Expressly Unallowable Costs - Raytheon Court of Appeals Decision Broadens the Definition

The U.S. Court of Appeals for the Federal Circuit just upheld Raytheon's appealed a decision by the ASBCA (Armed Services Board of Contract Appeals) that unallowable salary costs associated with Raytheon's lobbying activities were 'expressly unallowable' under FAR 31.205-22 and thus subject to penalty under FAR 42.709-1(a)(1) (known as level 1 penalties).

Raytheon submitted its 2004 incurred cost proposal in 2005. DCAA (Defense Contract Audit Agency) completed its audit in 2006 and found, among other things, over $220 thousand of expressly unallowable lobbying salary costs. In 2011, DCMA (Defense Contract Management Agency) demanded that Raytheon repay the Government for these costs and additionally, assessed a penalty and interest under FAR 42.709-1(a)(1).

Raytheon appealed to the ASBCA and lost on this issue. Its argument was that salary costs associated with lobbying activities were not specifically referenced in FAR 31.205-22 and accordingly, were not "expressly unallowable". The ASBCA upheld the DCMA decision, finding that lobbying costs are subject to penalty because "costs associated with certain named lobbying activities are stated to be unallowable under FAR 31.205-22" and "they are ... expressly unallowable. (That Decision can be accessed here). The ASBCA also noted that FAR 31.201-9(a) and (e)(2) makes salary costs of employees who participate in unallowable activities are also expressly unallowable as directly associated costs of that activity.

Raytheon then appealed the ASBCA decision to the Court of Appeals. Raytheon argued that salary costs of employees who participate in lobbying activities are not expressly unallowable under a cost principle in FAR. Raytheon contended that an item of cost must be mentioned or identified by name to be expressly unallowable and that the generic language of costs associated with lobbying activities is insufficient. The Court of Appeals found no basis for such an interpretation and explains, in detail, why it came to that conclusion (The full Court of Appeals decision can be accessed here).

Perhaps a fallout of this decision will be that the Government may renew its aggressiveness on calling out costs as expressly unallowable and subject to penalties. The penultimate paragraph of the decision reads:

Finally, Raytheon relies on a decision in a prior proceeding where the Board held that neither bonus and incentive compensation costs nor compensation cost is specifically named and stated as unallowable under the cost principle (in FAR 31.205-22), nor are such costs identified as unallowable in any direct or unmistakable terms. That decision is not binding on this court, and in any event, is contrary to the plain language of Subsection 22 to the extent that it concludes that salaries in the form of bonus and incentive compensation for lobbying and political activities are not "expressly unallowable".

After the decision ASBCA decision referenced here, DCAA ratcheted back its guidance on what constitutes expressly unallowable costs. Perhaps we will soon see that guidance amended again.

DCAA Updates Its Guidance on Identifying Expressly Unallowable Costs

DCAA (Defense Contract Audit Agency) has updated its audit guidance for identifying expressly unallowable costs. This update comes as a result of recent court cases and wording changes to the FAR (Federal Acquisition Regulations) and DFARS (DoD FAR Supplement).

The issue of expressly unallowable costs is significant because such costs are subject to a penalty if found by an auditor in an incurred cost claim or any other billing to the Government. It has also been controversial because contract auditors often clash as to whether a particular cost is expressly unallowable. DCAA's position historically has been that even if the cost principle does not include the word "unallowable" or the phrase "not allowable" does not mean that costs questioned based on that cost principle are not expressly unallowable. That was before the Raytheon case however, where the ASBCA (Armed Services Board of Contract Appeals) ruled that costs must be specifically named and stated as unallowable in order for them to be considered expressly unallowable.

The new guidance pars the listing of expressly unallowable costs from 110 examples to 91 cost principles identifying expressly unallowable costs. It also updates the guidance so as to be consistent with the Raytheon case. It now reads:

In order for a cost to be expressly unallowable, the cost principle must state in direct terms that the costs are unallowable, or leaves little room for interpretation or differences of opinion as to whether the particular cost meets the allowability criteria. 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 updated guidance can be downloaded here.

Waivers of Penalties for Unallowable Costs

Expressly unallowable costs are particular items or types of costs which under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable (FAR 31.001). Contractors who include expressly unallowable costs in their final indirect cost rate proposals are subject to penalty equal to the amount of the expressly unallowable costs (FAR 42.709-1). We have written extensively about expressly unallowable costs in past years and how DCAA (Defense Contract Audit Agency) continuously tries to expand the definition to make almost any cost exception an "expressly unallowable" costs with the ASBCA countering their push by narrowing the definition and throwing out the Agency's charges. For a recap of these issues, see "Expressly Unallowable Costs - ASBCA Narrows the Definition" and follow the various links.

The distinction between "unallowable costs" and "expressly unallowable costs" is significant. The latter carries penalties while the former classification does not. The broad purpose of the penalty provisions was to ensure that contractors, rather than the Government, bear the burden of assuring that contractor submissions for reimbursement of costs on Government contracts do not include unallowable costs. Congress was concerned with ending the "cat-and-mouse game", namely, "a game in which the cost of an item is submitted regardless of whether it's allowable, and the burden is placed on the Government auditors to identify and disallow the item(s).

The contracting officer can (and must) waive penalties in certain situations. The contracting officer must waive any penalties if the contractor withdraws the proposal before the Government formally initiates an audit, the amount of the unallowable costs which are subject to the penalty is less than $10 thousand, or the contractor demonstrates, to the contracting officer's satisfaction, that (i) it has established policies and personnel training and an internal control and review system that provides assurance that unallowable costs subject to penalties are precluded from being included in the contractor's final indirect cost rate proposal and (ii) the unallowable costs subject to the penalty were inadvertently incorporated into the proposal (i.e. their inclusion resulted from an unintentional error, notwithstanding the exercise of due care (see FAR 42.709-5).

In a recent ASBCA (Armed Services Board of Contracts Appeals) decision (Energy Matter Conversion Corporation (EMC2), ASBCA No. 61583), a contractor attempted to avoid penalties with other rationale.

EMC2 argued that the Government failed to inform EMC2 that it was disallowing legal costs for 2010/2011 until after it submitted its 2012/2013 incurred cost submissions. The Board was not persuaded stating that EMC2 cannot avoid the penalty by placing the burden of identifying and disallowing legal costs on the Government.

EMC2 further asserted that it had updated its accounting policies in 2017 but provided no evidence to support the assertion. Even if it had, that would not be a basis for a penalty waiver because those policies would have had to have been in place at the time it submitted its erroneous incurred cost proposal in 2016.

Thirdly, EMC2 argued that it had underbilled the Government. The Board found no evidence that EMC2 underbilled but also noted that underbilling was not one of the enumerated bases for penalty waiver.

Fourth, EMC2 pointed to the fact that the contracting officer waived the penalty in prior years. The Board stated that a contracting officer's decision is not binding in any subsequent proceeding.

Finally, EMC2 areued that it should be liable for only 55 percent of the penalty reflecting an apportionment of legal costs attributable to its "success" in the investigation. The Board noted that FAR 42.709-5 does not authorize such apportionment and added that the Court of Appeals has rejected apportionment arguments in similar circumstances.

There is one aspect to the penalty provision that seems very unfair to contractors - the idea that there is no waiver if the expressly unallowable costs did not result in increased costs to the Government. Say for example, a contractor spent $2 million on an SBIR contract for $750 thousand. Because the amount incurred was so far in excess of the contract amount, the contractor did not perform adequate screening of unallowable costs. The contract auditor audited the full $2 million and found expressly unallowable costs of $20 thousand - not nearly enough to bring the $2 million incurred below the $750 thousand contract amount. The contract auditor recommended penalties be assessed but thankfully in this real case, the contracting officer exercised its discretion not to assess penalties. But the contracting officer was certainly with his rights to do so.

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.

Failure to Report IR&D Expenditures May Render Such Costs Expressly Unallowable

Last week we spent a couple of postings on a proposal by DoD to require contractors to coordinate their IR&D (Independent Research & Development) plans with the Government (see: DoD Wants Contractors to Disclose Their IR&D Activities Before Incurring Any Costs) and the current rules that require contractors allocating more than $11 million of IR&D expenditures to Government contracts to report their expenditures in an online database (see: Disclosure of IR&D Projects Prior to Incurring Costs). The current rules have just begun to come into play - the DoD gave contractors until the end of 2014 to submit their initial reports.

The data submitted in on-line reporting facility are estimates and there is no expectation that they reconcile to actual costs. However, there is an expectation that the projects be reported in the database and this database will be accessible to both DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency) for their review.

This reporting requirement should not be taken lightly. It is a condition for the allowability of those IR&D costs. DCAA, for one, will be testing contractor projects against the reporting database and will, at a minimum, question any costs not found in the database. DCAA's guidance on the matter reads as follows:

If the contractor fails to input the IR&D information into the DTIC database, the costs are expressly unallowable; audit teams should question the costs and recommend application of penalties. If the team identifies significant expressly unallowable costs, consider reporting a noncompliance with CAS 405, Accounting for unallowable costs. 

So, in addition to questioning unreported IR&D costs, DCAA will recommend that the Contracting Officer level penalties for claiming expressly unallowable costs and if the particular contractor is subject to full or modified CAS (Cost Accounting Standards), will cite them in non-compliance with CAS 405 (which will add interest to the amount disallowed).

Expressly Unallowable Costs - ASBCA Narrows the Definition

Expressly unallowable costs are particular items or types of costs which under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable (FAR 31.001). Contractors who include expressly unallowable costs in their final indirect cost rate proposals are subject to penalty equal to the amount of the expressly unallowable costs (FAR 42.709-1). The Government, and in particular DCAA (Defense Contract Audit Agency) are usually very aggressive in making a connection between unallowable costs they find during an audit and the "expressly" unallowable provisions of FAR. By doing so, the Agency can recommend that contracting officers assess penalties, and the Government recoups more money from contractors. Refer to our five-part series on expressly unallowable costs from 2013.

Late last year and earlier this year, DCAA (Defense Contract Audit Agency) issued a pair of audit guidance memorandums on the subject of identifying unallowable costs that are "expressly" unallowable. The first one was dated December 18, 2014, subject: Audit Alert Distributing a Listing of Cost Principles That Identify Expressly Unallowable Costs. This memorandum contained a 32 page matrix of FAR cost principles that identified expressly unallowable costs. The second was issued on January 7, 2015, subject Audit Alert on Identifying Expressly Unallowable Costs. This guidance differentiated between unallowable costs stated in direct terms and unallowable costs not stated in direct terms. Either way, according to DCAA, the unallowable costs were "expressly" unallowable. We wrote about these two memorandums when they first appeared on DCAA's website. The first posting was dated January 28, 2015 and entitled Cost Principles that Identify Expressly Unallowable Costs. The second was the following day and entitled Identifying Expressly Unallowable Costs. At the time of our blog posts, we expressed our concern that DCAA was taking liberties with the FAR cost principles by calling out unallowable costs not stated in direct terms as expressly unallowable. The crux of the Agency's position was that if the cost principle left little room for differences of opinion as to whether the particular cost meets the allowability criteria, any unallowable costs were "expressly" unallowable.

The ASBCA (Armed Services Board of Contract Appeals) recently issued a decision that should cause DCAA to rethink its guidance (Raytheon Company ASBCA Nos. 57576, 57679, 58290 dated June 26, 2015).

In the Raytheon case, the Government contended that Raytheon failed to identify and exclude from its cost submissions, the cost of bonus and incentive compensation (BAIC) for those persons engaged in activities that generate unallowable costs under several cost principles (i.e. FAR 31.205-1, -22, -27, and -47) and that are expressly unallowable under these principles. Under the Government's logic, these directly associated costs were expressly unallowable because they related to expressly unallowable activities.

The Board ruled that BAIC cost is an item or type of cost, but it is not specifically named and stated as unallowable under FAR. While portions of salaries and fringe benefits are stated as unallowable, the Government, as claimant, has not show that BAIC constitutes either one. The Board believed that BAIC costs are not expressly unallowable costs.

The key point from the Raytheon decision is that costs must be specifically named and stated as unallowable in order for them to be considered expressly unallowable. This differs significantly with DCAA's position that if the cost principle leaves little room for differences of opinion as to whether the particular cost meets the allowability criteria, the costs are expressly unallowable.

If you are facing penalties for expressly unallowable costs, we recommend you consider whether such costs meet the tight FAR definition of expressly unallowable costs, as confirmed by the ASBCA in the Raytheon case.

Health Care Benefits Paid to/for Ineligible Dependents

We've discussed the topic of Government contractors paying for health care benefits (or health care costs) for ineligible dependents. In many cases, dependents who once received health benefits become ineligible because of divorce, because children "age out" of their parent's plans, because they are no longer students, or any number of other factors, depending upon the contractors' plans.

Such costs have always been considered unallowable but in 2009, DCAA (Defense Contract Audit Agency) upped the ante and began calling such costs not only unallowable but unallowable subject to penalties. Specifically, the 2009 guidance on dependent health care costs stated that costs that do not meet the "expressed requirements" for allowability are "expressly unallowable".  DCAA audits revealed some large contractors who inappropriately charged the Government for health benefit costs for dependents that were no longer eligible for such benefits under the contractors' plans. The guidance required that penalties should be assessed on any such benefit payments passed on to the Government.

That audit guidance ignored the second part of the definition of "expressly unallowable" cost which required that for a particular cost to be expressly unallowable, it must be specifically named and stated to be unallowable. As DCAA tried to apply the guidance, considerable uproar among contractors ensued. Finally in 2012, the Director of Defense Pricing had enough and reversed the DCAA position. In reversing the position however, the Director stated that he would pursue a DFARS change to make such payments expressly unallowable. That happened in December 2013 when DFARS 231.205-l(m)(1) was amended to explicitly state that fringe benefit costs that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable.

We would have thought that the issue of whether benefits paid to ineligible dependents being subject to penalties would have been resolved. But the issue still comes up from time to time during audits. There is no question that such costs incurred today, if claimed, are subject to penalty. However, the DFARS provision applies to contracts awarded after the effective date of the standard, in this case December 6, 2013. So, those penalties would not apply to any fringe benefit costs paid to ineligible dependents prior to that date although the costs would still be unallowable. But because DCAA is still winnowing away its backlog of over-aged incurred cost submissions from periods prior to the DFARS change, some auditors are not making the connection between the years under audit and the effective date of the standard.

We would guess that most contractors by now have set up internal controls to ensure that they are notified when there is a change is dependency status. More than a few contractors have initiated an annual survey to make certain that employees have not overlooked their responsibilities of notifying HR whenever there is a change in status.

Identifying Expressly Unallowable Costs

Yesterday we wrote about recent DCAA guidance telling its auditors how to spot "expressly unallowable costs" and turn those costs into a money-making deal for the U.S. Government. Earlier this month, DCAA (Defense Contract Audit Agency) "enhanced" that guidance in order to assist auditors in making determinations whether specific cost principles identify expressly unallowable costs. A copy of the "enhanced" guidance can be downloaded here.

According to DCAA's enhanced audit guidance, the overarching criteria for determining whether a cost is expressly unallowable is this:

In order for a cost to be expressly unallowable, 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. Thus, a cost principle makes costs expressly unallowable if (i) it states in direct terms that the costs are unallowable, or leaves little room for differences of opinion as to whether the particular cost meets the allowability criteria and (ii) it identifies the specific cost or type of costs in a way that leaves little room for interpretation.

There are many costs included in the FAR section on cost principles (FAR 15, Part 31) that leaves little room for interpretation as to whether the cost is expressly unallowable. Take FAR 31.205-51, Costs of alcoholic beverages, for example. The regulation states that the costs of alcoholic beverages are unallowable. Therefore, the cost of alcoholic beverages are expressly unallowable and contractors who fail to exclude such costs from their billings or incurred cost submissions, face the prospect of having the costs questioned and then being subjected to penalties. There are a lot of cost principles are not that clear or straight-forward and that's where one can expect that DCAA will take aggressive positions on whether such costs are expressly unallowable - especially given this new emphasis on identifying expressly unallowable costs.

In many situations, cost principles do not state in direct terms whether costs are unallowable. But, according to DCAA, the "... mere fact that the cost principle does not include the word unallowable or phrase not allowable does not mean that costs questioned based on that cost principle are not expressly unallowable." DCAA imparts a lot of weight on an old ASBCA case (Emerson Electric Co., ASBCA No. 30090, 87-1 BCA 19478) where the Board ruled that although the regulation did not state that foreign selling costs were unallowable, the only logical interpretation of the language was that they were expressly unallowable. DCAA loves the phrase "the only logical interpretation" because they use it over and over again throughout the guidance.

There is one aspect of the guidance that offers sound advice to auditors. It reads:

... the audit team will have to make a determination regarding whether the cost principle, used as the basis for questioning the costs, identifies expressly unallowable costs. In order for the cost to be expressly unallowable, it is not enough that our logical interpretation of the language is that the questioned costs are expressly unallowable. The Government must establish that it was "unreasonable under all the circumstances for a person in the contractor's position to conclude that the costs were allowable." Therefore, in situations where a cost principle does not specifically state that the applicable cost is unallowable or not allowable, the audit team will have to employ critical thinking when determining whether the cost principle identifies expressly unallowable costs. The audit team will need to analyze whether the cost principles identifies a cost or type of cost clearly enough that there cannot be a reasonable difference of opinion as to whether a questioned cost meets the criteria specified.

One aspect of penalties is that DCAA is advisory to the contracting officer. DCAA cannot levy penalties. Contracting officers have the authority to waive penalties and often do waive penalties, especially when they are immaterial or the administrative cost of recovering them would exceed whatever amounts could be recovered. Additionally, auditors and contracting officers often do not agree on whether costs are questionable and even if they do agree that a cost is unallowable, often disagree on whether the cost is expressly unallowable.

Cost Principles that Identify Expressly Unallowable Costs

The Defense Contract Audit Agency (DCAA) just published a listing cost principles found in the Federal Acquisition Regulations (FAR) and the DoD FAR Supplement (DFARS) that identify expressly unallowable costs. Expressly unallowable costs of course are subject to penalties if, for example, a Government contractor fails to exclude them from its annual incurred cost proposal. DCAA's new 32 page listing is sure to be controversial because not everyone believes as DCAA believes when it comes to whether certain costs are expressly unallowable or merely unallowable. Keep in mind that this listing represents DCAA's "view" of costs that are expressly unallowable and while in many cases such views are not controversial (e.g. the cost of alcoholic beverages), there are some items where reasonable parties may disagree as to whether they are "expressly" unallowable.

Penalties are nothing to take lightly. The amounts can add up and become rather punitive. For information on penalties on unallowable costs, please refer to our five part series on the subject beginning here.

The new DCAA audit guidance, which can be accessed here is referred to as a tool to help determine whether statements from the cost principles that are used as a basis to question costs are expressly unallowable. Auditors are cautioned however not to blindly follow the listing but to exercise auditor judgment when evaluating the costs. But, in the same paragraph and in an almost contradictory manner, the guidance emphatically states that "If an audit team questions costs, based on a statement from a cost principle that is on the list, it should treat the questioned costs as expressly unallowable and subject to penalties." What happened to the exercise of judgment?

The guidance then cautions that the 32 page listing is not comprehensive. It states that "The fact that a statement in a cost principle is not included on the list does not mean that costs questioned, based on that statement, are not expressly unallowable. There could be situations where costs questioned could be expressly unallowable based on the facts and circumstances of that particular situation". Here, DCAA is encouraging its auditors to find examples to add to the listing.

There are many examples throughout the listing where DCAA has taken liberty with the precise wording of the cost principle. Take "advertising" for example. The cost principle (FAR 31.205-1) does not use the term "unallowable" or "not allowable". However, DCAA determined that the costs were expressly unallowable based on a 25 year old ASBCA (Armed Services Board of Contract Appeals) decision from 1987. Perhaps so, but there are many FAR experts out there that might disagree with that position.

Get ready for some fun and games.

Rent Paid to Related Parties

There's one final lesson we want to draw out of the ASBCA (Armed Board Services Board of Contract Appeals) decision that we've been discussing this week, ASBCA No. 57795, Thomas Associates, Inc. Thomas had included expressly unallowable costs in its 2004 incurred cost proposal. The auditor discovered the costs during the audit and the contracting officer levied a penalty. Thomas lost its appeal of the contracting officer penalty determination.

One of the expressly unallowable costs included in Thomas's incurred cost submission was facility rent paid to a related party; Thomas's president, Ms Thomas. To support the reasonableness of those rental payments, Thomas provided rental information on comparable properties in the area which, unsurprisingly, were higher than what Tomas was paying.

The problem here for Thomas was that FAR 31.205-36, Rental Costs, limits allowable costs to actual cost of ownership for related party transactions. The pertinent section of FAR 31.205-36 reads::

(3) Charges in the nature of rent for property between any divisions, subsidiaries, or organizations under common control, to the extent that they do not exceed the normal costs of ownership, such as depreciation, taxes, insurance, facilities capital cost of money, and maintenance (excluding interest or other unallowable costs pursuant to Part 31), provided that no part of such costs shall duplicate any other allowed costs...

We frequently encounter similar situations where small businesses (and some not-so-small businesses) lease facilities from related parties. It is surprising the number of times that these businesses have the mistaken notion that they can claim "market rates" for rental payments.

One final note, "normal costs of ownership" by definition includes facilities capital costs of facilities (FCCM). When tallying the normal cost of ownership, many contractors fail to include FCCM. As we've discussed here on this blog, FCCM, in many cases, can be significant, especially when real property is involved.

Excuses that Didn't Work

For the past two days, we've been discussing various aspects of the Thomas Associates (TAI) decision from the ASBCA (Armed Services Board of Contract Appeals). This case involved the inclusion of expressly unallowable costs in the contractors annual incurred cost claim and the eventual assessment of penalties and interest for doing so.

The ASBCA did not buy the contractor's argument that the costs were not expressly unallowable but just plain unallowable. Expressly unallowable costs carries a penalty while non-expressly unallowable costs do not. The contractor found out the hard way just how significant these penalties can become. Penalties and interest totaled 45 percent of the expressly unallowable amounts included in the incurred cost claim.

In its complaint, the contractor requested that the penalties be waived. FAR 42.709 allows the Government to waive penalties under three circumstances.

1. The contractor withdraws its proposal before the Government begins its audit
2. The amount charged to Government contracts is less than $10 thousand
3. The contractor can show that it had good policies and procedures for identifying and excluding unallowable costs from its proposal but there was an unintentional error notwithstanding the exercise of due care.

ASBCA denied TAI's waiver request.

The contractor first argued that the unallowable costs, individually, did not exceed $10 thousand. The ASBCA rejected the argument stating that the $10 thousand threshold is an aggregate amount.

The contractor then argued that the penalties represented a financial hardship. The Board rejected this on the basis that "there is no known regulatory or decisional authority for considering "financial hardship" as a basis to waive penalties".

Finally, the contractor argued that it had not been audited previously and that this was a "learning experience". The ASBCA ruled that "learning experience" was not a condition for waiver of penalty and there was no evidence that the contractor submitted the expressly unallowable costs "inadvertently" or due to "unintentional error".