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Good morning,

Referring to ASBCA Nos.  57576, 57679, and 58290 Raytheon

For forward pricing I propose salaries after removing a percentage for unallowable cost.  I propose 100% of bonus costs (restricted stock) as allowable.

In proposing the 100% restricted stock cost I rely on FAR 31.201-6, Accounting for Unallowable Costs states "A directly associated cost is any cost that is generated solely …”.  “Solely” is what I am hanging my hat on. 


Whereas the ACO relying upon the ASBCA decision says that I should adjust the restricted stock allowability percentage equal to the same percentage used for proposed salaries.


Now I am rethinking myself after referring to FAR 31.201-6(2) Salary expenses of employees who participate in activities that generate unallowable costs shall be treated as directly associated costs to the extent of the time spent on the proscribed activity, provided the costs are material in accordance with subparagraph (e)(1) above (except when such salary expenses are, themselves, unallowable).




Thank you

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1. You seem to be on the right track regarding what CAS 405 says about "directly associated unallowable costs". A cost is a directly associated unallowable cost when it is incurred solely as a result of the unallowable activity. Without checking, I think there may be an Illustration at 405-60 that would help. Regardless, think of it this way: a lobbyist travels to Washington to meet with some Staffers. The labor is unallowable, of course. But so is the airfare, even though it was the lowest cost fare and meets all the requirements of 205-46 -- because the airfare would not have been incurred "but for" the lobbying activity. That's what directly associated means.

2. The 205-6 language you quoted refers to the cost of salaried employees. If I hire a Program Manager for an annual salary of $175,000, then that salary is what I'm going to pay. Mostly that PM charges time to programs. But once in a while, the PM has to review some technology related to a possible corporate acquisition, which is otherwise unallowable. But I didn't hire the PM as a M&A person, that's just a very small part of her job. That 205-6 language says I don't need to have the PM charge an unallowable account for the time spent performing due diligence, unless it's material in amount. A very long time ago DOD issued guidance that said anything less than 30% was immaterial. (Not sure people in power today would still agree.)

With respect to your question, here is my view based on the info you provided. For FPRP purposes you only need to remove unallowable labor for salaried employees if expected to be material in amount. Separately, you do not need to prorate restricted stock awards that are otherwise allowable, especially if you book the incentive comp to a non-labor account. However, if you book it to a Fringe Benefit pool, and you allocate Fringes to labor, then of course a proportionate share of Fringes needs to follow the unallowable labor.

Hope this helps.

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What does an employee have to do to earn a bonus?  If the bonus is earned because of unallowable activity, such as planning a merger or acquisition, then the bonus costs for that activity would be unallowable.  If the bonus is earned for something like business development the cost of which is allowable, the bonus would be allowable if it met the criteria of 31.205-6.

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