Kellogg Brown & Root Services, Inc.

ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of -- )

)

Kellogg Brown & Root Services, Inc. ) ASBCA No. 59557

)

Under Contract No. DAAA09-02-D-0007 )

APPEARANCES FOR THE APPELLANT: Jason N. W orkmaster, Esq.

Raymond B. Biagini, Esq.

Herbert L. Fenster, Esq.

Erin B. Sheppard, Esq.

McKenna Long & Aldridge LLP

Washington, DC

APPEARANCES FOR THE GOVERNMENT: E. Michael Chiaparas, Esq.

DCMA Chief Trial Attorney

Srikanti Schaffner, Esq.

Trial Attorney

Defense Contract Management Agency

Carson, CA

OPINION BY ADMINISTRATIVE JUDGE O'SULLIVAN

ON APPELLANT'S MOTION FOR AN ORDER DIRECTING

THE GOVERNMENT TO FILE THE COMPLAINT

Appellant Kellogg Brown & Root Services, Inc. (KBR) moves the Board to

direct the government to file the complaint in this appeal. The government opposes.

For the reasons that follow, appellant's motion is granted. The government is directed

to file its complaint no later than 30 days from the date of this opinion.

STATEMENT OF FACTS FOR PURPOSES OF THE MOTION

Contract No. DAAA09-02-D-0007, known as the LOGCAP (Logistics Civil

Augmentation Program) Support Contract, was awarded to KBR (then known as Brown

& Root Services) on 14 December 2001 (app. supp. R4, tab 9 at 002). Pursuant to the

contract, KBR and other contractors were tasked to provide selected services to

commanders in support of military and non-military (humanitarian and other) operations

(id. at 0058). The costs at issue in this appeal were incurred by KBR in its performance

of numerous task orders issued to it under the LOGCAP contract (R4, tab 2).

KBR was required by the contract, which incorporated Federal Acquisition

Regulation (FAR) Clause 52.228-3, WORKERS' COMPENSATION INSURANCE (DEFENSE

BASE ACT) (APR 1984 ), to provide workers' compensation insurance for its own

employees and to flow down this requirement to its subcontractors (app. supp. R4,

tab 9 at 040). Because it was responsible for ensuring that subcontractor employees

were covered, and because the contract work was being performed in parts of the

world where such insurance might not be easily accessible, KBR elected to provide

Defense Base Act (DBA) insurance for its subcontractors to ensure compliance (app.

supp. R4, tab 70, ex. A). Under this program, subcontractors provide KBR with

estimated payroll for each subcontract enrolled into the program. A separate DBA

policy is issued for each subcontract under the master policy. The subcontractors do

not reimburse KBR for the premiums and do not include DBA insurance costs in their

billings. KBR does not perform reviews of subcontractor payroll due to a lack of

certified payroll availability, especially in the Middle East. Through 2005, KBR had

provided insurance coverage to 94,405 subcontractor employees who were Third

Country Nationals and 81,239 subcontractor employees who were Host Country

Nationals. (Id. at 2298-99).

KBR's FY 2007 incurred cost proposal was initially submitted on 30 June 2008

(app. supp. R4, tab 91) and after several revisions, a final proposal was submitted on

8 June 2012 (app. supp. R4, tab 102). The incurred cost proposal included the cost of

subcontractor DBA premiums paid by KBR.

On 9 May 2014, DCAA provided the draft results of the audit with respect to

FY 2007 subcontractor DBA insurance to KBR via email (R4, tab 3). KBR formally

responded to the draft results by letter dated 19 May 2014 (R4, tab 6). The audit

report itself was finalized and issued on 30 May 2014 (R4, tab 7).

The draft audit results and final audit report do not vary in any substantive respect

on the issue of subcontractor DBA insurance costs. The final audit report states:

We take no exception to the proposed premium

rates used to calculate the subcontractor DBA insurance

costs. During our examination of the subcontractor DBA

insurance costs, the contractor stated it does not "true-up"

subcontractor DBA insurance costs based on actual

subcontractor labor. KBRSI asserts it does not have

visibility of the subcontractors' actual payroll records.

However, based on KBRSI's subcontractor DBA insurance

policy, the insurance company had the rights [sic] to verify

the subcontractors' remuneration. KBRSI was unable to

confirm the insurance company (AIG) or insurance broker

(Aon) verified the subcontractors' remuneration.

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The contractor is in noncompliance with

FAR 31.201-2(d) - Determining Allowability which states:

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 contracting officer may disallow all or part of a

claimed cost that is inadequately supported.

In addition, the contractor is in noncompliance with

(i) FAR 31.205-19( d)(l) because it did not measure,

assign, and allocate costs in accordance with 48 CFR

9904.416, and (ii) CAS 416-40(b) because it did not

allocate insurance costs to cost objectives based on the

beneficial or causal relationship between the insurance

costs and the benefiting or causing cost objectives. We

separately reported this potential CAS 416 noncompliance

in Audit Report No. 3321-2013H19200004, dated May 1,

2013 (previously provided to your office). The resolution

of this CAS 416 non-compliance is currently in process

and will be processed in accordance with FAR 30.605.

We question $33,851,898 by applying an audit

calculated 43 percent decrement factor to the subcontractor

DBA insurance costs of $78,725,344 proposed under GL

Account No. 600106 - Insurance - Special Property

Damage - Primary because the computation of

subcontractor DBA insurance costs was not based on the

actual subcontractor labor incurred during the year. Our

decrement factor is based on subcontract Master

Agreement GC02HU-VC-ML 5051 for the period October

2006 to September 2007.

In addition, there is an existing noncompliance

with CAS 406.40(b), CAS 416.40(a) and (b), and

CAS 416.50(b)(2) reported in Audit Report

No. 3321-2007K19200001, dated April 20, 2009. The

cited noncompliant practices relate to KBRSI immediately

expensing DBA insurance premiums and allocating these

expenses over open task orders (TOs) without regard to the

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period of performance of the TO. The results of the Rough

Order Magnitude (ROM) were issued under DCAA MFR

3321-2011K49200901, dated February 3, 2012. The

estimated impact of the noncompliant practice from Policy

Years (PY) 2002 to 2009 is $34,422,957. The costs

reported in this audit have not been impacted by this

CAS 406/416 noncompliance because the CAS 406/416

noncompliance and the resulting impact will be processed

in accordance with FAR 30.605.

(R4, tab 7 at 574-75)

In the following section of the audit report, entitled "basis of Contractor's

Cost," DCAA notes that the subcontractor DBA insurance premiums are based on

estimated payroll of covered workers for the policy term (R4, tab 7 at 576). Further,

DCAA notes that KBR is invoiced by the insurer quarterly based on said estimated

payroll, and this premium amount is charged to open task orders at the time the invoice

is received (id.). The audit report additionally notes that KBR's subcontractor DBA

insurance costs are supported by "bordereaux" files 1 compiled using the DBA

applications submitted by the subcontractors (id.). After the subcontractor's

application is submitted by KBR to the broker, the broker returns a confirmation of

coverage to KBRI who, in tum, provides it to the subcontractor (id.). Subsequently,

the same estimated payroll amounts are used to allocate premium costs to the various

Work Breakdown Structure (WBS) elements (id.).

In the next section, entitled "Audit Evaluation," DCAA states that it was able

to: (1) reconcile the proposed FY 2007 subcontractor DBA insurance cost to invoices

received; (2) verify the installment payments made; (3) verify that KBR solicited

adequate competitive quotes to ensure the premium was reasonable; and (4) verify that

the proposed costs were supported by valid insurance policies (R4, tab 7 at 576).

Finally, DCAA explains that it calculated the 43 percent decrement by

examining one ofKBR's subcontract Master Agreements and comparing the

"estimated DBA premium" per the Master Agreement (a premium amount calculated

by multiplying the labor hours invoiced under the Agreement for the period October

2006 to September 2007 by the Iraq/Kuwait premium rate) to the DBA premium

amounts invoiced by the insurer and paid by KBR. (R4, tab 7 at 576-77)

In its written response submitted 19 May 2014, KBR took issue with the audit

report claim that it had not adequately accounted for the subcontractor DBA costs or

1

According to KBR, bordereaux files list all sub-policies issued for a subcontractor's

labor force and any changes to that labor force (R4, tab 6 at 479).

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provided adequate documentation. It stated that it had provided "all pertinent

documentation" including the paid invoices, the bordereaux files, the insurance

policies, and the insurance renewal files, to support the premium pricing, and that

DCAA had not questioned the cost based on lack of documentation. (R4, tab 6 at 4 79)

KBR also disputed the allegations of CAS noncompliance, and asserted that the

method DCAA used to calculate the 43 percent decrement was unreasonable for a

number of reasons, including the fact that the decrement was calculated from a single

Master Agreement yet applied to all costs incurred in FY 2007; moreover, DCAA was

decrementing the actual total cost incurred and paid in FY 2007 using an estimate of

payroll data from one master agreement. (Id. at 480) KBR pointed out that it had

saved the government money by administering the DBA insurance between the

subcontractors and the insurance carrier, as it would have been more expensive if the

subcontractors had obtained and administered their own DBA policies (id. at 481 ).

The record in this appeal reflects that DCAA was aware by 2007 that

subcontractor DBA insurance premiums were based on estimated subcontract payroll

and were not subject to retroactive adjustment based on actual subcontractor payroll

costs. For instance, on 24 August 2007, DCAA's Gregory Hartsoe asked:

Why are adjusting entries being made to policy

8349311, 8 to 12 months after its coverage period closed?

My understanding was that subcontract DBA was not

subject to final payroll audit due to proprietary restrictions

on subcontractor financial data.

Additional data: Please provide the supporting premium

calculation worksheets as previously requested. These

worksheets should show the estimated subcontractor

payroll and applicable premium rate applied.

(Id. at 2379-80) KBR's Erin Wilkerson responded on 28 August 2007:

That is correct, however adjustments are not being made

due to "actual payroll" submissions. Adjustments are being

made [as] a result of amended applications correcting

contract amounts, performance periods, possibly overlooked

change orders, terminated contracts, etc - all for compliance

reasons and record housekeeping. If this is a practice that

needs to be discontinued, we need to discuss.

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I am continuing to research the support behind the

invoices, and will send you the data or updates as soon as I

get information.

(Id. at 23 78-79) In September 2007 this further email exchange took place between

Mr. Hartsoe and Ms. Wilkerson:

[DCAA:] Again, my understanding was that subcontract

DBA policies were billed at estimated payroll amounts and

never subsequently adjusted for actual costs incurred on

the subcontracts.

KBR RESPONSE: That is correct- as stated below,

the adjustments are not for "actual payroll" but rather

for amended applications. Examples include correcting

contract amounts, performance periods, possibly

overlooked change orders, terminated contracts, etc -

all for compliance reasons and record housekeeping.

[DCAA:] Since this post close adjustment process seems

to be a constantly recurring item, I would like detailed

breakout of just what is being done on a recurring basis to

cause such adjustments to be made for each quarter.

KBR RESPONSE: Please reference reasons stated

above -this would be on a subcontract by subcontract

basis. New DBA applications are processed for each

change in estimated payroll. For example, if a change

order was issued that increased a scope of work

requiring additional labor, the estimated payroll amount

would increase, and the total DBA premium would have

to be adjusted to cover these additional workers.

Therefore, this detailed breakout would be at a change

order level on a subcontract by subcontract basis.

The record does not contain any indication that DCAA objected to the

above-described quarterly adjustments to premium costs prior to the time KBR entered

into the FY 2007 subcontractor DBA policy. Nor does the record indicate that DCAA

objected to the clearly described practice of basing subcontractor DBA insurance

premiums on estimated subcontractor payroll prior to the time KBR entered into the

FY 2007 subcontractor DBA policy. In 2008, when the same DCAA auditor requested

supporting documentation for FY 2007 subcontractor DBA insurance costs, he

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specifically requested "listing of the subcontracts being covered and estimated payroll

for the period for each" (app. supp. R4, tab 89 at 2617-18).

KBR appeals from an administrative contracting officer's (ACO's) final

decision, dated 26 June 2014, demanding payment of $33,851,868 in allegedly

unallowable Defense Base Act (DBA) insurance costs billed to the government. The

final decision sets forth the following as the sole basis for the demand:

This is my final decision asserting a Government

claim for $33,851,868, pursuant to FAR 52.233-1,

Disputes, due to the inclusion ofunallowable Fiscal Year

(FY) 2007 direct costs claimed and billed to the

Government. My decision was based on FAR 31.201-2,

Determining Allowability, due to KBRSl's computation of

subcontract DBA insurance costs claimed and billed under

contract no. DAAA-09-02-D-0007. The cost billed was

not based on actual subcontractor labor incurred during

FY 2007. The following documents are referenced and

relied upon in making this decision:

(a) DCAA Audit Report No. 3321-2007K10100001

dated May 30, 2014

(b) KBRSl's response dated, May 19, 2014

(R4, tab 8)

KBR argues that requiring the government to file the complaint in this case is

warranted since the contracting officer's final decision only perfunctorily refers to

FAR 31.201 and the fact that KBR' s billed subcontractor DBA insurance costs were

not based on actual subcontractor labor, but does not provide any additional detail and

does not specify what portions of the "referenced and relied upon" documents are

relevant to the decision. KBR asserts that unless the government is required to file the

complaint, it will have been excused from "having to proffer a basic legal and factual

rationale for its demand of the significant sum at issue in this Appeal, resulting in a

[KBR] complaint simply disagreeing with the bare-bones conclusions of the Final

Decision and a Government answer simply denying these ... positions. Such pleadings

would do little, if anything, to advance this Appeal." (App. mot. at 2-3)

The government asserts in opposition to KBR's motion that: (1) the basis for

the government's claim is evident from numerous communications that took place

prior to the issuance of the ACO's final decision; (2) "KBR is well aware that the basis

for the Government's claim is that KBR has failed to show that DBA premiums based

on estimated, rather than actual subcontractor labor, are reasonable"; (3) it is KBR that

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bears the burden of proving the claimed costs to be reasonable pursuant to FAR

31.201-3(a); and (4) the facts bearing on the reasonableness of the claimed costs, i.e.,

"the information regarding the basis upon which the DBA insurance premiums were

calculated and paid," are within KBR's possession and are not known to the ACO

(gov't reply). 2

DECISION

Under the unique procedural requirements of the Contract Disputes Act (CDA),

all claims, whether contractor or government claims, must be the subject of a

contracting officer's final decision. 41 U.S.C. § 7103. The contractor, however, is the

only party who may initiate proceedings at the Board, 41 U.S.C. § 7104, and Board

Rule 6(a) requires the appellant to file the complaint in an appeal. If the contractor

appeals from a final decision on a government claim, the contractor typically presents

in its complaint enough information about the government claim to form a sufficient

predicate for the government's answer and allow for adequate framing of the issues.

Thus, the fact that the appeal involves a government claim is not enough, in and of

itself, to justify requiring the government to file the complaint.

In appropriate cases, the Board may exercise its discretion to require the

government to file the complaint, if doing so will facilitate efficient resolution of the

appeal. BAE Systems Land & Armaments Inc., ASBCA No. 59374, slip. op.

(18 November 2014); Beechcraft Defense Co., ASBCA No. 59173, 14-1 BCA

ii 35,592. Such situations can arise if relevant information concerning the basis for the

claim resides with the government, not the contractor. In BAE Systems, for example,

the contracting officer issued a "Defective Pricing Demand Letter" based on a DCAA

audit report alleging defective pricing, but the demand letter did not purport to be a

contracting officer's final decision. BAE filed a certified claim challenging the

government's demanded price adjustment, and over a year later the contracting officer

issued a final decision denying BAE' s claim. The Board granted BAE' s motion,

noting that BAE's "claim" was more in the nature of a defense against the

government's claim of defective pricing, and further stating:

[T]he contracting officer's final decision does not explain

in any depth why it rejected the contractor's arguments,

except with occasional summary remarks. In these

particular circumstances, proceedings would be more

2

In addition to KBR's motion, the government's reply, and KBR's response thereto,

KBR filed a Notice of Supplemental Authority referencing this Board's

decision in BAE Systems, cited herein, and the government filed a reply to

appellant's notice. All of these filings and the exhibits thereto have been

considered by the Board in reaching its decision.

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efficient if the Board could start with a government

articulation of the basis for its determination of defective

pricing, rather than appellant's speculation about the basis

for the government's assertions.

BAE Systems, slip. op. at 3 (citation omitted). In Beechcraft, the contractor appealed

from a DCMA contracting officer's final decision finding its accounting practices

noncompliant with Cost Accounting Standard (CAS) 402. The government

acknowledged that the appeal involved a government claim, but argued that appellant

was in the best position to assert facts establishing its compliance with the standard. The

Board held that since the burden of establishing noncompliance was on the government,

the proceedings would be facilitated by the government's filing an initial pleading setting

forth the facts and rationale in support of its claim. 14-1 BCA at 174,395.

In this case, the government has asserted that $33.9 million in subcontractor

DBA insurance premium costs incurred by KBR in performing the LOGCAP contract

are unallowable, yet it has not articulated a basis for its claim. The Board has

examined the ACO's decision which does not explain the rationale for finding these

costs unallowable. The final decision includes the summary sentence: "The cost

billed was not based on actual subcontractor labor incurred during FY 2007" but does

not explain why that fact, in the contracting officer's opinion, renders the costs

unallowable. It is important to note the costs billed were KBR's actual incurred

premium costs, as confirmed by the DCAA audit.

The final decision also states that it references and relies on the DCAA audit

report and KBR's response to that report. The Board has examined the audit report,

which states that it is disallowing the costs based on KBR's failure to "true up" its

subcontractor DBA insurance costs based on actual subcontractor payroll, and that this

failure to "true-up" is a noncompliance with FAR 31.201-2(d), which requires

contractors to maintain records sufficient to demonstrate that claimed costs have been

incurred, are allocable to the contract, and comply with applicable cost principles.

However, the audit report does not explain what significance, if any, actual

subcontractor labor costs (even if such information were available to KBR) would

have to the issue of the allowability of KBR's subcontractor DBA insurance costs,

which were based on estimated subcontractor payroll and not subject to adjustment

based on actual subcontractor payroll.

The government argues that KBR is "well aware" that the basis for the

government's claim is that "KBR has failed to show that DBA premiums based on

estimated, rather than actual subcontractor labor, are reasonable;" that the burden is on

a contractor to prove the reasonableness of incurred costs once challenged by the

government; and that KBR, not the ACO, possesses the facts bearing on the issue of

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reasonableness, i.e., "the information regarding the basis upon which the DBA

insurance premiums were calculated and paid." But neither the ACO's final decision

nor the DCAA audit report articulates a reasonableness challenge to KBR's incurred

DBA insurance costs. To the contrary, the audit report affirmatively states that KBR

solicited adequate competitive quotes to ensure the premium was reasonable, and the

operative FAR provision on cost reasonableness, FAR 31.201-3, is not cited in either

the audit report or the ACO's decision in connection with this issue. Moreover, the

record would seem to indicate that DCAA, and therefore the government, received all

the information it requested regarding "the basis upon which the DBA insurance

premiums were calculated and paid."

Finally, the government asserts that the basis for its claim is clear from "the

communications between the parties" leading up to the issuance of the final decision

on 26 June 2014. The Board has therefore examined all of the communications

between the parties in the record before it. None of these communications articulates a

basis for the government's claim.

Simply stated, appellant should not have to speculate about the basis for the

government's claim in its complaint. Thus, we find that proceedings in this appeal

would be facilitated by the government's filing the initial pleading setting forth the

basis or bases for its claim that KBR's FY 2007 subcontractor DBA insurance costs

are unallowable.

CONCLUSION

The Board grants appellant's motion to direct the government to file the

complaint in this appeal. The government is directed to file the complaint no later than

30 days from the date of this opinion. Appellant's answer shall be due 30 days

following receipt of the government's complaint.

Dated: 22 January 2015

(Signatures continued)

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I concur I concur

RICHARD SHACKLEFORD

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 Opinion and Decision of the

Armed Services Board of Contract Appeals in ASBCA No. 59557, Appeal of Kellogg

Brown & Root Services, Inc., rendered in conformance with the Board's Charter.

Dated:

JEFFREY D. GARDIN

Recorder, Armed Services

Board of Contract Appeals

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