Federal Circuit Decision Addressing Salary Costs Associated With Lobbying Activities Has Broad Implications

TAKEAWAYS

Contractors are subject to penalties if they include in-house salary costs associated with lobbying activities in their final indirect cost rate proposals. Such costs have been ruled "expressly unallowable." The Court's rationale—interpreting the definition of "expressly unallowable" at FAR 31.001 to not require that a cost be specifically named as unallowable—may be leveraged to broaden the scope of other expressly unallowable costs. Contractors should scrub their incurred cost proposals to exclude these costs, which they may have previously identified as allowable under a 2015 ASBCA decision. Imagine the following hypothetical: You are a Government contractor with cost-reimbursement contracts where the Government pays the costs of performance. You know that you cannot ask the Government to pay for lobbying costs (e.g., the costs of consultants who work to influence the outcomes of elections or legislation, and the costs of political contributions). Indeed, applicable regulations specifically call out such costs as being unallowable. Accordingly, you identify them as such in your incurred cost proposal. Suppose you also have employees who oversee some of these unallowable activities and interact with the consultants engaging them. In fact, if not for these unallowable activities, you would not have incurred a portion of these employees' salaries. Are such salary costs unallowable? And if they are, will you be subject to penalties for requesting that the Government reimburse you for these costs? These are the types of questions addressed by the U.S. Court of Appeals for the Federal Circuit in Raytheon Co. v. Sec. of Def., 2018-2371 (Oct. 18, 2019). The court's conclusions—based on a questionable interpretation of FAR 31.001—upend what had been established precedent at the Armed Services Board of Contract Appeals (ASBCA) ruling these costs were not expressly unallowable.

The FAR defines an "expressly unallowable cost" as "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." (See 48 C.F.R. § 31.001 and 48 C.F.R. § 9904.405-30(a)(2).) The ASBCA has long held that the Government bears the burden of proving that a cost is unallowable, and, with regard to costs that the Government claims are expressly unallowable, the burden is a difficult one. To meet its burden of proving a cost is expressly unallowable, the Government...