Court Opinion

ID: 9900180
Source: CourtListenerOpinion
Date Created: 2023-11-18 22:01:45.219726+00
Date Added: 2024-06-11T09:21:01.456326
License: Public Domain

ARMED SERVICES BOARD OF CONTRACT APPEALS
 Appeal of -                                  )
                                              )
 Honeywell International, Inc.                )    ASBCA No. 63286
                                              )
 Under Contract No. FA8576-20-C-0001          )

 APPEARANCES FOR THE APPELLANT:                    Thomas A. Lemmer, Esq.
                                                   Jessica R. Chao, Esq.
                                                    Dentons US LLP
                                                    Denver, CO

                                                   Gale R. Monahan, Esq.
                                                    Dentons US LLP
                                                    Dallas, TX

 APPEARANCES FOR THE GOVERNMENT:                   Samuel W. Morris, Esq.
                                                    DCMA Chief Trial Attorney
                                                   Peter M. Casey, Esq.
                                                   Debra E. Berg, Esq.
                                                    Trial Attorneys
                                                    Defense Contract Management Agency
                                                    Hanscom AFB MA

          OPINION BY ADMINISTRATIVE JUDGE O’CONNELL ON
        APPELLANT’S MOTION FOR JUDGMENT ON THE PLEADINGS

        Appellant, Honeywell International, Inc. (Honeywell), has moved for judgment
on the pleadings to sustain its appeal, contending that the government has failed to
state a claim upon which relief can be granted. The Board denies the motion.

       STATEMENT OF FACTS (SOF) FOR PURPOSES OF THE MOTION

      The following facts are undisputed for purposes of the motion, unless noted
otherwise.

       1. Honeywell has been performing government contracts subject to the Cost
Accounting Standards (CAS) since the 1980s (R4, tab 27). During this period, a
Honeywell segment, Sensor & Guidance Products (SGP), manufactured ring laser
gyros at a Minneapolis, MN, facility that it incorporated in products for government
contracts. SGP also manufactured gyros that it transferred to another Honeywell
segment located in Coons Rapids, MN, which incorporated them in products for
commercial customers. (Compl. ¶¶ 13-16) Honeywell refers to these as
interorganizational transfers (compl. ¶ 16). During this period, SGP submitted
disclosure statements to the government stating that it used a total cost input base
(mot. at 2).

        2. On April 18, 2022, Jerry Clark, a Defense Contract Management Agency
(DCMA) divisional administrative contracting officer (DACO) issued a government
claim for $151,139,355, which consisted of a principal debt amount of $56,180,190,
plus interest (R4, tab 27 at 4 1). The DACO used a start date of January 1, 1980, for
this calculation (id. at 3).

        3. The crux of the government’s claim is that it paid more than its fair share of
SGP’s general and administrative (G&A) expenses. The parties agree that when SGP
transferred the gyros to Coons Rapids, SGP transferred the associated labor, materials
and overhead costs from its allocation base at SGP to Coons Rapids (mot. at 2; R4,
tab 27 at 2). But all G&A costs of SGP remained with SGP. In simple math terms,
after transfer of the gyro costs to Coons Rapids, the numerator (the G&A expenses) in
the formula for calculating the G&A rate remained the same, but the denominator (the
cost input base) was smaller. This resulted in a higher G&A rate being applied to
government contracts. According to the DACO, this was a violation of CAS 410-
40(b)(1), 410-50(d) and 410-50(f), as well as SGP’s disclosed practice of using a total
cost input base. (R4, tab 27 at 1-3; see 48 CFR 9904.410)

       4. The DACO relied upon a rough order of magnitude prepared by the Defense
Contract Audit Agency (DCAA) to determine how much the higher G & A rate
affected government contract costs (R4, tab 27 at 2). According to DCAA’s
calculations, the gyro costs removed from the base were more than $13 million in
1980 and increased until they surpassed $65 million in 2019, or more than 10% of the
base in some years. DCAA calculated the annual impact at about $500,000 in 1980,
which increased over time and in some of the later years exceeded $3 million. (R4,
tab 26) Based upon this calculation, the DACO issued the government’s April 18,
2022 claim.

         5. Honeywell filed a timely appeal on May 16, 2022.

1
    Rule 4 citations are to the .pdf page number except for Rule 4 tab 6, where we use
         the Bates number for clarity.
                                             2
                                      DECISION

I.    Standard of Review

        FED. R. CIV. P. 12(c) provides that “[a]fter the pleadings are closed--but early
enough not to delay trial--a party may move for judgment on the pleadings.” The
Board has considered Rule 12(c) motions even though our Rules do not specifically
provide for such a motion. In appeals where the government is the claimant, but the
appellant has filed the complaint per the Board’s standard procedures (Board Rule
6(a)), we examine the CO’s final decision and the government’s answer. Club Car,
Inc., ASBCA No. 61710, 20-1 BCA ¶ 37,493 at 182,162. The Board accepts as true
the allegations in the claim and construes the facts in the light most favorable to the
government as the nonmoving party. Agility Pub. Warehousing Co. K.S.C.P. v. United
States, 969 F.3d 1355, 1364 (Fed. Cir. 2020). The Rule 12(c) analysis is functionally
identical to the standard for deciding a Rule 12(b)(6) motion to dismiss for failure to
state a claim upon which relief may be granted. MyMail, Ltd. v. ooVoo, LLC, 934 F.3d
1373, 1378 (Fed. Cir. 2019).

II.   CAS 410

       The purpose of CAS 410 - Allocation of Business Unit General and
Administrative Expenses to Final Cost Objectives – is “[t]o provide criteria for the
allocation of business unit [G&A] expenses to business unit final cost objectives based
on their beneficial or causal relationship.” CAS 410-20. G&A expenses “represent
the cost of the management and administration of the business unit as a whole.” Id.
The government has made a plausible contention that there is no difference in the
beneficial or causal relationship between the G&A expenses and the gyros made for
the government on the one hand, and those made for the commercial sector on the
other (gov’t opp’n at 9, 19; sur-reply at 2-3).

      CAS 410 contains the following definitions relevant to this motion:

             (3) Cost input means the cost, except G&A expenses,
             which for contract costing purposes is allocable to the
             production of goods and services during a cost accounting
             period.

             (4) Cost objective means a function, organizational
             subdivision, contract or other work unit for which cost data
             are desired and for which provision is made to accumulate
             and measure the cost of processes, products, jobs,
             capitalized projects, etc.

                                           3
                (5) Final cost objective means a cost objective which has
                allocated to it both direct and indirect costs, and, in the
                contractor’s accumulation systems, is one of the final
                accumulation points.

CAS 410-30(a).

         CAS 410-40(a) provides that the G&A expenses of a business unit (or segment)
must be grouped in a separate indirect cost pool “which shall be allocated only to final
cost objectives.” Generally, this G&A expense pool is to be allocated to final cost
objectives “by means of a cost input base representing the total activity of the business
unit . . .” CAS 410-40(b)(1).

        The contractor has three choices for a cost input base. Honeywell selected the
total cost input base. (SOF ¶ 1; CAS 410-50(d)(1)). Cost input is defined in the
standard, but total cost input is not. We will rely on the common meaning of the word
“total” to complete the definition. When used as an adjective, total can mean
“comprising the whole number or amount: a total cost of $4,000” or “complete,
absolute . . . .” New Oxford American Dictionary (3rd ed. 2010) (emphasis in
original).

        As stated above, under CAS 410-30(a)(3), cost input means the cost, except
G&A, allocable to the production of goods and services. While redundant, adding the
word “total” to “cost input” emphasizes that this base includes all costs, except G&A.
It also distinguishes it from the other two cost input bases, which use something less
than total cost. 2 For present purposes, the Board holds that the government has
adequately alleged that when Honeywell transferred the gyro costs to Coons Rapids,
the SGP base no longer met the definition of a total cost input base because it no
longer included all costs except G&A allocable to the production of goods and
services at SGP.

        CAS 410-50(d) provides that the base selected by the contractor must “include
all significant elements of that cost input which represent the total activity of the
business unit.” Taking 2019 as an example, the appeal asks the question of whether
SGP’s cost input base included all significant elements of cost input and represented
the total activity of the SGP segment when it subtracted from the base more than
$65 million in labor, materials, etc., to manufacture gyros. The government has made
a plausible allegation that the base no longer included all significant elements of cost
input and no longer represented the total activity of the segment after these costs were
removed.

2
    For example, a “value-added cost input base” subtracts material and subcontract
         costs from the total cost. CAS 410-50(d)(2).
                                             4
        Finally, the CAS Board addressed this issue in two preambles. See Allegheny
Teledyne, Inc. v. United States, 316 F.3d 1366, 1374 (Fed. Cir. 2003) (relying on the
preamble to CAS 413 to determine the CAS Board’s intended meaning). In the
preamble to CAS 410, the CAS Board responded to commentators who questioned
whether intersegment transfers like those made by Honeywell should be included in
the cost input base for allocation of G&A. In response, the Board stated: “where a
total cost input base has been selected, all significant costs other than the costs
included in the G&A expense pool should be included in the base.” 41 Fed.
Reg. 16,135, 16,136-37 (Apr. 16, 1976) (emphasis added).

        Three years later, the CAS Board addressed another question about one
segment of an organization performing work for another when it issued the preamble
to CAS 420, Accounting for Independent Research and Development Costs and Bid
and Proposal Costs. The Board stated: “[t]he Board believes that if work is performed
at a segment and sold to or transferred to another segment directly, it should be
considered a final cost objective of the performing segment. Allocating G&A
expenses to such work would be consistent with CAS 410 . . . .” 44 Fed. Reg. 55,123,
55,125 (Sep. 25, 1979).

       Based on these clear statements by the CAS Board, we hold that the
government has made a plausible allegation that the gyro costs are significant costs
that should have been included in the base of SGP as the performing segment.

III.   Honeywell’s Contentions

        Honeywell contends that CAS 410 grants it the discretion to send the gyro costs
to Coons Rapids. It cites CAS 410-20, which provides that the “purpose of this Cost
Accounting Standard is to provide criteria for the allocation of business unit [G&A]
expenses to business unit final cost objectives” and CAS 410-40(a), which provides
that “[b]usiness unit G&A expenses shall be grouped in a separate indirect cost pool
which shall be allocated only to final cost objectives.” (Mot. at 5 (emphasis by app.))
Honeywell has classified the gyro costs as intermediate cost objectives (a
product/service center), rather than final cost objectives, which, it contends, relieves it
of the obligation to allocate G&A to these costs (mot. at 10-11; compl. ¶ 17).

        Honeywell also cites the CAS 410-30(a)(3) definition of cost input, which
defines cost input as the cost, except for G&A “allocable to the production of goods
and services . . . .” Honeywell contends that because CAS 410 does not define when a
cost is allocable to the production of goods and services, then the contractor has
“reasonable discretion” to allocate the costs to intermediate cost objectives.
Honeywell also cites language from the CAS 410 preamble that allows contractors to
make “minor variations from the specific bases . . . ” (Mot. at 7-8 (citing 41 Fed. Reg.

                                             5
16,135, 16137)).

       As the government observes, CAS 410 does not even mention
interorganizational transfers. Thus, Honeywell reads a lot into the standard. Even if
we agreed that CAS 410 provides the contractor with discretion, the Board cannot
decide based on the pleadings whether Honeywell acted with “reasonable discretion.”
What Honeywell did here – manufacturing products for commercial customers in a
factory where the government pays the G&A expenses – could so easily be abused that
it would almost always be subject to challenge from the CO and review by the Board.

        The government has made convincing arguments that the contractor’s
discretion is not as broad as Honeywell contends. Certainly, Honeywell had discretion
in choosing which of the three cost input bases it would use. But once it selected the
total cost input base it was hemmed in by the language specifying what goes into that
base discussed above: “all significant elements,” “total cost,” and “total activity.”

        Moreover, there is a factual dispute as to whether the cost objectives are
intermediate as Honeywell contends. Based on the definition quoted above, there are
two elements of a final cost objective: 1) direct and indirect costs are allocated to it;
and 2) it is one of the final accumulation points in the contractor’s accumulation
systems. CAS 410-30(a)(5). Honeywell agrees that the costs transferred to Coons
Rapids includes both direct costs and overhead (SOF ¶ 3), so only the second of these
two prongs appears to be at issue. The DACO relied upon and cited an audit report
where DCAA concluded that the gyro line is a final accumulation point in SGP’s
system, which would make it a final cost objective (R4, tab 27 at 2 (citing R4, tab 10
at 20 (July 16, 2019 DCAA Audit Report No. 7831-2017P19410001). We need not
decide now whether DCAA is correct. This is a factual dispute that cannot be resolved
on a Rule 12(c) motion.

       Finally, Honeywell relies upon language in the CAS 410 preamble that states:

              Commentators suggested that minor variations from the
              specific bases presented should be allowed. The Board
              points out that the Standard requires that the allocation
              base selected should include all significant elements of
              cost input necessary to represent the total activity. If in a
              given circumstance, the exclusion of a particular item does
              not invalidate the chosen base’s representation of total
              activity, this is acceptable under the Standard. The Board
              notes that these are the kinds of decisions which involve
              consideration of the individual circumstances of a business
              unit; accordingly, the Standard provides the opportunity
              for the exercise of judgment in these situations.

                                            6
41 Fed. Reg. at 16,137. Honeywell reads this as supporting its discretion to decide
what is a final cost objective and when it may exclude costs from the base (mot. at 8).

        The words “minor variations” in the first sentence of the quoted language and
the phrase “should include all significant elements of cost input necessary to represent
the total activity” in the second sentence undercut Honeywell’s assertion that it
possesses wide discretion. Based on the dollar amounts involved and cited above, the
Board cannot agree for purposes of this motion that the variations were minor or that
the base included all significant elements of cost input.

       CAS Board Disclosure Form DS-1

        Honeywell also finds support for its practice in Form CASB DS-1, the Cost
Accounting Standards Disclosure Statement. Specifically, Honeywell points to Item
No. 4.5.0 in this form: Application of Overhead and G&A Rates to Specified
Transactions or Costs. This item lists five “rate codes,” including “full rate” and “no
overhead or G&A rate is applied.” The form lists the five rate codes as A, B, C, D and
Z. It then lists nine transaction types for which the contractor is to enter one of the
five codes. One of those transaction types is “interorganizational transfers out.” (R4,
tab 6 at G-285) Honeywell’s argument is that because a contractor could enter the
code for “no overhead or G&A rate is applied” next to “interorganizational transfers
out,” the CAS Board implicitly permitted Honeywell’s actions here (mot. at 9).

       The Board holds that without some other supporting evidence, one item in a
lengthy form demonstrates very little. The form seems to address whether the full rate
or some other rate (higher or lower than full rate) will be applied, not how the full rate
will be calculated in the first instance. We are not willing to make the leap that,
because the contractor could insert the code for “no overhead or G&A rate is applied”
next to “interorganizational transfers out,” the CAS Board essentially endorsed
Honeywell’s practice here. The clear statements by the CAS Board in CAS 410 and in
the preambles discussed above contradict the conclusions that Honeywell draws from
Item 4.5.0 in Form CASB DS-1.

                                            7
                                    CONCLUSION

       The government has stated a claim upon which relief may be granted.
 Appellant’s motion to dismiss is denied.

           Dated: June 7, 2023

                                                 MICHAEL N. O’CONNELL
                                                 Administrative Judge
                                                 Armed Services Board
                                                 of Contract Appeals

I concur                                           I concur

RICHARD SHACKLEFORD                                J. REID PROUTY
Administrative Judge                               Administrative Judge
Acting Chairman                                    Vice Chairman
Armed Services Board                               Armed Services Board
of Contract Appeals                                of Contract Appeals

      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. 63286, Appeal of
 Honeywell International, Inc., rendered in conformance with the Board’s Charter.

           Dated: June 8, 2023

                                                PAULLA K. GATES-LEWIS
                                                Recorder, Armed Services
                                                Board of Contract Appeals

                                            8