ARMED SERVICES BOARD OF CONTRACTAPPEALS Appeal of-- Northrop Grumman Corporation
Under ContractNo. N68936-05-C-0059
APPEARANCES FORTHEAPPELLANT: ) ) ) ) )

APPEARANCES FORTHE 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 ChiefTrial Attorney Robert L. Duecaster, Esq.

Trial Attorney Defense Contract Management Agency Manassas, VA
OPINION BYADMINISTRATIVE JUDGE DELMAN

Inthis appeal, Northrop Grumman Corporation (appellant orNGC) disputes the government's disallowance ofcosts for postretirement benefits (PRB) 1under FAR31.205-6(o). A hearing was held on entitlement only. We havejurisdiction under the ContractDisputes 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 Otherthan Pensions," identified in this record as Financial Accounting Standard (FAS) 106, which required all companies that were covered byFASB 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 FAS 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.

1NGC had a number ofPlans thatprovided for PRB to retirees. The Plan in issue here
was known as the "Northrop Retiree Medical and Life Plan" orthe "Northrop Main Plan," and all future references to PRB costs orPlan costs herein refer to costs under this Plan.Such a measurement required application ofvarious actuarial assumptions orprojections, including consideration ofanticipated future health care cost increases. (Tr. 1/20)
2. Priorto 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 ofthe Internal Revenue Code pursuant to the Deficit Reduction Act of 1984 (DEFRA). The DEFRA methodology was also based upon actuarial assumptions or projections, butunlike FAS 106, it did not include consideration ofanticipated future health care cost increases. (Tr. 1120, 22-23) The result ofthis difference, all otherthings being equal, is that annual costs under DEFRAtend to start lower and increase overtime while those costs computedunder FAS 1 06 tendto start higher and decrease overtime (compl. and**answer~** 8).
3. With respect to the Federal Acquisition Regulation (FAR) cost regulations, priorto 1991 there was no specificprovision inthe FARaddressing 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 FAS 106 or any otherparticular method ofaccrual accounting. It also required PRB costs assigned to the currentyearto be timely funded; those costs assigned to the currentyearbut not funded or otherwise liquidated bytax 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 orderto 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 incurredpursuant to law, employer-employee agreement, or an establishedpolicy ofthe contractor. In addition, to be allowable, PRBcosts mustalso be calculated in accordance withparagraphs (o)(2)(i), (ii), or (iii) of this section.

(iii) Accrual basis. Accrualcostingother than terminal funding must be measuredandassigned according to GenerallyAcceptedAccounting Principles and be paid to an insurer ortrustee to establish and maintain a fund or reserve for the sole purpose ofproviding PRB to retirees. The accrual must also be calculated in accordance with generally

2accepted actuarial principles and practices as promulgatedbythe Actuarial Standards Board. [Emphasis added]
See 59 Fed. Reg. 67045 (December 28, 1994). It is undisputed and we find thatthe "GenerallyAccepted Accounting Principles" or GAAP referred to in (iii) above refers to FAS 106.
5. FAR 31.205-6(o)(3) ("Section (o)(3)") continuedthe same requirement for timely funding ofPRB costs: (3) To be allowable, costs must be funded bythe time set for filing the Federal income taxreturn or any extension thereof. PRB costs assigned to the current year, but not funded or otherwise liquidated bythe tax return time, shall notbe allowable in any subsequent year.
6. Notwithstanding the newFARrequirement in Section (o)(2) that "Accrual costing otherthan terminal funding mustbe 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 contractpurposes (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: "Thispart covers the measurement and assignment ofcosts for employeepensions, postretirement benefits otherthan pensions (includingpost retirementhealth benefits), certain other types ofdeferred compensation, and insurance." Part VII was a multi-page document that contained many disclosures on the above subjects. Appellantregularly 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 reviewedthese disclosure statements for purposes ofgeneral adequacy and compliance. See FAR 30.202-7(a)(b). With certain reservations taken, the government did notnote any noncompliance with the CAS orthe FAR(see below).
8. Forexample, by cover letter to the DCMA Defense Corporate Executive (DCE) dated 19 February 1997, appellantprovided an updated Part VII using a new "form" for its disclosures and providing additional information required bythe new form
on actuarial and accounting practices, including those ofa new division, ESSD. Appellant's disclosure statement identified, amongst other disclosures, its use of DEFRA for PRB costs ofthe Planbut erroneously described the Plan as one which used "cash" accounting. The governmentbrought this matterto appellant's attention, indicating that the accounting method should have beenproperly described as "accrual"

3accounting. (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 costbased 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 ofnoncompliance with applicable CostAccounting Standards orwith FARPart 31 costprinciples. However, instances of noncompliance not detectedduring this review may be discoveredduring future review of your costaccountingpractices. These disclosed practices shallnot by virtue of such disclosure be deemed proper, approved, or agreedtopractices forpricing proposals or accountingandreporting contractperformance costdata. [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 ofwhich disclosedNGC's use ofDEFRA for Plan PRB costs. In response to the latter update, the DCE issued a letterto NGC dated 20 April 2000 stating as follows:

Inresponse to your letter dated February 14, 2000, subject: PartVII 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 DCAAAudit Report No. 4721-2000F19100002, dated 28 March 2000, I have determined that yourrevised Disclosure Statement Part VII adequately describes yourrevised cost accountingpractices. Except for previously reported conditions, no instances of noncompliance with applicable Cost Accounting Standards or FARPart 31 costprinciples were noted. A cost impact proposal is notrequired.

4This Disclosure Statementrevision includes general information on newNorthrop 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 disclosedpractices shallnot by virtue of such disclosure be deemedproper, approved, oragreedto practices forpricingproposals oraccounting andreporting contractperformance costdata. [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 ofdisclosure 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 ofrecord 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 FAS 106. In a 26 August 2003 letterto appellant the DCE stated in part as follows:
Based on a review made pursuant to FAR 30.602-3, I have determined that yourrevised Disclosure StatementPart 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 ofnoncompliance with applicable CostAccounting Standards or FARPart 31 cost principles noted. The revisions are effective April 1, 2003.
The subject disclosure statementwas revised to reflect changes and otherrevised disclosures regarding the disclosure ofthe cost accounting practices ofthe recently acquired Mission Systems (MS) and Space Technology (ST) business units and otherrevised 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

5at 0538). As far as the record shows, none ofthese revisions involved the subject disputed costs. Among its disclosures, appellant noted its use ofthe DEFRA methodology for the PlanPRB 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 limitthe impact of future increases inmedical costs by capping its subsidy ofretiree health care costs at fixed values. Italso soughtto obtain an advance agreement from the government accepting its prioruse and its continued use ofDEFRA. By letterto the DCE dated 16 May 2006, NGC statedthat ifthe government was unable to enter into such an agreement, NGC would seek, as an alternative, an advance agreement that would document its conversionto FAS 106 accounting with amortization ofthe PRB transition liability over a 15-yearperiod, with the government agreeing notto "disallow any future PRB costs on the basis ofDEFRA method ofaccounting" used in prioryears (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. Byletter 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 contractpurposes, effective 1July 2006, as follows:
The revised draft is intended to accomplish the following four objectives: (1) Itprovides for the implementation ofF AS 106 for Government contractpurposes effective July 1, 2006.

(2) Itprovides for measurement ofthe transition obligation as ofthe date FAS 106 is implemented for Government contract purposes. (3) Itprovides for measurement of annualPRB costs in accordance with FAS 106, and for amortization of the transition obligation [the disputed costs here] over future accountingperiods using the F AS 106delayedrecognition method. (4) Itrecognizes that the change is desirable. [Emphasis added] (R4, tab 6 at 31)
16. By letterto NGC dated 24 August 2006, the DCE also declined to enter into this advance agreement:



### 6Effective February 27, 1995, FAR 31.205-6(o)(2)(iii) required contractors to use the FAS 1 06 accounting method to accrue cost ofPRB 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 ofthe FAS 1 06 costs measured and assignable to prior accounting periods. These unfundedpriorperiod costs are not allowable in future accounting periods. (R4, tab 8) By letterto the government dated 2 October 2006, appellant disputed the DCE's position that the unfunded, priorperiod PRB costs were unallowable (R4, tab 9).
17. By letter dated 23 October 2006, appellant advised the DCE ofpreliminary CAS basis dollar impact changes by sector and yearresulting from the soon-to-be-announced Plan design change that cappedretiree health care costs (R4, tab 1 0). On 3 November 2006, NGC also formally notifiedthe DCE in writing ofNGC's switch from DEFRAto FAS 106 (R4, tab 11).
18. On 8 June 2007, DCAA issued a report addressing NGC's postretirement benefit expenseprojections and allocations for 2007-2011 forward pricing. Insofar as pertinent, DCAAprovided the following audit evaluation:
FAR 31.205-6(o) provides the contractor with a choice ofthree accounting methods to measure and assign PRB costs to accountingperiods: (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 accountingprinciples, i.e., FAS 106, as specified byFAR 31.205-6(o)(2)(iii), which states that "AccruedPRB costs shall be- (A) Measured and assigned in accordance with generally accepted accounting principles. However, the portion ofPRB costs attributable to the transition obligation assigned to the current yearthat is in
excess ofthe amount assignable underthe delayed recognition methodology described in paragraphs 112 and 113 ofFinancial Accounting Standards Board Statement 106 is unallowable." From February 27, 1995 untilNovember 1, 2006, the Northrop Retiree Medical andLife Plan costs were notmeasuredandassigned in accordance with FAR 31.205-6(o)(2)(iii). [Emphasis added]

7Priorto November 1, 2006, Northrop Grumman used a method and assumptions in compliance with DEFRAto fund the PRB costs. This has causedthe 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 FAS 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 currentyear, but not funded, paid
or otherwise liquidated by the taxreturn due date as extended
are not allowable in any subsequent year."

... We calculated total unallowable costs of$377.7 million from February 27, 1995 through October 31,2006 as the difference between the DEFRA funded amounts and amounts calculated using the FAS 1 06 methodology

.... (R4, tab 14 at 74)
19. On 26 July 2007, the DCE issued a Notice ofIntentto Disallowthe disputed, unfunded PRB costs at issue. This notice adopted the DCAAposition 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 ofNorthrop Grumman Corporation's June 2008 Briefing in Response to the Final Determination on the Allowability ofNorthrop Retiree Health Plan Costs" (R4, tab 21). In the audit report, DCAArevised questioned amounts and concluded that $253,361,512 in unfunded PRB costs were unallowable (id. at 110). While appellant used FAS 106 to accrue PRB costs for purposes ofits financial reporting each year, DCAA did not use those same figures to calculate the disallowance. Rather, it used recalculated FAS I06 figures provided by appellant to reflect the delayed recognition/amortization ofappellant's FAS 106 transition obligation as required by the FAR (tr. 2/14-15).2

2 The correctness ofthe figures used by DCAA to derive the disallowance figure goes to quantum, which is not before us.

821. 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 ofIntentto disallow costs and the 9 April 2008 Final Determination to disallow costs did not list any affected contracts, appellantused Contract No. N68936-05-C-0059 as a "test" contract that would determine the allowability of $6,232.11 for purposes ofthe 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 COSTAND PAYMENT (DEC 2002), which insofar as pertinent, made governmentpayments subjectto the allowability provisions ofF AR Subpart 31.2 in effect onthe date ofcontract award and the terms ofthe 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 FARversion above with regard to the issues pertinent here

..The 2005 regulation stated: (2) To be allowable, PRB costs shall be incurred pursuantto law, employer-employee agreement, or an established policy ofthe contractor, and shall comply with paragraphs (o)(2)(i), (ii), or (iii) ofthis subsection.

(iii) Accrualbasis. PRB costs are accrued during the working lives ofemployees. AccruedPRB costs shall be-(A) Measuredandassigned in accordance with generally acceptedaccountingprinciples. However, the portion ofPRB costs attributable to the transition

...under the delayed recognition methodology described inparagraphs 112 and 113 ofFinancial Accounting Standards Board Statement 106 is unallowable. The transition obligation is defined in Statement 106, paragraph 110; (B) Paidto an insurer or trustee to establish and maintain a fund orreserve 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 befunded by the time set for filing the Federal income tax return or any extension thereof, orpaidto an insurer,provider, or other recipient by the time set for filing the Federal income tax return or extension thereof PRB costs assignedto the currentyear, butnot funded, paidor otherwise liquidatedby the tax return due date as extendedare notallowable 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 ofinsurance and pension costs underthe cost regulations, and is assisted inthis endeavor by DCAA auditors and DCMA insurance/pension specialists, the latter ofwhomperform contractor insurance pensionreviews (CIPR). DFAS 242.7301(a). In this case there was an internal disagreement between CIPR and DCAArepresentatives overthe allowability ofthe unfunded PRB costs in subsequent years.
25. CIPRrepresentatives were ofthe opinion-consistent with that ofappellantthat FAS 106 measurements constituted a ceiling, and that the difference between the unfunded FAS 106 measurement andthe funded DEFRA measurement was not unallowable in future accounting periods underthe regulation (tr. 1/138). An internal CIPRtechnical paper supported the CIPRposition, butthis paper was not official DCMA policy (tr. 11175). DCAA disagreed with the CIPRteam, and held that under Section ( o)(3) the difference between the unfunded FAS 106 measurement and the funded DEFRA measurement was unallowable in future accounting periods under the regulation. Itwas this latter viewthat was ultimately adopted by the CO.
26. The record also reflects that in 2007 the then-current DCMADCE expressed
an opinion-within the government-consistent with that ofappellant and the DCMA CIPR team (R4, tab 13). His opinion was challenged by his superior, the DCMADeputy Director Cost & Pricing, Director Defense Corporate Executive Center, who expressed approval ofthe DCAAposition in an email dated 14 June 2007:
I thinkthe position is that the costprinciple, while possibly unfair, is clear

....

10[S]eems like the company knew the costs had to be assigned to the appropriate years perFAS 106 because oftheri [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 commitmentto recognize unfunded FAS 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) Itwas this position that was ultimately adopted by the CO.
27. Attrial, appellantpresented an expert report from an actuary who, interalia, expressed an opinion on the interpretation ofthe cost regulation and its relationship with CAS 416 from an actuarial perspective, consistent with the allowability ofthe 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 neverbe 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 mannerthat eliminated virtually all PRB costs associated with future increases in health care costs. Because the value ofthe eliminated Plan benefits exceeds the amount ofthe PRB costs that the Government alleges will be unallowable on and after November 1, 2006, the "unallowable" costs that are the subject ofthis 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-yearreview ofPRB costs ofNGC and other major contractors for calendar years 1999-2000. This review was made inresponse 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

11this to bethe case. In summary, the GAO concluded that the government identified only minorproblems 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 briefand addressed at the trial, we give this GAO review little, ifany, weight with respect to the allowability ofthe costs in issue underthe FAR.
DECISION
While the parties vigorously argue the merits oftheirrespective interpretations of the cost regulation, appellant's acknowledgment in its post-hearing briefexcerpted below

- consistent with the evidence ofrecord

- goes far to resolve the issue before us, i.e., whether appellant's practices violated the governing cost regulation in the FAR:
While FARrequires 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 withthis statement. We conclude that appellant's use ofthe DEFRA method violated Section (o)(2) ofthe cost regulation for purposes ofrecovering amounts thatwere not funded under Section (o)(3) below. 3

Not only did the FARrequire 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 calendaryear" in Section (o)(3) mustrefer backto 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 FAS-measured and assigned costs must be timely funded. Since appellant did not measure and assign its Plan PRB costs in accordance with GAAP/FAS 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 ofthe

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 ofits financial reporting- but failed to timely fund all such costs in violation ofSection (o)(3).

12transition 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. Butthis interpretation ignores the express requirement ofSection ( 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 ofthose FAS 106 costs it did not annually fund. However, no such language is contained in the regulation. We must enforce the regulation according to its plainterms and not insert additional words orphrases to alter an otherwiseplain and clear meaning. Tesoro Hawaii Corp. v. UnitedStates, 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. RGWCommunications, Inc. d/b/a Watson Cable Company, ASBCA Nos. 54495, 54557, 05-2 BCA**~** 32,972 at 163,335. We recently set outthis burden ofproofas follows: Equitable estoppel requires a showing of: 1) misleading conduct leading another to reasonably inferthat rights will not be asserted against it; 2) reliance onthis conduct; and 3) material prejudice as a result ofthis reliance. Mabus
v. GeneralDynamics C4 Systems, Inc., 633 F.3d 1356, 1359 (Fed. Cir. 2011). When estoppel is assertedagainst the government, a showingof affirmative misconduct is required in addition to these elements. UnitedPacific 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 ofthe unfunded, prioryear PRB Plan costs arising out ofappellant's switch to accruing PRB costs in accordance with FAS 106 in 2006.

13There is no evidence ofrecord showing that the governmentwas aware ofappellant's planto make this switch priorto 2006, so by definition the government could nothave earlierrepresented

- or misrepresented

- its position to appellant with respect to this plan and the associated unfunded PRB costs. None ofthe DCAA orDCE documents cited by NGC address the issue ofthese costs.
We further note that the DCE letter of 13 April 1998 was qualified and reserved the government's rights in "instances ofnoncompliance 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 ofwhich are relevant here) were voluntary accounting practice changes (finding 11).
To the extentthat 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, prioryearPRB costs, such reliance was unreasonable. The government did not mislead appellant with respect to the allowability ofthe unfunded PRB costs in dispute here, nor did the parties have a course ofdealing with respect to them. Appellant has also failed to prove affirmative misconduct on behalfofthe government. Neitherthe Federal Circuit northe Boardhas developed a litmus test for affirmative misconduct. Such a determination is necessarily fact-dependent. However, that the courts have imposedthis additional requirement when a party seeks to invoke equitable estoppel againstthe government underscores two self-evidentpoints: 1) that the moving party to make its case against the government mustprove something more than would be necessary against a private party; and 2) that this added requirement must, perforce, be ofa nature more compelling than the conduct that would otherwise apply against a private party. See, e.g., RGWCommunications, 05-2 BCA**~** 32,972 at 163,336 (referencing deliberate lies, a pattern offalse promises, or intentional deception as examples ofaffirmative misconduct). Appellant has failed to show any such affirmative misconduct here with respect to the allowability ofthe unfunded PRB costs in issue. There is nothing in the record showing that the government misrepresented orprovided 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 ofits actions in the event it moved from DEFRA to FAS 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. UnitedStates, 213 F.3d 1366, 1371-72 (Fed. Cir. 2000) (failure to call plaintiffs attention to possible legal

14consequences ofits actions does not constitute affirmative misconduct where no evidence ofproviding incorrect legal advice orrelated misrepresentations). Appellant argues that it was affirmatively misled by the government's repeated notifications that its use ofDEFRAwas FAR compliant. We disagree for a number of
reasons. First, none ofthe DCEresponses to appellant's disclosure statements cited by appellant specifically represented, without qualification, that DEFRAwas FAR compliant. The government did indicate, after a review ofa disclosure statement, that no FARviolations were noted, butthese responses were, for the mostpart qualified, and reserved government rights on further review.
Moreover, the fact that the government allowed appellant's yearly PRB costs calculated under DEFRAwas not a misrepresentation, nor was it improperunder 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 31.201-2(c), which provides for the disallowance ofcosts in excess ofthose generated by consistent FARpractices.4 Appellant's annual DEFRA-funded costs were not in excess ofthose generated by appropriate FARpractices; they were indisputably less than such costs. Hence, the allowance ofthese lesser amounts was proper under the regulations, and perforce was not a misrepresentation or affirmative misconduct.
We have duly considered all ofappellant's remaining arguments, but are not persuaded thatthey support a finding ofaffirmative misconduct. We conclude that appellant has notproven equitable estoppel against the government so as to barthe government's recovery here.
Nor is the government barredby the equitable doctrine oflaches. The doctrine of laches serves to bar a claim where the claimant has unreasonably and inexcusably delayed the assertion ofits claim resulting in economic prejudice orthe impairment ofthe ability to mount a defense. 

### JANA, Inc. v. UnitedStates, 936 F.2d 1265, 1269 (Fed. Cir. 1991). Initially, we note that the government is not the claimant here for purposes ofthe laches doctrine. Appellant first soughtto change methodologies from DEFRAtoFAS I06 in 2006, which among other things, resulted in the need to amortize the disputed unfunded PRB costs from prioryears as part ofa transition obligation. Basedupon a DCAA audit dated 8 June 2007, the government issued a notice ofintent to disallow the unfunded costs; on 21 September 2007 appellant objected, and DCMA issued a Final Determinationto disallow the costs on 9 April 2008. NGC flied a claim on

4FAR 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 inconsistentpractices in excess ofthe amount that would have resulted from usingpractices consistentwith this subpart are unallowable. (Emphasis added). 

### See also note 5, 

### infra.

1520 May 2010 and the DCE issued a final decision denying the claim on 18 February 2011. Assuming arguendo, that the equitable doctrine oflaches 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 ofthe regulation was, and still is supported by certain government actuaries on the CIPRteam. However, in our view, the opinion ofthese government actuaries does not trump the plain language ofSections (o)(2) and (o)(3) ofthe costregulation. Appellant also notes that since its various disclosure statements providedthat 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 overthe allowability ofthe unfunded transition obligation under the FAR 31 costprinciples. 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 FAR31.205-6(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 FAS 106

- will not be incurred and as such, the governmenthas no basis to disallow them. According to appellant's brief: "Itis axiomatic that the Government cannot disallow costs that have neverbeen and will neverbe 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 ofrecord.
Neitherparty addressed quantum in any detail in this entitlementproceeding. 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 ofthe Plan based upon the tax deductible amount in accordance with DEFRAwas 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. Itonly questioned the unfunded amounts when appellant sought to change its practice and switched to FAS 106 for government contract purposes. Appellant has shown no conflict between the CAS and FARin this respect.

16developed record to address whetherthe contention is grounded in fact; whetherthe unfunded PRB costs as part ofthe amortized transition obligation were included and "claimed" in appellant's incurred cost submission in 2007 and beyond; and ifso, how the government treated them, and whether any ofthese matters impacted quantum. Assuming, 

### arguendo, thatNGC is due a credit based upon the elimination ofthe future health care cost increases, the amount ofthat credit is also a quantum issue, as is the DCAA calculation in support ofthe disallowance. Ifthis 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. Forreasons stated and based upon the record before us, we conclude that FAR 31.205-6(o) supports the government's disallowance ofthe 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 ofContract Appeals

17

# ~t~ Ji(ELMAN- "--Administrative Judge Armed Services Board ofContractAppeals

I concur

Administrative Judge Acting Vice Chairman Armed Services Board ofContractAppeals**~---...,,**I certify that the foregoing is a true copy ofthe Opinion and Decision ofthe Armed Services Board ofContractAppeals inASBCANo. 57625, Appeal ofNorthrop Grumman Corporation, rendered in conformance with the Board's Charter.
Dated:

18 JEFFREY D. GARDIN Recorder, Armed Services Board ofContractAppeals