In Honeywell International, Inc., the ASBCA declined to dismiss a roughly $151 million claim by DCMA alleging a violation of CAS 410, holding that the government’s allegations were sufficient to state a claim for improper treatment of G&A expenses. The Board’s decision provides guidance on how to interpret CAS 410 — a topic that is often addressed by auditors, but has rarely been the subject of written opinions by the courts or boards of contract appeals.
CAS 410 gives contractors discretion to select an appropriate method for allocating G&A expenses. Among a number of potentially compliant methods, a contractor may allocate G&A to a “total cost input” base that spreads the costs broadly across its business. See CAS 410-50(d).
This case involved a contractor that had selected the total cost input base for its “SPG” business unit, which manufactured “gyros” included in products sold to the government. The SPG business also transferred some of the gyros to a separate business segment, which included the gyros in sales to commercial customers. The contractor did not include the cost of transferred gyros in SPG’s G&A base — instead, it placed those costs in the G&A base of the receiving business unit.
The government alleged that the SPG business unit had failed to comply with CAS 410’s total cost input standards, claiming that the omitted product costs amounted to “more than 10% of the [G&A] base in some years.” The government asserted that the contractor had thus significantly increased SPG’s G&A rate, which then was passed on to its government contracts.
The Board found that the government’s allegations were “plausible” and declined the contractor’s motion for early dismissal of the government’s case. While the Board therefore did not resolve the appeal, its decision offered several interpretive points for contractors subject to CAS 410.
First, the Board provided a definition of the term “total cost input.” The Board held that this term generally encompasses all of a contractor’s costs other than G&A expenses, while also giving contractors reasonable discretion to exclude costs that (i) are not “significant,” (ii) do not qualify as “final cost objectives,” or (iii) do not “represent the total activity of the business unit.” Applying that test, the Board found that the government had plausibly claimed that the transferred costs were “significant” under the circumstances. The Board also declined to consider the argument that the costs were reasonably considered to be “intermediate” rather than “final” cost objectives at this stage of the appeal. The Board explained that this argument was fact-intensive and could not be resolved without further proceedings.
Second, the Board held that CAS 410 gives contractors discretion, within certain limitations, to allocate G&A costs in a number of different ways. A contractor can allocate G&A across (i) “a total cost input base,” (ii) a “value-added” base that excludes material and subcontract costs; or (iii) “a single element cost input base; e.g., direct labor hours or direct labor dollars, which represents the total activity of a business unit . . . where it produces equitable results.” CAS 410-50(d). But the Board added that a contractor must exercise its discretion reasonably. Further, when a contractor selects the “total cost input” base to allocate G&A, its discretion becomes “hemmed in by the language specifying what goes into that base discussed above[.]”
Third, the Board concluded that the check-boxes in the government’s form CASB DS-1 — a standard form that contractors generally must submit when subject to full CAS coverage — could not be read to support a result contrary to the language of CAS 410. The Board rejected Honeywell’s claim that section 4.5.0 of the form, which permits a contractor to represent that “no overhead or G&A is applied” to “interorganizational transfers out,” implicitly authorized the company’s practice. The contractor argued that this standard form is codified at CAS 9903.202-9, and thus the CAS Board must have contemplated that contractors could exclude inter-company transfers from a producing segment’s G&A base. The Board disagreed and found that this argument, if accepted, would improperly read the CASB DS-1 form in a manner inconsistent with CAS 410.