FAR Part 31: U.S. Court of Appeals Reversed ASBCA Decision on Cost Allowability

decision reversed on cost allowability
Kellianne Mayer, CPA, CPCM
February 9, 2023

Change is Inevitable

As professionals in the accounting industry, whether we are in public accounting, private industry or government, change is something to which we are accustomed. On one end of the spectrum, tax professionals deal with change every year. Sometimes changes in tax law come so late that the preparation of certain returns is delayed.

Financial statement auditors have it better because changes in Generally Accepted Accounting Principles occur, but the process takes years. Finally, at the far end of the spectrum are professionals working in government accounting who deal with the Federal Acquisition Regulation (FAR). Specifically related to FAR Part 31 cost principles – it seldom changes. But interpretations of the treatment of costs in Part 31 do change, and staying on top of those interpretations is essential in advising our clients on cost allowability.

The Court Case Issues

Certain cost principles listed within FAR Part 31 are generic or vague as to the final intended interpretation of the treatment of the specified costs for allowability; which in turn, can require research outside of the FAR when determining cost allowability on government contracts. Oftentimes, we seek additional guidance from the Defense Contract Audit Agency Selected Areas of Cost Guidebook, and/or we review court cases decided by the Armed Services Board of Contract Appeals (ASBCA). In January 2023, the U.S. Court of Appeals reversed a previous ASBCA decision on appeal in the case of Raytheon1 regarding the treatment of cost allowability related to the following two points:

  • The cost treatment of after-hours work of employees involved in lobbying activities.
  • The point at which economic planning costs related to future acquisitions or divestitures become unallowable.

This major decision reversal2, in favor of the Government, changes the current interpretation of unallowable costs for activities related to FAR 31.205-22 Lobbying and political activity costs and FAR 31.205-12 Economic planning costs. The decision reinforces advice we have given for years regarding timekeeping and policies, as well as changes our interpretation related to the treatment of economic planning costs surrounding acquisitions or divestitures going forward.

Timekeeping and Tracking Unallowable Labor Activities

The first issue related to recording of time points directly the largest area of cost reimbursed by the government on contracts – labor. The need for adequate timekeeping policies for all staff – regardless of job title – is essential. We have always advised that total time reporting is required for Government contracting, meaning that all hours worked must be recorded, regardless of whether or not they are direct or indirect or allowable or unallowable. Some clients, for example, as a matter of policy, do not record entertainment that occurs outside of normal business hours. This approach makes sense, and we have not challenged this concept.

However, the decision in the Raytheon case related to the recording of lobbying efforts after hours changes that practice and viewpoint from the point of what is allowable. According to the ASBCA decision, going back to our example, if entertainment is a part of an employee’s normal job responsibilities, then this time must be recorded and accounted for in the job cost system. The unallowable labor cost must be removed from overhead. The ruling now requires that all of your principals and project managers responsible for business development (or anyone else that engages in unallowable labor-type activities after hours) must record all of their time, even entertainment, lobbying, or other typically unallowable efforts that occur after hours.

Economic Planning and Merger and Acquisition Costs

The second issue is a major change in past court decisions regarding the allowability of certain economic planning costs related to future mergers and acquisitions (M&A) or divestitures. For years we have relied on the ASBCA’s previous decision affirming Raytheon’s “bright-line” practice when advising clients on the treatment of allowable and unallowable costs regarding their M&A activity. Previously, any M&A activity that occurred before the letter of intent (LOI) was considered allowable as economic planning (i.e., a specific “target” had not been identified for pursuit or a specific point for divestiture).

The recent court decision, however, has now reversed its previous determination that allowed the “target” or LOI designation, and instead affirms that economic planning related to any M&A activity (any time or costs incurred planning for or in the search for a target) is now unallowable. This decision is a significant change for some clients and completely alters how we are required to advise on cost allowability related to economic planning costs.

What We Recommend

We recognize that every firm will address these changes differently, but from a general perspective, we have recommendations for each issue.


Establish a policy for all employees (regardless of job title) to record ALL time worked (even if outside regular business hours), whether direct or indirect, and whether or not the cost is allowable.

M&A/Economic Planning

Establish an unallowable project to capture unallowable internal labor as well as unallowable external costs. From a timing perspective, this project should be established when planning an acquisition or divestiture, most likely after the Board of Directors agrees that a plan to pursue an acquisition or divestiture is appropriate.

Final Thoughts

So, as much as we may not like change, change does happen, and we adapt accordingly. At Stambaugh Ness, we are fortunate to have people who love to read court cases and keep up to date on changes that may impact our clients.

The FAR, related to Part 31 does not change often; however, the landscape around contracting with the Government does change through the court system.

SN’s Government Contracting team can assist you with your government contract services needs through our expert team of professionals. Our solutions position you for greater success in the government contracting process. Our proactive approach reaches beyond one-time services, expanding to long-term relationships.

Contact us today for more information!

For a deeper dive into this topic, we invite you to watch our on-demand webinar Federal Contracting: Timekeeping Internal Contracts. And if you would like to have a conversation about government contract services, our team is always available.

1 United States Court of Appeals for the Federal Circuit in Case Number 21-2304, Secretary of Defense v. Raytheon Company, Raytheon Missile Systems, decided January 3, 2023.

2 See previous cases Armed Services Board of Contract Appeals in Nos. 59435, 59436, 59437, 59438, 60056, 60057, 60058, 60059, 60060, and 60061.


Kelli Mayer, CPA