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The government disallowed the contractor’s pension costs, finding the pension calculation had been based on unallowable compensation. The ASBCA sided with the government. The contractor could not use unallowable compensation as a basis for allowable pension costs.
Appeal of Northrop Grumman Corporation, ASBCA No. 62165
- The Government’s Claim – Northrop Grumman filed an Incurred Cost Submission, which sought reimbursement for certain pension plans. The pension costs were based on the actual compensation of the plan participants. Some of these participants, however, received compensation in excess of the FAR’s limitation on compensation. This meant the pension benefits calculation for certain individuals was based on unallowable compensation. The government disallowed pension costs based on salaries that exceeded the compensation limit.
- Directly Associated Costs – The government contended under the FAR, when an unallowable cost is incurred, its directly associated costs are also unallowable. Northrop’s pension costs were directly associated with unallowable compensation and thus were also not allowable. Northrop reasoned its pension costs were not directly associated with unallowable costs; rather, they were associated with an allowable pension plan. The ASBCA found this argument unpersuasive, noting Northrop created the pension plan. It drafted the plan so that a portion of costs was based on unallowable salary. If Northrop had not paid salary above the caps, it would not have paid the challenged pension costs. The pension costs were directly associated with unallowable costs.
- Defined Benefit v. Defined Contribution – Northrop argued the FAR’s salary cap didn’t apply because that provision only referred to defined contribution plans. Northrop reasoned its pension plan was a defined benefit plan. The board rejected this argument. Defined benefits plans are not mentioned in the FAR salary cap, because unlike contribution plans, defined plans are not based on compensation. Nevertheless, the fact that defined plans are not mentioned in the FAR provision doesn’t mean the compensation cap didn’t apply when Northrop sought to recover the costs of the plan.
- Allowability v. Allocability – Northrop contended the relevant inquiry should only be whether it had complied with the cost accounting standards in calculating its pension costs. The board said this was the wrong way to look at it. The cost accounting standards determine cost allocability—that is, whether the cost could be attributed to a contract. Costs may be allocable, but that doesn’t mean the government needs to allow them.
- Reasonableness – Aside from the FAR provision, the board noted the costs should be disallowed for the simple reason that they were unreasonable—they had been derived from unallowable compensation. A contractor cannot use unallowable salary as a basis for calculating allowable pension costs.
The contractor is represented by Thomas A. Lemmer and K. Tyler Thomas of Dentons US LLP. The government is represented by Samuel W. Morris and Kara M, Klass of the Defense Contract Management Agency.
–Case summary by Craig Lachance, Senior Editor
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