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Sikorsky Aircraft Corp. v. United States

United States Court of Appeals, Federal Circuit

December 10, 2014

UNITED STATES, Defendant-Appellant

Page 1316

Appeals from the United States Court of Federal Claims in Nos. 09-CV-0844 and 10-CV-0741, Judge Charles F. Lettow.

JEFFREY A. HALL, Bartlit Beck Herman Palenchar & Scott LLP, of Chicago, Illinois, argued for plaintiff-appellant. With him on the brief was KATHERINE M. SWIFT. Of counsel on the brief was KAREN L. MANOS, Gibson, Dunn & Crutcher LLP, of Washington, DC.

JAMES W. POIRIER, Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant. With him on the brief were STUART F. DELERY, Assistant Attorney General, BRYANT G. SNEE, Acting Director, and STEPHEN J. GILLINGHAM, Assistant Director. Of counsel on the brief were KATHLENE P. MALONE, Defense Contract Management Agency, of Boston, Massachusetts, and DAVID C. HOFFMAN, Defense Contract Audit Agency, of Fort Belvoir, Virginia.

Before DYK, TARANTO, and CHEN, Circuit Judges.


Page 1317

Dyk, Circuit Judge.

Sikorsky Aircraft Corporation (" Sikorsky" ) has had a number of government contracts that are subject to the government Cost Accounting Standards (" CAS" ).[1] These standards govern the allocation of costs among the various contracts being performed by a government contractor. Allocation of costs between government contracts and non-government (or commercial) contracts is particularly important.

Between 1999 and 2005, Sikorsky allocated its materiel overhead costs as between government and nongovernment contracts according to a direct labor base. The question is whether this was consistent with the CAS. The government contracting officer issued a final decision against Sikorsky, finding Sikorsky's allocations between 1999 and 2005 noncompliant with CAS 418 and concluding that Sikorsky owed the government approximately $65 million in principal and $15 million in interest. Sikorsky filed a complaint with the Court of Federal Claims (the " Claims Court" ) challenging this determination. The Claims Court held that the government failed to establish by a preponderance of the evidence that Sikorsky violated CAS 418. We affirm.


During the period in question (1999-2005), Sikorsky held a number of contracts with the United States government to furnish helicopters and other goods and services. Sikorsky also sold aircraft and other goods and services to commercial customers.

Sikorsky's government contracts were subject to the CAS. The CAS are a set of nineteen standards promulgated by the Cost Accounting Standards Board

Page 1318

(" CASB" ). At issue in this case is the application of CAS 418, which pertains to the " [a]llocation of direct and indirect costs." 48 C.F.R. § 9904.418.

Direct costs can be allocated to a particular cost objective (a contract).[2] CAS 418 governs how indirect costs are allocated to government cost objectives. See id. § 9904.418-20. Unlike direct costs, indirect costs are not directly related to one particular cost objective (or contract).[3] See id. § 9904.418-30(a)(2)-(3). Therefore, an allocation base (or allocation method) is used to allocate indirect costs to cost objectives. See id. § 9904.418-40(c). The allocation base allows measurement of the quantity of costs in an indirect pool attributable to a given cost objective. See id. The allocation base used must allocate pooled indirect costs to cost objectives in " reasonable proportion" to the relationship between the indirect costs and the cost objective. Id. For example, direct cost may be used as an allocation base if the amount of direct costs consumed by a cost objective is correlated to the indirect costs consumed by that cost objective.

Sikorsky collected its materiel overhead costs in an indirect cost pool.[4] Materiel overhead costs included the costs of purchasing and handling materiel, which Sikorsky's labor force used to manufacture and assemble aircraft and parts. The purchasing activities included issuing requests for price quotations to suppliers, negotiating pricing, drafting purchase orders, and coordinating parts delivery schedules with suppliers. The materiel handling (or, in other words, materiel logistics) costs included costs attributable to master scheduling, parts and requirements planning, receiving, internal transportation, trucking, traffic, warehousing, kitting, area control stations, and expediting. These materiel overhead costs were indirect costs related to multiple contracts.

Ideally, materiel overhead costs could be allocated using a base of the direct materiel costs. Sikorsky determined that such an allocation method would result in a distortion. This is so because Sikorsky is required by the government to use substantial amounts of government furnished materiel (" GFM" ), which is provided by the government to Sikorsky for use in its government contracts. GFM includes engines, hovering infrared suppression systems and auxiliary power units, crash seats, support equipment, and radios. GFM is not included in Sikorsky's direct materiel cost base. Sikorsky's only costs for this GFM are materiel overhead (handling and storage) costs, which are increased even though the government provides the GFM. For its commercial contracts, Sikorsky incurs direct materiel costs in addition to materiel overhead

Page 1319

costs. Therefore, allocation of materiel overhead in proportion to direct materiel costs as between government and commercial contracts would assign too little to the former and too much to the latter.

Before 1999, Sikorsky allocated its materiel overhead costs using an allocation base of direct materiel costs minus certain costs incurred for commercial contracts, namely commercial aircraft engines and used helicopters. These commercial costs were subtracted in order to compensate for the exclusion of GFM from the direct materiel cost base.

However, Sikorsky concluded in 1998 that the base it used prior to 1999 did not adequately compensate for the government-favoring distortions caused by the exclusion of GFM from direct materiel costs. Sikorsky changed its allocation method effective January 1, 1999. Between 1999 and 2005, Sikorsky allocated its materiel overhead costs to government cost objectives using a direct labor base. In other words, Sikorsky allocated its ...

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