Sikorsky Aircraft Corp. v. United States
| Decision Date | 30 November 2011 |
| Docket Number | No. 10-741C,No. 09-844C,09-844C,10-741C |
| Parties | SIKORSKY AIRCRAFT CORPORATION, Plaintiff, v. UNITED STATES, Defendant. |
| Court | U.S. Claims Court |
SIKORSKY AIRCRAFT CORPORATION, Plaintiff,
v.
UNITED STATES, Defendant.
No. 09-844C
No. 10-741C
United States Court of Federal Claims
Filed: November 30, 2011
Claim based upon allocation of overhead
costs to government contracts; Cost
Accounting Standards; scope and thrust of
48 C.F.R. § 9904.418-50; application of
M. Maropakis Carpentry to affirmative
defenses; criteria for proper cost-
accounting allocation of indirect costs;
relevance of unpublished regulatory
history; service of more than 25
interrogatories to a party; RCFC 33(a)(1)
Jeffrey A. Hall, Bartlit Beck Herman Palenchar & Scott LLP, Chicago, Illinois, for plaintiff. Of counsel were Shayna S. Cook, Allison W. Freedman, and Georgia N. Alexakis, Bartlit Beck Herman Palenchar & Scott LLP, Chicago, IL, and Karen L. Manos, Gibson, Dunn & Crutcher LLP, Washington, D.C.
James W. Poirier, Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, D.C., for defendant. With him on the briefs were Tony West, Assistant Attorney General, Jeanne A. Davidson, Director, Steven J. Gillingham, Assistant Director, and Sarah A. Murray, Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, D.C.
LETTOW, Judge.
Sikorsky Aircraft Corporation ("Sikorsky") holds a number of contracts to provide aircraft and spare parts to the United States government. On December 11, 2008, an administrative contracting officer issued a final decision demanding that Sikorsky pay the government approximately $80 million premised on the contention that Sikorsky had improperly allocated certain overhead costs to its government contracts. Sikorsky brought an action on that claim in a complaint filed with the court pursuant to 28 U.S.C. § 1491(a)(2) and 41 U.S.C. § 7104(b) on December 8, 2009. Thereafter, as a protective measure, in light of the subsequent decision of the Federal Circuit in M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010), Sikorsky submitted a claim to a contracting officer requesting a decision on Sikorsky's affirmative defenses to the government's claim. The contracting officer rejected that
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defensive claim on the ground that he lacked authority to act because the government's claim was in litigation. Sikorsky sought review of that denial via a second complaint filed on October 29, 2010. The two complaints were consolidated by an order issued November 22, 2010.
On the merits, the consolidated cases raise issues concerning the application of the Cost Accounting Standards ("CAS") set out at 48 C.F.R. Chapter 99, Subchapter B, Part 9904, and, specifically, the standards for allocation of direct and indirect costs codified at 48 C.F.R. §§ 9904.418-10 to 9904.418-63. The parties undertook discovery to prepare the issues for judicial resolution but soon reached a virtual impasse over the compass of the issues to be tendered for decision. In an effort to remove at least some of the resulting impediments, the government filed four motions — two motions in limine, a motion to dismiss the second complaint, and a motion for leave to serve interrogatories. After submission of numerous, lengthy briefs disputing the thrust and scope of the relevant Cost Accounting Standards and argument at several hearings, the motions have been made ready for decision. In essence, by the pending motions, the parties have asked the court to provide a general interpretative framework for the most relevant Cost Accounting Standard, 48 C.F.R. § 9904.418, and in particular Section 9904.418-50, to guide their preparation of the consolidated cases for trial and final disposition. Restated another way, the motions reflect the parties' and the court's efforts in this complex case to isolate and resolve relevant issues of law prior to completion of discovery and then, ultimately, trial. See Rumsfeld v. United Techs. Corp., 315 F.3d 1361, 1369 (Fed. Cir. 2003).1
The Cost Accounting Standards Board ("CASB") was established by Congress in 1970 to "promulgate cost-accounting standards designed to achieve uniformity and consistency in the cost-accounting principles followed by defense contractors and subcontractors under [f]ederal contracts." Act of Aug. 15, 1970, Pub. L. No. 91-379, sec. 103, § 7A(g), 84 Stat. 796, 797. Congress found uniform cost accounting principles desirable because they would require contractors to report their costs in a comparable way when vying for and performing under contracts with the federal government. Uniform standards, it was thought, would promote fair competition among contractors, allow more government contracts to be competitively bid, and prevent firms from overcharging the government and subsidizing their non-government business. See, e.g., Extension of the Defense Production Act and Uniform Cost Accounting Standards: Hearing on S. 3302 Before the Subcomm. on Prod. & Stabilization of the S. Comm. on Banking & Currency, 91st Cong. 5-7 (1970) (statement of Sen. William Proxmire).
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The five-member CASB2 since its inception has had "exclusive authority to prescribe, amend, and rescind cost accounting standards, and interpretations of the standards, [which govern] measurement, assignment, and allocation of costs to contracts with the [f]ederal [g]overnment." 41 U.S.C. § 1502; see also 48 C.F.R. §§ 9900.000 to 9904.420-63. See generally Darrell J. Oyer, Accounting for Government Contracts — Cost Accounting Standards, § 1.01 to .05 (2010). Under that authority, the CASB has set out nineteen Cost Accounting Standards, collected at 48 C.F.R. §§ 9904.401 to 9904.420 (CAS 419 does not exist). Of particular interest to the pending motions in this case is CAS 418, which sets out how contractors may distribute indirect costs, such as overhead, among their contracts. Specifically, CAS 418 specifies accounting practices for "the consistent determination of direct and indirect costs," "the accumulation of indirect costs . . . in indirect cost pools," and "the selection of allocation measures based on the beneficial or causal relationship between an indirect cost pool and cost objectives." 48 C.F.R. § 9904.418-20.
A direct cost is "any cost which is identified specifically with a particular final cost objective[, i.e., a contract] . . . . Costs identified specifically with a contract are direct costs of that contract." 48 C.F.R. § 9904.418-30(a)(2).3 Correspondingly, an indirect cost is "any cost not directly identified with a single final cost objective, but identified with two or more final cost objectives or with at least one intermediate cost objective." Id. § 9904.418-30(a)(3).4 Indirect costs are accumulated in "indirect cost pools." Id. § 9904.418-40(b).5 Both direct and indirect
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costs are allocated to cost objectives: "Allocate means to assign an item of cost, or a group of items of cost, to one or more cost objectives. This term includes both direct assignment of cost and the reassignment of a share from an indirect cost pool." Id. § 9904.418-30(a)(1). Indirect costs are apportioned according to an allocation method (also termed an allocation base, allocation basis, or cost driver), the selection of which is subject to detailed criteria. See id. § 9904.418-50. An allocation method, essentially, guides how an indirect cost is to be distributed among multiple cost objectives. For an indirect cost, an allocation method should be chosen based on the "causal or beneficial relationship," id. § 9904.418-40(c), between the indirect cost pool and the final cost objectives, i.e., the allocation base should distribute the indirect cost to final cost objectives in a manner accurately reflecting each cost objective's fair share of the indirect cost.6
The CASB took up the project of setting out proper allocation measures for indirect cost pools in the late 1970s. In 1978, the CASB published a proposed rule to establish five Cost Accounting Standards, namely, "Distinguishing Between Direct and Indirect Costs," "Allocation of Service Center Costs," "Allocation of Material-Related Overhead Costs," "Allocation of Manufacturing . . . Overhead Costs," and "Allocation of [Other] Indirect Costs." See Cost Accounting Standards: Indirect Cost Allocation, 43 Fed. Reg. 11,118 (proposed Mar. 16, 1978). For each category of indirect costs, the corresponding standard set out acceptable allocation methods. See id. at 11,120, 11,122-24, 11,127.
In 1979, in response to many comments expressing concern that the 1978 standards would lead to a proliferation of indirect cost pools, the CASB reduced the number of proposed Cost Accounting Standards from five to three. See Cost Accounting Standards; Indirect Cost Allocation, 44 Fed. Reg. 42,988, 42,988 (proposed July 23, 1979). The standards for material-related pools and manufacturing overhead pools were merged into one standard titled "Allocation of Overhead Costs of Productive Functions and Activities." Id. at 42,988, 42,990-91. Additionally, the standards for allocating service center pools and other indirect cost pools were merged into one standard titled "Allocation of Indirect Cost Pools." Id. at 42,988-90. A
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standard remained for "Distinguishing Between Direct and Indirect Costs." See id. at...
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