Government Looses Another "Expressly Unallowable" Case.

Luna Innovations, a Defense contractor, appealed to the ASBCA (Armed Services Board of Contract Appeals) a final decision from the DCMA (Defense Contract Management Agency) contracting officer determining that (i) Luna had included unallowable employee stock option costs in its final indirect rate proposal and (ii) the inclusion of those stock options represented expressly unallowable costs and therefore subject to penalties.

The Board ruled that the stock options were unallowable because they did not meet the precise requirements of FAR 31.205-6(i). We'll discuss that aspect tomorrow. The Board also ruled that these were expressly unallowable costs and therefore not subject to penalties. The Board also stated that even if they were expressly unallowable, the contracting officer should have waived the penalties. We'll explain.

An expressly unallowable cost is a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable (FAR 31.001). If a contracting officer determines that a contractor has submitted an expressly unallowable cost for reimbursement then the contractor shall be assessed a penalty (FAR 52.242-3(d). As the assessment of a penalty is a Government claim, the Government bears the burden of proof.

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 of costs, so 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. Moreover, the determination as to whether a cost is expressly unallowable will depend on the clarity and complexity of the particular cost principle and the circumstances involved.

In the Luna case, the Government asserts that the employee stock option costs were expressly unallowable because FAR 31.205-6(i)(1) specifically names and states that compensation calculated or valued based on changes in the price of corporate securities is unallowable. But the method Luna used (the so-called "Black-Scholes model) is a question of first impression. The fact that there could be a reasonable difference of opinion regarding the costs, the Board held that it was not unreasonable under all the circumstances for Luna to have claimed the employee stock options costs and therefore, the costs were not expressly unallowable.

You can read the full ASBCA decision here.