Court Opinion

ID: 4576143
Source: CourtListenerOpinion
Date Created: 2020-10-13 19:00:09.026062+00
Date Added: 2024-06-11T08:47:27.244015
License: Public Domain

ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of --                                   )
                                               )
DynCorp International LLC                      )      ASBCA No. 61950
                                               )
Under Contract No. W52P1J-07-D-0007            )

APPEARANCES FOR THE APPELLANT:                        Holly A. Roth, Esq.
                                                      William T. Kirkwood, Esq.
                                                      Elizabeth Leavy, Esq.
                                                       Reed Smith LLP
                                                       Washington, DC

APPEARANCES FOR THE GOVERNMENT:                       Arthur M. Taylor, Esq.
                                                       DCMA Chief Trial Attorney
                                                      Srikanti Schaffner, Esq.
                                                       Trial Attorney
                                                       Defense Contract Management Agency
                                                       Carson, CA

                OPINION BY ADMINISTRATIVE JUDGE CLARKE

       This case involves DynCorp International LLC’s (DI) appeal of a Defense
Contract Management Agency (DCMA) Contracting Officer’s Final Decision
implementing DCAA audits of cost reimbursement contracts and, in particular, the
disallowance of severance payments made to DI’s former CEO. We have jurisdiction
pursuant to the Contract Disputes Act of 1978 (CDA), 41 U.S.C. §§ 7101-7109. We
deny DI’s appeal. The parties have submitted the appeal for decision on the record,
pursuant to our Board Rule 11, and only entitlement is before us.

                                 FINDINGS OF FACT

(Each party relies exclusively on their joint Stipulation of Material Facts as their
Proposed Finding of Facts. We adopt the parties’ stipulated facts (stip.) and add
additional facts as appropriate.)

       1. Appellant is DynCorp International LLC (DI) (stip. ¶ 1).

       2. Respondent is the Defense Contract Management Agency (DCMA) acting
on behalf of those government agencies for which appellant performed cost type
contracts during calendar year (CY) 2015 and CY2016 (stip. ¶ 2).
      3. DI and the government are parties to numerous cost reimbursement contracts
which are assigned for contract administration purposes to DCMA, including Contract
No. W52P1J-07-D-0007 (Contract No. 0007) (stip. ¶ 3).

Severance Payments to DI CEO Mr. Gaffney

        4. From August 25, 2010 to July 10, 2014, DI employed Steven F. Gaffney as
its Chief Executive Officer (CEO). Mr. Gaffney’s terms of employment with DI were
subject to a 2010 Employment Agreement. Mr. Gaffney’s employment with DI was
terminated on July 10, 2014. In accordance with the 2010 Employment Agreement
and 2014 Separation Agreement between Mr. Gaffney and DI, following
Mr. Gaffney’s termination, DI agreed to pay severance to Mr. Gaffney in the
aggregated amount of $9.2 million (less applicable tax withholdings). The severance
amount was calculated in accordance with the 2010 Employment Agreement, which
stated that the severance payment would be “equal to two (2) times the sum of the
Base Salary and Bonus at Target.” (Stip. ¶ 4; R4, tab 5 at 2) 1

        5. As required by the 2010 Employment Agreement and 2014 Separation
Agreement, DI made severance payments to Mr. Gaffney in 2014, 2015 and 2016
(stip. ¶ 5; R4, tab 5 at 2).

2015 & 2016 Incurred Cost Proposals

       6. In accordance with Federal Acquisition Regulation (FAR) 52.216-7,
ALLOWABLE COST AND PAYMENT, DI submitted its CY2015 incurred cost
proposal (2015 ICP) to the DCMA on June 30, 2016, to establish DI’s final indirect
cost rates for January 1 through December 31, 2015. DI’s 2015 ICP included costs DI
incurred relative to DI’s severance payments to Mr. Gaffney in DI’s G&A expense
pool. (Stip. ¶ 6; R4, tab 2)

       7. On June 21, 2017, DI submitted its CY2016 incurred cost proposal
(2016 ICP) to the DCMA to establish DI’s final indirect cost rates for January 1
through December 31, 2016. DI’s 2016 ICP included costs DI incurred relative to DI’s
severance payments to Mr. Gaffney in DI’s G&A expense pool. (Stip. ¶ 7; R4, tab 3)

DCAA Audit Report

      8. On June 26, 2018, the Defense Contract Audit Agency (DCAA) issued
Audit Report Nos. 3181-2015D10100001 and 3181-2016D1010001 (the “Audit
Reports”) on DI’s proposed amounts on unsettled flexibly priced contracts for CY2015
and CY2016 (stip. ¶ 8). In particular, and with respect to the instant appeal and DI’s

1   The page numbers we cite are PDF page numbers for ease of locating.

                                           2
incurred costs relative to the severance payments at issue, the DCAA audit reports
included the following:

             5. Indirect Costs

                    a. Summary of Conclusions:

             We questioned $7,812,098 ($4,745,431 + $3,066,667) of
             proposed indirect severance costs based on FAR 31.201-3,
             Determining Reasonableness. . . .

(R4, tab 4 at 19) (Emphasis added)

      9. DCAA commented on severance pay:

             (1) Severance

                         (Table omitted, see R4, tab 4 at 20)

                    We observed a large amount of severance costs
             while performing data analytics on indirect costs.
             Subsequently, we found DI’s former Chief Executive
             Officer (CEO), received severance of $4,983,333 in CY
             2015 and $3,066,667 in CY 2016, totaling $8,050,000 for
             both years.

                    We requested DI to provide support demonstrating
             these severance costs were allowable and reasonable. In
             response, DI provided the former CEO’s employment
             agreement and separation agreement.

             • Employment Agreement. The employment agreement
             was effective August 25, 2010 for four years. The
             agreement stated if the employee was terminated by the
             company without cause or due to the company’s non-
             renewal of the term he would be entitled to “...a severance
             payment equal to two (2) times the sum of Base Salary and
             Bonus at Target, payable in twenty-four (24) equal
             monthly installments....” The agreement also defined the
             annual base salary as $2,000,000 and the target bonus as
             130 percent of base salary ($2,600,000).

                                          3
             • Separation Agreement. The separation agreement was
             effective July 10, 2014. The agreement stated the
             separation from DI would be treated as a termination
             without cause; therefore, the employee would be entitled to
             severance payments as defined in the employment
             agreement.

                   We reviewed employment agreements for other
             former CEOs at DI and CEOs of similar defense
             contractors and found the severance terms of twice a
             CEO’s salary plus bonus to be reasonable in comparison.

(R4, tab 4 at 20-21) (Emphasis added)

      10. DCAA commented on reasonableness:

                     Nevertheless, FAR 31.201-3(b) states in part: “What
             is reasonable depends upon a variety of considerations and
             circumstances, including --... (3) The contractor’s
             responsibilities to the Government ....” In our opinion, the
             annual compensation used in the calculation should be
             subject to the limit discussed in FAR 31.205-6,
             Compensation. FAR 31.205-6(p)(1)(i) defines compensation
             as, in part: “...the total amount of wages, salary, bonuses ....”
             Although the severance payments do not meet the definition
             of compensation, the salary and bonus components of the
             severance calculations do meet this definition. Therefore, in
             our opinion, the FAR 31.205-6(p) limitation on allowability
             of compensation is an appropriate benchmark to determine
             reasonableness of the salary and bonus components.
             Consequently, in our opinion, the salary and bonus portion
             of the severance payment calculation in excess of the limit in
             FAR 31.205-6(p)(1)(i) is unreasonable.

                     To determine the maximum allowable severance,
             we doubled the FAR 31.205-6(p)(2)(i) compensation
             limitation amount of $693,951 in effect when the employee
             was hired for this position (CY 2010). We subtracted that
             amount from the total severance proposed and paid to
             determine the total unallowable severance amount of
             $7,812,098. Our calculation of this amount is shown in the
             table below.

                                           4
          Total Unallowable Indirect Severance former CEO

                        Description                            Amount

               Severance Proposed and Paid
                        CY 2014                                $1,150,000
                        CY 2015                                4,983,333
                        CY 2016                                3,066,667
           Total Severance Proposed and Paid                   $9,200,000
          Less Maximum Allowable Severance *                   1,387,902
               Total Unallowable Severance                     $7,812,098

* Maximum Allowable Severance = $693,951 x 2 [= $1,387,902]

(R4, tab 4 at 21) (Emphasis added)

      11. DCAA’s CY2014 audit did not challenge DI’s severance costs:

                    DI’s CY 2014 severance costs of $1,150,000 were
             not included in the scope of this audit as our office
             examined and reported on those costs in DCAA Audit
             Report No. 031812013D10100001, dated January 2, 2018.
             In that audit, we did not specifically examine severance
             costs. Therefore, the costs were not questioned or a
             subject of discussion when the CY 2014 ICP was
             negotiated and settled on March 2, 2018. As a result,
             these costs have been recovered by DI in the CY 2014 ICP.

                    We determined $237,902 as the remaining portion
             of the allowable severance costs, after consideration of the
             already recovered severance costs in CY 2014 of
             $1,150,000 ($1,387,902 - $1,150,000 = $237,902). We
             questioned the difference between the proposed and paid
             severance in CY 2015 and the allowable severance costs
             ($4,983,333 - $237,902 = $4,745,431). We questioned all
             of the proposed and paid severance costs in CY 2016
             because the contractor recovered all of the allowable
             severance costs ($1,387,902) in CYs 2014 & 2015.

             Unallowable severance questioned by CY is shown in the
             table below.

                                          5
                               DynCorp International LLC

         Questioned CYs 2015 and 2016 Indirect Severance for Former CEO

                Severance Proposed and Paid              Questioned

                       CY 2014     $1,150,000            $
                       CY 2015     4,983,333                 4,745,431
                       CY 2016     3,066,667                 3,066,667

                       Total       $9,200,000             $7,812,098

(R4, tab 4 at 22) (Emphasis added)

       12. DI disagreed with the DCAA audit:

              d. Contractor’s Reaction:

              (1)    Severance

                      DI did not concur with the questioned indirect
              severance. DI disagreed with our use of the FAR 31.205-
              6(p)(2)(i) compensation limitation in effect when the
              employee was hired (CY 2010). DI was confused by our
              inclusion of the severance amounts paid in CY 2014 to its
              former CEO in our calculations of unallowable severance. DI
              stated that severance pay is not subject to the compensation
              limits discussed in FAR 3l.205-6(p) and must be evaluated
              separately for reasonableness. DI disagreed that the
              questioned severance costs are unreasonable based on FAR
              31.201-3. DI noted its Compensation Director and an
              executive compensation consulting firm both opined that DI
              was well within standard industry practices regarding the
              payment of these severance costs. Refer to Appendix 4 for
              the full text of the contractor’s reaction to questioned indirect
              severance.

(R4, tab 4 at 26)

                                            6
Statutory Cap

      13. The statutory cap on compensation increased every year:

       Statutory Cap                 Fiscal Year             Costs Incurred After
 $1,144,888                  2014                         Jan 1, 2014
 $980,796                    2013                         Jan 1, 2013
 $952,308                    2012                         Jan 1, 2012
 $763,029                    2011                         Jan 1, 2011
 $693,951                    2010                         Jan 1, 2010

https://www.whitehouse.gov/wp-
content/uploads/2017/11/ContractorCompensationCapContractsAwardedBeforeJune24
.pdf

        14. On January 7, 2019, DCMA’s Corporate Administrative Contracting
Officer (CACO) John R. Branch issued a Contracting Officer’s Final Decision
(COFD), which disallowed $4,986,523 from DI’s FY 2015 G&A Pool and $2,376,450
from DI’s FY 2016 G&A Pool and unilaterally established DI’s final indirect cost
rates for CY2015 and CY2016 based, in part, on the disallowed severance costs
incurred by DI (stip. ¶ 10).

      15. As is pertinent to this appeal, the COFD advised DI that the CACO had
determined that $6,029,210 of the severance DI paid to DI’s former CEO for CY2015
and CY2016 is unallowable. In particular, the COFD advised DI that the amount
CACO had determined to be unallowable was $3,951,448 in CY2015 and $2,077,762
in CY2016. (Stip. ¶ 11)

        16. The COFD advised DI that the CACO’s determination was based on the
CACO’s assertion that “[s]everance pay is compensation subject to the ceilings set
forth in FAR 31.205-6(p) for each applicable calendar year” and that the severance
amounts paid to DI’s CEO for CY2015 and CY2016 that exceed the statutory
compensation limits under FAR 31.205-6(p) are unallowable (stip. ¶ 12).

       17. The COFD also stated that, in the alternative to severance pay being
compensation subject to FAR 31.205-6(p), severance pay DI paid to its former CEO is
a directly associated cost under FAR 31.201-6(d) to the extent that it would not have
been incurred but for the underlying unallowable salary cost (stip. ¶ 13).

      18. The COFD unilaterally adjusted for the disallowed executive severance pay
and unilaterally established the final indirect rates for DI’s fiscal years ended in
December 31, 2015 and December 31, 2016 (stip. ¶ 14).

                                          7
         19. DI filed its notice of appeal of the COFD on January 22, 2019 (stip. ¶ 15).

       20. DI filed its Complaint on February 25, 2019 and limited the scope of its
appeal to the COFD’s disallowance of DI’s severance payments to DI’s former CEO,
Mr. Gaffney (stip. ¶ 16).

                                         DECISION

Jurisdiction

        The COFD involves both entitlement to reductions in severance pay and
calculation of the deductions. In this appeal, however, the DI focuses on the right to a
deduction, not the calculation of the deduction. We deny DI’s appeal but only as to
the government’s right to deductions in severance pay, not the amounts of the
deductions. Though, DI raises reasonable concerns in its claim over how the
deductions were calculated by DCAA (and they appear to remain to be negotiated),
that issue is not before us today.

Standard of Review

       Both parties rely exclusively on the facts included in their joint stipulation. We
agree that there are no disputed material facts. Therefore this appeal is appropriate for
resolution on the record pursuant to our Rule 11 submitted without a hearing.2

       We are presented with issues of contract/regulatory interpretation. Both parties
agree that the FAR provisions involved should first and foremost be interpreted based
on the “plain language” of the regulation (app. mot. at 7-8; gov’t mot. at 2). We agree.
TEG-Paradigm Envtl., Inc. v. United States, 465 F.3d 1329, 1338 (Fed. Cir. 2006) (We
enforce the “plain and ordinary” meaning of language that is clear and unambiguous.)
We need not conduct an exhaustive analysis of the law of regulatory interpretation
because this case is resolved on the “plain language” standard upon which the parties
and the Board agree.

2   The parties style their motions as “on the administrative record” not as motions for
         summary judgement or proceedings under Board Rule 11. In the end given the
         purely legal nature of the dispute before us and the stipulations of fact upon
         which the decision rests, the results of this appeal are no different than if we had
         treated the motions as motions for summary judgment instead of Rule 11
         submissions.

                                               8
Positions of the Parties

        In its July 22, 2019 Motion, DI organizes its argument into six questions of law
(app. mot. at 6-7). The highpoints of DI’s argument are as follows: (1) DI states that
“neither the audits conducted by the Defense Contract Audit Agency (DCAA) nor the
COFD, determined that DI’s severance payments made for CY2015 and CY2016 were
unallowable under FAR 31.205-6(g) [Severance pay]” (app. mot. at 9-10). DI also
points out that DCAA found that DI’s severance pay was reasonable, “[i]n fact, the
DCAA determined that DI’s severance payments for CY2015 and CY2016 were
‘reasonable’” (app. mot. at 10). (2) DI quotes the definition of compensation in
FAR 31.205-6(p) and argues, “[t]his definition does not include the term ‘severance
pay,’ nor does it reference FAR 31.205-6(g)” (app. mot. at 11). Therefore, DI argues
that the government’s characterization of severance pay as compensation was wrong.
Based on all this DI urges the Board to conclude that severance pay, “does not fall
within FAR 31.205-6(p)’s limitations on the allowability of ‘compensation’” (app. mot.
at 12). (3) Next DI argues that severance pay cannot be an unallowable “directly
associated cost” under FAR 31.201-6(d) because the severance pay was allowable and,
“because it was not incurred by DI as a result of, nor related to, any other cost DI
incurred in CY2015 and CY2016” (app. mot. at 13). (4) In its Reply Brief DI reiterates
that, “[i]n fact, DCAA also determined the severance payments to be reasonable” (app.
reply br. at 3). (5) DI argues the government’s argument that severance pay is
somehow “salary” or “wages” “contradicts the plain language of FAR 31.205- 6(g) and
the common meaning of its words” (app. reply br. at 4). DI dismisses the government’s
reliance on Armed Services Procurement Regulations (ASPR) cases and Black’s Law
Dictionary (app. reply br. at 5-6). DI argues that the Employee Compensation Cap
cannot reasonably be interpreted to apply to severance payments (app. reply br. at 7).
(6) Finally, DI reiterates its argument that severance payments are not “directly
associated costs” because “these severance payments were neither incurred by DI as a
result of, nor related to, any costs DI incurred that were subject to the Employee
Compensation Cap’s 2015 and 2016 ceilings” (app. reply br. at 8).

        In its August 22, 2019 Cross-Motion and Opposition, DCMA first deals with the
idea that severance pay is compensation. DCMA states that DI, “fails to cite any legal
authority for its position that severance pay is not a type of ‘wages’ or ‘salary.’”
DCMA argues, “the notion that severance pay is a type of ‘wages’ or ‘salary’ is
supported by the plain language of FAR 31.205-6(g).” DCMA focuses on the
definition of severance pay in FAR 31.205-6(g), “[s]everance pay is a payment in
addition to regular salaries and wages by contractors to workers whose employment is
being involuntarily terminated.” (Emphasis added by DCMA) (Gov’t cross-mot. at 2)
Citing Black’s Law Dictionary’s definitions of “regular,” “salary” and “wages,” DCMA
argues, “[s]everance pay is clearly a reward or recompense for services performed, as
the right to severance pay is earned only after performing personal services for the
employer, and therefore falls within the definition of ‘salary’” (gov’t cross-mot. at 3).

                                           9
DCMA relies heavily on its assertion “DynCorp asks the Board to ignore the word
‘regular’ in the definition of severance pay” which “alters the plain meaning of
FAR 31.205-6(g)” to exclude severance pay from wages and salary. DCMA sums up
with, “the plain meaning of FAR 31.205-6(g), after giving meaning to the word
‘regular,’ indicates that severance pay is a type of salary and wages, just not the usual
or customary type of salary and wages.” (Id.) DCMA points out that the ASPR, a
precursor to the FAR, referred to severance pay as “dismissal wages” (gov’t cross-mot.
at 4). Next, DCMA argues, “the severance pay that DynCorp paid to its former Chief
Executive Officer (CEO) is a directly associated cost under FAR 31.201-6(d) to the
extent that it would not have been incurred but for the underlying overceiling salary
cost” (gov’t cross-mot. at 5). DCMA contends, “[t]he CACO determined that any
compensation exceeding that cap is unallowable. . . . Therefore, the amount of
severance pay associated with the unallowable compensation is also unallowable”
(gov’t cross-mot. at 6). In its Sur-Reply DCMA argues, “DynCorp may not circumvent
FAR 31.205-6(p)’s compensation cap by drafting employment agreements that promise
to pay severance costs that exceed the benchmark compensation amount” (gov’t
sur-reply at 2). DCMA reiterates its argument that the definition of “compensation for
personal services” in FAR 31.001 when read with FAR 31.205-6(a) and
FAR 31.205-6(g), supports the conclusion that severance payments are compensation
(gov’t sur-reply at 2). DCMA returns to its argument about the word “regular” stating,
“[a]ppellant’s interpretation of severance pay renders meaningless the word ‘regular’ in
the definition” (gov’t sur-reply at 3). DCMA argues the reference to “dismissal wages”
in the ASPR is “entitled to deference because it provides additional evidence of the
promulgator’s intent, and demonstrates that the promulgators of the regulatory cap
intended for severance costs to be subject to the cap” (gov’t sur-reply at 4). Both
parties suggest that Black’s Law Dictionary supports their position. DCMA counters
that “DynCorp’s reliance on Black’s Law Dictionary is irrelevant since severance pay is
expressly defined under FAR 31.205-6(g)” (gov’t sur-reply at 5). Concerning the
matter of directly associated costs, DCMA argues, “[i]f Mr. Gaffney’s FY 2014 base
salary did not exceed the compensation cap, his annual severance pay would not have
exceeded the compensation cap either” (gov’t sur-reply at 7).

CEO Gaffney’s Base Salary Exceeded the Statutory Cap Every Year

       DI’s employment agreement with CEO Gaffney, effective August 25, 2010 for
four years, provided for a base salary of $2,000,000 and the target bonus of 130 percent
of base salary ($2,600,000) (finding 9). The statutory cap on compensation for that four
years ranged from $693,951 in 2010 to $1,144,888 in 2014 (finding 13). CEO Gaffney’s
base salary of $2,000,000 exceeded the statutory cap all four years. 3

3   The record does not include the audit reports for CY2010 through CY2014 so we do
         not know if DCAA disallowed DI’s salary and bonus payments to
         CEO Gaffney that exceed the statutory cap as we would expect.

                                          10
DCAA’s Audit Comment that the “Severance Terms” were Reasonable Does not Refer
to the Amounts

       We now turn to DI’s arguments as presented in its brief. Its first argument, that
the DCAA considered the severance pay to be reasonable and payable, is based upon a
misreading of the relevant language in DCAA’s audit report. DCAA included the
following finding in the audit report:

              We reviewed employment agreements for other former
              CEOs at DI and CEOs of similar defense contractors and
              found the severance terms of twice a CEO’s salary plus
              bonus to be reasonable in comparison.

(Finding 9) DI interprets this to mean that the severance payment “amounts” are
reasonable. We do not agree. DCAA simply found that “severance terms of twice a
CEO’s salary plus bonus to be reasonable.” The word “terms” cannot reasonably be
interpreted to refer to the dollar amount of the severance paid to former CEO Gaffney.
We interpret the language as DCAA finding the mechanism of calculating the
severance pay reasonable. DCAA did not find the $9,200,000 (finding 11) in
severance payments to CEO Gaffney reasonable and made that clear in the audit, “We
questioned $7,812,098 ($4,745,431 + $3,066,667) of proposed indirect severance costs
based on FAR 31.201-3, Determining Reasonableness. . . .” (Finding 8)

Severance Payments are not Compensation

      DI’s next argument, that severance payments are not “compensation” under the
FAR, fares better.

              We start with the FAR definition of compensation:

              31.001 Definitions.

              “Compensation for personal services” means all
              remuneration paid currently or accrued, in whatever form
              and whether paid immediately or deferred, for services
              rendered by employees to the contractor.

There is an additional definition of compensation in FAR 31.205-6(p):

              (p) Limitation on allowability of compensation.

                     ....

                                          11
                       (1) Definitions. As used in this paragraph (p)-

                        (i) “Compensation” means the total amount of
                wages, salary, bonuses, deferred compensation (see
                paragraph (k) of this subsection), and employer
                contributions to defined contribution pension plans (see
                paragraphs (j)(4) and (q) of this subsection), for the fiscal
                year, whether paid, earned, or otherwise accruing, as
                recorded in the contractor’s cost accounting records for the
                fiscal year.

From these definitions we understand that compensation (under the FAR cost
allowability definition) is “for services rendered” for “the fiscal year” that are “recorded
in the contractor’s cost accounting records for the fiscal year.” CEO Gaffney’s
severance payments cannot be for “services rendered” in fiscal years after his
employment has been terminated. DCAA agrees with this interpretation, “[a]lthough
the severance payments do not meet the definition of compensation . . . .” (Finding 10)
We find DCMA’s reliance on the word “regular” in FAR 31.205-6(g) and its argument
that severance pay is a “type of salary and wages, just not the usual or customary type
of salary and wages” unpersuasive. Severance pay is not compensation.

The Challenged Severance Payments are not Reasonable4

      We start with the fact that DCAA questioned DI’s severance costs based on
reasonableness:

                We questioned $7,812,098 ($4,745,431 + $3,066,667) of
                proposed indirect severance costs based on FAR 31.201-3,
                Determining Reasonableness. . . .

(Finding 8) (Emphasis added) Also:

                Consequently, in our opinion, the salary and bonus portion
                of the severance payment calculation in excess of the limit
                in FAR 31.205-6(p)(1)(i) is unreasonable.

(Finding 10) (Emphasis added)

4   We need not consider “directly associated cost” because our decision is based on
        reasonableness.

                                             12
       In order for a cost to be allowable it must meet certain requirements.
FAR 31.201-2, DETERMINING ALLOWABILITY, lists the five requirements
including reasonableness. We assess reasonableness under the guidance of
FAR 31.201-3, DETERMINING REASONABLENESS, which provides:

              31.201-3 Determining reasonableness.

                      (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.
              Reasonableness of specific costs must be examined with
              particular care in connection with firms or their separate
              divisions that may not be subject to effective competitive
              restraints. 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 contracting officer or the contracting
              officer’s representative, the burden of proof 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.

(Emphasis added) Focusing on FAR 31.201-3(a) we find that the DCAA audit
constitutes an “initial review of the facts” that resulted in “a challenge of a specific
cost by the contracting officer” that shifts the burden of proof to DI (findings 8, 14).
Therefore, DI has the burden of proving that its severance payments are reasonable.
We dealt with DI’s primary argument for reasonableness when we rejected DI’s

                                            13
interpretation of DCAA’s statement that it “found the severance terms of twice a
CEO’s salary plus bonus to be reasonable” to mean DCAA agreed the severance
payment amounts were reasonable. As we explained above DCAA did not find that
the dollar amounts of severance payments were reasonable.

      FAR 31.205-6, COMPENSATION FOR PERSONAL SERVICES,
subparagraph (p) Limitation on allowability of compensation, imposes statutory caps
on compensation. In CY2010 the following limitation applied:

             (ii) Costs incurred after January 1, 1998, for the
             compensation of a senior executive in excess of the
             benchmark compensation amount determined applicable
             for the contractor fiscal year by the Administrator, Office
             of Federal Procurement Policy (OFPP), under 41 U.S.C.
             1127 as in effect prior to June 24, 2014, are unallowable
             (10 U.S.C. 2324(e)(1)(P) and 41 U.S.C. 4304(a)(16), as in
             effect prior to June 24, 2014).

FAR 31.205-6(p)(2). Similar cap language applies after June 24, 2014.
FAR 31.205-6(p)(3)&(4). DCAA found that these caps did not apply to severance pay
but did apply to DI’s CEO’s salary and bonus:

             Although the severance payments do not meet the
             definition of compensation, the salary and bonus
             components of the severance calculations do meet this
             definition. Therefore, in our opinion, the FAR 31.205-6(p)
             limitation on allowability of compensation is an
             appropriate benchmark to determine reasonableness of the
             salary and bonus components.

(Finding 10) We agree. DCAA relied on the “responsibilities to the Government”
element of reasonableness:

             Nevertheless, FAR 31.201-3(b) states in part:

             “What is reasonable depends upon a variety of
             considerations and circumstances, including --... (3) The
             contractor’s responsibilities to the Government ....” In our
             opinion, the annual compensation used in the calculation

                                          14
                  should be subject to the limit discussed in FAR 31.205-6,
                  Compensation.

  (Finding 10) We agree. The statutory caps establish “The contractor’s responsibilities
  to the Government . . . and the public at large.” That is the responsibility not to claim
  salary costs over the statutory limit. 5 These are two of the itemized “considerations
  and circumstances” in FAR 31.201-3 supporting reasonableness. The statutory cap
  ranged from $693,951 in 2010 to $1,144,888 in 2014. DI’s CEO’s base salary of
  $2,000,000 exceeded these caps every year of CEO Gaffney’s employment.
  (Findings 13, 9) DI’s severance payments were calculated as two times the sum of
  base salary and bonus (finding 9-10). Therefore, DI’s severance payments were
  calculated in part using salary and bonus amounts that exceeded the statutory caps.
  We find that the portion of the severance payments derived from unallowable salary
  and bonus amounts above the statutory caps are likewise unallowable. This
  conclusion is just common sense, there is nothing magic about a severance pay
  calculation that converts unallowable salary into allowable severance payments.
  Interestingly, DCMA seems to have recognized this argument among the many
  arguments both parties made:

                  DynCorp may not circumvent FAR 31.205-6(p)’s
                  compensation cap by drafting employment agreements that
                  promise to pay severance costs that exceed the benchmark
                  compensation amount.

  (Gov’t sur-reply at 2) Bottom line: unallowable salary cost used in a severance pay
  calculation results in unallowable severance costs – unallowable in, unallowable out.
  We deny DI’s appeal.
                                      CONCLUSION

           Based on the above we deny the appeal.

           Dated: September 29, 2020

                                                CRAIG S. CLARKE
                                                Administrative Judge
                                                Armed Services Board
                                                of Contract Appeals
(Signatures continued)

  5   We use the word “claim” not “pay.” DI is free to pay its CEO whatever it wants but
          just cannot ask the government to pay more than the cap.

                                              15
 I concur                                           I concur

 RICHARD SHACKLEFORD                                J. REID PROUTY
 Administrative Judge                               Administrative Judge
 Acting Chairman                                    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 Order of Dismissal of the Armed
Services Board of Contract Appeals in ASBCA No. 61950, Appeal of DynCorp
International LLC, rendered in conformance with the Board’s Charter.

       Dated: September 29, 2020

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

                                            16