Just when you thought you were done with 2022’s year-end work, a recent court decision changed expectations regarding cost allowability and reinforced those related to timekeeping. In January 2023, the Federal Circuit Court found that the Armed Services Board of Contract Appeals (ASBCA) ruled inconsistently with the Federal Acquistion Regulation (FAR) and improperly interpreted Raytheon Co’s corporate practices and policies. This allowed Raytheon Co to overcharge the government in lobbying and merger and acquisition (M&A) activities.

While the judges explicitly state that policies interpreting FAR provisions are acceptable, they recognize that company-specific policies can misinterpret them. Context remains an essential factor in how your company interprets and puts into practice the FAR. A policy related to certain activities and timekeeping is insufficient to make the related costs incurred allowable.  

This ruling may impact your company’s policies and procedures related to government contracting in two major ways: timekeeping and mergers and acquisitions (M&A) unallowable time.  

Companies must keep track of and report total time for everyone. This aligns with Aldrich’s best practices regarding timekeeping: ensure all employees–regardless of position and whether the hours worked are direct, indirect, allowable, or unallowable–accurately record and submit their worked hours in a timely manner. Even when salaried employees work in excess of their standard hours, those hours must be recorded to allocate labor dollars properly. 

The Raytheon case calls attention to the expectation that all labor involved in an employee’s normal job responsibilities be recorded, even if outside of technical office hours and regardless of allowability. If work completed after hours can be considered part of an employee’s normal job responsibilities (like lobbying, entertainment, etc.), then this work must be accounted for and be properly allocated.   

M&A costs are considered unallowable from the moment a company begins to seriously consider merging with, acquiring, or being acquired by another company. The potential target does not have to be identified to make the activity unallowable. Previously, many companies interpreted the standard to mean that M&A activities that occurred before the letter of intent were allowable; however, the Federal Circuit Court disagrees.  

The case’s decision brings more risk into the equation because companies must individually determine when their economic planning becomes M&A activity. From the moment they decide to move forward with such activities, unallowable costs likely start to be incurred, which could be well before any letters of intent are in play.  

How do you comply? It’s all about your policies and vetting them against the FAR. Employees must distinguish between economic planning activities and when those become potential reorganization activities. Having project and time codes that provide that distinction will also support proper allocation. 

Aldrich CPAs and Advisors are here to help you implement policies and procedures compliant with court rulings, such as the Raytheon case. We understand that juggling these changes is difficult, especially in an ever-evolving landscape. 

If you’re interested in updating your policies and procedures, let’s talk.