ARMED SERVICES BOARD OF CONTRACT APPEALS Appeal of

-- ) ) A-T Solutions, Inc. ) ) Under Contract No. W91CRB-09-C-0043 )
APPEARANCES FOR THE APPELLANT:

APPEARANCES FORTHE GOVERNMENT: ASBCA No. 59338

Terry L. Albertson, Esq. Robert J. Sneckenberg, Esq.

Crowell & Moring LLP Washington, DC Raymond M. Saunders, Esq.

Army ChiefTrial Attorney MAJ ElinorJ. Kim, JA

Trial Attorney
OPINION BYADMINISTRATIVE JUDGE O'SULLIVAN Appellant A-T Solutions, Inc. (ATS) appeals a contracting officer's final decision denying its claim to recover commercial catalog prices for training equipment used in connection with improvised explosive device (IED) training provided under an Army contract. Only entitlement is at issue. We havejurisdictionunderthe Contract Disputes Act, 41 U.S.C. §§ 7101-7109. We sustain the appeal.
FINDINGS OF FACT
Solicitation and Award
1. InDecember 2008, the U.S. Army Research, Development and Engineering Command (RDECOM) solicitedproposals for a contract to provide training for armed forces to proactively defeat the IED threat. The solicitation was issued on behalfofthe Department ofDefense Joint IED Defeat Organization (JIEDDO), Joint Center of Excellence (JCOE), Joint Asymmetric Threat Awareness and Counter (JATAC) training program. Itcontemplated a single award ofa cost-plus-fixed-fee (CPFF) contract. (R4, tab 1 at 15, tab 3 at 1, 5, 15) The awardee was to provideprofessional training services and training materials and equipment, both inside the Continental U.S. (CONUS) and outside the Continental U.S. (OCONUS), for a base year and up to four option years (R4, tab 3 at 23).
2. Previously, in 2007, the Army awarded the first JATAC training contract to ATS on a firm-fixed-price, sole source, "gap-filler" basis to meet urgent training needs(tr. 29-30; R4, tab I at 16). This first contract was followed by a competitive contra¢t award to ATS pursuant to the GSA Schedule in 2008 (tr. 30). Underboththe first and second contract, ATS provided its training materials and equipment as commercial items and waspaid for them at its catalogprices (id.). These items includedvarious different types ofIEDs, training kits, and IED defeat tools (R4, tab I0). TheArmy decided to use a CPFF contract for the third procurement, which was competitive, with four offerors submittingproposals (app. supp. R4, tab 12 at 16).
3. ATS submitted its proposal on 30 January 2009 (R4, tabs 4-11). It proposed a total estimated cost across five years of$198,920,794, which included a fixed fee of $I0,391,146 (R4, tab 4 at 5). Inthe narrative portion ofits cost/price proposal, it spelled outthe assumptions onwhich its proposal was based. Amongthem were the following:
Fixed Fee -ATS proposes a fixed fee of9% on all direct labor, consultants and subcontractors. ATS proposes a fixed fee of0% on all othercost elements.

Travel

- All travel will be conducted IAW Joint Travel Regulations (JTR). Travel will be billed at actual incurred cost, with no additional fee orburdens applied

....

Training Materials and Equipment

- ATS is a manufacturer, distributor and supplier oftrainingproducts to a wide variety ofcustomers. Training Materials and Equipment listed inthis proposal include IED products, IED training devices, training kits, training manuals and commercial software products. These items are priced at the ATS commercial catalogprice, perFAR 52.2I5- 2I(a)(ii)(2)(B) and FAR 31.205-26. Quantity discounts have been applied where appropriate based on the total quantity ofeach item required bythe SOW. Anypurchase ofquantities less than indicated in the SOW may result in a higher unit price chargedto the Government. A complete set ofATS product catalogs, includingphotos and descriptions, is includedwiththis proposal.

2Consumable Items

- In orderto support a dynamic and relevant trainingprogram, each training program requires local procurement ofconsumable items. These items cannot be specifically identified or priced in advance. ATS will procure these items locally at the training location, to save shipping and handling costs. The total cost of consumable items is a relatively small component ofthe trainingprogram. In this proposal, we have identified a "budget" for locally procured consumable items for each trainingprogram. When directed by the Government, ATS will locally procure appropriate items and invoice them at actual incurred cost (no fee). (R4, tab 7 at 3-5) Examples given ofconsumable items included emerging threat IED components, electronics, and booby trap materials, repairparts, stage props to simulate field IED fabrication cells, and items usedto conceal IEDs (id. at 5-6).
4. In summary, ATS proposed to bill direct labor, consultants, and subcontractors at costplus a fixed fee calculated at 9% ofestimated cost. ATS proposed to bill travel at cost (no fee). ATS proposed to charge for its commercial item training materials and equipment at the catalog prices attached to the proposal (R4, tabs 10-11). Finally, consumable items bought locally would be billed at incurred cost (no fee).
5. The government's Pre-Negotiation Objective Memorandum (POM) noted that ATS's proposal was "indicative ofa superiorunderstanding ofthe requirements," demonstrated "unique expertise required to execute JATAC requirements" and "superiorvision," and offered lowerhourly rates than the other offerors (app. supp. R4, tab 12 at 26). With respectto ATS'sproposed training material and equipment costs, proposed as part ofOtherDirect Costs (ODCs), the government's evaluation stated:
ODCs

- Proposed a total ODC amount of$73,072,471.00. The amount includes CONUS and OCONUS travel, equipment, weapons, weapon supplies, clothing, training, subcontractor non-labor costs. ATS' ODC amount is the third highest among offerors. However, ATS provided detailed back up documentation to showtheir calculations at arriving at their ODCs total and it appears they fully understand the requirements ofthe SOW so the costs are consideredrealistic. (Id. at 37) The government further determined as follows:

38. The price proposal from ATS is determined tobe realistic, fair and reasonable based onthe cost realism/price analysis performed, their technical proposal is rated Excellent, and they received a very lowperformance risk rating; therefore, no further negotiations are necessary by the Government. Since two ofthe four proposals submitted are competitive and considered fair and reasonable, it is recommended the Price-Negotiation Memorandum be waived.
9. The total contract price [proposed by ATS] of $198,920,794.00 shouldbe accepted by the Government without further negotiations for the services requirement under this CPFF contract. (Id. at 46) Based onthe foregoing, the POM concluded that award should be made to ATS without further negotiation (id. at 29-30).
6. Contract No. W91CRB-09-C-0043 (the contract) was awardedto ATS on 19 May 2009, with an effective date of 1May2009 (R4, tab 1). The award stated that ATS'sJanuary 2009 proposal was accepted andthat the contract consisted of''the following documents: (a) the Government's solicitation and your offer, and (b) this award/contract. No further contractual document is necessary." (Id. at 1)
Contract Clauses
7. The contract contains the following clauses incorporated by reference: FAR 52.215-2,AUDIT AND RECORDS-NEGOTIATION (JUN 1999);FAR52.215-8, ORDER OF PRECEDENCE-UNIFORM CONTRACT FORMAT (OCT 1997); and FAR 52.244-6, SUBCONTRACTS FOR COMMERCIAL ITEMS (MAR 2007). The contract also incorporates, in full text, FAR52.216-7'ALLOWABLE COST AND PAYMENT (DEC 2002). (R4, tab 1 at 59-60, 62-65)
8. FAR 52.215-2 provides, in relevantpart: (b) Examination ofCosts. Ifthis is a cost-reimbursement, incentive, time-and-materials, labor-hour, orprice redeterminable contract, orany combination ofthese, the Contractor shall maintain and the Contracting Officer, or an authorized representative ofthe Contracting Officer, shall have the right to examine and audit all records and other evidence sufficient to reflect

4properly all costs claimedto have been incurred directly or indirectly in performance ofthis contract.
FAR 52.244-6 provides, in relevant part: (a) Definitions. As used inthis clause-
''Commercial item" has the meaning contained in Federal Acquisition Regulation 2.101, Definitions.
"Subcontract" includes a transfer ofcommercial items between divisions, subsidiaries, oraffiliates ofthe Contractor or subcontractor at any tier. (b) To the maximum extentpracticable, the Contractor shall incorporate, andrequire its subcontractors at all tiers to incorporate, commercial items or nondevelopmental items as components ofitems tobe suppliedunderthis contract.
FAR 52.216-7 provides, in relevantpart: (a) Invoicing. (1) The Government will make payments to the Contractorwhenrequested as work progresses, but (except for small business concerns) not more oftenthan once every 2 weeks, in amounts determined to be allowable by the Contracting Officerin accordance with Federal Acquisition Regulation (FAR) subpart 31.2 in effect on the date ofthis contract and the terms ofthis contract

....

(b) Reimbursingcosts. (1) Forthe purpose of reimbursing allowable costs

..., the term "costs" includes only-(i) Those recorded costs that, at the time ofthe request for reimbursement, the Contractorhas paidby cash, check, or other form ofactual payment for items or services purchased directly for the contract;

5(ii) When the Contractor is not delinquent in paying · costs ofcontract performance in the ordinary course of business, costs incurred, but not necessarily paid, for- (A) Supplies and services purchased directly for the contract and associated financing payments to subcontractors, provided payments determined due will be made- (1) In accordance with the terms and conditions ofa subcontract or invoice; and (2) Ordinarily within 30 days ofthe submission of the Contractor's payment request to the Government; (B) Materials issued from the Contractor's inventory and placed in the production process for use on the contract; (C) Direct labor; (D) Direct travel; (E) Other direct in-house costs; and (F) Properly allocable and allowable indirect costs, as shown in the records maintained by the Contractor for purposes ofobtaining reimbursement under Government contracts; and (iii) The amount offinancing payments thathave been paidby cash, check, or other forms ofpaymentto subcontractors.
ContractPerformance, Invoicing, and Audit
9. At a kick-offmeeting following award ofthe contract, ATS sought and received government approval to invoice for the training materials and equipment separately from the training services. Starting in October 2009, ATS began invoicing for the training materials and equipment at catalog prices, and the governmentpaid the invoices promptly and in full. (Tr. 48-50)
10. In February 2010, ATS received notice thatthe Defense Contract Audit Agency (DCAA) would be conducting an audit ofcontract cost. DCAA requested to



### 6review ATS's material costs after it hadreviewed, and approved, ATS's labor costs. (Tr. 46-48) Because DCAA did not accept ATS's position that it need not provide cost information for items that hadbeenproposed and accepted at price, and the Army deferred to DCAA, ATS suspended its billing for the training materials and equipment in February of2010 (tr. 47, 67). ATS continuedtoprovide all services and equipment required underthe contract. It resumed billing, but only provisionally, at direct material cost for the training aids and devices in Septemberof2010. (Tr. 67) Thereafter, in mid-2013, ATS began billing for delivered training materials at fully burdened cost (tr. 86).
11. DCAA finalized and issued its audit report on 7 July 2011 (R4, tab 17). The subject ofthe audit, as described by DCAA, was as follows:
Aspart ofourcomprehensive audit ofA-T Solutions, Inc. (ATS), we examinedthe contractor's accounting system as ofMarch 10, 2011, to determine whether it is adequate for accumulating costs under Government contracts andwhetherthe billingprocedures are adequate for the preparation ofcost reimbursement claims, i.e., interim public vouchers and progress payments.
ATS is responsible for establishing and maintaining an adequate accounting system for accumulating andbilling costs under Government contracts. Ourresponsibility is to express an opinion onthe adequacy ofthe accounting system based on our examination.
Based on its examination, DCAA concludedthat:
In our opinion, ATS' accounting system is inadequate for accumulating and billing costs under Government contracts. Our examination disclosed a significant deficiency that is consideredto be a material weakness in the design oroperation ofthe accounting system. We determinedthe contractor is not currently billing material at cost as required under a cost reimbursable contract. In ourjudgment, this deficiency could adversely affect the organization's ability to initiate, authorize, record, process, and/orreport costs in a manner that is consistent with applicable Government contract laws and regulations. As a result, we recommend you

7pursue suspension ofa percentage ofreimbursement of costs in accordance with DFARS 242.7502. (R4, tab 17 at 4-6)
12. DCAA explained the basis for its determination as follows:
We determined

...the contractor is billing costs associated with its training aids at catalog price ratherthan at actual unit cost. During discussions with Ms. Debbie Ricci, chieffinancial officer, [I] we determined the contractor is continuing a practice started under the original firm-fixed-price contract. However, the contractor's current contract, which began in late 2009, is cost-plus-fixed-fee. Costreimbursable type contracts require materials to be tracked and billed at the base cost level, unless otherwise stated in the subject contract. ATS asserts its material billings are in accordance with FAR31.205-26(e), which allows for material costs to be billed at price when costs are transferred and recorded between company segments at price. We reviewedthe contractor's submissions provided in support ofits assertion and performed an additional field visit on March 10, 2011. Based on the information provided, we do not believe ATS meets all the requirements ofFAR31.205-26(e). Although, the contractor has established the commerciality ofits products and has adequately demonstrated a physical transfer ofmaterial goods between Mission Support and Training (Warfighter), its accounting system documentation does not show a transfer of material at pricebetween divisions as specifically required by FAR 3l.205-26(e)(l)(2), which states: However, allowance may be atprice when- (1) It is the establishedpractice of the transferring organization toprice interorganizational (underlined for emphasis) transfers atother than cost for commercialworkof the contractor or any division, subsidiary oraffiliate of the contractor undera common control; and (2) The item being transferredqualifies for an exception under [FAR] 15.403-1(b) andthe

1Ms. Ricci succeeded Mr. Wise as CFO ofATS in June of2010 (tr. 60).

8contracting officer has notdetermined theprice to be unreasonable.
The transfer occurs at cost between the ATS Mission Support and ATS Training Divisions. ATS' proposed practice ofbilling material costs based on a commercial price, ifpermitted, would result in significant overbillings to the Government in excess ofthe contractor's cost for the material. (R4, tab 17 at 7)
13. ATS disagreed that its accounting records showed a transfer at cost rather than price and that its accounting system was therefore inadequate. In its rebuttal provided to DCAApriorto issuance ofthe final audit report, ATS stated:
The Company disagrees with DCAA's comment thatthe accounting records do not reflect the transfer ofcommercial products from Mission Support Solutions to Warfighter Solutions at price. DCAA's comment is based on the fact that Warfighter Solutions' Project Summary Report ("PSR") for this contract, a Deltek CostPoint management report, does not reflect Mission Support Solutions' price as the cost to theproject and Warfighter Solutions. This reporting practice was a result ofan intentional setup selection in the initial implementation ofDeltekCostpoint. In response to theauditcommentbyDCAA, the Companyhasmodified the capture of pricerelatedto intercompany [sic] transfers on thePSR reportandhas f1Xed the exception notedby DCAA. The Company does notbelievethis reporting exception invalidates the Company's interorganizational transferspursuantto FAR31-205-26(e).
The Company is confident that (1) the transfers were properly recorded by the Mission Supportbusiness unit at price in accordance with FAR 31-205-26(e), and (2) the financial results ofMission Support Solutions and Warfighter Solutions reflect the economics ofthis transfer at price. Basedon these facts, the Company believes allrequirements of FAR31.205-26(e) have been met. In analyzing FAR31.205-26(e), the FAR states that the established practice relative to interorganizational transfers must be that the transferring

9organization have an establishedpractice toprice these transfers at other than cost. Based on the FARdefinition the Company met this requirement. The Company was able to document that since 2007, the Mission Support Solutions business unit has consistently donejustthat

- price all transfers at catalog price. (R4, tab 17 at 15) ATS further noted DCAA's agreementthat the products sold by Mission Support were commercial products (id. at 14).
14. DCAA responded to ATS'srebuttal:
Based on the documentation reviewed during our field visits, we determined the intercompany [sic] transfers were being recorded at cost ratherthanprice. We contend that the Project Summary Reports are an integral part of ATS' ability to demonstrate its material transferpractices as they reflect recordedjob costs. Therefore, ATS' inability to show material transfers at price does not support its assertion ofan establishedpractice. Moreover accounting system modifications made in response and subsequentto DCAA's findings does [sic] not constitute a historically established practice as defined by FAR. (R4, tab 17 at 8)
15. Following issuance ofthe audit report, ATS continued performing the contract and seeking resolution ofthe issue with the government. Discussions took place throughout 20I0 and 2011 that included the possibility ofmodifying the contract to add a firm-fixed-price contract line item number (CLIN) to facilitate ATS'sbilling the commercial training materials at price. Ultimately, the Army decided not to modify the contract. (Tr. 64; R4, tab 15 at I, 10-11, tab 20 at 5 n.l)
16. In December of2012, ATS representatives met with the Defense Contract ManagementAgency (DCMA) administrative contracting officer (ACO) for the JATAC contract and otherDCMApersonnel to follow up onthe status ofATS's accounting system in the wake ofDCAA's recommendationthat ATS's accounting system be found inadequate. ATS representatives at this meeting included its President, Dennis Kelly, and its CFO, Deborah Ricci. DCMA informed ATS at the meeting that it would have to prove it was capable ofaccumulating costs on the JATAC contract to prevent its accounting system from being found inadequate. (Tr. 73-74) ATS thereafter, in orderto avoid an adverse determination ofinadequacy, submitted a "Corrective Action Plan" to provisionally bill its products at fully burdened cost until

10the dispute could be resolved (tr. 74-76; R4, tab 24). On 10 May 2013, DCAA issued an audit report concluding that ATS had effectively implemented corrective actions to address the deficiency noted in its earlier audit report (R4, tab 25). DCMA thereafter sent ATS a formal determination that its accounting system was adequate for accumulating and billing costs under government contracts (R4, tab 26).
ATS Business Units andAccounting Practices
1

7. At all times relevant hereto, ATS was a small business thatprovided counter-terrorism training services and solutions, including training related to how to identify, defuse, and evaluate IEDs. In providing the training, ATS relied on the experience and expertise ofits personnel and on training materials and equipment, primarily JED replicas, manufactured by ATS. (Tr. 21-22) Atthe time ofcontract award, ATS had two business units involved in delivering JED training. Its Training Solutions business unit (laterrenamed Warfighter Solutions) contracted for and provided the training, while the Logistics and Production unit (laterrenamed Mission Support), under its Technical Solutions business unit, manufacturedthe training aids and devices used to provide the training. (Tr. 22-23; app. supp. R4, tab 11)
18. Training materials and equipmentproduced by ATS's Mission Support unit were sold commercially for several years priorto award ofthe contract. Customers included state and local law enforcement agencies and private companies. ATS sold its products on the GSA Schedule and developed its first commercial catalog in the 2005/2006 timeframe. The products were sold eitherwith orindependently ofthe training services offeredby ATS. (Tr. 24-25; R4, tabs 10-11)
19. Prior to 2009, ATS employed accounting software known as Peachtree. In January 2009, it switched overto more sophisticated cost accounting software developed specifically for companies doing business with the federal government, DeItek CostPoint. Peachtree was characterizedby ATS's former chieffinancial officer, Michael Wise, as "kind ofa low-end software for small businesses," similarto QuickBooks inthat it "basically gives you a nice profit and loss statement and keeps track ofyour balance sheet. Butit doesn'treally go into a lot ofdetails on how every transaction that happens within the company occurs." (Tr. 50-51) SuccessorATS CFO Deborah Ricci agreed that Peachtree "has a balance sheet, income statement, and

... transactions andjournal entries. When you getto Costpoint, Costpoint isjustmuch more dimensional." In particular, Costpoint "operates on different levels called organizations

.... [Y]ou can establish the Training Division versus Mission Support Division. Each one ofthese groups has what's called an organization within [Cost]point. And you can generate any type ofdetails you need at that level." (Tr. 62)
20. ATS witnesses testified that DCAA's conclusion that the transfer oftraining materials between divisions occurred at cost was erroneous and contradictedby the

11documentary evidence ofrecord. Bothbefore and afterthe transition to Costpoint, Mr. Wise testified that ATS's business practice was for its Training Solutions unit to determine which and how many training aids and devices \Vould be neededto deliver training required by a contract, and then place an order for the material and equipment with the Mission Support unit. The material and equipmentwould then be transferred from the Mission Support unit to the Training Solutions unit and shipped to the training site. The costto the Training Unit was at catalog price: 

### Q And what value would the products be signed over to the Training Division?
A Effectively bill price, the catalogue price. Now within Logistics and Production we kept track ofboth-you know, how much it cost us to build it and how much we were selling it for. Because we needed to know how we were doing. Are we doing this right? Are we losing money or are we making money?
So we kept track ofboth within Logistics and Production. But from the training perspective, all they saw was the price, whatever it cost them to deliver that training. Q And did that transfer or assignedpayment to divisions price, was that, did that accountingpractice change whatsoever between the Peachtree and the Deltek systems?
A It got more sophisticated. Itdidn'tchange. I mean, the intent, the process, didn't change. Wejusthad bettertools, better documents, better controls overthe process, but it was still the same process. Q And that process was thatprice?
A That price, yes. Keep in mind, you know, we were-in ourindustry the leaders ofour divisions are all generally Type A personalities. And I've gotthe best division, I'm going to be this-sothere was a little bit of competitionthere, you know. Logistics and Production, they wanted to be the most successful. Training, they wanted to be the most successful. And so, you know, when we sold a device we

12(Tr. 54-56) wanted Logistics and Production to have the credit for that sale at the catalogue price.

21. Ms. Ricci testified that DCAA's conclusion that the transfers occurred at cost was incorrect:
A That's not correct. The transfer's at price. Everything [that] Mission Support transfers is at price. Nothing leaves Mission Support at anything otherthan pnce. 

### Q And how did-doyouknow how DCAA gotthe idea that the transfer was at cost?
A Yes, the one report they had asked for was called the project summary report. And we hadprovided it at the highest level. So they integrated

...at ourA-T Solutions, Inc. level and all the costs, both sides ofeverything, werejust loaded into this same report.

Q Were there subsidiary records in the Deltek accounting system that showed where the revenue for the products at issue were recorded?
A Absolutely. As I explained, Costpointhas different organizations. So we had separate organizations for training versus a separate organization for Mission Support. Both ofthose organizations have their own P&Ls and basically you canjustrun at that level.
Orrevenue summaries, you can run revenue details by each organization. And within those revenue summaries you can see that...Mission Support transferred those products at price. (Tr. 70-71) Ms. Ricci explained that there were business reasons to record revenues by division, including determining whethergoals had been met for purposes of management compensation (tr. 72).

1322. Fiscal year2009 revenue summaries by division are included in a package ofinformation Ms. Ricci prepared and delivered to DCAA in February of2011 to document how the revenues from interdivisional transfers were recorded in ATS's accounting system (tr. 88; supp. R4, tab 34). These summaries show revenue for both the Training Solutions division (CIED, organization 1.1.01.0.5.20.0), and the Logistics and Production division (later renamed Mission Support, organization 1.1.01.0.5.60.0) (tr. 89-92; supp. R4, tab 34, exs. 3-4). The summaries show that revenues from both JATAC II (predecessor contract) and JATAC III (the contract involved in this appeal) sales are recorded for the Mission Support division ofATS at catalog price (tr. 91-93; R4, tab 34, ex. 4 at 2). Attached to the revenue summary for the Mission Support division are overtwenty pages ofdetail listing the equipment soldby invoice at catalog price (R4, tab 34, ex. 4 at 4-27). However, ATS was unable to convince DCAAto examine these subsidiary records (tr. 70-71, 92).
23. ATS's expert witness, Mr. James Thomas,2 testified andprovided an expert report concerning ATS'sbooks and records for 12 transactions that tookplace in 2007-2008 when ATS was still using Peachtree accounting software (tr. 96-99; app. supp. R4, tab 18). Mr. Thomas characterized Peachtree as a small business software application based on a single organizational structure with a one dimensional chart ofaccounts, and statedthat ATS used separate accounts within Peachtree to record sales related to the Training division (40xxx series) and the Logistics and Production division (41xxx series) (app. supp. R4, tab 18 at 4-5). In particular, Mr. Thomas examined ATS's accounting records relating totraining services providedto the Pennsylvania State Police under invoice No. 523 dated 19 September 2008 (id. at 4).
24. Mr. Thomas'sreport summarizes his examination and conclusions:
The ATS accounting records for the PA State Police for invoice number 523 show the following:
1. The PA State Police agreed to a fixed price of $49,912 for training services to be providedby ATS. The fixed price of$49,912 included $7,800 oftraining equipment at ATS' commercial prices.

2 Mr. Thomas is a certifiedpublic accountant and a partner in the firm of PricewaterhouseCoopers LLP. He has over 30 years ofexperience advising companies in government contractpricing, costing, and accounting, and provides expert accounting services in government contract disputes. (App. supp. R4, tab 18, ex. A)

142. The Training division ofATS had responsibility for providing the training fur the PA State Police and, as part ofthe training,.furnishing training equipment such as student guides, training kits and electronic supplement kits supplied by the Logistics & Production division ofATS.
3. ATS issued invoice number 523 to the PA State Police dated 19 September:2008 for $49,912. The invoiced amount included training services totaling $42,112 and training equipment at commercial prices totaling $7,800.
4. The training equipment was shipped by the Logistics & Production division tothe PA State Police facility for use by the Training division in conducting the training on 22-26 September 2008.
5. ATS recorded the invoice and sale of$49,912 on 19 September 2008. The $7,800 consisted of three training equipment items valued at commercial prices

- 16 Electronics Training Kits ($4,800), 16 Electronics Student Guides ($2,000) and an Electronics Class Supplement Kit ($1,000). The $7,800 oftraining equipment was recorded as a Logistics & Production division sale in general ledger account 41000

- ATS Product Sales [-]to account for thephysical transfer oftraining equipmentto the Training division. The remaining $42, 112 for training services was recorded as a Training division sale in general ledger account 40500

- State/Local Sales

.... Based on the accounting records for invoice number 523, it is my opinion that the transfer oftraining equipment from the Logistics & Production division to the Training division was recorded as a sale by the Logistics & Production division at commercialprices. Ifthe transfer had been recorded at cost ratherthan price, the Logistics & Production division would have received a sales credit in account 41000 for a total of$3,868.64, which is the cost of

15goods sold for the equipment [as shownby ATS's accounting records]. (App. supp. R4, tab 18 at 6-7) Mr. Thomas evaluated 11 othertransactions in the 2007-2008 time frame and found the accounting for those transactions to be consistent with that for the PA State Police sale. He also looked at laterATS accounting records generated by the Deltek Costpoint software and found no indication that training equipment transferred between the two ATS divisions was everrecorded by the transferring division (Logistics and Production) at anything otherthan price. (Id. at 7-8; tr. 99)
25. The ATS Peachtree accounting records that Mr. Thomas reviewed are listed in exhibit B to his expert report:
Tab 1-ATS invoices pertaining to 12 sales to commercial customers in 2007-2008 (including invoice number 523 for $49,912 to the PA State Police);
Tab 2-2007 ATS general ledgertrial balance;
Tab 3-2008 ATS general ledgertrial balance; Ta\> 4-2007 general ledger detail for Account 41000, ATS Product Sales;
Tab 5-2008 general ledger detail for Account 11000, Accounts Receivable (showing $49,912 as both a debit to invoice 58031287 and a credit to invoice 523, both associated with the PA State Police sale at 21);
Tab 6-2008 general ledger detail for Account 14000, Inventory-Logistics (showing $1,094.40 as the cost ofgoods sold for the student guides sold on invoice 523 at 253);
Tab 7-2008 general ledger detail for Account 14200, Inventory-Production Finished Goods (showing $2359.52 and $414.72, respectively, as the cost ofgoods sold forthe Electronics Training Kits and the Electronics Class Supplement Kit at 55);
Tab 8-2008 general ledger detail for Account40500, Training division sales (showing a sale of$42,112 for training services on invoice 523);

16Tab 9-2008 general ledger detail for Account 41000, ATS Product Sales (showing a total sale of$7,800 on invoice 523 to the credit ofATS's Logistics and Production division at 60);
Tab 10-2008 general ledger detail for Account 56200, Cost ofGoods Sold (showing the total cost ofgoods sold for the three items sold under invoice 523 to be $3,868.64 at 68).
26. In summary, under the Peachtree accounting system employed by ATS in 2007-2008, a sale oftraining services by the Training division that incorporated training materials produced by the Logistics and Production division was accounted for as follows: when the sale was made, ATS issued an invoice to the customer for both the training services and the training materials, the latter at catalog price. The amount representing training materials at catalog price was recorded as a credit to Product Sales in the Logistics and Production general ledger account 41000. The amount representing the training services was recorded separately as a creditto the Training division (in the case ofthe PA State Police sale, account 40500, state/local sales). At the same time, ATS wouldrecord a debit to accounts receivable in the full amount of the sale, and a credit to Logistics and Production inventory accounts for cost ofgoods sold. (Findings 23-25; tr. 83)
27. Under the Costpoint accounting system employed by ATS starting on 1January2009, a sale oftraining services bythe Training division that incorporated training materials producedby the Logistics and Production division was accounted for as follows: whenthe sale was made, the Training unit would issue an invoice to the customer for both the training services and the training materials, the latter at catalog price. The sale amount representing training materials at catalog price was recorded as Logistics and Production division (organization 1.1.01.0.5.60.0) revenue, but posted to accounts receivable for the Training division (organization 1.1.01.0.5.20.0), which "owned" the contract and had the responsibility for collecting revenue from the sale. (Supp. R4, tab 34 at 1-2, exs. 1, 4) The revenue summary for the Training division would be credited with the sale price for the training services (id., ex. 1 at 4-5), but its profit and loss statement for the period would not contain eitherrevenue or cost related to the training materials since the materials were passed through to the end customer at the same catalog price credited as revenue to the Logistics and Production division and the net impactto the training organization was zero (id. at 2, ex. 3).
28. ATS witnesses testified, and the government does not contest, that ATS accounted for both external sales and internal transfers by the Logistics and Production division the same way, bothbefore and afterATS adopted the Costpoint accounting system (findings 20-22; gov'tbr., proposed findings offact (PFF)**~** 13).

17The predecessor Peachtree system, however, did not allow for the degree ofvisibility into transactions at the interdivisional level that Costpoint made possible (finding 19). Contracting Officer's Final Decision and this Appeal
29. On 26 March 2014 ATS submitted a certified claim to contracting officer (CO) Ofelia Rivera asserting entitlement to payment ofcatalog prices for ATS's commercial item training materials and equipment (R4, tab 30 (ltr. dtd. 2013 in error)). ATS stated in its claim thatthe difference between the amount billed and paidby the government and the prices to which it was entitled was $8,717,958 as of31January2014, and likely to grow to an estimated $9,832,565 bythe end ofthe contract term (id. at 1).
30. CO Rivera issued a final decision (COFD) denying ATS's certified claim on 22 May 2014 (R4, tab 31). In her decision, she acknowledged that ATS proposed to provide its commercial training materials at catalog price (id. at 2-3). However, she found this fact insufficient to overcome the terms ofthe solicitation and resulting CPFF contract, in particularthe Allowable Cost and Payment clause, FAR 52.216-7 (see finding 8), which sets forth the terms underwhich payments will be made to the contractor (id.). She observedthat using catalogpricing ''to support a proposed estimated cost in a competitive acquisition" was "appropriate" but would not influence "howpayments are actually disbursed on a CPFF contract." (R4, tab 31 at 3) She also found the commerciality ofthe materials not relevant, since the government's requirement "as a whole" was non-commercial. While commercial materials could be provided underthe contract, she stated, ATS's accounting for the cost ofmaterials must conform to the costprinciples and procedures ofFARPart 31 and the terms of the cost-type contract. (Id.)
31. CO Rivera also found that ATS's training materials did not come within the FAR 31.205-26(e) exception allowing materials transferred between divisions ofa company to be billed at price ifit is the establishedpractice ofthe transferring division to price such transfers at otherthan cost. Her finding in this regard was based on DCAA's conclusion that ATS's inter-organizational transfers were recorded at cost, notprice, and on the misimpressionthat DCAA had "determinedATS's accounting system [to be] inadequate" to meet the FARrequirement for billing at price. (Id. at 3)3
32. Finally, CO Rivera rejectedthe possibility ofmodifying the contractto add a firm-fixed-price CLIN to allow ATS to bill, and the government to pay, for the training materials at catalog price. Inher opinion, such a modification would not be in the best

3 Ms. Ricci testified that this finding was erroneous since the Defense Contract Management Agency (DCMA), not DCAA, has the authority to determine whether a contractor's accounting system is inadequate, and DCMA made no such determination with respect to ATS's accounting system (tr. 79).

18interest ofthe government, as it would "circumvent" FAR 52.216-7, "nullifying a contracting officer's ability to control costs." (R4, tab 31 at 4)
33. ATS timely appealed the COFD to the Board on 27 May 2014, and its appeal was docketed on 28 May 2014. A hearing was scheduled for 3-5 February, 2015. On 4 November 2014, the government filed a motion for partial summaryjudgment on Count 1ofATS's complaint. Because less than three months remained until the hearing, the Board deferred ruling on the government's motion.
DISCUSSION
Contentions ofthe Parties
ATS contends that the government agreed to pay commercial item catalogprices for its training materials by accepting its offerto provide those items at its catalogprices and incorporating its proposal into the contract. ATS points out that, consistent with such an agreement, the government accepted and paidATS's invoices for the materials at catalog price until February of2010 when DCAA questioned the allowability ofATS's billings under the contract. Alternatively, ATS asserts that its interdivisional transfers of the training materials were atprice, thus entitling it to bill the government for those materials at price pursuant to the cost principle at FAR 31.205-26(e).
The government presentedno testimony or other evidenceregarding whether the government agreed to pay ATS's commercial prices for its training materials, but contended that ATS cannot be paid for its training materials at its commercial catalog prices because the solicitation and resulting contract were unambiguously cost-plus-fixed-fee (CPFF) and ATS submitted a CPFF proposal.4 The government points out that there were only two line items in the contract, both ofwhich were CPFF and one ofwhich was not separately priced. Thus, it states, the government was obligated to pay ATS for its training materials at the allowable costthereof, unless ATS satisfied the requirements ofFAR 31.205-26(e) for billing at price. The government further contends that the record in this appeal demonstrates that ATS did not meet those requirements because (1) its interdivisional transfers oftraining materials were mere physical transfers lacking economic substance and thus did not qualify as interorganizational transfers under FAR 31.205-26(e); or, (2) even ifthe transfers qualified as interorganizational transfers under FAR31.205-26(e), the transfers were recorded at cost, notprice.
Whenthe government disallows a cost on the basis ofa FARcostprinciple, the burden is on the government to prove that the costs are unallowable. SRIInternational,

4 This is also the gist ofthe government's motion for partial summaryjudgment on Count 1ofATS's complaint.

19ASBCA No. 56353,**11-1BCA~34,694** at 170,865-66, modifiedin unrelated part, 11-2 BCA**~** 34,853. Bothparties in this appeal agree that the government bears the burden of proving that ATS's interdivisional transfers did not qualify to be billed at price under FAR 31.205-26(e) (gov'tbr. at 11; app. br. at 20).
The "atprice" exception to the material costprinciple's requirement that materials be billed at cost under cost-reimbursement contracts applies to "materials, supplies and services that are sold ortransferred between any divisions, subdivisions, subsidiaries, or affiliates ofthe contractor under a common control" when (1) it "is the establishedpractice ofthe transferring organization to price interorganizational transfers at otherthan cost for commercial work ofthe contractor or any division, subsidiary or affiliate ofthe contractor under a common control"; (2) the item beingtransferred qualifies for an exception to the requirement to submit cost orpricing data under FAR 15.403-l(b); and (3) the contracting officer has not determined theprice to be unreasonable. FAR31.205-26(e). The government concedes that elements 2 and 3 are met by the training materials at issue.
The government's position is that element 1is not met in this appeal, for two reasons. First, because ATS's transfers oftraining materials between the Logistics and Production division andthe Training division lacked "economic substance" and therefore do not qualify as transfers within the meaning ofthe relevant costprinciple (gov'tbr. at 12-16). Second, because even ifthetransfers qualify as such underthe cost principle, the transfers were at cost, not price (id. at 16-17).
As to the alleged lack ofeconomic substance, the costprinciple does not impose a requirement that the transfers in question have "economic substance," and the government's support for urging us to adopt such a test is thin: a bare citation to a section ofa cost accounting treatise that purportedly lists examples of interorganizational transfers (neitherthe text ofthe treatise northe context was supplied to the Board) and a citation to a Cost Accounting Standards regulation that addresses when transfers between affiliates will be deemed "subcontracts" for purposes ofCAS coverage (gov'tbr. at 14). We decline the government's invitationto read an "economic substance" requirement into the costprinciple at issue. The government has failed to establish the existence ofsuch a requirement orto suggest how a court orBoard could tell ifit had been met in aparticular case. While we do not accept the government'sposited "economic substance" requirement, we also do not hold that the transfers were mere "physical transfers" lacking economic substance, as the government has argued. Instead, we find that the government has not met its burden to show thatthe transfers ofcommercial ATS training materials between ATS divisions were not the sort oftransfers contemplated by FAR 31.205-26(e). The government argues thatthere could not have been a transferbetween divisions based on (1) accounting entries in the 2007-2008

20(Peachtree) ATS accounting records which it argues demonstrate that "[t]he training materials never entered the inventory ofthe Training Unit" (gov'tbr. at 14), and that the training materials were sold directly to the customer out ofATS product inventory (id.), and (2) the lack ofaccounting entries recording a sale or transfer from one division to another (gov'tbr. at 7, PFF ,-; 22).
The government offered no testimony or other evidence (otherthan the Peachtree accounting records) in support ofits argument. Moreover, the government's argument relies on a negative-whatATS's 2007-2008 accounting records do not show. Those accounting records were the product ofan unsophisticated small business accounting software application that did not provide visibi-lity into transactions at the divisional level (finding 19). ATS witnesses testified credibly that the Training division determined what materials would be needed for a particulartraining and ordered the materials from the Logistics and Production division, the training materials were then transferred from the Logistics and Production division tothe Training division at price, and that training materials never left Logistics and Production at anything otherthan commercial catalog price, whether on a direct sale to a customer or as part ofa sale of training services. (Findings 20-23) Theirtestimony is uncontradicted.
ATS began to use more sophisticated accounting software (Deltek Costpoint) in January of2009 that didprovide visibility into transactions at the business unit level, but could not convince DCAAto review the subsidiaryrecords detailing those transactions (finding 22). The Costpointrecords show that when a sale oftraining services and materials was made, the Training unit issued an invoice to the customer that included the training materials at catalog price, andthe sale amount for training materials at catalog price was recorded as Logistics and Production division revenue, butposted to accounts receivable for the Training division, which "owned"the contract and hadthe responsibility for collectingrevenue from the sale (finding 27). The revenue summary for the Training division would be credited with the sale price for the training services, but its profit and loss statement for the period would not contain eitherrevenue or cost related to the training materials since the materials were passed through to the end customer at price with a net impact to the Training division ofzero (id.). The government failed to address the Costpointrecords in its argument.
The fact that training materials never leftthe Logistics and Production division at anything otherthan price, and thatthere were valid business reasons for crediting that division with a sale at commercial price whetherthe transaction was external or internal,.carries great weight. Additionally, we do not see how the accounts receivable amount for sales oftraining materials could be posted to the Training division account rather than the Logistics and Production account ifthere had not been a transfer ofthe materials. That the transfer may be essentially pass-through in nature does notprevent its recognition. See, e.g., Pacific Gas & Electric Company v. UnitedStates, 838 F.3d 1341, 1351-52 (Fed. Cir. 2016) (under the Uniform Commercial Code (UCC), a

21middleman contract for purchase and sale is valid though the middleman will never have title to the goods, as title is to pass directly from the supplierto the customer of the middleman); Rumsfeldv. United Technologies Corp., 315 F.3d 1361, 1371 (Fed. Cir. 2003) (applying UCC in determining whether suppliers sold parts to contractor prior to sale to government, court held that contractor acquired title from the suppliers and conveyed it instantaneously to the government when the engine sale was made). Thus, we find on the record before us that the training materials were transferred between ATS divisions within the meaning ofthe cost principle. The government has not met its burden to show otherwise.
We also find that the transfers were recorded by the transferring division at price, thus satisfying FAR31.205-26(e). The government's argumentthat the transfers were recorded at cost rests on the proposition that any transfer between divisions would have had to take place before ATS sold the materials and issued the invoice, but since the first and only time the transaction is recorded atprice is when the sale is made to the customer, ipso facto, ifapriortransfer occurred at all, it must have occurred at cost. The government produced no evidence or law in support ofthis proposition. To the contrary, the United States Court ofAppeals for the Federal Circuit has recognized in its United Technologies decision that more than one valid transaction may take place simultaneously, 315 F.3d at 1371, and ATS has produced credible evidence that such transfers were recorded by the transferring division at commercial catalog price.
The government has failed to carry its burden ofprooftojustifythe disallowance underFAR 31.205-26(e). Because we have decided that ATS is entitled to recover its commercial catalogprices for training materials pursuantto FAR 31.205-26(e), we do not reach ATS's Count I claim thatthe contract, properly interpreted, also authorized ATS to bill and be paid for its training materials at commercial catalogprices. Our decision also moots the Army's motion for partial summaryjudgment, which was directed at Count I of ATS's complaint.
CONCLUSION
The appeal is sustained and returnedto the parties for determination ofquantum.
Dated: 8 February 2017

(Signatures continued)

22 Administrative Judge Armed Services Board ofContractAppealsI concur

# ~ifat~ff== Administrative Judge Acting Chairman Armed Services Board ofContract Appeals I concur

RICHARD SHACKLEFORD Administrative Judge Vice Chairman Armed Services Board ofContract Appeals

I certify thatthe foregoing is a true copy ofthe Opinion and Decision ofthe Armed Services Board ofContractAppeals in ASBCA No. 59338, Appeal ofA-T Solutions, Inc., rendered in conformance with the Board's Charter.
Dated:

23 JEFFREYD. GARDIN Recorder, Armed Services Board ofContract Appeals