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Federal Circuit Affirms Aircraft Contractor's Compliance With Cost Accounting Standard Sikorsky Aircraft Corp. v. United States, Fed. Cir., No. 2013-5096, -5099

Federal Circuit Affirms Aircraft Contractor's Compliance With Cost Accounting Standard

Sikorsky Aircraft Corp. v. United States, Fed. Cir., No. 2013-5096, -5099, 12/10/14

Key Holding:Court affirms denial of government's nearly $80 million claim for alleged CAS violation.

Rationale:Government was unable to show there was something wrong with the contractor's accounting method, the court said. According to a practitioner, the ruling “provides a sound basis for contractors to aggressively use materiality as a defense when the relevant requirement expressly or implicitly provides that immaterial impacts do not create a noncompliance.”

By Daniel Seiden - Interview quotes of John S. Pachter 

Dec. 10 --An aircraft contractor's method of allocating materiel overhead costs complied with Cost Accounting Standard (CAS) 418, the U.S. Court of Appeals for the Federal Circuit held in rejecting a nearly $80 million government claim (Sikorsky Aircraft Corp. v. United States, Fed. Cir., No. 2013-5096, -5099, 12/10/14).

Affirming the U.S. Court of Federal Claims, Judge Timothy B. Dyk said the government failed to show that Sikorsky Aircraft Corp. “adopted an inappropriate measure of resource consumption.”

The court declined to rule on the COFC's decision that the government's claim was timely under the Contract Disputes Act, but it did hold that the CDA's statute of limitations is not jurisdictional.

John S. Pachter of Smith Pachter McWhorter told Bloomberg BNA that he was not aware of any other case that addresses the application of accounting methods CAS 418-50(d) and (e), and that the court “took a strict constructionist approach and did not try to re-write CAS or other cost regulations as it has unfortunately done in the past.”

Contractor Changed Accounting Methods.

Between 1999 and 2005, Sikorsky held several government contracts to furnish helicopters and other goods and services.

Prior to 1999, Sikorsky allocated material overhead costs using an allocation base of direct materiel costs minus certain costs incurred for commercial contracts.

On Jan. 1, 1999, Sikorsky adopted a different method that allocated materiel overhead costs to government cost objectives using a direct labor base. The court said this meant Sikorsky allocated its materiel overhead costs in proportion to the direct labor costs consumed by each contract.

In October 2004, the Defense Contract Audit Agency reported that Sikorsky had failed to comply with CAS 418. Acting on the report, a contracting officer issued a final determination stating that Sikorsky owed the government approximately $80 million including interest.

The U.S. Court of Federal Claims ruled that the government's claim was timely under the Contract Disputes Act's six-year statute of limitations, but that the government was unable to demonstrate Sikorsky's noncompliance with the CAS (99 FCR 432, 4/9/13).

CAS Ruling Upheld.

In this appeal, the government argued that Sikorsky's materiel overhead pool should have been allocated using a direct materiel base as required by CAS 418-50(d) instead of a direct labor base.

The government said CAS 418-50(e) did not govern this issue.

But the court agreed with the COFC that subsection (e) governed the dispute. Moreover, according to the court, the government did not show that Sikorsky adopted an inappropriate measure of resource consumption to violate CAS 418.

Sikorsky's management and supervision costs did not comprise a material amount of the materiel overhead pool at issue, the court said.

According to Pachter “this is one of the few cases that places the concept of materiality front and center, and equates 'material' amount of cost with 'significant' amount of cost.”

Thomas A. Lemmer of McKenna Long & Aldridge LLP told Bloomberg BNA that in reaching this conclusion, the court rejected the government’s definition that something is material when it is more than de minimus.

“The government often makes a de minimus argument when attempting to disapprove cost accounting practices and business systems and to disallow costs, essentially requiring contractor perfection,” he said. “The court’s holding, therefore, provides a sound basis for contractors to aggressively use materiality as a defense when the relevant requirement expressly or implicitly provides that immaterial impacts do not create a noncompliance. Certainly, this 'significant' standard still leaves gray areas, but it is a big step forward for rebutting frequent audit findings that essentially reflect a government position that accounting practices and systems must be perfect.”

In addition, the court agreed with the COFC that Sikorsky satisfied the homogeneity requirement in CAS 418, stating that the government failed to show that any material difference in allocation resulted from Sikorsky's combination of manufacturing and materiel overhead costs. “This case may be unique in its discussion of 'homogeneity' in CAS 418,” Pachter added.

Pachter : Role for Unpublished Materials in Decisions.

The government suggested that internal government documents concerning the history of CAS provisions that were not published provided support for its argument about CAS applicability. By doing so, the court said the government disregarded the holding in Rumsfeld v. United Techs. Corp., 315 F.3d 1361 (Fed. Cir. 2003).

“Here we see Rumsfeldcontinuing to work its mischief,” Pachter stated. “Now that it has been invoked against the government, perhaps the Department of Justice will mount a campaign against it.”

“The idea that a judge can divine 'plain meaning' from a CAS or FAR provision, unmindful of the context in which the rule was promulgated, is unhinged from reality,” he said. “These are highly technical areas in which much expertise has been brought to bear. This is not to say that regulatory history controls interpretation of the published rule, any more than legislative history controls statutory interpretation. But neither should it be sealed off from judicial examination.

“When the court says it will not hear the views of 'self-proclaimed CAS experts' or of interpretive materials, the court is in effect proclaiming itself to be an expert. That is not the role of the court, and, as we have seen, when the court makes the attempt, its only recourse is the dictionary,” Pachter added.

Limitations Provision Is Not Jurisdictional.

The court also addressed Sikorsky's contention that the government's claim was barred under the CDA's six-year statute of limitations. Sikorsky argued that because the limitations period is jurisdictional, the court must decide that issue before addressing the claim's merits.

The court said § 7103 is not jurisdictional because it lacks any special characteristic that would warrant making an exception to the general rule that filing deadlines are not jurisdictional.

Pachter said that this “may at first blush be a welcome sign to agencies that are behind in audit reviews.”

Since the court did not address whether the limitations period at 41 U.S.C. § 7103 was satisfied here, however, Pachter said this means “the government will not have free rein on late claim submissions, and compliance with the limitations period will need to be addressed in future cases, although not as a jurisdictional matter.”

The court relied on Sebelius v. Auburn Reg'l Med. Ctr., 2013 BL 16335, U.S., No. 11-01231, 1/22/13, stating that filing deadlines ordinarily are not jurisdictional, but instead are quintessential claim-processing rules. Pachter said it is “questionable, to say the least” that the six-year limitations period in the CDA is the same as quintessential claim-processing rules.

Finally, the court said the D.C. Circuit reached the same conclusion on the jurisdictional issue in Menominee Indian Tribe of Wis. v. United States, 614 F.3d 519, 526 (D.C. 2010), (94 FCR 156, 8/10/10).

Judges Richard G. Taranto and Raymond T. Chen joined in the decision.

Jeffrey A. Hall and Katherine M. Swift of Bartlit Beck Herman Palenchar & Scott LLP, Chicago; Katherine L. Manos of Gibson, Dunn & Crutcher LLP, Washington, D.C., represented the appellant. James W. Poirier and others from the Justice Department, Washington, D.C.; Kathlene P. Malone of the Defense Contract Management Agency, Boston; David C. Hoffman of the Defense Contract Audit Agency, Fort Belvoir, Va., represented the government.

By Daniel Seiden

To contact the reporter on this story: Daniel Seiden in Washington at

To contact the editor responsible for this story: Jeff Kinney in Washington at

The court's decision is available at:

Copyright 2014, The Bureau of National Affairs, Inc.

Reproduced with permission from Federal Contracts Report102 FCR 697 (Dec. 16, 2014). Copyright 2014 by The Bureau of National Affairs, Inc. (800-372-1033) <>