The Armed Services Board of Contract Appeals’ (ASBCA) decision in Lockheed Martin Aeronautics Co., ASBCA No. 63621, reinforces a critical principle for government contractors:  contract performance requirements operate independently of cost accounting classifications. Contractors cannot avoid substantive FAR and DFARS obligations—here, U.S.-flag transportation requirements—by treating costs as indirect rather than direct.  In a nearly nine-figure dispute, the Board rejected Lockheed’s attempt to exclude foreign-flag shipping costs from these requirements based on their inclusion in indirect overhead pools. 

At the same time, the decision provides important guidance on the Government’s burden to establish cost unallowability. Although the Board rejected Lockheed’s legal theory, it denied summary judgment to both parties, concluding that the Government had not sufficiently tied the challenged costs to specific shipments that violated the applicable contract clauses.

In the rest of the post, we provide background on the case, summarize the parties’ arguments, and conclude with key takeaways for contractors.

Background

This dispute arises from the intersection of two familiar requirements in government contracting:  compliance with U.S.-flag transportation mandates and the recovery of costs through indirect rate structures.

Lockheed’s contracts incorporated two standard provisions: the Fly America Act (implemented through FAR 52.247-63) and the Cargo Preference Act (implemented through DRAFS 252.247-7023).  In general terms, these clauses require contractors to use U.S.-flag carriers and vessels for international transportation performed in connection with covered contracts, absent specified exceptions or waivers. These clauses may be referred to as the air and sea clauses, respectively. 

During fiscal years 2016 through 2019, Lockheed included international “shipping” costs in its manufacturing and engineering indirect overhead pools, which were then allocated across multiple contracts—both government and non-government. Following an audit, the Government concluded that some of this transportation had been performed using foreign-flag carriers or vessels in violation of the contract clauses, and it disallowed the associated costs as unallowable under FAR 31.201-2, ultimately demanding repayment of approximately $98 million. Lockheed appealed, arguing that the U.S.-flag requirements did not apply to transportation costs treated as indirect. In its view, because those costs were not tied to the performance of any single contract, the clauses—each of which applies to work performed “under this contract”—were inapplicable. The parties filed cross-motions for summary judgment presenting this threshold legal question.

Lockheed Martin’s Arguments and the Board’s Holdings

Argument 1: “Indirect” shipping is outside the scope of the U.S.-flag clauses

Lockheed argued that because it treated international shipping as an indirect cost—spread across multiple final cost objectives—the U.S.-flag requirements in the air and sea clauses should not apply to that transportation. In Lockheed’s view, the clauses’ linkage to “this contract” meant they applied only when transportation could be tied to direct-charged transportation under a single covered contract.

The Board drew a sharp distinction between cost allowability principles (FAR Part 31) and contract performance obligations, holding that the latter are triggered by conduct—i.e., whether transportation is performed under a covered contract—not by how costs are later allocated for accounting purposes. It emphasized that in fact, the air clause’s text does not mention “cost” and instead imposes performance requirements: when “performing work under this contract,” the contractor must use U.S.-flag air carriers for international air transportation if available. The Board reasoned that spreading transportation costs across multiple contracts (or pools) does not relieve the contractor of obligations when the shipment is performed in connection with at least one contract containing the clause. It found Lockheed’s proposed rule “nonsensical” in scenarios where a shipment supports multiple Government contracts that all contain the clause.

Critically, the Board rejected Lockheed’s position in the context of shipments supporting multiple contracts or mixed customers. It held that the relevant inquiry is whether the transportation was performed, at least in part, under a contract containing the clause—not whether the shipment can be tied exclusively to a single contract or customer. In other words, the presence of any covered contract in the purpose of the shipment is sufficient to trigger the clause’s requirements, regardless of how the associated costs are allocated.

Argument 2: Transportation is not “performing work under” a contract unless explicitly required

Lockheed contended that transportation merely “enables” performance and does not constitute “performing work under” a contract unless the contract expressly requires transportation (e.g., via a line item), which Lockheed suggested would typically be treated as a direct cost. The Board disagreed with that distinction, emphasizing that contract performance encompasses compliance with all contract terms and conditions—not just those expressly itemized.  It explained that certain contractual duties may be impossible to perform without transporting items internationally even if the contract does not expressly call out transportation. In those circumstances, transportation is “bound up” in performance, and therefore falls within the clauses’ requirement governing work performed “under this contract.”.

Argument 3: Administrative impracticalities (vouchers, waivers, reporting) imply a narrower scope

Lockheed argued that applying the clauses to indirect shipments would create unworkable compliance mechanics—such as needing to include foreign-flag justifications on numerous vouchers (air), or navigating waiver requests and reporting across multiple contracts and contracting officers (sea). The Board was skeptical of the claimed burdens (noting a lack of supporting evidence) and, in any event, found that such administrative concerns do not alter the meaning of the clauses’ clear performance requirements.

For the air clause’s voucher provision, the Board observed the text speaks to “vouchers involving” the transportation and that the referenced FAR guidance contemplates an “appropriate voucher” for the shipment, not repetitive notifications. For the sea clause, the Board similarly declined to narrow scope based on waiver-processing or reporting logistics, and it rejected the notion that indirect billing inherently prevents tracking what was shipped and for which contracts.

Government’s Burden-Shifting Arguments

On its cross-motion, the Government sought a ruling that Lockheed’s challenged transportation costs were unallowable because the shipments allegedly violated the U.S.-flag clauses, invoking FAR allowability principles tied to contract compliance. The Board denied summary judgment because the Government did not cite record evidence showing (i) foreign-flag air carriage used for international transportation of property in performing work under a contract containing the air clause, or (ii) foreign-flag sea transport of qualifying supplies under a contract containing the sea clause without authorization. The Board found the Government’s reliance on conclusory audit report statements insufficient, noting the reports did not identify contracts or provide factual detail tending to show clause violations.  The Board’s denial of the Government’s cross-motion underscores that the Government may not disallow costs on the basis of FAR 31.201-2(a)(4)—which, among other things, conditions cost allowability on compliance with contract terms—without contract-level evidence of the noncompliance.

The Government then argued Lockheed should bear the burden to prove allowability because the clauses require justification to depart from U.S.-flag requirements, and it cited a recent Federal Circuit decision for a “superior access” concept. The Board rejected that attempt, reiterating that the Government must prove costs are unallowable and that a party alleging breach bears the burden of proof—declining to treat the cited case as a “radical departure” from settled allocation of burdens in this context.

Practical Takeaways

• Treat U.S.-flag clauses as performance duties. Contractors should build compliance processes around how shipments are executed, not around whether freight is direct- or indirect-charged.

• Expect scrutiny of shipment-level purpose. Contractors should be prepared to trace international shipments to the contracts they support (even when pooled).

• Design waiver/exception workflows. For sea transport, plan lead times and documentation for authorization requests where foreign-flag use may be needed.

• Administrative complexity is not a defense.  The Board rejected arguments that compliance burdens justify narrowing clause scope. 

• Avoid informal carve-outs that conflict with FAR/DFARS. The decision underscores the risk that extrinsic arrangements may not override unambiguous clauses.