr, a subcontract administrator and supply chain manager, among other things, to Kuwait to head up a "DFACTiger Team"to review KBR's subcontracts for DFAC services in Iraq and Kuwait (tr. 2/87, 88-89, 91-92). KBRtried to arrive at apricing structurethat would accommodate the ability to change the headcount for whichthe subcontractorwould getpaid. The team developed a new subcontract format involving pricing bands and differentpricing categories within the bands, which it discussed withthe PCO and DCAAby conference call in about March 2004. (Tr. 2/92-93) Mr. Carrwas not aware ofthe TigerTeam's everreceiving a KBRrequisition to change the headcount at site H-3 to 1,422. Mr. Carr opined that, although he thought it would be difficult, KBR mighthave been able to negotiate with GCC to lower its price to reflect lowerheadcounts. Henevertried to do so. (Tr. 2/100)

1227. Regardless ofMAJ McCaa's failure to include the February LOTD in response to Mr. Maggard's request for copies ofoutstanding LOTDs, KBRdoes not deny that it received the LOTD contemporaneously and we find that it did. This is evident from the hearing testimony cited above and corroborated by the fact that KBRincorporated the revised headcounts for each ofthe H sites listed in the February LOTD into revised requests for proposals, except for site H-3. By 12 March 2004 KBRhad awarded subcontracts, signed by Mr. Carr, for each ofthe other H sites. They provided for DFAC services for the camp populations listed in the February LOTD. (R4, tab 5; supp. R4, tabs 203-10)

28. On 8 March 2004 Lt Col Blaine emailed "LOTD 04-59-CJTF7-08, (DFAC Planning)" (hereafter the "March LOTD") to KBR's Contract Administrator, Troy Vesper, acting onbehalfofMr. Ray, and to governmentpersonnel, including MAJ McCaa (app. supp. R4, tab 49 at 1954-55; tr. 1/36). The LOTD, which referred to the LOGCAP III contract and TO No. 59, appended a 1March 2004 memorandum which included a spreadsheet of"the
new OIF 2 feeding requirement" (app. supp. R4, tab 49 at 1956) at 38 DFAC sites, including the H sites. The memorandum stated:
1. CJTF-7 population has shifted and requires an evaluation of current feeding capacities to revise DFAC requirement under [TO] 59. This review ofOIF 2 population for each site will need to be validated by the MSC G4 and separate S4 staff. Once validated, adjustmentto current LOGCAP services will be changed to meet the requirements. MSC was taskedto highlight unit andpermanentpopulation count for both temporary and enduring camps in orderto validate feeding requirement for OIF 2.

2. The following spreadsheet is the new OIF 2 feeding requirementthat resulted from FRAGO 288 and will need approval priorto issue to change-LOTD. (App. supp. R4, tab 49 at 1956) The spreadsheet listed the OIF 2 requirement at site H-3 as 1,422, the same as in the February LOTD (id. at 1957). BG West signed the memorandum as approved (id. at 1956).
29. Lt Col Blaine's March LOTD stated:
1. This memoprovides information to assist KBR in determining DFAC headcountplanning. The attached
memo was signed by BG West, CJTF-7 C4. KBRis requested to acknowledge thatthe numbers provided are an estimate, and that KBR's on-site management staff

13should continue to coordinate closely with camp mayors to obtain the most accurate current headcount. Only through close coordination with the mayors can KBR
ensure they have reasonable estimates for meal preparation, mermite preparation, satellite headcount, and seating needs.
(R4, tab 49 at 1955) The LOTD added that the governmentbelieved the action was within the contract's scope and that, as the OIF 2 footprint decreased, and with the advent ofthe SPV program, the overall estimated contract cost should decrease. The LOTD providedthat KBR
was to contact LtCol Blaine ifthere were questions or concerns. The March LOTD did not rescind the February LOTD. (Tr. 1/88-89)

30. Mr. Carrrecalls receiving the February LOTD and believes he saw it in February 2004. Hewas not concerned whether it should be followed. He did not believe that the March LOTD had any effect upon the February LOTD. (Tr. 2/102-03, 105)

31. There is no evidence that a camp mayor everpurportedto direct KBRto change the February or March LOTDs' 1,422 headcount for site H-3 orthat KBR ever questioned Lt Col Blaine aboutthe 1,422 headcount for H-3 directed in those LOTDs.

32. The February and March LOTDs did not mention subcontractpricing. Lt Col Blaine and MAJ McCaa did notknow anything about KBR's subcontractpricing at the time ofthe LOTDs. (Tr. 1/59-60, 95)

33. On 10 April 2004, KBR and GCC executed Change OrderNo. 1to SK425, due to the SPV program, underwhich food at DFAC facilities was tobe providedby a contractor under direct contract with the government. The change reduced the NTE value ofDFAC operations at site H-3 by $3,003,518. Among otherthings, it revised meal prices to reflect actual days ofservice and implemented a new pricing structure to correspond with two stated camp population ranges: 4,501-5,500 and 5,501-6,500, referred to by the parties as "headbands." Change OrderNo. 1did notprovide pricing for orrefer to the February and March LOTDs' 1,422 figure for site H-3. The new pricing methodology was applied retroactively to subcontract inception. (R4, tab 6 at 120, 124; app. supp. R4, tab 29, subtab 

### I at 876-79)
34. The average headcount at the DFAC at site H-3 during March 2004 was 812; during April 2004 itwas 847; during May 2004 it was 1,119; during June 2004 it was 1,259; for July 2004 through 13 February 2005 it ranged from 1,278 to 1,844; and for 14 February 2005 through 30 April 2005 it ranged from 1,844 to 2,353. KBR, along with the government and GCC, signed rosters showing the actual headcount for each meal at site H-3 during these periods, such that KBRwas aware ofthe actual headcounts. KBRnonetheless paid its

14subcontractor GCC for a camp population of5,400 throughout these periods. (Gov't undisputed proposed fact findings (PFF) Nos. 13, 17, 19, 22, 24 with record citations)

35. On or about 24 April 2004 MAJ McCaa and KBR discussed a "Contract Compliance Analysis H-Sites" schedule. MAJMcCaa did not prepare the schedule and she was not sure who had. Section 8.0 ofthe schedule was entitled "BASE CAMP SUPPORT SERVICES MORE THEN [sic] 1,800 HEAD COUNT." Subsection 8.17
was entitled "DINING FACILITY (DFAC) OPERATIONS: Appendix B." Site H-3 was identified as "In Compliance." MAJ McCaa informed KBRthat she agreed with the information in the schedule, includingthe "In Compliance"reference. (R4, tab 17 at 459-60; tr. 1/90-91) However, she testified that her agreement was not based upon headcounts, but upon food policy. When she was discussing the schedule with KBR, MAJ McCaa did not question the identification ofsite H-3 as a camp with more than a 1,800 headcount. She did not know the headcounts at the DFACs orthe headcounts that KBRwas asking its subcontractors to serve and she did not discuss headcounts with anyone at KBR at thattime. MAJ McCaa never saw a DFAC subcontract, DFAC subcontract invoice, or KBR invoice. (Tr. 1/91-92, 98)
36. Mod. No. 14, signed and effective on 11 May 2004, 10 incorporated SOW Change 7 V3 into TO No. 59 (R4, tab 7 at 130). Underparagraph 8.17, "DINING FACILITY (DFAC OPERATIONS)," Change 7 stated:

8.17.1. The contractor shall provide, install, operate and maintain food service facilities (IAW Appendix B, this SOW) to accommodate the permanent and transient base camp populations, serving 4 meals per day IAW applicable Army regulations and the command's meal cycle for the area. (Id. at 144) The referenced Appendix B gave a headcount of 1,422 for DFAC services at site H-3, the same figure as in the February and March LOTDs (id. at 153). Change 7 included a paragraph 8.0, "BASE CAMP SUPPORT SERVICES," which provided that "[u]nless otherwise statedwithin each paragraph below, the contractor shall establish the following services at all base camps except those that contain permanentparty headcounts ofless than 1800 personnel (see paragraph 8.20)" (id. at 142). The referencedparagraph 8.20, "TEMPORARY BASE CAMPS WITH LESS THAN 1800 PERMANENTHEADCOUNT," providedthat "[t]he following services and service scope applies to Temporary Base Camps

10 The SOW Change 7 incorporated into Mod. No. 14 is dated 14 November 2004 (R4, tab 7 at 138). Lt Col Blaine described this a "disconnect" and believedthe 11 May 2004 date
was correct. Herecalled working with the LOGCAPplanning cell on the changes in connection with OIF 2 when he was in Iraq. (Tr. 1/54) This is substantiated by the fact that, priorto being incorporated into Mod. No. 14, SOW Change 7 was dated 14 November 2003 (see app. supp. R4, tab 33).

15in Iraq with a permanentheadcount ofless than 1800 personnel" (

### id. at 146). The listed services did not include maintenance ofa DFAC. Site H-3 was described as "NoLonger Enduring" (id. at 151). According to Lt Col Blaine the matters contained in Mod. No. 14
were all discussed inplanning meetings with all parties involved. He explainedthat "enduring camps were those that would get robust facilities and wouldbe beefedup" (tr. 1/56). Non-enduring camps were notthere "forthe long haul" but, for cost and service efficiency reasons, the government did notwantto shut down DFACsthatwere already in existence. An established DFAC would not be tom down but no more "robust services" wouldbe added to it. (Tr. 1/57)

37. KBR issued more change orders to SK425 between June 2004 and 14 March 2005, to add funding and extendperformanceto 15 June 2005. It did not adjustthe DF AC services at site H-3 to apply the 1,422 figure called for by the February and MarchLOTDs and Mod. No. 14 or adjust or create a headbandto accommodate that figure. (R4, tabs 8, 10-11, 13)

38. We find thatthe weight ofthe hearing testimony, cited above, not only from Lt Col Blaine and MAJ McCaa, but from KBR's witnesses Messrs. Warner, Maggard and Carr, was thatLOTDs were directives by the ACOs to be followed by KBR.

39. There is no contemporaneous written explanation for why KBR did not implementthe February LOTD regarding site H-3, which was bindingupon it. Even ifthe LOTD had not been binding, there is no contemporaneous documentary or other evidence that KBR applied reasonable businessjudgment in failing to follow theLOTD. Well after-the-fact hearingtestimony from KBRwitnesses 

### Mr. Warner and

### Mr. Maggard about the allegedly changing status ofsite H-3, which was diminished by its hearsay nature, was unpersuasive, especially giventhat KBR did not inquire ofLt Col Blaine aboutthe issue (findings 19-20, 23, 50). We find that KBR's costs incurred in excess ofthe amount it would have incurred had it compliedwiththe February LOTD were unreasonable.

40. Effective 1May 2005, ASC issued cost-plus-award-fee TO No. 89, in the amount of$4,972,882,216, to KBR, withperformancethrough 30 April 2006, for DFAC services at several sites, including H-3, where the headcountwas listed at 5,000 (R4, tab 12 at 255-56, 290-91).

41. On 10 June 2005 KBR and GCC executed Change OrderNo. 8 to SK425, which, 

### inter alia, funded additional reefer (refrigerator (tr. 2/28)) storage and revisedthe subcontract'spricing structure, providing monthly rates for a single headcountband of 4,500 to 5,501 (app. supp. R4, tab 29, subtab G at 593-94).

42. KBRpaid GCC a total of$33,234,684.74 in SK425 costs; the governmentpaid KBR for all ofthose costs (R4, tab 15 at 397-98; app. supp. R4, tab 29, subtab I at 774; gov't PFF No. 30).

1643. KBR acknowledged in KBR IVthat it "did not reduce costs to correspond with the reduced headcount planning figure for Site H-3"; fixed pricing for categories and headcount ranges continued through the life ofthe subcontract; and "SK425'spricing was neverbased on actual headcounts orthe 1422 planning figure ofthe February 17, 2004 e-mail" (the LOTD). KBR IV, 15-1 BCA

### ,i 35,988 at 175,816 (Statement ofFact (SOF) 

### ,i 7).

DCAA Audits

44. Beginning in or around 2004 the Army, DCMA and DCAAbecame concerned with KBR's DFAC-related subcontractpricing methodology, including subcontractors' alleged overbilling for headcounts that substantially exceededthe actual populations served. Auditing matters and reports continued into 2011. See KBR IV, 15-1 BCA 

### ,i 35,988 at 175,816 etseq.
45. By letter of 12 October 2007, U.S. Senator Claire McCaskill askedthe Department ofDefense's ChiefFinancial Officerto respond to concerns expressedto the Senatorby James Ransburg. Mr. Ransburg had formerly worked for a consulting company hired by KBR. Beginning in May 2005, he had performed contract analysis and closeout in connection with KBR's OIF work. He alleged that, bythe time he departed in August 2005, he had examined a portion ofKBR'sFY 2004 expired DFAC subcontracts and had found that about 85% ofthem had been mismanaged, resulting in excess of$50 million in overpayments and funding. He was concerned thatthis was a systematicproblem occurring throughout the DFAC subcontracts for FYs 2003-2006. (App. R4 hearing supp., tab A-11) See KBR IV, 15-1 BCA 

### ,i 35,988 at 175,820, SOF 

### ,i 33.

46. KBR alleges that DCAAwas unduly influencedby SenatorMcCaskill's letter;
was concernedwith impressing Mr. Ransburg; and rushed to respondtothe issues raised, thus sacrificing independence and impartiality (app. br. at 35-36). We have reviewed the record as a whole, includingthe portions citedby KBR, and we find that its allegations are not supported by substantial evidence.

47. George Duggan, a seniorDCAA auditor, went to Iraq in February 2007 to work
on open DFAC audits. He began an audit ofSK425 after learning in March 2007 about potential overbilling under another subcontract from a KBR subcontract managerwho referred him to Mr. Ransburg. See KBR IV, 15-1 BCA

### ,i 35,988 at 175,820, SOF 

### ,i 33. By email of5November 2007 to DCAA IBO auditorJames Minic, Mr. Duggan statedthat Mr. Minic needed to look out for LOTDs in KBR's subcontract files "because ifthe government directs [KBR] to adjust its SOWheadcounts down and they do not, then there exists a good chance thatthe subcontractor over-billed" (app. R4 hearing supp., tab A-25 at 5602). Mr. Duggan also noted that he had asked DCAA management in May 2007 to get the DCMA Commander at Camp Victory "toexplain more completely what an LOTD
means
- is it suggestive ormandatory?" but he had not yethad a response (id.).

1748. On 16 November 2007 DCAA's IBO issued a draft Statement ofCondition and Recommendation (SOCAR) to KBR, which reported that KBRhad overbilledthe government for SK425 under TO No. 59, in 2004 and 2005 in the total amount of $11,990,181, contrarytothe Allowable Cost and Payment clause and FAR 31.201-3, Determining reasonableness (R4, tab 14 at 388). The draft SOCAR stated in part:
Actual average monthly headcounts recorded for DFAC services from the beginning ofthe subcontract, in February 2004, through June 2005 were all below the [SOW] headcount of5,000, with the highest count at 2,647 and the lowest at 812. For all buttwo ofthe seventeen months ofthe subcontract period ofperformance the subcontractpricing table did not include lowerheadcountbands that would have accommodated the actual lower monthly headcounts. Nor did [KBR] revise the subcontractpricing tables until subcontract change order no. 6, dated March 15, 2005. Yet, according to [consultant Ransburg], as stated in his subcontract analysis memorandum, dated June 19, 2006, [the February LOTD] directed [KBR] to use 1,422 as the average headcount for this subcontract.

[KBR] should comply with the FARcites identified above and issue a creditto the government for the amounts of unreasonable costs explicated above and detailed in the attached schedules. (R4, tab 14 at 389) DCAA IBO calculated the questioned costs by using two government-created headcountbands of500 to 1,500 and 1,501 to 2,500 (id.; app. undisputed PFF No. 37). The reported average headcounts from 14 February 2004 through April 2005, priorto TO No. 89, ranged from 812 to 2,339 (R4, tab 14 at 390-94).
49. By letter of9 July 2008, KBRnotified Kristan Mendoza, PCO at ASC, ofa billing adjustment under SK425, affecting TO Nos. 59 and 89 and resulting in a $9,406,108.34 creditto the government. KBRreported that it had billed $33,234,684.74 to the government, when it should have billed $23,828,576.40 in light ofthe February LOTD. (R4, tab 15 at 396-97) Ofthe $9,406,108.34 credit, $8,953,783.34 applied to TO No. 59 and $452,325.00 applied to TO No. 89 (id. at 401). KBR's letter and attachments contained billing and credit calculations. KBR stated that it had advised ASC, DCMA and DCAA in late 2007 that it had initiated a review ofDFAC subcontracts in Iraq due to questions DCAA

18had raised in various requests and reports and the credit was the result ofKBR's analysis (id. at 397). KBR explained and qualified the credit as follows:

On February 17, 2004, DCMA Northern Iraq issued [an LOTD] that reduced the estimated headcount (HC) for dining facility services at site H-3

.... KBR inadvertently did not considerthe impact [of] this LOTD in the context ofunique language in [SK425], which allowed KBRto reduce the monthly price for labor and equipmentwhen a sustained HC reduction occurred. Similarly, KBRnegotiatedprices for consumables and support services (sewage and garbage), which were added to [SK425] after the LOTD had been issued, based upon the initial HC estimate. The adjustment in billings equals what [SK425] prices should have been for labor, equipment, consumables and support services as a result ofthe LOTD.

KBR's review to date supports the appropriateness ofa credit in the amount identified above. KBR, however, has not completed its review ofall relevant facts. Should the review uncover facts thatreveal that no credit is required or that the amount identified above is too high ortoo low, 

### KBR reserves the right to either eliminate the credit orto adjust the amount ofthe credit.
(Id.) KBR explained in support ofits creditthat it had awarded SK425 to GCC on 8February 2004 based upon an estimated headcount of5,400 at site H-3. The subcontract providedthat labor and equipmentprices were subjectto adjustment for a "sustained increase or decrease" in headcount, but after DCMA issued the February LOTD reducing the headcount for site H-3 to 1,422, KBR did not exercise its contractual right to reduce those prices. Moreover, when it negotiated Change OrderNo. 1to the subcontract, effective 10 April 2004, newprovisions for consumable and support services were priced based upon the original 5,400 headcount and not the LOTD's 1,422 headcount. KBR stated that it had not substantiatedthat its lack ofadjustment to the February LOTD was in accord with "reasonable businessjudgment" and, until it did, it was crediting the government with any amounts that could not bejustified. (Id. at 398)
50. Despite KBR's use ofthe term "inadvertent" in its credit letter to the government, KBRnever substantiatedthat its failure to follow the February LOTD was a mistake. It also never substantiated that it was an exercise in reasonable businessjudgment. The after-the-facthearsay testimony ofMessrs. Warner and Maggard implied that KBR decided not to follow the February LOTD based upon the government's alleged shifting considerations regarding site H-3. We give this testimony, uncorroborated by any

19contemporaneous or documented evidence, little weight. While we recognize that populations at various sites did shift during the wartime environment, which was challenging, after the February LOTD issued, the government repeatedly gave 1,422 as the population figure KBRwas to use regarding that site (findings 28-29, 36). Further, KBR
never inquired ofLt Col Blaine about the February LOTD, which the LOTD had directed it to do in case ofquestions (findings 14, 39).

51. DCAA's IBO issued an assist audit report on 29 September 2008 on KBR's FYs 2004 and 2005 DFAC procurements under LOGCAP III, TO Nos. 59 and 89, and SK425. 

### It found that some subcontract costs were billed, and KBRpaid, for headcounts exceeding actual headcounts that used DFAC services. (R4, tab 16 at 402-03) The stated significant issues with subcontract billings were that (1) KBR overpaid for DFAC services because GCC billed using prices and headcount bands that did not comportwith the actual number ofpersonnel using the DFAC services and (2) KBR did not include headcount bands in its DFAC subcontractpricing schedules that would have covered the lower monthly headcounts actually experienced (id. at 403-04). DCAA found that KBR
was billed $12,202,051 for SK425 costs that were not billed in accordance with subcontract terms, as requiredby FAR 31.201-2, Determining allowability, and for other costs that were unreasonable, as defined in FAR 31.201-3, Determiningreasonableness. DCAA statedthat "[o]urreview ofthe contractor's methodology to computethe [$9,406,108 creditto the government] disclosed that it uses the same basic methodology that we used and essentially confirms the majority ofour questioned cost." (Id. at 405) DCAA concluded thatthe major difference between KBR's $9.4 million credit and DCAA's $12.2 million computation was that KBR developed newheadcount bands solely for the purpose ofcomputingthe credit, but that actual billings had been based upon multiplying the unitprice for the particular cost category (e.g., labor, equipment, etc.) by the highestheadcount in the applicable range in the subcontract's pricing schedule, 4,501-5,500, regardless ofthe actual headcount (id. at 405,408). DCAA also questioned consumable and sewage/garbage prices as unreasonable because KBRpaid the prices for a headband of4,501-5,500 despite lower average headcounts (id. at 409, 412-13). For consumables, power generation, reefers, and sewage and garbage, DCAA applied "regression analysis" using SK425'spricing tables to determine what it considered to be a more representative headcount band range (id. at 409, 414-15; app. R4 hearing supp., tab A-28 at 5829-51, 5884; tr. 2/23-26; see R4, tab 6 at 124). The audit report did not address potential GCC demobilization costs that KBR mighthave incurred had the scope ofSK425 beenreduced in the spring of2004. Those costs were charged separately by GCC. (Tr. 2/52)
52. The 2008 assist auditreport did not rely upon ormention the February or March LOTDs. Accordingto DCAAregional audit managerJoann Niebruegge, who signedthe report, at the time the report was issued her audit team did not have an LOTD. The audit does not address the requirements ofTO Nos. 59 and 89. (R4, tab 16 at 416; tr. 2/8, 30)

2053. By letterto CO Mendoza dated 11 February 2010 on the first page and 19 February 2010 on all subsequentpages, KBR submitted a CDA claim, certified on 19 February 2010, to recover its $9,406,108.34 credit, plus interest (R4, tab 17 at 420-32). 

### It asserted that it was entitled to reimbursement for its reasonable, allowable, and allocable LOGCAP III costs underthe contract's Allowable Cost and Payment clause. KBR contended that, upon further review, its failure to reduce the headcount capacity at site H-3 under its subcontract was consistent with reasonable businessjudgment. KBR stated that, when SK425 was awarded, the SOW then in force specified a headcount at site H-3 of6,500 plus a satellite DFAC for 800 and that, under TO No. 59, KBRhad to be ready to meet headcount surges. KBRcontendedthat, while Change OrderNo. 1to SK425 was effective
on 10 April 2004, whichwas after the February LOTD, the LOTD had described the 1,422 headcount as a planning figure. KBR alleged that, during the transition from OIF 1to OIF 2, the government had issued conflicting directions regarding headcount requirements at Iraqi sites; the March LOTD effectively rescinded the February LOTD; and KBRwas now directed to obtain its DFAC headcounts from camp mayors. (R4, tab 17 at 422) KBR stated that there had beenno formal change to TO No. 59'sheadcount as of 10 April 2004 causing
an uncertainty thatrequired KBRto exercise businessjudgment and rendering SK425's Change OrderNo. 1price reasonable. KBRclaimed that, as of24 April 2004, the H site ACO (MAJ McCaa) had confirmed that it was providing DFAC services in accordance with TO No. 59's SOW. The contractor further alleged that, beginning in March 2004 and continuing through the end ofSK425, site H-3's maximum average daily headcount grew from 812 in March 2004 to 2,647 in June 2005 and that, as ofApril 2005, TONo. 89's SOW contained a headcount of5,000. Thus, the trend was upward despite the February LOTD. KBR also raised a number ofalleged problems with modifying its subcontract and contended that there would be little practical orcost benefit to the government in doing so. Lastly, KBR alleged that its subcontractor costs were reasonable because they did not result from gross disregard ofits requirements under the LOGCAP III contract. Rather, even ifthe H-3 headcount and SK425 price should have been adjusted downward, KBR's subcontract administrators had simply made a mistake in failing to do so.
54. By letterto KBRof 18 June 2010, ACO Antonio James stated that KBRhad advised him that it intendedto bill for the claimed amount. He stated thathe concurred with this process, it should resolve the claim, and he would defer issuing a final decision. (App. supp. R4, tab 78 at 2352) On 29 July 2010 KBR submittedvouchers for the amount ofthe withdrawn credit, which the government approved on about 10 August 2010. 

### It applied the amount against alleged KBRdebts to the government. (See R4, tabs 19-20)
55. On 26 August 2010 KBRadvised the ACO that it was treatingthe government's acceptance ofits vouchers as a final determination that it was entitled to the $9,406,108.34 claimed amount and, ifits understanding were correct, it would forego its interest claim (R4, tab 20). On 6 October 2010 the ACO responded that the government had made no determination regarding the allowability ofSK425 costs submitted; it disavowed any representation thatpayment ofKBR's interim voucher was a final determination that it was

21entitled to the amount paid; and "[s]ubjectto

...completion ofaudits and reviews," the government believed that payment ofthat amount resolved KBR's request for interim payment (R4, tab 21).

56. On 28 April 2011 DCAA's KBRResident Office in Houston, Texas, issued an audit report on costs incurred under SK425, and TO Nos. 59 and 89, for FYs 2004-06, which incorporated the IBO's assist audit report's findings. DCAA questioned a total of $12,202,051. Ofthat amount, DCAA questioned $11,636,551 as unreasonable on the ground that KBRbilled using headcount band pricing that did not represent actual headcounts. For consumables, sewage and garbage, DCAAused regression analysis to determine areasonable estimate for pricing actual headcounts. It stated that KBRhad not incorporated into SK425 lower headcount bands proposed by GCC for the initial period, which better represented the actual headcount served. DCAA also questioned $565,500 as unallowable because GCC was paid monthly costs at a higher amount than the subcontract specified. (R4, tab 23 at 499-500, 503-04; tr. 2/23-27) The auditors stated:
[KBR] contends its actions in not reducing headcount capacity underthe subcontractwere consistentwith reasonable businessjudgment. We disagree with [KBR's] position based on the contractorbeing directed in [the February LOTD] by the Government to adjust its level of service based on the reduction ofheadcounts. This instruction was ignored which resulted in the Government being overbilled. (R4, tab 23 at 509)
57. On 3 May 2011 DCAA issued a Form 1NoticeNo. 172 to KBR disapproving payment of$12,415,060 ($11,835,578 for TO No. 59 and $579,482 for TO No. 89) (R4, tab 24 at 525). The Form 1was based upon the disapproved SK425 costs of$12,202,051, plus indirect costs based upon interim indirect cost rates, less private security costs disapproved by a separate Form 1, plus fee (id. at 527, 533).
58. By final decision of22 March 2012, ACO James determined that $12,179,846 in KBR's billed SK425 DFAC costs at site H-3 were unallowable, citing DCAA's 28 April 2011 audit report and its Form 1. He stated that the decision was "based on KBR's failure to reduce the H-3 DFAC headcount as directedby the LOTD dated February 17, 2004" and that "[c]osts incurred for services exceeding the services required by the ACO are unreasonable, and therefore unallowable." (R4, tab 28 at 542, 544) The decision also stated that itresolved KBR's 19 February 2010 claim;the governmenthad properly withheld KBR's voluntary credit; and KBR's claim for interest was denied. The ACO allowed $235,214 ofDCAA's questioned costs from 13-17 February 2004, based upon the time

22between "contract inception" 11 and KBR's receipt ofthe February LOTD, and from 18-27 February 2004, accounting for the 10-day period KBRwas allowed under SK425 to implement changes (id. at 542). The final decision demandedpaymentby KBR of $11,483,487.74 (the disallowed $12,179,846 less $696,358.26- previously withheld) (id. at 545). KBRtimely appealed to the Board on 19 June 2012.

59. ACO James acknowledged that his final decision was basedupon KBR's failure to follow the February LOTD, thereby incurring unreasonable subcontract costs, whereas DCAA questioned billed costs versus actual costs. In preparing his final decision, ACO James did not ask DCAAto quantify the impact ofKBR's failure to follow the LOTD, i.e., to analyze what KBR's incurred costs would have been had it re-priced SK425 to reflect the February LOTD's headcount figure for site H-3. (Tr. 1/135; app. PFF No. 48)

60. DCMAraised at the hearing, and ACO James testified, thatthe costs he disallowed in his final decision thatpertained to TO No. 89 should not have been disallowed, because that TO set services at site H-3 for a headcount of5,000 (tr. 1/127). After creditingprivate security costs, ACOJames had disallowed $555,434 in costs, plus overhead, general and administrative costs, facilities capital cost ofmoney, and base fee, for a total disallowed amountpertainingto TO No. 89 of$579,482 (R4, tab 28 at 544).

61. DCMA now contends that KBRwas overpaid by $11,929,475 ($11,752,671 plus indirect costs and fee). Taking into accountthe government's withheld amount of $696,358.26, DCMAnow claims that KBR owes the government $11,233,117 ($11,929,475

- $696,358.26) for unreasonable and unallowable costs the government paid to KBRpertaining to SK425, plus CDA interest as of22 March 2012. (Gov'tbr. at 48-50; gov'treply br. at 32)

DISCUSSION

TheParties' Contentions

DCMA alleges that KBRhas not met its burden to prove that its DFAC costs were reasonable under FAR 31.201-3(a) (see finding 3). DCMA contends that KBRdid not act as a prudentperson in the conduct ofcompetitive business when it incurred subcontract costs for DFAC services at site H-3 for a camppopulation of5,400 afterLtCol Blaine had directed in the February LOTDthat KBRprovide DFAC services atthat site for a population of 1,422; KBR in effect ignored the LOTD with regard to site H-3; and it did not consider the LOTD's impact upon SK425. DCMA denies KBR's allegation (below) that Lt Col Blaine lacked authority to issue the LOTD. DCMA also contends, contraryto

11 The reference to a 13 February 2004 "contract inception" is unclear. We inferthat it refers to SK425, which was effective on 14 February 2004 (finding 9).

23KBR's allegation, that the $11,233,117 DCMA seeks represents a disallowance of unreasonable costs, not damages. DCMA asserts that:
[T]he amount ofKBR's reasonable costs for SK00425 should be limited to the amount ofDFAC costs that KBRwould have incurred ifit had adopted the headcount specified in the February LOTD for Site H-3, orthe DFAC costs for headcounts that were actually served, ifhigherthan the amount specified in the LOTD. KBRprovided no basis for calculating this amount or, for that matter, any basis for calculating an alternate amount otherthan the full costs that it paid GCC. In that vacuum, the Government's estimation of the reasonable costs should be adopted.
(Gov'treply br. at 32)

KBRcontends thatthe February and March LOTDs were planning documents, not binding contract modifications requiring KBRto reprice SK425 using the 1,422 headcount. Ifthey were intended to be contract modifications, then Lt Col Blaine lacked authority to issue them. KBR also alleges thatthe standard for assessing costreasonableness is flexible and depends upon the context in which the costs were incurred. 

### It asserts that it reasonably priced SK425 underthe totality ofthe circumstances, includingthe wartime environment, TO No. 59'srequirements, conflicting informationregardingprojectedheadcounts at site H-3, DCMA's failure toprovide clear guidance regarding that information, and government pressure for KBRto move to a newpricing structure. KBR alleges that "[f]acedwith these circumstances in April 2004, KBRreasonably established headcount bandpricing for SK425 in accordance with the then-existing minimum requirements of[TO No. 59]" (app. br. at 21). KBR also claims that costs canbe reasonable even ifincurred due to a contractor's simple error, absent gross disregard ofthe contractor's contractual obligations. KBRalso alleges that DCMAhas notproved damages with reasonable certainty. KBR contends thatthe government's cost calculation is inconsistent with its liability theory as expressed in the ACO's 22 March 2012 final decision and is based upon flawed DCAA audits that lacked independence and adequate evidentiary support.

Lt Col Blaine Had Authority to Issue the February and March LOTDs

We begin with KBR's contention that Lt Col Blaine lackedthe authority to issue the February and March LOTDs. The PCO delegated ACO authority to DCMA's Command-SanAntonio, which sub-delegated it to DCMAMiddle East. In accordance with FAR Subpart 1.6 and FAR42.302, Lt Col Blainewas appointed to be a CO and an ACO on 4 January 2004. He also served as Commander, DCMANorthern Iraq. UnderTONo. 59's SOWparagraph 1.4, unless otherwise specified, all SOWincreases, decreases or modifications were to be directed by the ACO. While LtCol Blaine's delegated authority

24excluded taking any action that involved changing TO No. 59's value or the contract's performance period, the February and March LOTDs stated that the government believed they were within the contract's scope; the cost impact should be minimal as services were reallocated from shrinking sites; KBRwas to contactLt Col Blaine for contractual questions; and KBRwas to submit any increase or decrease in its original estimated cost and any suggested changes tothe SOW. There is no evidence that KBR ever contacted Lt Col Blaine with questions aboutthe LOTDs; or suggestedthathe did nothave authority to issue them; orthatthey were not within TO No. 59's scope; orthat they changed TO No. 59's value; orthat KBR submitted any increase or decrease in its estimated costs or proposed changes to the SOW as a result ofthe LOTDs. (Findings 7-8, 11-12, 14, 19, 50)

The government frequently used LOTDs to provide direction, includingplanning data, to KBRfor in-scope contractrequirements. They were fairly commonly used under IDIQ contracts to adjust the level ofservice expected orprovided. Lt Col Blaine testified without contradiction that, as ACO, he was authorized to issue LOTDs. He could issue directions within the contract's scope but could not modify that scope. Formal modifications had to come from the PCO. (Finding 15) Indeed, in KelloggBrown &RootServices, Inc. v. UnitedStates, 107 Fed. Cl. 16, 19 (2012) (KBR I), aff'd, 742 F.3d 967 (Fed. Cir. 2014) (KBR III), which also involved TONo. 59, the parties stipulated, andthe court found, that Lt Col Blainehad the "requisite delegated authority" to issue the FebruaryLOTD, "altering anticipated camppopulations at five H sites."

We find no support for KBR'sproposition that Lt Col Blaine lacked the authority to issue the February and March LOTDs, the evidence is tothe contrary, and we conclude that he did have the requisite authority.

The February LOTD was Binding upon KBR and KBR DidNotExercise Reasonable Business Judgment in Failingto Comply with It Regarding KBR's contentionthat the February LOTD was merely a planning document and notbindingupon it, in practice KBRtreatedLOTDs as contractual directives. Forexample, Mr. Carr, head ofKBR's DFAC TigerTeam (finding 26), testified inKBR 

### I that change orders to subcontracts regarding headcountbands wouldbe implemented "once [KBR] was directed to changethe headcountthatwas contractually requiredthrough an LOTD from the client." 107 Fed. Cl. at 18. Moreover, as reported bythe court, KBR also contended in that casethat it did not have the discretion to alter its subcontractedheadcount capacity at a particular site on its own and that "[o]nlythe cognizant ACOpossessedthe authority to alter the stated capacity requirement through issuance ofanLOTD." Id. at 32. Although anLOTD is not an agreement, the principlethat "theparties' contemporaneous construction ofan agreement, before it has becomethe subject ofa dispute, is entitled to great weight in its interpretation,"Blinderman Construction Co. v. UnitedStates, 695 F.2d 552, 558 (Fed. Cir. 1982), is apt by analogy. We found thatthe weight ofthe

25testimony at the hearing, not only from Lt Col Blaine and MAJ McCaa, but from KBR's witnesses Messrs. Warner, Maggard and Carr, was that LOTDs were directives by the ACOs to be followed by KBR (finding 38). Until the current litigation, KBR did not assert thatthe February LOTD was not binding upon it. Despite MAJ McCaa's failure to include the February LOTD among those she provided to Mr. Maggard upon his request for outstanding LOTDs, KBR does not deny that it received the LOTD contemporaneously and we found that it did (finding 19). KBR's project manager, Mr. Warner, had no question about the February LOTD's validity and acknowledged that KBR "absolutely" could not simply disregard its direction without consulting with the government, and thathe never received any direction from the governmentto provide for a different headcount at site H-3 than 1,422 (finding 21). MAJ McCaa's 23 February 2004 LOTD and Lt Col Blaine's March LOTD did not rescind the February LOTD (findings 24, 29).
Further, KBR's initial reaction to DCAA's draft November 2007 SOCAR, which asserted that KBR's charged costs were unreasonable concerning site H-3, because it did not comply with the February LOTD's orderto reduce the headcountthere, was to issue a credit to the government. On 9 July 2008, KBRnotified the PCO ofa billing adjustment under SK425, affecting TO Nos. 59 and 89, which resulted in a $9,406,108.34 creditto the government. KBRreported that it had billed $33,234,684.74 to the government, when it should have billed $23,828,576.40 in light ofthe February LOTD. Ofthe $9,406,108.34 credit, $8,953,783.34 applied to TO No. 59 and $452,325.00 applied to TO No. 89. KBR stated thatthe creditwas qualified basedupon further fact development; it had inadvertently failed to considerthe February LOTD in the pricing ofSK425; ithad not billed the government appropriately; and it had not substantiatedthat its lack ofadjustment to account for the February LOTD was in accordance with "reasonablebusinessjudgment" and, until it did, it was crediting the government with the amounts that could not bejustified. (Finding49)
As in KBR III, "[t]herecord here is simply devoid ofa contemporaryjustification supporting areasonableness finding" regarding KBR's claimed costs. 742 F.3d at 972. There is no contemporaneous written explanation ofrecord for why KBRdid not implementthe February LOTD regarding site H-3, which was binding upon it. We found that KBR never substantiatedthat its failure to follow the LOTD was an exercise in reasonable business judgment or that itwas a mistake (finding 50). The United States Court ofAppeals for the Federal Circuitpreviously rejected KBR's argument that it is entitledto recover its costs absent gross misconduct on its part. KelloggBrown & RootServices v. UnitedStates, 728 F.3d 1348, 1359 (Fed. Cir. 2013) (KBR II), accordKBRIll, 742 F.3d at 971. Moreover the court noted in KBR IIIthat a contractor's "businessjudgmentmust still be exercised in a rational manner, even in wartime." 742 F.3d at 972. We conclude that KBR's billed DFAC costs for site H-3 that exceeded the amounts that should have been billed had KBR complied with the February LOTD were not reasonable underthe contract's Allowable Cost and Payment clause, FAR 52.216-7(a), and FAR 3l.201-2(a)(l) and 3l.201-3(a) (findings 2-3). KBR is to reimburse DCMA for those costs, plus interest, as set forth below.

26Quantum

This appeal encompassed quantum as well as entitlement. Cost reasonableness, which is at issue, is a question offact. The standard for assessing reasonableness is flexible, allowing a tribunal discretion "to consider many fact-intensive and context-specific factors." KBR 

### II, 728 F.3d at 1360, accordKBR Ill, 742 F.3d at 970. There is no presumption of reasonableness. KBRbears the burden to prove that the DFAC costs it billedto the government in connection with site H-3, after KBR's receipt ofthe February LOTD, were reasonable. KBR III, 742 F.3d at 970; FAR 3l-201-3(a). Contrary to KBR's contention, DCMA does not bear a burden ofproofregarding damages, which are not at issue. This appeal involves a government claim to recover unallowable costs.
"Acost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudentperson in the conduct ofcompetitive business" (finding 3, FAR 31-201-3(a)). KBRdid not have the right to disregard the February LOTD and it
was imprudentto do so. The costs KBRincurred due to its failure to reduce the site H-3 headcount in accordance with the LOTD and billed to the government were unreasonable (finding 39). Thus, KBRmustreimburse the government for those costs.

KBR contends that DCAA's audits were flawed. We found that its allegations that DCAA was unduly influenced by a letter from SenatorMcCaskill; DCAAwas concerned with impressing KBR's former consultant, Mr. Ransburg; and DCAArushed to respond to the issues raised, sacrificing independence and impartiality, were not supported by substantial evidence (finding46). Moreover, while DCAA's assist audit found KBR's subcontract costs billed to the governmentto be unreasonable on the ground that KBRbilled using headcount band pricingthat did not represent actual headcounts, the 28 April 2011 Resident Office's audit concludedthat KBR's ignoringthe February LOTD's direction to adjust its level ofservice based on reduced headcounts was not consistentwith reasonable businessjudgmentand had resulted in the government being overbilled. (Findings 51, 56) Similarly, the ACO's final decision on appeal focused upon the difference in costs KBR would have billed to the governmenthad KBRreduced the site H-3 headcount in accordance with the February LOTD and the costs it actually billed tothe government (finding 58 ). Regardless, when a CO's final decision is appealed, we conduct de novo proceedings. Wilner v. UnitedStates, 24 F.3d 1397, 1401-02 (Fed. Cir. 1994).

KBR asks the Boardto deny the government's claim andrule that KBRis entitled to the full amount challengedbythe government, including the amountthe governmenthas already recouped. KBRdisputes DCMA's legal arguments that KBR's SK425 costs in contention were unreasonable and thatthe governmentwas entitledto recoup those costs, and it disputes DCAA's independence and approach. However, KBRmade no effortto challenge the factual basis ofDCMA's quantum calculations and did not advance any quantum calculation ofits own at the hearing. The only quantum calculations from KBR,

27which it did not elaborate upon at the hearing, are those supporting its initial creditto DCMA for KBR's failure to follow the February LOTD, which resulted in a $8,953,783.34 credit regarding TO No. 59, the only TO now at issue. DCAA concluded that, with some exceptions, KBRhad followed the same methodology as DCAA in reaching the amount credited. (Findings 49, 51)

The weight ofthe evidence on the record before us supports DCMA's quantum calculations. Moreover, DCMA allowed for an equitable creditto KBRifthe actual population at site H-3 exceeded the February LOTD's figure of 1,422. Therefore, we conclude thatthe government is entitled to $11,233,117 (rounded) ($11,929,475.00 less the $696,358.26 it has already withheld), plus interest as of22 March 2012, the date ofthe CO's final decision demandingpayment from KBR, computed in accordance with the contract's Interest clause (finding 4). 12

DECISION

KBR's appeal is denied. DCMA's claim is sustained. KBR is to remit $11,233,117 to the government, plus interest as of22 March 2012, computed under the contract's Interest clause.

Dated: 15 March 2018

I concur

RICHARD SHACKLEFORD Administrative Judge Acting Chairman Armed Services Board ofContract Appeals Administrative Judge Armed Services Board ofContractAppeals

I concur 

# /)

O~ON Administrative Judge Vice Chairman Armed Services Board ofContract Appeals 

# ----

12 DCMA sought CDA interest. The CDA does not provide for the payment ofinterest to the government. However, interestpayable to the government under the contract's Interest clause is based upon CDA interest.

28I certify that the foregoing is a true copy ofthe Opinion and Decision ofthe Armed Services Board ofContract Appeals in ASBCANo. 58175, Appeal ofKellogg Brown & Root Services, Inc., rendered in conformance with the Board's Charter.

Dated:

JEFFREYD. GARDIN Recorder, Armed Services Board ofContract Appeals

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