ASBCA 62458

ARMED SERVICES BOARD OF CONTRACT APPEALS Appeal of - ) ) Left Hand Design Corporation ) ASBCA No. 62458 ) Under Contract Nos. N00014-10-C-0306 ) FA8651-08-C-0155 ) APPEARANCE FOR THE APPELLANT: Mr. Lawrence M. Germann President APPEARANCES FOR THE GOVERNMENT: Samuel W. Morris, Esq. DCMA Chief Trial Attorney Matthew D. Bordelon, Esq. Trial Attorney Defense Contract Management Agency Chantilly, VA OPINION BY ADMINISTRATIVE JUDGE YOUNG Left Hand Design Corporation (LHDC or appellant) appeals a claim by the Defense Contract Management Agency (DCMA or the government) for penalties for expressly unallowable costs. We have jurisdiction under the Contract Disputes Act, 41 U.S.C. §§ 7101-7109. The parties elected to proceed under Board Rule 11, decision on the record, and have submitted a joint stipulation of undisputed material facts (JSF) in support of their Rule 11 briefs. For the reasons discussed below, we deny the appeal. FINDINGS OF FACT 1. On April 3, 2017, LHDC submitted its Fiscal Years (“FYs”) 2009 through 2015 final indirect cost rate proposals (“FICRPs”) to Andrea Arapkiles, the Administrative Contracting Officer (“ACO”) (R4, tab 3; JSF ¶ 1). 2. On August 8, 2018, DCAA released the Independent Audit Report on Left Hand Design Corporation’s Proposed Amounts on Unsettled Flexibly Priced Contracts for FYs 2009, 2010, 2011, 2012, 2013, 2014, and 2015 (“the Audit Report”) (R4, tabs 8-9; JSF ¶ 5). 3. In the Audit Report, DCAA questioned several costs as unallowable and subject to penalty for FYs 2009 through 2015 (R4, tab 9; JSF ¶ 6).  4. On July 24, 2019, in an email to Mr. Lawrence Germann, LHDC’s president, ACO Arapkiles attached a spreadsheet identifying the questioned costs by fiscal year, types of costs, and the Federal Acquisition Regulation (FAR) cost principle associated with each of the costs. The ACO requested that Mr. Germann review the spreadsheet and respond whether the costs identified were expressly unallowable, and whether she should waive any penalties; the ACO also requested that LHDC provide any additional information she should consider prior to making a final penalty assessment determination. (R4, tab 10 at G- 000136-37; JSF ¶ 7) 5. On July 25, 2019, LHDC responded that it had misclassified certain costs in Schedule C of its FY 2011 FICRP and provided their correct classification (R4, tab 4; JSF ¶ 8). 6. In an email to ACO Arapkiles on August 6, 2019, Mr. Germann stated: Appreciation Expenses, a.k.a. Interest: We were not aware that the appreciation of the stock options that were issued as deferred compensation for our employees was an unallowable expense. .... At this time, we accept that the 2011 appreciation payments are unallowable expenses, but we request a waiver of the penalties associated with this error because we were not aware of this difference between IRS and FAR rules regarding them and because we made no financial gain from this error. Since this type of transaction (expense from stock option appreciation) had not occurred previously, we had no experience with it. Federal Income Tax: We have tried to determine if our bookkeeper, Perrin Elisha, had known that interest paid and federal income tax were unallowable expenses. The spreadsheet that Perrin generated to estimate our overhead and G&A rates on an ongoing basis, along with the earlier ICE reports, included interest paid and federal income tax along with allowable overhead expenses, although there were very little, if any, of either of these in LHDC’s early years. Perhaps the fact that these amounts were negligible 2  explains why DCAA did not teach us earlier that these are unallowable expenses. .... Summary: . . .