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.

Photo of Peter B. Hutt II Peter B. Hutt II

Peter Hutt represents government contractors in False Claims Act and fraud matters, and accounting, cost, and pricing disputes and counseling matters.

Peter is a leading False Claims Act lawyer in the government contracts arena. He has represented contractors for 35 years in matters

Peter Hutt represents government contractors in False Claims Act and fraud matters, and accounting, cost, and pricing disputes and counseling matters.

Peter is a leading False Claims Act lawyer in the government contracts arena. He has represented contractors for 35 years in matters alleging cybersecurity noncompliance; cost mischarging; CAS violations; quality assurance deficiencies; substandard products and services; defective pricing; health care fraud; price reduction issues; inadequate subcontractor oversight; and reverse false claims;. He has testified before Congress concerning the False Claims Act, and is a thought leader in the field. Peter also conducts internal investigations and advises clients on whether and how to make disclosures of potential wrongdoing.

Peter also represents contractors and grantees in accounting, cost, and pricing matters, and other contract and grant matters. He has addressed issues concerning pensions and post-retirement benefits; TINA and defective pricing; alleged CAS violations; cost accounting practice changes; alleged charging of unallowable and expressly unallowable costs; terminations; contract financing; price reduction clause issues; subcontracting and supply chain compliance; specialty metals compliance; and small business and DBE compliance. He has litigated cost, accounting, and contract breach matters in the Court of Federal Claims and the ASBCA.

Peter is recognized for his work both in False Claims Act and government contract disputes by Chambers USA, which notes that “He is absolutely outstanding. He is thoughtful and client-focused.” Chambers also notes that “Peter’s judgment and problem solving ability is unique. He is a very good False Claims Act lawyer.”

Photo of Frederic Levy Frederic Levy

Fred Levy is senior counsel in the firm’s Government Contracts and White Collar Defense and Investigations Practice Groups. He is a leading suspension and debarment lawyer, focusing his practice on the resolution of complex compliance and ethics issues. He has successfully represented numerous…

Fred Levy is senior counsel in the firm’s Government Contracts and White Collar Defense and Investigations Practice Groups. He is a leading suspension and debarment lawyer, focusing his practice on the resolution of complex compliance and ethics issues. He has successfully represented numerous high-profile corporations and individuals under investigation by the government in civil and criminal matters, including False Claims Act cases, and in suspension and debarment proceedings to ensure their continued eligibility to participate in federal programs. He has also conducted numerous internal investigations on behalf of corporate clients and advises corporations on voluntary or mandatory disclosures to federal agencies. Fred regularly counsels clients on government contract performance issues, claims and terminations, and litigates matters before the boards of contract appeals and in the Federal Circuit.

Related to his work involving program fraud, Fred counsels clients in the area of contractor “responsibility.” He is involved in the development and implementation of contractor ethics and compliance programs that meet the standards of the Federal Acquisition Regulation, Federal Sentencing Guidelines, and Sarbanes-Oxley, and he regularly conducts ethics and compliance training.

Fred is a principal editor of Guide to the Mandatory Disclosure Rule, and of The Practitioner’s Guide to Suspension and Debarment, 4th Edition. He is a vice-chair of the Debarment and Suspension Committee of the ABA Public Contract Law Section, and a former co-chair of that committee and of the Procurement Fraud Committee. He is a graduate of Columbia College and Columbia Law School.

Photo of Evan R. Sherwood Evan R. Sherwood

Evan Sherwood counsels federal contractors on Contract Disputes Act (CDA) claims, the cost accounting standards (CAS), cost allowability, requests for equitable adjustment (REAs), contract terminations for convenience/default, and related audits, litigations, and investigations. He also advises on contract compliance and formation issues, including TINA/defective pricing…

Evan Sherwood counsels federal contractors on Contract Disputes Act (CDA) claims, the cost accounting standards (CAS), cost allowability, requests for equitable adjustment (REAs), contract terminations for convenience/default, and related audits, litigations, and investigations. He also advises on contract compliance and formation issues, including TINA/defective pricing, data rights, mandatory disclosure rules, ethics, conflicts of interest, teaming arrangements, and other transaction agreements (OTAs). He has litigated matters before the Court of Federal Claims, the Armed Services Board of Contract Appeals, the Government Accountability Office, and the Federal District Courts.

In his work for defense and civilian agency contractors, Evan:

  • Prepares CDA claims and REAs;
  • Litigates matters involving CAS compliance, cost accounting practice changes, and cost allowability under the FAR and grant rules;
  • Defends contractors during audits and investigations involving the Defense Contract Audit Agency (DCAA), Defense Contract Management Agency (DCMA), and the Office of the Inspector General (OIG);
  • Advises on constructive changes, work delays, defective specifications, stop-work orders, government-furnished property, CPARS, warranty matters, data rights, and quality controls;
  • Counsels on disputes between primes and subcontractors, including teaming disputes; and
  • Conducts internal investigations and defends clients in federal investigations involving whistleblower allegations and retaliation claims.

Evan is a Vice Chair of the ABA Public Contract Law Section’s Contract Claims & Disputes Resolution Committee. He routinely writes and speaks about legal issues in federal contracting.