ARMED SERVICES BOARD OF CONTRACT APPEALS 

Appeal of--

Northrop Grumman Corporation 

Under Contract No. N68936-05-C-0059 

APPEARANCES FOR THE APPELLANT: 

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APPEARANCES FOR THE GOVERNMENT: 

ASBCA No. 57625 

Terry L. Albertson, Esq. 

Stephen J. McBrady, Esq. 

J. Catherine Kunz, Esq. 

Crowell & Moring LLP 

Washington, DC 

E. Michael Chiaparas, Esq. 

DCMA Chief Trial Attorney 

Robert L. Duecaster, Esq. 

Trial Attorney 

Defense Contract Management Agency 

Manassas, VA 

OPINION BY ADMINISTRATIVE JUDGE DELMAN 

In this appeal, Northrop Grumman Corporation (appellant or NGC) disputes the 

government's disallowance of costs for post retirement benefits (PRB)1 under 

FAR 31.205-6( o ). A hearing was held on entitlement only. We have jurisdiction under 

the Contract Disputes Act (CDA), 41 U.S.C. §§ 7101-7109. 

FINDINGS OF FACT 

1. In or around December 1990, the Financial Accounting Standards Board 

(FASB) issued a rule or statement entitled "Employers' Accounting for Postretirement 

Benefits Other than Pensions," identified in this record as Financial Accounting Standard 

(F AS) 106, which required all companies that were covered by F ASB requirements, 

including appellant, to account for PRB costs using a specific accrual cost method 

( compl. and answer~ 7). Thereafter, NGC used an accrual cost method under F AS 106 

to measure and assign PRB costs for financial reporting purposes starting in the early 

1990s, and continued to do so in its financial reporting at all times relevant in this appeal. 

1 NGC had a number of Plans that provided for PRB to retirees. The Plan in issue here 

was known as the "Northrop Retiree Medical and Life Plan" or the "Northrop 

Main Plan," and all future references to PRB costs or Plan costs herein refer to 

costs under this Plan. 
Such a measurement required application of various actuarial assumptions or projections, 

including consideration of anticipated future health care cost increases. (Tr. 1/20) 

2. Prior to 1995 and until2006, the relevant years, for Federal income tax and 

government cost accounting purposes, NGC chose to measure, assign and fund PRB costs 

for the Plan using a different cost accrual method, conforming with the relevant 

provisions of the Internal Revenue Code pursuant to the Deficit Reduction Act of 1984 

(DEFRA). The DEFRA methodology was also based upon actuarial assumptions or 

projections, but unlike F AS 106, it did not include consideration of anticipated future 

health care cost increases. (Tr. 1120, 22-23) The result of this difference, all other things 

being equal, is that annual costs under DEFRA tend to start lower and increase over time 

while those costs computed under F AS 1 06 tend to start higher and decrease over time 

(compl. and answer~ 8). 

3. With respect to the Federal Acquisition Regulation (FAR) cost regulations, 

prior to 1991 there was no specific provision in the FAR addressing PRB costs. After 

promulgation ofF AS 1 06, subsection ( o) was added to FAR 31.205-6 in 1991. This new 

subsection permitted accrual accounting for PRB costs, but did not specify F AS 106 or 

any other particular method of accrual accounting. It also required PRB costs assigned to 

the current year to be timely funded; those costs assigned to the current year but not 

funded or otherwise liquidated by tax return time were not allowable in any subsequent 

year. See FAC 90-5, effective 25 July 1991, 56 Fed. Reg. 29124 (June 25, 1991). 

4. Effective 27 February 1995, the government revised FAR 31.205-6( o ). Insofar 

as pertinent FAR 31.205-6( o )(2), as amended ("Section ( o )(2)"), stated that in order to be 

allowable, PRB costs calculated on an accrual basis must be measured and assigned 

according to Generally Accepted Accounting Principles (GAAP): 

(2) To be allowable, PRB costs must be reasonable and 

incurred pursuant to law, employer-employee agreement, or 

an established policy of the contractor. In addition, to be 

allowable, P RB costs must also be calculated in accordance 

with paragraphs (o)(2)(i), (ii), or (iii) of this section. 

(iii) Accrual basis. Accrual costing other than 

terminal funding must be measured and assigned 

according to Generally Accepted Accounting 

Principles and be paid to an insurer or trustee to 

establish and maintain a fund or reserve for the sole 

purpose of providing PRB to retirees. The accrual must 

also be calculated in accordance with generally 

2 
accepted actuarial principles and practices as 

promulgated by the Actuarial Standards Board. 

[Emphasis added] 

See 59 Fed. Reg. 67045 (December 28, 1994). It is undisputed and we find that the 

"Generally Accepted Accounting Principles" or GAAP referred to in (iii) above refers to 

FAS 106. 

5. FAR 31.205-6( o )(3) ("Section ( o )(3 )") continued the same requirement for 

timely funding ofPRB costs: 

(3) To be allowable, costs must be funded by the time 

set for filing the Federal income tax return or any extension 

thereof. PRB costs assigned to the current year, but not 

funded or otherwise liquidated by the tax return time, shall 

not be allowable in any subsequent year. 

6. Notwithstanding the new FAR requirement in Section ( o )(2) that "Accrual 

costing other than terminal funding must be measured and assigned according to 

Generally Accepted Accounting Principles," appellant continued to measure, assign, and 

fund its PRB costs in accordance with DEFRA for government contract purposes 

(tr. 1/18) (see CAS disclosure statements below). 

7. NGC regularly filed disclosure statements in accordance with CAS 

requirements. During the period 1995-2006, NGC's Part VII disclosure statements 

stated as follows: "This part covers the measurement and assignment of costs for 

employee pensions, post retirement benefits other than pensions (including post 

retirement health benefits), certain other types of deferred compensation, and insurance." 

Part VII was a multi-page document that contained many disclosures on the above 

subjects. Appellant regularly disclosed therein that it accounted for PRB costs in the 

Plan in accordance with DEFRA (see below). (App. supp. R4, tab 6; tr. 1/35-36, 43-45) 

The government reviewed these disclosure statements for purposes of general adequacy 

and compliance. See FAR 30.202-7(a)(b). With certain reservations taken, the 

government did not note any noncompliance with the CAS or the FAR (see below). 

8. For example, by cover letter to the DCMA Defense Corporate Executive 

(DCE) dated 19 February 1997, appellant provided an updated Part VII using a new 

"form" for its disclosures and providing additional information required by the new form 

on actuarial and accounting practices, including those of a new division, ESSD. 

Appellant's disclosure statement identified, amongst other disclosures, its use of 

DEFRA for PRB costs of the Plan but erroneously described the Plan as one which used 

"cash" accounting. The government brought this matter to appellant's attention, 

indicating that the accounting method should have been properly described as "accrual" 

3 
accounting. (App. supp. R4, tabs 6-7) The government did not note any noncompliance 

with the FAR (tr. 1149). 

9. On 10 March 1998, NGC submitted a revised Part VII disclosure statement 

regarding deferred compensation and insurance cost based upon certain changes 

recommended by DCAA. There is no showing that DCAA's recommendations involved 

the disputed issues here. Appellant disclosed among its other disclosures that it 

measured and assigned PRB costs for its Plan in accordance with DEFRA. 

(App. supp. R4, tab 10 at 0281) On 13 April 1998, the DCMA DCE issued a letter to 

NGC stating as follows: 

(!d. at 0265) 

I have noted no instances of noncompliance with 

applicable Cost Accounting Standards or with FAR Part 31 

cost principles. However, instances of noncompliance not 

detected during this review may be discovered during future 

review of your cost accounting practices. These disclosed 

practices shall not by virtue of such disclosure be deemed 

proper, approved, or agreed to practices for pricing 

proposals or accounting and reporting contract performance 

cost data. [Emphasis added] 

10. Similarly, appellant submitted a Part VII update on 5 April1999 

(app. supp. R4, tab 11) and another update dated 14 February 2000 for deferred 

compensation and insurance costs, both of which disclosed NGC's use ofDEFRA for 

Plan PRB costs. In response to the latter update, the DCE issued a letter to NGC dated 

20 April 2000 stating as follows: 

In response to your letter dated February 14, 2000, 

subject: Part VII Disclosure Statement Update and in 

accordance with FAR 30.602-3, I have reviewed your 

Disclosure Statement, Part VII revision. Based on the 

comments provided in DCAA Audit Report No. 

4721-2000F19100002, dated 28 March 2000, I have 

determined that your revised Disclosure Statement Part VII 

adequately describes your revised cost accounting practices. 

Except for previously reported conditions, no instances of 

noncompliance with applicable Cost Accounting Standards or 

FAR Part 31 cost principles were noted. A cost impact 

proposal is not required. 

4 
This Disclosure Statement revision includes general 

information on new Northrop Grumman pension plans and to 

eliminate discontinued and merged pension plans. No 

changes to cost accounting practices as defined under FAR 

52.230-2(a)(2) were noted. 

These disclosed practices shall not by virtue of such 

disclosure be deemed proper, approved, or agreed to 

practices for pricing proposals or accounting and reporting 

contract performance cost data. [Emphasis added] 

(App. supp. R4, tab 12 at 0306) 

11. On 30 July 2003, NGC submitted another Part VII update. According to 

appellant's cover letter: "This revision reflects the administrative modifications and 

clarifications of disclosure primarily attributed to Northrop Grumman Corporation's 

Pension, Post Retirement Benefits and Savings Plans as agreed to with the DCAA" 

(app. supp. R4, tab 25 at 0508). There is nothing of record indicating that these "DCAA 

agreements" involved the subject disputed costs. Among many other disclosures, this 

updated disclosure statement described two PRB plans, one that measured and assigned 

costs in accordance with DEFRA (the Plan in issue here) and one that measured and 

assigned costs in accordance with F AS 106. In a 26 August 2003 letter to appellant the 

DCE stated in part as follows: 

Based on a review made pursuant to FAR 30.602-3, I have 

determined that your revised Disclosure Statement Part VII, 

dated April 1, 2003 and revised July 29, 2003, adequately 

describes your cost accounting practices. As the practices are 

described, there are no instances of noncompliance with 

applicable Cost Accounting Standards or FAR Part 31 cost 

principles noted. The revisions are effective April 1, 2003. 

The subject disclosure statement was revised to reflect 

changes and other revised disclosures regarding the disclosure 

of the cost accounting practices of the recently acquired 

Mission Systems (MS) and Space Technology (ST) business 

units and other revised disclosures. 

(App. supp. R4, tab 26 at 0476) 

12. In 2004, NGC made additional revisions to its disclosure statement "to reflect 

recent modifications in the company's pension plans, employee group insurance plans, 

employee stock ownership plans, and other insurance programs" (app. supp. R4, tab 33 

5 
at 0538). As far as the record shows, none of these revisions involved the subject 

disputed costs. Among its disclosures, appellant noted its use of the DEFRA 

methodology for the Plan PRB costs. The government's response, dated 28 June 2004, 

was similar to that made in its 26 August 2003 letter above (app. supp. R4, tab 40). 

The 2006 Changes 

13. In 2006, NGC decided to modify its PRB Main Plan to limit the impact of 

future increases in medical costs by capping its subsidy of retiree health care costs at 

fixed values. It also sought to obtain an advance agreement from the government 

accepting its prior use and its continued use ofDEFRA. By letter to the DCE dated 

16 May 2006, NGC stated that if the government was unable to enter into such an 

agreement, NGC would seek, as an alternative, an advance agreement that would 

document its conversion to F AS 106 accounting with amortization of the PRB transition 

liability over a 15-year period, with the government agreeing not to "disallow any future 

PRB costs on the basis ofDEFRA method of accounting" used in prior years (R4, tab 3 

at 16). 

14. By letter dated 25 May 2006, the DCE declined to enter into an advance 

agreement sanctioning the use ofDEFRA as requested by appellant (R4, tab 5). 

15. By letter to the DCE dated 13 June 2006, NGC presented in more detail its 

alternative proposal, which provided for the implementation ofF AS 106 for government 

contract purposes, effective 1 July 2006, as follows: 

The revised draft is intended to accomplish the following four 

objectives: (1) It provides for the implementation ofF AS 106 

for Government contract purposes effective July 1, 2006. 

(2) It provides for measurement of the transition obligation as 

of the date F AS 106 is implemented for Government contract 

purposes. (3) It provides for measurement of annual PRB 

costs in accordance with FAS 106, and for amortization of the 

transition obligation [the disputed costs here] over future 

accounting periods using the F AS 106 delayed recognition 

method. ( 4) It recognizes that the change is desirable. 

[Emphasis added] 

(R4, tab 6 at 31) 

16. By letter to NGC dated 24 August 2006, the DCE also declined to enter into 

this advance agreement: 

6 
Effective February 27, 1995, FAR 31.205-6(o)(2)(iii) 

required contractors to use the F AS 1 06 accounting method to 

accrue cost of PRB plans. FAR 31.205-6( o )(3) requires that, 

to be allowable, PRB costs must be funded by the contractor's 

federal income tax return due date. However, Northrop 

Grumman's accounting method failed to fund the entire 

amount of the F AS 1 06 costs measured and assignable to 

prior accounting periods. These unfunded prior period costs 

are not allowable in future accounting periods. 

(R4, tab 8) By letter to the government dated 2 October 2006, appellant disputed the 

DCE's position that the unfunded, prior period PRB costs were unallowable (R4, tab 9). 

17. By letter dated 23 October 2006, appellant advised the DCE of preliminary CAS 

basis dollar impact changes by sector and year resulting from the soon-to-be-announced Plan 

design change that capped retiree health care costs (R4, tab 1 0). On 3 November 2006, NGC 

also formally notified the DCE in writing ofNGC's switch from DEFRA to FAS 106 

(R4, tab 11 ). 

18. On 8 June 2007, DCAA issued a report addressing NGC's post retirement 

benefit expense projections and allocations for 2007-2011 forward pricing. Insofar as 

pertinent, DCAA provided the following audit evaluation: 

FAR 31.205-6( o) provides the contractor with a choice 

of three accounting methods to measure and assign PRB costs 

to accounting periods: (1) pay-as-you-go method, (2) 

terminal funding method, or (3) accrual accounting method. 

The only acceptable accrual accounting method is the method 

in accordance with generally accepted accounting principles, 

i.e., F AS 106, as specified by FAR 31.205-6( o )(2)(iii), which 

states that "Accrued PRB costs shall be- (A) Measured and 

assigned in accordance with generally accepted accounting 

principles. However, the portion of PRB costs attributable to 

the transition obligation assigned to the current year that is in 

excess of the amount assignable under the delayed 

recognition methodology described in paragraphs 112 and 

113 ofFinancial Accounting Standards Board Statement 106 

is unallowable." From February 27, 1995 until November 1, 

2006, the Northrop Retiree Medical and Life Plan costs were 

not measured and assigned in accordance with FAR 

31.205-6(o)(2)(iii). [Emphasis added] 

7 
Prior to November 1, 2006, Northrop Grumman used a 

method and assumptions in compliance with DEFRA to fund 

the PRB costs. This has caused the historical PRB costs to be 

less than the amount that would have been measured and 

assigned in accordance with FAR 31.205-6(o)(2)(iii). 

Northrop Grumman failed to fund the entire amount ofF AS 

106 measured PRB costs and, as a result, the unfunded F AS 

106 costs are not allowable in future accounting periods, in 

accordance with FAR 31.205-6( o )(3), which states "To be 

allowable, PRB costs must be funded by the time set for filing 

the Federal income tax return or any extension thereof .... 

PRB costs assigned to the current year, but not funded, paid 

or otherwise liquidated by the tax return due date as extended 

are not allowable in any subsequent year." ... 

We calculated total unallowable costs of $3 77.7 

million from February 27, 1995 through October 31,2006 as 

the difference between the DEFRA funded amounts and 

amounts calculated using the F AS 1 06 methodology .... 

(R4, tab 14 at 74) 

19. On 26 July 2007, the DCE issued a Notice of Intent to Disallow the disputed, 

unfunded PRB costs at issue. This notice adopted the DCAA position above. (R4, tab 

15) NGC submitted its objections to this Notice on 21 September 2007 (R4, tab 16). The 

government issued its Final Determination, dated 9 April2008, reaffirming its position 

(R4, tab 17). 

20. On 11 July 2008, the DCAA issued Audit Report No. 4731-2008F17900002, 

"Review of Northrop Grumman Corporation's June 2008 Briefing in Response to the 

Final Determination on the Allowability of Northrop Retiree Health Plan Costs" (R4, tab 

21 ). In the audit report, DCAA revised questioned amounts and concluded that 

$253,361,512 in unfunded PRB costs were unallowable (id. at 110). While appellant 

used F AS 106 to accrue PRB costs for purposes of its financial reporting each year, 

DCAA did not use those same figures to calculate the disallowance. Rather, it used 

recalculated F AS I 06 figures provided by appellant to reflect the delayed 

recognition/amortization of appellant's FAS 106 transition obligation as required by the 

FAR (tr. 2/14-15).2 

2 The correctness of the figures used by DCAA to derive the disallowance figure goes to 

quantum, which is not before us. 

8 
21. NGC submitted a certified claim to DCMA on 20 May 2010, challenging the 

Final Determination that disallowed the disputed unfunded PRB costs. Because the 

26 July 2007 Notice of Intent to disallow costs and the 9 April 2008 Final Determination 

to disallow costs did not list any affected contracts, appellant used Contract 

No. N68936-05-C-0059 as a "test" contract that would determine the allowability of 

$6,232.11 for purposes of the claim and any appeal that might be necessary. (R4, tab 22) 

The test contract was a cost-type contract that contained the contract clause entitled FAR 

52.216-7, ALLOWABLE COST AND PAYMENT (DEC 2002), which insofar as pertinent, 

made government payments subject to the allowability provisions ofF AR Subpart 31.2 in 

effect on the date of contract award and the terms of the contract (R4, tab 1). 

22. The test contract was awarded effective 22 September 2005 (R4, tab 1). As of 

that date FAR 31.205-6(o) had been re-formatted, but was identical in all material 

respects to the 1995 FAR version above with regard to the issues pertinent here .. The 

2005 regulation stated: 

(2) To be allowable, PRB costs shall be incurred pursuant to 

law, employer-employee agreement, or an established policy 

of the contractor, and shall comply with paragraphs (o)(2)(i), 

(ii), or (iii) of this subsection. 

(iii) Accrual basis. PRB costs are accrued during the 

working lives of employees. Accrued PRB costs shall 

be-

(A) Measured and assigned in accordance with 

generally accepted accounting principles. 

However, the portion ofPRB costs attributable to 

the transition ... under the delayed recognition 

methodology described in paragraphs 112 and 113 

of Financial Accounting Standards Board 

Statement 106 is unallowable. The transition 

obligation is defined in Statement 106, paragraph 

110; 

(B) Paid to an insurer or trustee to establish and 

maintain a fund or reserve for the sole purpose of 

providing PRB to retirees; and 

9 
(C) Calculated in accordance with generally 

accepted actuarial principles and practices as 

promulgated by the Actuarial Standards Board. 

(3) To be allowable, PRB costs must be funded by the time 

set for filing the Federal income tax return or any extension 

thereof, or paid to an insurer, provider, or other recipient by 

the time set for filing the Federal income tax return or 

extension thereof PRB costs assigned to the current year, 

but not funded, paid or otherwise liquidated by the tax return 

due date as extended are not allowable in any subsequent 

year. [Emphasis added] 

(Stipulation filed 4 September 2013) 

23. The DCE issued a contracting officer's final decision on 18 February 2011 

denying NGC's claim (R4, tab 23). This appeal followed. 

24. Under DoD regulations, the CO is responsible for determining the allowability 

of insurance and pension costs under the cost regulations, and is assisted in this endeavor 

by DCAA auditors and DCMA insurance/pension specialists, the latter of whom perform 

contractor insurance pension reviews (CIPR). DFAS 242.7301(a). In this case there was 

an internal disagreement between CIPR and DCAA representatives over the allowability 

of the unfunded PRB costs in subsequent years. 

25. CIPR representatives were of the opinion-consistent with that of appellantthat F AS 106 measurements constituted a ceiling, and that the difference between the 

unfunded F AS 106 measurement and the funded DEFRA measurement was not 

unallowable in future accounting periods under the regulation (tr. 1/138). An internal 

CIPR technical paper supported the CIPR position, but this paper was not official DCMA 

policy (tr. 11175). DCAA disagreed with the CIPR team, and held that under Section 

( o )(3) the difference between the unfunded F AS 106 measurement and the funded 

DEFRA measurement was unallowable in future accounting periods under the regulation. 

It was this latter view that was ultimately adopted by the CO. 

26. The record also reflects that in 2007 the then-current DCMA DCE expressed 

an opinion-within the government-consistent with that of appellant and the DCMA CIPR 

team (R4, tab 13). His opinion was challenged by his superior, the DCMA Deputy 

Director Cost & Pricing, Director Defense Corporate Executive Center, who expressed 

approval of the DCAA position in an email dated 14 June 2007: 

I think the position is that the cost principle, while possibly 

unfair, is clear .... 

10 
[S]eems like the company knew the costs had to be assigned 

to the appropriate years per F AS 106 because of theri [sic] 

financial reporting, so the fact that they charged less than this 

using DEFRA was a choice they made. 

[Was] the fact that we let them use DEFRAin effect a 

commitment to recognize unfunded F AS 106 costs later? I 

don't see how this would be so unless they have some 

documentation to that effect. 

(App. supp. R4, tab 55) It was this position that was ultimately adopted by the CO. 

27. At trial, appellant presented an expert report from an actuary who, inter alia, 

expressed an opinion on the interpretation of the cost regulation and its relationship with 

CAS 416 from an actuarial perspective, consistent with the allowability of the unfunded 

PRB amounts (app. supp. R4, tab 86). He also expressed the opinion that since Plan cost 

modifications in 2006 capped future health care cost increases, the disputed unfunded 

PRB costs here-which represented the anticipated cost increases in accordance with F AS 

106 calculations-would never be incurred (id. at 10). According to NGC's expert: 

(Id.) 

The Plan amendments that NGC adopted effective 

November 1, 2006 "capped" the benefits in a manner that 

eliminated virtually all PRB costs associated with future 

increases in health care costs. Because the value of the 

eliminated Plan benefits exceeds the amount of the PRB costs 

that the Government alleges will be unallowable on and after 

November 1, 2006, the "unallowable" costs that are the 

subject of this appeal have been completely eliminated. 

[Footnote omitted] 

28. This expert opinion appears inconsistent with testimony that the disputed PRB 

costs appeared in NGC's incurred cost submission in 2007 and in subsequent years (tr. 

2/64-65). 

29. In or around 2002, the U.S. General Accounting Office (GAO) conducted a 

two-year review ofPRB costs ofNGC and other major contractors for calendar years 

1999-2000. This review was made in response to a Congressional inquiry that 

"expressed concerns that government contractors may be receiving undeserved financial 

benefits by reducing retiree health benefits that were paid for under government 

contracts" (app. supp. R4, tab 22 at 1). Based upon this review, the GAO did not find 

11 
this to be the case. In summary, the GAO concluded that the government identified only 

minor problems with the contractors' PRB costs during these years; it did not question 

any projected forward pricing rate proposals; and while certain assumptions used to 

project costs were questioned, the impact was negligible (id. at 5). 

30. Although cited by appellant in its brief and addressed at the trial, we give this 

GAO review little, if any, weight with respect to the allowability of the costs in issue 

under the FAR. 

DECISION 

While the parties vigorously argue the merits of their respective interpretations of 

the cost regulation, appellant's acknowledgment in its post-hearing brief excerpted below 

- consistent with the evidence of record - goes far to resolve the issue before us, i.e., 

whether appellant's practices violated the governing cost regulation in the FAR: 

While FAR requires that PRB costs be accrued using GAAP 

[FAS 106] ... there is no dispute that the DEFRA method did 

not comply with GAAP requirements .... 

(App. hr. at 38) We agree with this statement. We conclude that appellant's use of the 

DEFRA method violated Section (o)(2) of the cost regulation for purposes of recovering 

amounts that were not funded under Section (o)(3) below.3 

Not only did the FAR require that PRB costs be accrued using GAAP/ FAS 106 

under Section (o)(2), but Section (o)(3) required these costs be timely funded. Reading 

the allowability Sections (o)(2) and (o)(3) together, the "PRB costs assigned to the 

calendar year" in Section ( o )(3) must refer back to those costs required to be "assigned" 

under Section ( o )(2), that is, the PRB costs that were required to be measured and 

assigned in accordance with GAAP/FAS 106. We read these sections together to require 

that appellant's Plan PRB costs must be measured and assigned under GAAP/FAS 106 

and those same F AS-measured and assigned costs must be timely funded. Since 

appellant did not measure and assign its Plan PRB costs in accordance with GAAP/F AS 

106, violating Section (o)(2), it perforce violated Section (o)(3). 

Section ( o )(3) provides that those PRB costs not timely funded "shall not be 

allowable in any subsequent year." The disputed amortized PRB costs here- part of the 

3 Given NGC's acknowledgement, we need not address the government's theory that 

appellant did in fact measure and assign its Plan PRB costs in accordance with 

Section ( o )(2) - for purposes of its financial reporting- but failed to timely fund 

all such costs in violation of Section (o)(3). 

12 
transition obligation engendered by NGC's switch to FAS 106 in late 2006- were not 

timely funded by appellant, and hence were unallowable in subsequent years. 

Appellant contends that it met Section ( o )(3) by fully funding what it assigned, i.e, 

its DEFRA amounts. But this interpretation ignores the express requirement of Section 

( o )(2), i.e., that the amount must be measured and assigned in accordance with 

GAAP/FAS 106. As appellant admits, it did not measure and assign its Plan PRB costs 

under its government contracts in accordance with GAAP/FAS 106. 

Appellant also contends that the Section (o)(2) GAAP/FAS 106 measurement 

must be interpreted to serve as an allowability "cap" or "ceiling" to those amounts it 

otherwise annually funded under Section (o)(3) pursuant to DEFRA and without 

prejudice to the amortization of those F AS 106 costs it did not annually fund. However, 

no such language is contained in the regulation. We must enforce the regulation 

according to its plain terms and not insert additional words or phrases to alter an 

otherwise plain and clear meaning. Tesoro Hawaii Corp. v. United States, 405 F.3d 

1339, 1346 (Fed. Cir. 2005). 

Alternatively, appellant contends that the government's actions and/or inactions 

should estop the government from asserting this disallowance under the cost regulation. 

Appellant's burden to prove equitable estoppel against the government is a heavy one. 

RGW Communications, Inc. d/b/a Watson Cable Company, ASBCA Nos. 54495, 54557, 

05-2 BCA ~ 32,972 at 163,335. We recently set out this burden of proof as follows: 

Equitable estoppel requires a showing of: 1) misleading 

conduct leading another to reasonably infer that rights will 

not be asserted against it; 2) reliance on this conduct; and 3) 

material prejudice as a result of this reliance. Mabus 

v. General Dynamics C4 Systems, Inc., 633 F.3d 1356, 1359 

(Fed. Cir. 2011). When estoppel is asserted against the 

government, a showing of affirmative misconduct is required 

in addition to these elements. United Pacific Insurance Co. 

v. Roche, 401 F.3d 1362, 1366 (Fed. Cir. 2005). [Emphasis 

added] 

SplashNote Systems, Inc., ASBCA No. 57403, 12-1 BCA ~ 34,899 at 171,609. Appellant 

has failed to meet its heavy burden here. 

First, appellant has not shown any government misleading conduct with respect to 

the unfunded PRB costs in issue from which appellant could reasonably infer that the 

government would not assert its rights against appellant with respect to these costs. The 

dispute here involves the allowability of the unfunded, prior year PRB Plan costs arising 

out of appellant's switch to accruing PRB costs in accordance with FAS 106 in 2006. 

13 
There is no evidence of record showing that the government was aware of appellant's 

plan to make this switch prior to 2006, so by definition the government could not have 

earlier represented - or misrepresented - its position to appellant with respect to this plan 

and the associated unfunded PRB costs. None of the DCAA or DCE documents cited by 

NGC address the issue of these costs. 

We further note that the DCE letter of 13 April 1998 was qualified and reserved 

the government's rights in "instances of noncompliance not detected during this review" 

(finding 9). Reservation-type language was also found in the DCE letter dated 20 April 

2000 (finding 10). The DCE letter dated 26 August 2003 was based upon a "FAR 

30.602-3" review, that is, a review regarding whether certain disclosure statement 

revisions (none of which are relevant here) were voluntary accounting practice changes 

(finding 11 ). 

To the extent that appellant relied upon such letters as a government "stamp of 

approval" on appellant's 2006 proposal to switch to FAS 106 and to amortize the 

unfunded, prior year PRB costs, such reliance was unreasonable. The government did 

not mislead appellant with respect to the allowability of the unfunded PRB costs in 

dispute here, nor did the parties have a course of dealing with respect to them. 

Appellant has also failed to prove affirmative misconduct on behalf of the 

government. Neither the Federal Circuit nor the Board has developed a litmus test for 

affirmative misconduct. Such a determination is necessarily fact-dependent. However, 

that the courts have imposed this additional requirement when a party seeks to invoke 

equitable estoppel against the government underscores two self-evident points: 1) that 

the moving party to make its case against the government must prove something more 

than would be necessary against a private party; and 2) that this added requirement must, 

perforce, be of a nature more compelling than the conduct that would otherwise apply 

against a private party. See, e.g., RGW Communications, 05-2 BCA ~ 32,972 at 163,336 

(referencing deliberate lies, a pattern of false promises, or intentional deception as 

examples of affirmative misconduct). 

Appellant has failed to show any such affirmative misconduct here with respect to 

the allowability of the unfunded PRB costs in issue. There is nothing in the record 

showing that the government misrepresented or provided appellant incorrect advice 

regarding how it would treat appellant's switch to FAS 106 and the related unfunded 

PRB costs. Indeed, when NGC first sought an advance agreement on the issue, the 

government rejected it. While the DCAA did not call to appellant's attention in the 

1990s the possible legal consequences of its actions in the event it moved from DEFRA 

to F AS 106 in the future, we fail to see that DCAA was obligated to provide such advice, 

and do not believe that any such failure constituted affirmative misconduct so as to bar 

the government's disallowance here. See Zacharin v. United States, 213 F.3d 1366, 

1371-72 (Fed. Cir. 2000) (failure to call plaintiffs attention to possible legal 

14 
consequences of its actions does not constitute affirmative misconduct where no evidence 

of providing incorrect legal advice or related misrepresentations). 

Appellant argues that it was affirmatively misled by the government's repeated 

notifications that its use ofDEFRA was FAR compliant. We disagree for a number of 

reasons. First, none of the DCE responses to appellant's disclosure statements cited by 

appellant specifically represented, without qualification, that DEFRA was FAR 

compliant. The government did indicate, after a review of a disclosure statement, that no 

FAR violations were noted, but these responses were, for the most part qualified, and 

reserved government rights on further review. 

Moreover, the fact that the government allowed appellant's yearly PRB costs 

calculated under DEFRA was not a misrepresentation, nor was it improper under the cost 

regulations (nor is the government currently questioning these costs). The government's 

decision not to disallow these DEFRA amounts was consistent with FAR 31.20 1-2( c), 

which provides for the disallowance of costs in excess of those generated by consistent 

FAR practices. 4 Appellant's annual DEFRA-funded costs were not in excess of those 

generated by appropriate FAR practices; they were indisputably less than such costs. 

Hence, the allowance of these lesser amounts was proper under the regulations, and 

perforce was not a misrepresentation or affirmative misconduct. 

We have duly considered all of appellant's remaining arguments, but are not 

persuaded that they support a finding of affirmative misconduct. We conclude that 

appellant has not proven equitable estoppel against the government so as to bar the 

government's recovery here. 

Nor is the government barred by the equitable doctrine of laches. The doctrine of 

laches serves to bar a claim where the claimant has unreasonably and inexcusably 

delayed the assertion of its claim resulting in economic prejudice or the impairment of the 

ability to mount a defense. JANA, Inc. v. United States, 936 F.2d 1265, 1269 

(Fed. Cir. 1991). Initially, we note that the government is not the claimant here for 

purposes of the laches doctrine. Appellant first sought to change methodologies from 

DEFRA to F AS I 06 in 2006, which among other things, resulted in the need to amortize 

the disputed unfunded PRB costs from prior years as part of a transition obligation. 

Based upon a DCAA audit dated 8 June 2007, the government issued a notice of intent to 

disallow the unfunded costs; on 21 September 2007 appellant objected, and DCMA 

issued a Final Determination to disallow the costs on 9 April 2008. NGC flied a claim on 

4 FAR 31.201-2, DETERMINING ALLOWABILITY, provides at (c) as follows: When 

contractor accounting practices are inconsistent with this Subpart 31.2, costs 

resulting from such inconsistent practices in excess of the amount that would have 

resulted from using practices consistent with this subpart are unallowable. 

(Emphasis added). See also note 5, infra. 

15 
20 May 2010 and the DCE issued a final decision denying the claim on 18 February 

2011. Assuming arguendo, that the equitable doctrine of laches may be applied against 

the government under these circumstances, see JANA at 1269, we believe that the claim 

was not unreasonably or inexcusably delayed. 

Appellant also argues that its interpretation of the regulation was, and still is 

supported by certain government actuaries on the CIPR team. However, in our view, the 

opinion of these government actuaries does not trump the plain language of Sections 

(o)(2) and (o)(3) of the cost regulation. 

Appellant also notes that since its various disclosure statements provided that 

appellant measured and assigned PRB costs in accordance with DEFRA, it was obligated 

under CAS to follow these disclosed practices. However, this dispute is not over a CAS 

violation5 but rather over the allowability of the unfunded transition obligation under the 

FAR 31 cost principles. See FAR 31.201-2(a)(5) (factors to determine allowability 

include compliance "with any limitations set forth in this subpart"). Appellant did not 

comply with FAR 31.205-6( o) here. 

Finally, appellant contends that due to Plan modifications in 2006 that capped 

future increases in health care costs, the disputed unfunded PRB costs here - which 

according to appellant essentially represented such increased future health care costs per 

F AS 106 - will not be incurred and as such, the government has no basis to disallow 

them. According to appellant's brief: "It is axiomatic that the Government cannot 

disallow costs that have never been and will never be claimed or incurred" (app. br. at 

66). 

We accept this axiom, but it is unclear whether it applies in this case. The record 

reflects testimony that the disputed, unfunded PRB costs were included in appellant's 

incurred cost submission in 2007 and in years thereafter, and hence these costs were 

purportedly "claimed" by appellant in these years (finding 28). However, these incurred 

cost submissions are not of record. 

Neither party addressed quantum in any detail in this entitlement proceeding. 

While we believe appellant's contention is conceptually sound, we need a better 

5 The government conceded in its Answer,~ 10, that NGC's funding of the Plan based 

upon the tax deductible amount in accordance with DEFRA was in compliance 

with CAS 416, Accounting for Insurance Costs. Indeed, the government never 

questioned- under CAS or otherwise- the lesser-funded DEFRA amounts that 

were funded by appellant each year prior to 2007. It only questioned the unfunded 

amounts when appellant sought to change its practice and switched to F AS 106 for 

government contract purposes. Appellant has shown no conflict between the CAS 

and FAR in this respect. 

16 
developed record to address whether the contention is grounded in fact; whether the 

unfunded PRB costs as part of the amortized transition obligation were included and 

"claimed" in appellant's incurred cost submission in 2007 and beyond; and if so, how the 

government treated them, and whether any of these matters impacted quantum. 

Assuming, arguendo, that NGC is due a credit based upon the elimination of the future 

health care cost increases, the amount of that credit is also a quantum issue, as is the 

DCAA calculation in support of the disallowance. If this case is not settled, these 

quantum issues will have to be addressed by the Board at a later time. 

CONCLUSION 

We have duly considered appellant's remaining arguments but are not persuaded 

by them. For reasons stated and based upon the record before us, we conclude that 

FAR 31.205-6( o) supports the government's disallowance of the unfunded PRB costs 

under this test contract. We remand to the parties to determine quantum. 

The appeal is denied. 

Dated: 16 January 2014 

I concur 

Administrative Judge 

Acting Chairman 

Armed Services Board 

of Contract Appeals 

17 

"--Administrative 

Ji(ELMAN- ~t~ Judge 

Armed Services Board 

of Contract Appeals 

I concur 

Administrative Judge 

Acting 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. 57625, Appeal of Northrop 

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

Dated: 

18 

JEFFREY D. GARDIN 

Recorder, Armed Services 

Board of Contract Appeals