ARMED SERVICES BOARD OF CONTRACT APPEALS 
 
OPINION BY ADMINISTRATIVE JUDGE SCOTT 
 
 Pratt & Whitney (Pratt or P&W) has appealed under the Contract Disputes Act 
(CDA), 41 U.S.C. §§ 7101-7109, from a Defense Contract Management Agency 
(DCMA) Divisional Administrative Contracting Officer’s (DACO’s) final decision 
(COFD) dated December 24, 2013, asserting a $210,968,414 claim against it.  The COFD 
alleges that Pratt did not comply with Cost Accounting Standard (CAS) 418, Allocation 
of Direct and Indirect Costs, from January 1, 2005 to December 31, 2012, due to its use 
of manufacturing target costs (MTC) in lieu of revenue share payments as the cost of jet 
engine parts provided to Pratt under collaboration agreements.1  As we elaborate upon 
                                              
1 There is no dispute that the contracts at issue are CAS -covered.  The CAS is codified 
Appeal of - )  
 )  
Pratt & Whitney, a division of Raytheon ) ASBCA No. 59222 
  Technologies Company )  
 )  
Under Contract No. N00019-10-C-0005 )  
   
APPEARANCES FOR THE APPELLANT: Karen L. Manos, Esq.  
Dhananjay S. Manthripragada, Esq. 
Lindsay M. Paulin, Esq. 
Michael R. Dziuban, Esq. 
  Gibson, Dunn & Crutcher LLP 
  Washington, DC 
 
Jeffrey A. Hall, Esq. 
Cindy L. Sobel, Esq.  
Krista J. Perry, Esq. 
  Bartlit Beck Herman Palenchar & Scott LLP 
  Chicago, IL   
 
APPEARANCES FOR THE GOVERNMENT: Arthur M. Taylor, Esq. 
    DCMA Chief Trial Attorney 
 Peter M. Casey, Esq. 
Debra E. Berg, Esq. 
Alexander M. Healy, Esq. 
    Trial Attorneys   
    Defense Contract Management Agency 
    Hanscom AFB, MA   

 2 
below, Pratt acquires certain commercial engine parts from “collaborators.”  Unlike 
ordinary part suppliers, the collaborators share in the revenues and expenses of the engine 
programs.  Each part is assigned an MTC for internal purposes.  The sum of a supplier’s 
MTCs, as a percentage of the total engine cost, represents the supplier’s Gross Revenue 
Share (GRS) or percentage of participation in the engine program.  However, Pratt does 
not pay the GRS to the collaborators, but reduces the amount actually paid by Pratt to the 
collaborator by the collaborator’s share of certain expenses, resulting in a Net Revenue 
Share (NRS).  The COFD also asserts a claim under Federal Acquisition Regulation 
(FAR) 31.201-5, CREDITS.
2  
 
Pratt alleges that it complied with CAS 418; disputes the credit claim; and 
contends that DCMA breached a settlement agreement resolving these issues.  In 
June 2019, the Board conducted an 11-day hearing in Hartford, Connecticut on 
entitlement only.  The appeal is subject to a protective order.  For the reasons set forth 
below, we sustain the appeal in part and deny it in part. 
 
FINDINGS OF FACT  
 
Pratt’s Commercial and Military Engines Businesses 
 
1.  During the period relevant to this appeal, Pratt was one of the principal 
business segments of United Technologies Corp. (UTC).3  Pratt’s financial results are 
consolidated into UTC’s financial statements.  (R4, tab 714 at 2; tr. 5/122)  Pratt designs, 
develops, manufactures, sells, and services jet engines for military and commercial 
aircraft.  Manufacturing Operations (MO) is Pratt’s business segment “that produces the 
engines, modules and spare parts for commercial and military customers” (tr. 9/40) and 
provides product support (R4, tab 498 at 4756).  Commercial Engines (CE) is the 
business segment that sells commercial engines to commercial customers.  Military 
Engines (ME) is the business segment that sells engines to the U.S. and foreign 
governments.  Pratt uses the same manufacturing operations and facilities for military and 
commercial engines.  (Tr. 1/52, 9/40-41)  “[The] material comes into the same wells and 
is handled the same, regardless if it’s commercial or military . . .” (tr. 3/66).  
 
                                              
at 48 C.F.R. §§ 9903-05. 
2 We quote pertinent CAS and FAR provisions following our findings of fact. 
3 A segment is one of two or more business units or divisions that report directly to a 
home office.  See CAS 403-30(4), Definitions.  On April 3, 2020, UTC 
consummated a merger with Raytheon Company.  Raytheon Company became a 
wholly owned subsidiary of UTC, which changed its name to Raytheon 
Technologies Corporation.  This decision refers to Pratt and UTC as they were 
organized during the period at issue. 













 9 
the fairest measure’ of the value of the ‘consigned parts’” and found that the 
noncompliance period was retroactive to 1984.  United Technologies Corp., Pratt & 
Whitney, 01-2 BCA ¶ 31,592 at 156,118.  There is no indication in the record before us 
that DACO Swift’s Final Finding of Noncompliance mentioned MTC or Drag.  Pratt 
sought a COFD.  When DCMA did not respond, Pratt appealed to the Board from a 
deemed denial, which the Board docketed as ASBCA No. 47416. 
 
29.  On December 2, 1996, then-DACO William Morrow issued a COFD finding, 
as reported in the Board’s 2001 decision, that Pratt had:   
 
[I]mproperly excluded collaboration material from its 
allocation bases.  He concluded that the collaborators were 
“in essence subcontractors or vendors” to Pratt and that the 
net revenue share payment represented a cost to Pratt which 
should be . . . included in its allocation bases for the 
calculation of its MOH, G&A and IR&D/B&P rates.  He 
determined that Pratt’s failure to do so did not comply with 
the “requirement for a causal or beneficial relationship 
between indirect expenses attributable to collaboration parts 
and the final cost objectives that include collaboration parts” 
and violated CAS 410, 418 and 420. 
 
United Technologies Corp., Pratt & Whitney, 01-2 BCA ¶ 31,592 at 156,119 (see app. 
supp. R4, tab 85 at 3-4) (Emphasis added) 
 
The COFD determined that “[t]he net revenue share payment represents a cost to 
P&W because it is what P&W actually pays to its collaborators for the parts it receives” 
(app. supp. R4, tab 85 at 3) (emphasis added).  The decision defined “net revenue share” 
as “[g]ross revenue share less amounts deducted for DRAG credits” (id. at n.1).  The 
DACO found that the noncompliance resulted in a cost impact of $260,290,111 during 
the period 1984 through 1995 and demanded payment (id. at 4).  While it mentioned 
Drag, the Morrow COFD did not mention MTC.  The Board docketed Pratt’s appeal from 
this COFD as ASBCA No. 50453. 
 
30.  In 2001, the Board sustained ASBCA Nos. 47416 and 50453.
8  As part of its 
analysis, the Board reviewed the testimony of six individuals who were accepted by the 
Board as experts in, inter alia, the CAS; cost accounting for government contract 
purposes; generally accepted accounting principles (GAAP); and organizational 
economics and industrial organizations.  They testified on the nature of the revenue share 
payments made to collaborators and the business relationships under which those 
                                              
8 The Board denied a consolidated appeal, ASBCA No. 50888. 

 10 
payments were made.  United Technologies Corp., Pratt & Whitney, 01-2 BCA ¶ 31,592 
at 156,122-27. 
 
31.  The Board concluded that the economic substance of collaborator 
relationships should govern over their form, and that the collaborators were not 
subcontractors: 
 
We have concluded that the collaborators are not 
subcontractors to Pratt and that the program revenue share 
payments distributed by Pratt to them should not be treated as 
payment for the cost of the parts they manufacture.  
Accordingly, Pratt is not required to include revenue share 
payments distributed to its collaborators in its MOH 
allocation base . . . .  Pratt’s accounting for collaboration parts 
complies with [the relevant] CAS requirements. 
 
United Technologies Corp., Pratt & Whitney, 01-2 BCA ¶ 31,592 at 156,132.  
 
32.  On appeal, in 2003, in Rumsfeld, the U.S. Court of Appeals for the Federal 
Circuit discounted the expert testimony at the Board and analyzed the terms “cost” and 
“material cost” by reference to standard dictionaries, the FAR and the Uniform 
Commercial Code.  315 F.3d at 1369-71.  It found that those terms, as used in the CAS, 
“include the revenue share payments made by Pratt for the parts under the collaboration 
agreements.”  Id. at 1372.  The court did not specify whether it was referring to “gross” 
revenue share or “net” revenue share payments, after deductions for amounts a 
collaborator owed to Pratt.  However, footnote 13 provided that the “input cost” required 
that the “cost of a part thus must be measured as of the time it is used in production.”  Id.  
The court held that Pratt purchased parts from its foreign parts suppliers, and that the 
revenue share payments “comprise” costs for those parts.  Id. at 1377.  (We address the 
term “comprise,” a disputed issue, in our Discussion below.)  The court vacated and 
remanded the case.  In footnote 19, the court stated:        
 
To the extent that Pratt may argue that some portion of the 
revenue shares represented payments for items other than 
parts, Pratt may provide that evidence on remand.  The 
burden is upon Pratt, however, to show that the revenue share 
payments included payments beyond that for the 
collaboration parts.  The question of the propriety of  
  

 11 
removing Drag from the indirect cost pool is also not before 
us on appeal, and remains open on remand. 
 
Id. at 1377 n.19.
9  
 
 33.  Pratt’s use of “MTC” and “Drag” are at issue in the current litigation.  In 
Rumsfeld the Federal Circuit adopted the Board’s definition of the terms:   
 
Pratt was the only entity that had a direct contractual 
relationship to the purchasers of the engines.  The foreign 
parts suppliers had no direct relationship to the purchasers.  
However, under the collaboration agreements between Pratt 
and each parts supplier there was a complicated agreement 
that involved substantial risk sharing.  Pratt did not pay a 
preset price for the collaboration parts.  Instead, under the 
agreements, each collaborator was assigned a percentage 
share of the engine program (“program share”).  Substantially 
all of the collaboration agreements required each collaborator 
to pay to Pratt a substantial up-front “program entry fee” 
directly related to its program share.  The collaborator was to 
receive its program share of the revenues derived from the 
engine sale by Pratt “in consideration of the parts 
manufactured.”  The collaborator was to supply parts with an 
“equivalent engine value” based on its [MTC], i.e., parts with 
a particular combined value in relation to the total value of 
the engines produced by Pratt (the relative value of the parts 
being equal to the program share).  The MTC of a part was 
“the estimated cost of each part if Pratt were to manufacture 
the part.”  The collaborators also shared in certain costs that 
Pratt incurred for the engine programs, because a fee called 
“Drag” was subtracted from their revenue shares, the Drag 
representing Pratt’s “disproportionate program expenses,” 
which include “overhead for the program management and 
administration, marketing and sales, product support, material 
handling, and other administrative functions.”  The amount of 
“Drag” was based on a negotiated agreement between Pratt 
                                              
9 After the Federal Circuit remanded the appeals to the Board, the parties settled them 
(below).  Thereafter, DCMA asserted the claims currently at issue.  Although this 
appeal is arguably not part of the remand, Pratt asserts, and DCMA has not 
challenged, that there is no dispute that this appeal is governed by Rumsfeld (app. 
br. at 77).  We agree that, where relevant, Rumsfeld controls.  We address it further 
in our Discussion below. 

 12 
and each collaborator.  The express language of the 
collaboration agreements also provided that the relationship 
between Pratt and the foreign collaborators was that of 
independent contractors and not as partners. 
 
The collaboration parts were used by Pratt either directly to 
construct engines or as spare parts. 
 
Rumsfeld, 315 F.3d at 1364-65 (citations omitted) 
 
34.  The evidence in the current litigation concerning Drag is consistent with that 
in the prior litigation.  In recognition of Pratt’s lead role and the many expenses it incurs 
to manage the program, under the collaboration agreements Pratt withholds Drag, a 
negotiated percentage reduction from the collaborator’s revenue share, from its payments 
to a collaborator.  Drag expenses include Pratt’s “disproportionate” share of engine 
program expenses that are not incurred by the other collaborators, such as material 
handling; shipping; “customer-facing” activities by the sales force; marketing and 
product support; employee wages and fringe benefits; and related administrative 
expenses.  (Undisputed portion of APFF 40; R4, tab 329 at 9; tr.5/80-81, 6/198-00, 
7/143-44, 8/37; ex. A-385 at 81, ¶ 146) 
 
35.  Amy Johnson, Pratt’s vice president and controller (tr. 5/34-35), referred to 
Drag as a negotiated “fee” from a collaborator that Pratt earns as lead collaborator in a 
program (tr. 5/62, 80-81) or a “tax on revenue share” (tr. 5/87).  She stated that Drag is 
effected through a reduction of the collaborator’s share of gross revenue.  Drag is 
recorded as a reduction in cost of sales.  It can include many different kinds of things.  
(Tr. 5/80, 85-86) 
 
36.  Pratt’s expert LeeVan described Drag in her expert report as revenue share 
payments being “reduced or ‘dragged’ down” (ex. A-385 at 81, ¶ 146).  We address 
Drag, MTC and her report further, below. 
 
Pratt’s Financial Accounting for Collaboration Programs 
 
 37.  In Rumsfeld the court noted that, in 1996, Pratt changed its accounting 
practice regarding its payment to collaborators: 
 
From the inception of the collaboration agreements until 
July 2, 1996, after this dispute arose, Pratt treated its payment 
to collaborators differently for public financial statement 
purposes.  For that purpose, Pratt treated the payments as a 
“cost of sales.”  Cost of sales represents the cost to the seller 
of the products sold.  After this dispute arose in 1996, Pratt 

 13 
issued a public statement stating that the revenue shares 
would instead be treated as a reduction of gross sales, using 
Pratt’s internal accounting methodology.  This accounting 
change meant that for financial statement purposes the 
collaboration parts would no longer have an associated cost. 
 
Rumsfeld, 315 F.3d at 1366. 
 
38.  Upon Pratt’s sale of an engine or spare part, Pratt records the revenue and 
accounts receivable in its general ledger (undisputed gov’t proposed finding of fact 
(UGPFF) 107).  For Pratt’s financial reporting, it classifies a collaborator’s share of 
revenue as a cost of products sold, with Drag as a reduction to the cost of products sold.  
It does not break Drag out into specific accounting categories or offset it against specific 
expenses.  (Tr. 5/61-62, 80-81, 85, 87, 191-92)  However, each collaborator agreement 
defines the elements of Drag recovery for that particular collaborator (R4, tab 143 
at 253061).  From 2005 through 2012, the period at issue in this appeal, there were no 
material changes in the collaboration agreements’ DRAG provisions (tr. 11/134; 
UGPFF 171).  
 
 39.  As Pratt’s vice president/controller Johnson described it:   
 
Drag isn’t explicit around the amounts, so instead of trying to 
figure that out, we record drag consistently across our 
programs as a reduction of cost of sales because drag can 
include many different types of things. 
 
(Tr. 5/85)  Pratt determined that, given the range of Drag rates in its various programs, it 
would account for Drag as a reduction in cost of sales “versus allocating it across expense 
categories” (tr. 5/87).  However, Pratt was able to allocate the elements of Drag to 
specific line item expenses and formerly did so (tr. 5/88).  
 
40.  According to an internal Pratt memorandum dated July 19, 2007, after its 
2006 settlement with the government (below): 
 
With the elimination of the government requirement to 
allocate the recoveries by these line Items, the Government 
Accounting Group will no longer provide the allocations.  In 
general, the allocation to the expense line items would not 
benefit P&W as a whole while requiring a great deal of 
manual work for analysts during closing. 
 
(R4, tab 143 at 253062; UGPFF 166)  
 

 14 
 41.  On December 12, 2007, the Financial Accounting Standards Board (FASB) 
issued EITF (Emerging Issues Task Force) 07-1, “Accounting for Collaborative 
Arrangements,” which it incorporated into its Accounting Standards Codification (ASC), 
Section 808, “Collaborative Arrangements,” effective for financial statements after 
December 15, 2008.  Pratt adopted EITF-07-1 as of January 1, 2009.  (R4, tab 712B 
at 52, tab 723; app. supp. R4 tab 1488 at 1, n.1, 53; see tr. 1/241, 4/192, 5/46-47; see 
GPFF 105)  
 
42.  EITF-07-1 states in part: 
 
For costs incurred and revenue generated from third parties, 
the participant in a collaborative arrangement that is deemed 
to be the principal participant …should record that transaction 
on a gross basis in its financial statements. 
 
(EITF-07-1 ¶ 17; see ex. A-385 at 25) 
 
43.  A June 23, 2009 internal Pratt memorandum advised that Collaboration 
Accounting would “[c]alculate the revenue share payment, including determination of 
applicable offsets (e.g., FIA, warranty, and certification expenses” (R4, tab 175 
at 19781)).  
 
 44.  UTC’s annual Form 10 K for the fiscal year ended December 31, 2009 (which 
covered Pratt (see R4, tab 712B at 3)) reported that: 
 
The Collaborative Arrangements Topic of the FASB ASC 
requires that participants in a collaborative arrangement 
report costs incurred and revenues generated from such 
transactions on a gross basis and in the appropriate line items 
in each company’s financial statements. 
 
. . . . 
 
We adopted the provisions of the Collaborative Arrangements 
Topic as of January 1, 2009.  As required, we have applied 
the provisions retrospectively for all periods presented.  As a 
result, the collaborators’ share of revenues, which were 
previously reported on a net basis, are now reported on a 
gross basis.  Certain reclassifications were made to the prior 
year amounts in both the Consolidated Balance Sheet and 
Consolidated Statement of Operations.  In the Consolidated 
Balance Sheet, accounts receivable and accounts payable 
were each increased by $368 million at December 31, 2008, 

 15 
in order to reflect the amounts owed to our collaborative 
partners for their share of revenues on a gross basis. 
 
(R4, tab 712B at 52, n.15) 
 
 45.  In its publically reported financial statements for all periods relevant to this 
appeal, Pratt reported collaboration program revenues net of FIA.  Said to be relying 
upon GAAP, it treats FIA as a reduction in revenue rather than as a cost or expense.  
(Tr. 5/44-45, 56, 110-12, 115, 124-25, 131, 198; undisputed portion of APFF 104)  Pratt 
accrues the full amount of FIA as a liability to the airline at the time Pratt delivers an 
engine to the airframer (tr. 5/146-48).  FIA is the most significant reduction from revenue 
share payments.  It is typically the single greatest reduction in the engine program 
revenue.  (Ex. A-385 at 19, ¶ 36; UAPFF 110).  In Ms. Johnson’s experience, “[it] would 
be grossly overstating revenue” if Pratt did not exclude the FIA concessions from 
revenue (tr. 5/112).  Pratt always reports revenues net of FIA.  It reported revenues net of 
FIA both before and after EITF-07-01 (tr. 5/115, 125).   
 
 46.  Under EITF 07-01, Pratt, as lead collaborator, was required to include the 
collaborators’ share of revenue in cost of sales instead of netting it against Pratt’s 
revenue.  As a result of EITF 07-01, Pratt reports the collaborators’ share of revenue, net 
of FIA, in Pratt’s revenues, and reports collaborators’ share of revenues, net of FIA, as an 
expense in cost of sales, or cost of products sold.  It must also include a footnote 
disclosing the amount of collaborators’ revenue share that is included in cost of sales.  
(App. supp. R4 1488 at 51, n.15; tr. 4/193, 5/118-20, 131-32, 238; ex. A-385 at 27-28) 
 
 47.  Since 2009 UTC has included a footnote in its public financial statements that 
notes the requirement that Pratt include all collaboration program revenues (net of FIA) 
in its revenues and in its expenses (tr. 5/56-57, 123-24).  The footnote states in part: 
 
Revenues generated from engine programs, spare parts sales, 
and aftermarket business under collaboration arrangements 
are recorded as earned in our financial statements.  Amounts 
attributable to our collaborative partners for their share of 
revenues are recorded as an expense in our financial 
statements based upon the terms and nature of the 
arrangement. 
 
(App. supp. R4, tab 1488 at 51)  
 
 48.  For financial accounting purposes, Pratt does not record a cost in inventory 
when it receives engine parts from a collaborator.  Pratt incurs the obligation to pay a 
collaborator when there is a sale of an engine or spare parts.  If nothing is sold in a given 
month, Pratt does not owe a collaborator.  (Tr. 2/11, 5/116, 150-53; APFF 117 and gov’t 

 16 
response.)  Pratt takes “flash title” to the parts when the sale occurs.  Under this flash 
transfer Pratt takes title “for a second.”  (Tr. 5/150-51)  Pratt then has the obligation to 
pay its “partner”10 its share of revenue, net of FIA (tr. 5/151).  A collaborator can pay 
FIA to Pratt by check or it can be netted out from the wire transfer payment Pratt makes 
to the collaborator (tr. 5/152).  Ms. Johnson expressed that “[w]e don’t buy parts from the 
collaborators.  They share in the revenue of the program” (tr. 5/116). 
 
 49.  In its collaboration agreement administration, Pratt uses the terms “hard 
pegging” and “soft pegging.”  A part is “hard pegged” when it is consumed from 
inventory, which can take minutes to years.  Hard pegging means that a part is assigned 
to a requirement and will not change.  A sale does not occur until hard pegging and the 
inventory is cleared in the receiving well or in the shipping well.  “Soft pegging” means 
aligning a part to a requirement based upon dates and first in/first out priorities.  This can 
change depending upon actual use.  (Tr. 8/96, 101)    
 
 50.  In the late 1990’s, Pratt changed from a practice of just subtracting Drag from 
wire payment transfers to a collaborator and billing it separately for FIA and PCE, to 
netting down the total wire transfer payment by subtracting DRAG, FIA, PCE and 
program expense obligations from it.  Pratt’s reasons for the change were to simplify 
procedures; consider the time value of money by eliminating the time waiting for an 
invoice to be paid; and eliminate the need to pursue a collaborator that did not pay 
(tr. 6/175-76).  According to Mr. McIntire, the change “better matches the concept of a 
true net revenue share,” which is the collaborator’s share of revenues less Drag, FIA, 
concessions, PCE and anything else that renders the payment “more of a true net revenue 
position for a collaborator” (tr. 6/176-77). 
 
51.  Pratt’s MO pool of expenses includes costs such as procurement, supplier 
quality, supply chain management, expenses, material handling, receiving, scheduling 
and other costs.  It allocates its MO costs associated with the manufacture and sale of 
engines between its military and commercial businesses.  Pratt’s direct material allocation 
base includes three types of direct material:  direct material associated with parts that 
Pratt manufactures; vendor parts that it buys from suppliers; and collaborator material 
valued at MTC.  (Tr. 9/42-43; ex. A-385 at 30 ¶ 55) 
 
 52.  Pratt enters the parts it purchases from vendors in its accounting system at 
their incurred cost, which is the purchase price that Pratt actually pays, net of any 
discount or concession.  Pratt enters into the general ledger the direct material cost of 
parts it manufactures.  It does not add G&A and profit to those costs.  (Tr. 9/43-45)   
 
                                              
10 As reflected above, witnesses, documents and counsel sometimes referred to 
collaborators as “partners,” (see, e.g., tr. 6/86, 88, 7/167, 8/27, 9/180), although 
Mr. McIntire denied any partnership in the legal sense (tr. 7/245). 





 19 
example, Ms. Lazinsk testified as follows: 
 
Q  To your knowledge, after Rumsfeld was decided, did Pratt 
ever conduct any kind of study or examination to determine 
whether or how it could record a revenue share based cost as 
the cost of collaboration parts in the overhead base? 
 
A  Not that I'm aware of, no. 
 
Q  Was that, was the matter of a possible cost accounting 
change that used a revenue share based cost as the cost of 
collaboration parts ever discussed in Pratt? 
 
A  No.  Our belief was that manufacturing target cost was the 
cost of the parts. 
 
(Tr. 8/263; see also tr. 7/298-99) (similar testimony of Mr. Michael Munley, who held 
senior cost accounting positions at Pratt (tr. 7/254))  
 
 61.  Ms. Lazinsk confirmed that, after receipt of DACO Ennis’ disposition notice, 
Pratt’s alleged CAS 418 noncompliance should be corrected (below), but Pratt never did 
anything to correct the noncompliance (tr. 8/292).  She was not aware of any particular 
materiality threshold; believed that it was up to DCAA and the DACO; and believed that 
the DACO was the appropriate person to make materiality determinations under the CAS 
(tr. 9/24-25). 
 
 62.  Ms. Lazinsk understood that CAS 418 requires in a direct material overhead 
base that actual cost be used for the direct material and that, under the CAS regulations 
and Rumsfeld, “material cost or cost of the parts is the price you pay” (tr. 8/263).  She 
disagreed with DCMA counsel’s proposition that “the cost of the parts that Pratt pays is 
revenue share” and responded that “[r]evenue share is not a cost of parts,” but is a 
calculated number that identifies a collaborator’s share of the revenue from an engine 
sale by Pratt (id.).   
 
 63.  Pratt’s cost impact proposal concerned the CAS noncompliances asserted in 
the COFDs at issue in ASBCA Nos. 47416, 50453, and 54512.  On July 27, 2004, Pratt 
noticed an appeal from the deemed denial of the cost impact component of its submission 
and the Board docketed the appeal as ASBCA No. 54692.  (See R4, tab 129 at 109-10)  
 
 64.  By letter of September 7, 2004 to DACO Ennis, Pratt enclosed a revised CAS 
Disclosure Statement describing the planned changes to its accounting practices and a 
rough order of magnitude (ROM) cost impact analysis for Calendar Year (CY) 2005 (R4, 

 20 
tab 105 at 11178).  As related to Pratt’s manufacturing overhead allocation base, the 
revision stated:  “Material received from collaborators valued at [MTC]” (id. at 11191).   
 
65.  Prior to January 1, 2005, Pratt did not record anything in its material overhead 
base for collaborator parts.  On January 1, 2005, Pratt implemented the changed 
accounting practices described in its May 25, 2004 letter (finding 59) and revised 
Disclosure Statements (see tr. 3/168).  The forward pricing rate agreements and DCMA 
forward pricing rate recommendations for each year from 2005 to 2010 used MTC as the 
cost of collaboration parts in the material overhead base.  The forward pricing rate 
recommendation in 2010 included MTC for the cost of collaboration parts.  (Tr. 3/44-45, 
8/248, 9/60-62)
12    
 
Audits 
 
66.  In a draft statement of conditions and recommendations (SOCAR), as 
described in Pratt’s February 14, 2005 letter to DCAA (finding 77), DCAA rejected 
Pratt’s MTC proposal on the grounds, among other things, that it did not comply with 
CAS 418 or Rumsfeld (see R4, tab 107 at 9841).  DCAA also disagreed with Pratt’s 
intention to remove Drag credits from its indirect cost pools, alleging that this would 
violate FAR 31.201-5 (see id. at 9842-43).  
 
67.  In connection with DCAA’s audit of Pratt’s revised disclosure statement, 
Marianne Hart, a supervisory auditor at DCAA during the relevant time periods and a 
DCMA cost price analyst as of the hearing (tr. 3/68-69), prepared a work paper, dated 
January 4, 2005, “to determine materiality of the cited CAS 418 noncompliance.”  The 
work paper’s “conclusion” states:  
 
The proposed practice of including MTC in the MO MOH 
base would cause increased cost on government contracts of 
 when compared with the CAS compliant 
MO MOH base.  Therefore, this noncompliance is considered 
material.  
 
(R4, tab 506 at 5116; tr. 3/82-83) 
 
68.  To her recollection, Pratt never described MTC to Ms. Hart as an actual cost it 
pays for collaborator parts and, in her view, notional costs are not actual costs (tr. 3/80, 
91).  
 
 69.  Scott Moss, a certified public accountant (tr. 5/159), was Pratt’s manager of 
collaboration accounting from 2009 until mid-2017.  The Collaboration Accounting 
                                              
12 See also tr. 7/59-60 for pre-2010 period.   


 21 
group was responsible for determining revenue share and applicable Drag and, among 
other things, making monthly payments to collaborators.  The Collaboration 
Administration group was separate.  Among other things, it kept track of the parts 
delivered by collaborators, which were recorded in Pratt’s inventory system.  It tracked 
MTC and reported on a monthly basis for collaboration accounting purposes.  
(Tr. 5/160-62, 170, 172, 9/41)   
 
 70.  Mr. Moss described Drag as an agreed upon percentage, per a particular 
collaboration agreement, that would be reduced from the revenue paid to the collaborator.  
It appeared in the general ledger as basically an “other cost of sale.”  It was not on the 
collaborator cost of products sold line.  (Tr. 5/170) 
 
 71.  Mr. Moss did not use MTC in his job.  Pratt did not make monthly payments 
of MTC to collaborators for parts.  They were paid net revenue share.  MTC values did 
not enter into the calculation of the amount of revenue share payable to collaborators.  
Mr. Moss does not believe that anyone at Pratt ever told him that MTC was the actual 
cost of the parts supplied by collaborators.  (Tr. 5/171-73, 260) 
 
 72.  In calculating the net revenue share to be paid to collaborators in cash, 
Mr. Moss and his Collaboration Accounting group never included an amount for return 
on investment or return on entry fee (tr. 5/237-38).  
 
 73.  Ms. Susan Gest was Pratt’s manager of Collaboration Administration from 
2008 through 2012, prior to her retirement in 2013.  Collaboration Administration was 
the conduit between Pratt and its collaborators.  It communicated with them regarding 
financial information and supplied them with monthly reports produced by Collaboration 
Accounting.  (Tr. 9/162-64)  Collaboration Administration tracked parts by collaborator 
and knew to which engine program a part related (tr. 9/168). 
 
74.  A January 15, 2012 “Collaboration Administration-Financial Procedure” 
document on the subject of “Settlements-Over/Under Production Contribution,” signed 
by Ms. Gest, described the process of establishing and communicating the values of the 
annual over/under production contribution settlements between Pratt and its collaborators 
(below) (R4, tab 335 at 39799, 39803; tr. 9/165)  The document defined “MTC” as:   
 
[N]otional cost estimates that are assigned to program parts.  
The dollar amount of over or under production is expressed in 
MTC values.  MTC values are normally used only when 
referring to the value of an individual part, or when  
  



 23 
credits are not allocable, they are not allowable on 
government contracts. 
 
(Ex. A-28 at 3)  Her view was that, in order for the government to share in the credits, it 
must prove that the overhead expenses were allocated to government contracts (tr. 3/102-03).  
 
 79.  Ms. Hart was interviewed on April 28, 2010, during a DoD Office of 
Inspector General (OIG) investigation of the parties’ 2006 settlement of their disputes 
(below) (app. supp. R4, tab 861).  Between that interview and a subsequent OIG 
interview on December 14, 2010, Ms. Hart recused herself from the Pratt CAS 418 
noncompliance audit issues.  Mr. Ed Higgins then became the supervisory auditor.  
Ms. Hart explained that, after her first interview, she had been second-guessing herself 
and getting confused.  She wanted a “clean break, clean supervisor [and] clean opinion.”  
(App. supp. R4, tab 915 at 57; tr. 4/101-02) 
 
80.  Although Ms. Hart expressed uncertainties and caveats, she concluded in her 
December 14, 2010 OIG interview that she had not changed her position on the Drag 
credit issue (App. supp. R4, tab 915 at 46-48).  As of the 2019 hearing, Ms. Hart no 
longer believed that the government bore the burden of proof on the credits issue.  She 
opined that it was incumbent upon Pratt to show that its credits practice complied with 
the FAR.  (Tr. 3/183)  Ms. Hart believed that, while the government concluded that Drag 
credits should stay in the overhead pool, it did not test to see if Drag applied to any costs 
that had been allocated to government contracts and reimbursed by the government 
(tr. 3/192).  
 
 81.  Regarding revenue share payments, Ms. Hart found that collaborators are paid 
when they share in the revenue, not necessarily when parts are delivered.  Pratt did not 
record a cost for collaboration parts in its books and records at the time parts were 
delivered.  (App. supp. R4, tab 564, tr. 3/158-59, 4/90)  It was her understanding that the 
“revenue share . . . exchange happens at the end of the process, after the part is 
incorporated into the engine” (tr. 3/279).   
 
 82.  It is undisputed that:   
 
In a series of audit reports issued on September 23, 2005, 
DCAA challenged Pratt’s January 1, 2005 cost accounting 
practice changes.  See, e.g., [Rule 4, tab 498].  DCAA alleged 
that Pratt’s use of MTC as the cost of collaboration parts in its 
indirect cost allocation bases violated CAS 418 because Item 
4.1.0(b)(1)(d) [in] the revised Disclosure Statement stated that 
material received from collaborators was “valued” at MTC  
  

 24 
and CAS 418-50(d)(iv) determines that a material “cost” base 
is appropriate.  [R4, tab 498 at 4750]  
 
(UAPFF No. 154; see also, R4, tab 498, ex. A-39 (listing reports))   
 
83.  For example, one of the September 23, 2005 audit reports, 
No. 2641-2005B19200001, stated that Pratt had proposed unilateral accounting changes 
in 2004, which it had implemented on January 1, 2005, which did not comply with 
CAS 418 and FAR 31.201-5.  This included the use of MTC, which was not the cost of 
collaboration parts, as Rumsfeld had determined.  Also, “[t]he proposed practice to stop 
applying Drag credits to the MO MOH pool and the MO [G&A] pool” violated 
FAR 31.201-5.  (R4, tab 498 at 4748)  The report elaborated: 
 
[T]he practice included in the revised language of the 
disclosure statement is in noncompliance with CAS 418 and 
[Rumsfeld] that the cost of the collaboration parts is revenue 
share.  CAS 418-50(d)(iv) determines that a material cost 
base is appropriate for the allocation of indirect costs if the 
activity being managed or supervised is a material-related 
activity. 
 
(Id. at 4750)  The report continued: 
 
Since the court has determined the cost of the 
collaboration parts to be revenue share, the use of MTC, 
P&W’s estimate to manufacture the parts, is in 
noncompliance with CAS 418.50(a)(2).  
 
We recognize that footnote 19 [in Rumsfeld] does 
permit P&W to argue that some portion of the revenue share 
“represents payments for items other than parts”.  However, 
until such information is presented and evaluated, we will 
continue to require that the cost of the collaboration parts 
included in the MOH base be total revenue share. 
 
(Id. at 4751)
13  The audit report recommended that Pratt “remove any reference to [MTC] 
in the MO disclosure statement and replace it with ‘Revenue Share’” (id.). 
                                              
13 DCAA disagreed with Pratt’s position that the change to use of MTC was a change in 
accounting practice.  Rather, according to DCAA, the proposed addition of 
collaboration parts to the manufacturing overhead base was a proposed correction 
of a noncompliance.  Pratt was not changing the method by which costs in the base 
were measured; it was merely adding a cost to the existing base that should have 





 27 
withholdings from revenue share distributions to the 
collaboration partners and that to do so constituted 
compliance with the credits cost principle.  Accordingly, Pratt 
amended its Disclosure Statement to incorporate this 
methodology and, by letter dated December 23, 1992, 
tendered a voluntary refund to the Government reflecting the 
impact that crediting the pools would have had on negotiated 
firm fixed price military contracts for the years 1986 through 
1991.… 
 
. . . . 
 
Pratt has now changed its cost accounting practices to 
reflect the noncompliance upheld by the Federal Circuit in 
2003.  Under Pratt’s revised practice, collaboration material is 
included in the MOH base and receives its allocable share of 
the costs of MOH activities, as does all other material 
included in the allocation bases.  Accordingly, crediting the 
overhead pool for drag no longer serves any equitable or valid 
accounting purpose; to the contrary, including a cost for 
collaboration parts in the MOH base and also crediting the 
MOH pool for drag effectively results in a windfall for the 
Government.  In short, Pratt’s treatment of drag under its 
prior practice is completely irrelevant to determining the 
proper accounting for drag under its revised practice. 
 
(Id. at 4)   
 
DCAA Review, Settlement Agreement, Accounting Practices 
Agreement, and Dispositions14 
 
87.  During 2006 negotiations preceding the settlement of the litigation, 
DACO Ennis and Mr. Donald E. Nichols, Pratt’s Controller, ME, met several times to 
discuss the appropriate settlement amount (UGPFF 70).  During an April 29, 2006 
meeting Pratt gave DCMA a copy of a proposed settlement agreement, signed by 
Mr. Nichols, which included settlement of the “2005 Forward issues” as part of the 
$283,000,000 settlement amount (app. supp. R4, tab 555 at 3; UAPFF 160).  
 
88.  On May 3, 2006, DACO Ennis, Ms. Hart (then a DCAA Senior Auditor), 
Ms. Lazinsk and another Pratt representative met to discuss revising Pratt’s Disclosure 
                                              
14 In the context of this appeal, a “disposition” was the DACO’s resolution of audit report 
findings regarding compliance or noncompliance with the CAS (tr. 1/51). 

 28 
Statement (app. supp. R4, tab 564).  That same day Ms. Lazinsk submitted “updated 
Manufacturing Disclosure Statement Sections 1.6.1 and 4.1.0 with wording clarification 
regarding Collaborator Material in the Material Overhead Base” to DACO Ennis (ex. A-76 
at 25629).  Ms. Lazinsk noted that the changes did not change the manner in which Pratt 
accounted for the cost (id.). 
 
89.  Pratt’s “Collaboration Administration-Financial Procedure” document 
(Collaboration document), on the subject of “Government Accounting-Collaborator 
Supplied Part Costs,” effective May 3, 2006, and incorporated into its Disclosure 
Statement, contained the following pertinent definitions: 
 
Engine Equivalency (EE)-The notional cost value of a 
program part, assembly or entire engine expressed as a 
percentage, or in decimal form, of the total notional cost 
value of the all parts [sic] in the original base year engine. 
 
. . . . 
 
Manufacturing Target Costs (MTC)-the notional cost value 
(manufacturing direct and indirect expenses, excluding SG&A 
and profit) of collaborator supplied parts on the  
 programs.  
 
Notional Part Value (NPV)-the notional cost value for 
Collaborator supplied parts on the program.  
 
. . . . 
 
Part Base Value (PBV)-the notional cost value for 
Collaborator supplied parts on the  program.  
 
(R4, tab 502 at 4887-88)  
 
90.  On May 3, 2006, DACO Ennis asked DCAA to audit the revised Disclosure 
Statement (see app. supp. R4, tab 586 at 2909).  Ms. Hart’s work papers report that: 
 
Eileen called the meeting to ask [Pratt] to provide a 
disclosure statement revision and supporting documentation 
to help resolve the current DCAA cited CAS 418 
noncompliance with [MTC].  At the meeting I explained that 
section 1.6.1 of the disclosure statement does permit the[m] to 
use a less formal accounting technique to identify cost of 
parts.  Since P&W does not record the cost of collaboration 


 29 
parts on the formal books of record, we would allow a less 
formal technique as long as they could support that the less 
formal technique reasonably reflects the Cost of the 
collaboration parts.   
(App. supp. R4, tab 564) 
 
91.  On May 5, 2006, Pratt submitted an “updated version of the Settlement 
Agreement language” to DACO Ennis (app. supp. R4, tab 572), which included 
references to notices of disposition and settlement of the 2005 Forward issues (app. supp. 
R4, tab 574).  
 
92.  In response to the DACO’s May 3, 2006 request, DCAA examined Pratt’s 
revised material overhead disclosure statement and concluded in a May 5, 2006 draft 
audit report that the practice of using MTC to determine the cost of collaboration parts in 
the material overhead base was “compliant with CAS 418 and adequately described.”  
However, DCAA opined that the practice did not comply with Rumsfeld’s conclusion that 
revenue share was the cost of the collaboration parts.  DCAA did not consider the cost 
impact of the alleged noncompliance to be significant at the time.  (App. supp. R4, 
tab 586 at 2909)  
 
93.  On May 10, 2006, Ms. Hart transmitted a revised draft audit report to her 
supervisor, Ms. Farrelly (ex. A-85).  The draft stated in part:  
 
 The contractor proposes to use [MTC] to determine the 
cost of collaboration parts included in MO’s material 
overhead base.  We find this practice compliant with CAS 
418 and adequately described.  However, it should be noted 
that the practice is not consistent with [Rumsfeld].  The court 
found that “revenue share payments” are the cost of the 
collaboration parts. . . 
 
 . . . . 
 
Since P&W does not record the cost of collaboration 
parts as a cost on its formal books of record, P&W has 
proposed, via the Financial Procedure referenced in [sections 
4.1.0 and 1.6.1 (C) of its revised Disclosure Statement], to use 
the established MTC as the practice to determine the cost of 
the parts. 
 
Although we recognize that [Rumsfeld] determined 
revenue share payments to be the cost of the collaboration 

 30 
parts, we reviewed the described procedure to determine if 
MTC is a valid measure of the cost of the collaboration parts.  
Based on the following conclusions, we have determined 
MTC to be a reasonable and stable measure of the cost of the 
collaboration parts[:]  
 
• A comparison of MTC amounts to purchase orders shows 
the MTC to be equal to or greater than purchase order 
amounts[.]  
 
• Consistent with subcontractor price, MTC includes material, 
labor, and overhead costs.  
 
• Once MTC amounts are established, the amounts cannot 
change without approval of the collaborator.  
 
• Certain collaboration partners have terminated their 
collaboration agreement and negotiated long term supply 
agreements with P&W where the foreign company is paid 
MTC as a purchase order amount.  
 
(Id. at 1, 3; see also tr. 3/241)  Ms. Hart agreed that the collaboration agreements 
included a specific dollar amount for MTC (tr. 3/245-46).  
 
94.  On May 11, 2006, Ms. Hart transmitted to Ms. Farrelly a revised draft audit 
report, which stated in part:  
 
Previously, . . . we reported this proposed practice in 
noncompliance with CAS 418 because the direct material 
base should include a cost that is consistent with [Rumsfeld].  
That decision stipulated that “revenue share payments” 
comprise the cost of the parts.  Subsequent to that report, the 
[DACO] has determined the revenue share payments to be 
defined as gross revenue share less Drag and FIA.  Based on 
the DACO’s determination of revenue share payments, we 
consider MTC to be an adequate measure of the cost of the 
collaboration parts.  We now find this practice compliant with 
CAS 418 and adequately described.   
 
(Ex. A-87 at 3)  
 
95.  By email of May 16, 2006 to Ms. JeanMarie Faris, Counsel, DCMA Hartford, 
Pratt’s in-house counsel, Mr. David Ware, advised that he was drafting what he described 

 31 
as “an Advance Agreement to address the 2005 forward issues” (R4, tab 119).  On May 17, 
2006 he sent her “a draft of an Advance Agreement” (R4, tab 121). 
 
96.  DCAA personnel exchanged a series of internal emails on May 16, 2006.  In 
response to a comment from Ed Nelson, DCAA Northeast Regional Director (see 
APFF 173), that it is “obvious” that “there is a ton of profit in those engines,” Ms. Hart 
opined:  “What is obvious is that revenue share is a reimbursement to the partner for 
more than just part cost.  I don’t think we can make an assumption regarding profit 
without looking at all the other costs.”  (Ex. A-103)  
 
 97.  However, Mr. Nelson directed the DCAA auditors to report that the use of 
MTC was noncompliant with CAS 418 and that, while the report would reference 
DCAA’s comparison of revenue share payments (as defined by the DACO) to MTC, 
DCAA was not to opine on the significance or materiality of the comparison (app. supp. 
R4, tab 640).   
  
98.  Ultimately, in its audit report of May 24, 2006, DCAA determined that Pratt’s 
revision to its disclosure statement adequately described its accounting practice but that 
its proposed procedure for determining the cost of the collaboration parts as MTC did not 
comply with CAS 418 and Rumsfeld (R4, tab 550 at 10029, 10031-32). 
 
99.  After Mr. Nichols’ presentation of a draft settlement agreement to 
DACO Ennis, DCMA counsel, Ms. Faris and Pratt counsel, Mr. Ware, exchanged several 
additional drafts.  The communications between them also included some discussion of 
the handling of the 2005 forward accounting issues.  (Tr. 4/24, 35, 75, 10/245; UGPFF 78)  
Mr. Nichols stated that the Pratt and DCMA legal personnel “work[ed] out the actual 
agreements that ultimately got signed” in June 2006 (tr. 10/245). 
 
100.  On May 25, 2006, Ms. Faris sent to Mr. Ware “a markup of the settlement 
agreement based on the assumption that we will be signing a separate agreement on the 
2005 forward issues” (R4, tab 127 at 967) (emphasis added).  Mr. Ware referred to a 
separate agreement when he responded to Ms. Faris’ removal of an accord and 
satisfaction clause as follows: 
 
If your concern is about Pratt trying to claw back the $283M, 
part of the whole idea of moving the 2005 forward issues to a 
separate agreement was so that we would not be able to 
claim the money back if the government failed to live up to a 
commitment made concerning the 2005 forward issues. 
 
(R4, tab 127 at 966) (Emphasis added)  Mr. Ware referred to the APA as an “Advance 
Agreement” (id. at 965-66; see also R4, tab 123 (Mr. Ware’s May 18, 2006 email to 
Ms. Faris referring to separate Advance Agreement)).  At the hearing, Ms. Faris noted 

 32 
that Mr. Ware had offered the separate advance agreement.  She understood the APA to 
have been executed pursuant to FAR 31.109, Advance Agreements.  (Tr. 4/28-29, 36) 
 
 101.  Although appellant listed Mr. Ware as a hearing witness, it ultimately did not 
call him to testify. 
 
102.  The parties eventually reached consensus to resolve the issues arising under 
the 1992 noncompliance determination, the 1996 and 2003 COFDs, and the appeals 
arising therefrom.  This was memorialized in two agreements they signed and four 
documents issued by the DACO.  The agreements and all of the other documents (below) 
were dated and/or effective on June 5, 2006 and signed that day during the same meeting.  
(R4, tabs 128-129; app. supp. R4, tabs 29-32; tr. 7/113-16, 10/247)  Mr. Peter Leahy, 
DCMA Business Operations, Group Chief, advised government personnel by email dated 
June 5, 2006, on the subject of “Collaboration Agreement Signed,” that Pratt and the 
DACO had signed “the agreement settling the collaboration issue” that morning and that 
he and the DACO “did the right thing and in the best interests of the Government” (app. 
supp. R4, tab 702).   
 
103.  The “Settlement Agreement,” signed by DACO Ennis and Mr. Nichols, 
reported that the government’s claims of CAS-noncompliance (collectively, the 
“Government claim”) had been extended through December 31, 2004, and that the 
government was entitled to interest accruing to the June 5, 2006 effective date of the 
agreement.  It stated that, with respect to various final negotiated indirect cost rates and 
forward pricing rate agreements, the government and Pratt had entered into savings 
agreements that, among other things, preserved the parties’ rights to reopen the 
agreements depending upon the outcome of the then-pending appeals.  The Settlement 
Agreement referred to these agreements as the “Savings Agreement Collaboration 
Provisions.”  (R4, tab 129 at 109-10) 
 
104.  The preamble to the Settlement Agreement provided in part: 
 
WHEREAS, effective January 1, 2005 and forward, 
Pratt changed its U.S. Government contract cost accounting 
practices for commercial Collaboration Agreements; and 
 
WHEREAS, the undersigned DACO is authorized 
under relevant law and regulations and any applicable 
delegations of authority to resolve on behalf of the 
Government all disputes, claims, issues, and disagreements 
relating to the Final Decisions, the Government Claim, the 
Appeals, and the Savings Agreement Collaboration 
Provisions; and 
 

 33 
WHEREAS, the Parties have determined that it is in 
their best interests to settle all matters in dispute under the 
Final Decisions, the Government Claim, the Appeals, and the 
Savings Agreement Collaboration Provisions: 
 
(R4, tab 129 at 110)   
 
105.  The Settlement Agreement continued that: 
 
2.  In full and final Settlement of the Final Decisions, 
Government Claim, the Savings Agreement Collaboration 
Issues, and the Appeals, Pratt agrees to pay the Government 
$283,000,000 (“Settlement Amount”), said amount consisting 
of  
through the Effective Date…. 
 
   . . . . 
 
3.  The parties agree that UTC’s payments under the 
schedule stated in paragraph 2 fully and finally resolve the 
Final Decisions and the Government Claim, and that, 
accordingly, neither party will exercise its rights under the 
Savings Agreement Collaboration Provisions; 
 
4.  Upon receipt of the full Settlement Amount in 
accordance with paragraph 2 of this Agreement, the 
Government to the extent permitted by law hereby fully and 
forever, permanently and unconditionally, releases, 
extinguishes and discharges the Company and its past, present 
and future parents, subsidiaries, affiliates, predecessors, 
successors and assigns, and their directors, officers, 
employees, shareholders, agents, representatives, attorneys, 
heirs, executors, administrators, predecessors, successors and 
assigns, of and from any and all claims, disputes, demands, 
interest and damages of whatever kind, asserted or 
unasserted, known or unknown arising out of or relating in 
any way to the issues addressed in the Final Decisions, the 
Government Claim, the Appeals, the Savings Agreement 
Collaboration Provisions, including not only claims actually 
asserted but those that could have been asserted in the Final 
Decisions, Government Claim and the Appeals with respect 
to Pratt’s U.S. Government contract cost accounting treatment 
of Collaboration Agreements. 


 34 
 
5.  Simultaneously with the Government’s release of 
Pratt, Pratt similarly fully and forever, permanently and 
unconditionally releases, extinguishes and discharges the 
Government, its officers, agents and employees of and from 
any and all civil liabilities, obligations, claims, appeals, 
demands, interest and damages of any kind, whether known  
or unknown, asserted or unasserted, administrative or judicial, 
legal or equitable arising under or related in any way to the 
Appeals (ASBCA Nos. 47416, 50453, 54512 and 54692 . . . ), 
including not only claims actually asserted by Pratt but also 
those that could have been asserted by Pratt in said Appeals 
with respect to Pratt’s U.S. Government contract cost 
accounting treatment of Collaboration Agreements. 
 
6.  The parties hereto expressly recognize that this 
Settlement Agreement is entered into in accord and 
satisfaction of contested matters, as described above, and that 
the agreements described above do not represent an 
admission of liability or responsibility on the part of the 
Company or the Government. 
 
7.  This Settlement Agreement shall extend to and be 
binding upon the parties hereto and their respective agents, 
successors, and assigns. 
 
8.  Any disagreement or dispute that relates to this 
Settlement Agreement shall be a dispute under the [CDA]. 
 
 . . . . 
 
10.  This Agreement is the entire agreement between 
the Parties, and supercedes any prior agreements, whether 
oral or written, relating to the subject matter hereof.  This 
Agreement may not be altered, amended, modified, or 
otherwise changed except by a writing duly executed by both 
Parties.  
 
(R4, tab 129 at 110-12) (footnote omitted) 
 
106.  DACO Ennis and Mr. Nichols also signed the “Agreement Between the 
United States Government And United Technologies Corporation, Pratt & Whitney 
Division Regarding Certain Collaboration Agreement Accounting Practices” (APA), 

 35 
which stated that it was “under authority of [FAR] 31.109 [ADVANCE 
AGREEMENTS], FAR 30.601 [RESPONSIBILITY], and FAR 33.210 
[CONTRACTING OFFICER’S AUTHORITY]” (R4, tab 128 at 114).   
 
107.  The APA’s preamble provided in part: 
 
WHEREAS, the Government, in a series of eight audit 
reports in 2005 and one audit report in 2006 . . . addressed 
issues regarding Pratt’s accounting for commercial 
collaboration agreements (i.e. agreements with foreign firms 
relating to development and manufacture of jet engines and 
spare parts for commercial engine programs . . . effective 
January 1, 2005 forward (hereinafter the “2005 Forward 
issues”); and 
 
WHEREAS, the 2005 Forward issues include (1) 
Pratt’s (2) 
Pratt’s discontinuance of its prior practice of crediting 
overhead pools with “DRAG”, and (3) Pratt’s use of [MTC] 
as the cost of collaboration parts; and 
 
WHEREAS, simultaneously with the execution of this 
Agreement, the DACO is executing the Disposition Notices 
(hereinafter the “Disposition Notices”) and the Letter of 
Adequacy and Compliance (hereinafter the “Letter”) . . . 
resolving the 2005 Forward issues in the manner described 
below; and 
 
WHEREAS, the undersigned DACO is authorized 
under relevant law and regulations and any applicable 
delegations of authority to resolve on behalf of the 
Government all disputes, claims, issues and disagreements 
relating to the 2005 Forward issues; and 
 
WHEREAS, the parties have determined that it is in 
their best interests to resolve the 2005 Forward issues through 
the date of this agreement and to agree upon the prospective 
use of the practices at issue; 
 
NOW, THEREFORE, in consideration of the promises 
herein, the parties agree as follows: 
 
(R4, tab 128 at 114-15)  




 37 
 
5.  The Government waives its right to any cost impacts or 
interim or final rate changes relating to the 2005 Forward 
issues through the date of this Agreement, whether arising 
under or related to savings provisions in Pratt’s CAS-covered 
contracts or otherwise. 
 
6.  The adequacy and compliance of any future cost 
accounting changes related to collaboration agreement 
accounting either made by Pratt or ordered by the DACO 
shall be governed by the [CAS] in effect at that time. 
 
7.  Nothing in this Agreement shall be construed as limiting 
(a) the Government’s right and obligation to periodically 
review Pratt’s accounting practices for adequacy and CAS 
compliance and to make determinations regarding such 
adequacy and compliance based on the facts and 
circumstances present at the time of such reviews and the 
laws and regulations then in effect; or (b) any audit right 
granted by law, regulation or any contract provisions. 
 
8.  This Agreement is in accord and satisfaction of the 2005 
Forward issues to the extent stated in paragraphs 1 through 5 
above.  It shall extend to and be binding upon the parties 
hereto and their respective agents, successors and assigns to 
the extent permitted by law and regulation. 
 
(R4, tab 128 at 115-16) 
 
 109.  We have not been directed to any evidence that the APA was incorporated 
into any of Pratt’s government contracts.  It was not incorporated into the captioned 
contract, which the COFD at issue cited as a representative contract (R4, tab 334 at 187, 
tab 398).  Moreover, the APA does not specify its duration.   
 
 110.  Both before and after the APA was signed, Pratt used MTC in its forward 
pricing rate proposals, with the government’s approval (tr. 9/157-59).  
 
111.  While DACO Ennis acknowledged that the parties were “all working to put 
everything together, to bed,” (tr. 7/116), she insisted at the hearing that the Settlement 
Agreement and the APA were separate agreements (see tr. 7/57-59, 68, 86, 92, 111, 130).   
 
112.  One of the three disposition notices issued by DACO Ennis, concerning 
audit-alleged noncompliances, was entitled “Resolution/Disposition of DCAA Audit 

 38 
Findings Regarding MO G&A Pool Composition and Elimination of DRAG Credits to 
Overhead Pools” and referred to one particular audit report (app. supp. R4, tab 29 at 495).  
It was signed as approved by DACO Ennis and Mr. Leahy (id. at 498). 
 
113.  DCAA had alleged that Pratt was in violation of CAS 410 and FAR 31.205, 
CREDITS.  The disposition notice stated in part:   
 
Now that the CAFC has required the cost of collaboration 
parts to be placed in the allocation bases, P&W has 
acknowledged that it must put at least some measure of costs 
in the bases, and has therefore reversed its position on 
crediting overhead pools with DRAG.   
 
. . . . 
 
[T]he DACO concurs with P&W’s argument that 
crediting the overhead pool for “DRAG” no longer serves any 
equitable or valid accounting purpose because including a 
proper cost for collaboration parts in the MOH base will now 
cause those parts to draw their commensurate share of 
overhead.  Thus, continuing to credit the MOH pool for 
DRAG in this new circumstance would effectively result in a 
windfall for the Government.  In short, P&W’s treatment of 
DRAG under its prior practice (when no part cost appeared in 
the base) is irrelevant to determining the proper accounting 
for DRAG under its revised practice.  This prior practice is 
also irrelevant to establishing the “part cost”. 
 
(App. supp. R4, tab 29 at 496-97)  
 
114.  The DACO also determined in the disposition notice that Drag was intended 
to cover overhead expenses that exceeded, i.e. were disproportionate to, a party’s share of 
a collaboration program and not to any relationship between the overhead expenses of 
collaboration programs and other engine programs (app. supp. R4, tab 29 at 497).  She 
relied in part upon the following definition of Drag from a March 8, 1991 collaboration 
agreement between Pratt   
 
“DRAG” means the compensation,  
 required of one Party to 
compensate the other Party for the amount of overhead 
expenses incurred by such other Party in excess of the 
…other Party’s Program Share of such expenses, including, 
without limitation, expenses relating to material handling, 


 39 
program management and administration, marketing and 
product support, but not including guarantee, warranty and 
service policy or product liability expenses.  [Emphasis added 
by DACO] 
 
(Id.)  The DACO summarized that she agreed with Pratt that Drag was properly treated as 
a credit to material cost rather than to the various indirect cost pools (id.).   
 
115.  Another of the disposition notices, signed by DACO Ennis and Mr. Leahy, 
was entitled “Resolution/Disposition of DCAA Audit Findings Regarding LCE [Large 
Commercial Engines (gov’t br. at 4)] and ME Pool Composition and Elimination of 
DRAG Credits to Overhead Pools” (app. supp. R4, tab 30 at 499).  It covered three audit 
reports with, among other things, similar DCAA allegations as above and came to the 
same conclusion in favor of Pratt’s treatment of Drag, “[b]ased on [the DACO’s] legal 
review” (id. at 501).   
 
116.  A third disposition notice, signed by DACO Ennis and Mr. Leahy, was 
entitled “Resolution/Disposition of DCAA Audit Findings Regarding Inclusion of MTC as 
Cost of Collaboration Parts in MOH Allocation Base” (app. supp. R4, tab 31 at PW-503, 
506).  It covered three audit reports involving MTC.  The DACO reported that Pratt had 
submitted a proposed procedure whereby the cost of collaboration parts would be 
determined based upon actual part receipt quantities and MTC.  DCAA had concluded that 
the procedure for determining the cost of collaboration parts as MTC did not comply with 
CAS 418 and Rumsfeld.  Pratt countered that MTC was an appropriate measure of the cost 
of collaboration parts for the purpose of allocating MO costs.  As reported by the DACO, 
Pratt contended: 
 
Since MTC represents the negotiated “price” for parts based 
on, as a starting point, P&W’s costs to purchase or 
manufacture, P&W believes MTC is an appropriate amount 
for CAS 418.40 purposes for three reasons.  First, MTC is a 
negotiated amount between P&W and the respective 
collaborator predicated on P&W’s purchase or manufacturing 
costs and is more closely akin to a “purchase order price” 
than revenue share payments, and is more predictable (i.e. not 
relying on the after-the-fact netting of costs from gross 
revenue share).  Second, MTC amounts are readily trackable 
to quantities of parts, at the part number level, received from 
a collaborator.  Third, and as DCAA current audit report 
confirms, the use of MTC or net revenue share amounts in the 
material overhead base produces by and large substantially 
the same result, a result not materially harmful to the 
Government. 



 41 
agreements with P&W in which MTC is the purchased order 
price. 
 
f) P&W provided purchase orders which reflected costs 
equal to or less than MTC amounts. 
 
(App. supp. R4, tab 31 at 505)   
 
118.  The DACO decided in the disposition notice that, although noncompliant in 
her view, Pratt’s inclusion of MTC as the cost of collaborator parts had practical 
advantages; was more consistent and more beneficial to the government in verifying 
incurred costs and forward pricing rates; and that, overall, the impact to the government 
from the use of MTC was immaterial.  She disposed of the noncompliance on the latter 
ground without requiring contract adjustments.  If the noncompliance were not corrected, 
the DACO reserved the right for the government to make adjustments should the 
noncompliance become material in the future.  (App. supp. R4, tab 31 at 506) 
 
119.  In her “Letter of Adequacy and Compliance,” as the APA referred to it, the 
DACO determined that Pratt’s voluntary change to  and 
eliminating Drag credits to overhead pools at certain segments complied with the CAS 
and the FAR, whereas using MTC as the cost of collaboration parts did not comply with 
the CAS or Rumsfeld.  However, she found that the noncompliance did not presently 
result in a material amount of increased costs to the government.  It should be corrected 
but, if not, the government reserved the right to make appropriate contract adjustments if 
the noncompliance became material.  (App. supp. R4, tab 32)  
 
120.  Ms. Ennis was the cognizant Federal agency official at Pratt at the time of 
the Rumsfeld remand.  As the DACO for Pratt, she had a CO’s warrant.  (Tr. 3/148, 7/21, 
8/147-48)  Ms. Ennis was responsible for determining whether Pratt’s disclosed practices 
were adequate and compliant with the CAS, and for resolving the cost impact of a 
noncompliance (tr. 7/22, 8/168-69).  Ms. Ennis responded affirmatively to appellant’s 
counsel’s questions whether “the resolution and disposition of DCAA audit finding[s] 
was something that [she], as the warranted DACO, [was] required to do;” whether doing 
so was “within the scope of [her] authority as the DACO;” and whether at the time she 
signed the documents she believed they contained “[v]alid obligations of the United 
States with [Ms. Ennis] as its authorized representative” (tr. 7/116).  The government has 
not come forward with any evidence that DACO Ennis was not authorized to execute the 
documents in question. 
 
121.  Mr. Leahy, the DCMA official one level above DACO Ennis, agreed that 
when DCAA issues an audit report with a CAS noncompliance, the contracting officer is 
required by regulation to disposition the audit findings (tr. 8/207-08).  Mr. Leahy signed 
the disposition memoranda because approval at one level above the contracting officer 


 42 
was required.  He also agreed with Ms. Ennis’ determinations.  (Tr. 8/209-10)  If 
Mr. Leahy had thought that Ms. Ennis’s decision was contrary to the FAR or the CAS, he 
would not have signed the disposition memoranda (tr. 8/210-11).  He opined that 
DACO Ennis had the authority to sign the Settlement Agreement and the APA and to 
resolve the disposition issues (tr. 8/207-08).  No question has been raised about 
Mr. Nichols’ authority to sign on behalf of Pratt.   
 
 122.  Mr. Leahy opined that the Settlement Agreement was “looking backwards” 
and intended to resolve the pending litigation while the APA was intended to resolve the 
alleged CAS noncompliances “going forward” (tr. 8/155-56).  He considered the 
Settlement Agreement and the APA to be two separate agreements (tr. 8/158, 204). 
 
123.  Ms. Faris was a government trial attorney in the initial ASBCA appeals and 
advised DACO Michael Olbrych in connection with the final decision in this appeal 
(below) (tr. 4/9-10, 51-52).  She acknowledged, based upon her communications with 
Pratt counsel Ware, that it was Pratt’s position that it wanted to resolve the litigation, 
which looked backwards, and the accounting issues, which looked forward (tr. 4/59-60).  
However, Ms. Faris explained that the government was unwilling to include the litigation 
issues and the accounting issues in the same agreement: 
 
[T]he government would not agree in the litigation settlement 
agreement to discussion of any forward-looking accounting 
practices, so those accounting changes that Pratt made in 
2005 on January 1st.  The government did not want to fully 
and finally settle those going forward in the same document 
as the settlement agreement because we couldn’t agree, in 
perpetuity, to certain accounting practices.  They were always 
going to be subject to audit, especially in the case of [MTC], 
which, the DACO had concluded was noncompliant with 
CAS, but at the time, immaterial, so we couldn’t agree in 
perpetuity to those things. 
 
(Tr. 4/29-30; see also tr. 4/37)  
 
124.  While the government objected to addressing the accounting practices in the 
settlement agreement, Ms. Faris acknowledged that “[o]bviously, if the Government 
wanted to have some type of agreement, going forward, in terms of accounting 
procedures, we couldn’t leave them up in the air.  But we didn’t want them to be part of 
the settlement agreement of the litigation” (tr. 4/57).  
 
 125.  Pratt’s signing official, Mr. Nichols, stated that Pratt would not have signed 
the Settlement Agreement without the APA (tr. 10/247).  He considered all of the 
documents to be part of one settlement: 

 43 
I believe everything was signed on June 5th, 2006 between 
Eileen Ennis and I, and I believe Peter Leahy was there as 
well.  But all of these documents—again, they were all 
important, part and parcel, to the whole agreement, the 
settlement.  And so they were all signed on exactly the same 
day.  
 
(Tr. 10/247)  Mr. Nichols acknowledged that the APA does not refer to the Settlement 
Agreement and it does not refer to the APA.  He stated that “[t]here’s two separate 
documents as it turned out” (tr. 10/262). 
 
OIG Investigation 
 
126.  In January 2009, the Government Accountability Office’s Fraudnet office 
forwarded to the OIG a September 2008 email chain from a “retired DCAA employee” 
criticizing the 2006 settlement (app. supp. R4, tab 792).  The individual alleged that there 
was pressure from DCAA’s and DCMA’s highest levels to settle the litigation for an 
amount that was agreeable to the contractor rather than an amount that was fair to the 
taxpayer and that the amount was approximately $500 million lower than it should have 
been to be consistent with government procurement regulations, including the CAS (id. 
at 16902; see also app. supp. R4, tab 1358 at 8389).   
 
127.  After an extensive investigation, as stated in its May 30, 2014 report, the 
OIG found no evidence to substantiate the allegation of pressure from higher-level 
management to settle the litigation (app. supp. R4, tab 1358 at 8383, 8392).  However, 
among other criticisms, the OIG concluded that DCMA had not complied with 
government regulations and the settlement amount was not substantiated:  
 
DCMA’s settlement position was derived without obtaining 
sufficient documentation from Pratt to substantiate the 
[DACO’s] prenegotiation settlement position consistent with 
FAR Part 31 “Contract Cost Principles and Procedures,” the 
rules and regulations established by the Cost Accounting 
Standards Board, and the intent of the Court as stated in 
Footnote 19 [of Rumsfeld].  Because DCMA did not 
substantiate [its] position, we are not able to provide a reliable 
estimate of what the settlement amount would have been had 
DCMA complied with the regulations. 
 
(Id. at 8395)
15  
                                              
15 In connection with discovery disputes involving the OIG investigation, the Board  

 44 
Post-Settlement Audits 
 
128.  On July 27, 2010, during the course of the OIG’s investigation, DCAA 
issued an audit report on Pratt’s March 2, 2010 proposal for forward pricing rates from 
CYs 2010 through 2012 (R4, tab 576 at 21074-75) (2010 forward pricing audit report).  
One of the stated purposes of the audit was to determine whether MTC “continues to be a 
reasonable surrogate for the cost of the collaboration material as defined using Revenue 
Share Payments (also known as NRS)” (id. at 21078).  In part, the report addressed 
DCAA’s continuing view that Pratt’s practice of using MTC as the cost of collaborator 
parts was noncompliant with CAS 418.  The report noted that Pratt had not provided NRS 
amounts in its proposal and that the auditors had requested MTC and NRS amounts as 
part of the audit (id. at 21094-95).  Certain of the requested data were not provided until 
June 28, 2010 (id. at 21095).  The report concluded that the noncompliance was 
“significant enough to materially impact the results of audit of the material overhead 
rate” (id. at 21080).  The report recommended that “contract price negotiations not be 
concluded for the material overhead rate until the impact of using [MTC] rather than 
Revenue Share Payments in the proposed direct material allocation base [was] 
determined and considered by the contracting officer” (id.).   
 
129.  Mr. Brian Nardi was the lead auditor for the 2010 forward pricing audit.  He 
drafted the audit report and reviewed the material overhead rate.  (Tr. 2/68-69)  Ms. Hart 
was the supervisory auditor (tr. 2/158).  Mr. Nardi acknowledged that, in the audit report, 
“revenue share payments” meant NRS (tr. 2/165-66), but at the hearing, he disavowed 
some of the report’s statements concerning NRS and said they were mistaken 
(tr. 2/161-69).  As one example, he stated: 
 
Again, net revenue share, like I said, there was a confusion 
and really what we’re meant to say was gross revenue share 
in most cases.  But again, it’d have to be taken as a context 
throughout the report to see, you know, where there’s an error 
and where not. 
 
(Tr. 2/91)  Mr. Nardi confirmed that GRS was DCAA’s “final position on what is the 
correct way to value the collaboration material, not [NRS]” (tr. 2/113).   
 
130.  The government avers that DCAA’s definition of NRS at the time meant 
GRS less only Drag (gov’t reply br. at 25).  However, the Nardi testimony it cites refers 
both to Drag and to a more expansive list of deductions provided by Pratt, such as FIA, 
                                              
conducted an in camera review of what appellant enumerates as 2,600 documents 
(tr. 6/68) and of the transcripts of OIG interviews of more than a dozen 
government employees. 
 

 45 
test and certification expenses, entry fees, and expenses that Pratt invoiced to the 
collaborators (tr. 2/91-92, 95).  Mr. Nardi agreed with appellant’s counsel’s description 
that Mr. Nardi’s “understanding of net revenue share is gross revenue less items such as 
drag [and] invoices, which includes things like [fleet] introductory assistance, entry fees, 
and various other costs” (tr. 2/186). 
 
131.  The 2010 forward pricing audit report states variously: 
 
•[O]ur opinion on the material overhead rate is qualified to 
the extent that the material overhead base may be understated 
by using MTC rather than a NRS amount . . . . 
 
(R4, tab 576 at 21078) 
 
•[T]he DACO did reserve the right to make adjustments 
should this impact become material in the future when 
comparing the MTC to [NRS] amounts. 
 
(R4, tab 576 at 21094) 
 
•[T]he impact of the use of MTC rather than the use of NRS 
in the proposed direct material allocation base needed to be 
considered during our review of this FPRP. 
 
(Id.) 
 
•Revenue Share Payments (also known as [NRS]) 
 
(R4, tab 576 at 21095) 
 
•[A]ctual payments (wire transfers) made to Collaborators 
 
(R4, tab 576 at 21098) 
 
(See also tr. 2/163-73)  
 
132.  On September 22, 2011, DCAA issued a CAS 418 noncompliance audit 
report, referred to by the parties and hereafter as the “192 audit” report.  A “192 audit” is 
one that reports upon a noncompliance found in another audit (tr. 3/212; see also 
tr. 2/71).  The 192 audit covered the period January 1, 2005, through the date of the audit.  
Mr. Nardi drafted the report but had a different supervisory auditor, who suggested that 
he revise his draft to refer to the cost of collaboration parts as “revenue share” rather than 
NRS.  Mr. Nardi agreed.  As issued, in contrast to the 2010 forward pricing audit report, 

 46 
the 192 audit report compared MTC to GRS.  (R4, tab 594 at 4461, 4464, 4473, tab 598 
at 4539, 4541; tr. 2/211-12)   
 
133.  Mr. Nardi explained that DCAA’s noncompliance report was not based upon 
the FASB directive EITF 07-1.  The noncompliance had already been established in a 
previous 2005 audit report and, in his view, was supported by Rumsfeld and by Pratt’s 
disclosure statement and policies and procedures that describe its valuation of 
collaboration material as an estimate.  (Tr. 2/222) 
 
134.  In finding that Pratt’s practice of using MTC as the cost of collaborator parts 
was noncompliant with CAS 418-50(a)(2), DCAA stated: 
 
The contractor’s disclosed and established practices 
related to the material overhead (MOH) rate are considered 
noncompliant with CAS 418-50(a)(2).  [Pratt’s] disclosed and 
established practice is to use a direct material cost base to 
allocate material overhead.  The direct material cost base 
includes parts received from collaboration partners at [MTC] 
and Total Engine Equivalency to Partners (TEEP), notional 
cost values.  The use of MTC and TEEP in a material cost 
base is noncompliant with CAS 418-50(a)(2) since these 
amounts are not P&W’s actual direct material cost for 
collaboration parts. 
 
(R4, tab 594 at 4461) (Emphasis added)  
 
 135.  Pratt’s Collaboration document, effective May 27, 2008, like the May 3, 
2006 document (finding 89), defined MTC as “the notional cost value (manufacturing 
direct and indirect expenses, excluding SG&A and profit) of collaborator supplied parts” 
(R4, tab 607 at 4671; tr. 2/77-80).  Pratt’s Collaboration document, on the subject of 
“Program Production Contribution,” effective February 15, 2010, defined MTC as 
“notional cost estimates that are assigned to collaboration program parts” (R4, tab 186 
at 6281).  To DCAA auditor Nardi, “notional” meant “estimate” (tr. 2/79).
16   
 
136.  In its 192 audit report DCAA stated that it did not consider notional cost 
values to be direct costs as defined by CAS for purposes of CAS 418 (R4, tab 594 
at 4463).  DCAA also found that Pratt’s use of MTC instead of actual costs had a material 
impact upon the MOH expenses allocated to government contracts:  
                                              
16 “TEEP” and “PEV” (part equivalent value) are alternative terms used in at least two 
legacy programs, respectively, rather than MTC (tr. 1/245-46, 6/182-83; see 
complaint ¶ 15, n.2).  According to DCAA, “TEEP” is “the notional cost value for 
collaborator supplied parts on the V2500 program” (tr. 1/57).  

 47 
 
Beginning January 1, 2009, P&W began recording a cost for 
collaboration parts in cost of sales (COS) accounts17.  While 
performing our review of the P&W, MO Forward Pricing 
Rate Proposal (FPRP) for [CYs] 2010 through 2012 . . . we 
determined that the cost impact of using MTC in place of the 
CY 2009 actual cost recorded in COS accounts has a material 
impact on material overhead expense allocated to government 
contracts. 
 
(R4, tab 594 at 4462)  DCAA reported that the CY 2009 partner revenue share recorded 
in COS was  greater than the CY 2009 MTC, which affected Pratt’s 
material overhead rate, resulting in an approximate impact upon government contracts of 
(id at 4464).   
 
 137.  Mr. Joseph Hart, the CACO as of the hearing, who also served as a DACO 
during relevant periods (tr. 1/7, 43-44), described the effect of the potential 
noncompliance noted in the 192 report as follows.  The Manufacturing Operations 
Material Overhead Base is allocated to both commercial and military contracts.  The 
value of the base is important because it will shift costs between those contracts.  If one 
side’s base is undervalued, it will shift costs to the other.  In the government’s opinion, 
MTC is not an actual cost and is “significantly lower” than GRS.  Pratt’s use of MTC 
lowered the amount in the commercial engines’ share of the base, meaning the 
commercial business would have less overhead allocated to it and the government 
business would have more.  (Tr. 1/58-59, 105)  
 
138.  Based upon the 192 audit report, then-DACO Brian Hawkins issued a 
September 28, 2011 notice of potential noncompliance with CAS 418 (R4, tab 5).  On 
April 4, 2012, DACO Olbrych requested that Pratt “provide any evidence it has to establish 
that gross revenue share payments included payments beyond that for collaboration parts” 
(R4, tab 16).  Pratt provided extensive amounts of information and engaged outside experts, 
Ms. Margaret Worthington and Mr. Gary Gutzler, who reported upon the question of 
whether revenue share payments included payment for items other than parts (tr. 9/95-98).  
With an August 10, 2012 letter to Mr. Olbrych, Mr. Michael Nisbet, then Pratt’s Controller, 
ME, provided him with a copy of Ms. Worthington’s expert report and Mr. Gutzler’s 
analysis (R4, tabs 265 A-C).  Neither individual was called as a witness in the subject 
                                              
17 The audit report stated that this change was required by Financial Accounting 
Standards Board EITF 07-1 – Accounting for Collaborative Arrangement (app. 
supp. R4, tab 967 at 121).  See also “Pratt & Whitney, Commercial Engines, 
Accounting & Controls,” dated December 15, 2010 (R4, tab 208 at 162203-04; 
tr. 1/133-34, 241). 


 48 
appeal.  Mr. Hart acknowledged that Pratt engaged in good faith discussions on the disputed 
issues (tr. 1/219-20).   
 
 139.  Ms. Worthington opined that:  (1) DCAA erred in concluding that CAS 418 
required Pratt to value collaborator-produced parts in the material overhead allocation 
base on the basis of GRS; (2) as the government determined in 2006, Pratt’s inclusion of 
MTC, in lieu of NRS, in the material overhead allocation base, did not result in a material 
impact upon material overhead allocated to Pratt’s government contracts; and (3) if NRS 
were used in valuing collaborator parts included in the MOH allocation base, the NRS 
calculation must be adjusted downward to reflect PCE costs and collaborator return on 
entry fees (R4, tab 265 B at 1005-06).   
 
140.  The government read Ms. Worthington’s report to opine that the use of MTC 
was “a better deal for the government and that the adjusted [NRS] was much lower than 
MTC” (tr. 2/235).  However, DACO Olbrych found that the Worthington report showed 
that there was a “very substantial difference” between the use of MTC and GRS on 
government contracts that generated “a lot of impact to the government” (tr. 1/288). 
 
 141.  Based upon DCAA’s initial reading of the Worthington report, it 
misunderstood the meanings of GRS and NRS.  As the government’s understanding of 
collaboration arrangements evolved, it deemed it apparent that all of the expenses listed in 
the Worthington report, including Drag, were part of the overall part costs.  (Tr. 2/291-92) 
 
 142.  The government considered that all of its questions had not been answered.  
On August 29, 2012, DACO Olbrych sent a follow-up letter to Ms. Lazinsk.  The 
remaining questions concerned Drag.  The government still wanted supporting 
information concerning the propriety of Pratt’s removing Drag from its indirect cost pool.  
The government’s position was that, if Pratt incurred the Drag expenses for its 
collaborators, then those overhead expenses existed in its overhead pools.  If the 
collaborators were reimbursing Pratt for those expenses, they should be removed from 
the overhead pools charged to the government.  Otherwise, Pratt would be paid twice for 
the same overhead.  Based upon the APA, from 2005-2012, Pratt did not credit Drag to 
the overhead pools.  It had done so prior thereto.  (R4, tab 271; tr. 1/116-19)  
 
 143.  On May 7, 2013 DACO Olbrych issued to Pratt a Determination of CAS 418 
Noncompliance (R4, tab 306; tr. 1/64-65).
18  He had determined that MTC was not an 
actual cost; it was a notional cost and there were “really large deltas” between the two 
that were “causing considerable financial harm to the government” (tr. 1/250-51).  He 
stated that he disagreed with the former DACO’s determination that Pratt’s 
                                              
18 Mr. Hart participated in the drafting of this determination and drafted or shared in the 
drafting of other documents signed by DACO Olbrych (see tr. 1/46-47, 65, 116, 
160-61, 249). 

 49 
discontinuance of its prior practice of crediting Drag to its overhead pools was compliant 
with both the CAS and the FAR since January 1, 2005 (R4, tab 306 at 172).  He also 
disagreed with the former DACO’s determination that the difference between revenue 
share payments and MTC payments was immaterial in 2005.  Based upon DCAA’s 
September 22, 2011 192 audit report (finding 132) and information provided to him by 
Pratt on August 10, 2012 (finding 138), DACO Olbrych considered Pratt’s CAS 418 
noncompliance to be material to government contract pricing as of CY 2005 (R4, tab 306 
at 173).  In making the materiality determination, Mr. Hart confirmed, and appellant has 
not contested, that he and DACO Olbrych considered the FAR criteria on materiality and 
all of the factors in 48 C.F.R. 9903.305 (tr. 1/65-66, 71-73; ex. G-1).  Moreover, we have 
found no evidence that the DACOs acted arbitrarily or capriciously or in bad faith or 
abused their discretion.   
 
 144.  Between May 7, 2013 and DACO Olbrych’s December 24, 2013 COFD 
determination that Pratt had violated CAS 418 (below), Pratt attempted to persuade the 
government that there was not a material difference between NRS and MTC.  It added 
costs to be deducted from GRS, such as return on entry fees and post-certification costs, 
to the point that the resulting adjusted NRS was below MTC.  (Tr. 1/271-72)  
Mr. Olbrych did not accept Pratt’s contention that MTC was an acceptable surrogate for 
actual cost.  He described a surrogate as a substitute or stand-in and “not the real deal” 
(tr. 1/277).  He also disagreed with Pratt that the APA provided that MTC was an 
acceptable surrogate for actual costs, noting that the APA stated that Pratt was 
noncompliant with the CAS and that it should correct the noncompliance (id.).  
 
 145.  Prior to the COFD, the DACO asked Pratt to submit information concerning 
its accounting changes and to revise them so that they would comply with CAS 418.  Pratt 
did not offer any revisions nor did it submit any general dollar magnitude cost impact 
valuation of its alleged CAS 418 noncompliance as addressed in FAR 52.230-6(c).  (R4, 
tab 328 at 178; tr. 1/291, 2/305-06; UGPFF 291)  
 
146.  On October 10, 2013, DACO Olbrych asked DCAA to prepare a ROM cost 
impact estimate, based upon the information available to it, resulting from Pratt’s alleged 
noncompliance with CAS 418 from 2005 through 2012.  DCAA did not have access to all 
of Pratt’s pertinent records and could not reconcile the GRS figures in the Worthington 
report.  It used the collaborator share of revenue as reported as a cost of sales in Pratt’s 
annual audited financial statements for the period 2007-2012.  (See R4, tab 326 at 2841; 
tr. 1/294-96, 2/308-09, 314) 
 
147.  On November 19, 2013, DCAA gave the DACO a ROM estimate of 
financial harm to the government from Pratt’s alleged noncompliance with CAS 418 (R4, 
tabs 326, 328; tr.1/291-92, 2/307-08).  It contained some errors, e.g., when DCAA 
prepared the ROM, it did not know that Pratt’s financial statements also covered Pratt & 
Whitney Canada and Pratt & Whitney Joint Ventures nor that the reported cost of sales 

 50 
amount in the statements did not include FIA, Pratt’s largest deduction from GRS, 
rendering the ROM understated (tr. 2/102-03, 323-25). 
 
148.  On December 24, 2013, Mr. Olbrych issued a COFD asserting a claim 
against Pratt for $210,968,414 (principal and interest).  The COFD cited, inter alia, 
DCAA’s September 22, 2011 192 audit report (finding 132); the DACO’s September 28, 
2011 notice of potential noncompliance with CAS 418 (finding 138); Rumsfeld, and the 
parties’ June 5, 2006 Settlement Agreement and APA (findings 103-06), in support.  The 
COFD alleged that the principal amount of the claim represented the cost to the 
government from Pratt’s failure to comply with CAS 418 from January 1, 2005 through 
December 31, 2012:    
 
P&W’s disclosed accounting practices do not correctly 
estimate the cost of its collaboration-supplied direct materials 
that comprise a portion of its material overhead base.  P&W 
has been using MTC estimates in lieu of revenue share 
payments to cost its collaboration materials.  Revenue share 
payments represent the actual cost of collaboration-supplied 
parts per CAS 418-50(a)(2).  In considering this specific 
issue, the [Federal Circuit] defined the cost of collaboration 
material as revenue share payments.  P&W began using MTC 
to estimate the cost of its collaboration materials on January 
1, 2005 and has continued to use MTC to the present. 
 
(R4, tab 334 at 182-83) (Emphasis added)  As of the hearing, Pratt continued to use MTC 
in its Manufacturing Operations’ material overhead pool (tr. 11/134). 
 
 149.  The DACO made the following findings, among others, concerning Pratt’s 
alleged noncompliance with CAS 418, and Drag: 
 
7.  Results from the [192] audit disclosed a substantial delta 
between either GRS or NRS and MTC.  The cost impact of 
this delta was determined to be  in CY 2009.  
This is a material cost impact to Government contracts under 
48 C.F.R. 9903.305 and FAR 30.602. 
 
. . . . 
 
16.  I find that P&W’s use of MTC was noncompliant with 
CAS 418 from January 1, 2005, through December 31, 2012. 
CAS 418-50(a)(2) requires a business unit to use actual costs 
in accounting for its direct costs. 
 


 51 
17.  I find that gross revenue share is the cost of the 
collaborator parts. 
 
18.  I find that P&W’s use of MTC has had a material cost 
impact upon Government contracts since January 1, 2005. 
 
19.  I find that the collaborator’s share of Drag and other 
expenses needs to be removed from the applicable P&W 
overhead pools.  This adjustment prevents P&W from a 
double-recovery of the collaborator’s share of Drag and other 
expenses as indirect costs since they would already be 
recoverable as part of P&W’s direct material cost on contract 
pricing actions. 
 
20.  I also find that the 2006 [APA] was not valid when it was 
entered and is not binding upon the Government. 
 
(R4, tab 334 at 185-86) (Emphasis added)  The COFD did not mention the FAR 31.201-5 
Credit provision.  DACO Olbrych confirmed, and appellant does not dispute, that, in 
making his materiality determination, he considered all of the criteria in 48 C.F.R. 
9903.305 (tr. 1/258-59; UGPFF 302).  Moreover, we have found no evidence that he 
acted arbitrarily or capriciously or in bad faith or abused his discretion.   
 
150.  Analogizing to other vendor situations, the DACO determined that it “made 
no sense” that Pratt was paying for items other than the purchased parts themselves 
(tr. 1/273).  When revenue shares were booked to cost of sales, it seemed “pretty clear” 
what Pratt was paying for the parts (tr. 1/278).  The collaborators were paying a share of 
Pratt’s overheads.  They transferred those costs to their books and accounted for them in 
their financial statements.  The costs became the costs of the collaborators.  They were 
paying Pratt for its costs.  (Tr. 1/272, 281) 
 
151.  Pratt appealed from this COFD on March 18, 2014 and the Board docketed 
the appeal as ASBCA No. 59222, the appeal currently before us.
19  
 
                                              
19 Pratt appealed from a COFD issued on December 18, 2018, which asserted a 
$307,910,177 government claim for Pratt’s alleged noncompliance with CAS 418 
from January 1, 2013 to December 31, 2017, due to its continued use of MTC in 
lieu of revenue share payments as the cost of collaborator parts.  The Board 
docketed the appeal as ASBCA No. 61935 on January 11, 2019, and stayed it until 
the subject appeal has been decided. 

 52 
Experts 
 
We have cited above to evidence from the parties’ experts largely for their factual 
information, not for any particular expertise.  Additional evidence from the experts 
follows. 
 
Ms. Sam Hadley 
 152.  The government proffered Ms. Sam Hadley as an expert in accounting, cost 
accounting, GAAP, and the principles that apply under the FAR and the CAS.  Appellant 
objected, inter alia, that the proffer was too broad.  Said to be in view of Rumsfeld’s 
strictures, the government did not offer Ms. Hadley as an expert on CAS interpretation, 
rather on the application of the CAS in particular circumstances.  The Board admitted her 
as an expert in government contract accounting, the FAR, GAAP and the CAS as they 
apply to the circumstances at hand, with any individual objections to be considered if 
raised.  (Tr. 9/250-51, 253-54)  Ms. Hadley’s expert report is at R4, tab 400. 
 
 153.  Ms. Hadley did not have prior experience with collaboration agreements 
involving the aerospace industry (tr. 9/237).  However, based upon her review of relevant 
documents (see R4, tab 400, app’x B; tr. 10/8-10) and her knowledge of industry 
standards, Ms. Hadley opined that: 
 
1. Margaret Worthington’s August 2012 report is not reliable 
and does not support Pratt’s use of MTC. 
 
2. By definition, MTC is not an actual cost and has not been 
shown to be comparable to suppliers’ part prices. 
 
3. Based on the evidence provided, Pratt has not shown that 
revenue share payments include costs for items other than 
parts. 
 
4. Pratt has the appropriate information and documentation 
to use revenue share instead of MTC. 
 
5. The impact to the Government of using MTC instead of 
GRS, or an appropriate derivative, is significantly greater 
than Pratt has stated, and material to the amount of the 
overheard allocated to the government. 
 
(R4, tab 400 at 3; see tr. 10/6-8, 167)  In “appropriate derivative” Ms. Hadley included 
NRS, various definitions of revenue share and the like (tr. 10/8).  Thus, in Ms. Hadley’s 
expert opinion, Pratt’s use of MTC rather than NRS had a significant impact upon the 

 53 
government and was material to the amount of overhead allocated to government 
contracts.  Similarly, DACO Olbrych found that there was a material cost impact upon 
government contracts due to Pratt’s use of MTC rather than GRS or NRS (finding 149).  
Appellant’s expert LeeVan acknowledged that, during the government’s eight year claim 
period (2005-2012), material overhead allocated to government contracts using MTC was 
higher than an allocation using NRS (ex. A-385 at 77 ¶ 139).  There is no persuasive 
evidence, for the relevant time period, that Pratt’s use of MTC rather than NRS did not 
have a material impact upon costs it charged to government contracts.  
 
 154.  Ms. Hadley found that Pratt’s accounting summaries and correspondence 
defined MTC as an engineering estimate developed when Pratt negotiates program share 
with its collaborators (tr. 10/18-19).  She opined that Pratt “has recognized MTC as an 
engineering estimate at learned out production, without the application of G&A and 
profit, to establish a price for the part” (R4, tab 400 at 11; tr. 10/18-19, 188).  In 
“Manufacturing Target Cost,” she identified the “T” in “Target” as “a target production 
cost, at optimal production value” (tr. 10/28; see also tr. 10/188).  She described “learned 
out” as what one can produce the part for “once all the kinks have gotten out of the 
system” (id.).  The parties get more efficient at producing a part over time, lowering 
production costs (tr. 10/30).   
 
 155.  Ms. Hadley addressed a PW4000 Growth Engine Collaboration Agreement 
between Pratt , which defines MTC as follows: 
 
“Manufacturing Target Cost” or “MTC” means the estimated 
learned out total cost P&W would incur if P&W 
manufactured, procured or assembled the Engine or Part, 
including its material, labor, and manufacturing overhead. 
 
(R4, tab 465 at 17151 ¶ 1.20; tr. 10/26-27)  She relied in part upon the agreement’s 
Appendix 10, Engineering Change Procedure, which defines MTC in essentially the same way: 
 
Manufacturing Target Cost (MTC) is the EV [Equivalent 
Value] of a Part, module or Engine (including Assembly & 
Test) in a particular year’s economy, stated in U.S. dollars.  It 
represents the estimated learned out total cost P&W would 
incur if P&W manufactured, procured or assembled the 
Engine or Part including its material, labor and manufacturing 
overhead. 
 
(R4, tab 465 at 17258 ¶ 2.3; see tr. 10/27) 
 


 54 
156.  The Appendix states what is included in MTC in the context of the 
 and identifies several items that are excluded, such as 
G&A (R4, tab 465 at 17258 ¶¶ 2.7, 2.8; see tr. 10/27). 
 
 157.  Ms. Hadley referred to a February 14, 2011 Pratt email on the subject of 
“Learning Curve Description,” which attached a Pratt document entitled “PV’s and Part 
MTC vs. Actual Production Costs” (R4, tab 216; tr. 10/30).  That document states in part: 
 
PV = An agreed upon percentage of a part’s value relative to 
the entire engine irrespective of the part (or engine’s) 
actual cost.  These percentages drive the economics of the 
partnership arrangement. 
 
Engine MTC = Manufacturing Target Cost is a notional value 
of engine cost.  MTC escalates from a base value every year 
by a formula specified in the contract which is common for 
all program participants. 
 
Part MTC = PV * Engine MTC.  Obviously, Part MTC 
escalates in the same fashion as engine MTC.  It is a notional 
measure of the economic contribution of this part to the 
program.  It is unlikely that it is a good measure of the true 
cost of a part. 
 
. . . . 
 
At the beginning of the program, actual cost is likely much 
higher than Part MTC.  As a company builds more parts, the 
manufacturer comes down a learning curve and each part 
costs less and less to build . . . .  Offsetting this learning is the 
natural inflation (labor and material costs) in manufacturing 
processes. 
 
(R4, tab 216 at 266475) (Emphasis added)  In this email Pratt was explaining the concept 
of MTC to a potential new collaborator (tr. 6/132-33).   
 
 158.  Ms. Hadley defined “standard costing” as: 
 
[A] concept in cost accounting that, for ease in accounting, 
establishes a standard cost for things that it will distribute 
within the accounting system.  One of the requirements in the 
[CAS] of using standard costing is that [the] discrepancy 


 55 
between actuals and standard then be disposed of or adjusted 
one way or another. 
 
(Tr. 10/32)  She opined that, contrary to standard costing, Pratt has not accounted for the 
differences between actual costs and MTC and disposed of, or reconciled, them in some 
manner (tr. 10/32-33). 
 
159.  Ms. Hadley pointed out that Pratt documentation expresses that MTC  
(tr. 10/33, citing app. 
supp. R4 tab 136 at 163609 ¶ B).  
 
 160.  Ms. Hadley noted that “Pratt’s CAS disclosure statements define MTC as the 
‘notional cost value (manufacturing direct and indirect expenses, excluding [SG&A] and 
profit) of collaborator supplied parts’” (R4, tab 400 at 11). 
 
 161.  Ms. Hadley found that MTC does not appear in Pratt’s books and records, 
such as its general ledger, in Pratt’s accounting system.  The books and records do not 
accumulate MTC as a cost or a liability to the collaborators.  (Tr. 10/17, 35, 149)  “MTC 
would never hit the financials” (tr. 10/157).   
 
 162.  According to Ms. Hadley, MTC is not a quantifiable amount contained 
within revenue share.  Moreover Pratt established prices to the airframers that are not 
based upon a certain mark-up of MTC.  (Tr. 10/36) 
 
 163.  Ms. Hadley opined that MTC does not represent a “true cost” (tr. 10/156).  It 
is an engineering estimate that does not include all of the cost.  It is a method of insuring 
that all parties are using the same cost figure so they can calculate their revenue 
percentages.  The parties are bound by the negotiated MTC regardless of actual cost.  
(Tr. 10/157-59)  To Ms. Hadley, the most obvious factor that renders MTC not a true cost 
is the omission of G&A from its composition (tr. 10/27).  MTC also does not include 
profit (tr. 10/172, 186-87, 189; see also tr. 6/203).  
 
164.  Regarding whether Pratt pays its collaborators GRS or NRS and which 
represents the cost of a part, Ms. Hadley stated that NRS is not an account in Pratt’s 
accounting system.  GRS and all expense recoveries are such accounts.  NRS is just the 
mathematical result of all of the debits and credits in all of the other accounts.  
Ms. Hadley opined that the fact that expense recoveries were netted against GRS did not 
bear upon a part’s cost and the use of “NRS” was an “oversimplification” and an 
“accounting convenience.”  (R4, tab 400, at 14-15; tr. 10/61-62, 68-69; see also 
tr. 1/68-69 (per Mr. Hart, NRS is not a “real number” and deduction of a collaborator’s 
debts to Pratt from Pratt’s payments to the collaborator makes no sense “other than for 
the ease of payment.”))   
 




 57 
conclusion in a DCAA work paper, which she distinguished.  (App. supp. R4, tab 136; 
tr. 10/168-70)  She found that the work paper supported that MTC values were clearly not 
actual costs in that they were reported, in her words, as “wildly different” (tr. 10/171, 
citing app. supp. R4, tab 136 at 163609 ¶ 3).  She also noted that the work paper 
demonstrated that actual cost information was available (tr. 10/171).  Ms. Hadley 
believes it is possible to determine Pratt’s actual costs and the true impact to the 
government of using MTC instead of actual costs, given the data and knowledge of 
Pratt’s employees.  Pratt has already identified the types of costs it incurs.  (R4, tab 288 
at 1870; tr. 10/209, 223)  
 
172.  Ms. Hadley opined that MTC is not the cost of a part; the actual value is the 
amount paid to collaborators based upon revenue share (tr. 10/190). 
 
Ms. Cheryl LeeVan 
 
 173.  Appellant proffered, and the Board accepted, Ms. Cheryl LeeVan as an 
expert in long term contracting and aerospace industry accounting, economics, operations 
and contract administration, Pratt’s collaboration practices, financial forensics, GAAP, 
and regulations governing federal contracts, including the application and practice of the 
FAR cost principles and the CAS, as detailed in appellant’s March 11, 2019 letter to the 
Board (tr. 11/15-16).  Her expert report is contained at ex. A-385.   
 
 174.  Ms. LeeVan addressed MTC in her expert report summary as follows: 
 
Each collaboration agreement is separately negotiated between 
Pratt and the collaborator, along with contractual/financial 
terms of the agreement.  As described in the  
Collaboration Agreement, [MTC] is the estimated learned out 
total cost Pratt would incur if Pratt manufactured, procured or 
assembled the engine or part, including its material, labor, and 
manufacturing overhead.  As a result of negotiations with 
collaborators, MTC is the arms-length negotiated price for the 
collaborator supplied parts. 
 
(Ex. A-385 at 7) 
 
 175.  Regarding whether Pratt pays GRS or NRS to collaborators, Ms. LeeVan 
determined persuasively that it pays NRS: 
 
Even though Pratt agrees to share a portion of the program 
revenue with the collaborator over the life of the program, 
Pratt does not pay the collaborators [GRS], and the revenue 
share payments to collaborators are significantly less than 






 60 
Pratt’s revenue share payments to collaborators do not include payment by Pratt for any 
items other than parts (or for services integral to providing the parts).   
 
188.  Pratt pays NRS to collaborators, not GRS (see findings 56, 129-131, 175, 179). 
 
CAS AND FAR PROVISIONS PERTAINING TO COST ISSUES 
 
CAS Provisions Relevant to Pratt’s Use of MTC 
 
 CAS 401, Consistency in Estimating, Accumulating and Reporting Costs, provides 
at paragraph (a) (2) of CAS 401-30, Definitions, that:   
 
Actual cost means an amount determined on the basis of cost 
incurred (as distinguished from forecasted cost), including 
standard cost properly adjusted for applicable variance. 
 
48 C.F.R. 9904.401-30(a)(2). 
 
 CAS 407, Use of Standard Costs for Direct Material and Direct Labor, provides at 
paragraph (a) of CAS 407-30, Definitions, that: 
 
(8)  Standard Cost means any cost computed with the use of 
pre-established measures. 
 
(9)  Variance means the difference between a pre-established 
measure and an actual measure. 
 
48 C.F.R. 9904.407-30(a)(8)-(9).  It defines “actual cost,” at paragraph (b)(1), as “[a]n 
amount determined on the basis of cost incurred.”  48 C.F.R. 9904.407-30(b)(1).  
 
CAS 410, Allocation of Business Unit General and Administrative Expenses to 
Final Cost Objectives, cited by the DACO in his final decision at issue, as explained in 
CAS 410-20, Purpose: 
 
[Provides] criteria for the allocation of business unit [G&A] 
expenses to business unit final cost objectives based on their 
beneficial or causal relationship.  These expenses represent 
the cost of the management and administration of the business 
unit as a whole.  The Standard also provides criteria for the 
allocation of home office expenses received by a segment to 
the cost objectives of that segment.  This Standard will 

 61 
increase the likelihood of achieving objectivity in the 
allocation of expenses to final cost objectives . . . . 
 
48 C.F.R. 9904.410-20. 
 
 Under paragraph (a) of CAS 410-40, Fundamental Requirement, “[b]usiness unit 
G&A expenses shall be grouped in a separate indirect cost pool which shall be allocated 
only to final cost objectives.”  48 C.F.R. 9904.410-40(a). 
 
 CAS 418-40, Fundamental Requirements, provides at paragraph (c) that: “[p]ooled 
costs shall be allocated to cost objectives in reasonable proportion to the beneficial or 
causal relationship of the pooled costs to cost objectives . . . .”  48 C.F.R. 9904.418-40(c). 
 
 Paragraph (a)(2) of CAS 418-50, Techniques for Application, relied upon by the 
DACO in his final decision at issue, provides in part that: 
 
(a) Determination of direct cost and indirect cost. 
 
. . . . 
 
(2)  In accounting for direct costs a business unit shall use 
actual costs, except that –  
 
 (i)  Standard costs for material and labor may be used 
as provided in 9904.407 . . . . 
 
48 C.F.R. § 9904.418-50(a)(2). 
 
CAS 418-50(d), cited by DCAA in is audit reports (findings 82- 83), provides in 
part: 
 
(d) Allocation measures for an indirect cost pool which 
includes a material amount of the costs of management or 
supervision of activities involving direct labor or direct 
material costs.  
 
. . . . 
 
(2) The base used to represent the activity being managed or 
supervised shall be determined by the application of the 
criteria below.  All significant elements of the selected base 
shall be included. 
 

 62 
. . . . 
 
(iv) A material cost base is appropriate if the activity being 
managed or supervised is a material-related activity. 
 
48 C.F.R. 9904.418-50(d) 
 
CAS 418-50(e) provides in part: 
 
(e) Allocation measures for indirect cost pools that do not 
include material amounts of the costs of management or 
supervision of activities involving direct labor or direct 
material costs.  Homogeneous indirect cost pools of this type 
have a direct and definitive relationship between the activities 
in the pool and benefiting cost objectives.  The pooled costs 
shall be allocated using an appropriate measure of resource 
consumption.  This determination shall be made in 
accordance with the following criteria taking into 
consideration the individual circumstances. 
 
48 C.F.R. 9904.418-50(e) 
 
CAS and FAR Provisions Relevant to Materiality 
 
 CAS 418-50, paragraph (c), Change in Allocation Base, provides in part that 
“[t]he determination of materiality shall be made using the criteria provided in 
9903.305.”  48 C.F.R. 9904.418-50(c).  Subpart 9903.305 provides: 
 
In determining whether amounts of cost are material or 
immaterial, the following criteria shall be considered where 
appropriate; no one criterion is necessarily determinative:  
 
(a) The absolute dollar amount involved.  The larger the 
dollar amount, the more likely that it will be material.  
 
(b) The amount of contract cost compared with the amount 
under consideration.  The larger the proportion of the amount 
under consideration to contract cost, the more likely it is to be 
material.  
 
(c) The relationship between a cost item and a cost objective.  
Direct cost items, especially if the amounts are themselves 

 63 
part of a base for allocation of indirect costs, will normally 
have more impact than the same amount of indirect costs.  
 
(d) The impact on Government funding.  Changes in 
accounting treatment will have more impact if they influence 
the distribution of costs between Government and 
non-Government cost objectives than if all cost objectives 
have Government financial support.  
 
(e) The cumulative impact of individually immaterial items.  
It is appropriate to consider whether such impacts:  
 
(1) Tend to offset one another, or  
(2) Tend to be in the same direction and hence to 
accumulate into a material amount.  
 
(f) The cost of administrative processing of the price 
adjustment modification shall be considered.  If the cost to 
process exceeds the amount to be recovered, it is less likely 
the amount will be material. 
 
48 C.F.R. § 9903.305.  
 
 In promulgating the CAS materiality criteria, now at § 9903.305, the CAS Board 
stated “the essence of materiality is to allow for the exercise of judgment.  [The matter of 
cost impact] requires the exercise of judgment in the administration of the contracts 
involved and of the cost impact provisions prescribed by the acquisition agencies.”  
45 Fed. Reg. 8677 at 8678 (Feb. 8, 1980); 42 Fed. Reg. 54254 (Oct. 5, 1977) (“The 
essence of materiality criteria is to allow for the [exercise] of judgment . . . . ”) 
 
 Paragraph (a) of FAR 30.602, MATERIALITY, provides that:  “In determining 
materiality, the CFAO [Cognizant Federal Agency Official] shall use the criteria in 
48 CFR 9903.305.”  Paragraph (c)(3)(ii) provides that:  “If the noncompliance is not 
corrected, the Government reserves the right to make appropriate contract adjustments 
should the cost impact become material in the future.”  FAR 30.602(c)(3)(ii). 
 
Paragraph (b)(4) of FAR 30.605, PROCESSING NONCOMPLIANCES, provides 
in part that “[i]f the CFAO makes a determination of noncompliance, the CFAO shall 
follow the procedures in paragraphs (c) through (h) of this section, as appropriate, unless 
the CFAO also determines the cost impact is immaterial.” 
 

 64 
 FAR 52.230-6, ADMINISTRATION OF COST ACCOUNTING STANDARDS 
(APR 2005) provides in paragraph (c) that:  
 
When requested by the CFAO, submit . . . (1)  A general 
dollar magnitude (GDM) proposal in accordance with 
paragraph (d) or (g) of this clause. 
 
FAR Provision Relevant to Drag Issue 
 
FAR 31.201-5, CREDITS, provides in relevant part: 
 
The applicable portion of any income, rebate, allowance, or 
other credit relating to any allowable cost and received by or 
accruing to the contractor shall be credited to the Government 
either as a cost reduction or by cash refund. 
 
FAR Provisions Concerning Advance Agreements and Contracting Officer’s Authority 
 
 FAR 31.109, ADVANCE AGREEMENTS, provides in part: 
 
(a) The extent of allowability of the costs covered in this part 
applies broadly to many accounting systems in varying 
contract situations.  Thus, the reasonableness, the 
allocability and the allowability under the specific cost 
principles at subparts 31.2, 31.3, 31.6, and 31.7 of certain 
costs may be difficult to determine.  To avoid possible 
subsequent disallowance or dispute based on 
unreasonableness, unallocability or unallowability under 
the [foregoing specific cost principles], contracting 
officers and contractors should seek advance agreement 
on the treatment of special or unusual costs . . . .  
However, an advance agreement is not an absolute 
requirement . . . . 
 
(b) Advance agreements may be negotiated either before or 
during a contract but should be negotiated before 
incurrence of the costs involved.  The agreements must be 
in writing, executed by both contracting parties, and 
incorporated into applicable current and future contracts.  
An advance agreement shall contain a statement of its 
applicability and duration. 
 

 65 
(c) The contracting officer is not authorized by this 31.109 to 
agree to a treatment of costs inconsistent with this part. 
 
 FAR 33.210, CONTRACTING OFFICER’S AUTHORITY, provides in part that 
“[e]xcept as provided in this section, contracting officers are authorized, within any 
specific limitations of their warrants, to decide or resolve all claims arising under or 
relating to a contract subject to the [CDA] . . . .”  
 
THE PARTIES’ CONTENTIONS
20 
 
The Government’s Contentions 
 
 Among other things, the government contends that MTC is not an actual cost and 
Pratt’s use of MTC in connection with its purchase of collaborators’ engine parts, in lieu 
of actual cost, violates CAS 418(d), which requires Pratt to use “actual costs” in its direct 
material cost base.  The government asserts that Pratt does not pay MTC to buy parts; it 
pays revenue share.  The government alleges that the GRS attributable to the parts at the 
time of their production is the cost of the parts that Pratt pays to the collaborators. 
 
 The government asserts that Pratt failed to meet its burden under Rumsfeld to 
show that some portion of the revenue share payments by Pratt to collaborators were 
payments for items other than parts.  The government alleges that, except for some minor 
services, the only items Pratt purchased with revenue shares were parts and Pratt 
obviously does not pay the program share of expenses that a collaborator owes to Pratt.  
 
 The government further contends that Pratt’s claim that “revenue share” is only 
the net cash it wires to collaborators is “frivolous” (gov’t br. at 85) and Pratt has no basis 
for reducing GRS by netting down the wired amount to cover the expenses a collaborator 
owes to Pratt.  The government elaborates:  
 
Netting accounts payable (gross revenue share) and accounts 
receivable (collaborator share of expenses) in sending cash to 
collaborators is a matter of accounting convenience or “cash 
management.”  Pratt merely reduces the amounts of cash Pratt 
and the collaborators would send to each other.  These 
reimbursements do not reduce the collaborator share of 
revenue recorded in the income statement or accounts payable 
in Pratt’s general ledger (and its financial statements).  Pratt’s  
  
                                              
20 We have considered all of the parties’ contentions, whether or not we mention or 
address them. 

 66 
economic obligation to the collaborator for the parts remains 
gross revenue share.  
 
(Gov’t br. at 85-86) (citations omitted) 
 
 Additionally, according to the government, the only other “items other than parts” 
that Pratt claims were included in revenue share payments to collaborators are imaginary 
or hypothetical concepts that lack any basis in the collaboration agreements (gov’t br. 
at 86).  This includes Pratt’s claim that revenue share payments include payments for 
return on investment or return on entry fees and the like.  Moreover, the government 
alleges that, contrary to Pratt’s contention that it cannot do so, it can and must assign 
“revenue share” based upon the cost of collaboration parts when they are used during 
production (gov’t br. at 88). 
 
 T he government further asserts that the DACOs acted within their discretion and did 
not abuse that discretion, or violate any statute or regulation, in finding that Pratt’s CAS 
418 violation for the years 2005 through 2008 materially impacted the costs allocated to 
government contracts (gov’t br. at 91).  The government asserts that, contrary to Pratt’s 
“frivolous” stance, the APA does not contain any numerical standard of materiality and 
does not establish materiality measurement guidelines (gov’t br. at 97-98).  The 
government also contends that “[i]t would be legal error for the Board to substitute its own 
view of materiality (much less Pratt’s opinions) for that of the DACOs” (gov’t br. at 100); 
an abuse of discretion review standard applies; and a de novo review by the Board of the 
DACOs’ exercise of their discretion would be invalid (see, e.g., gov’t br. at 93, 108).  Also, 
as part of its materiality discussion, the government, in effect, renews its LeeVan and its 
Engine Programs motions in limine (below).  
 
 Next, the government states that, until January1, 2005, Pratt credited Drag 
reimbursements to its indirect cost pools.  As of the APA, it changed its practice and 
failed to credit Drag reimbursements to the indirect material overhead cost pools to which 
they were charged.  The government alleges that this violates FAR 31.201-5, CREDITS.  
The government elaborates that Pratt is compensated for its Drag expenses by its 
collaborators, but also charges those expenses to the government through its indirect 
material overhead cost pool and thus is paid twice for the same expenses.  The 
government asserts that the APA’s “permission to allow Pratt to not credit DRAG 
payments, in direct violation of the Credits provision, is null and void” (gov’t br. at 115).    
 
 In that vein, the government contends that the APA is unlawful and invalid.  The 
government alleges that:  (1) the APA is not supported by consideration; (2) the APA 
must be construed as separate from the Settlement Agreement due to the Settlement 
Agreement’s integration clause and that neither agreement refers to the other; (3) because 
the APA is not ambiguous, the Board cannot consider extrinsic, or parol, evidence in 
interpreting it; and (4) the APA violates the law.  (Gov’t br. at 116-20)  

 67 
 
 Regarding the latter contention, the government alleges that, on its face, the APA 
violates several of FAR 31.109’s mandatory provisions concerning advance agreements, 
including purporting to permit Pratt to treat costs in violation of the Credits clause.  The 
government further contends that Pratt is construing the APA to grant it a right in 
perpetuity to use MTC as the cost of collaboration parts in its allocation base, which the 
agreement does not support and which violates the FAR, the CAS, and Rumsfeld.  In fact, 
the APA requires Pratt to correct its CAS noncompliance and to compensate the 
government for its noncompliant use of MTC, if and when the government determines 
that Pratt’s noncompliant practice is material.  Lastly, the government alleges that the 
APA lacks any limit on its applicability or duration and there is no evidence that it was 
incorporated into any contracts, both failures being in violation of FAR 31.109(b).  
(Gov’t br. at 120-24)   
 
Appellant’s Contentions  
 
 Among other things, appellant contends that its use of MTC complies with 
CAS 418 and Rumsfeld and while “[t]here is no dispute that this appeal is governed by 
[Rumsfeld],” contrary to the government’s argument, the court did not already decide the 
issues currently before this Board (app. br. at 77).  Appellant describes the issue in 
Rumsfeld as “whether Pratt was required to include a cost for collaboration parts in its 
overhead allocation bases,” which the court decided it was required to do. (app. br. at 77) 
(emphasis in original).  However, appellant characterizes the issue now before the Board 
as defining that cost.  
 
Appellant stresses that: 
 
Importantly, the Federal Circuit did not hold that the 
revenue share payments—much less gross revenue shares—are 
the cost of the collaboration parts; it held that revenue share 
payments “comprise” or include costs for the parts.  
“Comprise” means “to include esp. within a particular scope.”  
MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY 256 
(11th ed. 2012). . . .  In the patent claim context, the Federal 
Circuit has held that the terms “comprise” and “comprising” 
are “inclusive or open-ended” and “broader than consist.”  E.g., 
CIAS, Inc. v. All. Gaming Corp., 504 F.3d 1356, 1360–61 (Fed. 
Cir. 2007) (contrasting the terms “comprise” and “consist,” 
explaining that “. . . ‘comprising’ . . . is inclusive or open-ended 
and does not exclude additional, unrecited elements or method 
steps . . .”).  The Federal Circuit has expressed no conflicting 

 68 
interpretation of the meaning of “comprise” in the government 
contracts context. 
 
(App. br. at 77-78) (emphasis in original)  Appellant alleges that footnote 19 in Rumsfeld 
(finding 32) reflects the Federal Circuit’s recognition that “revenue share payments may 
compensate collaboration partners for more than just parts” (app. br. at 78). 
 
Appellant contends that the logical interpretation of Rumsfeld is that the phrase 
“revenue share payments” means revenue share paid to collaborators—that is, NRS.  In 
fact, according to appellant, regardless of whether the starting point is GRS or NRS, the 
evidence establishes that revenue share payments include payments beyond those for 
collaboration parts, and that MTC constitutes the cost of those parts.  (App. br. at 79) 
 
 A ppellant alleges that the government did not prove that its use of MTC violates 
CAS 418 and that a change in accounting base was required by CAS 418(c).  Appellant 
asserts that it complies with CAS 418 because it allocates its material overhead pool over 
a material cost base, as permitted by CAS 418-50(d)(2); “the activity being managed or 
supervised is a material-related activity” (CAS 418-50(d)(2)(iv)); and “MTC provides 
consistent, stable negotiated parts values that promote allocation of material overhead ‘in 
reasonable proportion to the beneficial or causal relationship of the pooled costs to cost 
objectives’ [CAS 418-40(c)].”  (App. br. at 79) 
 
 Appellant asserts that “CAS 418 nowhere states that costs included in a material 
cost base for the allocation of indirect costs must be ‘actual costs’” (app. br. at 81).  It 
acknowledges that CAS 418 provides that “[i]n accounting for direct costs a business unit 
shall use actual costs,” but it alleges that, because material overhead is not a direct cost, 
“it need not be allocated by use of actual costs” (id.). 
 
 Appellant contends that CAS interpretation is a question of law that the Board 
reviews de novo such that, contrary to the government’s contention, the DACO’s 
determination of materiality is not reviewed under an abuse of discretion standard 
(app. br. at 74). 
 
 Additionally, appellant contends that GRS is not the cost of the collaborator parts; 
the government has not met its burden to prove that it is entitled to a credit for Drag 
under FAR 31.201-5; and DACO Ennis acted within the scope of her authority in 
negotiating and executing the Settlement Agreement, the APA and the disposition 
notices, and the government is bound by each of them.  Appellant further alleges that the 
Settlement Agreement and the APA are part of the same 2006 settlement and the APA is 
legally valid.   
 
Appellant also alleges that the government breached the 2006 settlement in two 
respects.  First, the portion of the government’s CAS 418 claims that includes the cost 

 69 
impact of the alleged noncompliance from January 1, 2005 through June 5, 2006, is 
barred by what appellant describes as the “release” in paragraph 5 of the APA and 
assertion of a CAS 418 noncompliance claim based upon Pratt’s use of MTC as the cost 
of collaborator parts from January 1, 2005 through December 31, 2012 is “plainly 
contrary” to the “waiver” in paragraph 5 (see finding 108) (app. br. at 111-12).21   
 
Second, the DACO allegedly breached the APA by asserting a CAS 418 claim 
without first satisfying the conditions of paragraph 4 of the APA (see finding 108), 
because he did not consider the materiality of any cost impact as compared to “revenue 
share payments.”  Rather he only made a comparison to GRS.  He also failed to make a 
good faith effort to identify an appropriate portion of revenue share payments as the CAS 
compliant cost of collaborator parts, i.e., the portion of revenue share payments that was 
for “other than parts.”  (App. br. at 112)  
 
Appellant also asserts that, as with its CAS 418 claims, the portion of the 
government’s Drag credit claim covering the period from January 1, 2005 through 
June 5, 2006, is barred by the “release” in paragraph 5 of the APA.  Appellant contends 
that, additionally, the entire Drag credit claim is barred by accord and satisfaction 
pursuant to paragraph 2 of the APA (see finding 108).  Lastly, appellant asserts that all of 
the government’s claims are barred by the CDA’s statute of limitations.   
 
The Government’s Reply Brief Contentions 
 
 The government replies, inter alia, that:  GRS is the cost of collaborator parts; 
MTC violates CAS 418 and Rumsfeld; MTC is not an actual cost as required by 
CAS 418; and appellant has not met its burden to prove that some portion of the revenue 
shares is payment for items other than parts (gov’t reply br. at 43).   
 
 The government alleges that appellant misreads Rumsfeld and that appellant’s 
reliance upon “the peculiar treatment of ‘comprise’ in patent cases is utterly misplaced” 
(gov’t reply at 34). 
 
 The government disputes appellant’s argument that CAS 418 does not require that  
  
                                              
21 Appellant discusses the Settlement Agreement in the context of whether there were 
separate agreements, and mentions the release in its paragraph 4 (see finding 105), 
but it does not appear to allege that this release bars the government’s claims 
(app. br. at 107, 111).  Accordingly, we do not address a release issue that was not 
raised. 

 70 
costs included in a material cost base for the allocation of indirect costs be actual costs, as 
follows:   
 
Like all “allocation bases,” Pratt’s Direct Material Base 
allocates indirect costs.  That its direct material cost base 
allocates indirect costs does not mean that the direct material 
cost in the base does not need to be “accounted for” using 
“actual costs.”  Subsection 50(a)(2) states that those direct 
material costs shall be accounted for using actual costs.” 
 
(Gov’t reply at 37-38) 
 
 The government alleges that appellant’s “actual cost” arguments are undermined 
by the fact that it never attempted to use, and never addressed, standard costing under 
CAS 401-30(a)(2) and CAS 407-30(a)(8), which constitutes an actual cost under 
CAS 418, and could have been used to estimate the cost of parts used during the time of 
production (gov’t br. at 90-91; gov’t reply br. at 39-40).  The government asserts that, 
regardless, GRS is the actual cost of collaborator parts that complies with Rumsfeld and 
CAS 418.  (Gov’t reply br. at 40) 
 
 The government argues further that appellant’s CAS 418 noncompliance is 
material; appellant violated the Credit cost principle by failing to credit Drag; and the 
APA, which the government characterizes as an advance agreement, is invalid and 
unenforceable (gov’t reply at 46-57). 
 
Lastly, the government asserts that the CDA’s statute of limitations does not bar 
its claims.  It adds that, even if it knew or should have known of a claim under CAS 418 
more than six years prior to the COFD at issue, under the continuing claims doctrine, its 
claims for Pratt’s continuing CAS 418 and FAR 31.201-5 violations within the six years 
preceding presentation are timely. 
 
The government does not address appellant’s waiver, release and accord and 
satisfaction arguments.  
 

 71 
Appellant’s Surreply Contentions 
 
 Appellant responds by disclaiming the government’s arguments and expanding 
upon some of its own.  
 
DISCUSSION 
 
Preliminary Matters 
 
 We address the following matters first because they affect the scope of the 
evidence and the issues to be considered and decided. 
 
Government’s Motions In Limine  
 
As summarized in the Board’s January 28, 2020 Order, on May 21, 2019, the 
government filed a pre-hearing “Motion In Limine to Exclude the Expert Report and 
Testimony of Cheryl LeeVan” (LeeVan motion) and a “Motion In Limine to Exclude 
Evidence and Testimony Concerning Pratt’s Engine Programs that Post Date 2012” 
(Engine Programs motion).  The Board denied the LeeVan motion, as memorialized in its 
May 30, 2019 “Order on the Government’s Motion to Strike and on Various of the 
Parties’ Motions” (¶12).  The May 30, 2019 Order deferred ruling on the Engine 
Programs motion until after the hearing (¶9).   
 
On December 16, 2019, the government submitted a post-hearing “Renewed 
Motion In Limine to Exclude Evidence and Testimony, Including the Opinions of 
Cheryl LeeVan, Concerning Events that Post Date and Do Not Relate to the Relevant 
2005 through 2012 Time Period.”  The motion renewed the LeeVan and Engine 
Programs motions.  The Board’s January 28, 2020 Order declined to re-visit its denial of 
the LeeVan motion but stated that it would address the Engine Programs motion in its 
decision on the merits.   
 
 The Board grants the government’s Engine Programs motion to the extent that the 
Board has not considered testimony or other evidence that post-dates and does not relate 
to the 2005 through 2012 period relevant to this appeal.  If it arguably does so relate we 
have considered it, whether or not we have relied upon it.   
 
The Government’s Claims are not Barred by the CDA’S Statute of Limitations 
 
The CDA requires that: 
 
(A)  In general.  Each claim by a contractor against the 
Federal Government relating to a contract and each claim by 
the Federal Government against a contractor relating to a 

 72 
contract shall be submitted within 6 years after the accrual of 
the claim.  
 
(B)  Subparagraph (A) of this paragraph does not apply to a 
claim by the Federal Government against a contractor that is 
based on a claim by the contractor involving fraud. 
 
41 U.S.C. § 7103(a)(4)(A)-(B). 
 
FAR 33.206, INITIATION OF A CLAIM, provides: 
 
(b)  The contracting officer shall issue a written decision on 
any Government claim initiated against a contractor within 
6 years after accrual of the claim, unless the contracting 
parties agreed to a shorter time period.  The 6-year period 
shall not apply to contracts awarded prior to October 1, 1995, 
or to a Government claim based on a contractor claim 
involving fraud. 
 
The CDA does not define “accrual” of a claim, but FAR 33.201, states: 
 
Accrual of a claim means the date when all events, that fix the 
alleged liability of either the Government or the contractor 
and permit assertion of the claim, were known or should have 
been known.  For liability to be fixed, some injury must have 
occurred.  However, monetary damages need not have been 
incurred. 
 
 An assertion that a claim is barred by the CDA’s statute of limitations is not a 
jurisdictional issue but is an affirmative defense with regard to which the proponent bears 
the burden of proof.  Sikorsky Aircraft Corp. v. United States, 773 F.3d 1315, 1322 (Fed. 
Cir. 2014); Kellogg Brown & Root Services, Inc., ASBCA No. 58175, 15-1 BCA 
¶ 35,988 at 175,823. 
 
Claim accrual is not necessarily suspended until the contracting party performs an 
audit or other financial analysis to determine the amount of its damages.  Sparton DeLeon 
Springs, LLC, ASBCA No. 60416, 17-1 BCA ¶ 36,601 at 178,312; Raytheon Missile Systems, 
ASBCA No. 58011, 13-1 BCA ¶ 35,241 at 173,018.  Moreover, claim accrual does not turn 
upon the date the contracting officer or other individual with authority to assert a claim has 
knowledge of it.  Thus, a contracting party cannot delay the running of the statute of 
limitations by postponing an audit or keeping the claim information from an individual 
authorized to assert the claim.  See Raytheon Missile Systems, 13-1 BCA ¶ 35,541 at 173,018. 
 

 73 
The test for determining when the events that fix the alleged claim liability were 
known or should have been known includes a reasonableness component.  Supreme 
Foodservice GmbH, ASBCA No. 57884 et al., 16-1 BCA ¶ 36,426 at 177,582 (citing 
Kellogg Brown & Root Services, Inc., 15-1 BCA ¶ 35,988 at 175,825).  Claim accrual 
does not depend upon what a party subjectively understood; rather, “it objectively turns 
upon what facts are reasonably knowable.”  Raytheon Missile Systems, 13 BCA ¶ 35,241 
at 173,017.  “The events fixing liability should have been known when they occurred 
unless they can be reasonably found to have been either concealed or ‘inherently 
unknowable’ at that time.”  Id.  Once a party is on notice that it has a potential claim, the 
statute of limitations can begin to run.  Gray Personnel, Inc., ASBCA No. 54652, 06-2 
BCA ¶ 33,378 at 165,476
22.  In evaluating when the claimed liability was fixed, we first 
examine the legal basis of the claim.  Id. at 165,475. 
 
As indicated in FAR 33.206, the government asserts a claim through a contracting 
officer’s decision.  See also Sikorsky Aircraft Corp., 773 F.3d at 1320.  The COFD at 
issue is dated December 24, 2013 (finding 148).  To be timely, the government’s claims 
must have been asserted no more than six years after their accrual.  Thus, if they accrued 
before December 25, 2007, they are not timely. 
 
DCAA’s September 22, 2011 192 audit report (finding 132), which had 
questioned Pratt’s MTC accounting practices, was one of the bases for the COFD.  The 
COFD alleged that “the [192] audit disclosed a substantial delta between either GRS or 
NRS and MTC”; the impact was over  in CY 2009; and this was a material 
cost impact to government contracts under 48 C.F.R. § 9903.305 and FAR 30.602 (R4, 
tab 334 at 185).  The decision demanded $210,968,414 from Pratt on the basis that it had 
not complied with CAS 418 from January 1, 2005, through December 31, 2012.  Rather 
than the required actual costs, it had used MTC estimates in lieu of revenue share 
payments to cost its collaboration materials in accounting for its direct costs, and the use 
of MTC had had a material cost impact upon government contracts since January 1, 2005.  
(Findings 148-49) 
 
The COFD declared that GRS was the cost of collaborator parts.  The COFD also 
claimed that Pratt’s failure to remove the collaborators’ share of Drag and other expenses 
from its overhead pools would cause a double recovery of those items as indirect costs 
because they were already recoverable as part of Pratt’s direct material costs on contract 
pricing actions.  The COFD also claimed that the APA was invalid and not binding upon 
the government.  (Finding 148)  Appellant does not focus upon the latter contention in its 
statute of limitations affirmative defense.   
 
                                              
22 The Raytheon Missile Systems and Gray Personnel cases were decided before Sikorsky 
held that the CDA’s statute of limitations was not jurisdictional, but their relevant 
precepts still apply. 


 74 
 Appellant asserts that the government’s CAS 418 claim is based upon the cost impact 
of its January 1, 2005 accounting practice change, which adopted the use of MTC as the 
cost of collaborator parts, and that the government’s Drag claim is based upon appellant’s 
January 1, 2005 discontinuance of its practice of allocating Drag credits to its indirect cost 
pools.  Therefore, according to appellant, the question is, when did the government know, or 
reasonably should have known, that it had a basis to seek a cost adjustment because of what 
appellant describes as the accounting changes?  (App. br. at 114) 
 
Appellant contends that the government’s claims accrued when DCAA issued its 
September 23, 2005 audit report opining that Pratt’s use of MTC did not comply with 
CAS 418 and that its practice of no longer crediting Drag to its indirect cost pools 
violated FAR 31.201-5.  Appellant alleges that the report found that the CAS 418 
violations had a material cost impact upon the government.  Appellant further contends 
that, at the latest, the government was aware of these issues when it executed the 
settlement documents on June 5, 2006.  (Ap. br. at 115) 
 
 The government responds, among other things, that appellant has acknowledged 
that “‘materiality is a required element of [a CAS 418] noncompliance, including in 
determining whether a contractor is required to change its existing allocation base’” 
(gov’t reply br. at 59, quoting app. br. at 74).  Therefore, according to the government, its 
claim under CAS 418 could not have accrued before the government knew, or should 
have known, that the impact resulting from Pratt’s noncompliance was material.  The 
government asserts that it was not until the July 27, 2010 forward pricing audit report 
(finding 128) that it first knew of a potential material impact and it was not until the 
September 22, 2011 192 audit report that it identified a material impact (finding 132).  
The government points out, as we have found, that the September 23, 2005 audit report 
relied upon by appellant did not make any materiality determination or mention 
materiality (finding 84).  
 
 Citing, inter alia, Fluor Corp., ASBCA No. 57852, 14-1 BCA ¶ 35,472, the 
government adds, arguendo, that, even if it should have known of its CAS 418 and 
FAR 31.201-5 claims more than six years before the COFD, a government claim for CAS 
noncompliance falls under the continuing claims doctrine, such that the portion of its 
claims that falls within the limitations period survives.   
 
 A ppellant itself has posited that materiality is a required element of a CAS 418 
violation.  As of the June 5, 2006 settlement and APA agreements, the CACO had 
determined that, while noncompliant, appellant’s use of MTC did not presently result in a 
material amount of increased costs to the government.  However, the government 
reserved the right to make appropriate adjustments if the noncompliance became material 
in the future (finding 108).  The September 23, 2005 audit report preceded the June 5, 
2006 APA, which resolved the forward pricing issues through June 5, 2006 (finding 128) 
and the audit report did not mention materiality (finding 84).   

 75 
 
 W hile the government cannot deliberately delay the accrual of a claim by delaying 
an audit, for example, in the CAS compliance context, audits may well be essential 
before it can be determined whether the government has a claim.  The government 
contends that it first knew of a potential material impact from appellant’s CAS 
noncompliance upon the issuance of the July 27, 2010 forward pricing audit report.  That 
report concluded that the noncompliance was “significant enough to materially impact 
the results of audit of the material overhead rate” and that the contracting officer should 
determine the impact of using MTC rather than revenue share payments in the proposed 
direct material allocation base (finding 128).
23 
 
 We conclude, under Gray Personnel, 06-2 BCA ¶ 33,378 at 165,476, which refers 
to claim accrual upon notice of a potential claim, that the government’s claim accrued not 
later than the July 27, 2010 forward pricing audit report, rather than the September 22, 
2011 192 audit report cited in the COFD, which specifically found that appellant’s alleged 
CAS noncompliance had a material impact upon its government contracts (findings 132, 
136, 148).  Regardless, the July 27, 2010 date of the audit report, or the June 28, 2010 
receipt of data, were both well within the CDA’s 6-year claim assertion limit.  
 
In sum, appellant has not met its burden to prove its affirmative defense that the 
government’s claims are barred by the CDA’s statute of limitations.  Because we conclude 
that they are not so barred, we do not reach the government’s continuing claims argument. 
 
The Settlement Agreement and the APA are Separate Agreements 
 
Appellant’s personnel and the government’s personnel referred to the Settlement 
Agreement and the APA, at various times, as a single agreement or as separate 
agreements.  However, with one unclear exception (see finding 102), the government 
consistently referred to them as separate agreements and revised a Pratt settlement 
agreement draft to call for separate agreements (see, e.g., findings 100, 111, 122-25).  
 
Regardless, neither party claims that the Settlement Agreement or the APA is 
ambiguous.  Under the circumstances, when the provisions of an agreement are clear and 
unambiguous, they must be given their plain and ordinary meaning and a tribunal may 
                                              
23 The government was arguably aware of a potential claim as early as January 4, 2005.  
See finding 67 concerning Hart report.  However, the July 27, 2010 audit report 
notes that Pratt had not provided NRS amounts in its proposal and that the auditors 
had requested MTC and NRS amounts as part of the audit.  Certain of the 
requested data were not provided until June 28, 2010.  See finding 128.  The 
government argues that this information was necessary for the government to 
determine materiality of the potential CAS 418 claim (gov’t reply at 58-59).  Pratt 
did not respond to the government’s argument.   

 76 
not resort to extrinsic evidence to interpret them.  Coast Federal Bank, FSB v. United 
States, 323 F.3d 1035, 1040 (Fed. Cir. 2003) (en banc).   
 
The government relies upon the integration clause in the Settlement Agreement, 
which provides that the “Agreement is the entire Agreement between the Parties, and 
supercedes any prior agreements” (finding 105 ¶ 10), to bar appellant’s contention that 
the Settlement Agreement and the APA must be read together as part of the same 
agreement.  The government contends that the clause refers to contemporaneous as well 
as prior agreements.  (Gov’t reply br. at 55-56)  However, the integration clause refers 
only to prior agreements.  Nevertheless, the Settlement Agreement and the APA, while 
executed at the same meeting (finding 102), do not refer to each other (finding 125).  
They record separate transactions and are not ambiguous. 
 
 The Settlement Agreement and the APA are clearly separate agreements. 
 
The APA is a Valid Agreement 
 
 Appellant contends that the APA is not an advance agreement, even though, 
contemporaneously, Pratt drafted and referred to the agreement as an advance agreement 
(findings 95, 100).  While the APA states that it was under the authority of FAR 31.109, 
ADVANCE AGREEMENTS (finding 106), the government notes correctly that the APA 
does not satisfy the requirements of an advance agreement, including that it be 
incorporated into applicable current and future contracts and that it “shall contain a 
statement of its applicability and duration.”  FAR 31.109(b).  We have not been directed 
to any evidence that the APA was incorporated into any of Pratt’s government contracts 
and it was not incorporated into the captioned contract.  We find no statement in the 
agreement specifying its duration.  (Finding 109)   
 
 Regardless, as we pointed out in Paradigm II, LLC, d/b/a JB Carpet & Upholstery 
Care, ASBCA No. 55849, 09-1 BCA ¶ 34,070 at 168,464: 
 
The determination of a contract type is a matter of law, 
Maintenance Engineers v. United States, 749 F.2d 724, 726 
n.3 (Fed. Cir. 1984), and we are not bound either by what the 
contract is called or by the label attached to it by the parties.  
Mason v. United States, 615 F.2d 1343, 1346 (Ct. Cl.), cert. 
denied, 449 U.S. 830 (1980).  
 
 The elements of a valid contract are:   
 
1)  a mutual intent to be bound; 2)  an unambiguous offer and 
acceptance; 3)  consideration; and 4)  actual authority on the 
part of the government representative to bind the government. 

 77 
 
Ruby Emerald Constr. Co., ASBCA No. 61096, 18-1 BCA ¶ 37,197 at 181,084.  The 
government principally challenges that the APA satisfies elements 3), consideration, and 
4), authority to bind the government.   
 
“Consideration is ‘a bargained for exchange consisting of an act, forbearance, or 
return promise.’”  Ruby Emerald, 18-1 BCA ¶ 37,197 at 181,086 (citations omitted).  The 
APA is based upon the following premises:   
 
WHEREAS, the parties have determined it is in their 
best interests to resolve the 2005 Forward issues through the 
date of this agreement and to agree upon the prospective use 
of the practices at issue;  
 
NOW, THEREFORE, in consideration of the promises 
herein, the parties agree as follows: 
 
(Finding 107) 
 
Through the APA the parties settled the “2005 Forward issues” addressed in 
DCAA audits, which pertained to Pratt’s accounting for commercial collaboration 
agreements, including, as relevant to this appeal, Pratt’s discontinuance of its practice of 
crediting Drag to its overhead pools and its use of MTC as the cost of collaboration parts.  
DCMA agreed that it would not require Drag credits prospectively, provided that Pratt 
continued to include a cost for collaboration parts in its allocation base(s) and that the 
Drag provisions of the collaboration agreements did not materially change.  Additionally, 
if the government later found the cost impact of Pratt’s use of MTC to be material, Pratt 
agreed to engage in a “good faith effort” with the government to identify a 
CAS-compliant cost measure.  (R4, tab 128 at 115; findings 107-08)  These were 
promises and mutual forbearances by the parties.  Lastly, the APA was backed by the 
general consideration of aiming to avoid the costs of litigation over the 2005 Forward 
issues.   
 
 In sum, the APA was supported by consideration. 
 
 Regarding DACO Ennis’ authority to execute the APA, contrary to the 
government’s current position, both Pratt and the government declared contemporaneously 
that she was authorized to execute it (tr. 7/116, 10/267; findings 106-07, 120-21; see 
FAR 33.210).  The government has not come forward with any evidence that she was not 
authorized (finding 120).  No question has been raised about Mr. Nichols’ authority to sign 
on behalf of Pratt (finding 121). 
 

 78 
The government now alleges that, by executing the APA, DACO Ennis violated 
FAR 31.205-1 concerning the allocation of credits to the government, FAR 30.602(c) and 
30.605(b)(4) concerning MTC, and FAR 31.109(b) concerning advance agreements 
(gov’t br. at 120-24).  There was no firm consensus among government personnel as to 
whether FAR violations had occurred.  Regarding Drag credits, for example, DCAA 
auditor, Ms. Marianne Hart, first opined internally in 2005 that in order for the 
government to share in the credits, it must prove that the overhead expenses were 
allocated to government contracts.  Although she changed her view concerning the 
burden of proof during the hearing, she still held this view at the time of her 2010 OIG 
interviews.  She noted that, while the government had concluded that Drag credits should 
stay in the overhead pool, it did not test to see if Drag applied to any costs that had been 
allocated to government contracts and reimbursed by the government.  (Findings 78-80)  
In fact, in her work, appellant’s expert, Ms. LeeVan, did not see any reconciliation of 
Drag recoveries to any particular cost in an overhead pool (finding 180).   
 
The government bears the burden to prove that it overpaid appellant and is entitled 
to a credit.  Alaska Aerospace Corp., ASBCA No. 59794, 16-1 BCA ¶ 36,498 at 177,843.  
It has not met that burden. 
 
The government also has not established that DACO Ennis lacked authority to 
settle the disputed MTC issues.  Moreover, while the APA did not meet all of the FAR 
criteria for advance agreements (see FAR 31.109; finding 109), this does not mean that it 
was not otherwise a legitimate agreement.  The fact that the government changed its view 
and now disagrees with the DACO’s positions, as expressed in the APA and concurred in 
by her superior, Mr. Leahy (finding 121), does not render the APA invalid. 
 
In sum, the APA was a legitimate agreement.   
 
The Portion of the Government’s CAS 418 Claims Covering the Period 
from January 1, 2005 through June 5, 2006, is Barred by Waiver 
 
Appellant raises the affirmative defenses that the government’s claims are barred 
by waiver, release and accord and satisfaction.  Appellant has the burden to prove its 
affirmative defenses.  The Ryan Co., ASBCA No. 58137, 15-1 BCA ¶ 35,998 at 175,860.  
“Waiver occurs when a party intentionally relinquishes a known right.”  Chugach 
Federal Solutions, Inc., ASBCA No. 61320, 19-1 BCA ¶ 37,314 at 181,496 (citation 
omitted).  “A release is a contract whereby a party abandons a claim or relinquishes a 
right that could be asserted against another.”  Holland v. United States, 621 F.3d 1366, 
1377 (Fed. Cir. 2010) (citation omitted).  
 
In paragraph 5 of the APA, the government stated explicitly that it “waives its 
right to any cost impacts or interim or final rate changes relating to the 2005 Forward 
issues” through June 5, 2006, the date of the APA (finding 108).  Those issues pertained 

 79 
to questions raised in audit reports concerning Pratt’s accounting for commercial 
collaboration agreements “effective January 1, 2005 forward” (finding 107).  Although 
appellant refers to paragraph 5 as containing a “release” (app. br. at 112), the paragraph 
employs the term “waives” but does not mention “release” (finding 108). 
 
 In sum, the portion of the government’s CAS 418 claims covering the period from 
January 1, 2005 through June 5, 2006, is barred by waiver.  While appellant’s citation to 
a release in the APA appears to be unsupported, we need not address this question 
(see n.21 above).  
 
The Government’s Entire Drag Credit Claim is Barred by Accord and Satisfaction 
 
Appellant additionally contends that the government’s entire Drag credit claim is 
barred by accord and satisfaction pursuant to APA paragraph 2.  An accord and 
satisfaction occurs when “a claim is discharged because some performance other than 
that which was claimed to be due is accepted as full satisfaction of the claim.”  Holland, 
621 F.3d at 1377.  The party asserting the affirmative defense of accord and satisfaction 
has the burden of proving:  (1) proper subject matter; (2) competent parties; (3) a meeting 
of the parties’ minds; and (4) consideration.  Optex Systems, Inc., ASBCA No. 58820, 
14-1 BCA ¶ 35,801 at 175,097 (citing Holland, 621 F.3d at 1382).  
 
APA paragraph 2 states: 
 
2.  The Disposition Notices and Letter also conclude that 
Pratt’s discontinuance of its prior practice of crediting DRAG 
to its overhead pools was compliant with both CAS and the 
[FAR] from January 1, 2005 to the [June 5, 2006] date of this 
agreement.  The Government will not require such credits 
prospectively, provided that Pratt continues to include a cost 
for collaboration parts in its allocation base or bases and that 
the “DRAG” provisions of the collaboration agreements do 
not materially change. 
 
(Finding 108)   
 
APA paragraph 3 provides: 
 
3.  The Disposition Notices, the Letter, and this Agreement 
resolve the 2005 Forward  and DRAG credit issues.  The 
Government shall take no further action on the audit reports 
addressing these issues, and the DACO hereby withdraws any  
  


 80 
and all interim or final findings of noncompliance arising 
under or related to these issues. 
 
(Id.) (Emphasis added)  
 
 APA paragraph 5 states: 
 
5.  The Government waives its right to any cost impacts or 
interim or final rate changes relating to the 2005 Forward 
issues through the date of this Agreement, whether arising 
under or related to savings provisions in Pratt’s CAS-covered 
contracts or otherwise. 
 
(Id.) 
 
 APA paragraph 7 states: 
 
7.  Nothing in this Agreement shall be construed as limiting 
(a) the Government’s right and obligation to periodically 
review Pratt’s accounting practices for adequacy and CAS 
compliance and to make determinations regarding such 
adequacy and compliance based on the facts and 
circumstances present at the time of such reviews and the 
laws and regulations then in effect; or (b) any audit right 
granted by law, regulation or any contract provisions. 
 
(Id.)   
 
 APA paragraph 8 declares: 
 
8.  This Agreement is in accord and satisfaction of the 2005 
Forward issues to the extent stated in paragraphs 1 through 5 
above.
[24]  It shall extend to and be binding upon the parties 
hereto and their respective agents, successors and assigns to 
the extent permitted by law and regulation. 
 
(Id.) 
 
 The government has not presented evidence that any CAS changes, or any new 
questions concerning appellant’s accounting practices or CAS compliance have occurred.  
                                              
24 We have quoted here the paragraphs relevant to the Drag issue.  The other paragraphs 
are quoted at finding 108. 

 81 
In fact, the unrebutted testimony of appellant’s expert, Ms. LeeVan, was that appellant 
has satisfied paragraph 2’s conditions for the government’s continuing not to require it to 
credit Drag to its overhead pools (finding 181-82).   
 
We have found that there was consideration for the APA agreement, DACO Ellis 
was authorized to enter into it, and the APA was a valid agreement.  The government has 
not challenged that there was a meeting of the parties’ minds.  We conclude that appellant 
has met its burden to prove that an accord and satisfaction occurred. 
 
 Therefore, the government’s entire Drag credit claim is barred by accord and 
satisfaction. 
 
The Government Did Not Breach the APA  
 
 The APA states the government’s position that Pratt’s use of MTC as the cost of 
collaboration parts does not comply with the CAS, but that this did not presently result in 
a material amount of increased costs to the government, such that no contract adjustments 
were then required.  However, the government reserved the right to make adjustments 
should the noncompliance become material.  If it became material, when compared to 
using revenue share payments as the cost of collaboration parts, the parties agreed to 
make a good faith effort to identify a portion of revenue share payments as the 
CAS-compliant cost of collaboration parts or to identify another CAS-compliant means 
of addressing collaboration parts.  (Finding 108)   
 
 Prior to the COFD at issue, in its July 27, 2010 forward pricing audit report, 
DCAA advised that Pratt’s continuing noncompliance with CAS 418 was “significant 
enough to materially impact the results of audit of the material overhead rate” 
(finding 128).  The report recommended that contract price negotiations concerning the 
material overhead rate await the contracting officer’s consideration and determination of 
the impact of using MTC rather than Revenue Share Payments in the proposed direct 
material allocation base (id.). 
 
In its September 22, 2011 192 noncompliance audit report, DCAA stated that 
Pratt’s use of MTC in place of actual costs did not comply with CAS 418-50(a)(2) 
because the amounts were not Pratt’s actual direct material cost for collaboration parts.  
DCAA concluded that this had a material impact upon material overhead expense 
allocated to government contracts.  (Findings 132, 134) 
 
Thereafter the parties engaged in good faith discussions on the disputed issues and 
Pratt provided extensive amounts of information, including expert reports, on the 
question of whether gross revenue share payments included payments beyond that for 
collaboration parts.  The parties also addressed the issue of the materiality of the alleged 
CAS 418 noncompliance and its impact.  DACO Olbrych also considered ROM cost 

 82 
impact estimates from DCAA concerning Pratt’s alleged CAS 418 violation.  
(Findings 138-40, 143-47) 
 
Contrary to appellant’s contention that the Board does not review the DACOs’ 
materiality determinations under an abuse of discretion standard, a contracting officer’s 
determination of whether a cost impact is material involves judgment and discretion.  
(“[T]he essence of materiality is to allow for the exercise of judgment.  [The matter of 
cost impact] requires the exercise of judgment in the administration of the contracts 
involved and of the cost impact provisions prescribed by the acquisition agencies.”  
45 Fed. Reg. 8677 at 8678 (Feb. 8, 1980); (“[T]he essence of materiality criteria is to 
allow for the [exercise] of judgment.”  42 Fed. Reg. 54254 (Oct. 5, 1977)) (CAS Board 
statements in promulgating what is now 48 C.F.R. § 9903.305)  This discretion is 
considerable but it is subject to the required review by the contracting officer of the 
materiality criteria in § 9903.305 where appropriate (“In determining whether amounts of 
cost are material or immaterial, the following criteria shall be considered where 
appropriate” (emphasis added)); see Raytheon Co., Space & Airborne Systems, ASBCA 
No. 58068, 16-1 BCA ¶ 36,484 at 177,773.
25   
 
 In this appeal, DACOs Hart and Olbrych have attested, and appellant does not 
dispute, that they considered all of the criteria in reaching their materiality 
determinations.  Moreover, we have not found any evidence that the DACOs acted 
arbitrarily or capriciously or in bad faith or abused their discretion.  (Findings 143, 149)   
 
 In sum, the DACOs acted within the parameters of the APA, and the government 
did not breach it, when the DACOs reviewed whether appellant’s use of MTC as the cost 
of collaboration parts had a material impact upon the costs charged to government 
contracts.  
 
Merits of Government’s CAS 418 Claims 
 
 The government bears the burden to prove that appellant did not comply with 
CAS 418.  Sikorsky, 773 F.3d at 1322.   
 
                                              
25 Raytheon identifies the abuse of discretion review standard as consideration of 
“(1) evidence of whether the government official acted with subjective bad faith; 
(2) whether the official had a reasonable, contract-related basis for her decision; 
(3) the amount of discretion given to the official; and (4) whether the official 
violated a statute or regulation.”  16-1 BCA ¶ 36,484 at 177,773 (citing Campbell 
Plastics Engineering & Mfg., Inc. v. Brownlee, 389 F.3d 1243, 1250 (Fed. Cir. 
2004)). 

 83 
Appellant’s Use of MTC as the Cost of Collaboration Parts 
Does Not Comply with CAS 418 
 
Appellant asserts that CAS 418(d) does not require that costs included in a 
material cost base for the allocation of indirect costs be “actual” costs.  While it 
acknowledges that CAS 418-50(a)(2) provides that “[i]n accounting for direct costs a 
business unit shall use actual costs,” it alleges that, because material overhead is not a 
direct cost, it need not be allocated by using actual costs.   
 
The government counters that, like all allocation bases, Pratt’s direct material base 
allocates indirect costs.  However, under CAS 418-50(a)(2) (“In accounting for direct 
costs a business unit shall use actual costs”), the direct material cost in the base needs to 
be accounted for using actual costs.  This has been DCAA’s and the DACOs’ position for 
many years (see, e.g., the 192 audit report, finding 134, and the December 24, 2013 
COFD, finding 149).   
 
The government’s interpretation is consistent with Rumsfeld, where the court 
stated that “under CAS 410, 418 and 420, in allocating G & A, B & P, and IR & D, Pratt 
was required to include a cost for collaboration parts in its allocation bases.”  Rumsfeld, 
315 F.3d at 1377; see also Rumsfeld at 1366 (“Pratt allocated its G & A expenses to cost 
objectives using direct material cost as its allocation basis . . . Thus, a cost base calculated 
using direct material costs aggregated the ‘costs’ of all materials used in performing the 
project.”)  
 
We conclude that the government has the more reasonable interpretation of 
CAS 418-50(a)(2) and its related provisions and that appellant was required to use actual 
costs as the cost of its collaboration parts.   
 
 As defined in CAS 401-30(a)(2), “[a]ctual cost means an amount determined on 
the basis of cost incurred (as distinguished from forecasted cost).”  MTC, in contrast to 
actual cost,  
 is “a theoretical value, a notional cost lever . . . it’s never, say, the true cost” 
(finding 17).  Appellant’s representations in the predecessor litigation, its own 
documentation, and testimony by its witnesses establish that there can be no doubt that 
MTC is not an actual cost.  (See, e.g., findings 17-18, 20, 74-76, 89, 135, 157, 160)   
 
Appellant’s Use of MTC as the Cost of Collaboration Parts 
Does Not Comply with Rumsfeld 
 
 Appellant disagrees with the Federal Circuit’s Rumsfeld decision and, in this 
litigation, has disregarded the court’s ruling with respect to the cost of collaboration parts.  
In Rumsfeld, which is binding upon the Board, the court determined that the price Pratt 
paid for collaborator parts, and their cost, was revenue share, as follows:  Pratt “paid a 


 84 
‘price’ for the parts.  It became bound by the obligation to pay the collaborators’ share of 
revenue just prior to its transfer of parts to a purchaser.”  Rumsfeld, 315 F.3d at 1371 
(emphasis added); “the transactions constituted a sale, wherein title passed from the foreign 
collaborators to Pratt and Pratt became obligated to pay a price to the foreign collaborators 
representing the revenue share.”  Id. at 1372 and see n.13 (court treats revenue share 
attributable to a particular part as a material cost); “[i]n short, we find the terms ‘cost’ and 
‘material cost’ as used in CAS to be clear and unambiguous, and to include the revenue 
share payments made by Pratt for the parts under the collaboration agreements.”  Id. 
(emphasis added); “[i]n summary, we hold that the CAS regulations define material costs 
in terms of items purchased for a price, and that the collaboration parts satisfy this 
definition” id. at 1377; and “we hold that Pratt purchased the parts from its foreign parts 
suppliers, and that the revenue share payments comprise costs for those parts.”  Id. at 1378 
(emphasis added).  Moreover, to the extent Pratt argues that MTC is a superior measure of 
the cost of parts because it is “consistent” and “stable” (app. br. at 79), this goes against 
Rumsfeld’s holding that the part cost must be “measured as of the time it is used in 
production.”  Rumsfeld, 315 F.3d at 1372 n.13.    
 
 Thus, Pratt’s use of the notional MTC as the cost of collaboration parts, rather than 
the revenue share payments specified by the court, does not comply with Rumsfeld.  
 
Revenue Share Payments Do Not Include Payments for Items Other Than Parts  
 
Rumsfeld quoted from the Board’s 2001 decision that all of the collaboration 
agreements but one “provide[d] that the sharing of gross revenues from the sale of 
engines and parts will be ‘in consideration of the parts manufactured.’”  Rumsfeld, 
315 F.3d at 1371.  In footnote 19 the court allowed Pratt to provide evidence on remand 
“to show that the revenue share payments included payments beyond that for the 
collaboration parts.”  Id. at 1377 n.19 (finding 32).  The burden of proof was on Pratt.  
Rumsfeld, 315 F.3d at 1377 n.19.  
 
Appellant urges that the word “comprise” in the court’s holding that revenue share 
payments “comprise costs” for the parts should be read as open-ended, to mean “included 
but not limited to.”  The case appellant cites for this proposition, as it acknowledges, is in 
the specialized area of patent law (app. br. at 78, citing CIAS Inc. v. Alliance Gaming 
Corp., 504 F.3d 1356 (Fed. Cir. 2007)), under different facts and law than apply here.  
We conclude that, here, the most reasonable interpretation in context is that 
“comprise(s)(d)” means “consists of.”  This is in harmony with the court’s several other 
usages of the word in its decision, i.e., “[a]llowable indirect costs must be allocated 
according to a base comprised of direct costs” (Rumsfeld, 315 F.3d at 1363); “[t]he CAS 
comprise a set of rules” (id. at 1365); “[t]he Board instead found that the collaboration 
agreements comprised a form of ‘collaborative partnering,’” (id. at 1368); and “GAAP 
comprises a hierarchy of different sources” (id. at 1374, n.17).   
 

 85 
Dictionary definitions also support our interpretation.  See, e.g., Oxford Advanced 
Learner’s Dictionary (synonym for “comprise” is to “consist of somebody/something,” 
“consist of”); Oxford Lexico (“comprise primarily means “consist of”).   
 
In sum, we have found (finding 187), and we affirm, that Pratt has not met its 
burden to prove that its revenue share payments to collaborators include payment by Pratt 
for any items other than parts (or for services integral to providing the parts).   
 
Net Revenue Share, Rather Than Gross Revenue Share, is the Proper  
Measure of the Cost of Collaborator Parts 
 
 Contrary to the parties’ various contentions, when the court in Rumsfeld held that 
revenue share payments were the cost of collaboration parts, it did not specify gross 
revenue share or net revenue share.  However, in its holding, quoted above, and 
elsewhere in its decision, the court’s focus was upon payments. 
 
As DACO Morrow recognized in his December 2, 1996 COFD, prior to the instant 
litigation, “[t]he net revenue share payment represents a cost to P&W because it is what 
P&W actually pays to its collaborators for the parts it receives” (app. supp. R4, tab 85 
at 4; see also finding 29) (emphasis added).  The government also used net revenue share 
in its 2010 forward pricing audit, although, at the hearing, auditor Nardi claimed 
confusion and mistake (findings 129, 131).  Appellant’s expert, Ms. LeeVan, determined 
persuasively that Pratt pays net revenue share to collaborators (finding 175).  The 
purchase price Pratt actually pays to collaborators is net of any discount or concession 
(finding 52, see finding 130).  Pratt’s representative, Ms. Lazinsk, testified credibly that 
collaborators are never paid gross revenue share (finding 56).   
 
 Thus, we determine that net revenue share, rather than gross revenue share, is the 
proper measure of the cost of collaborator parts. 
 
  

 86 
DECISION 
 
 We grant appellant’s appeal to the extent that we conclude that the portion of the 
government’s CAS 418 claims covering the period from January 1, 2005 through June 5, 
2006, is barred by waiver; the government’s entire Drag credit claim is barred by accord 
and satisfaction; and net revenue share, rather than gross revenue share, is the proper 
measure of the cost of collaborator parts.  Otherwise, we deny the appeal, conclude that 
appellant violated CAS 418 by using MTC rather than NRS, which had a material impact 
upon costs charged to overhead in government contracts, and we remand the appeal to the 
parties for resolution of quantum. 
 
 Dated:  November 22, 2021 
 
 
 
 
 
 
 
 
I concur 
 
 
 
RICHARD SHACKLEFORD 
Administrative Judge 
Acting Chairman 
Armed Services Board 
of Contract Appeals 
 I concur 
 
 
 
 DAVID D’ALESSANDRIS 
Administrative Judge 
Acting Vice Chairman 
Armed Services Board 
of Contract Appeals 
  
 
 
 
CHERYL L. SCOTT 
Administrative Judge 
Armed Services Board 
of Contract Appeals 

 87 
 I certify that the foregoing is a true copy of the Opinion and Decision of the 
Armed Services Board of Contract Appeals in ASBCA No. 59222, Appeal of Pratt & 
Whitney, rendered in conformance with the Board’s Charter. 
 
 Dated:  November 23, 2021 
 
 
 
 
 
 
 
 
 
 
PAULLA K. GATES-LEWIS 
Recorder, Armed Services 
Board of Contract Appeals