K Street needs more chill

A fun thing about large government contractors is that their overhead costs often include things like paying for lobbyists and then they get to charge the government for those overhead costs.

A lot of the time these overhead costs are effectively hidden from the government, wrapped into firm-fixed prices or labor rates. In those cases, a contractor will spread around its indirect costs and effectively gamble that it can make up the margin on volume.

Sometimes, though, the government uses a type of contract called a "cost-reimbursement contract", which allows the contractor to just bill the government for its costs. It's a sweet deal!

But not every cost can be passed on to the government; you can't ask to get reimbursed the government for "unallowable costs." For example, you can't charge your federal income and excess profit taxes back to the government (imagine if you could!). And one unallowable cost is efforts to lobby the government.[1]

There is a catch. Sometimes lobbyists do things that actually involve allowable costs. For example, the FAR makes it an allowable cost to "provid[e] a technical and factual presentation of information on a topic directly related to the performance of a contract through hearing testimony, statements or letters to the Congress."

To deal with these sometimes allowable, sometimes unallowable costs, contractors developed corporate policies around tracking time and activities so that the contractor can, in fact, get money back from the government.

Anyway, according to the Federal Circuit, here's what Raytheon did in 2007 and 2008:

Raytheon’s Government Relations Department, which in 2007 and 2008 consisted of 20 to 22 employees, is housed in Arlington, Virginia. During the relevant time period, government-relations employees engaged in various activities including information gathering, internal discussions on lobbying strategies, attending meals with contractors and Congresspeople or Congressional staff, meeting with internal Raytheon customers, attending political fundraising events, administering Raytheon’s Political Action Committee, interfacing between Raytheon and the legislative branch of the U.S. government, and responding to requests from Congressional staffers, among other similar activities. Raytheon’s Policy 23-3045-110, “Identifying and Reporting Lobbying Activity Costs,” instructed employees to record all compensated time spent on lobbying activities.

So far so good; lobbyists doing lobbyist things.

Accounting personnel then identified and withdrew costs associated with that time from Raytheon’s incurred-cost submissions. Raytheon’s employees considered time worked outside of regular hours and on weekends to be part of their regular work duties, yet Raytheon’s Lobbying Policy instructed them not to report “[t]ime spent on lobby activity after the scheduled working day,” which was between 8:00 a.m. and 5:00 p.m., Monday through Friday. Government-relations employees do not report time spent on allowable (i.e., non-lobbying) activities.

Freeze frame. You read that right, Raytheon essentially calculated its lobbyists' salaries, deducted whatever hours during 8 am to 5 pm that were unallowable, and passed on the difference to the government.

The logical implication of this is straightforward: if someone did a bunch of unallowable activity but only worked the graveyard shift, the government would bear 100% of the costs!

Eventually it came to pass that, during an audit, the Defense Contract Audit Agency found that Raytheon improperly charged the government for lobbying costs and sought reimbursement. Raytheon appealed that finding.

Now, before you go and flip a table in rage, I invite you to take a moment and think like a lawyer. I know. I know. Just work with me for a moment.

Assume that you start from the proposition that all costs are allowable unless they're unallowable. And further, you assume that people are only supposed to work from 8 to 5. And further further, you assume that, because you're not paying anyone overtime, the labor cost is fixed whether someone works the graveyard shift. Logically, you might argue (as Raytheon did) that "there was no cost to [Raytheon] or to the government for work outside normal business hours."

This argument worked! It actually worked! The Armed Services Board of Contract Appeals (“Board”) found in favor of Raytheon! Amazingly, the Board found that "Raytheon’s lobbyists worked early mornings, late nights, and weekends from time to time on what all of the testifying witnesses considered to be a regular part of their work duties" and yet the Board also concluded that "logically, the expectation of regular night and weekend work would be factored into the salary paid to the lobbyists."

Well, the Secretary of Defense disagreed and appealed to the Federal Circuit. A few weeks ago, the Federal Circuit reversed the Board's decision:

Raytheon’s time-paid accounting is a fiction that necessarily overcharges the government when it ignores time spent working on unallowable activities after regular business hours. Raytheon’s lobbyists worked on unallowable activities after-hours, and their salaries necessarily compensated them for that time. Raytheon’s policies ignoring after-hours time resulted in the government reimbursing Raytheon for unallowable costs.

Ah well, it almost worked?

Maybe the conclusion is a sad one? On the one hand, obviously, Raytheon shouldn't be able to pretend that lobbyists' unallowable costs can only happen from 8 to 5.

But, on the other hand, here's what the Circuit said:

[Raytheon's] argument is based on the premise—unprovable here—that all of Raytheon’s government-relations employees worked full 40-hour work weeks during recordable time periods and that time worked outside regular business hours was only additional time. But employees could have worked less between 8:00 a.m. and 5:00 p.m., Monday through Friday, to offset time spent working earlier or later in the day or on weekends.

I mean. Don't you kind of feel a bit bad for those lobbyists that worked early mornings, late nights, and weekends only to learn later that your employer would later tell a federal court that you could have been "quiet quitting" this whole time?!

Ok, no; you're right. I don't feel that bad either.

[1] Think for a moment of how bad the optics of paying for lobbying would be. Would you want to explain to Project On Government Oversight that the government is spending taxpayer dollars to influence where federal appropriations dollars flow? I know I wouldn't.

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