                 ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of--                                    )
                                               )
Northrop Grumman Corporation                   )       ASBCA No. 57625
                                               )
Under Contract No. N68936-05-C-0059            )

APPEARANCES FOR THE APPELLANT:                         Terry L. Albertson, Esq.
                                                       Stephen J. McBrady, Esq.
                                                       J. Catherine Kunz, Esq.
                                                         Crowell & Moring LLP
                                                         Washington, DC

APPEARANCES FOR THE GOVERNMENT:                       E. Michael Chiaparas, Esq.
                                                       DCMA Chief Trial Attorney
                                                      Robert L. Duecaster, Esq.
                                                       Trial Attorney
                                                       Defense Contract Management Agency
                                                       Manassas, VA

                   OPINION BY ADMINISTRATIVE JUDGE DELMAN

      In this appeal, Northrop Grumman Corporation (appellant or NGC) disputes the
government's disallowance of costs for post retirement benefits (PRB) 1 under
FAR 31.205-6(o). A hearing was held on entitlement only. We have jurisdiction under
the Contract Disputes Act (CDA), 41 U.S.C. §§ 7101-7109.

                                   FINDINGS OF FACT

       1. In or around December 1990, the Financial Accounting Standards Board
(FASB) issued a rule or statement entitled "Employers' Accounting for Postretirement
Benefits Other than Pensions," identified in this record as Financial Accounting Standard
(F AS) 106, which required all companies that were covered by FASB requirements,
including appellant, to account for PRB costs using a specific accrual cost method
(compl. and answer~ 7). Thereafter, NGC used an accrual cost method under FAS 106
to measure and assign PRB costs for financial reporting purposes starting in the early
1990s, and continued to do so in its financial reporting at all times relevant in this appeal.

1
    NGC had a number of Plans that provided for PRB to retirees. The Plan in issue here
       was known as the "Northrop Retiree Medical and Life Plan" or the "Northrop
       Main Plan," and all future references to PRB costs or Plan costs herein refer to
       costs under this Plan.
Such a measurement required application of various actuarial assumptions or projections,
including consideration of anticipated future health care cost increases. (Tr. 1/20)

        2. Prior to 1995 and until2006, the relevant years, for Federal income tax and
government cost accounting purposes, NGC chose to measure, assign and fund PRB costs
for the Plan using a different cost accrual method, conforming with the relevant
provisions of the Internal Revenue Code pursuant to the Deficit Reduction Act of 1984
(DEFRA). The DEFRA methodology was also based upon actuarial assumptions or
projections, but unlike FAS 106, it did not include consideration of anticipated future
health care cost increases. (Tr. 1120, 22-23) The result of this difference, all other things
being equal, is that annual costs under DEFRA tend to start lower and increase over time
while those costs computed under FAS 106 tend to start higher and decrease over time
(compl. and answer~ 8).

        3. With respect to the Federal Acquisition Regulation (FAR) cost regulations,
prior to 1991 there was no specific provision in the FAR addressing PRB costs. After
promulgation ofFAS 106, subsection (o) was added to FAR 31.205-6 in 1991. This new
subsection permitted accrual accounting for PRB costs, but did not specify FAS 106 or
any other particular method of accrual accounting. It also required PRB costs assigned to
the current year to be timely funded; those costs assigned to the current year but not
funded or otherwise liquidated by tax return time were not allowable in any subsequent
year. See FAC 90-5, effective 25 July 1991, 56 Fed. Reg. 29124 (June 25, 1991).

       4. Effective 27 February 1995, the government revised FAR 31.205-6(o). Insofar
as pertinent FAR 31.205-6(o)(2), as amended ("Section ( o)(2)"), stated that in order to be
allowable, PRB costs calculated on an accrual basis must be measured and assigned
according to Generally Accepted Accounting Principles (GAAP):

                     (2) To be allowable, PRB costs must be reasonable and
              incurred pursuant to law, employer-employee agreement, or
              an established policy of the contractor. In addition, to be
              allowable, P RB costs must also be calculated in accordance
              with paragraphs (o)(2)(i), (ii), or (iii) of this section.



                             (iii) Accrual basis. Accrual costing other than
                     terminal funding must be measured and assigned
                     according to Generally Accepted Accounting
                     Principles and be paid to an insurer or trustee to
                     establish and maintain a fund or reserve for the sole
                     purpose of providing PRB to retirees. The accrual must
                     also be calculated in accordance with generally


                                             2
                    accepted actuarial principles and practices as
                    promulgated by the Actuarial Standards Board.
                    [Emphasis added]

See 59 Fed. Reg. 67045 (December 28, 1994). It is undisputed and we find that the
"Generally Accepted Accounting Principles" or GAAP referred to in (iii) above refers to
FAS 106.

       5. FAR 31.205-6(o)(3) ("Section ( o)(3 )") continued the same requirement for
timely funding ofPRB costs:

                     (3) To be allowable, costs must be funded by the time
             set for filing the Federal income tax return or any extension
             thereof. PRB costs assigned to the current year, but not
             funded or otherwise liquidated by the tax return time, shall
             not be allowable in any subsequent year.

       6. Notwithstanding the new FAR requirement in Section (o )(2) that "Accrual
costing other than terminal funding must be measured and assigned according to
Generally Accepted Accounting Principles," appellant continued to measure, assign, and
fund its PRB costs in accordance with DEFRA for government contract purposes
(tr. 1/18) (see CAS disclosure statements below).

      7. NGC regularly filed disclosure statements in accordance with CAS
requirements. During the period 1995-2006, NGC's Part VII disclosure statements
stated as follows: "This part covers the measurement and assignment of costs for
employee pensions, post retirement benefits other than pensions (including post
retirement health benefits), certain other types of deferred compensation, and insurance."
Part VII was a multi-page document that contained many disclosures on the above
subjects. Appellant regularly disclosed therein that it accounted for PRB costs in the
Plan in accordance with DEFRA (see below). (App. supp. R4, tab 6; tr. 1/35-36, 43-45)
The government reviewed these disclosure statements for purposes of general adequacy
and compliance. See FAR 30.202-7(a)(b). With certain reservations taken, the
government did not note any noncompliance with the CAS or the FAR (see below).

      8. For example, by cover letter to the DCMA Defense Corporate Executive
(DCE) dated 19 February 1997, appellant provided an updated Part VII using a new
"form" for its disclosures and providing additional information required by the new form
on actuarial and accounting practices, including those of a new division, ESSD.
Appellant's disclosure statement identified, amongst other disclosures, its use of
DEFRA for PRB costs of the Plan but erroneously described the Plan as one which used
"cash" accounting. The government brought this matter to appellant's attention,
indicating that the accounting method should have been properly described as "accrual"


                                           3
 accounting. (App. supp. R4, tabs 6-7) The government did not note any noncompliance
 with the FAR (tr. 1149).

       9. On 10 March 1998, NGC submitted a revised Part VII disclosure statement
 regarding deferred compensation and insurance cost based upon certain changes
 recommended by DCAA. There is no showing that DCAA's recommendations involved
 the disputed issues here. Appellant disclosed among its other disclosures that it
 measured and assigned PRB costs for its Plan in accordance with DEFRA.
 (App. supp. R4, tab 10 at 0281) On 13 April 1998, the DCMA DCE issued a letter to
 NGC stating as follows:

                       I have noted no instances of noncompliance with
                applicable Cost Accounting Standards or with FAR Part 31
                cost principles. However, instances of noncompliance not
                detected during this review may be discovered during future
                review ofyour cost accounting practices. These disclosed
                practices shall not by virtue ofsuch disclosure be deemed
                proper, approved, or agreed to practices for pricing
                proposals or accounting and reporting contract performance
                cost data. [Emphasis added]

(!d. at 0265)

       10. Similarly, appellant submitted a Part VII update on 5 April1999
(app. supp. R4, tab 11) and another update dated 14 February 2000 for deferred
compensation and insurance costs, both of which disclosed NGC's use ofDEFRA for
Plan PRB costs. In response to the latter update, the DCE issued a letter to NGC dated
20 April 2000 stating as follows:

                       In response to your letter dated February 14, 2000,
                subject: Part VII Disclosure Statement Update and in
                accordance with FAR 30.602-3, I have reviewed your
                Disclosure Statement, Part VII revision. Based on the
                comments provided in DCAA Audit Report No.
                4721-2000F19100002, dated 28 March 2000, I have
                determined that your revised Disclosure Statement Part VII
                adequately describes your revised cost accounting practices.
                Except for previously reported conditions, no instances of
                noncompliance with applicable Cost Accounting Standards or
                FAR Part 31 cost principles were noted. A cost impact
                proposal is not required.




                                             4
                    This Disclosure Statement revision includes general
             information on new Northrop Grumman pension plans and to
             eliminate discontinued and merged pension plans. No
             changes to cost accounting practices as defined under FAR
             52.230-2(a)(2) were noted.

                    These disclosed practices shall not by virtue ofsuch
             disclosure be deemed proper, approved, or agreed to
             practices for pricing proposals or accounting and reporting
             contract performance cost data. [Emphasis added]

(App. supp. R4, tab 12 at 0306)

        11. On 30 July 2003, NGC submitted another Part VII update. According to
appellant's cover letter: "This revision reflects the administrative modifications and
clarifications of disclosure primarily attributed to Northrop Grumman Corporation's
Pension, Post Retirement Benefits and Savings Plans as agreed to with the DCAA"
(app. supp. R4, tab 25 at 0508). There is nothing of record indicating that these "DCAA
agreements" involved the subject disputed costs. Among many other disclosures, this
updated disclosure statement described two PRB plans, one that measured and assigned
costs in accordance with DEFRA (the Plan in issue here) and one that measured and
assigned costs in accordance with FAS 106. In a 26 August 2003 letter to appellant the
DCE stated in part as follows:

             Based on a review made pursuant to FAR 30.602-3, I have
             determined that your revised Disclosure Statement Part VII,
             dated April 1, 2003 and revised July 29, 2003, adequately
             describes your cost accounting practices. As the practices are
             described, there are no instances of noncompliance with
             applicable Cost Accounting Standards or FAR Part 31 cost
             principles noted. The revisions are effective April 1, 2003.

             The subject disclosure statement was revised to reflect
             changes and other revised disclosures regarding the disclosure
             of the cost accounting practices of the recently acquired
             Mission Systems (MS) and Space Technology (ST) business
             units and other revised disclosures.

(App. supp. R4, tab 26 at 0476)

      12. In 2004, NGC made additional revisions to its disclosure statement "to reflect
recent modifications in the company's pension plans, employee group insurance plans,
employee stock ownership plans, and other insurance programs" (app. supp. R4, tab 33


                                           5
 at 0538). As far as the record shows, none of these revisions involved the subject
 disputed costs. Among its disclosures, appellant noted its use of the DEFRA
 methodology for the Plan PRB costs. The government's response, dated 28 June 2004,
 was similar to that made in its 26 August 2003 letter above (app. supp. R4, tab 40).

       The 2006 Changes

         13. In 2006, NGC decided to modify its PRB Main Plan to limit the impact of
 future increases in medical costs by capping its subsidy of retiree health care costs at
 fixed values. It also sought to obtain an advance agreement from the government
 accepting its prior use and its continued use ofDEFRA. By letter to the DCE dated
 16 May 2006, NGC stated that if the government was unable to enter into such an
 agreement, NGC would seek, as an alternative, an advance agreement that would
 document its conversion to FAS 106 accounting with amortization of the PRB transition
 liability over a 15-year period, with the government agreeing not to "disallow any future
 PRB costs on the basis ofDEFRA method of accounting" used in prior years (R4, tab 3
 at 16).

      14. By letter dated 25 May 2006, the DCE declined to enter into an advance
 agreement sanctioning the use ofDEFRA as requested by appellant (R4, tab 5).

        15. By letter to the DCE dated 13 June 2006, NGC presented in more detail its
 alternative proposal, which provided for the implementation ofFAS 106 for government
 contract purposes, effective 1 July 2006, as follows:

              The revised draft is intended to accomplish the following four
              objectives: (1) It provides for the implementation ofFAS 106
              for Government contract purposes effective July 1, 2006.
              (2) It provides for measurement of the transition obligation as
              of the date FAS 106 is implemented for Government contract
              purposes. (3) It provides for measurement of annual PRB
              costs in accordance with FAS 106, and for amortization of the
              transition obligation [the disputed costs here] over future
              accounting periods using the FAS 106 delayed recognition
              method. (4) It recognizes that the change is desirable.
              [Emphasis added]

(R4, tab 6 at 31)

       16. By letter to NGC dated 24 August 2006, the DCE also declined to enter into
this advance agreement:




                                            6
             Effective February 27, 1995, FAR 31.205-6(o)(2)(iii)
             required contractors to use the FAS 106 accounting method to
             accrue cost of PRB plans. FAR 31.205-6(o)(3) requires that,
             to be allowable, PRB costs must be funded by the contractor's
             federal income tax return due date. However, Northrop
             Grumman's accounting method failed to fund the entire
             amount of the FAS 106 costs measured and assignable to
             prior accounting periods. These unfunded prior period costs
             are not allowable in future accounting periods.

(R4, tab 8) By letter to the government dated 2 October 2006, appellant disputed the
DCE's position that the unfunded, prior period PRB costs were unallowable (R4, tab 9).

       17. By letter dated 23 October 2006, appellant advised the DCE of preliminary CAS
basis dollar impact changes by sector and year resulting from the soon-to-be-announced Plan
design change that capped retiree health care costs (R4, tab 10). On 3 November 2006, NGC
also formally notified the DCE in writing ofNGC's switch from DEFRA to FAS 106
(R4, tab 11 ).

       18. On 8 June 2007, DCAA issued a report addressing NGC's post retirement
benefit expense projections and allocations for 2007-2011 forward pricing. Insofar as
pertinent, DCAA provided the following audit evaluation:

                     FAR 31.205-6(o) provides the contractor with a choice
             of three accounting methods to measure and assign PRB costs
             to accounting periods: (1) pay-as-you-go method, (2)
             terminal funding method, or (3) accrual accounting method.
             The only acceptable accrual accounting method is the method
             in accordance with generally accepted accounting principles,
             i.e., FAS 106, as specified by FAR 31.205-6(o)(2)(iii), which
             states that "Accrued PRB costs shall be- (A) Measured and
             assigned in accordance with generally accepted accounting
             principles. However, the portion of PRB costs attributable to
             the transition obligation assigned to the current year that is in
             excess of the amount assignable under the delayed
             recognition methodology described in paragraphs 112 and
             113 ofFinancial Accounting Standards Board Statement 106
             is unallowable." From February 27, 1995 until November 1,
             2006, the Northrop Retiree Medical and Life Plan costs were
             not measured and assigned in accordance with FAR
             31.205-6(o)(2)(iii). [Emphasis added]




                                            7
                        Prior to November 1, 2006, Northrop Grumman used a
                method and assumptions in compliance with DEFRA to fund
                the PRB costs. This has caused the historical PRB costs to be
                less than the amount that would have been measured and
                assigned in accordance with FAR 31.205-6(o)(2)(iii).
                Northrop Grumman failed to fund the entire amount ofFAS
                106 measured PRB costs and, as a result, the unfunded FAS
                106 costs are not allowable in future accounting periods, in
                accordance with FAR 31.205-6(o )(3), which states "To be
                allowable, PRB costs must be funded by the time set for filing
                the Federal income tax return or any extension thereof....
                PRB costs assigned to the current year, but not funded, paid
                or otherwise liquidated by the tax return due date as extended
                are not allowable in any subsequent year." ...

                        We calculated total unallowable costs of $3 77.7
                million from February 27, 1995 through October 31,2006 as
                the difference between the DEFRA funded amounts and
                amounts calculated using the FAS 106 methodology ....

(R4, tab 14 at 74)

       19. On 26 July 2007, the DCE issued a Notice of Intent to Disallow the disputed,
unfunded PRB costs at issue. This notice adopted the DCAA position above. (R4, tab
15) NGC submitted its objections to this Notice on 21 September 2007 (R4, tab 16). The
government issued its Final Determination, dated 9 April2008, reaffirming its position
(R4, tab 17).

        20. On 11 July 2008, the DCAA issued Audit Report No. 4731-2008F17900002,
"Review of Northrop Grumman Corporation's June 2008 Briefing in Response to the
Final Determination on the Allowability of Northrop Retiree Health Plan Costs" (R4, tab
21 ). In the audit report, DCAA revised questioned amounts and concluded that
$253,361,512 in unfunded PRB costs were unallowable (id. at 110). While appellant
used FAS 106 to accrue PRB costs for purposes of its financial reporting each year,
DCAA did not use those same figures to calculate the disallowance. Rather, it used
recalculated FAS I 06 figures provided by appellant to reflect the delayed
recognition/amortization of appellant's FAS 106 transition obligation as required by the
FAR (tr. 2/14-15). 2



2
    The correctness of the figures used by DCAA to derive the disallowance figure goes to
         quantum, which is not before us.

                                              8
        21. NGC submitted a certified claim to DCMA on 20 May 2010, challenging the
Final Determination that disallowed the disputed unfunded PRB costs. Because the
26 July 2007 Notice of Intent to disallow costs and the 9 April 2008 Final Determination
to disallow costs did not list any affected contracts, appellant used Contract
No. N68936-05-C-0059 as a "test" contract that would determine the allowability of
$6,232.11 for purposes of the claim and any appeal that might be necessary. (R4, tab 22)
The test contract was a cost-type contract that contained the contract clause entitled FAR
52.216-7, ALLOWABLE COST AND PAYMENT (DEC 2002), which insofar as pertinent,
made government payments subject to the allowability provisions ofFAR Subpart 31.2 in
effect on the date of contract award and the terms of the contract (R4, tab 1).

       22. The test contract was awarded effective 22 September 2005 (R4, tab 1). As of
that date FAR 31.205-6(o) had been re-formatted, but was identical in all material
respects to the 1995 FAR version above with regard to the issues pertinent here .. The
2005 regulation stated:

             (2) To be allowable, PRB costs shall be incurred pursuant to
             law, employer-employee agreement, or an established policy
             of the contractor, and shall comply with paragraphs (o)(2)(i),
             (ii), or (iii) of this subsection.



                    (iii) Accrual basis. PRB costs are accrued during the
                    working lives of employees. Accrued PRB costs shall
                    be-

                        (A) Measured and assigned in accordance with
                        generally accepted accounting principles.
                        However, the portion ofPRB costs attributable to
                        the transition ... under the delayed recognition
                        methodology described in paragraphs 112 and 113
                        of Financial Accounting Standards Board
                        Statement 106 is unallowable. The transition
                        obligation is defined in Statement 106, paragraph
                        110;

                        (B) Paid to an insurer or trustee to establish and
                        maintain a fund or reserve for the sole purpose of
                        providing PRB to retirees; and




                                            9
                         (C) Calculated in accordance with generally
                         accepted actuarial principles and practices as
                         promulgated by the Actuarial Standards Board.

             (3) To be allowable, PRB costs must be funded by the time
             set for filing the Federal income tax return or any extension
             thereof, or paid to an insurer, provider, or other recipient by
             the time set for filing the Federal income tax return or
             extension thereof PRB costs assigned to the current year,
             but not funded, paid or otherwise liquidated by the tax return
             due date as extended are not allowable in any subsequent
             year. [Emphasis added]

 (Stipulation filed 4 September 2013)

      23. The DCE issued a contracting officer's final decision on 18 February 2011
denying NGC's claim (R4, tab 23). This appeal followed.

       24. Under DoD regulations, the CO is responsible for determining the allowability
of insurance and pension costs under the cost regulations, and is assisted in this endeavor
by DCAA auditors and DCMA insurance/pension specialists, the latter of whom perform
contractor insurance pension reviews (CIPR). DFAS 242.7301(a). In this case there was
an internal disagreement between CIPR and DCAA representatives over the allowability
of the unfunded PRB costs in subsequent years.

         25. CIPR representatives were of the opinion-consistent with that of appellant-
that FAS 106 measurements constituted a ceiling, and that the difference between the
unfunded FAS 106 measurement and the funded DEFRA measurement was not
unallowable in future accounting periods under the regulation (tr. 1/138). An internal
CIPR technical paper supported the CIPR position, but this paper was not official DCMA
policy (tr. 11175). DCAA disagreed with the CIPR team, and held that under Section
( o)(3) the difference between the unfunded FAS 106 measurement and the funded
DEFRA measurement was unallowable in future accounting periods under the regulation.
It was this latter view that was ultimately adopted by the CO.

       26. The record also reflects that in 2007 the then-current DCMA DCE expressed
an opinion-within the government-consistent with that of appellant and the DCMA CIPR
team (R4, tab 13). His opinion was challenged by his superior, the DCMA Deputy
Director Cost & Pricing, Director Defense Corporate Executive Center, who expressed
approval of the DCAA position in an email dated 14 June 2007:

             I think the position is that the cost principle, while possibly
             unfair, is clear....


                                             10
              [S]eems like the company knew the costs had to be assigned
              to the appropriate years per FAS 106 because of theri [sic]
              financial reporting, so the fact that they charged less than this
              using DEFRA was a choice they made.

              [Was] the fact that we let them use DEFRAin effect a
              commitment to recognize unfunded FAS 106 costs later? I
              don't see how this would be so unless they have some
              documentation to that effect.

(App. supp. R4, tab 55) It was this position that was ultimately adopted by the CO.

      27. At trial, appellant presented an expert report from an actuary who, inter alia,
expressed an opinion on the interpretation of the cost regulation and its relationship with
CAS 416 from an actuarial perspective, consistent with the allowability of the unfunded
PRB amounts (app. supp. R4, tab 86). He also expressed the opinion that since Plan cost
modifications in 2006 capped future health care cost increases, the disputed unfunded
PRB costs here-which represented the anticipated cost increases in accordance with FAS
106 calculations-would never be incurred (id. at 10). According to NGC's expert:

             The Plan amendments that NGC adopted effective
             November 1, 2006 "capped" the benefits in a manner that
             eliminated virtually all PRB costs associated with future
             increases in health care costs. Because the value of the
             eliminated Plan benefits exceeds the amount of the PRB costs
             that the Government alleges will be unallowable on and after
             November 1, 2006, the "unallowable" costs that are the
             subject of this appeal have been completely eliminated.
             [Footnote omitted]

(Id.)

       28. This expert opinion appears inconsistent with testimony that the disputed PRB
costs appeared in NGC's incurred cost submission in 2007 and in subsequent years (tr.
2/64-65).

       29. In or around 2002, the U.S. General Accounting Office (GAO) conducted a
two-year review ofPRB costs ofNGC and other major contractors for calendar years
1999-2000. This review was made in response to a Congressional inquiry that
"expressed concerns that government contractors may be receiving undeserved financial
benefits by reducing retiree health benefits that were paid for under government
contracts" (app. supp. R4, tab 22 at 1). Based upon this review, the GAO did not find


                                             11
this to be the case. In summary, the GAO concluded that the government identified only
minor problems with the contractors' PRB costs during these years; it did not question
any projected forward pricing rate proposals; and while certain assumptions used to
project costs were questioned, the impact was negligible (id. at 5).

       30. Although cited by appellant in its brief and addressed at the trial, we give this
GAO review little, if any, weight with respect to the allowability of the costs in issue
under the FAR.

                                          DECISION

       While the parties vigorously argue the merits of their respective interpretations of
the cost regulation, appellant's acknowledgment in its post-hearing brief excerpted below
- consistent with the evidence of record - goes far to resolve the issue before us, i.e.,
whether appellant's practices violated the governing cost regulation in the FAR:

                While FAR requires that PRB costs be accrued using GAAP
                [FAS 106] ... there is no dispute that the DEFRA method did
                not comply with GAAP requirements ....

(App. hr. at 38) We agree with this statement. We conclude that appellant's use of the
DEFRA method violated Section (o)(2) of the cost regulation for purposes of recovering
amounts that were not funded under Section (o)(3) below. 3

        Not only did the FAR require that PRB costs be accrued using GAAP/ FAS 106
under Section (o)(2), but Section (o)(3) required these costs be timely funded. Reading
the allowability Sections (o)(2) and (o)(3) together, the "PRB costs assigned to the
calendar year" in Section (o)(3) must refer back to those costs required to be "assigned"
under Section (o)(2), that is, the PRB costs that were required to be measured and
assigned in accordance with GAAP/FAS 106. We read these sections together to require
that appellant's Plan PRB costs must be measured and assigned under GAAP/FAS 106
and those same FAS-measured and assigned costs must be timely funded. Since
appellant did not measure and assign its Plan PRB costs in accordance with GAAP/F AS
106, violating Section (o)(2), it perforce violated Section (o)(3).

      Section (o)(3) provides that those PRB costs not timely funded "shall not be
allowable in any subsequent year." The disputed amortized PRB costs here- part of the


3
    Given NGC's acknowledgement, we need not address the government's theory that
         appellant did in fact measure and assign its Plan PRB costs in accordance with
         Section (o)(2) - for purposes of its financial reporting- but failed to timely fund
         all such costs in violation of Section (o)(3).

                                               12
transition obligation engendered by NGC's switch to FAS 106 in late 2006- were not
timely funded by appellant, and hence were unallowable in subsequent years.

        Appellant contends that it met Section (o)(3) by fully funding what it assigned, i.e,
its DEFRA amounts. But this interpretation ignores the express requirement of Section
(o)(2), i.e., that the amount must be measured and assigned in accordance with
GAAP/FAS 106. As appellant admits, it did not measure and assign its Plan PRB costs
under its government contracts in accordance with GAAP/FAS 106.

       Appellant also contends that the Section (o)(2) GAAP/FAS 106 measurement
must be interpreted to serve as an allowability "cap" or "ceiling" to those amounts it
otherwise annually funded under Section (o)(3) pursuant to DEFRA and without
prejudice to the amortization of those FAS 106 costs it did not annually fund. However,
no such language is contained in the regulation. We must enforce the regulation
according to its plain terms and not insert additional words or phrases to alter an
otherwise plain and clear meaning. Tesoro Hawaii Corp. v. United States, 405 F.3d
1339, 1346 (Fed. Cir. 2005).

      Alternatively, appellant contends that the government's actions and/or inactions
should estop the government from asserting this disallowance under the cost regulation.
Appellant's burden to prove equitable estoppel against the government is a heavy one.
RGW Communications, Inc. d/b/a Watson Cable Company, ASBCA Nos. 54495, 54557,
05-2 BCA ~ 32,972 at 163,335. We recently set out this burden of proof as follows:

             Equitable estoppel requires a showing of: 1) misleading
             conduct leading another to reasonably infer that rights will
             not be asserted against it; 2) reliance on this conduct; and 3)
             material prejudice as a result of this reliance. Mabus
             v. General Dynamics C4 Systems, Inc., 633 F.3d 1356, 1359
             (Fed. Cir. 2011). When estoppel is asserted against the
             government, a showing of affirmative misconduct is required
             in addition to these elements. United Pacific Insurance Co.
             v. Roche, 401 F.3d 1362, 1366 (Fed. Cir. 2005). [Emphasis
             added]

SplashNote Systems, Inc., ASBCA No. 57403, 12-1 BCA ~ 34,899 at 171,609. Appellant
has failed to meet its heavy burden here.

       First, appellant has not shown any government misleading conduct with respect to
the unfunded PRB costs in issue from which appellant could reasonably infer that the
government would not assert its rights against appellant with respect to these costs. The
dispute here involves the allowability of the unfunded, prior year PRB Plan costs arising
out of appellant's switch to accruing PRB costs in accordance with FAS 106 in 2006.


                                             13
There is no evidence of record showing that the government was aware of appellant's
plan to make this switch prior to 2006, so by definition the government could not have
earlier represented - or misrepresented - its position to appellant with respect to this plan
and the associated unfunded PRB costs. None of the DCAA or DCE documents cited by
NGC address the issue of these costs.

       We further note that the DCE letter of 13 April 1998 was qualified and reserved
the government's rights in "instances of noncompliance not detected during this review"
(finding 9). Reservation-type language was also found in the DCE letter dated 20 April
2000 (finding 10). The DCE letter dated 26 August 2003 was based upon a "FAR
30.602-3" review, that is, a review regarding whether certain disclosure statement
revisions (none of which are relevant here) were voluntary accounting practice changes
(finding 11 ).

       To the extent that appellant relied upon such letters as a government "stamp of
approval" on appellant's 2006 proposal to switch to FAS 106 and to amortize the
unfunded, prior year PRB costs, such reliance was unreasonable. The government did
not mislead appellant with respect to the allowability of the unfunded PRB costs in
dispute here, nor did the parties have a course of dealing with respect to them.

        Appellant has also failed to prove affirmative misconduct on behalf of the
government. Neither the Federal Circuit nor the Board has developed a litmus test for
affirmative misconduct. Such a determination is necessarily fact-dependent. However,
that the courts have imposed this additional requirement when a party seeks to invoke
equitable estoppel against the government underscores two self-evident points: 1) that
the moving party to make its case against the government must prove something more
than would be necessary against a private party; and 2) that this added requirement must,
perforce, be of a nature more compelling than the conduct that would otherwise apply
against a private party. See, e.g., RGW Communications, 05-2 BCA ~ 32,972 at 163,336
(referencing deliberate lies, a pattern of false promises, or intentional deception as
examples of affirmative misconduct).

        Appellant has failed to show any such affirmative misconduct here with respect to
the allowability of the unfunded PRB costs in issue. There is nothing in the record
showing that the government misrepresented or provided appellant incorrect advice
regarding how it would treat appellant's switch to FAS 106 and the related unfunded
PRB costs. Indeed, when NGC first sought an advance agreement on the issue, the
government rejected it. While the DCAA did not call to appellant's attention in the
1990s the possible legal consequences of its actions in the event it moved from DEFRA
to FAS 106 in the future, we fail to see that DCAA was obligated to provide such advice,
and do not believe that any such failure constituted affirmative misconduct so as to bar
the government's disallowance here. See Zacharin v. United States, 213 F.3d 1366,
1371-72 (Fed. Cir. 2000) (failure to call plaintiffs attention to possible legal


                                             14
consequences of its actions does not constitute affirmative misconduct where no evidence
of providing incorrect legal advice or related misrepresentations).

       Appellant argues that it was affirmatively misled by the government's repeated
notifications that its use ofDEFRA was FAR compliant. We disagree for a number of
reasons. First, none of the DCE responses to appellant's disclosure statements cited by
appellant specifically represented, without qualification, that DEFRA was FAR
compliant. The government did indicate, after a review of a disclosure statement, that no
FAR violations were noted, but these responses were, for the most part qualified, and
reserved government rights on further review.

       Moreover, the fact that the government allowed appellant's yearly PRB costs
calculated under DEFRA was not a misrepresentation, nor was it improper under the cost
regulations (nor is the government currently questioning these costs). The government's
decision not to disallow these DEFRA amounts was consistent with FAR 31.20 1-2(c),
which provides for the disallowance of costs in excess of those generated by consistent
FAR practices. 4 Appellant's annual DEFRA-funded costs were not in excess of those
generated by appropriate FAR practices; they were indisputably less than such costs.
Hence, the allowance of these lesser amounts was proper under the regulations, and
perforce was not a misrepresentation or affirmative misconduct.

       We have duly considered all of appellant's remaining arguments, but are not
persuaded that they support a finding of affirmative misconduct. We conclude that
appellant has not proven equitable estoppel against the government so as to bar the
government's recovery here.

        Nor is the government barred by the equitable doctrine of laches. The doctrine of
laches serves to bar a claim where the claimant has unreasonably and inexcusably
delayed the assertion of its claim resulting in economic prejudice or the impairment of the
ability to mount a defense. JANA, Inc. v. United States, 936 F.2d 1265, 1269
(Fed. Cir. 1991). Initially, we note that the government is not the claimant here for
purposes of the laches doctrine. Appellant first sought to change methodologies from
DEFRA to FAS I 06 in 2006, which among other things, resulted in the need to amortize
the disputed unfunded PRB costs from prior years as part of a transition obligation.
Based upon a DCAA audit dated 8 June 2007, the government issued a notice of intent to
disallow the unfunded costs; on 21 September 2007 appellant objected, and DCMA
issued a Final Determination to disallow the costs on 9 April 2008. NGC flied a claim on

4
    FAR 31.201-2, DETERMINING ALLOWABILITY, provides at (c) as follows: When
        contractor accounting practices are inconsistent with this Subpart 31.2, costs
        resulting from such inconsistent practices in excess of the amount that would have
        resulted from using practices consistent with this subpart are unallowable.
        (Emphasis added). See also note 5, infra.

                                             15
20 May 2010 and the DCE issued a final decision denying the claim on 18 February
2011. Assuming arguendo, that the equitable doctrine of laches may be applied against
the government under these circumstances, see JANA at 1269, we believe that the claim
was not unreasonably or inexcusably delayed.

       Appellant also argues that its interpretation of the regulation was, and still is
supported by certain government actuaries on the CIPR team. However, in our view, the
opinion of these government actuaries does not trump the plain language of Sections
(o)(2) and (o)(3) of the cost regulation.

       Appellant also notes that since its various disclosure statements provided that
appellant measured and assigned PRB costs in accordance with DEFRA, it was obligated
under CAS to follow these disclosed practices. However, this dispute is not over a CAS
violation5 but rather over the allowability of the unfunded transition obligation under the
FAR 31 cost principles. See FAR 31.201-2(a)(5) (factors to determine allowability
include compliance "with any limitations set forth in this subpart"). Appellant did not
comply with FAR 31.205-6(o) here.

       Finally, appellant contends that due to Plan modifications in 2006 that capped
future increases in health care costs, the disputed unfunded PRB costs here - which
according to appellant essentially represented such increased future health care costs per
FAS 106 - will not be incurred and as such, the government has no basis to disallow
them. According to appellant's brief: "It is axiomatic that the Government cannot
disallow costs that have never been and will never be claimed or incurred" (app. br. at
66).

        We accept this axiom, but it is unclear whether it applies in this case. The record
reflects testimony that the disputed, unfunded PRB costs were included in appellant's
incurred cost submission in 2007 and in years thereafter, and hence these costs were
purportedly "claimed" by appellant in these years (finding 28). However, these incurred
cost submissions are not of record.

      Neither party addressed quantum in any detail in this entitlement proceeding.
While we believe appellant's contention is conceptually sound, we need a better

5
    The government conceded in its Answer,~ 10, that NGC's funding of the Plan based
        upon the tax deductible amount in accordance with DEFRA was in compliance
        with CAS 416, Accounting for Insurance Costs. Indeed, the government never
        questioned- under CAS or otherwise- the lesser-funded DEFRA amounts that
        were funded by appellant each year prior to 2007. It only questioned the unfunded
        amounts when appellant sought to change its practice and switched to FAS 106 for
        government contract purposes. Appellant has shown no conflict between the CAS
        and FAR in this respect.

                                             16
developed record to address whether the contention is grounded in fact; whether the
unfunded PRB costs as part of the amortized transition obligation were included and
"claimed" in appellant's incurred cost submission in 2007 and beyond; and if so, how the
government treated them, and whether any of these matters impacted quantum.
Assuming, arguendo, that NGC is due a credit based upon the elimination of the future
health care cost increases, the amount of that credit is also a quantum issue, as is the
DCAA calculation in support of the disallowance. If this case is not settled, these
quantum issues will have to be addressed by the Board at a later time.

                                    CONCLUSION

       We have duly considered appellant's remaining arguments but are not persuaded
by them. For reasons stated and based upon the record before us, we conclude that
FAR 31.205-6(o) supports the government's disallowance of the unfunded PRB costs
under this test contract. We remand to the parties to determine quantum.

      The appeal is denied.

      Dated: 16 January 2014



                                                ~t~
                                               Ji(ELMAN-
                                             "--Administrative Judge
                                                                             ~---...,,



                                                Armed Services Board
                                                of Contract Appeals


I concur                                       I concur




Administrative Judge                           Administrative Judge
Acting Chairman                                Acting Vice Chairman
Armed Services Board                           Armed Services Board
of Contract Appeals                            of Contract Appeals




                                          17
     I certify that the foregoing is a true copy of the Opinion and Decision of the
Armed Services Board of Contract Appeals in ASBCA No. 57625, Appeal of Northrop
Grumman Corporation, rendered in conformance with the Board's Charter.

      Dated:



                                              JEFFREY D. GARDIN
                                              Recorder, Armed Services
                                              Board of Contract Appeals




                                         18
