Exelis, Inc., ASBCA No. 58966

Background

Exelis (intermediate home office formerly part of ITT) paid long-term incentive plan (LTIP) TSR awards in cash to executives based on a relative total shareholder return (TSR) metric comparing Exelis stock price changes and dividends to peers over a three-year period. 2004–2006 TSR payout occurred in January 2007.
Exelis included TSR awards and a $7,050 holiday-band entertainment cost in its FY 2006 indirect cost proposal, which it certified as a final indirect cost proposal under FAR 52.216-7(d)(2)(i).
DCAA/DCMA audits (2006–2012) reviewed FY 2004–2006 submissions; DCAA/DCMA concluded the TSR awards were calculated from securities price changes and dividends and thus unallowable under FAR 31.205-6(i); entertainment costs were unallowable under FAR 31.205-14.
DCMA CACO assessed a penalty under FAR 42.709 (implementing 10 U.S.C./41 U.S.C. penalty provisions) for including expressly unallowable costs in a final indirect cost proposal; Exelis appealed to the ASBCA.
Exelis argued TSR awards were not covered by FAR 31.205-6(i) because they were paid from a predetermined award pool (an incentive, not stock-based/deferred compensation), pointed to prior government audit silence/communications and other contractors’ differing treatments, and sought waiver of the entertainment penalty under FAR 42.709-5(c).

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Are Exelis's TSR cash awards allowable under FAR 31.205-6(i)?	TSR is an incentive based on a preset award pool and thus not compensation "based on changes in prices of corporate securities"; therefore allowable.	TSR payouts are calculated/valued from stock-price changes and dividends (TSR metric) and fall within FAR 31.205-6(i).	Held: Unallowable. TSR awards are calculated/valued based on securities price changes and dividend payments and are expressly unallowable under FAR 31.205-6(i).
Is the contracting officer’s penalty for including expressly unallowable costs in a final indirect cost proposal proper?	Penalty improper because government positions changed and audits earlier did not reject TSR; also submission was not a final indirect cost rate proposal.	Exelis certified the submission as a final indirect cost proposal under FAR 52.216-7; the costs were expressly unallowable, so penalty authorized under FAR 42.709/ statute.	Held: Penalty proper. The 2006 submission was a final indirect cost proposal and penalties were correctly imposed for expressly unallowable costs.
Was waiver of the entertainment-cost penalty required under FAR 42.709-5(b) ($10,000 threshold)?	Entertainment cost was only $7,050, below $10,000, so waiver required.	Waiver threshold applies to total expressly unallowable costs in the submission, not a single category; total exceeded $10,000.	Held: No waiver. Total expressly unallowable costs (TSR + entertainment) exceeded $10,000.
Was waiver of the entertainment-cost penalty required under FAR 42.709-5(c) (inadvertent inclusion + internal controls)?	Exelis had policies/training/controls (later-dated materials) demonstrating inadvertence and controls to preclude such inclusions.	Exelis failed to provide contemporaneous evidence to the contracting officer showing controls in place at the time; submitted documents post‑dating the proposal and inadequate pre‑existing documents.	Held: No waiver. Exelis did not satisfy FAR 42.709-5(c) because it did not provide evidence to the contracting officer that effective policies/controls existed when the proposal was submitted.

Key Cases Cited

M Eagles Tool Warehouse, Inc. v. Fisher Tooling Co., 439 F.3d 1335 (Fed. Cir. 2006) (use of "such as" in regulation indicates examples are non‑exhaustive)
Ratzlaf v. United States, 510 U.S. 135 (U.S. 1994) (courts rely on plain text of an unambiguous regulation rather than regulatory history)
Frederick v. Shinseki, 684 F.3d 1263 (Fed. Cir. 2012) (same principle regarding reliance on plain regulatory language)