Defense contractor Raytheon, which makes missiles and other weapon systems at its Tucson-based Missiles & Defense unit, faces millions of dollars in penalties for improperly billing the Pentagon for lobbying and corporate work.

 Raytheon Technologies

Defense contractor Raytheon could end up repaying the Pentagon millions of dollars following a federal appeals court ruling that the company overbilled the government for employee time spent on lobbying and corporate activities.

The case stems from a finding by a Defense Department audit agency that Raytheon Co. and its Tucson-based Missile Systems division billed the government for unallowable lobbying expenses and corporate-development work in 2007 and 2008.

Raytheon Co. merged with United Technologies Corp. in 2020 to form Raytheon Technologies Corp. Now called Raytheon Missiles & Defense, the Tucson unit is the region’s biggest employer and makes many of the nation’s front-line weapon systems.

Based on a Pentagon audit, the Defense Contracts Management Agency filed claims in 2014 and 2015, including interest and penalties for about $17 million in unallowable costs claimed by Raytheon for 2007 and a total of about $4 million for 2008, challenging lobbying and corporate-development costs as well as expenses for employee recruitment, bonuses and air travel.

After Raytheon withdrew some of its claims, about $3 million in claims for lobbying costs and $1.7 million in corporate costs for the two years remained in dispute.

Raytheon appealed that ruling to the Armed Services Board of Contract Appeals, which held a hearing in 2017 and ruled in favor of the defense contractor.

The Pentagon appealed the matter to the U.S. Circuit Court of Appeals for the Federal Circuit, which on Tuesday, Jan. 3, issued a decision reversing the board’s ruling and remanding it for a finding of costs and possible penalties Raytheon must pay. Raytheon declined to comment on the ruling.

The case involves so-called indirect costs, which are part of normal business operations rather than a specific contract.

Each year, contractors submit indirect-cost rate proposals including a schedule of all claimed expenses, but expenses for lobbying and work involving corporate matters like mergers or acquisitions are not allowed.

The appellate court ruled that Raytheon’s use of a “time-paid accounting” procedure allowed the company to improperly overbill the Pentagon for time that staffers in its government-relations department in Arlington, Virginia, spent performing lobbying activities after normal work hours.

“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,” Judge Sharon Prost wrote in an opinion for a three-judge panel.

The appeals court also ruled that Raytheon billed the government for unallowable work by staffers in its corporate-development department in Waltham, Massachusetts. Both lobbying and corporate costs are “expressly unallowable” under federal acquisition rules, the court noted. Raytheon testified to the contract-appeals board that the government was not charged for any night and weekend work.

The company also contended that the distinction between unallowable and allowable corporate-development costs is “unclear” under federal acquisition rules, but it followed a “bright-line” distinction allowing general planning but disallowing planning for a specific acquisition or divestiture.

Several weapon systems made by Tucson-based Raytheon Missiles & Defense are helping Ukraine fend off Russia's invasion.

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Contact senior reporter David Wichner at dwichner@tucson.com or 520-573-4181. On Twitter: @dwichner. On Facebook: Facebook.com/DailyStarBiz