The requirements for allowability are the legal fees must be (1) reasonable (2) allocable to a contract (3) accounted for in accordance with cost accounting standards, if applicable or generally accepted accounting standards (4) permitted under the terms of the contract and (5) not limited by any specific cost principles. In Hirsch Tyler Co. the ASBCA rejected the government contention that legal costs incurred in an unsuccessful defense of an employment discrimination lawsuit were in themselves unreasonable because it was found the contractor violated the Civil Rights Act. The Board held the costs did not fall within any categories of cost principles that made them unallowable and the company followed prudent business practices to defend a litigation, no matter what the outcome, and they are of the type generally recognized as ordinary and necessary for the conduct of business. The case was considered consistent with the US Supreme Court ruling that "in an adversary system of criminal justice, it is a basic tenant of our public policy that a defendant in a criminal case has counsel to represent him." Nonetheless, DCAA continues to challenge costs of legal fees on reasonableness grounds based on the nature of the underlying wrongdoing rather than the reasonableness of the contractor’s actions in defending themselves. For example, in DCAA guidance published April 13, 1995 auditors are advised to question as unreasonable costs incurred by contractors in defending against stockholder derivative suits related to contractor wrongdoing.

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