Court Opinion

ID: 4661328
Source: CourtListenerOpinion
Date Created: 2021-02-18 20:00:09.613807+00
Date Added: 2024-06-11T08:02:12.705541
License: Public Domain

ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeals of -                                      )
                                                  )
Raytheon Company and Raytheon Missile             )    ASBCA Nos. 59435, 59436, 59437
 Systems                                          )               59438, 60056, 60057
                                                  )               60058, 60059, 60060
                                                  )               60061
                                                  )
Under Contract Nos.      W15P7T-07-C-P207         )
                         W31P4Q-07-C-0159         )

APPEARANCES FOR THE APPELLANT:                        Karen L. Manos, Esq.
                                                      John W.F. Chesley, Esq.
                                                      Erin N. Rankin, Esq.
                                                       Gibson, Dunn & Crutcher LLP
                                                       Washington, DC

APPEARANCES FOR THE GOVERNMENT:                       Arthur M. Taylor, Esq.
                                                       DCMA Chief Trial Attorney
                                                      Alexander M. Healy, Esq.
                                                       Trial Attorney
                                                       Defense Contract Management Agency
                                                       Hanscom AFB, MA

                    OPINION BY ADMINISTRATIVE JUDGE SCOTT

       Raytheon Company (Raytheon) and its Raytheon Missile Systems (RMS) business
segment 1 have appealed under the Contract Disputes Act (CDA), 41 U.S.C. §§ 7101-7109,
from Defense Contract Management Agency (DCMA) contracting officers’ final decisions
(COFDs) asserting government claims. DCMA seeks payment of allegedly unallowable
and expressly unallowable costs that Raytheon included in its final indirect cost proposals
for 2007 and 2008, and penalties regarding some of the costs. These timely appeals were

1   A segment is one of two or more business units or divisions that report directly to a
         home office. See CAS 403-30(4), 48 C.F.R. § 9904.403-30 (4). As reported to the
         Board on September 24, 2020, on April 3, 2020 United Technologies Corporation
         (UTC) consummated a merger with Raytheon Company. As a result, Raytheon
         Company, formerly a publicly traded corporation, became a wholly owned
         subsidiary of UTC and UTC changed its name to Raytheon Technologies
         Corporation. In this decision we refer to Raytheon Company as structured in the
         2007-2008 period at issue. For convenience, unless otherwise indicated, we use
         “Raytheon” when referring to both Raytheon and RMS in their capacity as
         appellants.
consolidated for disposition. The Board conducted a two-week hearing, covering
entitlement and quantum, in Boston, Massachusetts. The parties filed over 560 pages of
post-hearing briefing.

                               GENERAL FINDINGS OF FACT

                          Background, Audits, COFDs, and Appeals

       1. Raytheon, headquartered in Waltham, Massachusetts, is a global technology
company specializing in defense, security, and civil markets. Raytheon and its business
segments collectively had more than 70,000 employees in 2007 and 2008. RMS, a wholly
owned business segment, is headquartered in Tucson, Arizona. It manufactures defensive
and offensive weapons for air, land, sea, and space. In 2007 and 2008, it had about 12,000
employees. (App. undisputed 2 proposed findings of fact (AUPFF) 3 ¶¶ 1-2)

        2. Each year, in connection with the determination of its indirect rates, Raytheon
and its businesses submit final indirect cost proposals to the government (see tr. 3/10).
These appeals pertain to the following proposals: (a) Raytheon Company’s contractor
fiscal year (which, for the company is its calendar year (CY) (tr. 3/10)) 2007 certified final
indirect cost proposal, submitted on June 23, 2008, including $2.34 billion of indirect
corporate office costs (app. supp. R4, tab 208 at 3032, 3317); (b) Raytheon Company’s
2008 certified final indirect cost proposal, submitted on June 23, 2009, including $2.45
billion of indirect corporate office costs (app. supp. R4, tab 331 at 5096, 5297); (c) RMS’
2007 certified final indirect cost proposal, submitted (as revised) on October 27, 2010
(app. supp. R4, tab 260 at 4117); and (d) RMS’ 2008 certified final indirect cost proposal,
submitted (as revised) on October 22, 2010 (app. supp. R4, tab 350 at 5872). A high level
company officer certified that the costs included in each proposal were allowable in
accordance with the cost principles in the Federal Acquisition Regulation (FAR) and its
supplements and that the proposal did not include any costs that were expressly
unallowable under the FAR’s applicable cost principles or its supplements (see, e.g., app.
supp. R4, tab 331 at 5297).

       3. As discussed below, two groups within Raytheon’s Corporate Office worked
together to prepare the 2007 and 2008 corporate proposals: Corporate Government
Accounting (CGA) and Corporate Administration and Services (A&S), which prepared
various schedules for the proposals. (See, e.g., tr. 6/252, 8/8-9) CGA and RMS have
training in preparing the proposals. RMS follows CGA’s written guidelines; it has work
and desk instructions for each schedule; and it conducts testing and internal audits. It has
a “very rigorous review process” (tr. 3/12), described by Rachel Garcia, Senior Manager
of Government Accounting and Internal Controls Excellence at RMS, whose office is
responsible for preparing RMS’ incurred cost proposal. (Tr. 2/264-265, 3/9-13)

2   If a proposed fact is not undisputed, it will be entitled “APFF.”
3   The proposed findings of facts are found in the corresponding parties’ post-hearing
          briefs, and reference the applicable paragraph numbers.
                                               2
       4. The Defense Contract Audit Agency (DCAA) audited the proposals (app. supp.
R4, tab 208 (Corporate Audit Report for 2007); tab 260 (RMS Audit Report for
FY 2007); tab 331 (Corporate Audit Report for 2008); and tab 350 (RMS Audit Report
for 2008)). DCAA opined that some included costs were unallowable and others were
expressly unallowable and subject to “level one” penalties under FAR 42.709(a)(1).
(See, e.g., app. supp. R4, tab 208 at 3183-88 (lobbying-related costs)). Based upon
Raytheon’s inclusion of allegedly unallowable costs in its proposals, DCAA also issued
two audit reports alleging that Raytheon had not complied with Cost Accounting
Standard (CAS) 405, 48 C.F.R. § 9904.405, Accounting for Unallowable Costs, for 2007
and 2008 (app. supp. R4, tab 215 (CAS 405 Audit Report for 2007) and tab 344
(CAS 405 Audit Report for 2008)). DCMA’s corporate administrative CO (CACO),
Thomas Forbush, and the divisional administrative CO (DACO) for RMS, Jack Bradley,
largely based the following COFDs at issue upon the six audit reports (app. supp. R4,
tabs 276-277, 279, 281, 283, 356-358, 363-365). We describe them here, and address
them further below, as pertinent to the instant appeals.

        5. The CACO’s June 20, 2014 COFD (Corporate COFD for 2007) asserted a
$10,468,740 government claim for disallowed costs, penalties and interest, due to
Raytheon’s inclusion of allegedly unallowable and expressly unallowable costs in its CY
2007 incurred cost proposal, and denied its request for a waiver of penalties under
FAR 42.709-5(c). It cited the captioned flexibly-priced contract and Contract
No. W31P4Q-07-C-0159 as representative contracts. (App. supp. R4, tab 279
at 4556-58) The CACO found that certain Corporate Development compensation costs
were expressly unallowable under FAR 31.205-27, ORGANIZATION COSTS (APR
1988). Raytheon’s Government Relations compensation costs were expressly
unallowable under FAR 31.205-22, LOBBYING AND POLITICAL ACTIVITY COSTS
(OCT 1997); and bonus, incentive compensation, and restricted stock costs for employees
alleged to have engaged in expressly unallowable activities were expressly unallowable.
(Id. at 4563-66, 4568) Raytheon’s appeal from this COFD is docketed as ASBCA No.
59435.

       6. The CACO issued a second COFD, dated June 20, 2014 (CAS 405 COFD for
2007), asserting a $7,469,506 government claim in total. The portion on appeal is the
government’s $1,870,428 claim for noncompliance with CAS 405 and FAR 31.201-6,
ACCOUNTING FOR UNALLOWABLE COSTS (NOV 2005), due to Raytheon’s
inclusion of allegedly expressly unallowable Government Relations costs in its 2007
incurred cost proposal, and a $307,776 government claim for noncompliance with CAS
405, due to Raytheon’s inclusion of allegedly expressly unallowable Corporate
Development costs in that proposal. The COFD also claimed, and Raytheon challenged,
that bonus and restricted stock costs for employees alleged to have engaged in expressly
unallowable activities were expressly unallowable. The CAS 405 COFD for 2007 cited
the captioned contract as a flexibly-priced contract affected by the alleged CAS
noncompliance, and Contract No. N00019-07-C-0093 as a representative firm-fixed-price

                                           3
contract so affected. (App. supp. R4, tab 281 at 4573, 4575, 4579-81) Raytheon’s appeal
from this COFD is docketed as ASBCA No. 59436.

        7. On June 22, 2015, the CACO issued a COFD (Corporate COFD for 2008)
asserting a $1,154,383 government claim, including penalties and interest, due to
Raytheon’s inclusion of allegedly unallowable and certain expressly unallowable costs in
its final indirect cost rate proposal for CY 2008 and denying Raytheon’s request for a
waiver of penalties. The CACO cited allegedly expressly unallowable Corporate
Development, Government Relations, and bonus and incentive compensation costs. He
also cited what Raytheon refers to as “Recruitment Reminder” item costs (APFF ¶ 10) and
DCMA refers to as “Souvenir ‘Reminder Item’ Advertising” costs (gov’t reply br. at 4
(chart)), said to be unallowable under FAR 31.205-1, PUBLIC RELATIONS AND
ADVERTISING COSTS (AUG 2003).4 The COFD named representative Contract
No. W15P7T-08-C-P203. (App. supp. R4, tab 364 at 5954-56, 5961) Raytheon’s appeal
from this COFD is docketed as ASBCA No. 60056.

        8. On June 22, 2015, the CACO also issued a COFD pertaining specifically to
airfare (Corporate Airfare COFD for 2008) asserting a $760,8615 government claim due to
Raytheon’s inclusion of airfare costs in its final indirect cost proposal for CY 2008 that
were allegedly unallowable under FAR 31.205-46, TRAVEL COSTS (OCT 2003). He
cited Contract No. W15P7T-08-C-P203 as a representative contract. (App. supp. R4,
tab 363 at 5946-48) Raytheon’s appeal from this COFD is docketed as ASBCA
No. 60057.6

       9. On June 22, 2015, the CACO also issued a COFD asserting a $2,030,636
government claim under CAS 405 and FAR 31.201-6 (CAS 405 COFD for 2008). He
found $981,822 in Government Relations costs to be expressly unallowable under
FAR 31.205-22 and $831,797 in Corporate Development costs to be expressly
unallowable under FAR 31.205-27. He cited flexibly-priced Contract No. W15P7T-08-C-
P203 and firm fixed-price Contract No. W15P7T-07-C-M204 as representative contracts
affected by the alleged CAS noncompliance. (App. supp. R4, tab 365 at 5966, 5968-69;
AUPFF ¶¶ 9, 12) Raytheon’s appeal from this COFD is docketed as ASBCA No. 60058.

       10. On June 12, 2014, the DACO issued a COFD (RMS COFD for 2007)
concluding, among other things, that substantial portions of RMS’ costs for airfare,
outside legal patent, and employee recruiting were unallowable under FAR 31.205-46,
TRAVEL COSTS (OCT 2003); FAR 31.205-30, PATENT COSTS (JUL 2005); and FAR

4 This regulation has been updated since the 2007-2008 period at issue.
5 The parties settled part of DCMA’s airfare cost claims. The Board docketed the settled
       portion as ASBCA Nos. 61136, 61137, 61138, and 61139 and dismissed those
       appeals with prejudice on May 24, 2017, pursuant to the settlement agreement.
       The portion still in dispute amounts to $76,556 (see finding 14).
6 Numerous appeals from government claims relating to corporate airfare costs have been

       stayed pending the outcome of the instant appeals.
                                            4
31.205-34, RECRUITMENT COSTS (JUL 2005), respectively. The DACO also alleged
a lack of documentation under paragraph (d) of FAR 31.201-2, DETERMINING
ALLOWABILITY (MAY 2004). Although the COFD did not name a representative
contract, it was based upon the RMS Audit Report for 2007, which lists affected contracts.
(App. supp. R4, tab 260 at 4098, tab 277; ex. G-10; AUPFF ¶¶ 13-14) Raytheon’s and
RMS’ appeal from this COFD is docketed as ASBCA No. 59437.

       11. The DACO issued another COFD on June 12, 2014 (RMS Penalties COFD for
2007), asserting a $94,905 government claim for penalties, due to Raytheon’s inclusion of
various allegedly expressly unallowable costs, totaling $135,763, in its incurred cost
proposal for FY 2007. The DACO denied Raytheon’s request for a penalty waiver. (App.
supp. R4, tab 276 at 4535-36, 4538; AUPFF ¶ 15) Although the COFD did not name a
representative contract, it was based upon the RMS Audit Report for 2007, which lists
affected contracts (app. supp. R4, tab 260 at 4098). Raytheon’s appeal from this COFD is
docketed as ASBCA No. 59438.

        12. For 2008, the DACO issued a COFD on June 11, 2015, disallowing RMS’
indirect airfare costs. He did not make a payment demand because the amount of costs
claimed to be unallowable, plus an amount Raytheon had agreed to remove from its claim
for other indirect costs, was less than the amount being withheld from current approved
billing rates for 2008. (App. supp. R4, tab 358; AUPPF ¶ 16) Raytheon’s appeal from
this COFD is docketed as ASBCA No. 60059.

        13. On June 11, 2015, the DACO also issued two COFDs disallowing RMS’ direct
airfare costs that had been included in its billings under two named contracts and
demanding payment of $167,427 and $17,274, respectively (RMS Direct Airfare COFDs
for 2008) (app. supp. R4, tabs 356-57; AUPFF ¶ 17). Raytheon’s appeals from these
COFDs are docketed as ASBCA Nos. 60060 and 60061.

       14. A summary of the costs remaining in dispute in these appeals follows. The
chart was submitted by Raytheon (APFF ¶ 18). Government disagreements or comments
are highlighted (gov’t reply br. at 4).

                                            5
    Business             Cost Type           Years       Disputed           COFD Basis for
                                                         Amount                Disallowance
    Corporate   Travel (airfare)             2008    $76,556            31.205-46, Travel costs.
    RMS         Indirect Travel (airfare)    2007    $815,036           31.201-2(d) (supporting
                                             2008    $978,429           documentation).
                                                                        31.205-46, Travel costs.
    RMS         Direct Travel (airfare)      2008    $184,701           31.205-46, Travel costs.
    Corporate   Corporate Development        2007    $307,776           31.205-27, Organization
                                                     (Gov’t $862,010)   costs.
                                             2008    $868,322           Expressly unallowable
                                                     (Gov’t $831,797)
    Corporate   Government Relations         2007    $1,870,428         31.205-22, Lobbying and
                                             2008    $1,065,481 7       political activity costs.
                                                                        Expressly unallowable.
    RMS         Outside Legal Patent         2007    $120,600           31.201-2(d) (supporting
                                                                        documentation).
                                                                        31.205-30, Patent costs.
    RMS         Engineering Labor Overhead 2007      $96,701            31.205-30, Patent costs.
                                                                        Expressly unallowable.
    RMS         Recruiting Travel            2007    $51,436            31.201-2(d) (supporting
                                                                        documentation).
                                                                        31.205-34, Recruitment
                                                                        costs.
    Corporate   Restricted Stock,            2007    $1,242,895         FAR 31.205-22,
                Incentive Compensation,      2008    $125,280           Lobbying & political
                Bonus                                                   activity costs; FAR
                                                                        31.205-27, Organization
                                                                        costs; FAR 41.205-47,
                                                                        Costs related to legal and
                                                                        other proceedings.
                                                                        Expressly unallowable.
    Corporate   Recruitment Reminder         2008    $17,780            31.205-1, Public
                Items or Souvenir                                       relations and advertising
                Advertising costs.                                      costs.
                                                                        31.205-27,
    Corporate   CAS 405 Noncompliance        2007    $2,178,204         Organization costs.
                                             2008    $1,813,619         31.205-22, Lobbying
                                                                        and political activity.
                                                                        Expressly unallowable.

7   Per DCMA, of the $1,065,481, $981,822 is expressly unallowable and $83,659 is
         unallowable (see app. supp. R4, tab 364 at 5955, 5962; gov’t reply br. at 4 n.3).
                                               6
 Statutory and Regulatory Provisions Applicable to All or Several of the Subject Appeals

     15. Among others addressed separately below, the following statutory, FAR and
CAS provisions are pertinent:

             FAR 31.201-2, DETERMINING ALLOWABILITY
             (MAY 2004), provides in part:

             (a) A cost is allowable only when the cost complies with all of
                 the following requirements:

                (1) Reasonableness.

                (2) Allocability.

                (3) Standards promulgated by the CAS Board, if
                    applicable, generally accepted accounting principles
                    and practices appropriate to the circumstances.

                (4) Terms of the contract.

                (5) Any limitations set forth in this subpart.

                ....

             (d) A contractor is responsible for accounting for costs
                 appropriately and for maintaining records, including
                 supporting documentation, adequate to demonstrate that
                 costs claimed have been incurred, are allocable to the
                 contract, and comply with applicable cost principles in
                 this subpart and agency supplements. The [CO] may
                 disallow all or part of a claimed cost that is inadequately
                 supported.

             FAR 31.201-3, DETERMINING REASONABLENESS
             (JUL 1987), provides in part:

             (a) A cost is reasonable if, in its nature and amount, it does
                 not exceed that which would be incurred by a prudent
                 person in the conduct of competitive business.… No
                 presumption of reasonableness shall be attached to the
                 incurrence of costs by a contractor. If an initial review of
                 the facts results in a challenge of a specific cost by the
                 [CO] or the [CO’s] representative, the burden of proof

                                             7
                    shall be upon the contractor to 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 of cost generally recognized as
                        ordinary and necessary for the conduct of the
                        contractor’s business or the contract performance;

                    (2) Generally accepted sound business practices, arm’s
                        length bargaining, and Federal and State laws and
                        regulations;

                    (3) The contractor’s responsibilities to the Government,
                        other customers, the owners of the business,
                        employees, and the public at large; and

                    (4) Any significant deviations from the contractor’s
                        established practices.

               FAR 52.216-7, ALLOWABLE COST AND PAYMENT
               (DEC 2002), incorporated into the cost contracts at issue, 8
               provides in part that:

               (a) Invoicing.

                    (1) The Government will make payments to the
                        Contractor when requested as work progresses … in
                        amounts determined to be allowable by the [CO] in
                        accordance with [FAR] subpart 31.2 in effect on the
                        date of this contract and the terms of the contract.

               …

               (d) Final indirect cost rates.

                    (1) Final annual indirect cost rates and the appropriate
                        bases shall be established in accordance with
                        Subpart 42.7 of the [FAR] in effect for the period
                        covered by the indirect cost rate proposal.

         Title 10 U.S.C. § 2324, Allowable costs under defense contracts, provides:

8   See, e.g., ASBCA Nos. 60056-61, R4, tab 2 at 158.
                                                8
(a) Indirect Cost That Violates a FAR Cost Principle.-

    The head of an agency shall require that a covered
    contract provide that if the contractor submits to the
    agency a proposal for settlement of indirect costs incurred
    by the contractor for any period after such costs have been
    accrued and if that proposal includes the submission of a
    cost which is unallowable because the cost violates a cost
    principle in the [FAR] or applicable agency supplement to
    the [FAR], the cost shall be disallowed.

(b) Penalty for Violation of cost principle.-

    (1) If the head of the agency determines that a cost
        submitted by a contractor in its proposal for
        settlement is expressly unallowable under a cost
        principle referred to in subsection (a) that defines the
        allowability of specific selected costs, the head of the
        agency shall assess a penalty against the contractor in
        an amount equal to-

        (A) the amount of the disallowed cost allocated to
            covered contracts for which a proposal for
            settlement of indirect costs has been submitted;
            plus

        (B) interest (to be computed based on provisions in
            the [FAR]) to compensate the United States for
            the use of any funds which a contractor has been
            paid in excess of the amount to which the
            contractor was entitled.

    (2) If the head of the agency determines that a proposal
        for settlement of indirect costs submitted by a
        contractor includes a cost determined to be
        unallowable in the case of such contractor before the
        submission of such proposal, the head of the agency
        shall assess a penalty against the contractor in an
        amount equal to two times the amount of the
        disallowed cost allocated to covered contracts for
        which a proposal for settlement of indirect costs has
        been submitted.

                               9
             (c) Waiver of Penalty. --The [FAR] shall provide for a
                 penalty under subsection (b) to be waived in the case of a
                 contractor’s proposal for settlement of indirect costs
                 when-

                   ....

                 (1) The contractor demonstrates, to the [CO’s]
                     satisfaction, that--

                     (A) it has established appropriate policies and
                         personnel training and an internal control and
                         review system that provide assurances that
                         unallowable costs subject to penalties are
                         precluded from being included in the contractor’s
                         proposal for settlement of indirect costs; and

                     (B) the unallowable costs subject to the penalty were
                         inadvertently incorporated into the proposal.

       FAR 42.709, SCOPE (NOV 2016), and its subsections implement the statutory
penalty and waiver provisions as does FAR 52.242-3, PENALTIES FOR
UNALLOWABLE COSTS (MAR 2001).

      CAS 405-40, Fundamental Requirement, states in part that:

             (a) Costs expressly unallowable or mutually agreed to be
                 unallowable, including costs mutually agreed to be
                 unallowable directly associated costs, shall be identified
                 and excluded from any billing, claim, or proposal
                 applicable to a Government contract.

48 C.F.R. § 9904.405-40(a).

      FAR 31.201-6 reflects CAS 405’s requirements and provides, in part:

             (a) Costs that are expressly unallowable or mutually agreed to
                 be unallowable, including mutually agreed to be
                 unallowable directly associated costs, shall be identified
                 and excluded from any billing, claim, or proposal
                 applicable to a Government contract. A directly
                 associated cost is any cost that is generated solely as a
                 result of incurring another cost, and that would not have
                 been incurred had the other cost not been incurred. When

                                            10
                   an unallowable cost is incurred, its directly associated
                   costs are also unallowable.

               ASBCA NO. 59435 -- GOVERNMENT RELATIONS COSTS

       FINDINGS OF FACT CONCERNING GOVERNMENT RELATIONS COSTS

        16. The following statutory and regulatory provisions apply to lobbying:

       Title 31 U.S.C. § 1352, Limitation on Use of Appropriated Funds to Influence
Certain Federal Contracting and Financial Transactions, provides in part:

               (a)(1) None of the funds appropriated by any Act may be
                      expended by the recipient of a Federal contract, grant,
                      loan, or cooperative agreement to pay any person for
                      influencing or attempting to influence an officer or
                      employee of any agency, a Member of Congress, an
                      officer or employee of Congress, or an employee of a
                      member of Congress in connection with any Federal
                      action described in paragraph (2) of this subsection
                      [including the awarding of any Federal contract].

        Title 10 U.S.C. § 2324(e), Specific Costs Not Allowable, provides in part:9

               (1) The following costs are not allowable under a covered
                   contract:

                  ....

               (B) Costs incurred to influence (directly or indirectly)
                   legislative action on any matter pending before Congress,
                   a State legislature, or a legislative body of a political
                   subdivision of a State.

      FAR 31.201-6(c)(1), ACCOUNTING FOR UNALLOWABLE COSTS
(NOV 2005), provides that “The practices for accounting for and presentation of
unallowable costs must be those described in 48 CFR 9904.405, Accounting for
Unallowable Costs [CAS 405].”

9   See also Title 10 U.S.C. § 2249, Prohibition on Use of Funds for Documenting
         Economic or Employment Impact of Certain Acquisition Programs, and DOD FAR
         Supplement (DFARS) 231.205-22, Legislative Lobbying Costs, which implements
         that statute and makes such costs unallowable.

                                              11
     FAR 31.201-6(e)(2), ACCOUNTING FOR UNALLOWABLE COSTS
(NOV 2005), provides:

          Salary expenses of employees who participate in activities that
          generate unallowable costs shall be treated as directly
          associated costs to the extent of the time spent on the
          proscribed activity, provided the costs are material in
          accordance with subparagraph (e)(1) above (except when such
          salary expenses are, themselves, unallowable). The time spent
          in proscribed activities should be compared to total time spent
          on company activities to determine if the costs are material.
          Time spent by employees outside the normal working hours
          should not be considered except when it is evident that an
          employee engages so frequently in company activities during
          periods outside normal working hours as to indicate that such
          activities are a part of the employee’s regular duties.

      FAR 31.205-22, LOBBYING AND POLITICAL ACTIVITY COSTS (OCT 1997),
provides in part:

          (a) Costs associated with the following activities are
              unallowable:

              (1) Attempts to influence the outcomes of any Federal,
                  State, or local election, referendum, initiative, or
                  similar procedure, through in kind or cash
                  contributions, endorsements, publicity, or similar
                  activities;

              (2) Establishing, administering, contributing to, or paying
                  the expenses of a political party, campaign, political
                  action committee [PAC], or other organization
                  established for the purpose of influencing the
                  outcomes of elections;

              (3) Any attempt to influence

                  (i) the introduction of Federal, state, or local
                      legislation, or

                  (ii) the enactment or modification of any pending
                       Federal, state, or local legislation through
                       communication with any member or employee of
                       the Congress or state legislature (including efforts
                       to influence state or local officials to engage in
                                        12
                           similar lobbying activity), or with any
                           government official or employee in connection
                           with a decision to sign or veto enrolled
                           legislation;

                  (4) Any attempt to influence

                       (i) the introduction of Federal, state, or local
                           legislation, or

                       (ii) the enactment or modification of any pending
                            Federal, state, or local legislation by preparing,
                            distributing or using publicity or propaganda, or
                            by urging members of the general public or any
                            segment thereof to contribute to or participate in
                            any mass demonstration, march, rally, fund
                            raising drive, lobbying campaign or letter writing
                            or telephone campaign;

                  (5) Legislative liaison activities, including attendance at
                      legislative sessions or committee hearings, gathering
                      information regarding legislation, and analyzing the
                      effect of legislation, when such activities are carried
                      on in support of or in knowing preparation for an
                      effort to engage in unallowable activities; or

                  (6) Costs incurred in attempting to improperly
                      influence..., either directly or indirectly, an employee
                      or officer of the Executive branch of the Federal
                      Government to give consideration to or act regarding
                      a regulatory or contract matter.

        FAR 31.205-22(b) excepts certain activities from paragraph (a)’s coverage, e.g.
“providing technical and factual . . . information on a topic directly related to performance
of a contract . . . in response to a documented request” from a member of Congress, or any
activity specifically authorized by statute to be undertaken with contract funds.

       FAR 31.205-22(c) provides:

              When a contractor seeks reimbursement for indirect costs,
              total lobbying costs shall be separately identified in the
              indirect cost rate proposal, and thereafter treated as other
              unallowable activity costs.

                                             13
      FAR 31.205-22(d) provides:

             Contractors shall maintain adequate records to demonstrate
             that the certification of costs as being allowable or
             unallowable (see 42.703-2) [requirement for certification of
             indirect costs] pursuant to this subsection complies with the
             requirements of this subsection.

      CAS 405-40(e), Fundamental Requirement, 48 C.F.R. § 9904.405-40(e) provides:

             All unallowable costs covered by paragraphs (a) through (d) of
             this subsection shall be subject to the same cost accounting
             principles governing cost allocability as allowable costs. In
             circumstances where these unallowable costs normally would
             be part of a regular indirect-cost allocation base or bases, they
             shall remain in such base or bases. Where a directly
             associated cost is part of a category of costs normally included
             in an indirect-cost pool that will be allocated over a base
             containing the unallowable cost with which it is associated,
             such a directly associated cost shall be retained in the indirect-
             cost pool and be allocated through the regular allocation
             process.

      Raytheon’s Government Relations Department Activities

       17. At all relevant times, Raytheon maintained an office in Arlington, Virginia,
known as the Washington Office or Washington Area Office (see, e.g., tr. 5/23). In 2007
and 2008 the office included a Government Relations Department, among others. Costs
associated with Government Relations were collected in cost center 90206. The
Department’s name has changed from time to time (e.g., “Congressional Relations;”
“Legislative Affairs;” or “Legislative Operations”) but the cost center designation has
remained the same. We use “Government Relations” for convenience. (See Rule 4,
tabs 121, 169; app. supp. R4, tab 208 at 3184; tr. 5/19, 176, 6/85, 10/105; AUPFF ¶ 19)
Government Relations serves as Raytheon’s primary interface with the United States
Congress (gov’t undisputed proposed finding of fact (GUPFF) ¶ 35 (first sentence only)).

       18. In 2007 and 2008 Government Relations had approximately 20-22 employees,
of whom approximately 12-13 were federal government relations specialists, managers or
directors; two were responsible for state and local government relations; two were
responsible for PAC activities; and the remainder were administrative specialists. In its
2008 annual Lobbying Report to Congress, Raytheon identified up to 13 individuals who

                                            14
had acted as lobbyists 10 in given areas (usually fewer per area). (R4, tab 169; tr. 5/24,
10/171; AUPFF ¶¶ 20-21 (excluding n.8))

        19. Raytheon’s General Policies and Procedures, No. 23-3045-110,
“IDENTIFYING AND REPORTING LOBBYING ACTIVITY COSTS,” effective
December 13, 1984 and continuing through 2007 and 2008 (Lobbying Policy), covered
how Government Relations employees were to log their time to comply with
FAR 31.205-22 and exclude unallowable lobbying costs (app. supp. R4, tab 1;
tr. 5/283-84, 9/284-85). The Lobbying Policy provided in part:

                5.1 Unallowable Costs

                5.1.1 Lobbying Activity Costs—These activities include:

                     a. Attempts to influence the outcomes of any Federal,
                        state, or local election, referendum, initiative, or
                        similar procedure, through in kind or cash
                        contributions, endorsements, publicity, or similar
                        activities;

                     b. Establishing, administering, contributing to, or paying
                        the expenses of a political party, campaign, [PAC], or
                        other organization established for the purpose of
                        influencing the outcomes of elections;

                     c. Any attempt to influence (1) the introduction of Federal
                        or state legislation, or (2) the enactment or modification
                        of any pending Federal or state legislation through
                        communication with any member or employee of the
                        Congress or state legislature (including efforts to
                        influence state or local officials to engage in similar
                        lobbying activity), or with any government official or
                        employee in connection with a decision to sign or veto
                        enrolled legislation;

                     d. Any attempt to influence (1) the introduction of Federal
                        or state legislation, or (2) the enactment or modification
                        of any pending Federal or state legislation by preparing,
                        distributing, or using publicity or propaganda, or by
                        urging members of the general public or any segment
                        thereof to contribute to or participate in any mass

10   Raytheon objects to the term “lobbyist” in some cases, stating that it has no such job
         title. We use the term for convenience, without making any substantive
         determination on the question of lobbying costs, unless we so state.
                                               15
       demonstration, march, rally, fund raising drive,
       lobbying campaign, or letter writing or telephone
       campaign; or

    e. Legislative liaison activities only when carried on in
       support of or in knowing preparation for an effort to
       engage in unallowable activities. Thus, only those
       legislative liaison activities which, from their timing
       and subject matter, can reasonably be inferred to have
       had a clearly foreseeable link with later lobbying fall
       within the “knowing preparation” standard of this
       section.

5.1.2 Associated Lobbying Activity Costs

    a. The lobbying activity costs defined above include the
       applicable portions of salaries of employees and fees of
       individuals or firms engaged in lobbying activity on
       behalf of Raytheon (whether or not such employees or
       firms are registered as lobbyists under any applicable
       law).

    b. Also unallowable are costs that are “directly associated”
       with lobbying activity costs, as defined in Section 5.1.1
       above. A “directly associated” cost as defined by the
       [CAS] Board (CASB) is a “cost which is generated
       solely as the result of the incurrence of the (unallowable
       lobbying cost) and which would not have been incurred
       had the (unallowable lobbying cost) not been incurred.”
       ....

5.2 Allowable Costs

5.2.1 Non-Lobbying Activity Costs—These activities include:

    a. Providing a technical and factual presentation of
       information, on or off Raytheon premises, on a topic
       directly related to the performance of a contract
       through hearing testimony, statements or letters to the
       Congress or a state legislature, or subdivision,
       member, or cognizant staff member thereof, in
       response to a documented request (including a
       Congressional Record notice requesting testimony or
       statement for the record at a regularly scheduled
       hearing) made by the recipient member, legislative
                              16
       body or subdivision, or a cognizant staff member
       thereof; provided such information is readily
       obtainable and can be readily put in deliverable form;
       and further provided that costs under this section for
       transportation, lodging or meals are unallowable unless
       incurred for the purpose of offering testimony at a
       regularly scheduled Congressional hearing pursuant to
       a written request for such presentation made by the
       Chairman or Ranking Minority Member of the
       Committee or Subcommittee conducting such hearing.

    b. All legislative liaison activities not in support of
       unallowable lobbying activity costs as defined in
       Section 5.1 above. Allowable legislative liaison
       includes gathering information or legislation,
       analyzing the [e]ffect of legislation, and attending
       legislative sessions or hearings and reporting on the
       subject matter of such legislative sessions or hearings.

....

6. PROCEDURE

....

NOTE: The applicable portion of employees’ salaries is
      withdrawn through the overhead rate submission . . .

    b. In addition to the above reporting requirement,
       employees who spend more than 25% of their
       compensated hours during the month on lobbying
       activity are also required by Government regulation to
       maintain time logs, calendars, or similar records
       documenting all of their lobbying activity.

NOTE: Time spent on lobby activity after the scheduled
      working day is not reported.

....

6.2.2 Raytheon is required to maintain “adequate records” to
      support a required certification in its annual indirect
      cost rate proposal that Raytheon has properly
      segregated and not claimed for reimbursement the cost
      of any unallowable lobbying activity.
                              17
(App. supp. R4, tab 1 at 1-4) 11

      20. Raytheon’s Company Policy No. 6-RP, “Overhead and G&A Rates for
Accounting and Provisional Billing Purposes (Excluding Unallowable Costs),” effective
June 26, 2002, identifies lobbying costs as expressly unallowable (R4, tab 112 at ¶ 6.2).

        21. In 2007 and 2008 Raytheon’s CGA, particularly James Pflaumer, Manager of
Government Accounting, promulgated “Guidelines - Accounting for Selected Costs In
Accordance With FAR Part 31” (Unallowable Guidelines), which addressed lobbying,
among other costs (app. supp. R4, tab 48 at 797-98, tab 101 at 1587; tr. 3/9-10, 5/298,
6/19). Two of the testifying lobbyists did not recall seeing the Unallowable Guidelines
prior to this litigation (tr. 7/9 (Robert Neal), 10/149 (Joseph Zummo)). PAC Manager
Courtney Watson was fully aware of the Lobbying Policy and the Unallowable
Guidelines, which were available to all of the lobbyists. The Unallowable Guidelines
were subordinate to the Lobbying Policy. (Tr. 5/177, 220-21, 6/19, 27)

        22. Ms. Watson found the distinction between allowable and unallowable costs to
be fairly clear. In her experience Government Accounting took accurate time reporting
very seriously. These considerations led to the development of the Lobbying Tool
(below). (Tr. 5/217-21)

       23. In addition to in-house training, the Government Relations department was
trained by outside counsel concerning what were allowable and unallowable costs, for
purposes of recording time accurately. The training, which was at least annual, included
compliance with the FAR’s lobbying provisions. (Tr. 5/218-19, 7/24, 45-46) By email
dated January 4, 2008 to the Government Relations personnel and others, Robert Shanks,
Raytheon’s corporate counsel, sent “Additional Guidance: New Lobbying and Ethics
Reform Act” (R4, tab 151 at 71755-56; tr. 7/23-24). The document gave statistical order
numbers and charge numbers for purposes of charging lobbying costs and described
lobbying as follows:

                Direct lobbying is the communication of Raytheon’s view to a
                federal, state or local legislator or a staff member or any other
                government employee who may help develop legislation.
                Even if there is no pending legislation, you would be engaged
                in lobbying if you asked a legislator or covered Executive
                Official to take an action that would require legislation, such

11   The only material difference between the Lobbying Policy’s recital of unallowable
         lobbying costs and those contained at FAR 31.205-22(a) is that the Policy did not
         include a counterpart to FAR 31.205-22(a)(6), concerning illegal attempts to
         improperly influence an Executive Branch employee or officer. Raytheon
         maintains, without challenge, that these prohibitions are addressed elsewhere in its
         policies and are not in dispute in these appeals. (App. br. at 18, n.9)
                                               18
              as funding an agency or program. PLEASE NOTE: Lobbying
              includes preparation time for “white papers” and other written
              or oral lobbying activities, as well as time spent supporting the
              PAC.

(R4, tab 151 at 71762) The Government Relations team had worked with Raytheon’s
Business Development, Finance and Legal Teams to prepare these “basic instructions”
(tr. 7/27-28). In addition to providing charge instructions to Raytheon’s various
businesses, Raytheon had separate training for them concerning the definitions of
lobbying (tr. 7/28-30).

       24. In 2007 and 2008 Raytheon withdrew unallowable costs from its Government
Relations cost center 90206 through A&S, which was responsible for preparing the
Corporate incurred cost submissions. Donna Ferrero, a Consulting Budget Analyst, was
responsible for collecting costs from cost center 90206, ensuring that the unallowable
portion was withdrawn, and calculating the cost disallowance factor (below). She had no
written instructions on how to complete the lobbying withdrawal calculation but had
consulted with her predecessor and supervisor on the matter and, based upon her several
years’ experience, she knew what was required. (Tr. 6/252-54; AUPFFs 48-49)
Ms. Ferraro was making mathematical calculations, not evaluating the substance or
purpose of the time reported (tr. 6/260-61, 267). Ms. Watson noted that “the onus [was]
on each individual employee” to enter his or her time accurately (tr. 5/209-10).

     25. During the relevant time periods Raytheon’s paper time sheets for its
Washington Office defined “Lobbying” as follows:

              Lobbying is defined by the Lobbying Disclosure Act (LDA) as
              any oral or written communication (including e-mail) to an
              executive or legislative branch official with regard to the
              formulation, modification, or adoption of federal legislation, a
              federal rule, regulation, Executive Order, or any other
              program, policy, or position of the U.S. Government.
              Exclusions include written responses to requests for
              information, testimony before a committee and administrative
              requests.

(R4, tab 127 at 144664) This definition was to provide guidance regarding lobbying
activities but there was no specific training on how to fill out the time sheets (tr. 5/229).

        26. Congressional “[LDA] Guidance,” effective January 1, 2008, revised
February 15, 2013, states that the LDA “does not contain any special record keeping
provisions” but, for an organization employing in-house lobbyists, it “requires a good
faith estimate of the total expenses of its lobbying activities” (R4, tab 229 at 14;
tr. 5/38-40).

                                              19
      27. In addition to the LDA’s definition of lobbying, at least Messrs. Neal, Zummo,
and Woody Lee were also familiar with the FAR definition of lobbying and used the
concepts embodied in each in recording unallowable time (tr. 7/17, 9/287-88, 10/135).

        28. During 2007 and all relevant times, Raytheon instructed its Government
Relations personnel to exclude from their monthly time-sheet reports any time spent on
unallowable lobbying activities on a weekend, holiday, or before 8 AM or after 5 PM.
Raytheon never withdraws time for unallowable lobbying activities occurring during
those periods on the ground that its Government Relations employees are salaried and
charged indirectly; they are paid based upon a 40-hour work week; and including time
outside of that period would result in an overstatement of the withdrawal amount.
Raytheon maintains, and the government has not rebutted, that there was no cost to it or
to the government for work outside normal business hours. 12 (R4, tab 103 at 65-68;
tr. 5/52, 235-37, 240-44, 6/276-77, 9/288-89; see similarly tr. 10/138-40; GUPFF ¶ 53 as
restated in APFF ¶ 53)

       29. Accounting for labor costs as a function of time paid, rather than time worked,
is one common industry method. Raytheon asserts that it is required to use that method
under CAS 401, 48 C.F.R. § 9904.401, Consistency in Estimating, Accumulating and
Reporting Costs, because that is its disclosed accounting practice and the one it uses in
bidding. (Tr. 1/199-200, 2/59, 6/109-10) We find that Raytheon appropriately excluded
work from its lobbying cost reporting for which there was no cost to the government.

        30. For the most part, other than some identification of weekends, travel, paid time
off, holidays or leave, Raytheon’s paper time sheets are not detailed. Their purpose is to
report time spent on unallowable activities only. Normally, they identify the hours spent
on lobbying for a given day, not the specific activities. They also do not report the nature
of any alleged non-lobbying activities. (R4, tabs 127-32, 134-35, 137, 139, 141-42;
tr. 9/286, 349, see tr. 5/93 (Raytheon did not provide the auditors with detailed logs of
employees’ work activities), but see finding 60 (auditors did not ask for such materials)).
A few of the time sheets describe at least some of the reporting individual’s activities (see,
e.g., R4, tabs 133, 136, 138, 140).

       31. In 2008, Raytheon transitioned from paper time sheets to an online Lobbying
Compliance Tool (Lobbying Tool), in response to the Honest Leadership and Open
Government Act of 2007, Pub. L. 110-81, 121 Stat. 735 (Sept. 14, 2007), and to new
procurement laws in several states. From January 1, 2008 until March 31, 2008, before
Raytheon implemented the Lobbying Tool, its lobbyists used internal “statistical orders”
to track their lobbying hours. Like the time sheets, the orders did not describe specific

12   Raytheon’s cost accounting does not allocate costs to the night and weekend work.
         However, logically, the expectation of regular night and weekend work would be
         factored into the salary paid to the lobbyists. The government did not introduce
         testimony on this point, so we accept Raytheon’s testimony that the government
         was not charged for the night and weekend work.
                                              20
activities. (See R4, tabs 151, 177 at 2, tab 214 at 1-2, tab 217 at spreadsheet attachment;
tr. 5/55-56, 202-03, 217-18; GUPFF ¶¶ 56-58 as restated in APFF 43, GUPFF ¶ 60).

        32. Raytheon implemented the Lobbying Tool in April 2008. It allowed its
lobbyists to log on to Raytheon’s internal intranet in order to report their lobbying hours
monthly (see R4, tabs 190, 193; GUPFF ¶ 61). The Lobbying Tool accounted separately
for LDA lobbying activities and those that were unallowable under FAR 31.205-22. For
example, PAC activities are not lobbying for purposes of the LDA but are unallowable
under the FAR. The Lobbying Tool tracked total lobbying hours per employee, including
for the LDA, the Internal Revenue Service, and FAR compliance. As of the audit (below),
each employee who lobbied prepared a one-page monthly time log showing the total
number of hours that the employee engaged in disallowed lobbying or PAC efforts each
day. At the end of every month, the employee entered the hours spent on lobbying-related
activities into the Lobbying Tool. The time logs were then consolidated and formed the
basis for Raytheon’s voluntary cost withdrawal for lobbying activities. The unallowable
lobbying withdrawal percentage was calculated by dividing the total hours spent on
lobbying activity by the total annual hours worked. (App. supp. R4, tab 208 at 3185-87;
tr. 5/61, 211-14)

        33. As with the predecessor paper time sheets, under the Lobbying Tool lobbyists
were not to record more than 8 hours a day or enter any weekend or holiday lobbying
(tr. 5/243-44, 280-81, 10/139-40; GUPFF ¶ 63). The tool did not provide information
regarding the nature of Raytheon’s lobbyists’ activities (R4, tab 215 at attachment;
tr. 6/294-95; GUPFF ¶ 65).

        34. For all relevant times, Raytheon relied upon the lobbying time reported by its
Government Relations lobbyists to determine its unallowable lobbying activity costs under
FAR 31.205-22, which it referred to as its “lobbying withdrawal calculation.” Raytheon’s
A&S Budgets Group, in particular analyst Ferrero, was responsible for the calculation as
part of the preparation of Raytheon Corporate’s annual indirect cost proposals, including
for FYs 2007 and 2008. Ms. Ferrero did not know the process by which Raytheon’s
lobbyists recorded their time. (R4, tab 103 at 62-64 (app. resp. to interrog. No. 24);
tabs 160, 184; tr. 6/252-61; GUPFF ¶¶ 66-67)

       35. For the lobbying cost withdrawal calculation, Raytheon established a ratio of
unallowable hours worked by the Government Relations employees to their total hours
worked. The ratio’s numerator was the total number of unallowable hours reported by the
lobbyists. The denominator was the total number of work hours available during a given
year to the employees who reported unallowable hours, based upon a 40-hour work week
less vacation and holidays. Dividing the numerator by the denominator yielded a
percentage—the lobbying disallowance factor. Raytheon applied this factor to what it
deemed to be Government Relations’ recoverable expenses (including the salary and
fringe benefits paid to its lobbyists and their administrative staff) to determine the costs
associated with unallowable lobbying activities under FAR 31.205-22. (R4, tab 103
at 62-64 (app. resp. to interrog. No. 24); tabs 160, 184, 710 ¶ 69; tr. 6/255-60
                                             21
(disallowance factor applied to labor, salary, and some other general ledger accounts);
GUPFF ¶¶ 68-69)

       36. For Raytheon Corporate’s 2007 and 2008 incurred cost proposals, Ms. Ferrero
calculated the disallowance factors at 53.3% and 50%, respectively, resulting in
withdrawals of $2,466,654.88 and $2,558,450.79 (R4, tabs 160-61, 184 at tab entitled
“cc902906 Withdrawal,” tab 185; tr. 6/255-60, 318-23, 333; GUPFF ¶¶ 70-73).

        37. By the time of the 2007 and 2008 withdrawals, Ms. Ferrero had enhanced the
process to avoid some past inadvertent errors. She personally reviewed every
Government Relations time sheet submitted in 2007; ensured that employees who joined
or left the cost center received a prorated allocation for purposes of the withdrawal factor;
confirmed that the list of employees for each year’s withdrawal was correct; and
confirmed her draft analysis with the Corporate A&S Finance Manager embedded in the
Washington Office. Her supervisor, Charles Vilandre, also exercised closer supervision
over the withdrawal process than he had previously. (Tr. 6/312-313, 315-16, 319-21,
333-34) Two State and Local Government Relations specialists did not prepare paper
timesheets in 2007. They were not required to do so under the LDA. However, with
Ms. Watson’s assistance, Ms. Ferrero made reasonable efforts to ascertain and report their
unallowable lobbying time. (R4, tabs 157-59; tr. 5/245-48, 6/283-87)

         DCAA’s Corporate Audit for 2007 and Corporate COFD for FY 2007

        38. In 2008, Catherine Grindlay (now Quinn, as we refer to her) of DCAA began
the initial Corporate Audit of Government Relations cost center 90206 for 2007. Along
with two others from DCAA, Ms. Quinn interviewed Government Relations employees
during one visit in December 2008 regarding CY 2007 lobbying costs, as reflected in
typewritten interview summaries, which were not sworn transcripts. (R4, tab 218;
tr. 8/236-38, 241-42) The purpose of her interviews was to determine if the amount of
unallowable lobbying costs Raytheon recorded coincided with the employees’ stated job
roles and activities (app. supp. R4, tab 208 at 3184-86). The employees interviewed, in
2008 and later, were not given copies of DCAA’s interview notes for review (tr. 5/142,
151, 8/241, 9/308)

       39. On November 3, 2008, Michael Logsdon, a Raytheon manager of the
Government Relations cost center and the Washington Area Office’s point of contact with
DCAA (tr. 6/51, 8/233) 13, responded to an inquiry from Ms. Quinn concerning lobbying
costs. He noted that, in 2006, DCAA had conducted a comprehensive review of
Raytheon’s “processes to review, collect and withdraw” lobbying and directly associated
lobbying costs at its Washington Office. He represented that there were no deficiencies
noted regarding those costs and Raytheon’s fundamental identification of the costs was
unquestioned. (Ex. A-18 at 6681)

13   Mr. Logsdon’s name was misspelled as “Loxton” in the hearing transcript (see, e.g.,
         app. supp. R4, tab 148 at 002081).
                                              22
       40. A draft report, later superseded (below), was sent to Raytheon on July 14,
2009. It recommended changing Raytheon’s total disallowance factor from 53.3% to
65.9%. The change was made by adjusting the withdrawal percentages for four
Government Relations employees. For Douglas Baragar (employee ID 1019110),
Ms. Quinn reported that, in his interview, he stated that he spent 65-70% of his time on
unallowable lobbying activities. However, he had withdrawn 42% of his time for 2007.
The auditors raised his withdrawal percentage from 42% to 65%. For William “Woody”
Lee (employee ID 09033), the auditors raised his withdrawal percentage from 13% to 85%
on the ground that he was the only lobbyist covering Raytheon’s civil programs. For
William Lynn (employee ID 1030582), the auditors raised his withdrawal percentage from
12% to 85%14 and for Ms. Watson (employee ID 105056),15 they raised the percentage
from 67% to 100%. DCAA was concerned that the Government Relations employees
were not capturing time spent preparing for lobbying, although, as reflected in
Ms. Quinn’s interview notes, the employees she questioned responded that they classified
such time as unallowable. (R4, tab 218 at 6790, 6798, 6805, 6812, 6814-15, 6819, 6827;
app. supp. R4, tab 126 at 1929, tab 148 at 2083-85; tr. 5/88-90, 8/244-47, 250-51, 255-56;
ex. A-18 at 6679-80; APFF ¶ 77) Essentially, DCAA viewed some of Government
Relations’ activities as related to lobbying and expressly unallowable and Raytheon
viewed them as allowable (tr. 5/129).

        41. Four members or alumni of Government Relations, all of whom were there in
2007/2008, testified at the hearing (Ms. Watson and Messrs. Neal, Lee, and Zummo).
Ms. Watson, who was a credible witness, joined Government Relations in 2005 as the
PAC Manager (tr. 5/177). She was responsible for ensuring that Raytheon’s PAC, or
“RAYPAC,” complied with all federal election campaign laws. She raised funds from
eligible employees for the PAC and distributed them to candidates who supported
Raytheon’s views (tr. 5/192; APFF ¶ 21 (undisputed portion)). Ms. Watson worked
outside her normal 8:30 AM – 5:30 PM workday about 10% of the time. She considered
the functions she attended outside her normal work hours to be part of her regular work
duties. She recorded her activities on a daily log, notes on her desk calendar and Lotus
notes. She archived her emails. She was not a registered lobbyist as of the hearing and
was not in 2007. It was not part of her duties to pursue “earmarks” or directed
appropriations in 2007. She spent 1-2 hours per week engaged in internal discussions on
lobbying strategies. She classified the meeting time regarding lobbying as nonrecoverable
as well as time spent at meals with other contractors that were also attended by members
of Congress or Congressional staff. She attended political fundraising events both during
and outside normal work hours and accounted for her time. In 2007, Ms. Watson reported
that the Legislative Operations team hosted 24 events and attended 654 fundraisers. She
considered all of her time administering Raytheon’s PAC to be unallowable. She deemed
her role in lobbying compliance, internal efforts to support business development,

14   Mr. Lynn’s and employee Judith Pauletich’s costs are no longer at issue (tr. 5/35).
15   The audit report mistakenly identified Ms. Watson as employee ID 1050586, rather than
         105056 (see R4, tab 145 at 1, app. supp. R4, tab 148 at 2084).
                                             23
training, staff meetings, and the like to be allowable costs and opined that responding to
requests and giving hearing testimony were Government Relations’ activities that were
not lobbying. She was a salaried employee paid based upon a 40-hour work week and
recorded lobbying and political events as unallowable up to her normal business hours.
Ms. Watson estimated that she spent 65% to 70% of her time a year on PAC lobbying
activities. (R4, tab 145 at 2; tab 218 at 6803-07; tr. 5/196, 201-02, 206, 235, 237, 239,
243, 260-61). Ms. Watson was confident that she had captured all of her unallowable time
in 2007 and 2008 (tr. 5/285).

        42. Mr. Neal, a credible witness, joined Government Relations in January 2007 as
a Senior Manager. During 2007 and 2008 he was the chief interface between RMS and
the legislative branch of government. (Tr. 7/6, 44; APFF ¶ 22 (undisputed portion)) He
was a registered lobbyist as of the hearing and in 2007 (R4, tab 218 at 6787). On some
days in 2007 and 2008, Mr. Neal worked over eight hours on lobbying activities. Outside
of normal business hours he might attend early morning or late evening meetings, PAC
meetings, PAC events with members of Congress, breakfasts, lunches, and dinners. In
2007 and 2008, on occasion he would attend morning fundraisers, work a full day, then
attend fundraisers at night (tr. 7/22). Mr. Neal recorded his activities on a daily log, notes
on his desk calendar, and Lotus notes calendar, which was usually “pretty detailed”
(tr.7/11). He archived his emails (R4, tab 218 at 6787). He considered the functions he
attended before 8 AM and after 5 PM to be part of his regular work duties. He opined that
business development activity, learning about programs, reading trade/industry press,
clerical activity, responding to requests from Congressional staffers, and explaining the
nature of program funding that had been provided in a fiscal funding bill, were allowable
costs. He considered time spent providing facts was allowable, but if the time were
colored in any way by an attempt to influence, it was not allowable. He classified time
spent at meals with other contractors that were also attended by members of Congress or
their staff as lobbying or political time. Mr. Neal evaluated whether an activity was
lobbying on a case by case basis. The time he spent on lobbying activities varied, with
less time spent when Congress was in recess. He deemed his annual lobbying percentage
to be 60%-70%. (Id. at 6793; tr. 7/37, 80-81, 86, see also tr. 7/41)

        43. Mr. Neal “didn’t estimate” his time; he entered his time as appropriate on a
daily basis, applying a “conservative bias on each day” as to what was unallowable
(tr. 7/13). Mr. Neal logged “mixed purpose” activities as lobbying (tr. 7/52). He collected
and submitted his time at the end of the month (tr. 7/11-12). Mr. Neal credibly vouched
for the accuracy of his recorded unallowable lobbying time on his 2007 time sheets (app.
supp. R4, tab 69; tr. 7/70, 77-78).

        44. Mr. Lee, a credible witness, joined Raytheon as a Government Relations
Manager in 1995, after a career in the United States Coast Guard, and was promoted to
Senior Manager of Government Relations. He was responsible for Civil Programs until
his retirement in 2014. (Tr. 9/276-78, 281-82, 317; APFF ¶ 23) (undisputed portion))
Mr. Lee spent less than 3% of his time working on obtaining earmarks for Raytheon. He
classified that work, and internal discussions on lobbying activities, as non-recoverable
                                             24
lobbying costs. The amount of time he spent on the internal discussions varied
depending upon the time of year, with February to April as the busiest. Mr. Lee was a
registered federal lobbyist, because he spent, or might spend at a given time, more than
20% of his time in lobbying activities, although he described his allowable activities as
“much greater” (tr. 9/307). He travelled infrequently overnight to attend events also
attended by Executive or Legislative Branch officials or lobbying firms. He designated
those costs as non-recoverable unless a member of Congress or staffer had requested the
visit. Mr. Lee opined that information gathering (reading reports, papers, learning
programs and the status of matters, professional development and internal staff meetings
that did not involve lobbying) generated allowable costs. Unallowable activities
included attempts to influence. Mr. Lee advised DCAA auditor Quinn that he normally
worked about 8 hours per day, but he attended fundraisers and Hill events both during
the regular work day and after hours. The fundraisers were typically outside regular
hours and were sometimes on weekends. This was an expected part of the job in
Government Relations and part of his regular work duties. In 2007, Mr. Lee attended
119 political fundraisers and 44 local non-fundraising events. In 2008, he attended
103 political fundraisers and 34 non-fundraising events. No matter how many hours he
worked on unallowable activities, he would report only 8 hours per day on the ground
that he was an exempt salaried employee. He recorded his work activities on Palm
Calendar software and on his time sheets, daily or close thereto. The purpose of the time
sheets was to record time spent on unallowable activities only. Mr. Lee credibly
estimated that he spent 20%-30% of his time annually on lobbying. (R4, tab 143 at
9518, tab 175 at 9587, tab 218 at 6816-22; tr. 9/286-88, 291-92, 315-16, 328, 335,
337-38, 349)

        45. Joseph Zummo, a credible witness, was Director of Government Relations as
of the hearing. He joined Government Relations as a Senior Manager in 2005, after
serving as an aviator in the United States Navy. During 2007 and 2008, he was the Senior
Manager principally responsible for programmatic and policy issues of interest to
Raytheon. He was a registered lobbyist as of the hearing and in FY 2007. When
interviewed by Ms. Quinn in 2008, Mr. Zummo reported that he usually worked about
10 hours a day. Outside his normal work day, and sometimes during his normal work
hours, he attended trade association events and political fundraisers. He accounted for his
time and considered his activities before 8 AM and after 5 PM to be part of his regular
work duties. His primary duties for Raytheon were as a lobbyist and working on policy.
Part of his duties in 2007 was to pursue earmarks or directed appropriations, but he spent
very little time on this. He reported that time as non-recoverable. Mr. Zummo often
engaged in internal discussions within his department on lobbying strategies. He
classified this time, or some of it, as non-recoverable. Mr. Zummo attended meetings with
other contractors that were also attended by members of Congress or Congressional staff.
He classified his time as recoverable or not, depending upon the meeting’s purpose.
About 15 times a year Mr. Zummo traveled for Congressional staff site visits or
fundraising in districts or states. He reported that time as non-recoverable lobbying. He
attended fundraising events for the Raytheon PAC. He opined that his internal meetings
and data gathering activities resulted in allowable costs. Mr. Zummo opined that, during
                                            25
2007-08, an active period for him, he was “probably incredibly conservative” and “erred
on the side of reporting most of [his activity]” as unallowable (tr. 10/115). If there were
“any room for interpretation,” Mr. Zummo recorded his activity as unallowable
(tr. 10/134). He recorded his activities on a daily log, notes on his desk calendar, and
Lotus notes. He archived his emails. Mr. Zummo credibly estimated that he spent 90% of
his time performing lobbying activities on a yearly basis. (R4, tab 218 at 6823-29;
tr. 10/103, 105, 107, 138-39; APFF ¶ 24 (undisputed portion))

       46. Messrs. Neal, Lee, and Zummo had similar views that unallowable lobbying
constituted attempts to influence legislation; preparing to influence legislation; attempts to
influence elections and preparing to do so; and political activity, such as fund raisers or
grass roots political activity or preparing to do either; or organizing or participating in
PAC-related activities and preparing to do so (tr. 7/17, 52, 9/283-84, 10/114).

        47. Government Relations personnel engaged in some allowable non-lobbying
activity. Whether an activity was lobbying or non-lobbying could be “situational
dependent” (tr. 10/162, 164) (Zummo) or dependent upon the purpose and evaluated on a
case-by-case basis (tr. 7/53, 57-58) (Neal). For example, Mr. Zummo considered internal
strategy sessions concerning Congressional outreach to be lobbying, which he reported as
such (tr. 10/162). His description of non-lobbying activity, which he opined was
compliant with the LDA and the FAR, was “anything that’s not advocating or trying to
influence legislation . . .” (tr. 10/114). Some examples were planning and administrative
matters; human resources issues; conferences; external and internal matters that had
nothing to do with trying to influence legislation; interpreting existing law for Raytheon
headquarters or business divisions; budget analysis after a statute had been enacted; and
examining international issues (tr. 10/160-63). Mr. Zummo used his judgment, training,
and understanding of the LDA, FAR and Internal Revenue Code in classifying his time
(tr. 10/132-33). The views of other testifying Government Relations personnel were
similar. For example, Mr. Neal considered lobbying to depend upon whether he was
attempting to influence legislation or preparing to influence legislation, “broadly
speaking,” engaging with a member of Congress, or organizing or participating in
PAC-related activities. (Tr. 7/17) Ms. Watson described lobbying activities as attempts to
influence (tr. 5/261).

        48. A few more examples, from the testifying Government Relations personnel, of
what they consider to be non-lobbying activities, include attending legislative hearings
and gathering information for Raytheon’s senior leadership, without attempting to
influence the legislators (tr. 7/53-54); monitoring public sources for information that
might affect Raytheon’s programs and policies (tr. 9/293, 10/114); responding to
Congressional oversight inquiries that did not involve attempts to influence legislation
(tr. 9/295-96, 10/164-65); budget analysis after a statute has been enacted (tr. 10/163); and
training and lobbying compliance activities, staff administrative meetings, ethics matters,
internal efforts to support business development, diversity, health and safety, and human
resources work (tr. 5/202, 9/313-14, 10/160).

                                             26
       49. While DCAA’s initial audit report recommended changing Raytheon’s total
disallowance factor from 53.3% to 65.9% (finding 40), during her testimony Ms. Quinn
disavowed that report (tr. 8/311). Her focus during her testimony was upon the lack of
records of any Congressional requests to Raytheon for information (e.g., tr. 8/273, 285,
287, 312, 314).

        50. By memorandum dated December 30, 2010, DCAA Raytheon Corporate
requested an assist audit from DCAA’s Mount Vernon Branch Office, which specialized
in audits of defense contractors’ lobbying costs (app. supp. R4, tab 172 at 2562;
tr. 5/9-10). Although the initial audit report had not questioned all of cost center 90206’s
costs, even before they requested the assist audit the DCAA Raytheon Corporate auditors
now planned to question the entire cost center 90206. That was their “strategy.”
(Tr. 8/245, 286-87) The audit request stated that Raytheon did not keep records of
Congressional requests and did not obtain requests in writing. The auditors questioned all
of cost center 90206’s costs due to an alleged lack of adequate records. They deemed the
employees in question to be lobbyists and stated that Raytheon “cannot justify the
lobbyists[,] time was allowable” (app. supp. R4, tab 172 at 2563). They speculated that
employees other than those interviewed might have assisted lobbyists with the creation of
white papers or with technical information; many of those employees had trouble
remembering their activities during FY 2007; and, because they did not normally take part
in lobbying activities, they might not have known how to record their time. (Id.
at 2562-63) We have not been directed to any evidence to support this speculation.

      51. On December 17, 2009, Mr. Logsdon responded to an inquiry from Ms. Quinn
concerning records of Congressional requests as follows:

               I did discuss this with John Barnes [ 16] and Doug Hughes in
               Legislative Operations. They told me that it is very rare to
               receive written requests for information. Requests for
               information are overwhelmingly received via telephone call, or
               when in meetings with a staffer. They may get the occasional
               e-mail, but formally documented requests are extremely rare,
               and therefore not separately tracked. John and Doug also said
               that the time that they or their staff would spend in responding
               to these requests would be recorded as lobbying time in our
               tool, and therefore not claimed, because while the staffer may
               be asking for factual data, in most instances we would use the
               request to make our case, which would cross over to lobbying
               activity.

(App. supp. R4, tab 165 at 2472)

16   In 2008 John Barnes was Vice President of Legislative Operations. Doug Hughes was
          Program Integrator. (R4, tab 169; tr. 5/185, 187)
                                             27
      52. Ms. Quinn based her ultimate conclusion that all of cost center 90206’s costs
should be disallowed on the fact that she did not find documentation “either way” on
whether the costs were allowable or not (tr. 8/267, 276, 278), or claimed or not (tr. 8/290).

        53. As of January 2012, Nathaniel Yesner supervised the Branch Office audit team
(tr. 5/9-12). The Branch Office made an effort to “sell” its services internally to DCAA
and to solicit assist audit requests, deeming the audit of lobbying costs to be a “unique
area,” unlike verifying numbers on a page (tr. 5/12, 120; see R4, tab 191).

       54. The Branch Office auditors did not rely upon the interviews DCAA had
already conducted; they wanted to perform an independent review (tr. 5/109-10). Out of
the 20 members of Government Relations, the assist auditors interviewed Messrs. Lee,
Neal and Zummo, Ms. Watson, Caroline Cooper and Carla Zeppieri in February, April
and May 2012, several years after the indirect cost proposals in question. They also
reviewed the work product of lobbying consultants hired by Raytheon. 17 (R4, tab 211
at A (2/5); tr. 5/159-60)

       55. Mr. Yesner’s June 6, 2012 Audit Summary for FY 2007 stated that this field
work confirmed that 90-100% of the employees’ time was spent on lobbying efforts and
supported DCAA Raytheon Corporate’s decision to question 100% of cost center 90206.
The largest discrepancy between the percentage of costs withdrawn by Raytheon for cost
center 90206 and the audit-determined unallowable percentage applied to Mr. Lee’s costs,
where the auditors determined that 13% was withdrawn but 100% should have been
withdrawn. The next largest discrepancy applied to Mr. Neal’s costs, where the auditors
determined that 54% was withdrawn but 100% should have been withdrawn. The auditors
also concluded that 100% of Mr. Zummo’s costs should have been withdrawn, rather than
the 85% that was withdrawn. The other alleged discrepancies were Ms. Cooper, for
whom Raytheon withdrew 82%, but the auditors determined that there was an over-
withdrawal and only 65% should have been withdrawn; Ms. Watson, where the auditors
determined that 67% was withdrawn but 91% should have been withdrawn; and Ms.
Zeppieri, where the auditors determined that 86% was withdrawn but 90% should have
been withdrawn. The auditors averaged the percentage of lobbying costs that Raytheon
withdrew at 64% and those that allegedly were unallowable at 91%. (R4, tab 211 at A
(1/5) – (2/5))

       56. The Branch Office auditors questioned 100% of the costs of Raytheon’s “State
and Local” Government Relations employees and of its office assistants without
interviewing them (tr. 5/161-62). The auditors concluded that 100% of Government
Relations’ 2007 costs, allegedly representing direct lobbying and lobbying-related effort,
was expressly unallowable under FAR 31.205-22 (tr. 5/22-23).

       57. Mr. Yesner confirmed that Government Relations employees were good about
recording direct lobbying activities as unallowable and that Raytheon appropriately

17   However, consultants are not at issue in these appeals (tr. 10/176).
                                               28
accounted for its PAC costs (tr. 5/121). He also acknowledged that the employees he
interviewed in 2012 (Watson, Zeppieri, and Zummo) reasonably accounted for their time
(tr. 5/152-54, 168), but he further stated that “[w]e don’t really know, to be honest with
you, the accuracy of the direct lobbying time . . .” (Tr. 5/168) The auditors speculated
that the employees might not be tracking research, preparation, strategy and other time
spent in what DCAA considered to be lobbying-related activities or preparation for direct
lobbying (tr. 5/121-22, 168, 8/255-56). However, auditor Quinn acknowledged that
nothing in her notes gave her concern that Raytheon’s employees were not withdrawing
pre-lobbying or lobbying preparation costs (tr. 8/268) and we have not been directed to
any evidence to support this speculation.

        58. DCAA held a March 19, 2013 exit conference with Mr. Vilandre, Senior
Manager of A&S. DCCA received Raytheon’s response to its draft audit report on April 3,
2013. Raytheon disputed that the questioned costs –then all of its submitted costs for cost
center 90206 -- were unallowable. Raytheon alleged that, other than the time entered in the
Lobbying Tool, Government Relations employees were not required to track their time
because they charged it as indirect costs. Moreover, their time not entered into the
Lobbying Tool was spent on allowable non-lobbying activities such as research and analysis
of legislation’s impact; monitoring and reporting to Raytheon’s management upon current
trends and issues; business development, such as internal staff meetings and events;
professional development; and office administration. Raytheon contended that DCAA had
arbitrarily and incorrectly concluded that, under FAR 31.205-22(b)(1), the only allowable
activity would be related to documented requests for white papers. Raytheon asserted that
its Lobbying Tool captured its unallowable lobbying activities and fully complied with
FAR 31.201-2(d). Raytheon also pointed out that the 2012 interviews were 5 years after the
2007 year in question whereas the Lobbying Tool entries were contemporaneous with the
reported lobbying activities. (App. supp. R4, tab 208 at 3186-87)

        59. DCAA replied in its October 25, 2013 Corporate Audit Report for FY 2007
that, through interviews, the auditors had determined that Raytheon’s lobbyists spent 90 to
100 percent of their time on lobbying-related activities, directly or indirectly, which was
much more than Raytheon had reflected in its lobbying analysis. The auditors considered
that the only lobbying-related costs that were allowable were those that satisfied
FAR 31.205-22(b)’s requirement for “documented requests” from Congress and the like
for information regarding contract performance and Raytheon maintained that such
requests were seldom formally documented and were usually made by email or telephone.
Because Raytheon could not provide documented requests, DCAA concluded that the
costs DCAA deemed to be lobbying-related were expressly unallowable under FAR
31.205-22. Of the adjusted claimed cost center 90206 costs, the auditors reported that
$1,870,428 were expressly unallowable and subject to a level one penalty. (App. supp.
R4, tab 208 at 3029, 3184-85, 3188)

      60. Auditor Quinn acknowledged that, during her audit for 2007, she did not ask to
review any of the materials (calendars, notes, emails, etc.) that each of the employees

                                            29
interviewed cited in support of his or her work activities (tr. 8/264-68). Similarly, the
assist auditors did not ask the Raytheon interviewees for their calendars (tr. 5/151).18

        61. Based upon DCAA’s audit report, the CACO found in his June 20, 2014
Corporate COFD for 2007 that, among other disallowed costs (see finding 5), Raytheon
had included $1,870,428 in its proposal for salary and labor costs paid to its Government
Relations lobbyists that were expressly unallowable lobbying costs under FAR 31.205-22
and subject to penalties and CAS 405 damages (app. supp. R4, tab 279 at 4556, 4566;
tr. 7/258-59; ex. G-5; GPFF ¶ 19) (undisputed portion)). On the same day, the CACO
issued the 2007 CAS 405 COFD, finding that Raytheon’s submission of alleged expressly
unallowable lobbying and political activity costs in the amount of $1,972,355, among
other disallowed costs, violated CAS 405. The CACO cited Raytheon’s failure to supply
documented requests from Congress in support of allowable lobbying activity as a basis
for his decision. (App. supp. R4, tab 281 at 4573, 4579-80) Raytheon’s appeals ensued as
reported above (findings 5-6).

         DCAA’s Corporate Audit Report for 2008 and Corporate COFD for 2008

       62. For 2008, the auditors interviewed five registered lobbyists and the PAC
manager out of 20 Congressional Relations Office employees. The auditors used their
“judgmental selection” in determining who they would interview. (App. supp. R4,
tab 331 at 5214; tr. 5/159-60)

        63. Although they did not interview all employees, the auditors checked whatever
facts they might have had concerning each employee (tr. 5/161). The auditors reviewed
Raytheon’s LDA filings for 2008, including those made by its consultants; consultant
invoices and agreements; Raytheon’s voluntary withdrawals of cost center 90206 costs;
executive biographies; organization charts and employee listings and distribution data; and
performance goals and appraisals. DCAA found that Raytheon had determined that an
average of 50% of its Congressional relations employees’ time was unallowable and had
therefore withdrawn 50% of the cost center 90206 costs. (R4, tab 184 at first tab, entitled
“7.15”; app. supp. R4, tab 331 at 5213-15; tr. 5/102-03, 6/259)

       64. For 2008, Raytheon included what it characterized as the unallowable lobbying
time of its Government Relations administrative staff in its lobbying withdrawal

18   DCMA points out that, in 2012, when DCAA asked Raytheon for its 2007 calendars in
        connection with Raytheon’s acquisition and divestiture (A&D) costs (below),
        Raytheon claimed that the calendars in practicality were likely no longer retained,
        were not records under the FAR, and were not used to support Raytheon’s claimed
        costs (R4, tab 298 at 147551-52). The calendar question is not material to our
        decision. DCAA did not ask for calendars, etc. in connection with its lobbying cost
        audits and Raytheon has relied upon other evidence, such as time sheets, its
        lobbying tool, and credible witness testimony.
                                             30
calculation, which the government contends mathematically reduced its disallowance
factor (see R4, tab 184 at first tab, entitled “7.15”; tr. 6/302-07; GPFF ¶ 92).

        65. On December 19, 2014, DCAA issued its Corporate Audit Report for 2008
(app. supp. R4, tab 331). The auditors questioned $1,187,981 in claimed employee
compensation costs of the Government Relations cost center based upon FAR 31.205-22
and FAR 31.201-6 (id. at 5097, 5099, 5215). Of the questioned amount, $985,144 was
said to be subject to a level one penalty (id. at 5211). The auditors analyzed the above
interviews and documents to develop “estimated percentages of each employee’s time
spent on unallowable effort in 2008” (id. at 5214).

        66. The government also relies upon an internal Raytheon online article dated
January 31, 2005 (R4, tab 115; tr. 6/50; ex. A-7). The article profiles Chris Lombardi,
then manager of Government Relations. It reports that “[the] job necessitates most of the
team [spend] one-half to two-thirds of their days canvassing Capitol Hill” (R4, tab 115
at 15414) and that Mr. Lombardi discussed attempts to influence the outcome of
legislation, among other things (id. at 15413-15). DCAA reported in a 2006 work paper
that, during a DCAA interview, Mr. Lombardi stated that he had taken “poetic liberties”
for the article (ex A-7). Mr. Neal described the article as a public relations “puff piece”
and that, while he sometimes worked one-half to two thirds of his time on Capitol Hill, to
characterize it as a daily occurrence was “broadly overstated” (tr. 7/68). Mr. Lombardi
was not called to testify. We find that the accuracy of the 2005 hearsay article has been
undermined and, in any event, the article is not probative of the amount of unallowable
lobbying hours spent by Government Relations personnel in CYs 2007 and 2008.

      67. The auditors questioned 100 percent of the time of 17 employees, including
employees they did not interview (app. supp. R4, tab 331 at 5215; tr. 5/161-62).

       68. DCAA’s 2008 audit of Government Relations followed materially the same
plan as for 2007 and, with minor exceptions, DCAA questioned nearly the entire cost
center costs as expressly unallowable. Raytheon alleged, inter alia, that DCAA had
misinterpreted FAR 31.205-22. (App. supp. R4, tab 331 at 5216; AUPFF ¶ 94)

        69. On June 22, 2015, the CACO issued his Corporate COFD for 2008. He largely
adopted DCAA’s recommendations and concluded that Raytheon had included $1,065,481
in its proposal for salary and labor costs paid to its Government Relations lobbyists and
administrative staff for performing and supporting unallowable lobbying activities, of
which $981,822 was for expressly unallowable salary expenses paid to Raytheon’s
lobbyists (app. supp. R4, tab 364 at 5954, 5961; GPFF ¶ 20 (undisputed portion), APFF ¶
96 (undisputed portion)). The same day, the CACO issued the 2008 CAS 405 COFD,
finding that Raytheon’s submission of expressly unallowable lobbying and political
activity costs, among other allegedly expressly unallowable costs, violated CAS 405. The
CACO cited Raytheon’s failure to supply documented requests from Congress in support
of allowable lobbying activity as a basis for his decision. (App. supp. R4, tab 365 at 5966,
5969) Raytheon’s appeals ensued as set forth above (findings 7, 9).
                                            31
       70. The government contends that Raytheon’s withdrawal of unallowable lobbying
costs has “dramatically increased” since 2001, both in terms of the “gross” percentage it
withdraws from its entire Government Relations office and the “lobbying disallowance
factor” it applies to the “recoverable expenses” of that cost center (gov’t br. at 62; see exs.
G-1 – G-4; GPFF ¶¶ 145-50). The government alleges that this is a “troubling indictment”
of Raytheon’s lobbying withdrawal practices through 2015 and supports a conclusion that
it under withdrew in 2007 and 2008 (gov’t br. at 62).

       71. John G. Panetta, Sr., Raytheon’s senior director of government accounting,
disagrees with the government’s position. He demonstrated that, from 2007 forward the
amount of costs Raytheon withdrew remained about $4 to $5 million – closer to $4
million in recent years – while the gross cost amount has been substantially reduced,
thereby mathematically affecting the gross withdrawal percentage and the lobbying
disallowance factor. (Tr. 1/110, 10/193; exs. G-1, -2) Mr. Panetta noted that the source of
the cost center costs, and the nature of the withdrawal, have changed significantly over the
years. Consultant costs in particular were substantially reduced, from the 2007-2008
period in dispute to 2015. However, the lobbying work remained and internal Raytheon
personnel had to absorb the workload. Also, Government Relations’ headcount dropped
from about 20 in 2007 to 12 at the end of 2015. Thus, Raytheon’s personnel are engaged
in more unallowable activity per person today than they were previously. Raytheon was
not reporting more unallowable lobbying activity; it was reporting the same. (App. supp.
R4, tabs 126, 142; tr. 10/194, 202-04; exs. A-22, -23). We find the government’s position
concerning cost reporting in years other than 2007 and 2008, in dispute, to be
unpersuasive in view of Mr. Panetta’s credible, persuasive testimony to the contrary.

                 DISCUSSION OF GOVERNMENT RELATIONS COSTS

         I. The Parties’ Contentions 19

            A. The Government’s Contentions

    DCMA alleges that Raytheon has claimed lobbying costs that are expressly
unallowable and that Raytheon has not provided any meaningful support for its assertion
that they are allowable. DCMA contends that job descriptions, performance appraisals,
organizational goals, and the 2005 internal article profiling a former manager of
Government Relations (finding 66), demonstrate that the overwhelming majority of time
spent by that department is on unallowable lobbying (gov’t br. at 48-52).

19   Here, and with regard to the cost issues below, we discuss the parties’ principal
         contentions. We have considered all of their arguments, whether or not we address
         them. We have considered and reject the government’s argument that the Board
         erred in not admitting certain documents into evidence at the hearing.
                                              32
        DCMA further contends that Raytheon’s lobbying estimates 20 and withdrawal
calculations are severely flawed, in part because it inappropriately relied upon the LDA
for guidance; its lobbyists were not trained on FAR Part 31 or on Raytheon’s lobbying
policies; and because there are flaws in Raytheon’s withdrawal calculations, which
wrongly diluted its lobbying withdrawal factor. The alleged flaws are that there was no
oversight regarding the accuracy of lobbyists’ estimations of their unallowable lobbying
time; the lobbyists were instructed not to include weekend, holiday, or any time outside of
normal business hours in their estimates; there were various estimation or calculation
errors, including pertaining to Raytheon’s State lobbyists; and Raytheon wrongly included
the lobbying hours of its administrative staff, and of an employee who worked only half of
his time for Government Relations.

            B. Raytheon’s Contentions

        Raytheon denies all of DCMA’s allegations and relies upon its contemporaneous
time documentation and first-hand witness testimony. It contends that DCMA’s criticisms
of its process for withdrawing unallowable lobbying costs from its cost proposals are
unfounded. Raytheon identifies the key costs at issue as pertaining to alleged
“pre-lobbying” or “preparation for lobbying” activities. It asserts that its unrefuted time
records and testimony establish that it excluded these activities as unallowable. (App. br.
at 146) Raytheon also contests DCAA’s conclusion that Raytheon claimed costs for time
spent responding to Congressional requests but did not document the requests.

        Raytheon concludes that, should the Board nonetheless determine that the
questioned costs are unallowable lobbying costs, DCMA has not met its burden to prove
that they are expressly unallowable and subject to penalties.

        DCMA replies that Raytheon is required by regulation to establish its entitlement to
costs. That is, FAR 31.201-2(d) requires contractors to maintain records, including
supporting documentation, adequate to demonstrate that claimed costs have been incurred
and that they comply with applicable cost principles in FAR subpart 31.2, and the CO may
disallow all or part of a claimed cost that is inadequately supported (see finding 15).
Thus, according to DCMA, Raytheon has the burden to provide adequate records for all of
its costs (gov’t br. at 6).

        Moreover, according to DCMA, regarding lobbying costs in particular,
FAR 31.205-22(d) requires that a contractor maintain adequate records to demonstrate
that its certification of lobbying costs as being allowable or unallowable complies with
FAR 31.205-22 (see finding 15). DCMA contends that this shifts the burden to Raytheon
“to establish entitlement to its Lobbying costs” (gov’t br. at 7).

20   DCMA uses the term “estimate” or the like, to which Raytheon objects. Witnesses for
        both parties used the term. The Board deems some estimation to be common when
        assessing time spent. In any case, the issue is immaterial to our decision.
                                            33
        Raytheon responds that, in the 2007 and 2008 Corporate Audit reports, DCAA did
not question the salary and labor costs of Government Relations personnel on the basis of
FAR 31.201-2(d), nor did the CACO in the 2007 and 2008 Corporate COFDs (app. br.
at 107 (disputing portion of GPFFs 19-20)). Raytheon alleges that DCMA’s attempt to
shift the burden to Raytheon to establish that the “lobbying costs” are supported by
documentation and are allowable fails. Raytheon asserts that, first, the costs at issue are
not lobbying costs and, in any case, the fact that claimed costs must be supported is a
general principle governing all costs and does not shift the specific burden of proof
regarding lobbying costs from the government to Raytheon.

         I. DCMA Has The Burden to Prove That Raytheon Submitted Expressly
            Unallowable Costs

       We addressed the government’s burden to prove that costs are expressly
unallowable, and subject to penalty in Raytheon Company, ASBCA No. 57743 et al., 17-1
BCA ¶ 36,724 (Raytheon I), recon. denied, 18-1 BCA ¶ 37,129, aff’d, Raytheon Co. v.
Sec. of Defense, 940 F.3d 1310 (Fed. Cir. 2019) 21:

                The government acknowledges that the CO’s decision that a
                cost is expressly unallowable and subject to penalty is subject
                to the Board’s de novo review under the CDA . . . . See 41
                U.S.C. § 7103(e); Wilner v. United States, 24 F.3d 1397,
                1401-02 (Fed. Cir. 1994) (en banc); that it bears the burden to
                prove that costs are expressly unallowable; and that “the bar is
                high” . . . . The government also bears the burden of proof
                that a penalty assessment was warranted.

                In General Dynamics Corp., ASBCA No. 49372, 02-2 BCA ¶
                31,888 at 157,570, rev’d in part on other grounds, Rumsfeld v.
                General Dynamics Corp., 365 F.3d 1380 (Fed. Cir. 2004), the
                Board described the government’s burden to show that costs
                are expressly unallowable and subject to penalty:

                       The FAR and CAS definitions of “expressly
                       unallowable” point to the need to examine the particular
                       principle involved in light of the surrounding
                       circumstances. Moreover, since Congress adopted the
                       “expressly unallowable” standard to make it clear that a
                       penalty should not be assessed where there were
                       reasonable differences of opinion about the allowability

21   Raytheon appealed to the Federal Circuit from that part of the Board’s decision in
         Raytheon I concerning lobbying cost issues. This was the only part of the Board’s
         decision that was appealed. The government did not appeal from the Board’s
         decision on corporate development costs.
                                               34
                      of costs, we think the Government must show that it
                      was unreasonable under all the circumstances for a
                      person in the contractor’s position to conclude that the
                      costs were allowable. The scope of the inquiry will
                      vary with the clarity and complexity of the particular
                      cost principle and the circumstances involved.
                      [Emphasis added]

Raytheon I, 17-1 BCA ¶ 36,724 at 178,845 (citations to government’s brief in Raytheon I
omitted).

        DCMA acknowledges that it generally has the burden to prove its claims that costs
at issue are unallowable under a regulation and that they are “expressly unallowable” as
defined by the CAS and the FAR (gov’t br. at 6). It notes, however, that the Board has
previously pointed out that:

               If a cost is allocable to a contract and is reasonable, the
               government normally has the burden to prove that it is
               unallowable due to a contract provision, statute or regulation,
               Lockheed Martin Western Development Laboratories, ASBCA
               No. 51452, 02-1 BCA ¶ 31,803 at 157,102. However, a given
               regulation may require the contractor to establish entitlement
               to costs.

Fiber Materials, Inc., ASBCA No. 53616, 07-1 BCA ¶ 33,563 at 166,252.22

        Auditor Yesner described auditing lobbying costs as a “unique area” (finding 53).
Indeed, the Government Relations lobbying cost issues do not lend themselves to
resolution with certainty. In any case, we concur with Raytheon that DCMA has not
justified shifting the burden of proof to the contractor. Thus, DCMA bears the burden to
prove that the costs in question are unallowable lobbying costs.

         I. DCMA Has Not Met its Burden to Prove that the Government Relations Costs
            at Issue Are Unallowable Lobbying Costs and Thus Has Also Not Met its
            Burden to Prove that Raytheon Violated CAS 405 Regarding Those Costs.

        Raytheon contends that DCMA has not met its burden to prove that the
Government Relations costs that Raytheon did not withdraw from its cost proposals in
2007 and 2008 were unallowable lobbying costs under FAR 31.205-22. Raytheon asserts
that it appropriately withdrew its lobbying costs from its cost proposals; the costs at issue
are not lobbying costs; and DCMA has not established that they are. Raytheon maintains
that, in contrast to DCAA’s speculation, Raytheon kept contemporaneous records of the

22   See Thomas Associates, Inc., ASBCA No. 57126, 11-2 BCA ¶ 34,858 at 171,477 for
         clarification of the $10,000 penalty threshold addressed in Fiber Materials.
                                             35
time it spent on lobbying, including time sheet reporting in 2007; its lobbying tool in
2008; and calendars, notes, and the like, which DCAA did not ask to see. This was
corroborated by the credible hearing testimony of current and former members of
Government Relations. (See findings 31-32, 41-45)

      DCMA alleges that Raytheon’s personnel were not adequately trained in the FAR’s
lobbying reporting requirements. The evidence is to the contrary. Raytheon, inter alia,
provided in-house and outside counsel training, at least annually, and published its
“Lobbying Policy” and “Unallowable Guidelines. (Findings 19-21, 23)

      Regarding the amount of unallowable lobbying hours reported by Raytheon,
FAR 31.201-6(e)(2) provides that time spent by employees outside normal working hours
should not be considered except when it is evident that an employee engages so frequently
in company activities during those extra hours as to indicate that the activities are a part of
the employee’s regular duties (see finding 16). Raytheon’s lobbyists worked early
mornings, late nights, and weekends from time to time on what all of the testifying
witnesses considered to be a regular part of their work duties (findings 41-42, 44-45).

        Since lobbying responsibilities were a regular part of the work duties,
FAR 31.201-6(e), ACCOUNTING FOR UNALLOWABLE COSTS (NOV 2005),
provides that these activities should be considered in determining materiality of the
activities. However, that FAR subsection only applies to determining whether the costs
were material. It does not instruct how the unallowable costs should be calculated. The
FAR provides that “[t]he practices for accounting for and presentation of unallowable
costs must be those described in 48 CFR 9904.405, Accounting for Unallowable Costs.”
FAR 31.201-6(c)(1) (finding 16). CAS 405, in turn, provides that unallowable costs
“shall be subject to the same cost accounting principles governing cost allocability as
allowable costs.” CAS 405-40(e) (finding 16).

        Here, Raytheon’s Lobbying Policy provides that “[t]ime spent on lobby activity
after the scheduled working day is not reported” and the Policy’s record-keeping
requirements apply to “employees who spend more than 25% of their compensated hours
during the month on lobbying activity” (finding 19) (emphasis added). Accounting for
labor costs as a function of time paid, rather than time worked, is a common industry
method. Raytheon asserts that it is required to use that method under CAS 401,
Consistency in Estimating, Accumulating and Reporting Costs, because that is its
disclosed accounting practice and the one it uses in bidding. (Finding 29) Thus, we find
that Raytheon’s method of removing the unallowable costs was proper, based on its
disclosed accounting practice.

       Raytheon instructed its employees not to report lobbying time in excess of
“normal” work hours because they were salaried employees who are charged indirectly;
they are paid based upon a 40-hour work week; and including time outside of that period
would result in an overstatement of the lobbying withdrawal amount. There was no cost
to Raytheon or the government for work outside normal business hours. (Finding 28) We
                                              36
have found that Raytheon appropriately calculated its lobbying costs consistent with its
disclosed accounting practice and that there was no additional cost to the government,
under this accounting (finding 29).

       Like DCAA, DCMA focuses upon an alleged lack of documented requests from
Congress for information, which, under FAR 31.202-22 (b), would be an exception to
FAR 31.202-22(a)’s unallowable lobbying activities (findings 16, 49-50, 59, 61, 69).
However, Raytheon asserts that, because it is not claiming lobbying activity costs, it is not
relying upon any exception to unallowable lobbying activities. It also points out that
formal documented requests from Congress are “extremely rare,” with most
communication being in person or by telephone, with an occasional email (finding 51).

        Mr. Neal opined that responding to requests from Congressional staffers and
providing facts were allowable, but if the time were colored in any way by an attempt to
influence, it was not allowable (finding 42). This is consistent with Raytheon’s
representation to DCAA that it’s normal practice was not to claim the costs of responding
to Congressional inquiries because presenting facts could “cross over” into lobbying
(finding 51). Like Mr. Zummo (finding 45), Mr. Neal evaluated his time on a case by
case basis, with a conservative bias towards unallowability, if there were any question.
He recorded his activities on a daily log, and on a “pretty detailed” Lotus notes calendar,
and he archived his emails (finding 42), as did Ms. Watson (finding 41). Mr. Lee
recorded his work on Palm Calendar software and on his time sheets (unallowable
activities only), daily or close thereto (finding 44).

       The auditors questioned 100% of the costs of Raytheon’s “State and Local”
Government Relations employees and of its office assistants without interviewing them.
The auditors concluded that 100% of Government Relations’ 2007 costs, allegedly
representing direct lobbying and lobbying-related effort, was expressly unallowable under
FAR 31.205-22. (Finding 56) Nonetheless, Mr. Yesner confirmed that Government
Relations employees were good about recording direct lobbying activities as unallowable
and that Raytheon appropriately accounted for its PAC costs. He also acknowledged that
the employees he interviewed in 2012 reasonably accounted for their time. (Finding 57)

        In contrast, Mr. Yesner also stated that the auditors did not really know the
accuracy of the direct lobbying time. They speculated that employees might not be
tracking time spent in what DCAA considered to be lobbying-related activities or
preparation for direct lobbying, although Raytheon’s Lobbying Policy described
legislative liaison activities as unallowable costs “when carried on in support of or in
knowing preparation for an effort to engage in unallowable activities” (finding 19).
Moreover, as reflected in auditor Quinn’s interview notes, the employees she questioned
responded that they classified such time as unallowable. She acknowledged that nothing
in her notes gave her concern that Raytheon’s employees were not withdrawing
pre-lobbying or lobbying preparation costs. (Finding 57) The auditors also speculated
that employees other than those interviewed might have assisted lobbyists with the
creation of white papers or with technical information; many of those employees had
                                             37
trouble remembering their activities during FY 2007; and, because they did not normally
take part in lobbying activities, they might not have known how to record their time. We
have found no support for either of these speculations. (Findings 50, 57)

        The initial audit report had not questioned all of cost center 90206’s costs.
However, Ms. Quinn disavowed that report. (Finding 49) Even before they requested the
assist audit, DCAA’s Corporate auditors developed a “strategy” to question the entire cost
center 90206 (finding 50). Ms. Quinn based her ultimate conclusion that all of cost center
90206’s costs should be disallowed on the fact that she did not find documentation “either
way” on whether the costs were allowable or not, or claimed or not (finding 52). Her
conclusion, as self-described, is unsupportable and underscores the fact that DCMA has
not met its burden of proof.

       DCAA changed its audit position, apparently as of 2006 (finding 39), but at least
from 2009 through 2012, getting successively further away from the CY 2007 and 2008
years in question, and each time increasing the lobbying cost disallowance factor (e.g.,
findings 38, 40, 54-55). DCAA’s and DCMA’s conclusions are undermined by
contradictory evidence, general beliefs rather than specific proof, and speculation.

       We conclude that DCMA has not met its burden to prove that Raytheon’s costs in
question are unallowable lobbying costs. Therefore, it also has not met its burden to prove
that Raytheon did not comply with CAS 405 with regard to those costs.

                                       DECISION

      ASBCA Nos. 59435, 59436, 60056 and 60058, to the extent that they cover alleged
unallowable lobbying costs, are sustained.

     ASBCA Nos. 59435, 59436, 60056 -- CORPORATE DEVELOPMENT COSTS

    FINDINGS OF FACT CONCERNING CORPORATE DEVELOPMENT COSTS

      72. The following regulations are pertinent to the parties’ dispute over corporate
development costs:

             FAR 31.205-12, ECONOMIC PLANNING COSTS
             (OCT 2003), provides in part:

             Economic planning costs are the costs of general long-range
             management planning that is concerned with the future overall
             development of the contractor’s business and that may take
             into account the eventual possibility of economic dislocations
             or fundamental alterations in those markets in which the
             contractor currently does business. Economic planning costs
             are allowable. Economic planning costs do not include
                                            38
organization or reorganization costs covered by 31.205-27.
See 31.205-38 for market planning costs other than economic
planning costs.

FAR 31.205-27, ORGANIZATION COSTS (APR 1988),
provides in part that:

(a) Except as provided in paragraph (b) of this subsection,
    expenditures in connection with-

    (1) planning or executing the organization or
        reorganization of the corporate structure of a business,
        including mergers and acquisitions,

    (2) . . . .

    (3) raising capital (net worth plus long-term liabilities),
        are unallowable. Such expenditures include but are
        not limited to incorporation fees and costs of
        attorneys, accountants, brokers, promoters and
        organizers, management consultants and investment
        counselors, whether or not employees of the
        contractor. Unallowable reorganization costs include
        the cost of any change in the contractor’s financial
        structure, excluding administrative costs of short-term
        borrowings for working capital, resulting in
        alterations in the rights and interests of security
        holders, whether or not additional capital is raised.

(b) The cost of activities primarily intended to provide
    compensation will not be considered organizational costs
    subject to this subsection, but will be governed by
    31.205-6. These activities include acquiring stock for-

    (1) executive bonuses,

    (2) employee savings plans, and

    (3) employee stock ownership plans.

FAR 31.205-38, SELLING COSTS (AUG 2003), provides in
part:

(a) “Selling” is a generic term encompassing all efforts to
    market the contractor’s products or services, some of
                              39
                  which are covered specifically in other subsections of
                  31.205. The cost of selling efforts other than those
                  addressed in this cost principle are unallowable.

             (b) Selling activity includes the following broad categories:

             ....

             (4) Market planning. Market planning involves market
                 research and analysis and general management planning
                 concerned with development of the contractor’s business.
                 Long-range market planning costs are subject to the
                 allowability provisions of 31.205-12. Other market
                 planning costs are allowable.

      Raytheon’s Corporate Development Office

        73. At all times relevant to these appeals, Raytheon maintained an office at its
corporate headquarters which we refer to as “Corporate Development.” At some point
that office split from “Strategic Planning,” also referred to as “Corporate Strategic
Development Group” or “Strategic Business Development.” (See app. supp. R4, tab 208
at 3195, tab 331 at 5224; tr. 1/185-86, 3/215-16, 255) In 2007 and 2008 Corporate
Development, identified as cost center 90043, had seven or eight employees, six of
whom were focused upon strategic business transactions and acquisition and divestiture
(A&D) or merger activities, and one or two of whom were administrative assistants (see
app. supp. R4, tab 208 at 3195-97, tab 331 at 5221, 5228).

      74. As we found in Raytheon I regarding Corporate Development’s status as of
Raytheon’s 2004 incurred cost submission:

             Raytheon’s Corporate Development department was
             responsible for working with its business units in strategic
             development and growth opportunities, including strategic
             analysis of a business’ capabilities to market its products and
             services to the government and function in government work.
             Where there were gaps in business’ capabilities, Corporate
             Development would work with them to determine the right
             ways to fill the gaps, either through, inter alia, internal
             investment, research and development, licensing of intellectual
             property (IP), partnerships or acquisitions. This process was
             known as “gap analysis.” Working with Raytheon’s
             businesses on M&A and divestitures was not Corporate
             Development’s primary role but was part of its work to find
             strategic growth initiatives.

                                            40
Raytheon I at 178,840 (finding 68) (citations to record omitted).

        75. The testimony in the instant appeals, concerning the calendar year 2007 and
2008 incurred cost submissions, which was credible, was to the same effect (e.g
tr. 8/47-48 (Corporate Development’s role is to work with Raytheon’s businesses with
their strategic development plans); tr. 7/127 (“understanding what [the businesses are]
trying to do ultimately to ensure mission success and then looking for opportunities,
whether they be acquisitions, divestitures, partnerships, teaming agreements, joint
ventures, IP licensing, to help execute that mission”); tr. 3/223 (Corporate Development
does full spectrum of A&D activities); tr. 7/128 (gap is distance between current
capabilities and customer requirements); tr. 3/249 (gaps are market based, technically
based and/or customer based); tr. 3/257 (strategic GAP analysis is assessment undertaken
principally by business unit, but it includes Corporate Strategy and Corporate
Development); tr. 3/259 (gap analysis includes pursuit of multiple avenues); tr. 3/273
(Corporate Development expected to drive the gap process); tr. 4/239, 269-70, 277-78,
299-300, tr. 7/100-01, 104-05 (all activities have an eye toward A&D, but there is a lot of
activity prior to the ultimate decision, including market analysis and gap analysis);
tr. 4/239, 262, 270, 277-78, 295, tr. 7/128-29, tr. 8/48-49 (gap analysis; methods to fill
gap); tr. 4/240, 242 (not uncommon that Corporate Development would change paths
along the way)).

        76. Corporate Development made proposals for acquisitions or divestitures to the
Acquisition Council which, in 2007 and 2008, consisted of senior Raytheon leaders,
including the Chief Executive Officer, Chief Financial Officer, General Counsel and Vice
President of Corporate Development (tr. 3/227, 8/53-54). Raytheon declared its intentions
regarding potential acquisitions and divestitures through the Acquisition Council
(tr. 8/57). Corporate Development did not know which route Raytheon was going to
follow until after the Acquisition Council made its decision (tr. 3/261, 8/56).
Occasionally, even after an Acquisition Council decision, Raytheon would change course
based upon information developed during the acquisition or divestiture process (tr. 3/265,
4/297, 300-01).

       Raytheon’s Guidelines and Policies Regarding Organization Costs

      77. Raytheon’s FAR Part 31 Guidelines, as of August 31, 2004, Revision No. 2,
provided concerning Acquisition, Merger, Divestiture and Other “Organization” Costs:

              Unallowable acquisition costs commence with the submission
              of an indicative offer. Unallowable divestiture costs
              commence when the decision to “go to market” with the
              offering materials is made. Commencement of unallowable
              merger costs should be discussed with business segment or
              Corporate Counsel. These unallowable costs end at the
              completion of the final balance sheet adjustment for the

                                            41
                 transaction. The unallowable cost categorizations are
                 applicable to both Business and Corporate personnel.

(R4, tab 106 at 2109, 2116)

      78. Raytheon’s FAR Part 31 Guidelines further state that the following
Acquisition, Merger, Divestiture and Other “Organization” Costs are to be claimed:

                 A general review of other companies as part of marketing
                 strategy or strategic planning activities (e.g. economic planning)
                 including preliminary discussions and advice about the
                 advisability of [M&A] prior to identification of a specific
                 opportunity. This also includes technical review, review of
                 structure, facilities and modes of operation.

(R4, tab 106 at 2117)

        79. Raytheon’s November 2, 2004 Company Policy No. 121-RP, “Mergers and
Acquisitions” (2004 M&A policy), “[e]stablishes the guidelines and responsibilities for
activities concerning [M&A]” (R4, tab 256 at ¶ 2.1). It provides that “[a]ll activities
concerning [M&A] by any Business, including opportunities presented by a third party,
must be coordinated with Corporate Development. . .” (Id. at ¶ 5.1). It further states:

                 Prior to receipt of Corporate approval to proceed with a
                 transaction, all communication by a Business with an
                 acquisition candidate concerning its interest in a transaction
                 must be coordinated with Corporate Development.
                 Communications with third parties, such as investment
                 bankers, venture capitalists or other financing sources, related
                 to an acquisition opportunity or transaction must also be
                 coordinated in advance with Corporate Development. . . .
                 Corporate Development is responsible for issuance and
                 execution of any engagement letter entered into with
                 investment bankers . . . .

(Id. at ¶ 5.4)

       80. The 2004 M&A policy also provides:

                 Relating to costs associated with [M&A], all Businesses must
                 establish and maintain adequate internal controls necessary to
                 ensure compliance with applicable [FAR] and [CAS] Board
                 rules and regulations. Organizational costs associated with
                 [M&A] are generally unallowable. Unallowable acquisition
                 costs commence with the submission of an indicative offer.
                                                42
                 These unallowable costs for [M&A] end at the completion of
                 the final balance sheet adjustment for the transaction.

(Id. at ¶ 5.7)

        81. Effective December 23, 2004, Raytheon issued Company Policy No. 126-RP,
Divestitures (2004 Divestiture Policy) (R4, tab 257). The 2004 Divestiture Policy
contained similar provisions to those quoted above from the 2004 M&A policy (see id.
at ¶¶ 2.1, 5.1, 5.4), including that “[o]rganizational costs associated with divestitures are
generally unallowable” (id. at ¶ 5.7).

       Corporate Development’s Time-Keeping Practices

       82. Dr. Charles Mueller, “Director III” of Corporate Development during the
relevant time periods (tr. 3/216), described Raytheon’s “bright line” rule, articulated
above. At the point, on the acquisition side, when Raytheon submitted a non-binding
indicative offer (NBIO), or on the divestiture side, when it made the decision to go to
market, the company switched from recording costs as allowable to recording them as
unallowable. (Tr. 3/227-28, 261-64) Even if Raytheon changed course after the
Acquisition Council’s initial decision about an NBIO or going to market, Corporate
Development employees continued to withdraw their time as unallowable because the
reconsideration “was after the bright line moment” (tr. 3/265).

       83. In formulating its “bright line” rule Raytheon officials took into consideration
the economic planning, organization, and selling cost principles, FAR 31.205-12, -27,
and -38 (tr. 6/24-25).

       84. Kathy Giovannini, a consulting budget analyst in the corporate A&S office,
with many years’ experience, collects Corporate Development’s time withdrawal
information (tr. 3/269-70, 6/337-39, 351). When the employees reported their time in
days, she converted each day to eight hours, which is “a normal work day for exempt
employees” at Raytheon (tr. 6/351). The time collecting process is similar to that
described above for Government Relations employees. The following are a few examples
of senior employee timekeeping.

        85. At one point, Corporate Development employees submitted their unallowable
time, after the “bright line,” annually, but later changed to quarterly reporting.
Dr. Mueller relied upon his memory in submitting his time, past the “bright line,” to his
administrative assistant, who kept a calendar for his benefit. His time was not hard to
track because his projects were serial and he typically worked only one project at a time.
The work, particularly divestitures, was focused and demanding and could last many
months. He was a professional and worked significant hours, whatever it took to
accomplish the job. In 2007, Dr. Mueller withdrew 97% of his time as unallowable. In
2008, he withdrew 83%. (R4, tab 268 at 9682, tab 279, 284; app. supp. R4, tabs 79, 110;
tr. 3/230-33, 267, 269-70, 272, 277-78, 6/389, 391; see app. br. at 48, n.26)
                                              43
        86. Thomas O’Rourke was a director of Corporate Development during the
relevant time period (tr. 4/236). As a professional, he worked the hours needed. They
varied from project to project and with the status of a project at a given point. (Tr. 4/279)
Mr. O’Rourke followed Raytheon’s “bright line” guidance in submitting his time
(tr. 4/283, 303). His office used calendars, notes and meeting information to submit their
time (tr. 4/293-94). For the time he submitted in 2007, he aggregated all the efforts
throughout the year by project, including source information, calendar invitations for
meetings, email correspondence, and handwritten notes. He recorded 226 days for
acquisition work in 2007, approximately 98-99% of his time, and no days for divestitures.
That was a very busy year for acquisitions, with about 23 projects submitted to the
Acquisition Council. In 2008, following the same documentation process, he recorded
about 65% of his time on acquisitions and none for divestitures. (App. supp. R4, tabs 80,
111; tr. 4/303-07, 315)

         87. Yiannis Rexinis was a consulting financial analyst in Corporate
Development, starting in May 2007 and continuing throughout the relevant time period.
All of his activities were acquisition related; he never worked on divestitures. (Tr. 7/89,
125, 129-30) He understood and followed the “bright line” rule in recording his time
(e.g., tr. 7/130-32). In recording his time Mr. Rexinis used, e.g., Lotus Notes, a
calendar, email functions, notes and call logs (tr. 7/113). In 2007 he withdrew
approximately 76% of his time as unallowable and in 2008 he withdrew about 68%.
Mr. Rexinis recalled allowable activities in 2007-2008 as including his work on
Raytheon’s strategic dialog process. He stands by the accuracy of his time records. (R4,
tab 289; app. supp. R4, tab 81; tr.-7/135--40)

        88. In tracking his time, Paul Bailey, Director of Corporate Development, follows
the “bright line” rule, which he was involved in formulating (R4, tab 105; tr. 8/46, 52-55,
57-58). Mr. Bailey’s time varies considerably. In 2007, he withdrew 59% of his time as
unallowable and in 2008, 64 % (app. supp. R4, tabs 77, 109; tr. 8/62-64). He does not
start collecting and submitting his time until the bright line has passed (tr. 8/70). On a
quarterly basis he checks his calendar, his project notebooks, his project files, documents
that were created, presentations, and Excel spreadsheets and calculates how much time he
spent after the NBIO and go to market dates (tr. 8/61, 87, 110).

       89. The withdrawal percentages for the Corporate Development cost center’s six
employees, including non-salary costs and salary costs for support personnel, were 53.4%
in 2007 and 48.8% in 2008 (R4, tab 102 at 57-58 (response to interrogatory No. 20),
tab 302 (unallowable cost percentages derived from percentage of allowable costs)).

       90. In July 2012, a DCAA auditor asked Raytheon’s Mr. Vilandre for the 2007
calendars of three Raytheon employees, acknowledging that, “I know this may be a far
stretch (as this is about five years ago)” (R4, tab 298 at 147553). Mr. Vilandre responded
to another DCAA auditor, with a copy to the requesting auditor and to Raytheon’s
Mr. Panetta:
                                             44
             I am not clear as to why at this point DCAA is asking for this
             information. For example, Raytheon withdrew the cost
             associated with 1,880 hours of Thomas O’Rourke’s cost for
             [A&D] activity in 2007. According to the view that DCAA
             has taken with regard to lobbying activities, that is essentially
             all of the time that an average employee would normally work
             during the year, considering holidays and paid time off.
             Further, DCAA has indicated to me on more than one occasion
             that it intends to question the entire claimed cost in cost center
             90043, in which Mr. O’Rourke resides. So why would it be
             necessary to review his calendar?

             [Explanation of withdrawals for the other two Raytheon
             employees]

             Finally, as a practical matter, I would not expect employees to
             retain their calendars for five years. I know I no longer have
             my own 2007 calendar. We have provided DCAA with the
             documentation we received from the corporate functions to
             support the withdrawn costs, and DCAA has interviewed these
             employees. I am unclear on the benefit of requesting these
             employees to search for and produce these calendars. What
             are your thoughts?

(R4, tab 298 at 147552) As referred to above, Mr. Panetta added: “employee calendars
are not ‘records’ as would be defined in the FAR. They are not in any way used to
support our claimed costs” (R4, tab 298 at 147551).

      Corporate Audit Report for 2007, COFDs and Appeals

       91. The Corporate Audit report for 2007, dated October 15, 2013, questioned
$903,817 of Corporate Development’s costs, citing FAR 31.201-2, DETERMINING
ALLOWABILITY (MAY 2004), and 31.205-27, ORGANIZATION COSTS (APR 1988).
Except for several adjustments for cost categories subject to different audits, DCAA
alleged that all costs within Corporate Development cost center 90043 were expressly
unallowable. This was a significant departure from prior years’ audits. After other
adjustments for alleged calculation errors for related costs outside Corporate
Development’s cost center, the questioned amount was $862,010, said by DCAA to be
subject to a “level one” penalty. (App. supp. R4, tab 208 at 3194-99, tab 331 at 5224-25;
AUPFF ¶¶ 131-132)

       92. Raytheon submitted to DCMA an “initial response,” dated November 22,
2013, to the Corporate Audit Report for 2007, addressing all disputed issues, including
Corporate Development A&D issues (app. supp. R4, tab 217). Incurred cost negotiations
                                            45
followed in the spring of 2014 (see app. supp. R4, tab 266; tr. 8/11). A DCMA price cost
analyst, who assisted in the negotiations (tr. 8/11, 113-15), recorded a potential settlement
in the following email to DCAA:

              After reviewing the additional documentation Raytheon
              provided, showing all different phases and activities of the
              Corporate Development employees, a portion of the cost seem
              [sic] to be economic planning. The phases which we deem to
              be economic planning are the stages where Raytheon has yet
              to identify a target to acquire or divest. In order to amicably
              resolve this matter we have agreed to split the cost, not to
              include the credit of $82,153. In addition we are putting
              together a partial settlement, A&D will be included in it, that
              states this is not precedent setting.

(App. supp. R4, tab 265 at 4185) DCMA had misunderstood that Raytheon had agreed to
accept a 50-50 split of the disputed A&D costs and the parties did not settle this issue
(app. supp. R4, tab 353 at 5890-91; tr. 7/293-94, 8/23, 129-30).

       93. The June 20, 2014 Corporate COFD for 2007, the June 20, 2014 CAS 405
COFD for 2007, and the ensuing appeals are described above (findings 5-6). The former
COFD adopted the findings in the Corporate Audit Report for 2007, except for the
$862,010 recommended amount to be recovered by the government, and concluded that
$307,776 in what the parties agree are Corporate Development salary costs were expressly
unallowable and subject to penalty and it denied Raytheon’s request for a penalty waiver
(app. supp. R4, tab 208 at 3194-95, tab 279 at 4558, 4566; AUPFF ¶ 144). The latter
COFD declared that the submission of those costs violated CAS 405 (app. supp. R4,
tab 281; AUPFF ¶ 144).

        94. The $307,776 demanded in the Corporate COFD had the effect of reducing
DCAA’s $862,010 recommended recovery by $554,234 (app. supp. R4, tab 285
at 4630-31). There was no difference between these costs and those penalized as
expressly unallowable (tr. 8/33). At the hearing the CACO attributed the reduced
demand to a mistake. He testified that he had not been involved in the negotiations but
had understood that there had been a settlement. (Tr. 7/282-87) However, his COFD
states that “[t]he undersigned conducted joint fact-finding with Raytheon and
determined that of the amount questioned by DCAA [$862,010], this amount [$307,776]
constituted unallowable organization costs” (app. supp. R4, tab 281 at 4580). Prior to
the hearing, the government purported to increase its claim back to the $862,010
questioned by DCAA (gov’t br. at 12, n.4).

                                             46
         Corporate Audit Report for 2008, COFDs and Appeals

        95. DCAA’s audit of Corporate Development’s costs for 2008 began in April 2014
(tr. 6/205-06). Anthony Vegelante, 23 the senior auditor who conducted the audit (tr. 6/127,
130) recommended in his April 30, 2014 work paper, before DCAA had interviewed
Raytheon employees regarding 2008, that DCAA should continue to question 100% of
A&D cost center 90043’s activities because they were predominantly unallowable. He
asserted at the hearing that he had nonetheless maintained an open mind. (Tr. 6/227, 242;
ex. A-15 at B-05 (2/8))

        96. DCAA interviewed the six cost center 90043 employees who had voluntary
cost withdrawals from Raytheon’s 2008 Corporate Incurred Cost submission concerning,
among other things, the percentage of their time spent on A&D activities or non-A&D
activities (R4, tabs 309-14 at questions and answers Nos. 10, 12): Mr. Bailey,
Ms. Brezinsky, and Messrs. Josh Burack, Mueller, O’Rourke, and Rexinis (R4, tab 308).
According to Mr. Vegelante’s interview notes, Mr. Bailey responded that he spent “a lot”
of time on non-A&D activities but that it varied “quite a bit” annually from 75% to 25%.
The time he spent on A&D activities was also “quite variable and ranged from 25% to
75% depending upon the year. (R4, tab 309 at 3) Ms. Brezinski responded that it
depended. She currently spent 30% of her time on non-A&D activities but in 2008 she
spent 100% of her time on non-A&D activities. (R4, tab 310 at 3) Mr. Burack responded
that none of his activities were non-A&D and all were “transaction activities or related”
(R4, tab 311 at 2-3). Mr. Mueller responded that “very little” of his time was spent on
non-A&D activities; the time spent on A&D activities was “quite variable;” and “all his
time is allowable or unallowable A&D” (R4, tab 312 at 3). Mr. O’Rourke responded that
10% of his activities were non-A&D and 90% were A&D (R4, tab 313 at 3). Mr. Rexinis
responded that none of his time was spent on non-A&D activities and 100% was A&D
(R4, tab 314 at 3).

        97. Auditor Vegelante did not define to the interviewees what he meant by “A&D
activities.” He did not know whether they interpreted it to mean all A&D activities or just
those that occurred after the “bright lines” had been crossed. (Tr. 6/243-46)

       98. Mr. Vegelante concluded that Raytheon’s practices, policies and procedures
and other guidance were consistent in that “they do not consider [A&D] activities before a
specific A&D project is approved (NBIO/go to market decision) to be unallowable and do
not track those hours/costs.” He stated that “[t]his interpretation directly contradicts our
interpretation of the FAR . . .” (Tr. 6/208; ex. A-14 at 1/3; see also ex. A-15 at 1/8)

       99. Mr. Vegelante agreed with Raytheon’s counsel that the basic issue between
the parties was that they had different interpretations of the interaction among various
FAR cost principles, such as economic planning costs under FAR 31.205-12 and

23   The hearing transcript misspelled Mr. Vegelante’s name as “Begelante” (see, e.g.,
         tr. 6/3).
                                              47
organization costs under FAR 31.205-27 (tr. 6/ 218-19). Raytheon viewed activities in
the A&D cycles prior to the “bright line” to be allowable economic planning and market
planning costs whereas DCAA deemed them to be directly associated with unallowable
costs per FAR 31.201-6 (tr. 6/221; ex. A-15 at 1/8). However, Mr. Vegelante stated that
DCAA did not question those costs on the ground that they were “directly associated”
with unallowable costs but because the activities were themselves unallowable
(tr. 6/222).

       100. The 2008 Corporate Audit Report, dated December 19, 2014, questioned all
salary costs from Corporate Development’s cost center, amounting to $831,707, as
expressly unallowable under FAR 31.205-27, 31.201-6 and 31.201-2. It concluded that a
level one penalty applied. (App. supp. R4, tab 331 at 5219-20; UAPFF ¶ 136)

        101. The June 22, 2015 Corporate COFD for 2008, and the ensuing appeals are
described above (findings 7, 9). The former COFD adopted DCAA’s recommendations,
found all $831,797 in Corporate Development employee salary costs claimed by Raytheon
to be expressly unallowable and subject to penalty, and denied Raytheon’s waiver request
(app. supp. R4, tab 364 at 5954, 5957, 5961; UAPFF ¶ 148). The latter COFD declared
that the submission of those costs violated CAS 405 (app. supp. R4, tab 365; UAPFF ¶
148).

      DISCUSSION OF CORPORATE DEVELOPMENT COSTS

      I. The Parties’ Contentions

          A. The Government’s Contentions

       DCMA contends that Raytheon violated FAR 31.205-27, ORGANIZATIONAL
COSTS (APR 1988), by charging the government for expressly unallowable A&D labor
and salary costs such that the government is entitled to penalties, interest and CAS 405
damages. The government seeks, through the dates of the applicable COFDs,
$1,601,141.20 for 2007 and $1,380,549.72 for 2008. (Gov’t br. at 86)

        DCMA first asserts that Raytheon’s published policies confirm that it recognizes
that its A&D costs are expressly unallowable organizational costs under FAR 31.205-27.
Secondly, DCMA alleges that Raytheon failed to support its A&D cost withdrawals from
its incurred cost submissions. DCMA also disputes the accuracy of Raytheon’s time
sheets, characterizing them as general approximations of the time worked after the “bright
lines” (submission of indicative offer/decision to go to market) had been crossed,
sometimes recorded up to a year after the work had occurred. DCMA asserts “that
Raytheon has violated its responsibilities under FAR 31.201-2(d)” (gov’t br. at 89), which
requires a contractor to maintain records, including supporting documentation, adequate to
demonstrate that claimed costs have been incurred and that they comply with applicable
cost principles.

                                            48
       DCMA also alleges that Raytheon’s calculation of its unallowable A&D costs is
based upon a “deeply distorted reading of FAR 31.205-27” and “fundamentally wrong
‘bright line’ rules” (gov’t br. at 89 (emphasis in original omitted). DCMA contends that
“Corporate Development plans for [A&D],” not for long-term strategy; and it “does not
perform any meaningful long-term economic planning under FAR 31.205-12,” nor
“long-range market planning under FAR 31.205-38(b)(4)” (gov’t br. at 94, 96). DCMA
asserts that Raytheon’s application of its “bright line” rules is contrary to Raytheon I and
Dynalectron Corp., ASBCA No. 20240, 77-2 BCA ¶ 12,835. It contends that those
decisions stood for the proposition that, with respect to the disallowance of organization
costs, FAR 31.205-27 (formerly Armed Services Procurement Regulation (ASPR)
15-205.23, as discussed in Dynalectron) did not distinguish between costs associated with
unconsummated acquisitions and those associated with consummated acquisitions.
Rather, the FAR stricture applied to all activities associated with the “planning” of
acquisitions or divestitures. (Gov’t br. at 93)

      DCMA further contends that Raytheon made several mistakes in its withdrawal of
expressly unallowable A&D costs and that contemporaneous records demonstrate that
Corporate Development performs significant amounts of unrecorded expressly
unallowable activities.

       B. Raytheon’s Contentions

        Raytheon responds that DCMA has not met its burden to prove that Raytheon’s
Corporate Development costs are unallowable, expressly unallowable or subject to
penalties. Raytheon asserts that its “bright line” rules accurately reflect the relationship
among FAR 31.205-12, -27 and -38(b)(4), in accordance with Raytheon I, and it posits
that all “planning” is not unallowable, pointing to allowable economic or market planning
(app. br. at 154-55). Raytheon also alleges that DCMA misreads Dynalectron, Raytheon
I, and Raytheon’s policies and procedures. Raytheon represents that, if it changed paths
after a “bright line” was crossed, it “appropriately withdrew those post-threshold costs as
unallowable, unconsummated organizational activities” (app. br. at 156). Raytheon also
disclaims that it made the mistakes in its cost withdrawal process cited by DCMA.

       Regarding damages, Raytheon asserts that DCMA has not presented any specific
evidence of quantum damages. The contractor also contends that, due to judicial
admission and lack of jurisdiction, the Board cannot consider DCMA’s post-2007
Corporate COFD claim that 100% of Corporate Development’s 2007 costs are expressly
unallowable. The COFD had claimed that about 35% of those costs, or $307,776, were
expressly unallowable and had reinstated 65% as allowable. However, close to the
hearing, DCMA increased its claim by 189%, to $862,010, which was all of cost center
90043’s costs (see findings 91, 94). Raytheon contends that this increase is barred by the
doctrine of judicial admission, because DCMA admitted in its Answer to the Complaint
that only $307,776 was in dispute. Raytheon also contends that the greatly increased
claim was, in fact, a new claim, not covered by any COFD, resulting in the alleged
jurisdictional impediment.
                                             49
       Raytheon summarizes that the disputed Corporate Development costs are allowable
and, even if they are not, they are not expressly unallowable and subject to penalties.
Moreover, even if they were subject to penalties, DCMA has not met its burden to prove
the amount of the penalties. It also it has not met its burden to prove that Raytheon
violated CAS 405 regarding the Corporate Development costs.

      I. DCMA Has Not Met Its Burden To Prove That The Disputed Corporate
         Development Costs Are Unallowable Organization Costs And Thus Has Also
         Not Met Its Burden To Prove That Raytheon Violated CAS 405 Regarding
         Those Costs.

        First, DCMA’s claim that Raytheon’s published policies confirm that it recognizes
that its A&D costs are expressly unallowable organizational costs under FAR 31.205-27,
is groundless, as evidenced by this litigation. Secondly, DCMA has not challenged the
reasonableness or allocability of the corporate development costs in question.

        In fact, the government acknowledges that the key issue is whether the disputed
corporate development costs are unallowable organization costs under FAR 31.205-27 or
allowable economic or market planning costs under FAR 31.205-12. Raytheon views
activities prior to crossing the “bright lines” to generate allowable costs whereas the
government deems them to be unallowable.

       Contrary to DCMA’s stance, Raytheon’s “bright line” practice does not run afoul
of Dynalectron or Raytheon I. Dynalectron, which focused upon a regulatory change
concerning the costs of unconsummated acquisitions, did not address the interplay among
the regulations that are now FAR 31.205-27, FAR 31.205-12 and FAR 31.205-38. In
Raytheon I, in deciding that the costs at issue were allowable economic and market
planning costs and not expressly unallowable organization costs subject to penalty, the
Board reasoned:

             Under FAR 31.205-12 costs of “generalized long-range
             management planning that is concerned with the future overall
             development of the contractor’s business” are allowable but
             the regulation excludes organization and reorganization costs
             covered by FAR 31.205-27 . . . . FAR 31.205-38 states that
             market planning involves market research and analysis and
             generalized management planning concerned with the
             contractor’s business development; the allowability of
             long-range market planning costs is controlled by FAR
             31.205-12; and other market planning costs are allowable to
             the extent that they are reasonable and not in excess of certain
             limitations . . . . FAR 31.205-27 provides in relevant part that
             “expenditures in connection with” planning “the organization
             or reorganization” of a business’ corporate structure,
                                            50
             “including mergers and acquisitions,” are unallowable . . . .
             The regulation does not clearly limit its coverage to costs of
             targeting a specific merger or acquisition. Although it
             mentions “the” organization or reorganization of a business, in
             the singular, it also refers to costs in connection with mergers
             and acquisitions broadly, in the plural, not to “a” merger and
             acquisition.

             Thus, the distinction between allowable economic planning
             costs under FAR 31.205-12 and unallowable organization
             costs under FAR 31.205-27 is unclear. The regulations
             themselves do not draw a defined line between the two.
             However, reading the regulations together, including with
             FAR 31.205-38, the intent appears to be that costs in
             connection with actually planning the organization or
             reorganization of a business, such as by a specific merger or
             acquisition, are unallowable whereas generalized long-range
             management planning costs are allowable. A learned treatise,
             in discussing the interplay between organization costs under
             FAR 31.205-27 and economic planning costs under
             FAR 31.205-12, supports this analysis:

                    [C]are should be taken to distinguish between the costs
                    of planning an organizational change, the costs of
                    which are unallowable, and the costs of generalized
                    long range planning. Under FAR 31.205-12,
                    Economic Planning Costs, the costs of surveying
                    various business opportunities, making demographic
                    and economic studies, and evaluating potential markets
                    or firms for mergers or acquisitions would be
                    allowable. Conversely, once a target has been
                    identified, the costs of planning or executing
                    organizational changes would be unallowable.

             (Ex. A-21 (John Cibinic, Jr. & Ralph C. Nash Jr., Cost-
             Reimbursement Contracting at 943 (3d ed. 2004))

Raytheon I, 17-1 BCA ¶ 36,724 at 178,852.

        In sum, Raytheon’s “bright-line” policy represents a reasonable reading of the
FAR provisions governing organization, economic planning, market planning and selling
costs and, applying the General Dynamics standard, it was not unreasonable for Raytheon
to treat the costs at issue as allowable. Moreover, although Raytheon and the government
would benefit from Raytheon’s application of more uniform, timely and descriptive

                                            51
time-keeping procedures,24 DCMA has not carried its burden to prove by a
preponderance of the evidence that the amount of unallowable hours withdrawn by
Raytheon’s personnel, which is supported by documentation 25 and credible witness
testimony (see, e.g., findings 41-45, 57-58, 60), from its CY 2007 and 2008 incurred cost
proposals was inaccurate, nor that any of the included Corporate Development costs were
unallowable, let alone expressly unallowable and subject to penalties. Thus, DCMA has
also not met its burden to prove that Raytheon violated CAS 405 regarding those costs.

       Therefore, we need not consider whether DCMA’s increase in its claim that about
35% of Corporate Development’s 2007 costs were expressly unallowable to 100% were
expressly unallowable was tantamount to a new claim that the Board lacks jurisdiction to
entertain, or whether the doctrine of judicial admission applies.

                                        DECISION

      ASBCA Nos. 59435, 59436, and 60056, to the extent that they cover alleged
unallowable Corporate Development costs, are sustained.

     ASBCA NO. 59438 -- ENGINEERING LABOR OVERHEAD/PATENT COSTS 26

            FINDINGS OF FACT CONCERNING ENGINEERING LABOR
                         OVERHEAD/PATENT COSTS

       102. The following regulation is pertinent to the parties’ disputes over RMS’
invention disclosure costs and patent legal costs (below):

              FAR 31.205-30, PATENT COSTS.

              (a) The following patent costs are allowable to the extent that
                  they are incurred as requirements of a Government
                  contract (but see 31.205-33 [Professional and consultant
                  service costs]):

                  (1) Costs of preparing invention disclosures, reports, and
                      other documents.

                  (2) Costs for searching the art to the extent necessary to
                      make the invention disclosures.

24 The same is true of Government Relations’ time-keeping methods.
25 We do not disclaim the value of diaries, calendars, log books, Lotus Notes, etc. as
       time keeping records.
26 DCMA refers to the costs at issue as “patent” costs. Raytheon denies that they are

       patent costs and refers to them as “engineering labor overhead” costs (e.g., app. br.
       at 187-88). We use various cost terms as appropriate.
                                             52
                   (3) Other costs in connection with the filing and
                       prosecution of a United States patent application
                       where title or royalty-free license is to be conveyed to
                       the Government.

              (b) General counseling services relating to patent matters,
                  such as advice on patent laws, regulations, clauses, and
                  employee agreements, are allowable (but see 31.205-33).

              (c) Other than those for general counseling services, patent
                  costs not required by the contract are unallowable. (See
                  also 31.205-37. [Royalties and other costs for use of
                  patents])

(Emphasis added)

        103. The parties agree that the costs at issue are not “general counseling services”
as set forth in FAR 31.205-30(b) (GPFF ¶ 256; app. br. at 128).

       104. Raytheon’s Policy on “Intellectual Property” was reissued effective
January 2, 1990 (1990 IP Policy) (R4, tab 353 at 9477). It remained in effect until
July 26, 2013, when it was superseded (R4, tab 366 at § 1.1; tr. 3/100; GUPFF ¶ 259).

       105. The 1990 IP Policy provided in part:

              1. PURPOSE

              The intellectual property of the Company requires certain
              controls and documentation to:

              1.1 Protect such intellectual property from disclosure and/or
                  use that is not in the best interest of the Company.

                     ....

              5. DEFINITIONS

                     ....

              5.2 Invention Disclosure -- A complete written description of
                  the invention. The information to be provided is spelled
                  out on the face of the Record of Invention, Form 10-
                  5876, and the written description together with the

                                             53
                   Record of Invention form is essential to constitute a
                   complete Invention Disclosure.

(R4, tab 353 at 9477-78)

       106. The 1990 IP Policy’s Exhibit A, “Types of Intellectual Property,” stated that
“Raytheon’s research and development programs should result in a flow of invention
disclosures to the Patent Counsel” (R4, tab 353, § 2.2 at 9480) and that “[a] patent is the
principal mechanism for protecting rights in an invention or discovery” (R4, tab 353,
§ 3.1 at 9481).

       107. Effective September 3, 2004, Raytheon issued “Invention Disclosure” Policy
No. 13-RP (2004 Invention Disclosure policy), which was in effect in 2007 and remained
in effect until June 9, 2009. (R4, tabs 354, 363; tr. 9/15; see GUPFF ¶ 263) The policy’s
“Purpose” was:

              1.1 To document the Company policy with respect to
                  inventions and software improvements and to provide
                  incentives for the creation of certain intellectual property
                  rights in the form of technical inventions which may or
                  may not be patentable or which may qualify for
                  protection as a trade secret.

              2.2 To assure that a subject invention is reported as required
                  and defined by a Government contract.

              2.3 To stimulate continued growth by providing recognition
                  of employees who conceive significant technological
                  advances.

(R4, tab 354 at 9463)

108. Section 4.2 of the 2004 Invention Disclosure Policy defines a “subject
invention” as “[a]n invention first conceived or reduced to practice in the course
of or under a U.S. Government contract, and under which the Government has
certain rights. The rights usually take the form of a non-exclusive royalty-free
license to use the invention for Government purposes.” (R4, tab 354 at 9463)

        109. Under the 2004 Invention Disclosure policy, when a “new invention” is
conceived, RMS engineers must prepare an invention disclosure report, which in 2007
was submitted through Raytheon’s Intellectual Property Center’s (RIPC) website
(tr. 9/12-14; see tr. 9/37-38).

       110. Invention Disclosures are submitted on Raytheon Form 10-5876 (R4, tab 353
¶ 5.2 at 9478; app. supp. R4, tab 33 ¶ 4.3 at 253-54, tab 390). There is no separate patent
                                             54
disclosure form (tr. 9/88). Form 10-5876 requires the inventor to describe the invention
technically and to explain how it is new (app. supp. R4, tab 389; tr. 9/29-30). It also
requires identification of the labor charge code applicable to the time the inventor spent
conceiving of or reducing the invention to practice. If the invention was discovered
separately from government contract work, the inventor must identify the charge code for
the company-funded program or overhead. If the work was performed under a
government contract, the invention disclosure reports the contract number and the
applicable FAR and Defense Federal Acquisition Regulation Supplement (DFARS) patent
rights clauses. (App. supp. R4, tab 85 at 1300, tab 86 at 1325, 1331, tab 87 at 1342, 1346;
tr. 9/48-49, 53-56, 59-60; APFF ¶ 242)

        111. According to the 2004 Invention Disclosure Policy, new Invention
Disclosures were to be submitted to the “Patent Evaluation Committees,” which had the
“primary function of evaluating inventions” (R4, tab 354 § 5.4; see also § 4.4 (“Patent
Evaluation Committee – A decision-making body . . . which, as a primary function,
reviews and evaluates the technical and economic (business) merits of an invention and
determines whether patent, trade secret or other types of protection or courses of action
should be pursued;” GUPFF ¶ 264) RMS did not have a Patent Evaluation Committee.
For all relevant times, the Business Unit Invention Review Committee (BUIRC) assumed
those responsibilities. (R4, tab 354 § 7.6; tr. 9/20, 89-90; GUPFF ¶ 265)

        112. The 2004 Invention Disclosure Policy was not limited to patents but applied
to all intellectual property (tr. 9/15-16). Under that policy, Raytheon issued “Invention
Disclosure Instructions” and an “Invention Disclosure Questionnaire And Detailed
Description” (R4, tabs 355-56). The instructions called for the employee/inventor to “fill
in the Business, Business Unit, and Site to which the invention pertains” stating that
“[t]his will allow [Raytheon Corporate’s Intellectual Process & Licensing Office (IP&L)]
to determine which Intellectual Property Attorney, Patent Engineer, and Patent Evaluation
Committee will process the disclosure” (R4, tab 355 at 1092).

       113. The questionnaire provided that the inventor was to prepare the Invention
Disclosure Form and to send one copy to the Regional Patent Engineer. After review,
comments and signatures, including by the manager of the program office or business area
“most likely to benefit from protection (via patent or trade secret)” of the invention, the
executed copy of the disclosure form was also to be sent to the Regional Patent Engineer.
(R4, tab 356 at 1095)

       114. Sherry Botos is RMS’ “Patent Engineer” (tr. 9/15). Among her primary
responsibilities is to “[f]acilitate the preparation, submission and critical review of
invention disclosures” (R4, tab 361 at 265969-70; tr. 9/74). She helps inventors get
through RMS’ invention review committee, which reviews invention disclosures for all
types of intellectual property protection (tr. 9/15-16, 77).

     115. During the relevant period, the inventor’s manager and the Program
Management Office reviewed the invention disclosure. The initial reviews primarily
                                            55
assessed whether it was technically feasible to protect the specific invention. If approved,
the invention disclosure was submitted to the Patent Engineer and docketed in the internal
Raytheon Intellectual Property Docketing tool (RIPD) to track key dates and actions. The
BUIRC then evaluated the technical and economic merits of the invention disclosure to
determine whether Raytheon should file for a patent or treat the intellectual property as a
trade secret, innovation award, or a different type of intellectual property. If the BUIRC
decided not to seek a patent, the invention was not disclosed to the public and remained
confidential. If the BUIRC decided to seek a patent, the invention disclosure was “rated
to file” (tr. 9/93) and submitted to IP&L. It was at this decision point that RMS deemed
the associated costs to be patent costs. IP&L reviewed the invention disclosure and
submitted it to Raytheon’s external legal counsel, who prepared and submitted a patent
application to the United States Patent and Trademark Office (PTO). In 2010, the RIPC
and RIPD were consolidated and invention disclosures were submitted through an “IP
Track” tool, which can run automated reports of data from prior years and was used by
Raytheon at the hearing, without objection, to reflect 2007 data. (App. supp. R4, tab 373;
tr. 9/12-14, 18-22, 24-25, 28, 91-93)

        116. RMS does not consider the costs to discover new inventions, of preparing and
submitting invention disclosures, of a manager’s review of invention disclosure forms, or
of BUIRC’s review to be patent costs (tr. 9/14, 17-19, 24, 76, 86). Regarding the BUIRC
in particular, Raytheon does not consider its review and other costs to be patent costs
because “there’s no patent at that stage” (tr. 9/24). The rationale is that, at the time an
invention disclosure is being prepared and reviewed, RMS does not know whether a
patentable invention is involved (tr. 9/82-83).

       117. Prior to a decision to seek a patent for an invention, the labor costs for the
preparation and internal review, including by BUIRC, of invention disclosures are
collected in RMS’ engineering labor overhead pool. RMS considers them to be allowable
labor costs, even if the invention is ultimately deemed to be patentable. The costs are built
into RMS’ indirect cost rates and charged to the government. (App. br. at 130 (resp. to
GPFF ¶ 269); tr. 9/82-83, 86)

       118. RMS considers the costs of filing a patent application and prosecuting the
patent to be patent costs. It segregates the patent costs as allowable, if they pertain to
“subject inventions” or, if not, the costs are deemed to be unallowable. (Tr. 9/25-26)

       119. In 2007, 149 invention disclosures were prepared and submitted internally by
RMS engineers. BUIRC ultimately approved 110 of these invention disclosures as
“patent worthy” and patent applications were filed with the PTO. Of the 149 invention
disclosures, 26 were “subject inventions.” (App. supp. R4, tab 373; tr. 9/37-38, 85-86;
app. br. at 128, 130-31 (unrebutted resp. to GPFF ¶¶ 256, 271 (undisputed portion)))

       120. DCMA contends that “if and when a patent is pursued, the invention
disclosure itself is literally submitted as part of the application,” citing Rule 4, tabs 354-56
(gov’t br. at 105-06; GPFF ¶ 268). The Board did not locate support for the contention in
                                              56
the cited documents. Raytheon has not denied it but it responds that “there is no
evidentiary support” for it (app. br. at 130 (addressing GPFF ¶ 268)). Thus, this matter
remains unclear.

        121. DCAA noted in its March 18, 2014 RMS Audit Report for 2007, regarding
patent costs, that it considered “all effort incurred by RMS employees to prepare, review,
and approve/disapprove invention disclosures for patent applications to be patent costs”
subject to the strictures of FAR 31.205-30 (app. supp. R4, tab 260 at 4042) (emphasis
added). Therefore, all such efforts not specifically required by a government contract
were expressly unallowable costs. DCAA described RMS’ position as: “the costs
incurred to prepare, review, and submit an [i]nvention [d]isclosure, which may or may not
result in a patent filing, [are] allowable and allocable indirect expenses claimed as part of
the engineering overhead pool” (id.). RMS’ Senior Manager of Government Accounting,
Ms. Garcia, confirmed that this was RMS’ stance (tr. 2/274).

        122. DCAA based its cost evaluation upon information RMS provided
(tr. 3/90-92). DCAA reported that, in response to its request for documentation of actual
labor costs and directly associated costs incurred for invention disclosure and patent
efforts, RMS advised that the costs were not segregated. It provided estimates, upon
which DCAA based its questioned amount of $96,701 in “engineering labor costs claimed
in the engineering overhead pool for RMS patent activities not required by contract.”
DCAA speculated that the actual costs incurred could be “substantially more.” (App.
supp. R4, tab 260 at 4043) (emphasis added) DCAA concluded that RMS had violated
CAS 405 by failing to identify adequately and exclude the expressly unallowable patent
costs.

        123. RMS responded that DCAA had misinterpreted its invention disclosure
practice and that its Record of Invention form, as described in its 1990 IP Policy
concerning invention disclosures, was used to document and catalog an invention
regardless of whether it was subsequently submitted for patent approval or protected as
intellectual property in some other manner. RMS asserted that DCAA had questioned
costs based upon terminology identifying a general procedure and that those costs were
allowable business expenses unrelated to patent filings. DCAA replied that, unlike RMS’
practice, FAR 31.205-30 did not exclude costs of invention disclosures not submitted for
patent approval, or protected as intellectual property in some other way, from its
unallowable cost restrictions. (App. supp. R4, tab 260 at 4044)

        124. DCAA changed its position from the time the audit of RMS’ 2007 costs
began at the end of 2008 until the audit concluded, after a long hiatus, in or about
December 2013, with the audit report issuing in March 2014 (app. supp. R4, tab 260;
tr. 3/16-17; see APFF ¶¶ 249-50). Due to a lack of employee recall and of specific time
recording requirements, the auditors initially found “insufficient audit evidence upon
which [to] question any related labor costs” (app. supp. R4, tab 180 at 2698).

                                             57
        125. The DACO’s June 12, 2014 RMS Penalties COFD for 2007 was based in
large part upon DCAA’s RMS Audit Report for 2007. He cited $96,701 in “engineering
labor overhead costs,” i.e. “costs to prepare, review, and approve/disapprove invention
disclosures for patent applications” as expressly unallowable under FAR 31.205-30 and
subject to a level one penalty (app. supp. R4, tab 276 at 4536) (emphasis added). He
stated that the costs were incurred in connection with invention disclosures for patent
applications, not due to a contract requirement, and that, contrary to RMS’ contention,
FAR 31.205-30 did not base cost allowability on whether the costs lead to a patent filing
(id.). DCMA withheld the questioned engineering labor overhead costs (tr. 3/28-30).

       126. DCMA based its calculation of disallowed costs upon information provided
by RMS, which did not provide documentation pertaining to invention disclosures related
to government contract requirements until shortly before the DACO issued his final
decision. By that time he had statute of limitations concerns and apparently did not
consider the documentation. (Tr. 4/195)

        127. Raytheon states that DCAA auditors who examined alleged patent-related
activities at another Raytheon business segment, known as Intelligence and Information
Systems (IIS), did not question the inventors’ labor costs because they determined they
were not patent expenses and the inventors charged their time spent on inventions to
Independent Research and Development. DCAA also did not question the labor costs for
IIS’ invention review committee members’ time because their time spent on meetings was
charged to overhead, not patent expense. (App. supp. R4, tab 187 at 2792-94; see APFF
¶ 248) DCMA does not dispute that the IIS review occurred but alleges that there is a lack
of evidence concerning what was “clearly a superficial review” by DCAA of IIS’ patent
costs, which, in any case, are not at issue here and are irrelevant (gov’t reply at 50-51,
citing APFF ¶¶ 247-51).

       128. The government alleges that “RMS Has Acknowledged That Such
Patent/Invention Disclosure Costs Are Expressly Unallowable” (gov’t br. at 106). DCMA
contends that a DCAA audit covering FY 2006 examined the same type of
patent/invention disclosure costs at issue here, used the same methodology, and
determined that they were expressly unallowable. The 2007 audit report states that:
“Using the contractor’s estimates, we calculated the number of disclosures not related to
Government contracts, an estimate of the number of hours required to create and file the
disclosures, and the number of hours required to administer the BUIRC” (app. supp. R4,
tab 260 at 4042). However, contemporaneously, the contractor expressed its disagreement
with DCAA and the CACO’s final decision assessing a penalty. It asserted that DCAA
had “incorrectly conflated the preparation of invention disclosures with the preparation of
patent applications” (app. br. at 131, discussing GPFF ¶ 272), but it did not appeal the
decision and paid the invention disclosure costs at issue. (R4, tab 362 at 112290-93,
tab 364 at 2, tab 365; tr. 3/25-26, 28-29, 92-93, 95-96) Raytheon states that it paid the
costs not because it acknowledged that they were unallowable but “in order to facilitate
negotiations, and settle costs in avoidance of litigation” (tr. 3/29; see app. br. at 131,
discussing GPFF ¶ 272).
                                            58
        129. Raytheon disagrees that DCAA used the same methodology in 2006 and 2007
to calculate RMS’ allegedly unallowable patent costs. Raytheon states, and the record
supports, that, for 2006, DCAA segregated the disclosures required by government
contracts from its calculation of unallowable patent costs (R4, tab 362 at 112291-92; app.
br. at 131). Raytheon contends that, although the RMS Audit Report for FY 2007 states
that the auditors calculated the number of disclosures not related to government contracts,
an audit work paper contradicts this. It lists all 149 invention disclosures submitted on
RMS’ invention disclosure forms, without reduction for work performed pursuant to a
government contract. (See app. supp. R4, tab 373; tr. 9/37-38) DCMA replies that
Raytheon has not confirmed that any of the disputed costs were incurred as requirements
of a government contract (gov’t reply at 67, addressing GPFF ¶¶ 256, 272)

       130. DCMA also cites to deposition and hearing testimony by Ms. Garcia
allegedly admitting that FAR 31.205-30 means that invention disclosure costs not required
by a government contract are expressly unallowable (tr. 2/284-87). Raytheon replies that
the government relies upon excerpts of testimony taken out of context and ignores that the
balance of Ms. Garcia’s testimony, which was that the costs at issue are allowable. She
also distinguished RMS’ view of patent costs and DCMA’s position. (App. br. at 131-32,
addressing GPFF ¶ 273 and citing tr. 2/270, 273-75, 286, 3/22) Ms. Garcia’s testimony is
not entirely clear, but we find no admission by her that the invention disclosure costs at
issue are unallowable. In any case, the interpretation of FAR 31.205-30 is the province of
the Board.

       131. Based upon the foregoing, it appears, but is unclear, that the $96,701
disallowed amount includes costs for, or related to, invention disclosures, including
managers’ and BUIRC’s reviews (see tr. 3/91), with regard to which RMS ultimately
sought patents, and invention disclosures and related costs for which it did not seek
patents.

      132. The Board docketed Raytheon’s and RMS’ appeal from the penalties COFD
as ASBCA No. 59438.

      DISCUSSION OF ENGINEERING LABOR OVERHEAD/PATENT COSTS

      I. The Parties’ Contentions

          A. The Government’s Contentions

       DCMA principally asserts that FAR 31.205-30(a) and (c) expressly make all patent
costs unallowable except for general counseling services and costs incurred as
requirements of a government contract (gov’t br. at 107). DCMA contends that the FAR
expressly defines unallowable “[p]atent costs” to include the “[c]osts of preparing
invention disclosures, reports, and other documents.” (Id. (emphasis in original omitted))
Therefore, according to DCMA, it is absolutely clear that the costs of preparing invention
                                            59
disclosures that are not a government contract requirement are expressly unallowable.
DCMA claims that the FAR specifically defines “preparation” of “invention disclosures”
“as an initial but essential step in the [p]atent application process (whether or not a patent
is ultimately submitted, rejected, or obtained)” (id.). At the hearing government counsel
stated that “the FAR specifically names that certain patent costs are unallowable”
(tr. 2/278).

       DCMA asserts that RMS’ costs to prepare and review invention disclosure forms
“associated with its patent application process” that were not specifically required by a
government contract are expressly unallowable and subject to penalties that the DACO
was not required to waive (gov’t br. at 110). DCMA further contends that Raytheon’s
own invention disclosure policies, and its past payment of penalties regarding invention
disclosure costs, reflect the legitimacy of DCMA’s position.

          B. Raytheon’s Contentions

       Raytheon responds that the threshold issue is whether FAR 31.205-30 “is specific
to costs for patents, or whether it applies to a broader category of costs relating to
inventions and intellectual property generally” (app. br. at 187). Raytheon advocates the
former interpretation, based upon the FAR’s “plain meaning” (id.) and asserts that
DCMA’s interpretation is unreasonably broad.

       Raytheon alleges that DCMA “cannot show that the preparation, review, and
evaluation of Form 10-5876 and new inventions are patent costs,” stating that RMS’
invention disclosures were prepared for all types of inventions whether or not they were
patentable; many times they were not patented; and, “in all cases, the activities occurred
before RMS decided whether or not it would seek a patent on the invention” (app. br.
at 189). Raytheon posits that the fact that a preliminary activity might in the future result
in unallowable costs is not dispositive, citing Raytheon I at 178,851 regarding a mergers
and acquisitions (M&A) database. Raytheon adds that, even if it went through its patent
submission review process and applied for a patent, if it did not receive one, there was no
patent and thus no unallowable patent costs under FAR 31.205-30.

        Raytheon continues that the only reasonable interpretation of FAR 31.205-30(a)(1)
is that it refers to those disclosures required by government contracts, “i.e. the requirement
to disclose subject inventions to the [CO] set forth in the FAR and DFARS patent rights
clauses . . .” (app. br. at 190) (citations to DFARS omitted). Raytheon contends that, at a
minimum, even under the government’s FAR interpretation, a portion of the disallowed
costs are allowable, i.e., the costs of 26 disclosures, including BUIRC review, because
they were required by government contracts.

      Raytheon further contends that, if the Board determines that any of RMS’ 2007
engineering costs for preparation of invention disclosures and evaluation of inventions are
unallowable, the government nonetheless has not met its burden to prove that they are
expressly unallowable under FAR 31.205-30 and subject to penalties. Raytheon alleges
                                              60
that the FAR does not “specifically name and state” that the costs of the activities at issue
are unallowable, citing Raytheon I at 176,050, and even if it did, DCMA has not
established that it was unreasonable under all of the circumstances for RMS to believe the
costs were allowable. (App. br. at 190-91) Raytheon contends that RMS reasonably
believed the costs were not covered by FAR 31.205-30 because they related to activities
prior to any determination to seek a patent. Often no patent was sought. Raytheon alleges
that, given the regulation’s “gray area,” RMS reasonably drew an “unallowable” line
regarding non-subject contracts at the point the BUIRC determined that a patent
application should be filed. (App. br. at 192) Raytheon notes that DCAA considered the
same sort of costs to be allowable in its audit of IIS and initially in auditing the costs at
issue. Therefore, the costs cannot be expressly unallowable. At worst, there is a
reasonable difference of opinion.

       Alternatively, Raytheon alleges that, should the Board determine that the costs were
expressly unallowable, the DACO was required to waive penalties and his determination
not to do so was arbitrary and capricious and in contravention of FAR 42.709-5(c)(1)-(2)
(app. br. at 193).

       II. FAR 31.205-30

       DCAA considered “all effort incurred by RMS employees to prepare, review, and
approve/disapprove invention disclosures for patent applications to be patent costs”
subject to FAR 31.205-30 (finding 121) (emphasis added). DCAA based its questioned
amount of $96,701 in “engineering labor costs claimed in the engineering overhead pool
for RMS patent activities not required by contract” (finding 122) (emphasis added).
Following suit, the DACO’s June 12, 2014 RMS Penalties COFD for 2007 cited
“engineering labor overhead costs,” i.e. “costs to prepare, review, and approve/disapprove
invention disclosures for patent applications” as expressly unallowable under
FAR 31.205-30 (finding 125) (emphasis added).

      DCMA based its calculation of disallowed costs upon information provided by
RMS, which did not provide documentation pertaining to invention disclosures related to
government contract requirements until shortly before the DACO issued his final decision.
By that time he had statute of limitations concerns and apparently did not consider the
documentation. (Findings 122, 126)

       Raytheon contends that DCAA did not limit its disallowances to patent costs that
were not required by a government contract, but rather excluded all of RMS’ invention
disclosure and review costs, even if they were incurred pursuant to a government contract
requirement or no patents were involved. The crux of appellant’s argument is that the
disallowed costs were not for patent activities or patent applications but were general
engineering and overhead costs of invention disclosures and review that might or might
not result in patent applications. When there ultimately was no decision to pursue a
patent, there were no patent costs. (Findings 115-118)

                                             61
       Both parties misconstrue FAR 31.205-30. Paragraph (a) provides that certain
“patent costs” are “allowable to the extent that they are incurred as requirements of a
Government contract.” Subparagraph (a)(1) lists the costs of “preparing invention
disclosures” as among the allowable “patent costs” under the stated circumstances.
Subparagraph (b) states that general counseling services relating to patent matters are
allowable, but the parties agree that such services are not at issue (finding 103).
Paragraph (c) provides that, other than patent costs for general counseling services, patent
costs not required by a government contract are unallowable.

        The government misreads FAR 31.205-30 to apply more broadly than it does, and
it adds language to the regulation that is not there. The regulation certainly does not
specifically define “preparation” of “invention disclosures” “as an initial but essential step
in the [p]atent application process (whether or not a patent is ultimately submitted,
rejected, or obtained) (see finding 102). Moreover, it does not state that all invention
disclosures are patent costs, regardless of whether patents are involved. Indeed, some of
RMS’ invention disclosures are associated with forms of intellectual property other than
patents, or with RMS’ recognition of invention efforts that did not lead to patent
applications (see, e.g., findings 107, 112, 114-15, 118, 121, 123). It is not clear whether
such costs are among the costs at issue.

       On the other hand, Raytheon also misreads FAR 31.205-30. RMS does not
consider the costs to discover new inventions, of preparing and submitting invention
disclosures, of a manager’s review of invention disclosure forms, or of BUIRC’s review to
be patent costs, on the ground that there is not yet any patent and RMS does not know
whether there will be one. RMS defines patent costs to be those occurring after the
BUIRC decides to pursue a patent. (Findings 115-118)

        Raytheon likens RMS’ invention disclosure costs to M&A data base consultant
costs at issue in Raytheon I. Raytheon compares RMS’ invention disclosure activities to
what they describe as the preliminary data base activities in Raytheon I that might or
might not have resulted in unallowable organization costs. (App. br. at 189) Raytheon I,
in part, involved the interplay among FAR 31.205-12, Economic planning costs,
FAR 31.205-27, Organization costs, and FAR 31.205-38, Market planning costs. The
Board stated that, reading the regulations together, “the intent appears to be that costs in
connection with actually planning the organization or reorganization of a business, such as
by a specific merger or acquisition, are unallowable whereas generalized long-range
management planning costs are allowable.” Raytheon I at 178,852. The Board noted that
the database was intended to be used both for general planning and specific M&A
purposes when ultimately configured. However, Raytheon terminated the design and
build of the M&A application, which was never completed or used in connection with any
M&A target. The Board held that the disputed costs were allowable economic and market
planning costs. Id. The Board’s decision in Raytheon I concerning consultant costs to
design and build an M&A database, and the interplay of three regulations, is not apt here.

                                              62
       Raytheon’s interpretation of FAR 31.205-30 is unreasonable. Under its
interpretation, patent-related invention disclosure costs would never be unallowable, even
if no government contract requirement were involved, and the FAR’s reference to
allowable patent invention disclosure costs would be superfluous.

       The reasonable interpretation of FAR 31.205-30 is that, when patents are involved,
the costs of the associated invention disclosure and review are patent costs. They are
allowable if incurred due to government contract requirements. Otherwise, they are not
allowable. There is no exception for costs incurred during the invention disclosure
preparation and review process prior to the decision to pursue a patent. If patents are not
involved, the invention disclosure and related costs are allowable.

       In 2007, RMS engineers prepared 149 invention disclosures and submitted them
internally. BUIRC ultimately approved 110 of them as “patent worthy” and patent
applications were filed with the PTO. Of the 149 invention disclosures, 26 were “subject
inventions.” (Finding 119) It appears that the $96,701 disallowed amount at issue
improperly includes costs for subject inventions and might include costs for non-patent
invention disclosures and review that are allowable. The Board cannot determine from the
record what the proper amount of unallowable costs should be. This is a failure of proof
by the government leading us to sustain the appeal. 27

                                          DECISION

         ASBCA No. 59438 is sustained.

                      ASBCA NO. 59437 – OUSIDE PATENT LEGAL COSTS

            FINDINGS OF FACT CONCERNING OUTSIDE PATENT LEGAL COSTS

      133. The following FAR and CAS provisions are relevant to the parties’ dispute
concerning outside patent legal costs:

                FAR 31.201-4, DETERMINING ALLOCABILITY
                (APR 1984), provides in part:

                A cost is allocable if it is assignable or chargeable to one or
                more cost objectives on the basis of relative benefits received

27   In any case, if the government could have established the proper amount of unallowable
          costs, its various treatments of FAR 31.205-30 (see findings 124, 127), including
          its overly broad interpretation in this appeal, would have undermined its contention
          that the invention disclosure and review costs at issue were “expressly
          unallowable” under FAR 42.709-1(a)(1). The government’s demand for a level
          one penalty was unwarranted.

                                               63
or other equitable relationship. Subject to the foregoing, a cost
is allocable to a Government contract if it—

  (a) Is incurred specifically for the contract;

  (b) Benefits both the contract and other work, and can be
      distributed to them in reasonable proportion to the
      benefits received; or

  (c) Is necessary to the overall operation of the business,
      although a direct relationship to any particular cost
      objective cannot be shown.

FAR 31.202, DIRECT COSTS (MAY 2004), provides in part:

  (a) No final cost objective shall have allocated to it as a
      direct cost any cost, if other costs incurred for the same
      purpose in like circumstances have been included in
      any indirect cost pool to be allocated to that or any
      other final cost objective. Direct costs of the contract
      shall be charged directly to the contract. All costs
      specifically identified with other final cost objectives of
      the contractor are direct costs of those cost objectives
      and are not to be charged to the contract directly or
      indirectly.

  (b) For reasons of practicality, the contractor may treat any
      direct cost of a minor dollar amount as an indirect cost
      if the accounting treatment—

       (1) Is consistently applied to all final cost objectives;
           and

       (2) Produces substantially the same results as treating
           the cost as a direct cost.

FAR 31.203, INDIRECT COSTS (MAY 2004), provides in
part:

  (a) For contracts subject to full CAS coverage, allocation
      of indirect costs shall be based on the applicable
      provisions. For all other contracts, the applicable CAS
      provisions in paragraphs (b) through (h) of this section
      apply.

                               64
         (b) After direct costs have been determined and charged
             directly to the contract or other work, indirect costs are
             those remaining to be allocated to intermediate or two
             or more final cost objectives. No final cost objective
             shall have allocated to it as an indirect cost any cost, if
             other costs incurred for the same purpose, in like
             circumstances, have been included as a direct cost of
             that or any other final cost objective.

         (c) The contractor shall accumulate indirect costs by
             logical cost groupings with due consideration of the
             reasons for incurring such costs. The contractor shall
             determine each grouping so as to permit use of an
             allocation base that is common to all cost objectives to
             which the grouping is to be allocated. The base
             selected shall allocate the grouping on the basis of the
             benefits accruing to intermediate and final cost
             objectives. When substantially the same results can be
             achieved through less precise methods, the number and
             composition of cost groupings should be governed by
             practical considerations and should not unduly
             complicate the allocation.

         (d) Once an appropriate base for allocating indirect costs
             has been accepted, the contractor shall not fragment the
             base by removing individual elements. All items
             properly includable in an indirect cost base shall bear a
             pro rata share of indirect costs irrespective of their
             acceptance as Government contract costs. For example,
             when a cost input base is used for the allocation of
             G&A costs, the contractor shall include in the base all
             items that would properly be part of the cost input base,
             whether allowable or unallowable, and these items shall
             bear their pro rata share of G&A costs.

CAS 402-20, Purpose, states that:

      The purpose of this standard is to require that each type of cost
      is allocated only once and on only one basis to any contract or
      other cost objective. The criteria for determining the
      allocation of costs to a product, contract, or other cost
      objective should be the same for all similar objectives.
      Adherence to these cost accounting concepts is necessary to
      guard against the overcharging of some cost objectives and to
      prevent double counting. Double counting occurs most
                                      65
              commonly when cost items are allocated directly to a cost
              objective without eliminating like cost items from indirect cost
              pools which are allocated to that cost objective.

48 CFR § 9904.402-20.

       CAS 402-30, Definitions, states under subsection (a) that:

              (1) Allocate means to assign an item of cost, or a group of
                  items of cost, to one or more cost objectives. This term
                  includes both direct assignment of cost and the
                  reassignment of a share from an indirect cost pool.

                                             ….

              (3) Direct cost means any cost which is identified specifically
                  with a particular final cost objective. Direct costs are not
                  limited to items which are incorporated in the end product
                  as material or labor. Costs identified specifically with a
                  contract are direct costs of that contract. All costs
                  identified specifically with other final cost objectives of
                  the contractor are direct costs of those objectives.

                                             ….

              (5) Indirect cost means any cost not directly identified with a
                  single final cost objective, but identified with two or more
                  final cost objectives or with at least one intermediate cost
                  objective.

48 CFR § 9904.402-30 (a).

       CAS 402-40, Fundamental Requirement, provides in part that:

              All costs incurred for the same purpose, in like circumstances,
              are either direct costs only or indirect costs only with respect
              to final cost objectives.

48 CFR § 9904.402-40.

       134. Raytheon withdraws the “vast majority” of patent costs it pays to its external
counsel to prepare and submit patent applications, but it charges the government the costs
associated with the preparation of its patent application if it considers the patent to be a
“subject invention” conceived of as a requirement of a government contract under

                                             66
FAR 31.205-30. These costs are charged to the government as indirect costs and are not
charged directly to the contract. (GUPFF ¶ 270)

       135. The $120,600 costs at issue are for outside counsel to prepare patent
applications and related filings for subject inventions. The questioned costs constitute
100% of RMS’ claimed outside legal costs relating to patents for 2007. Raytheon and
RMS fist claimed that the costs were for general counseling services related to patent
matters, which the parties now agree is not the case (finding 103). Raytheon ultimately
alleged that they were incurred in connection with subject inventions. (App. supp. R4,
tab 260 at 4071-73; tr. 2/293-94, 3/41-43, 4/196-97; AUPFF ¶ 252)

        136. RMS collected all outside legal costs, including patent-related costs, in its
G&A expense pool (tr. 2/294-95). Raytheon contends that this practice was in accordance
with RMS’ 2007 CAS disclosure statement and CAS 402, Consistency in Allocating Costs
Incurred for the Same Purpose (APFF ¶ 253). The costs were then segregated as
allowable and were claimed, or as unallowable, and were not claimed, as follows: When
inventors discovered a new invention in performing a government contract, Raytheon
tracked the subject invention as it proceeded through the invention disclosure process.
The outside legal invoices for patent applications and maintenance were segregated as
either allowable or unallowable legal costs by Raytheon’s corporate legal department.
Raytheon coded the invoices as allowable only if the patent activities involved a subject
invention and were conducted as part of a government contract requirement. RMS
received those costs from Raytheon corporate as a legal allowable “stat order.”
Raytheon’s corporate legal department coded the invoices as unallowable if they related to
an invention that was not a subject invention. In 2007, RMS incurred approximately
$2.5 million in unallowable outside legal costs relating to patents, which RMS withdrew
from its incurred cost proposal. (Tr. 3/41-44; APFF ¶ 253) (undisputed portion)
Raytheon alleges, without contradiction, that this amounts to a 95% withdrawal by RMS
(APFF ¶ 253).

       137. DCMA does not dispute the general process described by Raytheon but
contends that “it is false that such a process is specifically identified in Raytheon’s CAS
disclosure statement” (gov’t reply br. at 51-52 (resp. to APFF ¶ 253)). The disclosure
statement is not of record. However, DACO Bradley testified credibly that the patent
legal cost process was not noted in the disclosure statement (tr. 4/200). On the other hand,
Ms. Garcia testified credibly that, while the disclosure statement did not mention patent
legal costs in particular, it referred to all legal costs, to be collected in the G&A pool and
charged indirectly (tr. 2/295).

        138. Shortly prior to the COFD at issue, Raytheon provided a sample of the
questioned invoices to DCAA, along with the associated government contracts and
invention disclosures referencing the contracts (app. supp. R4, tab 274; tr. 3/68-69). RMS
also provided a spreadsheet (ex. A-20) concerning the questioned invoices that tied them
to the particular government contract involved. (R4, tab 357; app. supp. R4, tab 85
at 1300, tab 86 at 1325, tab 274 at 4531, tab 305; tr. 3/46-54, 4/195, 9/27-28, 34-36)
                                             67
Ms. Botos testified credibly to the accuracy of the spreadsheet. She had verified the
underlying documents. (Tr. 9/34, 36) DCMA did not rebut her testimony or refute the
contents of Exhibit A-20. Ms. Garcia also researched the $120,600 costs at issue and
found that they were for outside patent legal work required by contract (tr. 2/293-94).
DCMA did not rebut her credible testimony.

       139. As we found above, DACO Bradley assessed that, in order to issue a timely
COFD, and not exceed the CDA’s six-year statute of limitations, he and DCAA did not
have time to review RMS’ documentation (tr. 3/187-88, 4/195; finding 126).

       140. DACO Bradley’s June 12, 2014 2007 RMS COFD questioned $120,600 in
“Legal Allowable (Patent Legal Costs)” on the ground that they were identified with
patent disclosures that were not required by a government contract and therefore were
unallowable (app. supp. R4, tab 277 at 4544). The COFD stated that the costs were
unallowable per FAR 31.201-2 and FAR 31.205-30 as directly associated costs of patent
disclosures. The DACO concluded that RMS had not provided sufficient documentation
to demonstrate that the patent legal costs were allowable in that they were either incurred
as a government contract requirement or were for general counseling services related to
patent matters. (Id.) DCMA did not withhold the questioned costs because RMS’
decrements to its billing rates had covered those costs (tr. 3/30-31, 37-40).

       141. DCMA has not rebutted Raytheon’s representation, and we so find, that:

              . . . RMS’s Government contracts contain patent rights clauses
              obligating RMS to pursue patents of subject inventions to
              which they take title and to grant the Government a license for
              Government purpose rights . . . . [T]he costs at issue were
              incurred as requirements of Government contracts.

(APFF ¶ 257) RMS submitted supporting documentation to the government, albeit late in
the process. Accordingly, and due to Ms. Botos’ and Ms. Garcia’s unrebutted credible
testimony, we find that the costs at issue were incurred due to government contract
requirements. (See R4, tab 357; tr. 2/293-94, 9/27-28; ex. A-20; finding 138)

       142. DCMA also has not rebutted Raytheon’s representation, and we so find, that,
in accordance with CAS 402, RMS has consistently classified all of its outside legal costs
as indirect expenses. This includes the legal costs for subject inventions, which benefit
the government contract under which they were discovered and benefit Raytheon as a
whole because it owns the patent. (See tr. 2/294-95; app. br. at 100-101 (APFF ¶ 253),
196)

      143. Raytheon and RMS’ appeal from this COFD was docketed as ASBCA
No. 59437 and consolidated with ASBCA Nos. 59435, 59436, and 59438.

                                             68
                 DISCUSSION OF OUTSIDE PATENT LEGAL COSTS

       I. The Parties’ Contentions

         A. The Government’s Contentions

        We dispense with some of the parties’ contentions because we have addressed them
above. Of the remaining allegations, DCMA contends that FAR 31.205-30(a) requires
that, in order to qualify as direct costs of government contracts, Raytheon must prove that
they are “literal line item requirements” of the contracts (gov’t reply at 87). Additionally,
even if Raytheon were able to demonstrate that the outside patent legal costs were required
by government contracts, the costs should have been charged directly to the government
contract involved, in accordance with FAR 31.201-2(a)(2), FAR 31. 201-4, and CAS 402.
They were not and are therefore unallowable. (Id.)

         B. Raytheon’s Contentions

        Raytheon alleges that the costs at issue are expressly allowable because each of the
disallowed invoices was associated with a subject invention developed under a government
contract. Raytheon asserts that RMS met its obligation under FAR 31.201-2(d) to maintain
documentation supporting the allowability of its patent legal costs but the government
chose to ignore the submitted documentation due to its statute of limitation concerns (app.
br. at 194). Raytheon further asserts that DCMA has not met its burden to show that the
costs are unallowable under FAR 31.205-30, which does not limit its allowability
provisions to direct costs. It adds that, under the government’s “line item” contention,
“other than contracts for the purpose of acquiring patent application filing services, it is
difficult to fathom what costs would be allowable . . . .” (App. br. at 195)

       Regarding allocability, Raytheon urges, and we have found, that, in accordance
with CAS 402, RMS has consistently classified all of its legal costs as indirect expenses.
This includes the legal costs for subject inventions, which benefit not just the government
contract under which they were discovered but benefit Raytheon as a whole because it
owns the patent. Therefore, the outside legal patent costs in question are properly
allocable as indirect costs. (Finding 142; app. br. at 196)

       II. RMS’ Outside Legal Patent Costs Are Allowable and Allocable As Indirect
           Costs

       The FAR governs cost allowability. When the CAS applies, as here, if there is any
conflict between the CAS and the FAR, the CAS governs allocability. See Raytheon Co.
v. United States, 747 F.3d 1341, 1350 (Fed. Cir. 2014), United States v. Boeing Co., 802
F.2d 1390, 1394-95 (Fed.Cir.1986).

      The outside patent legal costs at issue are allowable. They were incurred due to
government contract requirements (finding 141). FAR 31.205-30 does not specify that
                                             69
there be a “line item” link to a government contract. Indeed, it is established that the
regulation applies to indirect patent costs as well as direct patent costs. Rocket Research
Co., ASBCA No. 24972, 81-2 BCA ¶ 15,307 at 2 (“Nothing in the history of [a
predecessor to FAR 31.205-30] or in the literal language of the clause, as promulgated,
warrants a distinction between direct and indirect patent costs.”)

       Concerning allocability, in this case there is no conflict between the FAR’s
provisions regarding indirect costs and those of the CAS. FAR 31.203(a), similarly to
CAS 402-30(a)(5), provides that an indirect cost is one identified with two or more final
cost objectives. Under FAR 31.203(b), indirect costs are to be accumulated by logical
cost groupings. Each grouping should be determined so as to permit distribution of the
grouping on the basis of the benefits accruing to the several cost objectives.
(Finding 133) As Raytheon points out, RMS’ patent legal costs at issue benefit both the
government contracts under which they were incurred and Raytheon, because it owns
the patents (finding 142).

        Raytheon and RMS’ consistent practice has been to charge outside legal costs
indirectly (finding 136). This satisfies CAS 402. “CAS 402 gives the contractor
considerable freedom in the classification of particular costs, so long as the contractor
maintains consistency in making that determination. See CAS 402-20.” ATK Thiokol,
Inc. v. United States, 598 F.3d 1329, 1332 (Fed. Cir. 2010) (independent research and
development (IR&D) costs were properly charged as indirect costs despite government’s
contention that, under FAR IR&D regulation, they should have been charged directly
because they were required for contract performance).

        We conclude that Raytheon and RMS’ regular disclosed practice of charging
outside legal costs as indirect costs meets CAS 402’s consistency requirements and was
proper under the circumstances of this appeal. All of the outside legal patent costs at issue
are allowable and allocable as indirect costs.

                                        DECISION

       ASBCA No. 59437 is sustained to the extent that it covers outside legal patent
costs. The remainder of the disputes covered in ASBCA No. 59437 are addressed below.

ASBCA Nos. 59437, 60057, 60059-60 -- AIRFARE COSTS (CORPORATE AND RMS)

 FINDINGS OF FACT CONCERNING AIRFARE COSTS (CORPORATE AND RMS)

           FAR 31.205-46, Travel Costs—DCAA Interpretation Conflicts With
                         DCMA and Raytheon Interpretation

       144. From April 9, 1986, until January 10, 2010, and at all times relevant to the
contracts and costs at issue in these appeals, FAR 31.205-46, TRAVEL COSTS, governed

                                             70
the allowability of airfare costs (see GPFF ¶ 275, APFF ¶ 150). FAR 31.205-46 provided
in part 28

                (a) Costs for transportation, lodging, meals, and incidental
                    expenses.

                    (1) Costs incurred by contractor personnel on official
                        company business are allowable, subject to the
                        limitations contained in this subsection.

                     ....

                    (4) Subparagraphs (a)(2) and (a)(3) of this subsection
                        [pertaining to the Federal Travel Regulations (FTR)
                        and Joint Travel Regulations (JTR)] do not
                        incorporate the regulations cited in subdivisions
                        (a)(2)(i), (ii), and (iii) of this subsection in their
                        entirety. Only the maximum per diem rates, the
                        definitions of lodging, meals, and incidental expenses,
                        and the regulatory coverage dealing with special or
                        unusual situations are incorporated herein.

                (b) Airfare costs in excess of the lowest customary standard,
                    coach, or equivalent airfare offered during normal
                    business hours are unallowable except when such
                    accommodations require circuitous routing, require travel
                    during unreasonable hours, excessively prolong travel,
                    result in increased cost that would offset transportation
                    savings, are not reasonably adequate for the physical or
                    medical needs of the traveler, or are not reasonably
                    available to meet mission requirements. However, in
                    order for airfare costs in excess of the above standard
                    airfare to be allowable, the applicable condition(s) set
                    forth in this paragraph must be documented and justified.

(App. supp. R4, tab 158 at 2197-98)

28   The parties agree that FAR 31.205-46 was amended, effective October 31, 2003, to
         renumber the paragraphs and make certain changes to other sections of the cost
         principle. As part of this amendment, the relevant text was moved from
         paragraph (d) to paragraph (b). No change was made to the quoted paragraph
         as part of the October 2003 amendment or at any other time prior to January
         2010. (Gov’t br. at 120, n.46; app. br. at 58, n.37) For ease, we refer to
         FAR 31.205-46(b) unless otherwise indicated.
                                              71
         145. Effective January 11, 201, FAR 31.205-46(b) was amended to state:

               (b) Airfare costs in excess of the lowest priced airfare
                   available to the contractor during normal business hours
                   are unallowable except when such accommodations require
                   circuitous routing, require travel during unreasonable
                   hours, excessively prolong travel, result in increased cost
                   that would offset transportation savings, are not reasonably
                   adequate for the physical or medical needs of the traveler,
                   or are not reasonably available to meet mission
                   requirements. However, in order for airfare costs in excess
                   of the above airfare to be allowable, the applicable
                   condition(s) set forth above must be documented and
                   justified.

(R4, tab 459 at 11152) (emphasis added to reflect changes) As noted above, before
amendment, the provision read: “(b) (Airfare costs in excess of the lowest customary
standard, coach, or equivalent airfare offered during normal business hours are
unallowable . . . .” (emphasis added to reflect language before changes).

       146. FAR 31.205-46(b) implements 10 U.S.C. § 2324(e)(1)(J), which makes
unallowable “Costs for travel by commercial aircraft which exceed the amount of the
standard commercial fare” (Defense Procurement Improvement Act of 1985, title IX,
National Defense Authorization Act Fiscal Year 1986, Pub. L. 99-145, § 911, 99 Stat. 583
(Nov. 8, 1985); AUPFF ¶ 151, supplemented by gov’t at gov’t reply br. at 34).

       147. In 2001, a dispute arose between Raytheon and the government regarding the
interpretation of the phrase “lowest customary standard, coach, or equivalent airfare
offered during normal business hours.” DCAA questioned RMS’ use of standard coach
fares offered to the general public to determine the allowability of premium airfare costs,
and argued that it should instead use Raytheon’s negotiated discount agreements with
certain airlines. Local DCAA personnel at RMS elevated the issue to DCAA
Headquarters. (Tr. 7/185, 10/56-57; AUPFF ¶ 152)

      148. By email of December 11, 2001 to Terry Murphy, Raytheon’s Assistant
Controller for Government Accounting, Daniel Dowd, Acting Defense Corporate
Executive (DCE) 29 detailed his understanding of Raytheon’s excess airfare withdrawal
methodology and DCAA’s objection thereto as follows:

29   DCMA has not disputed Raytheon’s statement that “[a]t the time, the ‘Defense
        Corporate Executive’ was a function within DCMA serving – with respect to the
        five largest defense contractors – the same role as what is currently the CACO”
        (app. br. at 59, n.38).
                                              72
             Raytheon has AMEX record the lowest customary standard
             coach fare on all quotes and invoices where higher class
             airfare is utilized …. The Company then treats as unallowable
             costs the difference between the actual higher class fare
             utilized and the standard coach rate.

             It is DCAA’s opinion that the unallowable amount should be
             the actual higher class fare utilized less the negotiated reduced
             coach airfare.

(App. supp. R4, tab 8 at 51; AUPFF ¶ 153)

        149. By April 10, 2002 email to Mr. Dowd, Glen Gulden of DCMA headquarters,
said to be its representative to the DAR Council (APFF ¶ 154), stated:

             My review of the historical files found when the language
             “lowest customary standard, coach or equivalent airfare
             offered during normal business hours” was incorporated into
             the cost principle the meaning was: the lowest fare class
             regularly offered during normal business hours. The
             Committee report goes on to say that they do not recommend
             that the standard be the lowest fare available. The record does
             not address your specific situation (company discounts). The
             Committee wanted a generic definition.

             I discussed your issue with the cost, pricing and finance part of
             OSD [Office of the Secretary of Defense] and they felt we
             would be held to the words in the FAR which would support
             the company’s position. After reviewing the files I would
             have to agree with the OSD position if we were faced with
             making a decision about going to court.

(App. supp. R4, tab 10) On August 20, 2002, Mr. Dowd forwarded Mr. Gulden’s email to
DCAA Resident Auditor Seay Anne Sheley, identifying Mr. Gulden as “our expert on
FAR principle issues” (id.).

       150. On November 20, 2002, DCAA Headquarters issued “Audit Guidance on the
Application of FAR 31.205-46 (d), Airfare Costs in Excess of the Lowest Customary
Standard” (DCAA’s November 2002 memorandum) (app. supp. R4, tab 11 at 60). DCAA
took the position:

             FAR 31.205-46(d) disallows cost of airfare in excess of the
             lowest customary standard, coach, or equivalent airfare offered
             during normal business hours available to the contractor. The
             lowest customary standard airfares available to Raytheon for
                                            73
             certain city pairs are those negotiated with American Express
             Travel (AMEX). Any airfare costs in excess of the AMEX
             negotiated standard coach airfare should be questioned.

(Id.) The memorandum elaborated, among other things, that:

             Raytheon Corporate uses standard coach airfare that is
             available to the public (street fare) as their baseline for
             calculating excess unallowable airfare. DCAA uses the
             customary airfare that is available to Raytheon as the baseline
             for calculating excess unallowable airfare.

             ....

             The FAR clause for “customary standard” is specific to the
             contractor.

(Id.) The memorandum likened the airfare regulation to the discount provisions of
FAR 31.205-26, MATERIAL COSTS (app. supp. R4, tab 11 at 61). DCAA sent a copy of
the memorandum to Raytheon (id. at 58).

      151. By January 27, 2003 email to Resident Auditor Sheley, DCE John McGrath
responded to DCAA’s November 20, 2002 memorandum as follows:

             DCMA Headquarters disagrees with the guidance in the
             attached DCAA memorandum. Based on their review of the
             available documents and conversations with OSD personnel,
             the agency believes that using a different standard to
             determine unallowable excess airfare costs than cited in
             FAR 31.205-46(d) (lowest customary standard, coach, or
             equivalent airfare offered during normal business hours)
             would not be sustainable if Raytheon disputed this cost
             question before the ASBCA or other court. There is nothing
             in the record to indicate defense contractors are to negotiate
             airfare rates with carriers and that the negotiated rates are the
             customary rates to be used for determining the unallowable
             amount. Accordingly, I can't support or sustain DCAA’s
             audit position.

             I want to inform you also that I surveyed the other DCMA
             [DCEs] regarding this issue and all those responding
             concurred with the position taken by DCMA Headquarters.

             At my request, Raytheon Corporate Office provided
             information on Domestic Travel costs in CY 2001. It showed
                                             74
              that 98.5 percent of flights taken were Coach Class, 1.4
              percent of flights taken were First Class, and 0.1 percent of
              flights taken were Business Class. Further, the majority of
              those using First Class or Business Class were pre-approved
              for preferred seating. Therefore, the excess airfare costs
              would be allowable. The foregoing indicates that the total
              potential cost question using DCAA’s suggested method
              would be relatively small.

              While I understand and appreciate the arguments raised by
              DCAA to support its position, the relatively immaterial travel
              amounts involved and the guidance from my Headquarters
              leads me to conclude that I can’t support DCAA at this time.
              If, however, future audits determine that more Raytheon
              employees are flying other than standard coach and the
              amount of money has become material, I will reconsider my
              position.

              Based on the foregoing, I would have to agree with my
              Headquarters that we would be held to the words in the
              FAR 31.205-46(d) standard (lowest customary standard,
              coach, or equivalent airfare offered during normal business
              hours) which would support the company’s position.

(App. supp. R4, tab 15 at 76 (January 2003 McGrath memorandum))

       152. Mr. McGrath understood that the baseline Raytheon was using was a coach
fare available to the general public and that the OSD and Mr. Gulden agreed with
Raytheon’s position (tr. 9/226-27). Mr. McGrath believed that Raytheon’s position was
the correct reading of the FAR (tr. 9/237).

        153. Although the January 2003 McGrath memorandum mentioned domestic air
travel, all of Raytheon’s premium air fare travel, whether claimed or not, is an exceptional
circumstance, amounting to 4-5 percent of its flights (tr. 2/35).

       154. Mr. McGrath sent a copy of his memorandum to Raytheon’s Assistant
Controller for Government Accounting, Mr. Murphy (app. supp. R4, tab 15 at 77), who
understood it to mean that “DCMA headquarters agreed with Raytheon’s position, that the
language of standard coach airfare in [the] FAR was what was to be used, and that they
could not sustain [DCAA’s] position of using negotiated rates” (tr. 10/61-62). It was not
Mr. Murphy’s understanding that DCMA headquarters had based its opinion on cost
immateriality. Mr. McGrath never conveyed that to him. (Tr. 10/62-63)

      155. After DCAA’s November 2002 memorandum, the issue of “Excess Airfare
Withdrawal Methodology” had been added as an “open item” discussion topic during
                                             75
periodic “open items” meetings held among DCMA, DCAA, and Raytheon Corporate
Government Accounting (see app. supp. R4, tab 12 at 65, tab 13 at 68, tab 14 at 72;
tr. 10/58-60). After the January 2003 McGrath Memorandum, the excess airfare
withdrawal item was removed from the agendas for the “open items” meetings, which
meant to Mr. McGrath and Mr. Murphy that the issue had been resolved and was closed
(see app. supp. R4, tab 16; tr. 9/239, 10/63-64).

       156. The government admits that Mr. McGrath was acting within the scope of his
authority as the CACO for Raytheon when he issued his January 2003 memorandum (app.
supp. R4, tab 195 at 2911-12 (gov’t resp. to interrog. No. 12); tr. 7/189).

        157. In May 2007, as part of its audit of 2003 airfare costs, DCAA recommended
that “the DCE consider requiring Raytheon to factor any negotiated airfare discounts into
its policies and procedures relative to calculating unallowable amounts when premium
airfares are purchased” (app. supp. R4, tab 93 at 1470-71; tr. 8/124). In response, DCMA
Corporate contract specialist Roger Christianson, spoke to then-DCE Daniel Dowd
(Mr. McGrath having retired). They determined that they had to follow the January 2003
McGrath memorandum and it was re-affirmed. The government then continued to apply
what it described as a “walk-up coach fare” as the standard for allowability under
FAR 31.205-46(b). (App. supp. R4, tab 97 at 1519; tr. 8/178)

       158. For its audit of 2004 airfare costs, also undertaken in 2007, DCAA used a
standard coach or equivalent coach fare as the baseline for allowability under
FAR 31.205-46(b) (app. supp. R4, tab 102 at 1634, 1639; tr. 8/180-81).30

         Revised Language of FAR 31.205-46(b)

       159. On August 10, 2006, DCAA submitted a proposal to the DAR Council “to
clarify” the travel cost principle (R4, tab 431). David Johnson, Regional Director for
DCAA’s Eastern Region, was the proposal’s primary drafter (tr. 7/154, 158). On
October 19, 2006, the Acquisition Finance Team (AFT) met to discuss the proposal.
Mr. Johnson attended. His November 6, 2006 Memorandum for Record reported that
“[t]he Team majority did not concur with DCAA’s proposal and will recommend that the
Case be closed with no further actions.” (App. supp. R4, tab 56 at 903-04, 906). The
memorandum elaborated in part:

                It was quite clear from the beginning that DCAA’ s proposal
                was not well received by many of the representatives on the
                Team. The OSD representative, Chris Werner, essentially set
                the tone for the majority by taking the position that the
                existing language in the FAR is consistent with statutory
                language at 10 USC 2324(e)(1)[J] and 41 USC 256(e)(1)[J]),

30   As noted elsewhere, the record does not clearly identify “coach” fare, which is
         described in various ways.
                                               76
              which states “Costs for travel by commercial aircraft which
              exceed the amount of the standard commercial fare” are
              unallowable. The majority strongly believe that the current
              standard provides a reasonable baseline for allowable costs
              and any amounts less than this standard represent a savings to
              the Government, regardless as to whether those reduced fares
              are for first or business class accommodations. The majority
              also seemed to buy into the rationale that DCAA’s
              recommendation would remove the contractors’ incentive to
              negotiate reduced fares and might ultimately lead them to no
              longer pursue discounted fares, and eventually eliminate any
              cost savings that the Government is currently realizing.

(Id. at 904-05) (emphasis in original)

       160. The AFT’s draft majority report provided in part as follows:

              The [AFT] notes that FAR 31.205-46(b) implements the
              statutory limitation on allowable contractor airfare costs found
              at 10 U.S.C. 2324(e)(1)(J) and 41 U.S.C. 256(e)(1)(J). These
              provisions state that the “costs for travel by commercial
              aircraft which exceed the amount of the standard commercial
              fare” are not allowable on flexibly priced Government
              contracts. Clearly, the statutory words “standard commercial
              fare” anticipate a ticket price that is available to the general
              public. Against this background, the [AFT] is convinced that
              the most reasonable interpretation of FAR 31.205-46(b) is that
              it also refers to the lowest standard or coach fare available to
              the general public. Nothing in the past Cost Principles
              Committee and Contract Administration Committee reports
              cited by DCAA alters this conclusion. Fundamentally, we
              believe that contractors should be able to rely on the most
              logical, plain English meaning of the cost principles.

              ....

              It is also important to note that only the actual expenses
              incurred by a contractor are allowable on Government
              contracts. This means that the Government will actually save
              money in any case where a contractor has taken the initiative
              to negotiate airfares for its employees that are below the
              lowest standard or coach fare available to the general public.
              And even if the contractor has negotiated a higher level of
              seating at the lowest standard or coach fare available to the
              general public, the Government is not harmed. In all cases, we
                                            77
              will only allow the actual airfare costs incurred by the
              contractor up to, but not exceeding, the lowest standard or
              coach fare available to the general public.

              ....

              DCAA’s proposal would actually remove a contractor’s
              incentive to negotiate airfares for its employees that are below
              the lowest standard or coach fare available to the general
              public, thereby eliminating any cost savings the Government
              may now enjoy as the direct result of such a contractor
              initiative.

(App. supp. R4, tab 55 at 901 (headings omitted)) (emphasis added) The draft majority
report concluded that the current standard was sound public policy and that “the lowest
standard or coach fare available to the general public represents a relatively objective,
commercially based, ‘bright line’ test of cost reasonableness that adequately protects the
taxpayers from reimbursing premium fares for higher levels of seating” (id. at 902).

        161. Mr. Johnson prepared DCAA’s draft minority report (tr. 7/193-94), which
stated, among other things, that the majority’s position allowed contractor employees to
travel by first or business class at the taxpayer’s expense, which DCAA “adamantly”
opposed (R4, tab 433 at 12424). The report stated that the “current rule” was “ambiguous
and inconsistently applied” and that it benefited larger contractors, which could negotiate
airline discounts (id. at 12425). It was also inconsistent with other FAR cost principles
that generally require contractors to pass discounts and rebates back to the government,
such as FAR 31.205-26 (id. at 12425-26). The draft minority report stated that its
interpretation of the travel cost principle “promotes a reasonable policy that would hold up
to public scrutiny” and, even if the majority disagreed, “the current rule is ambiguous and
needs to be clarified or restated to ensure consistent and equitable treatment among all
contractors” (id. at 12427).

       162. According to Mr. Johnson, “the majority of the focus of the other team
members was … on the materiality of the issue we brought to the table” (tr. 7/169). Their
view was that “this was just not a material issue” because the dollar amounts being
questioned were not “significantly material (tr. 7/169-70). However, neither
Mr. Johnson’s Memorandum for Record, nor the draft majority report, nor Mr. Johnson’s
draft minority report, mentioned any materiality issue (app. supp. R4, tabs 55-56; R4,
tab 433).

      163. DCAA persisted and brought the travel cost principle issue to the Office of
Defense Procurement and Acquisition Policy (DPAP). Mr. Johnson’s November 16, 2006
Memorandum for Record of a November 13, 2006 meeting he and a colleague had with
DPAP representatives states in part:

                                             78
              While DPAP does not concur with our interpretation of the
              existing language, (nor do they wish to take a position
              regarding the proper interpretation of the current language),
              they have conceded that the language is ambiguous.
              Therefore, DPAP will recommend that the [AFT] draft a
              notice of proposed rule making to be issued in the Federal
              Register to obtain input with supporting rationale from the
              public on what the policy on airfare costs should be.

              ....

              During the meeting, Mr. Capitano made it clear that DPAP is
              not agreeing with our interpretation of the current FAR
              language, nor did he express DPAP’s interpretation of the
              current language. He believes that the subject FAR case deals
              with whether and how the FAR language should be revised
              (prospectively), not what the current language means
              (retrospectively).

(App. supp. R4, tab 58 at 913)

      164. On December 20, 2007, the DAR Council and the Civilian Agency
Acquisition Council (the Councils) published a proposed rule to “amend the [FAR] to
change the travel cost principle to ensure a consistent application of the limitation on
allowable contractor airfare costs” (app. supp. R4, tab 104 at 1679).

       165. In October 2008, after receiving public comment on both sides of the issue
(app. supp. R4, tab 164 at 2415-18), the AFT recommended:

             (1) Changing the Travel Cost Principle to the “lowest fare
                 available to the contractor.” The rationale being that it is
                 not prudent to allow the costs of the lowest fares available
                 to the general public when contractors have obtained lower
                 fares as a result of direct negotiation. (2) Omit the term
                 “standard” from the description of the classes of allowable
                 airfares, since that term doesn’t describe the actual classes
                 of airline service. (3) Omit the term “coach or equivalent”,
                 given that in today’s environment, these fares may not be
                 the lowest available to contractors. (4) Publishing these
                 changes as a final rule to change the travel cost principle to
                 ensure a consistent application of the limitation on
                 allowable contractor airfare costs.

(App. supp. R4, tab 164 at 2297)

                                             79
        166. On December 10, 2009, the Councils published the final rule “to change the
travel cost principle” (app. supp. R4, tab 163 at 2236). As noted above, the Councils
changed the allowability restriction from “Airfare costs in excess of the lowest customary
standard, coach, or equivalent airfare offered during normal business hours” to “Airfare
costs in excess of the lowest priced airfare available to the contractor during normal
business hours” (id. at 2238). The effective date was January 11, 2010 (id. at 2236), after
award of the representative contracts and incurred costs at issue in these appeals.

      167. Raytheon revised its Travel Policy, effective July 1, 2010, to reflect the
change to the FAR (app. supp. R4, tab 168 at 2484; tr. 2/26-28).

        168. On May 25, 2012, CACO Dowd issued a COFD challenging, among other
things, Raytheon’s use of a public coach airfare as the baseline for unallowable airfare
costs in CY 2005 and assessing penalties. 31

         Raytheon’s Application of Exceptions in FAR 31.205-46(b)

       169. Meanwhile, in 2003, a second FAR 31.205-46(b) issue arose regarding
Raytheon’s implementation through its Travel Policy of the exceptions in the regulation
that permitted costs in excess of standard, coach fare in certain circumstances. That is:

               [W]hen such accommodations require circuitous routing,
               require travel during unreasonable hours, excessively prolong
               travel, result in increased cost that would offset transportation
               savings, are not reasonably adequate for the physical or
               medical needs of the traveler, or are not reasonably available
               to meet mission requirements. However, in order for airfare
               costs in excess of the above standard airfare to be allowable,
               the applicable condition(s) set forth in this paragraph must be
               documented and justified.

      170. Exhibit A, “Employee Guidelines for Company Travel Policy,” ¶ 2.4.6 of the
Raytheon Travel Policy in effect on April 28, 2003, stated:

               Employees traveling on trans-oceanic flights should use coach
               class when possible. However, upgrading from coach to
               business class is authorized on trans-oceanic flights when:

31   The Board docketed Raytheon’s appeal from this COFD as ASBCA No. 58212. The
         Board denied the parties’ cross motions for partial summary judgment (while
         granting an unopposed summary judgment motion by appellant on one issue).
         Raytheon Co., ASBCA No. 58212, 15-1 BCA ¶ 35,999 (Raytheon 58212). The
         Board then stayed the appeal pending the outcome of the subject appeals.
                                              80
                   a. The total scheduled flight time from origin to destination
                      is more than 10 hours;

                   b. The most direct routing is used (circuitous routing to
                      achieve the 10 hour requirement is not permitted) and;

                   c. There is no overnight layover en-route.

(App. supp. R4, tab 17 at 81, 84)

        171. The criteria for business class travel on oceanic flights were included in
Raytheon’s Travel Policy to meet FAR 31.205-46(b)’s requirements regarding
allowability of airfare in excess of standard, coach fare, if the costs were claimed (tr. 1/42,
88, 2/32, 9/100). Mr. Panetta opined that Raytheon’s Travel Policy “entrance criteria” for
allowability, itineraries, and expense information in its WebTE satisfied the FAR’s
requirement for documentation and justification of airfare in excess of standard, coach
(tr. 2/34 -35). WebTE is a highly customized expense reporting and reimbursement
system developed by Raytheon. A credit card company provides data sets of travel
expenses, such as airline tickets, that an employee assembles into an expense report,
codes, and incorporates into the system. Itineraries sometimes go into the system.
(Tr. 2/9, 9/118)

        172. Raytheon considered Exhibit A to its Travel Policy to provide guidelines,
not requirements. An employee’s manager had the discretion to approve business class
travel even if the policy criteria were not met. The employee would be reimbursed his
or her actual expenses, but that travel would be charged to an unallowable account. This
is true whether an employee is traveling in support of a government contract or a
commercial contract. If for a government contract, the government would only be billed
for standard coach fare. The key control is manager approval. (Tr. 1/81, 85, 94, 99,
2/31-32, 9/100-02, 160, 10/65-66)

        173. By letter of September 25, 2003 to Mr. Murphy, DCE McGrath forwarded an
August 22, 2003 DCAA audit report that questioned two potential non-compliances with
FAR 31.205-46 (app. supp. R4, tab 18 at 87, 91). The report stated that none of the FAR
exceptions indicated that “flight time alone can be the decisive factor for upgrading air
travel accommodations from standard coach air fare. The FAR also does not make an
exception for senior executives to travel first class” (id. at 91).32

        174. In late 2003 to early 2004, DCMA and Raytheon corresponded concerning
Raytheon’s Travel Policy and its compliance with FAR 31.205-46. Much of the focus
was upon Raytheon’s use of more than 10-hours’ flight time as a criterion for allowing
airfare in excess of standard, coach. (App. supp. R4, tabs 20-21, 23) Raytheon noted,
inter alia, that, prior to consolidation with the “new” Raytheon, its legacy companies

32   It appears that only Raytheon’s president is authorized to fly first class (tr. 1/57-58).
                                                 81
had long-standing policies and practices that allowed employees to upgrade to business
class on transoceanic flights under certain conditions, including flight time of greater
than 10 hours (“old” Raytheon), 8 hours (E-Systems), and 6 hours (Hughes) (R4, tab 23
at 138).

       175. By letter to Mr. Murphy of January 27, 2004 (2004 McGrath letter), DCE
McGrath compared Raytheon’s Travel Policy with the criteria that federal employees
must meet when traveling on official business to TDY sites outside of the United States
(app. supp. R4, tab 24). He highlighted ¶ C2204A(8) of the FTR as follows:

             The travel is between authorized origin and destination points
             (one of which is in the USA) and the scheduled flight time
             (including airport stopovers and plane changes) is in excess of
             14 hours. A traveler is disqualified from using business class
             accommodations at Government expense if (a) a "stopover" en
             route is an overnight stay, (b) a rest stop en route [is]
             authorized, or (c) an overnight rest period occurs at the TDY
             location before beginning work. Business-class
             accommodations must only be used when exceptional
             circumstances warrant. Approval authorities must consider
             each request for business-class individually and carefully
             balance good stewardship of [scarce] resources with the
             immediacy of mission requirements.

(Id. at 140) Regarding the 10-hour criterion, DCE McGrath wrote in part:

             I understand that 10 hours of flight time or waiting at airports
             for connecting flights can be viewed as unreasonable by
             reasonable people. I also understand that flight time does not
             represent the true amount of time a traveler spends in travel
             status. There is time spent traveling from an employee’s
             residence to the airport and from the airport to the work site or
             returning to their residence. I also appreciate the fact that
             being able to rest better or sleep on a long flight before
             reporting to work improves efficiency and productivity.
             Further, that traveling overnight and not incurring additional
             hotel or meal expenses can benefit the Government. For these
             reasons, I will not disagree with a DCMA-Raytheon [CO’s] or
             Defense Corporate Analyst’s decision to view business-class
             airfare as allowable and reimbursable expenses if:

                1. Travel primarily takes place during non-customary
                   business hours i.e., flights take place in the late
                   afternoon, evening or night/early morning and it is
                   required. The reason(s) why the employee must travel
                                            82
                   during unreasonable hours must be clearly presented on
                   the employee’s expense account or other document that
                   is subject to review/audit by the Government.

                2. Raytheon employees report directly to their TDY or
                   permanent duly station (PDS) after arrival at their
                   destination airport, i.e., no rest periods en route or at the
                   TDY /PDS site before reporting to work.

                3. Flight time, not an employee’s departure from their
                   residence and travel time to a TDY site (and the reverse
                   when returning home), must exceed 10 hours in
                   duration. And, flight time is defined as the scheduled
                   flight time between departure and arrival airports
                   (including airport stopovers and plane changes).

             While this decision does not meet your request to use the
             Raytheon Travel Policy to justify and document that flight
             time of over 10 hours meets the FAR definition for requiring
             travel during unreasonable hours, it does allow the
             reimbursement of business-class airfare by the Government if
             this exception to the FAR is justified and documented. But, in
             no way should Raytheon view my decision as justification for
             an employee to travel on a trans-oceanic flight primarily
             during normal business hours that allows the employee
             sufficient time to consume a meal and get sufficient rest and/or
             sleep in a hotel or other such facility before reporting to work.

(Id. at 141) Mr. Panetta described the letter as a “very important document” which “[laid]
out the accord between Raytheon and DCMA under which DCMA would not question the
[business class airfare] cost as being unallowable” (tr. 1/136).

       176. DCE/CACO McGrath had the authority to determine whether Raytheon was
compliant with the FAR and the CAS (tr. 9/196). The government admits that he was
acting within the scope of his responsibilities when he issued the 2004 McGrath letter
(app. supp. R4, tab 195 at 2911-12 (response to interrogatory No. 12)).

       177. Effective July 12, 2004, Raytheon revised its Travel Policy concerning
business class travel on transoceanic flights based upon the 2004 McGrath letter (app.
supp. R4, tab 27 at 230; tr.1/140, 2/37-38). The revised Exhibit A, Employee Guidelines
for Company Travel Policy, ¶ 2.4.6, included the following four criteria:

             Employees traveling on trans-oceanic flights should use coach
             class when possible. However, upgrading from coach to
             business class is authorized on trans-oceanic flights when:
                                             83
                a. The total scheduled flight time from origin to destination
                   is more than 10 hours;

                b. The flight is overnight, and no flight is available during
                   normal business hours that satisfies the traveler’s
                   business requirements;

                c. The most direct routing is used (circuitous routing to
                   achieve the 10 hour requirement is not permitted) and;

                d. There is no significant rest period upon arrival at the
                   destination, nor is there a rest stop enroute.

(App. supp. R4, tab 27at 233)

      178. In an internal July 30, 2004 DCAA email, copied to Mr. McGrath, Resident
Auditor Sheley opined that:

             I think FAR is sufficiently vague and that Raytheon’s policy
             does not contradict FAR and it seems in some ways to be even
             more restrictive (the “and” versus “or” on the exceptions as
             we’ve discussed earlier).

(App. supp. R4, tab 31 at 245-46)

       179. By letter to Mr. Murphy dated August 18, 2004, DCE McGrath wrote that he
had reviewed Raytheon’s revised policy and found that it complied with FAR 31.205-46
(app. supp. R4, tab 29; tr. 10/78-79).

       180. Raytheon relied upon DCE McGrath’s approval because he was the cognizant
federal agency official for determining Raytheon’s compliance with the CAS, the
acceptability of its business systems, and the allowability of costs. He provided guidance
and oversight to the other COs assigned to cover Raytheon, through whom final indirect
rates and billing rates were established. (Tr. 2/38-39, tr. 10/79)

        181. In February 2007, Raytheon combined its policy for business travel,
meetings, and entertainment expenses with its policy for company travel (app. supp. R4,
tab 92 at 1403). The combined policy maintained the same four criteria for treating
premium airfare in excess of standard, coach fare as allowable, but it added the following
definition and note to the “no significant rest period” criterion:

             (4) There is no significant rest period upon arrival at the
                 destination, nor is there a rest stop enroute. Significant

                                            84
                  rest period is defined as a hotel stay prior to reporting to
                  work.

              Note: If the traveler arrives before noon on a week day, it is
              assumed that they are going to work that same day and there is
              no significant rest period. Conversely, if arrival is after noon,
              OR on a weekend, it will be assumed there was a rest period,
              and the difference between the premium class airfare and the
              coach comparison airfare provided by Raytheon’s designated
              travel agency, will be processed as unallowable airfare. If that
              is not a valid assumption, comments should be included in the
              “Comments” section of the Expense Statement. The
              comments should explain the nature of the work that was
              performed before a significant rest period.

(Id. at 1409) The note was added to remove subjectivity in expense processing and to
ensure consistency (tr. 9/105).

       182. In an April 28, 2008 revision to its travel policy, among other things,
Raytheon changed the fourth criterion in Exhibit A, ¶ 2.1.5.b. (4) to read “Upon arrival at
their destination the traveler performed work prior to an overnight rest period” (app. supp.
R4, tab 128 at 1938, 1944). The changes were due to Raytheon’s implementation of an
“airfare wizard” in its WebTE travel system to require an employee to answer directly if
he or she met the criteria instead of Raytheon’s Finance Shared Services (FSS) processors
making an assumption from the traveler’s itinerary based upon the time the employee
arrived in-country (tr. 9/97, 112-13, 118). Travelers could still override the guidelines
with approval from their manager (tr. 9/109-10, 113-14).

        183. By letter to Mr. Panetta dated October 26, 2010, stated to be “effective
immediately,” then-CACO Dowd rescinded the 2004 McGrath letter, stating that it had
created “significant confusion” among COs (app. supp. R4, tab 169 at 1). He elaborated
that Raytheon’s Travel Policy was not consistent with the FAR on the grounds that neither
flight duration nor work performance upon arrival were FAR 31.205-46(b) exceptions; the
policy could not justify airfare costs exceeding the lowest priced airfare available to the
contractor; and it did not require employees to document and justify when airfare other
than the lowest price available was used (id.).

      184. By letter to Mr. Dowd of December 20, 2010, Mr. Panetta disagreed with his
October 26, 2010 letter and asked that he rescind it. Mr. Panetta stated in part:

              The genesis of the McGrath memo was to address the
              ambiguity in the regulations with respect to allowability of
              costs where there was excessively prolonged travel and travel
              during unreasonable hours. The McGrath memo introduced a
              criterion which facilitated a mutually acceptable basis for
                                             85
              determining allowability of these costs. In accepting this
              determination RTN and DCMA effectively settled long
              standing discussions on this grey area within the regulations.
              RTN believed this was working well in that costs were
              agreeably classified and thereby resulting in no disputes in this
              area adding to our collective efficiency.

              Your rescission of this memo, in the Company’s view, may
              actually add confusion to our process where none existed in
              the past (rather than clearing up the confusion that you
              referenced). Portions of the Raytheon Company policy on
              travel are based on this memo, which in our view is more
              restrictive than the current FAR language. By agreeing to this
              determination back in 2004 the Company agreed to higher
              unallowable costs than is required by the FAR cost principle
              governing this element of cost.

(App. supp. R4, tab 171 at 2560) Mr. Panetta did not receive a response (tr. 2/40-41).

       185. On September 22, 2011, Raytheon revised its travel policy and removed the
requirement that, as a condition of flying business class, upon arrival at the traveler’s
destination he or she must perform work prior to an overnight rest period (R4, tab 466
at 2290-91) (work requirement removed from ¶ 2.1.5.(b)(4)).

        186. On October 26, 2012, DCAA issued a draft Statement of Condition and
Recommendation (SOCAR) alleging that Raytheon was noncompliant with
DFARS 252.242-7006, Accounting System Administration, because its Travel Policy was
noncompliant with FAR 31.205-46. On April 23, 2013, DCAA issued two Forms 1,
Notice of Costs Suspended and/or Disapproved, contending that certain premium airfare
costs charged directly to two RMS contracts were unallowable. Mr. Panetta responded by
letter to DACO Jack Bradley dated May 15, 2013. (R4, tab 476; tr. 2/44-45; AUPPF
¶ 196) He stated that DCAA’s position “extends well beyond the plain meaning” of the
FAR (R4, tab 476 at 1) and gave Raytheon’s reasons for disagreeing with DCAA.

       187. On March 29, 2013, DCAA issued an audit report finding that RMS’
estimating controls from 2009 through 2011 were deficient concerning its treatment of
premium airfare. DCAA recommended that it revise its policies, procedures and standard
practices relating to estimating international travel to reflect that only the lowest available
fare be proposed in accordance with FAR 31.205-46(b). (R4, tab 474 at 51, 54)

       188. By letter of October 2, 2013 to then-CACO Jeffry Holt, on the allowability of
premium class airfare, Mr. Panetta focused upon the FAR 31.205-46(b) exception “not
reasonably adequate for the physical or medical needs of the traveler.” He stated that this
was the company’s primary basis for allowing premium class airfare. He correlated it
with other exceptions and compared Raytheon’s policy favorably with the FTR for
                                              86
military personnel and the JTR for DoD civilians (now merged and called the “JTR”). He
asserted that Raytheon’s Travel Policy, its travel agent’s documentation, and its WebTE
expense system documented and justified how each trip met the requisite criteria.
Mr. Panetta stressed that imposing a “significant deficiency” determination regarding
Raytheon’s estimating system regarding premium class airfare was unwarranted. He
emphasized Raytheon’s willingness to compromise. (R4, tab 487)

       189. To resolve DCAA’s threatened disapproval of its estimating system,
Raytheon revised its Travel Policy, effective February 24, 2014 (R4, tab 493, see also
tabs 490-492; tr. 1/44, 100-02, 2/54-56). The revised policy required a more stringent
approval process, including director-level pre-approval for business class travel and
approval of the expense report and reimbursement to the employee. The biggest change
was to include a “meaningful work upon arrival” criterion. If the employee did not
complete meaningful work, he or she would still be reimbursed for business travel but
Raytheon would not charge the government for those costs. (R4, tab 493 at 152597
(Ex. A, ¶ 2.1.5.b.(2)); tr. 1/45, 104, 2/56-57). After the changes were made, DCMA
approved the estimating system (tr. 1/105, 109).

       190. After a five-year audit of Raytheon’s accounting system, on January 29, 2015,
DCAA issued an audit report questioning how Raytheon accounted for allowable and
unallowable costs. DCAA found a significant deficiency in Raytheon’s accounting
system due to its treatment of premium class airfare. (R4, tab 500; see also R4, tab 499
(response to SOCAR); tr. 2/57-58)

        191. During the relevant period, FSS processed the company’s travel and expense
(T&E) statements. The processors were responsible for ensuring that the costs complied
with policy and were classified correctly as allowable or not based upon the FAR, and for
withdrawing any unallowable costs. They were provided with written guidance and
training materials, including hardcopy manuals, desktop procedures, and unallowable cost
guidelines. (App. supp. R4, tabs 42, 44-45, 101; tr. 9/115-18, 124-26) AMEX was
Raytheon’s travel agent until it transitioned to BCD Travel beginning in July 2007
(tr. 9/360). The agents within those companies were dedicated solely to the Raytheon
account and received substantial, on-going, training regarding its travel policies
(tr. 9/368-71, 377; AUPFF ¶ 211).

        192. FSS processors used “checkpoints” to review any T&E statement that
included premium airfare. Raytheon’s baseline for determining allowable costs was a
standard coach fare. (See app. supp. R4, tab 44; tr. 9/98, 132) For example, “Checkpoint
#1, Is Coach Fare Higher?” was to compare the premium airfare to a standard coach fare
(app. supp. R4, tab 44 at 596). According to Jamie Humbarger, Raytheon’s Travel
Accounting Manager (tr. 9/95), if the standard coach fare were higher than the premium
fare, there were no unallowable costs and no need to proceed (tr. 9/132). If the claimed
airfare exceeded the standard coach fare, the processor moved on to the next checkpoint
and reviewed each leg of the trip to ensure that it complied with Raytheon’s Travel Policy.
For round trips, only one way had to meet the criteria. It was Ms. Humbarger’s
                                            87
understanding that, during the relevant period, this was the most cost-effective way to
purchase a ticket. (Tr. 9/135-36)

        193. During 2007 and 2008, Raytheon was party to a series of agreements with
various airlines pursuant to which certain flights qualified for negotiated discounts. The
agreements applied corporate wide, including to RMS travelers. (App. supp. R4, tabs 37,
40-41, 47, 94-95, 99, 103, 114-16, 118, 125, 130, 136; tr. 9/359-61; APFF ¶ 212
(undisputed portion)) During the relevant period and as of the hearing, Jeanine Davis was
manager of all of Raytheon’s global travel. She negotiated all of the travel agreements
and managed Raytheon’s relationships with those suppliers (tr. 9/359). Each contract was
“very different” and, within the contracts, the discount rates varied per market and per
class of service or fare basis (tr. 9/382). Raytheon’s discounted premium airfare was often
less than a coach fare. The discounts could be significant, including, inter alia, 40%, or
37%. (Tr. 1/125; 10/33, 35-36; see GPFF ¶ 298)

       194. Although both parties contend that FAR 31.205-46 was clear prior to the
2010 amendment, they dispute the meaning of “standard, coach fare.” The government
contends that the “Y” fare (economy, i.e. coach see tr. 9/391) is the “‘highest priced coach
fare’ available on a given flight at the time of purchase,” one that is interchangeable and
refundable, citing, inter alia, testimony by Ms. Davis agreeing with the government’s
characterization (gov’t rely at 42 regarding APFF ¶ 214; tr. 10/8). Ms. Humbarger
described standard coach fare as the “fare available to the general public” and opined that
it was not necessarily the highest coach fare charged, depending upon the circumstances
and timing of booking (tr. 9/153-54). Ms. Humbarger and Ms. Davis disagreed with the
government’s description of the “standard coach fare” as the “walk-up fare” one would
pay for a ticket on a flight departing the same day (tr. 9/133, 374-75). Rather,
Ms. Humbarger described it as the “standard coach fare at the time of the ticketing or the
time the reservation was made, whether it be two weeks in advance or two months in
advance” (tr. 9/133).

       195. Raytheon’s third-party travel agency printed on the itineraries what Raytheon
contends to be the standard coach fare at the time of booking. The record suggests that
Raytheon used the “Y” fare or full-fare coach as the “standard, coach fare;” however, the
record is not entirely clear on this point. 33 Occasionally, the fare designation was not
included on the itinerary, such as when the employee did not use the preferred travel
agent. Then, Raytheon’s processors used Semi-Automatic Business Research
Environment (SABRE), a licensed software used by travel agents to book air travel, to
determine the standard, coach fare. SABRE did not provide historical data on airfare
prices so the processors tried to replicate the booking as closely as possible. The SABRE
analysis was performed shortly after the trip. (Tr. 9/132, 142-43; AUPFF ¶ 213)

33   Airline booking codes differ between airlines and can change over time. We take
          judicial notice of the fact that there are typically refundable airfares available to the
          public at a lower price than the full-fare “Y” booking code. See also (App. supp.
          R4, tab 45 at 619, 624; tr. 9/127, 130, 388-89)
                                                 88
       2008 Corporate Airfare Audit

        196. On December 19, 2014, DCAA issued its Corporate Audit Report for 2008.
Auditor Benjamin Blodgett conducted the 2008 Corporate travel, including airfare, portion
of the audit. (App. supp. R4, tab 331 at 5094, 5255-69; tr. 2/168, 207) As is relevant to
the ensuing COFD, DCAA questioned three categories of airfare costs: “Premium
Airfare,” “Excess Over Lowest Cost,” and “Excess Over Airline Agreement” (app. supp.
R4, tab 331 at 5256; R4, tab 517; tr. 2/207-08).

       197. In the “Premium Airfare” category, DCAA questioned all airfare with a seat
class greater than coach. It did not consider any FAR 31.205-46(b) exceptions. It did not
agree with Raytheon’s Travel Policy, or the checklist used by FSS processors to document
that an employee went right to work upon arrival at the employee’s destination, based
upon an alleged lack of documentation. Also, DCAA disagreed with the assumption that
an employee who qualified for premium airfare on an outgoing flight also qualified on the
return. (App. supp. R4, tab 331 at 5256; tr. 2/169-71)

        198. Rather than use the standard coach fare printed on a traveler’s itinerary,
DCAA derived its own audit-determined lowest, discounted coach airfare as the lowest
airfare allegedly available to Raytheon (tr. 2/178-79, 214). On the ground that an average
cost could not be determined for international flights, DCAA calculated a “current day
price using a percentage ratio comparing premium airfare … to coach airfare” (app. supp.
R4, tab 331 at 5262-63). DCAA applied the ratio to the premium airfare to calculate what
it considered to be a reasonable amount for coach fare (id.). The ratio was calculated in
2014 to disallow costs incurred in 2008 (tr. 2/214). In calculating the ratio, DCAA did not
try to match the time of year or number of days in advance that the actual ticket was
purchased. Instead, it used a period of six weeks in advance of the date when it was
performing its Internet search, regardless of the month in which the flight actually
occurred. (Tr. 2/216-17) For domestic legs of international flights, DCAA used the
lowest airfare in the Department of Transportation’s Consumer Airfare Reports for 2008,
which list certain average fares (app. supp. R4, tabs 232-33; tr. 2/212).

       199. Raytheon cites to examples of DCAA’s calculation of the ratio in a manner
that did not account for the traveler’s actual destinations. Auditor Blodgett agreed. (See
R4, tab 552, items identified at APFF ¶ 221; tr. 2/218-47; app. br. 88-90) The
government disagrees with Raytheon’s characterization of DCAA Corporate’s position
and calculations (gov’t reply br. at 44-45, responding to APFF ¶¶ 218-22, citing GPFF
¶¶ 301-03, 475-80).

       200. Raytheon asserts that DCAA applied the 2010 version of FAR 31.205-46(b)
to Raytheon’s 2008 airfare costs. Auditor Blodgett agreed. (App. supp. R4, tab 331
at 5261; tr. 2/177-78; APFF ¶ 220). On the other hand, the government states, without
specific citation or elaboration, that “all” of DCAA’s conclusions and calculations
regarding the 2008 Corporate airfare “are principally based upon the 2008 version of
                                            89
FAR 31.205-46(b)” (gov’t reply br. at 44). It is unclear whether the government is relying
upon its own interpretation of the 2008 FAR provision.

       201. Mr. Blodgett believed his method of determining quantum was reasonable:

              Because we were just trying to determine -- when we were
              doing the audit, we were just trying to determine a reasonable
              amount. We understand these are negotiations, so we were
              just trying to give the government some kind of platform to,
              kind of, base where they should start at.

(Tr. 2/250)

        202. Referring to the audit, on June 22, 2015, CACO Forbush issued the Corporate
Airfare COFD for 2008, asserting a government claim against Raytheon due to its
inclusion of airfare costs in its final indirect cost proposal for CY 2008 that were allegedly
unallowable under FAR 31.205-46 (app. supp. R4, tab 363 at 5946-48, 5951). The
disallowed costs were in two categories: “Inadequate Premium to Coach Airfare
Withdrawal” and “Premium Class Airfare” (id. at 5947). However, DCAA had not
questioned the former category (see R4, tab 517). The costs that the CACO assigned to
that category were actually the costs questioned by DCAA in its “Excess Over Lowest
Cost” and “Excess Over Airline Agreement” categories. CACO Forbush had mistakenly
assumed that DCAA had questioned only costs for premium airfare when virtually all of
the questioned costs in those two categories were for coach class airfare. The government
is no longer pursuing the costs questioned by DCAA in the “Excess Over Lowest Costs”
and “Excess Over Airline Agreement” categories. (See tr. 2/210-11, 247; APFF ¶ 218
(undisputed portion))

      203. As set forth above (finding 8), the Board docketed Raytheon’s appeal from
the Corporate Airfare COFD for 2008 as ASBCA No. 60057.

       2007 and 2008 RMS Airfare Audits

      204. DACO Bradley, who did not conduct the 2007 or 2008 RMS airfare audits,
was the only witness presented by the government to explain them (AUPFF ¶ 224).

        205. As with the 2008 Corporate audit, for both the 2007 and 2008 RMS audits,
DCAA questioned all premium airfare that it sampled (app. supp. R4, tab 260 at 4050-54,
tab 350 at 5783-89, 5799-805, 5849-54, 5857-61), and it determined that Raytheon’s
Travel Policy did not comply with FAR 31.205-46(b) (app. supp. R4, tab 350 at 5765).
However, the auditors who performed the RMS audits used a different method to
determine the allowable coach airfare baseline. Although, when the itineraries were
available, DACO Bradley acknowledged that “usually the standard coach was on there”
(tr. 4/56), for both years, the auditors declined to use the coach fare printed on the
itinerary. They concluded that the actual airfare was not on the itinerary or WebTE or
                                             90
elsewhere. For 2007, DCAA searched the Internet for flights departing two days after the
date DCAA conducted its review, in 2014. For 2008, the auditors searched for flights one
week thereafter. (App. supp. R4, tab 260 at 4052, tab 350 at 5785; tr. 3/168, 172)

        206. DCAA’s method of deriving 2007 and 2008 airfare costs did not account for
various factors that could affect airfare price, for example, fluctuations due to season, trip
duration, day and time of travel, or the fact that six or seven years had passed. In each
case, DCAA selected the lowest priced coach fare that could be found through an Internet
search. Because the testing occurred years after the flights, DCAA applied Global Insight
inflation rates to decrement (or, rarely, increase) the selected airfares to a purported
2007/2008 amount. (See tr. 4/60, 171-72, 175-77, 181-82, 184-85)

       207. DCAA reduced its derived baseline airfare by applying its computation of
an average percentage discount purportedly available to RMS regardless of whether the
particular flight qualified for a discount, and if so, how much (tr. 4/60-61, 67-69).
DACO Bradley explained that:

              So Raytheon, on the itinerary, did identify the standard
              walk-up coach airfare, but again, we did not consider that
              coach airfare to be applicable. We think Raytheon, if they
              were going to determine the unallowable amount, should use
              the airfare that was available to Raytheon.

              So a standard walk-up coach airfare might be $5,000. But
              Raytheon might get a $2,000 airfare. Because they get big
              discounts from them. Plus, the walk-up fare is, again, you go
              up to the counter and buy the ticket, anybody can go buy it.

(Tr. 3/172-73)

       208. Thus, as with the Corporate Audit for 2008, DCAA in effect applied the 2010
version of FAR 31.205-46(b), which was in accord with its interpretation of the
predecessor version at issue, to RMS’ 2007 and 2008 costs.

       209. Both parties offered detailed examples of sample flights to show differences
between airfares charged and DCAA’s audit-determined fares, with the government
aiming to show that Raytheon overcharged and Raytheon aiming to show that the
audit-determined coach fares were significantly less than the actual coach fares and
discounted coach fares that Raytheon actually paid (e.g., GPFF ¶¶ 475-480; APFF ¶ 231).
In view of our disposition of this appeal, we need not make any findings concerning these
competing contentions.

       210. DACO Bradley’s COFDs for FYs 2005 and 2006 did not disallow any
premium airfare costs for RMS employee travel. He stated that those issues had been
resolved at the corporate level. (Tr. 4/25-26, 150-53)
                                              91
       211. As noted above, on June 12, 2014, DACO Bradley issued his RMS COFD for
2007 (finding 10). He found $1,579,454 in claimed travel costs to be unallowable, citing
the categories, as relevant, of “Foreign Airfare,” “Statistical Sample,” “Domestic Travel,”
“Per Diem,” “Unsupported,” and “Unallocable” (app. supp. R4, tab 277 at 4543-44). He
found certain foreign airfare to be unallowable “since the employee flew business class
instead of utilizing the lowest available airfare as required by FAR 31.205-46(b)” (id.
at 4544.). On the other hand, DACO Bradley found some of the airfare questioned by
DCAA to be allowable coach fares (tr. 4/225-26).

        212. DACO Bradley stated that RMS had violated its own Travel Policy with
regard to documentation requirements as well as the FAR. He quoted the 2007 version of
FAR 31.205-46(b), but he nonetheless concluded that the business class travel was not
justified because “Raytheon has not adequately documented an exception to the criteria
contained in FAR 31.205-46(b) for allowance of airfare in excess of the lowest available
airfare available to the contractor during normal business hours” (app. supp. R4, tab 277
at 4545). Thus, like DCAA, the DACO applied his interpretation of the 2007 FAR, which
reflected the language of the 2010 version.

        213. After the COFD, for the 2007 costs at issue, and various sample itineraries,
RMS gave the government a 2007 “credit card lookup” report, a tool provided by the
AMEX travel agency for looking up the details of a ticket, including class of service (app.
supp. R4, tab 317; tr. 9/128-31). Although DCAA and DACO Bradley considered the
report, they found it to be unreliable in validating the class of airfare that was flown and
the DACO declined to use it (tr. 4/121-22, 133, 226-27). Raytheon contends that this
means that coach flights shown in the report are still mistakenly part of the government’s
cost disallowance (APFF ¶ 234). The government counters that appellant’s contention
lacks documentary support and that the credit card look-up report information is not
pertinent in any event because the DACO was only considering it as part of settlement
negotiations (tr. 4/121; gov’t reply br. at 48). There is insufficient evidence of record for
the Board to make specific findings on the substance and applicability of the credit card
look-up report(s).

        214. Raytheon and RMS’ appeal from the RMS COFD for 2007, with regard to
travel costs, is part of ASBCA No. 59437.

       215. On June 11, 2015, DACO Bradley issued a COFD disallowing RMS’ 2008
indirect travel costs for premium airfare as noncompliant with FAR 31.205-46(b) and with
FAR 31.201-2(d)’s documentation requirements. Raytheon’s appeal from this COFD is
docketed as ASBCA No. 60059 (finding 12).

       216. Also on June 11, 2015 DACO Bradley issued two COFDs disallowing RMS’
2008 direct airfare costs that had been included in its billings under two contracts. He
again referred to the company’s alleged failure to comply with FAR 31.205-46(b),
FAR 31.201-2(d), and its own Travel Policy. He again, in effect, applied the 2010 version
                                             92
of FAR 31.205-46(b) by calling for use of the lowest airfare available to the contractor.
(App. supp. R4, tabs 356-57) Raytheon’s appeals from these COFDs are docketed as
ASBCA Nos. 60060 and 60061, respectively (finding 13).

       217. Except as noted above, DACO Bradley’s 2007 and 2008 RMS COFDs
largely incorporated DCAA’s findings with respect to questioned airfare (app. supp. R4,
tabs 277, 356-358). However, of the amounts disallowed by these COFDs, the
government is no longer pursuing disallowed costs based upon projections from DCAA’s
purported use of “statistical sampling,” or disallowed costs for “per diem,” “unsupported,”
or “unallocable” (ex. G-7; AUPFF ¶ 223).

        218. In reaching his decisions, DACO Bradley did not agree with or feel bound by
DCE McGrath’s August 18, 2004 determination that Raytheon’s Travel Policy, which
applied to the entire corporation, complied with FAR 31.205-46(b) (app. supp. R4, tab 29;
tr. 4/19-20, 22-23).

       219. Upon consideration of the above record concerning Raytheon’s Travel Policy
during the 2007-2008 time period, including the contemporaneous interpretations of
FAR 31.205-46(b) by DCE/CACO McGrath, DCMA’s Mr. Gulden, DCAA resident
auditor Sheley, and DoD personnel, we find that the government has failed to prove its
contention that the policy did not comply with the regulation.

                           DISCUSSION OF AIRFARE COSTS

   I. The Parties’ Contentions

       A. The Government’s Contentions

       1. Raytheon Has Not Satisfied FAR 31.205-46(b)’s Prerequisites for Allowing
          Costs of Premium Airfare

      The following summarizes the government’s principle contentions. First, the
government characterizes the cost allowability questions at hand as:

              Whether Raytheon’s Travel Policy justifies business-class
              airfare under FAR 31.205-46(b) --- and the determination of
              the appropriate “baseline” to apply under the FAR if it does
              not --- are both questions of regulatory interpretation. In this
              light, the Board must answer these questions based on the
              plain language of the regulation, as well as its purpose and
              regulatory history.

(Gov’t br. at 170)

                                             93
       Specifically, the government contends that Raytheon allows its international
travelers to upgrade to business class as a general rule, notwithstanding
FAR 31.205-46(b)’s strict criteria. Therefore, it has failed to satisfy its obligation,
addressed in Data-Design Laboratories, ASBCA No. 27535, 85-3 BCA ¶ 18,400, to
demonstrate, on a case by case basis, that the FAR’s exceptions apply. The government
adds that, under an ASPR predecessor to the current FAR 31.205-46(b), Raytheon had to
show that flying coach class “caused” one of the FAR’s exceptions and the current FAR is
similar. (Gov’t br. at 170)

       Citing legislative history, the government contends that the promulgators of
FAR 31.205-46(b) intended that contractors be allowed premium class air travel under the
circumstances described in the FTR/JTR. Because Raytheon’s implementation of the
“physical needs exception” in its Travel Policy is in effect a “rubber stamp” (gov’t br.
at 173) and compares unfavorably with the FTR/JTR, it must be categorically rejected.
(Gov’t br. at 173-175)

        The government alleges that Raytheon’s Travel Policy does not satisfy
FAR 31.205-46(b)’s criteria; Raytheon does not meet its own standards; and Raytheon
does not meet the “actual work” requirement set forth by CACO McGrath in 2004 (gov’t
br. at 177-81).

        The government asserts that the Board should construe FAR 31.205-46(b), as in
effect from 1986 until January 2010, “to limit the allowable airfare for unauthorized
premium flights to the actual coach fare available to Raytheon, including any and all
applicable discounts available to Raytheon through its airline agreements” (gov’t br.
at 189). The government contends that this reading “is compelled by, and is consistent
with, the plain language of the regulation” (id.). However, the government again refers to
regulatory history for support (id.).

      The government alleges that its interpretation of FAR 31.205-46(b) is consistent
with FAR 31.201-5, CREDITS (AUG 2007), which provides that:

              The applicable portion of any income, rebate, allowance, or
              other credit relating to any allowable cost and received by or
              accruing to the contractor shall be credited to the Government
              either as a cost reduction or by cash refund.

The government contends that, in the circumstances at hand, Raytheon is foregoing
available discounts when it believes the government is covering the difference, a
“perverse result” in direct contradiction of FAR 31.201-5 (gov’t br. at 192).

       The government asserts that, in contrast to its reasonable interpretation pursuant to
the plain language of FAR 31.205-46(b), Raytheon’s interpretation is unreasonable. It
makes no economic sense and frustrates the regulation’s purpose by allowing Raytheon to
charge the government more for an “unauthorized” premium flight than the coach fare
                                             94
Raytheon would have paid if its employee took the coach flight authorized by its Travel
Policy and FAR 31.205-46(b)’s criteria. (Gov’t br. at 193)

        The government alleges that Raytheon cannot rely upon the views of CACO
McGrath and DCMA DAR Council representative Gulden, which favored Raytheon’s
interpretation of FAR 31.205-46(b) (gov’t br. at 193-94). The government contends that
such “extrinsic evidence cannot trump the plain language of the cost principle” and is
irrelevant to the Board’s determination (gov’t br. at 194). The government also claims
that CACO McGrath’s position was based upon misleading information from Raytheon
that the costs at issue were immaterial in amount (id. at 194-95).

       If the Board is not persuaded that FAR 31.205-46(b)’s language is plain, the
government again contends that legislative history supports its interpretation; it asserts
that Raytheon’s interpretation is unreasonable and leads to absurd results; and the 2010
amendments to the FAR “were simple clarifications of existing requirements, not
impermissible ‘retroactive changes’” (gov’t br. at 199).

       2. Raytheon’s Disallowed Airfare Costs Were Unreasonable

        The government contends that Raytheon’s alleged purchase of premium airfare in
situations that FAR 31.205-46(b) did not contemplate, simply because it was cheaper than
the highest-priced coach fare, was unreasonable. The government continues that
“Raytheon believes that it has found a way to pass along all or a portion of these
indisputably unqualified premium fares to the Government, by reading a loophole into
FAR 31.205-46(b).” (Gov’t br. at 182) (emphasis in original)

        The government alleges that, when a premium airfare was less than the full, highest
priced, “street” coach airfare, Raytheon did not bother to determine whether traveling
premium class met the requirements of Raytheon’s Travel Policy or of FAR 31.205-46(b)
and it charged the government with the premium fare regardless of whether the actual
coach fare available to it was substantially less than the highest-priced “Y” fare. Thus, the
government was subsidizing Raytheon’s premium travel. (Gov’t br. at 183-186) The
government argues:

              Raytheon’s practice of submitting airfare costs to the
              Government in excess of those airfare costs that were actually
              available, and contractually obligated, to Raytheon (costs
              which Raytheon’s own policies instructed Raytheon to incur)
              is unreasonable as a matter of law.

(Gov’t br. at 186)

                                             95
       B. Raytheon’s Contentions

       1. The Government has not Met its Burden to Prove that the Disputed Airfare
          Costs are Unallowable Under FAR 31.205-46(b)

       Raytheon contends that, for many reasons, the government has not met its burden
to prove that the disputed airfare costs are unallowable under FAR 31.205-46(b). The
following are its principal arguments:

        Raytheon alleges that “the [g]overnment fundamentally misconstrues the travel cost
principle” (app. br. at 162). By its plain language, FAR 31.205-46(b) does not make
premium class travel unallowable. Rather, it imposes an allowability limitation on
“[a]irfare costs in excess of lowest customary standard, coach, or equivalent airfare
offered during normal business hours” (id.). Indeed, FAR 31.205-46(a)(1) states that costs
“incurred by contractor personnel on official company business are allowable” subject to
stated limitations (id.). One such limitation is in FAR 31.205-46(b) but, as long as airfare
costs do not exceed the “lowest customary standard, coach, or equivalent airfare offered
during normal business hours,” they are not unallowable under FAR 31.205-46 and the
exceptions are irrelevant (id.). Raytheon distinguishes the Board’s Data-Design
Laboratories decision relied upon by the government and the regulation and statute
involved therein (id. at 163).

        Raytheon asserts that the pre-2010 version of FAR 31.205-46(b), which refers to
the “lowest customary standard, coach, or equivalent airfare offered during normal
business hours,” is unambiguous (app. br. at 164). It plainly means a coach fare available
to the general public -- not the negotiated coach fare available only to Raytheon. This is
consistent with the underlying statute, 10 U.S.C. § 2324(e)(1)(J), which refers to “standard
commercial fare” (app. br. at 165). Therefore, the baseline for cost allowability was the
standard coach fare available to the general public (id.).

        Raytheon alleges that, because the pre-2010 regulation is clear, it is inappropriate
to refer to its regulatory history (app. br. at 166). It adds that, in any case, the government
improperly relies upon unpublished committee and subcommittee reports and irrelevant
history (id.). Further, the government has misreported or misconstrued the legislative
history, which actually favors Raytheon’s interpretation of the regulation (id. at 166-67).

      Raytheon further assert that the government’s airfare claims are based upon an
impermissible, retroactive application of the 2010 changes to FAR 31.205-46(b) to the
2007 and 2008 costs at issue and, contrary to the government’s contention, the changes
were substantive, not merely clarifications (app. br. at 168).

        Next, Raytheon contends that its Travel Policy complies with FAR 31.205-46(b).
It alleges that the policy’s business class travel criteria satisfies the regulation’s
conditions (app. br. at 171). Raytheon alleges, inter alia, that the government is
                                              96
incorrect that the regulation’s “unreasonable hours” exception “applies only when
coach-class accommodations cause the unreasonable hours and only business-class
seats are available on flights during more reasonable hours” (app. br. at 173) (citation
omitted) (emphasis in original). Further, the government misinterprets the regulation’s
“physical needs” exception and relies upon inapplicable FTR/JTR restrictions, contrary
to FAR 31.205-46(a)(4) (finding 144), which limits the FTR/JTR’s applicability (id.).

        Raytheon alleges that its Travel Policy and WebTE supporting documentation
satisfy FAR 31.205-46(b)’s requirement for documentation and justification of the
applicable conditions for premium travel (app. br. at 176). The Travel Policy contains the
requisite criteria and airfare in excess of standard coach requires approval from an
employee’s manager, which is documented in the WebTE travel expense system (id).
That system includes the employee’s expense statement, trip purpose, business class
criteria compliance and the FSS processor’s notes. Regardless, contrary to the
government’s contention, there is no requirement in FAR 31.205-46(b) for documentation
and justification on a case by case basis. Raytheon distinguishes Data-Design
Laboratories as involving a different regulation and stricter requirements for first class
airfare. (App. br. at 177-78)

       Raytheon contends that:

              [T]here is no requirement -- in FAR 31.205-46(b),
              Raytheon’s Travel Policy, the 2004 McGrath Letter, or even
              the Government travel regulations – to perform work upon
              arrival as a condition for allowability for costs in excess of
              the standard coach fare. Most importantly, nowhere in
              FAR 31.205-46(b) is there any mention of work.

(App. br. at 178)

       Raytheon asserts that, regardless of the foregoing, the government is bound by
DCE McGrath’s approval of Raytheon’s interpretation of the allowability limitation in
FAR 31.205-46(b) and of Raytheon’s Travel Policy, citing, inter alia, MPR Associates,
Inc., ASBCA No. 54689, 05-2 BCA ¶ 33,115 (app. br. at 180).

       2. Raytheon’s Airfare Costs Were Reasonable

       Raytheon contends that its airfare costs were reasonable as defined in
FAR 31.201-3. Its interpretation and implementation of FAR 31.205-46(b) was
reasonable and allowing business class travel on transoceanic flights that met
Raytheon’s Travel Policy criteria and/or the employee’s manager had approved was
consistent with standard industry practice. Raytheon implemented the Travel Policy the
same way for both commercial and government contracts. The airfare costs did not
exceed those that a prudent person would incur in the conduct of competitive business.

                                             97
Moreover, so long as Raytheon’s discounted premium fares were less than the standard
coach fare, the government realized a cost savings. (App. br. at 182-86)

        Under Raytheon’s interpretation of the pre-2010 version of FAR 31.205-46(b), the
“lowest customary standard, coach, or equivalent airfare offered during normal business
hours,” meant the standard coach fare available to the general public (app. br. at 182).
Raytheon asserts that the reasonableness of its interpretation is evident by the fact that,
except for DCAA, the government’s own representatives so interpreted the regulation
contemporaneously. Raytheon states that “[i]t was only after FAR 31.205-46 changed in
2010 -- to make unallowable (subject to the previous exceptions) airfare costs ‘in excess
of the lowest priced airfare available to the contractor’ -- that DCMA determined that
Raytheon’s previously-approved practice was no longer compliant with FAR 31.205-46.”
(App. br. at 183-84)

        Raytheon contends that its interpretation and implementation of the conditions for
allowing airfare costs in excess of standard coach fare were also reasonable. In fact, it
revised its Travel Policy criteria for transoceanic business class airfare to resolve a
disagreement with DCAA, and DCE McGrath approved the revised policy and determined
that it complied with FAR 31.205-46(b). (App. br. at 184)

       3. The Government has not Met its Burden to Prove the Amount of any
          Unallowable or Unreasonable Airfare Costs

        Raytheon asserts that, for the three audits at issue -- Raytheon Corporate (2008
costs) and RMS (2007 and 2008 costs) -- DCAA questioned all premium airfare costs
reviewed, regardless of whether they exceeded the standard coach fare (app. br. at 186).
This was erroneous because premium airfare costs that do not exceed the standard coach
fare are allowable under FAR 31.205-46(a) and are not subject to the cost allowability
limitation in FAR 31.205-46(b) (id.).

        Moreover, according to Raytheon, it did not have discounts on every flight, but
DCAA did not determine which, if any, discounts applied (app. br. at 186). Instead, for
the RMS audits, DCAA applied an average discount and, for the Raytheon Corporate
audit, it misapplied an assumed discount and ratio against an inappropriate, inapplicable
coach fare (app. br. at 186-87).

       Raytheon states that the government did not present any testimony by the DCAA
auditors who performed the RMS audits and instead relied upon audit work papers that are
not self-explanatory and DACO Bradley did not explain (app. br. at 187).

       C. The Parties’ Replies

       The parties’ replies reiterate or augment their prior contentions. To mention just a
few of their points, the government delves into legislative history to support its arguments
(gov’t reply br. at 92-95). It contends that, in Raytheon 58212, the Board already found
                                             98
FAR 31.205-46(b) to be ambiguous and that the government’s interpretation was
reasonable (gov’t reply br. at 68). It also alleges that DCAA’s quantum analysis was
reasonable and sufficient for the Board to make a fair and reasonable approximation of
damages (gov’t reply br. at 46-47).

        Raytheon replies that the plain language of both the governing statute and
FAR 31.205-46(b) make it clear that the benchmark for unallowable costs is the standard
coach fare available to the general public (app. reply br. at 30). While the regulation does
not use the term “general public,” “the words ‘customary,’ ‘standard,’ and ‘offered’ are all
consistent with a public fare and inconsistent with a contractor-specific fare” (app. reply
br. at 33). The Board is not to attempt to discern regulatory intent when the regulation is
clear on its face (id.). Raytheon also asserts that, in Raytheon 58212, the Board did not
find the regulation to be ambiguous (id. at 34). Rather, there were no determinations of
ambiguity, of the reasonableness of each party’s interpretation, or whether extrinsic
evidence could be examined. Raytheon adds that, if the Board were to deem that
legislative history is relevant, it supports Raytheon’s interpretation. (Id. at 34-35)

        Raytheon stresses that, under FAR 31.205-46(b), airfare costs are unallowable only
to the extent that they exceed the “lowest customary standard, coach, or equivalent airfare
offered during normal business hours,” i.e., the publicly available coach fare. “[B]ecause
Raytheon never charged the Government more than the publicly available coach fare, it
did not exceed the ceiling of subsection (b) and the costs are generally allowable pursuant
to subsection (a).” (App. reply br. at 38)

        Thus, the Board need not address the government’s criticisms of Raytheon’s Travel
Policy because there are no excess costs to disallow (app. reply br. at 38). If the Policy
were relevant, it complied with FAR 31.205-46(b) and the government is bound by its
prior, contemporaneous, reasonable, authorized determination that it did so (id. at 40-41).

       II. The Government Misreads the Pre-2010 Version of FAR 31.205-46(b)

        The parties agree that the version of FAR 31.205-46(b) in effect from April 9, 1986
until January 10, 2010, and at all times relevant to the costs at issue, is the version that
governs these appeals (see GPFF ¶ 275, APFF ¶ 150). Indeed, “[t]he regulations
applicable to a contract are those in effect at the time the contract was executed.” Boeing
Co., ASBCA Nos. 57549, 57563, 13 BCA ¶ 35,427 at 173,786 (citation omitted); see also
finding 15 (the Allowable Cost and Payment clause incorporated into the contracts at
issue). The parties disagree about the proper interpretation of the regulation.

       We are to “construe a regulation in the same manner as we construe a statute, by
ascertaining its plain meaning.” Tesoro Hawaii Corp. v. United States, 405 F.3d 1339,
1346-47 (Fed. Cir. 2005) (citations omitted). We must look at a regulation’s “plain
language and consider the terms in accordance with their common meaning.” Lockheed
Corp. v. Widnall, 113 F.3d 1225, 1227 (Fed. Cir. 1997) (citations omitted).

                                            99
        The disputed phrase in the pre-2010 version of FAR 31.205-46(b) is: “Airfare
costs in excess of the lowest customary standard, coach, or equivalent airfare offered
during normal business hours are unallowable [with exceptions].” Both parties first
contend that the language is plain, despite their subsequent excursions into regulatory
history. When a regulation’s language is plain, “[i]t is well-settled that a tribunal is not to
resort to the history of the drafting of a regulation . . . in construing an unambiguous
regulation,” except in rare circumstances, not present here. SWR, Inc., ASBCA
No. 56708, 15-1 BCA ¶ 35,832 at 174,227, n.3.

        Raytheon persuasively presents dictionary definitions of “customary,” “standard,”
and “offered” in support of their common meaning and Raytheon’s contention that they
are all consistent with a public fare and inconsistent with a contractor-specific fare (app.
br. at 164, app. reply br. at 30, 32-33). In connection with the governing statute,
10 U.S.C. § 2324(e)(1)(J), which makes “[c]osts for travel by commercial aircraft which
exceed the amount of the standard commercial fare” unallowable (emphasis added),
Raytheon cites to the FAR definition of “commercial item,” which associates
“commercial” with the “general public.” See FAR 2.101. The government counters that,
in accordance with the promulgators’ intent, the regulation’s plain language “must be read
as applicable to the coach airfare actually available to a contractor” (gov’t reply br. at 90).
It relies upon the word “lowest” in the regulation as allegedly modifying not only
“customary standard” but also the words “coach” and “equivalent” airfare (id. at 91).

        Raytheon replies that “lowest” applies only to the words that immediately follow
it -- “customary standard.” Raytheon notes that even if “lowest” referred to “customary
standard,” “coach” and “equivalent” airfare, this does not resolve whether the terms
apply to the lowest fare available to the general public or to each individual contractor.
Raytheon points out that, if the promulgators had intended the interpretation of
FAR 31.205-46(b) advanced by the government, they could have so drafted the
regulation, as they did in the current version and with other subsections of pre-2010
FAR 31.205-46, which directly referred to contractor-specific costs (app. reply br. at 31
(citing FAR 31.205-46(a)(1) (“Costs incurred by contractor personnel . . . ”),
FAR 31.205-46(c)(2) (“The costs of travel by contractor-owned, -leased, or –chartered
aircraft . . . ”), and FAR 31.205-46(d) (“Costs of contractor-owned or leased
automobiles . . .”)).

       In any case, as noted, we examine regulatory intent only if a regulation is
ambiguous. We evaluate alleged ambiguity in a regulation similarly to our consideration
of an alleged ambiguity in a contract provision. See BAE Systems Information &
Electronic Systems Integration, Inc., ASBCA No. 44832, 03-1 BCA ¶ 32,193 at 159,116.
As with a contract, for a regulation to be ambiguous, each party’s interpretation must be
reasonable. Metric Constructors, Inc. v. NASA, 169 F.3d 747, 751 (Fed. Cir. 1999). The
government states that, in Raytheon 58212, the Board found that the government’s
interpretation of the pre-2010 version of FAR 31.205-46(b) was reasonable and the
regulation was ambiguous. However, in Raytheon 58212 there was no determination of
reasonableness or of ambiguity. Rather, the Board concluded that it was presented with a
                                              100
question of fact as to the reasonableness of each party’s interpretation of FAR 31.205-46(b)
and that there could be “no determination on a motion for partial summary judgment of
ambiguity and no determination as to whether extrinsic evidence may be examined in
resolving the meaning of the disputed language . . . .” Raytheon 58212, 15-1 BCA
¶ 35,999 at 175,864.

        In fact, while Raytheon’s interpretation of the pre-2010 version of
FAR 31.205-46(b) as referring to a standard coach fare available to the general public is
reasonable, the government’s interpretation is not reasonable. As noted, the governing
statute makes commercial aircraft travel costs that exceed the “standard commercial fare”
unallowable. It does not refer to any negotiated airfare available to a particular contractor.
Similarly, the pre-2010 implementing regulation, FAR 31.205-46(b), refers to the “lowest
customary standard, coach, or equivalent airfare.” The government’s contention that
“[t]his plain language must be read as applicable to the coach airfare actually available to
a contractor” (gov’t reply br. at 90) is simply incorrect no matter how much the
government strains to read that language into the regulation. Moreover,
contemporaneously, DCE McGrath and other DCMA officials agreed with Raytheon’s
reading of the regulation’s plain language, despite DCAA’s disagreement (findings 149,
151-52, 154, 157, 159-60).

       Contrary to the government’s stance, its revision of the regulation in 2010 was not
a mere clarification, it was a change. If that change were made to apply to the 2007 and
2008 costs in question, it would be an impermissible retroactive change. “Retroactivity is
not favored in the law.” Bowen v. Georgetown University Hospital, 488 U.S. 204, 208
(1988). “The presumption against statutory retroactivity is founded upon elementary
considerations of fairness dictating that individuals should have an opportunity to know
what the law is and to conform their conduct accordingly. It is deeply rooted in this
Court’s jurisprudence . . .” Landgraf v. USI Film Products, 511 U.S. 244, 245 (1994).

       In sum, 10 U.S.C. § 2324(e)(1)(J), makes airfare costs unallowable if they exceed
“the standard commercial fare.” The statute does not mention contractor-specific airfare.
The pre-2010 FAR 31.205-46(b) implementing regulation does not mention
contractor-specific airfare, and there are no words in the regulation that support the
government’s interpretation, unlike with Raytheon’s interpretation. Thus, DCAA’s use of
Raytheon’s discounted airfares as baselines to measure allegedly unallowable costs, rather
than standard commercial coach fares, was incorrect.

       III. The Government has not Proved that Raytheon’s Travel Policy Did Not
            Comply with FAR 31.205-46(b); the Policy was Reasonable

      Under FAR 31.201-2 (a)(1), to be allowable, a cost must be reasonable. The
government alleges that Raytheon’s Travel Policy during the relevant time periods did not
comply with FAR 31.205-46(b)’s exceptions for allowing premium travel and Raytheon’s
premium airfare costs were unreasonable. Here, when there are no costs above
FAR 31.205-46(b)’s allowable threshold, there is no need to evaluate the regulation’s
                                             101
exceptions. In any case, the government has not met its burden to show that Raytheon’s
Travel Policy did not comply with the regulation (see, e.g., findings 172, 219; app. reply
br. at 40).

        The government cites to Data-Design Labs, 85-3 BCA ¶ 18,400, for the
proposition that Raytheon had to document the circumstances justifying premium air
travel on a case by case basis (gov’t br. at 170-72; gov’t reply br. at 96-97). As Raytheon
points out, Data-Design involved a different statute, different regulation, first class
airfare, and is otherwise distinguishable. Regardless, even if Raytheon were required to
document and justify business class upgrades for tickets that did not exceed the standard
coach fare (which we do not find), it did so (see, e.g., findings 171, 182, 188, 191-92;
app. br. at 171-78). In particular, Raytheon’s Travel Policy documented and justified
premium airfare under FAR 31.205-46(b)’s exceptions for “travel during unreasonable
hours” and “not reasonably adequate for the physical or medical needs of the traveler.”
Raytheon also reasonably applied a criterion of “no significant rest period” upon arrival.
The regulation itself did not state that a traveler must perform work upon arrival. (See
findings 144, 172-75, 184; app. reply br. at 40, n.26)

       Contemporaneously, DCE McGrath endorsed Raytheon’s interpretation of
FAR 31.205-46(b) and determined that its Travel Policy complied with the regulation. He
acted within the scope of his authority in so doing. (Findings 149, 151-52, 156) This
binds DCMA and underscores the reasonableness of Raytheon’s interpretation and
implementation of the cost principle. MPR Associates, Inc., ASBCA No. 54689, 05-2
BCA ¶ 33,115 at 164,112.

       IV. Because Raytheon Did Not Charge the Government More Than
           FAR 31.205-46(b)’s Cost Allowability Cap, There Are No Unallowable
           Excess Costs

        Under FAR 31.205-46 “[c]osts incurred by contractor personnel on official
company business are allowable,” subject to certain limitations, including those in
FAR 31.205-46(b) regarding premium airfare. However, we agree with Raytheon that, by
its plain language, the pre-2010 version of FAR 31.205-46(b) does not make premium
class travel unallowable per se. Rather, it imposes an allowability limitation upon airfare
costs that exceed the “lowest customary standard, coach, or equivalent airfare offered
during normal business hours,” which Raytheon reasonably interprets as a baseline of
standard coach fare available to the general public. Therefore, as long as airfare costs do
not exceed that limitation, they are not unallowable under FAR 31.205-46. (App. br.
at 162) Raytheon represents, without rebuttal, that it “never charged the [g]overnment
more than the publicly available coach fare” (app. reply br. at 38) and “there are no costs
above the subsection (b) threshold” (id. and see finding 172).

        The Board’s quantum decision regarding another cost regulation, FAR 31.205-6(o)
(Postretirement benefits other than pensions (PRB)) is apt. There, the Board concluded
that “the government suffered no damages” and that the cost disallowance in question was
                                            102
improper. Northrop Grumman Corp., ASBCA No. 60190, 17-1 BCA ¶ 36,800
at 179,365, reaffirmed, 18-1 BCA ¶ 36,947, aff’d, Secretary of Defense v. Northrop
Grumman, 942 F.3d 1134 (Fed. Cir. 2019). The Board stated: “We consider that
FAR 31.205-6(o), properly construed, establishes a cost allowability ‘ceiling,’ and focuses
on whether the contractor overcharged the government for PRB costs in its relevant cost-
related submissions.” Northrop Grumman Corp., 17-1 BCA ¶ 36,800 at 179,371
(emphasis in original). The Board concluded that “[t]here is no excess to disallow.” Id.
at 179,372 (emphasis in original). In reaffirming its decision, the Board explained that
“[t]he gravamen of this dispute has always been whether the government was damaged,
i.e., in the words, of FAR 31.201-2(c) whether the contractor claimed (or the government
paid) any disallowable ‘excess’ PRB costs as a consequence of appellant's noncompliance.
The ultimate overriding fact is that the government did not pay any ‘excess.’ It cannot
overcome that basic fact …” Northrop Grumman Corp.,18-1 BCA ¶ 36,947 at
180,043-44.

        The same is true in the appeal before us. Raytheon did not claim any airfare
costs in excess of the standard coach fare available to the general public 34 and there is
no evidence that it charged the government for any costs that it did not incur. We
cannot determine on this record whether Raytheon incurred costs in excess of
FAR 31.205-46(b)’s “lowest customary standard, coach, or equivalent airfare offered
during normal business hours” (emphasis added), which neither party illuminates. In
any case, the government has not met its burden to prove that it suffered any damages.

       Accordingly, the Board need not address Raytheon’s challenges to DCAA’s
calculations of allegedly unallowable premium airfare and Raytheon’s assertion that the
government did not meet its burden to prove quantum.

                                          DECISION

      ASBCA No. 59437, to the extent that it pertains to airfare, and ASBCA Nos. 60057,
60059, 60060, and 60061 are sustained.

34   The record before us contains non-contemporaneous Raytheon-specific fares estimated
         by DCAA, and a “standard fare” reported by Raytheon’s travel agent, that is
         apparently the full-fare “Y” booking code. On this record, we accept the “standard
         fare” as the “lowest customary standard, coach” fare. However, we explicitly limit
         our holding to the record before us, and do not interpret the FAR as providing that
         the “Y” fare is the “lowest standard, coach fare.”
                                             103
            ASBCA NO. 59437 – RMS’ 2007 RECRUITING TRAVEL COSTS

     FINDINGS OF FACT CONCERNING RMS’ 2007 RECRUITING TRAVEL COSTS

      220. FAR 31.205-34, RECRUITMENT COSTS (MAY 1999), quoted more fully
below, provides in paragraph (a), subject to inapplicable exceptions, that certain costs are
allowable, including “[t]ravel costs of applicants for interviews.” FAR 31.205-34(a)(5).

        221. The 2007 RMS Audit Report originally questioned $199,715 of RMS’
claimed recruiting costs. As set forth below, RMS agreed to withdraw $103,312 of the
questioned costs, which pertained to spouses or guests, leaving $96,402 at issue.
(Tr. 2/298, 3/74, 197-201; see gov’t. br. at 113) During incurred cost negotiations, RMS
provided additional supporting information concerning certain of its recruiting costs,
which DCAA accepted, leaving about $51,000 ultimately at issue (R4, tabs 602-06;
tr. 2/299-300; 3/198-99, 205-08).

        222. DACO Bradley’s June 12, 2014 2007 RMS COFD disallowed $50,434 in
airfare costs claimed for interviewees traveling to RMS’ Tucson, Arizona headquarters as
unallowable under FAR 31.201-2 for lack of supporting documentation, and $1,002 as
excessive and unreasonable on the ground that the costs pertained to duplicate tickets.
The DACO stated that the information RMS supplied did not show that interviews were
actually completed or establish that the costs were for interviewees and not for their
guests. (App. supp. R4, tab 277 at 4543, 4546-47) 35 As noted, RMS’ appeal from this
COFD was docketed as ASBCA No. 59437.

        223. The hiring events at issue typically brought in hundreds of applicants for
interviews, which occurred at RMS or local hotels. RMS paid for the applicants’ travel
costs, including flights and hotels. As DACO Bradley acknowledged, RMS provided
documentation to show that the costs were incurred and paid. (Tr. 4/203) For the first
part of 2007, RMS also paid the travel costs for certain interviewees to bring a guest.
RMS reimbursed these costs as part of its recruiting efforts for certain positions because
accepting a job at RMS often meant relocating the applicant’s family. RMS ultimately
voluntarily withdrew the travel costs for guests from its 2007 incurred cost proposal.
(App. supp. R4, tab 256 at 3967, tab 260 at 4040; tr. 3/55-56, 74, 198; AUPFF ¶ 259)

       224. RMS provided documentation to support its 2007 recruiting travel costs,
including: interview and hiring event schedules; applicant travel expense statements;
screen shots from its Human Resources (HR) system, “RAYCATS,” showing that the
individuals applied for positions at RMS and submitted resumes; other RAYCATS
tracking records; HR expense reimbursement records; relocation documents; medical
clearance documents; background application documents; American Express statements

35   Although the decision also cited FAR 31.205-33, PROFESSIONAL AND
         CONSULTANT SERVICE COSTS (AUG 2003), it did not address that regulation.
                                            104
itemizing the applicants’ air fare charges; and hotel invoices itemizing the applicants’
hotel charges. (App. supp. R4, tab 83 at 1169-1215, tab 84, tab 256 at 3967, tab 260
at 4040; tr. 3/56-59, 62, 79)

       225. DCAA nevertheless concluded, with a few exceptions, that there was
insufficient support to establish that the individuals whose costs were in question actually
participated in an interview and that “interview panels” were completed, making the costs
unreasonable in DCAA’s view (app. supp. R4, tab 260 at 4041; tr. 4/204, 208). For
example, DCAA questioned, and the COFD disallowed, airfare costs for four interviewees
(app. supp. R4, tab 375 at 6322-24). They flew to Tucson around June 19, 2007 for a
hiring event held by RMS at the Westin La Paloma hotel. The supporting documentation
submitted to DCAA showed that they had submitted their resumes and stayed at the hotel.
(App. supp. R4, tab 84 at 1241, 1243-44, 1246, 1279, 1281, 1295, 1297; tr. 3/ 59-61,
63-66) The government wanted an initialed “Travel Interview Reimbursement Form,”
submitted by some of the interviewees (see, e.g., R4, tabs 603-604 at 109620; app. supp.
R4, tab 84 at 1240, 1286; tr. 3/57). Otherwise, the government did not accept that the
individual was brought in by RMS for an interview. However, submission of this form
was an exception to the regular practice. (See tr. 3/76-77)

        226. Of the $1,002 in recruiting travel costs questioned as excessive in the 2007
RMS COFD (finding 222), DCAA later accepted $673 pertaining to one interviewee,
leaving only $329 in airfare costs for one interviewee in question. DCAA was concerned
that the individual was an interviewee and a spouse and sought reimbursement in both
capacities. (Tr. 3/203-04) In its response to DCAA’s draft audit report, RMS noted that
one individual had expensed two trips, one trip as a spouse and a second trip as an
interviewee (app. supp. R4, tab 260 at 4040).

        227. As noted, RMS ultimately agreed to withdraw costs for spouses and guests.
If the challenged $329 refers to the referenced interviewee as a spouse, and it was not
withdrawn, the amount is not material, and the parties are to agree to an adjustment in the
government’s favor as they deem to be the most practical.

             DISCUSSION OF RMS’ 2007 RECRUITING TRAVEL COSTS

       I. The Parties’ Contentions

          A. The Government’s Contentions

       DCMA alleges that claimed travel costs related to RMS’ recruiting are unallowable
because “(1) RMS failed to provide adequate support showing potential employees
actually were interviewees for a position – as opposed to spouses or guests ($51,107), and
(2) several ‘duplicate’ airline tickets were identified for the same prospective employee
($329)” (gov’t br. at 112-13).

                                            105
          B. Raytheon’s Contentions

       Raytheon contends that the questioned costs are expressly allowable under
FAR 31.205-34(a)(5), which states that recruiting costs are allowable and does not specify
any particular type of documentation in support of claimed costs. Raytheon asserts that it
provided ample documentation and that there is no basis in the FAR for the government’s
requiring documentation signed by the interviewee to prove that an interview occurred.
The government is merely speculating that the interviews never took place or that the
costs were for guests, regardless of the fact that RMS voluntarily withdrew guest costs. In
any case, RMS incurred the guest costs as part of its efforts to encourage applicants to
relocate their families to Tucson and FAR 31.205-34 does not make such costs
unallowable. (App. br. at 196-98)

          C. The Government Failed to Satisfy its Burden of Proof

        We conclude that the government has not met its burden to prove that the recruiting
costs challenged in the 2007 RMS COFD are unallowable. Any spouse-related costs for
the one referenced interviewee are immaterial and can be reimbursed to the government,
as the parties see fit, in accordance with RMS’ voluntary agreement to withdraw such
costs (finding 227).

                                         DECISION

      With the exception of any spouse-related costs mentioned above, ASBCA
No. 59437, to the extent that it pertains to RMS’ recruiting travel costs, is sustained.

 ASBCA NOS. 59435, 59436, 60056 - BONUS, INCENTIVE COMPENSATION, AND
                       RESTRICTED STOCK COSTS

      FINDINGS OF FACT REGARDING RAYTHEON’S BONUS, INCENTIVE
             COMPENSATION, AND RESTRICTED STOCK COSTS

       228. CACO Forbush’s Corporate COFD for 2007 included a claim that bonus,
incentive compensation, and restricted stock costs for employees alleged to have engaged
in expressly unallowable activities, such as lobbying and corporate development, were
themselves expressly unallowable. The CACO found that $681,044 in restricted stock
costs were unallowable under FAR 31.205-22, LOBBYING AND POLITICAL
ACTIVITY COSTS (see finding 16); FAR 31.205-27, ORGANIZATION COSTS (see
finding 27); and FAR 31.205-47, COSTS RELATED TO LEGAL AND OTHER
PROCEEDINGS. For the most part, the COFD identified the legal proceedings, which did
not appear to include anything relevant to any of the appeals at issue in this decision as a
whole. (App. supp. R4, tab 279 at 4556, 4563, 4566-67) Indeed, none of the appeals have
been described as involving any legal or other proceedings covered by FAR 31.205-47.
Neither party discussed that regulation or its alleged relevance. Accordingly, we do not
                                             106
consider it here or below. As noted, the Board docketed Raytheon’s appeal from this
COFD as ASBCA No. 59435.

       229. CACO Forbush’s CAS 405 COFD for 2007 claimed, among other things, that
bonus and restricted stock costs for employees alleged to have engaged in expressly
unallowable activities were expressly unallowable. He found $570,035 in bonus costs to
be expressly unallowable under FAR 31.205-22, FAR 31.205-27, and FAR 31.205-47,
and $683,891 in restricted stock costs to be expressly unallowable under those regulations
and under FAR 31.205-1, ADVERTISING COSTS. (App. supp. R4, tab 281 at 4573,
4575, 4580-81)36 As noted, the Board docketed Raytheon’s appeal from this COFD as
ASBCA No. 59436.

        230. CACO Forbush’s Corporate COFD for 2008 concluded that $125,280 in
incentive compensation costs paid to Raytheon’s “Strategic Business Development”
employees were expressly unallowable under FAR 31.205-27. He stated that: “[t]hese
costs include the applicable employee bonus and incentive compensation for their time
spent performing unallowable [A&D] activities. As you know, these determinations relate
to matters currently being litigated as part of ASBCA Nos. 57576 et al.” (App. supp. R4,
tab 364 at 5961). As noted, the Board docketed Raytheon’s appeal from this COFD as
ASBCA No. 60056. The CACO’s 2008 CAS 405 COFD, issued the same day as his
Corporate COFD for 2008, did not mention bonus, restricted stock or incentive
compensation costs (app. supp. R4, tab 365).

        231. The parties resolved some of the matters in dispute. They agree that, for
2007, bonus, restricted stock, incentive compensation costs in the amount of $1,242,895
remain at issue and, for 2008, incentive compensation costs in the amount of $125,280
remain in dispute. (Tr. 7/249, 251-52; see finding 14; gov’t br. at 115; app. br. at 161
(total of $1,368,175 in dispute)).

     DISCUSSION OF RAYTHEON’S BONUS, INCENTIVE COMPENSATION, AND
                       RESTRICTED STOCK COSTS

         I. The Parties’ Contentions

             A. The Government’s Contentions

       The government contends that the Board’s decision in Raytheon Co., ASBCA
No. 57576 et al., 15-1 BCA ¶ 36,043 (CAS 405 decision), is controlling (gov’t br. at 116).
There the Board held that bonus, incentive compensation, and restricted stock awards paid
to Raytheon employees performing unallowable activities under FAR 31.205-47 were

36   The COFD appears to be inconsistent concerning the bonus and restricted stock
         amounts stated to be expressly unallowable (see above compared to chart at app.
         supp. R4, tab 281 at 4575), but this is immaterial in view of their settlement of
         some of the issues (finding 231) and of our decision, below.
                                              107
expressly unallowable and that the same categories of payments to employees performing
unallowable activities under FAR 31.205-22 and FAR 31.205-27 were unallowable. 15-1
BCA ¶ 36,042 at 176,052.

            B. Appellant’s Contentions

       Raytheon contends that that the government has failed to meet its burden to prove
that Raytheon owes it $1,368,175 in allegedly unallowable bonus, incentive
compensation, and restricted stock awards. It asserts that the evidence of record is paltry
and insufficient to prove the government’s claim. (App. br. at 161-62)

         The Board’s Resolution

       The circumstances of these appeals differ significantly from those of the CAS 405
decision. Unlike in that decision, we have not found any claimed costs to be unallowable
under FAR 31.205-22, FAR 31.205-27, or FAR 31.205-47. Thus, the employees in
question were not performing unallowable activities and any bonus, incentive
compensation or restricted stock payments associated with their allowable activities are
not expressly unallowable or unallowable.

                                          DECISION

       We sustain ASBCA Nos. 59435, 59436, and 60056, to the extent they cover bonus,
incentive compensation and restricted stock awards.

              ASBCA NO. 60056—“SOUVENIR” OR “REMINDER ITEMS” COSTS

              FINDINGS OF FACT REGARDING “SOUVENIR” OR “REMINDER
                                  ITEMS” COSTS

         232. The following statute and regulations are pertinent:

       Title 10 U.S.C. § 2324 (e)(1) provides that certain specific costs are “not
allowable,” including, under subsection (H), “Costs of advertising designed to promote the
contractor or its products,” and, under subsection (I), “Costs of promotional items and
memorabilia, including models, gifts, and souvenirs.”

     FAR 31.205-1, PUBLIC RELATIONS AND ADVERTISING COSTS
(AUG 2003), provides in part 37:

                (a) “Public relations” means all functions and activities
                    dedicated to-

37   This FAR provision has changed but we include the one in effect during the period at
         issue.
                                              108
       (1) Maintaining, protecting, and enhancing the image of
           a concern or its products; or

       (2) Maintaining or promoting reciprocal understanding
           and favorable relations with the public at large, or
           any segment of the public. The term public relations
           includes activities associated with areas such as
           advertising, customer relations, etc.

(b) Advertising means the use of media to promote the sale of
    products or services and to accomplish the activities
    referred to in paragraph (d) . . . . . Advertising media
    include but are not limited to conventions, exhibits, free
    goods, samples . . . .

....

(d) The only allowable advertising costs are those that are --

....

     (2) Costs of activities to promote sales of products
         normally sold to the U.S. Government, including
         trade shows . . . are allowable . . . . However, such
         costs do not include the costs of memorabilia (e.g.
         models, gifts and souvenirs)…

     (3) Allowable in accordance with 31.205-34.

(e) Allowable public relations costs include the following:

. . . . [list of various activities]

(f) Unallowable public relations and advertising costs
    include the following:

. . . . [list of various activities]

     (5) Costs of promotional material, motion pictures,
         videotapes, brochures, handouts, magazines, and
         other media that are designed to call favorable
         attention to the contractor and its activities.

                                   109
                   (6) Costs of souvenirs, models, imprinted clothing,
                       buttons, and other mementos provided to customers or
                       the public.

(Emphasis added)

      FAR 31.205-34, RECRUITMENT COSTS (MAY 1999), provides in part:

             (a) Subject to paragraph (b) of this subsection, the following
                 costs are allowable:

                   (1) Costs of help-wanted advertising.

                   (2) Costs of operating an employment office needed to
                       secure and maintain an adequate labor force.

                   (3) Costs of operating an aptitude and educational testing
                       program.

                   (4) Travel costs of employees engaged in recruiting
                       personnel.

                   (5) Travel costs of applicants for interviews.

                   (6) Costs for employment agencies, not in excess of
                       standard commercial rates.

             (b) Help-wanted advertising costs are unallowable if the
                 advertising-

                   (1) Does not describe specific positions or classes of
                       positions; or

                   (2) Includes material that is not relevant for recruitment
                       purposes, such as extensive illustrations or
                       descriptions of the company’s products or
                       capabilities.

(Emphasis added)

       233. Under the category “Recruitment Reminder Items” (RRI) CACO Forbush’s
2008 Corporate COFD disallowed $17,780 in costs on the ground that they “related to
items given away by Raytheon as souvenirs” and “constitute[d] unallowable promotional
costs under FAR 31.205-1” (app. supp. R4, tab 364 at 5961).

                                             110
       234. The costs at issue are 15% of Raytheon’s RRI costs incurred for 2008. The
costs apparently include purchase costs and the costs of handling and displaying the items.
(See, e.g., R4, tab 646) Raytheon voluntarily withdrew 85% of the costs consistent with
negotiated resolutions reached with DCMA in prior years, including for 2007, even
though, in Raytheon’s view, the costs were allowable (see, e.g., app. supp. R4, tab 32
at 251; tr. 8/35).

       235. No resolution was reached for 2008. DCAA considered the 2008 costs in
question to be expressly unallowable but, although he thought so too, CACO Forbush
did not so claim in view of a June 17, 2013 letter to Raytheon from predecessor CACO
Holt, entitled “Contracting Officer Determination on Allowability -- Public Relations
and Advertising Costs-(FAR 31.205-1),” which stated that DCMA would consider such
costs to be expressly unallowable beginning with Raytheon’s CY 2009. (R4, tab 646;
app. supp. R4, tab 331 at 5201-02; app. supp. R4, tab 364 at 5961; tr. 7/256-57, 360-62,
8/35-37)

        236. The RRIs are items such as mouse pads, pens, pencils, coffee mugs, and
possibly T-shirts, that bear Raytheon’s logo, with at least some, if not all, showing its
website, which, if accessed, would enable checking for available jobs (app. supp. R4,
tab 331 at 5201; tr. 2/71-72, 8/33-34). Raytheon hands the items out at collegiate job fairs
to “kids that come up to the booth as a way to get them aware of the Raytheon name”
(tr. 8/33). At these and other events, Raytheon tries to solicit young engineering students
to replenish the company’s acquisition workforce. The items are not handed out to the
general public outside of the job fairs. (App. supp. R4, tab 331 at 5201; tr. 2/71-72, 75,
8/34) However, there is no evidence that the physical items themselves describe specific
positions or classes of positions or that they are unique to students or recruits.
Mr. Michael Downing, Raytheon’s Senior Manager of Government Accounting at the
Corporate office, agreed that the RRIs could be characterized as souvenirs, reminder
items, giveaways and mementos (tr. 8/6, 44).

    237. As noted, the Board docketed Raytheon’s appeal from the 2008 Corporate
COFD as ASBCA No. 60056.

          DISCUSSION OF “SOUVENIR” OR “REMINDER ITEMS” COSTS

       I. The Parties’ Contentions

          A. The Government’s Contentions

        The government alleges that Raytheon’s voluntary withdrawal of 85% of its RRI
costs was a “tacit acknowledgment that these costs are unallowable” (gov’t br. at 117). It
also alleges that the CACO “determined that the remaining 15% of souvenir costs charged
to the Government by Raytheon were expressly unallowable pursuant to FAR 31.205-1
(Public Relations & Advertising Costs)” (id.).

                                            111
        The government contends that the costs at issue are for souvenirs or mementos that
“fit squarely into the unallowable costs specified in FAR 31.205-1” (gov’t br. at 118). It
alleges that “[t]he souvenirs are provided to the public or a segment of the public (the
attendees of various college fairs and other symposiums), and the purpose of those
souvenirs is dedicated to maintaining favorable relations within the definition of public
relations” (id.). Thus, the cost principle makes both the souvenirs and the related handling
activities expressly unallowable (id.).

         The government asserts that Raytheon’s mementos, souvenirs and giveaways are
not allowable recruitment costs under FAR 31.205-34, which makes specific costs
allowable but not costs of souvenirs for college students, which it does not address. In
contrast, FAR 31.205-1 expressly makes souvenirs or mementos for the public or segment
of the public and the activities to distribute them unallowable. The government states that
“it is also obvious that [the RRI] are literally ‘designed to call favorable attention’ to
Raytheon in order to attract people to its website.” (Gov’t br. at 119) 38 The government
also relies upon 10 U.S.C. § 2324(e)(1)(H) and (I), quoted in part above (finding 232).

   The government concludes that “the Board should find that Raytheon’s souvenir
reminder items are expressly unallowable” (gov’t br. at 120).

            B. Appellant’s Contentions

        Raytheon asserts that the government has not met its burden to prove that the RRI
costs at issue are unallowable (app. br. at 198). Raytheon contends that the costs are
recruitment costs, which FAR 31.205-34 makes allowable, and that the regulation does
not limit the types of allowable costs to those it enumerates (id.). Raytheon also alleges
that the costs are “fairly ‘costs of help-wanted advertising’ made allowable by subsection
(a)(1)” of FAR 31.205-34 (app. reply br. at 51). On the other hand, Raytheon alleges that
the RRIs are neither for public relations nor advertising as defined in FAR 31.205-1 (app.
br. at 198; app. reply br. at 50). Rather, their purpose is to encourage candidates to apply
for positions at Raytheon and to remind them of Raytheon’s recruiting website (app. br.
at 198). Further, according to Raytheon, “RRIs are not meant to enhance the image of
Raytheon to the public or a segment of the public, and they do not promote the sale of
Raytheon’s products” (app. br. at 198-99).

      Finally, Raytheon notes that CACO Forbush did not find the costs in question to be
expressly unallowable or impose penalties (app. br. at 199, n.72). Raytheon asserts that,

38   The government also alleges that a prior, unappealed COFD involving
         FAR 31.205-1(f)(5) and (6) pursuant to which RMS paid a penalty (R4, tab 645
         at 112352) (business card holders and travel mugs deemed to be expressly
         unallowable gifts to job applicants) is binding upon RMS and authoritative
         regarding Raytheon (gov’t br. at 119-20). There are no proposed fact findings and
         no developed record regarding this contention. Under the circumstances, we reject
         it.
                                             112
under the circumstances, the Board does not have jurisdiction to do so and the government
is seeking an impermissible advisory opinion when it asks the Board to find the costs to be
expressly unallowable (id.).

       II. RRI Costs are Unallowable

        First, the government’s argument that, due to its prior practice of withdrawing 85%
of its RRI costs, Raytheon has tacitly acknowledged that its RRI costs are unallowable, is
plainly wrong, as this litigation exemplifies. As we have found, in the past, DCMA and
Raytheon resolved their RRI cost dispute with the stated cost allocation, but Raytheon
continued to believe that its RRI costs were allowable (finding 234). However, we
conclude that the most reasonable reading of the regulations pertinent to this dispute is
that the costs of the items in question are unallowable.

       FAR 31.205-1(a), upon which the government relies, defines “public relations” as:

              all functions and activities dedicated to –

              (1) Maintaining, protecting, and enhancing the image of a
                  concern or its products; or

              (2) Maintaining or promoting reciprocal understanding and
                  favorable relations with the public at large, or any
                  segment of the public. The term public relations includes
                  activities associated with areas such as advertising,
                  customer relations, etc.

        Subsection (d) of FAR 31.205-1 lists the “only allowable” advertising costs. Items
such as the RRI items in question are not named. In fact, by way of analogy, the
regulation specifies in subsection (d)(2), regarding costs of activities to promote product
sales, that “such costs do not include the costs of memorabilia (e.g. models, gifts, and
souvenirs) . . . .” However, subsection (d)(3) includes among allowable costs those that
are allowable under FAR 31.205-34, addressed below.

        Subsection (e) of FAR 31.205-1 lists allowable public relations costs. Items such
as the RRI items in question are not covered. Subsection (f) lists “[u]nallowable public
relations and advertising costs,” including in subsection (5), “[c]osts of promotional
material . . . [and] handouts . . . designed to call favorable attention to the contractor and
its activities.” The items at issue are certainly promotional material designed to call
favorable attention to Raytheon. The unallowable costs also include, per subsection (6),
“[c]osts of souvenirs, models, imprinted clothing, buttons, and other mementos provided
to customers or the public.” (Finding 232) We consider that attendees at collegiate job
fairs or similar events could reasonably be described as members of the public or, at least,
a segment thereof.

                                             113
        Raytheon relies upon FAR 31.205-34, which makes allowable listed recruitment
costs. The RRI items in question are not listed. While Raytheon contends that they
could fairly be included in subsection (a)(1)’s allowable “[c]osts of help-wanted
advertising,” subsection (b)(1) states that help-wanted advertising costs are unallowable
if the advertising “[d]oes not describe specific positions or classes of positions.” While
some, if not all, of the disputed items are marked with Raytheon’s recruiting website,
which would show available jobs if accessed, there is no evidence that the physical items
themselves describe specific positions or classes of positions (finding 236). To the
extent that the RRI items display the web address for a recruiting webpage containing
information regarding job listings, the RRIs conceivably would comply with the spirit of
the FAR; however, they do not comply with the FAR as written. We apply the FAR as
written. FAR 31.205-34(b)(2) additionally provides that help-wanted advertising costs
are unallowable if they “[i]nclude[] material that is not relevant for recruitment
purposes, such as extensive illustrations or descriptions of the company’s products or
capabilities.” Thus, the FAR strictly limits allowable help-wanted advertising to
advertising describing specific positions or classes of positions without irrelevant
material. The RRIs do fit within this narrow definition.

       We conclude that, on balance and in practicality, the physical items in question are
most properly classified as “souvenirs,” which are things “kept as a reminder.” Merriam
Webster Dictionary, merriam-webster.com, (last visited January 29, 2021). Souvenir
costs are not allowable. Indeed, the governing statute provides that “[c]osts of
promotional items and memorabilia, including models, gifts, and souvenirs” are not
allowable. Title 10 U.S.C. § 2324 (e)(1)(I); (finding 232). The disputed items also fit the
categories of unallowable promotional items, memorabilia and mementos. 39 Raytheon’s
Senior Manager of Government Accounting at the Corporate office agreed that the RRIs
could be characterized as souvenirs, reminder items, giveaways and mementos (finding
236).

       Accordingly, we deny Raytheon’s appeal. However, contrary to the government’s
assertion that we should conclude that the RRI costs were expressly unallowable, we
decline to do so when the CACO and his COFD on appeal did not do so (finding 235).
Moreover, this is not an obvious case of unallowability and of a contractor’s flaunting the
regulations. The parties had operated for years under a negotiated resolution under which
Raytheon was allowed to include 15% of its RRI costs in its incurred cost proposals
(finding 234). Further, under CACO Holt’s June 17, 2013 “Contracting Officer
Determination on Allowability-- Public Relations and Advertising Costs-(FAR 31.205-1),”
DCMA was not going to consider such costs to be expressly unallowable until 2009
(finding 235), which is after the 2008 year in question.

                                         DECISION

         We deny ASBCA No. 60056 to the extent that it covers RRIs.

39   We need not address whether the items are gifts.
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                              SUMMARY OF DECISIONS

       We sustain ASBCA Nos. 59435, 59436, 59438, 60056, 60057, 60058, 60059,
60060, and 60061. Except for the immaterial amount of spousal travel costs stated, we
sustain ASBCA No. 59437. We sustain ASBCA No. 60056 in part, to the extent stated,
and deny it to the extent that it covers RRIs.

      Dated: February 1, 2021

                                                  CHERYL L. SCOTT
                                                  Administrative Judge
                                                  Armed Services Board
                                                  of Contract Appeals

 I concur                                         I concur

 RICHARD SHACKLEFORD                              DAVID D’ALESSANDRIS
 Administrative Judge                             Administrative Judge
 Acting Chairman                                  Acting Vice Chairman
 Armed Services Board                             Armed Services Board
 of Contract Appeals                              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 Nos. 59435, 59436, 59437, 59438, 60056,
60057, 60058, 60059, 60060, 60061, Appeals of Raytheon Company and Raytheon
Missile Systems, rendered in conformance with the Board’s Charter.

      Dated: February 3, 2021

                                                 PAULLA K. GATES-LEWIS
                                                 Recorder, Armed Services
                                                 Board of Contract Appeals

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