Total Cost Input (TCI) vs. Value Added (VA)

Background

A contractor should conduct a thorough review of their accounting practices and provide a position paper when a contractor wants to revise its G&A rate calculation using the value-added method rather than the total cost input (TCI) method.

When to Use a Value Added Base

A value-added cost base is appropriate when inclusion of material and subcontractor costs would significantly distort the allocation of the G&A expense pool in relation to benefits received.

For example if 72% of the G&A type expense, based on the combined value of direct material/subcontractors and direct labor would be allocated to material and subcontractor costs, total cost input base, would not produce an equitable allocations. G&A expenses are associated with providing resources which benefit the corporation as a whole, managing personnel and manufacturing operations as well as research and development rather than materials and subcontractors.

A Contractor’s G&A expenses should be allocated on a base representing its total activity but considering its operations, total activity is best reflected by direct labor and manufacturing overhead.

The inclusion of raw materials and subcontract costs in the base may produce a gross distortion, if included in the allocation base.

The guidance included in CAS 410, Allocating G&A expenses, and associated cases are helpful for illuminating the meaning of total activity. The justification of the use of a value added method in lieu of a TCI method is best illustrated in a classic case, Ford Aerospace and Communications (Aerospace and Communications Corporation Inc. Aeronautic Division, ASBCA 23883).

In that case, it was noted the CAS Board in its prefactory comments to CAS 410 stated that “total activity” refers to the production of goods and services during the cost accounting period. It includes material, subcontracts, labor and overhead.

In the Ford case, the government maintained that by omitting materials and subcontracts (i.e. using the value-added base) this would result in an inaccurate measure of total activity. The Board rejected this position. Though it noted material and subcontract costs can be “includible in total activity” it is fallacious to conclude “each dollar expended for materials and subcontracts necessarily bears the same relationship to incurrence of G&A expenses as each dollar of labor and overhead.” To the contrary, the total cost of each element comprising total activity “may or may not best represent total activity depending on the circumstances of each business unit. The crucial question is not what activity elements may comprise total activity, but what best represents total activity.”

CAS 410 does not establish a preference for the TCI method. Rather, CAS 410 expressly authorizes three cost input allocation methods:

1. TCI,

2. Value Added,

3. A single element representing total activity)

and leaves the selection to be based on individual circumstances of the company.

In deciding that a contractor was entitled to use the value-added method, a Board would cite two primary reasons:

1.The material and subcontract content of the contractors contract is disproportionate and G&A expenses pertain more to the contractors in-house activity than to the contractors material and subcontract activity.

2.The G&A expenses provided substantially more benefits to the contractors labor-intensive development contracts than the material intensive production contracts.

Factors Governing Choice of Allocation Base

In determining whether to use a total cost input allocation base or a value-added allocation base, consideration must be given to which type will best represent a contractor's total activity. CAS 410 does not require use of or establish a preference for a total cost input base. The type chosen should result in allocations of G&A expense to contracts based on their casual or beneficial relationship, consistent with the full costing concept of Cost Accounting Standard 410, that do not distort the actual benefits received by the contracts from G&A expense. Implicit in this determination is an examination of each contractor's internal and individual business circumstances.

Cost Accounting Standard 410, Allocation of G&A Expense: Use of the Value-Added Base: Base Best Representing Total Activity.–

A contractor's material and subcontract content was much higher in his production contracts than in his research and development contracts, and his general management expenses pertained much more substantially to his in-house activity than to his material and subcontract activity. In addition, his general management expenses provided substantially more benefit to his labor intensive development contracts. Under these circumstances, use of a value-added allocation base (which excluded subcontract and material costs) for general and administrative expenses not only conformed to CAS 410 but was actually required because inclusion of material and subcontract costs seriously distorted the benefits received by the contracts from G&A expenses.

Examples of such distortion that were set out in Defense Department guidance papers were not exhaustive and did not preclude application of a value-added base to other situations where fluctuations in the labor and material content of contracts are encountered. Here, the contractor's general management activities were mostly directed to in-house related work and only in small part directed to material and subcontract-related work. Due to this disparity, the total cost input base significantly distorted the benefits received by the contractor from G&A expenses. These contracts were for labor intensive development and engineering projects, rather than material intensive production contracts. Inclusion of material costs associated with his production contracts in the base of development contracts was inappropriate and gave a skewed result.

Change to Cost Accounting Method: Adjustment for Deviation from Cost Accounting Standard: Government: Directed Noncompliance.–

When the government forced a contractor to adopt an inappropriate allocation base for G&A expense, which effectively forced him into noncompliance with CAS 410, it caused a constructive change the same as if it had forced performance in compliance with an erroneous interpretation of specifications and drawings. Thus the contractor was entitled to compensation for the resulting increased administrative costs. CAS provisions that would otherwise have required the contractor to have included in his contract costing the cost of implementing a new standard did not apply. The adjustment provisions of CAS are available only with respect to contracts awarded prior to the effective date of each new standard; this contract was awarded after the effective date of the applicable standard, and the government viewed the contract as not being subject to the adjustment provisions clause even though it knew that the contract had been priced using the contractor's value-added base. Moreover, there was no indication that the operation of the standard Changes clause was precluded with regard to price adjustments related to implementation of Cost Accounting Standards.

Issue

The principal issue for resolution in this appeal is whether the Aeronutronic Division (appellant or Aeronutronic (FACC) of Ford Aerospace is required or permitted by Cost Accounting Standard (CAS) 410 to use a value-added cost input base for allocating its “general and administrative” (G&A) expenses to contracts, beginning 1 January 1978. The Government contends that FACC is required to use a total cost input base. FACC argues that the value-added base best satisfies CAS 410 criteria in its circumstances. FACC further contends that the Government misapplied the Standard by requiring appellant to use a total cost input base and thus constructively changed the referenced contract. As a result, FACC contends it is entitled to an equitable adjustment under the contract's “Changes” clause. The parties have stipulated that in the event the Board finds that FACC is required or permitted to use the value-added base beginning 1 January 1978, and that it is entitled to the relief requested under the captioned contract for its use of a total cost input allocation base, then the amount which FACC is entitled to recover in connection with the dispute under this contract is $652,670, plus interest computed in accordance with the “Payment of Interest on Contractor's Claims” clause of the contract.

Facts

The referenced fixed-price, incentive contract, bearing an effective date of 25 February 1977, was awarded to the Aeronutronic Division of Ford Aerospace and Communications Corporation (sometimes FACC) in the total amount of $40,505,162 for production of “Chaparral” ground-to-air missiles, guidance sections and related items. The contract (hereinafter Contract 0236) contained provisions for some 31 option items for various services and supplies. Ford's basic effort was to be performed from February 1977 through April 1979. Incorporated into Contract 0236 were, requirements that Ford shall:

• 1. Comply with all Cost Accounting Standards in effect on the date of award of this contract or if the Contractor has submitted cost or pricing data, on the date of final agreements on price as shown on the Contractor's signed certificate of current cost or pricing data. The Contractor shall also comply with any Cost Accounting Standard which hereinafter becomes applicable to a contract or subcontract of the Contractor. Such compliance shall be

required prospectively from the date of applicability to such contract or subcontract.

• 2. Agree to an equitable adjustment as provided in the changes clause of this contract if the contract cost is affected by a change which, the contractor is required to make to his established cost accounting practices whether such practices are covered by a Disclosure Statement or not.

• 3. Negotiate with the Contracting Officer to determine the terms and conditions under which a change to either a disclosed cost accounting practice or an established cost accounting practice may be made. A change to a practice may be proposed by either the Government or the Contractor, provided, however, that no agreement may be made under this provision that will increase costs paid by the

United States.

• 4. Agree to an adjustment of the contract price or cost allowance, as allowance, as appropriate, if he or a subcontractor fails to comply with an applicable Cost Accounting Standard …. and such failure results in any increased costs paid by the United States. Such adjustment shall provide for recovery of the increased costs to the United States together with interest .

If the parties fail to agree whether the Contractor or a subcontractor has complied with an applicable Cost Accounting Standard, rule, or regulation of the Cost Accounting Standards Board and as to any cost adjustment demanded by the United States, such failure to agree shall be a dispute concerning a question of fact within the meaning of the disputes clause of this contract.

On 10 March 1978, the Cost Accounting Standards Board amended the Cost Accounting Standards clause to provide for “voluntary” accounting changes and requires that the contractor shall:

• When the parties agree to a change to a disclosed cost accounting practice or an established cost accounting practice, other than a change under (4)(A) above, negotiate an equitable adjustment as provided in the changes clause of this contract.

The “Administration of Cost Accounting Standards (1975 MAR)” clause, provided in pertinent part:

For the purpose of administering Cost Accounting Standards requirements under this contract, the Contractor shall:

(a) Submit to the cognizant Contracting Officer a description of the accounting change and the general dollar magnitude of the change to reflect the sum of all increases and the sum of all decreases for all contracts containing the Cost Accounting Standards clause;

(i) for any change in cost accounting practices required to comply with a new Cost Accounting Standard within sixty (60) days (or such other date as may be mutually agreed to) after award of a contract requiring such change;

(ii) for any unilateral change to cost accounting practices proposed in accordance with paragraph of the clause of this contract entitled “Cost Accounting Standards” not less than sixty (60) days (or such other date as may be mutually agreed to) prior to the effective date of the proposed change; or

(iii) for any failure to comply with an applicable Cost Accounting Standard or to follow a disclosed practice as contemplated of the clause of this contract entitled “Cost Accounting Standards” within sixty (60) days (or such other date as may be mutually agreed to) after the date of agreement of such noncompliance by the Contractor.

(b) Submit a cost impact proposal in the form and manner specified by the cognizant Contracting Officer within sixty (60) days (or such other date as may be mutually agreed to) after the date of determination of the adequacy and compliance of a change submitted.

(c) Agree to appropriate contract and subcontract amendments to reflect adjustments

Ford Aerospace is involved in research, development, and production of tactical missiles, electro-optical systems, advanced fire control systems, and missile controls for U.S. Government and commercial customers. Ford is a a systems integrator. It performs the engineering and manufacture of the guidance and control sections for the “Sidewinder” missile, and then integrates the guidance control sections with subcontractor-furnished subsystems into the final product.

Ford Aerospace also has developed and produces the “Chaparral” short range air defense system. Aeronutronic also has been involved in developing laser guidance technology for application to a veriety of guided projectiles. Other major products of the appellant are the “Pave Tack” electro-optical target acquisition, laser designator, and weapon delivery system and the target acquisition and tracking “FLIR” pod system. Additionally, it produces 25 MM ammunition; missile, satellite, and hot gas control valves; and sodium sulfur battery systems.

CAS 410 History

Initial work on a Cost Accounting Standard directed to the allocation of G&A expense began in 1972. The Cost Accounting Standards Board staff, under the cognizance of Mr. Clark Adams, Project Director, conducted preliminary research at that time to identify major issues in the G&A allocation area. A research questionnaire based on these issues was distributed to selected third parties on 28 July 1972. The staff's research revealed that numerous approaches were being utilized to allocate G&A expenses, and that the total cost input base and the cost of sales base were the most widely used allocation bases for G&A expense. Many business units further reported use of abated G&A rates for subcontract and other specific categories of cost. A majority of contractors responding to the questionnaire indicate they had “homogeneous” operations, i.e., the proportion of material, labor and manufacturing overhead was the same for all Government work as well as for both Government and commercial work. On 25 May 1973, the CAS Board staff sent a preliminary draft standard to a small number of Government, industry, and professional representatives for comment. Pertinent options of the preliminary draft provided as follows

The measure of total productive activity used as the base for allocation of general management expense shall be determined in accordance with the following criteria:

(i) Total cost input. Total cost input is an acceptable allocation base for general management expense and is appropriate in most circumstances. Total cost input shall be used as the allocation base where the material, labor and overhead costs are all significant measures of business unit activity, and where the proportion of each varies significantly among all cost objectives which receive an allocation of general management expense. An alternative allocation base may be used where it is representative of business unit total productive activity.

(ii) Value-added input. Value-added input is total cost input reduced by the cost of purchased materials and subcontracts. Value-added input may be an appropriate allocation base in those circumstances where inclusion of material and subcontract costs in the allocation base would have a significantly distorting effect in relation to the benefits received, but where costs other than payroll are significant measures of activity of the overall operation.

A value-added base may be appropriate for those operations in which the other direct costs and overheads are a significant factor, but where the ratio of such costs to total payroll costs varies among all cost objectives which receive an allocation of general management expense.

(iii) Total payroll dollars/hours. (iv) Cost of sales.

Fundamental Requirement

The Standard requires that general management expense be grouped in a separate pool and be allocated to final cost objectives over a total cost input base. The costs of other functions included in G&A expense are covered by a provision that such costs shall be directly allocated to cost objectives, where practical, and otherwise shall be allocated through the use of preferable allocation techniques.

Techniques for Application

2. Paragraph (b) generated a number of comments. The comments concerned the usefulness and clarity of the criteria provided for the selection of a particular allocation base, the measurement of total cost input, the degree of preference for total cost input, and the use of cost of sales as an allocation base. The provision has been rewritten to establish total cost input as the base required for allocation of general management expense. The definition of total cost input has been revised to more clearly define the composition of this allocation base. Total cost input has been selected as the allocation base for general management expense because it is a general measure of the activity of the cost accounting period.

10. On 13 December 1973, the Cost Accounting Standards Board staff circulated for comment a second draft Standard to approximately 350 interested parties. (R4B, tabs 1, 3, 17) In issuing the draft Standard for comment, the Cost Accounting Standards Board also attached a “Summary and Analysis of Disclosure Statement Data.” Among other things, the summarized data indicated that of the 506 business units analyzed: (1) 47.4% used a cost input base for allocating G&A expenses; (2) 34.2% used a cost of sales base; and (3) 18.4% used some other method. (R4B, tab 10) This draft, which was never formally published, in important respects provided (R4B, tab 3):

Sec. 40.40 Fundamental requirement. (a) Allocation of business unit G&A expense to cost objectives shall be in proportion to the beneficial or causal relationship existing between the activities for which the G&A expense was incurred and the cost objectives of the business unit.

(b)(1) Those G&A expenses which constitute general management expense shall be grouped in a separate cost pool for allocation and shall be allocated only to final cost objectives. Total cost input shall be used as the base by which general management expense is allocated to the final cost objectives of the business unit.

(2) All final cost objectives shall have general management expense allocated to them by means of the total cost input base unless a particular final cost objective does not receive benefits similar to the benefits accruing to the other final cost objectives. The allocation of general management expense to final cost objectives which do not receive benefits similar to the benefits accruing to other final cost objectives shall be determined in accordance with 40.50(g)

(c) Those G&A expenses whose beneficial or causal relationship to cost objectives is more directly measurable than by a total cost input base shall not be included in general management expense. These G&A expenses shall be allocated by a base selected in conformity with a hierarchy of preferable allocation techniques which represent beneficial or causal relationships in accordance with the criteria provided in 40.50(c).

Sec. 40.50 Techniques for application.

(b) Total cost input shall be used as the base for allocating general management expense.

(g) Where a particular final cost objective receives significantly different benefit from general management expense than that which would be reflected by the allocation of such expenses pursuant to subparagraph (b) of this section, the Government and the contractor may agree to a special allocation from general management expense to the particular final cost objective commensurate with the benefits received. The amount of a special allocation to any final cost objective made pursuant to such an agreement shall be excluded from the pool of general management expense to be allocated pursuant to subparagraph (b) of this section, and the particular final cost objective's data shall be excluded from the base used to allocate this pool.

11. With respect to the provision in the proposed December 1973 standard requiring use of a total cost input base for allocating G&A expenses, the Cost Accounting Standard Board staff summarized the responses of some 97 commentators as follows

B. THE SELECTION OF AN ALLOCATION BASE FOR THE DISTRIBUTION OF G&A EXPENSE TO FINAL COST OBJECTIVES

The draft Standard provided that total cost input was to be the only base used for the allocation of general management expense except in exceptional circumstances, and that other expenses classified as G&A expense were to be allocated on the hierarchy of preferred allocation techniques. There were five sub-issues commented techniques. There were five sub-issues commented upon under this topic.

1. The requirement to use a single base for allocating general management expenses—72. The provision requiring the use of a single base for the allocation of general management expense is claimed to be inflexible, arbitrary, unnecessarily restrictive, and to ignore the CASB charter to provide criteria in Standards. The provision of a single allocation base was cited as ignoring the analysis of the Disclosure Statement data which showed that a number of bases are currently acceptable for the allocation of G&A expense. The commentators also pointed out that no single allocation base will have a particular relationship to all of the costs which constitute G&A, nor can a single base recognize the varying production circumstances found in Government contracting environment. Commentators suggested that the Standard should provide criteria to select an appropriate base in a given situation.

2. The requirement to use total cost input as the single base for the allocation of general management expense—61. Commentators noted that total cost input has a potential for resulting in an inappropriate allocation in situations where contracts have varying and disproportionate material and subcontracting costs and where there is a significant use of Government furnished equipment and materials. Other commentators noted that the total cost input base could conflict with the allocation base for Renegotiation Board reporting. University commentators noted that total cost input does not specifically fit the allocation base provided in A-21. It was also pointed out that the total cost input base conflicts with the concept of G&A as a period cost.

3. The provision for use of alternatives to total cost input—16. While most commentators felt a provision for exception to using total cost input should be provided, they expressed the belief that the exception provided in the staff draft Standard would be difficult to use. They claimed that the lack of a clear relationship between the pool expense and final cost objectives will make the determination of “significantly different benefits” extremely difficult, and that itwill be difficult to obtain agency agreement on a special allocation because of the impact of any special allocation on the distribution to the remaining final cost objectives. Some commentators believed that this provision should be stated in terms of class of contract or type of situation rather than in terms of individual contracts in order to minimize the administrative burden.

4. The use of cost of sales as an allocation base for G&A—16. Commentators urged that cost of sales should be allowed as a base for the allocation of G&A, because G&A is a period cost and the use of a cost of sales base would be in conformity with generally accepted accounting principles and IRS regulations. Commentators stated that the data for cost of sales is more readily available than the data for total cost input. Commentators stated that any difference resulting from the use of cost of sales instead of total cost imput would even out over the long run.

ALTERNATIVES

1. Require the use of total cost input only and provide for a more definitive treatment of specific items within the context of total cost input. 2. Provide for the use of alternative allocation bases which would serve as a measure of cost input. The alternatives would include total cost input, value-added and a single element base. 3. Provide for the use of any allocation base, including cost of sales, so long as the base would comply with stated criteria.

The staff recommends that the second alternative be selected. The underlying concept of selecting a cost input allocation base is that the expenses in the G&A pool relate to the overall management and administration of the business unit; therefore, the allocation base chosen should be one which measures the total activity of the accounting period and not just some portion of it. A base that provides a representative measure of cost input will be representative of all of the productive activity of a business unit during the cost accounting period. While cost of sales is a base currently in use, that base is subject to period fluctuations which can result in inequitable allocations of G&A expense to activities of the period. The measurement of cost of sales is based on the recorded date of sales. Management activities of a period are not related to the sales date.

Under current conditions as defined by Armed Services Board of Contract Appeals cases, cost of sales can only be used where it closely approximates total cost input. In light of past regulatory experience and our research, any criteria which the Board would establish for the use of cost of sales allocation base would provide for the use of cost of sales where it approximates total cost input, that is, where there is no change in the beginning or ending inventories. The types of cost which make up cost of sales are the same as those which make up cost input. Thus, the selection of cost of sales as an allocation base would not eliminate the problem raised under Issue 2 above, relative to determining and measuring the elements of cost which make up total cost input.

The comments on Issue 3, relative to the use of the exception provision, raised the issue of framing such a provision to apply to a class of contracts or type of situation. If the G&A pool meets the requirements of the Standard, the existence of a need for special allocation to a class of contracts or type of situation would indicate that the allocation base being used is not representative of the total activity of the business unit during a cost accounting period. The Standard is designed to provide consistent accounting treatment for all contracts, except for a particular contract or other final cost objective which is an exception to a business unit's normal operation.

Thus, the staff has concluded that the exception provision should continue to be stated in terms of an individual contract or other final cost objective. The relationship between the expenses in the G&A pool and final cost objectives is not one which is identifiable with a high degree of precision. The cost input allocation base for G&A expense is a broad measure which is normally representative of the total activity of a business unit during a cost accounting period. Thus, for a given final cost objective to qualify for special treatment, the difference in its beneficial or causal relationship to G&A expense, as compared with the relationship of other final cost objectives to G&A expense, should be one which is apparent and capable of being supported. The provision of the Standard will call for the exercise of judgment. Nonetheless, materiality criterion based on a measure of “significantly different benefits” is a proper criterion for use in evaluating and establishing a separate and exceptional allocation to a given final cost objective.

12. In particular, the Council of Defense and Space Industry Associations (“CODSIA”) response to the same December 1973 proposal favored the use of the value-added base particularly where costs of purchasing and subcontracting are excluded from the G&A expense pool, a well as where the material and subcontract element varies as a percentage of total cost from contract to contract. CODSIA stated in pertinent part (Id.):

Value-Added Method—This method considers that the material and subcontract element of total cost input is not “benefitted” by G&A expense to the same degree as are the “in-house” elements of labor and overhead. This situation particularly occurs where the contractor has established a separate overhead pool to collect the costs of purchasing and subcontracting. Material or procurement overhead pools will include the costs of the work of guiding outside subcontractors and suppliers, and such pools will in turn be subject to the G&A expenses of the company on a value-added basis. Value-added may also be a particularly appropriate method where the material and subcontract element varies as percentage of total costs from contract to contract. For example, in the case where 40% may be typical of production contracts, 10% on R and D contracts, and 1% on service contracts.

13. On 24 September 1974, a revised draft Standard was published in the Federal Register for comment. This proposed draft stated in pertinent part (id):

§410.40 Fundamental requirement. (a) Business unit G&A expenses shall be identified and grouped in a separate indirect cost pool and shall be allocated only to final cost objectives.

(b)(1) The G&A expense of a business unit shall be allocated to its final cost objectives using a cost input allocation base except as provided in paragraph (b)(2) of this section. The base selected shall be representative of the total activity of the business unit during the entire cost accounting period.

(2) The allocation of G&A expense to final cost objectives which receive benefits significantly different than the benefits accruing to other final cost objectives shall be determined by special allocation.

§410.50 Techniques for application.

(c) A cost input base which measures the total activity of a business unit shall be used to allocate G&A expense. The allocation base shall include all elements of cost input necessary to describe the total activity of the business unit. Once the elements of the cost input allocation base have been determined the allocation base shall not be fragmented. Total cost input allocation base generally is an appropriate measure of the total activity of the business unit and shall be used except that

(1) Value-added cost input shall be used as an allocation base where inclusion of material and subcontract costs would significantly distort the allocation of G&A expense in relation to the benefits received but where costs other than direct labor are significant measures of activity. A value-added cost input base is total cost input less materials and subcontract costs.

(2) A single element cost input base, e.g., direct labor dollars, shall be used where it is a better representation of the total activity of the business unit during a cost accounting period than either a total cost input base or a value-added cost input base. A single element base may not produce equitable results where other measures of activity are also significant in relation to total activity. A single element base will usually be inappropriate where it is an insignificant part of the total cost of some or all of the final cost objectives which receive an allocation of G&A expense.

(g) Where a particular final cost objective in relation to other final cost objectives received significantly different benefit from G&A expense than that which would be reflected by the allocation of such expenses pursuant to paragraph (c) of this section, the Government and the contractor may agree to a special allocation from G&A expense to the particular final cost objective commensurate with the benefits received. The amount of a special allocation to any final cost objective made pursuant to such an agreement shall be excluded from the pool of G&A expense to be allocated pursuant to paragraph (b) of this section, and the particular final cost objective's data shall be excluded from the base used to allocate this pool. [Emphasis added] 14. On 9 September 1975, a subsequent draft version of the Standard was published for comment in the Federal Register. (R4B, tab 5) In its introductory discussion of the proposed Standard, the Cost Accounting Standards Board stated, inter alia, as follows (id.): The Board published an earlier proposal for this Standard in the FEDERAL REGISTER for September 24, 1974 (39 FR 34300). The Board supplemented the publication by sending copies of the FEDERAL REGISTER material to organizations and individuals who had expressed an interest in the work of the Board. Fifty responses were received. After reviewing those responses, the Board has revised the proposal in a number of ways, and the proposal as revised is being published for comments by interested persons. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 10 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… To assist interested persons who wish to comment on this proposal, the Board has identified below the principal areas in which it has modified the proposal published on September 24, 1974, together with the Board's reasons for those modifications. 1. Selection of an Allocation Base for the G&A Expense Pool.

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Commentators also asserted that the Standard was unduly rigid because it permitted only one base for the allocation of the G&A expense pool. The proposed Standard is not limited to the use of one allocation base; rather, the scope of the base, the measurement of total activity, is limited to cost input as this is the measure of the total activity of the business unit. The proposed Standard provides that the measure of cost input best representing the total activity of the business unit during a cost accounting period would be the one chosen as the base. The Standard provides criteria for determining the cost input base which will best measure total activity. The criteria are provided so that the allocation base for the G&A expense pool can be selected giving consideration to the differing circumstances of individual business units. Commentators expressed concern that the criteria for selection of a particular cost input base were not clear and could lead to disputes. The Board has recognized the merit of these comments and has modified the Standard to clarify the criteria for selection of an allocation base in a particular circumstance. Under the proposed Standard, only a cost input base may be used. Three cost input bases have been provided and criteria have been established for selection of the appropriate base. The individual circumstances of a given business unit must be analyzed, and the cost input base that best represents the total activity of that business unit would be the base selected. The Board's research indicates that generally total cost input, because it is a broad measure of all of the work done and includes all of the costs allocable to the contracts of the period will be a measure that is representative of the total activity of the cost accounting period. In this context the term “total activity” refers to the production of goods and services during a cost accounting period. This scope of activity is selected in light of the fact that the purpose of this Standard is to provide guidelines for the allocation of expense to the work of a cost accounting period. Thus, the total activity involved in the production of goods and services is the measure selected to act as a base for allocating the G&A expense pool to the final cost objectives of a given cost accounting period. [Emphasis added] 15. The proposed 9 September 1975 Standard itself provided in relevant part (R4B, tab 5): §410.40 Fundamental requirement. (a) Business unit G&A expenses shall be grouped in a separate indirect cost pool which shall be allocated only to final cost objectives. (b)(1) The G&A expense pool of a business unit for a cost accounting period shall be allocated to final cost objectives of that cost accounting period by means of a cost input base representing the total activity of the business unit during that entire cost accounting period,… §410.50 Techniques for application.

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(d) The cost input base used to allocate the G&A expense pool shall include all significant elements of that cost input which represent the total activity of the business unit. The cost input measure selected to represent the total activity of a business unit during a cost accounting period may be any one of the three: total cost input, value-added cost input, or single element cost input. The determination of which allocation base best represents the total activity of a business unit must be judged on the basis of the facts of each situation. (1) A total cost input allocation base is generally acceptable as an appropriate measure of the total activity of a business unit. (2) Value-added cost input may be used as an allocation base where inclusion of material and subcontract costs would significantly distort the allocation of the G&A expense pool in relation to the benefits received, but where © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 11 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… costs other than direct labor are significant measures of total activity. A value-added cost input base is total cost input less material and subcontract costs. (3) A single element cost input base, e.g. direct labor hours or direct labor dollars, which represents the total activity of a business unit may be used to allocate the G&A expense pool where it produces equitable results. A single element base may not produce equitable results where other measures of activity are also significant in relation to total activity. A single element base is inappropriate where it is an insignificant part of the total cost of some of the final cost objectives. 16. Cost Accounting Standard 410 was promulgated on 16 April 1976. It provided in relevant part (R4B, tab 1): PART 410—ALLOCATION OF BUSINESS UNIT GENERAL AND ADMINISTRATIVE EXPENSES TO FINAL COST OBJECTIVES

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§410.20 Purpose. The purpose of this Cost Accounting Standard is to provide criteria for the allocation of business unit general and administrative (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 increase the likelihood of achieving objectivity in the allocation of expenses to final cost objectives and comparability of cost data among contractors in similar circumstances. (Emphasis added) §410.30 Definitions.

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(1) Allocate. To assign an item of cost or a group of items of cost, to one or more cost objectives. This term includes both direct assignment of cost and the reassignment of a share from an indirect cost pool. (2) Business unit. Any segment of an organization, or an entire business organization which is not divided into segments. (3) Cost input. 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. 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. (5) Final cost objective. 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. (6) General and Administrative (G&A) expense. Any management, financial, and other expense which is incurred by or allocated to a business unit and which is for the general management and administration of the business unit as a whole. G&A expense does not include those management expenses whose beneficial or causal relationship to cost objectives can be more directly measured by a base other than a cost input base representing the total activity of a business unit during a cost accounting period. (7) Segment. One of two or more divisions, product departments, plants, or other subdivisions of an organization reporting directly to a home office, usually identified with responsibility for profit and/or producing a product or service. The term includes Government-owned contractor-operated (GOCO) facilities, and joint ventures and subsidiaries (domestic and foreign) in which the organization has a majority ownership. The term also includes those joint ventures and subsidiaries (domestic and foreign) in which the organization has less than a majority of ownership, but over which it exercises control.

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© 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 12 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… §410.40 Fundamental requirement. (a) Business unit G&A expenses shall be grouped in a separate indirect cost pool which shall be allocated only to final cost objectives. (b)(1) The G&A expense pool of a business unit for a cost accounting period shall be allocated to final cost objectives of that cost accounting period by means of a cost input base representing the total activity of the business unit except as provided in paragraph (b)(2) of this section. The cost input base selected shall be the one which best represents the total activity of a typical cost accounting period. (2) The allocation of the G&A expense pool to any particular final cost objectives which receive benefits significantly different from the benefits accuring to other final cost objectives shall be determined by special allocation, (410.50(j)). (c) Home office expenses received by a segment shall be allocated to segment cost objectives as required by 410.50(g). (d)(1) Except as provided in (d)(2) below, any costs which do not satisfy the definition of G&A expenses in this Standard, but which have been classified by a business unit as G&A expenses, can remain in the G&A expense pool unless they can be allocated to business unit cost objectives on a beneficial or causal relationship which is best measured by a base other than a cost input base. (2) Independent Research and Development costs and Bidding and Proposal costs shall be treated pursuant to provisions of existing laws, regulations and other controlling factors. §410.50 Techniques for application.

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(d) The cost input base used to allocate the G&A expense pool shall include all significant elements of that cost input which represent the total activity of the business unit. The cost input base selected to represent the total activity of a business unit during a cost accounting period may be: (1) total cost input, (2) value-added cost input, or (3) single element cost input. The determination of which cost input base best represents the total activity of a business unit must be judged on the basis of the circumstances of each business unit. (1) A total cost input base is generally acceptable as an appropriate measure of the total activity of a business unit. (2) Value-added cost input shall be used as an allocation base where inclusion of material and subcontract costs would significantly distort the allocation of the G&A expense pool in relation to the benefits received, and where costs other than direct labor are significant measures of total activity. A value-added cost input base is total cost input less material and subcontract costs. (3) A single element cost input base, e.g., direct labor hours or direct labor dollars, which represents the total activity of a business unit may be used to allocate the G&A expense pool where it produces equitable results. A single element base may not produce equitable results where other measures of activity are also significant in relation to total activity. A single element base is inappropriate where it is an insignificant part of the total cost of some of the final cost objectives.

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(g)(1) Allocations of the home office expenses of (i) line management of particular segments or groups of segments, (ii) residual expenses, and (iii) directly allocated expenses related to the management and administration of the receiving segment as a whole shall be included in the receiving segment's G&A expense pool. (2) Any separate allocation of the expenses of home office (i) centralized service functions, (ii) staff management of specific activities of segments, and (iii) central payments or accruals, which is received by a segment shall be allocated to the segment cost objectives in proportion to the beneficial or causal relationship between the cost objectives and the measures if such allocation is significant in amount. Where a beneficial or causal relationship © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 13 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… for the expense is not identifiable with segment cost objectives, the expenses may be included in the G&A expense pool.

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(j) Where a particular final cost objective in relation to other final cost objectives receives significantly more or less benefit from G&A expense than would be reflected by the allocation of such expenses using a base determined pursuant to paragraph (d) of this section, the business unit shall account for this particular final cost objective by a special allocation from the G&A expense pool to the particular final cost objective commensurate with the benefits received. The amount of a special allocation to any such final cost objectives shall be excluded from the G&A expenses pool required by section 410.40(a), and the paticular final cost objective's cost input data shall be excluded from the base to allocate this pool.

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§410.80 Effective Date. (a) The effective date of this Standard is October 1, 1976. (b) This Standard shall be followed by each contractor after the start of his next fiscal year beginning after January 1, 1977. [Emphasis added] 17. The Preamble to Cost Accounting Standard 410, setting forth prefatory comments of the Cost Accounting Standards Board, provided in relevant part (R4B, tab 1): 1. SELECTION OF AN ALLOCATION BASE FOR THE G&A EXPENSE POOL

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Cost Input Base. Commentators took the position that the use of a cost input base would violate generally accepted accounting principles used for financial accounting purposes because G&A expenses are most commonly viewed as a period cost and not allocated to production nor inventoried. The use of a cost input base would result in inventorying G&A expenses for contract costing purposes. Further, commentators assessed that there is no beneficial or causal relationship between the G&A expense pool and cost input, cost objectives or specific final cost objectives. The logical extension of this argument is that these expenses should not be allocable to Government contracts. If no beneficial or causal relationship can be established then there should be no recovery, because for a cost to be attached to cost objectives some beneficial or causal relationship should exist. There are a number of firms which inventory G&A expenses on Government contracts for financial disclosure purposes. Moreover, the IRS and the SEC have recognized that in some instances G&A expenses are being applied to the inventory of these contracts at the end of the accounting period. While the Standard does not require that G&A expense be inventoried for financial reporting purposes, the inventorying of G&A expenses on Government contracts has been an acceptable accounting procedure for financial reporting as well as for filing with the SEC. Under current IRS regulations, G&A expenses may be allocated to inventory. The Standard being promulgated today is based on the concept of full-costing of final cost objectives. For Government contracting purposes, both direct and indirect costs, including G&A expenses, are allocable. Thus, for contract costing purposes, the concept of period expense is inapplicable. The Board has concluded that there is a beneficial or causal relationship between G&A expenses and all of the final cost objectives of a cost accounting period. Therefore, these costs are allocable to such final cost objectives. Commentators also asserted that the Standard was unduly rigid because it permitted only one base for the allocation of the G&A expense pool. The Standard is not limited to the use of one allocation base; rather, the scope of the base, the measurement of total activity, is limited to cost input as this is the measure of the total activity of the business unit. The Standard provides that the measure of cost input best representing the total activity of the business unit during a cost accounting period is to be the one chosen as the base. The Standard includes criteria for determining the cost input base which will best measure total activity. The criteria are © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 14 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… provided so that the allocation base for the G&A expense pool can be selected giving consideration to the differing circumstances of individual business units. Commentators expressed a variety of views concerning the criteria for the selection of a cost input allocation base. Some commentators noted that the criteria included the necessary guidance and means for selecting the base. Others expressed concern that the criteria for selection of a particular cost input base were not clear andcould lead to disputes. Some commentators expressed the view that the inclusion of value-added and singleelement allocation bases was redundant. Also, a contractor should be required to demonstrate that the use of a total cost input would not result in an appropriate allocation before the use of one of the other bases was permitted. Other commentators stated that explicit inclusion of direct labor hours and direct dollar serves to clarify the Standard. Commentators suggested that the selection criteria should be modified to remove any bias favoring a total cost input base. The Board has recognized the merit of the numerous comments and suggestions received during the research process. The Standard has been modified to clarify the criteria for the selection of an allocation base in a particular circumstance. Under the Standard, only a cost input base may be used. Three cost input bases have been provided and criteria have been established for selection of the appropriate base. The individual circumstances of a given business unit must be analyzed, and the cost input base that best represents the total activity of that business unit would be the base selected. The Board's research indicates that generally total cost input, because it is a broad measure of all of the work done and includes all of the cost allocable to the contractors of the period, will be a measure that is representative of the total activity of the cost accounting period. In this context The term “total activity” refers to the production of goods and services during a cost accounting period. This scope of activity is selected in light of the fact that the purpose of this Standard is to provide guidelines for the allocation of expense to all of the work of a given cost accounting period. [Emphasis added] C. Post-Promulgation Developments Concerning Cost Accounting Standard 410 Relevant To This Dispute 18. Following promulgation of Cost Accounting Standard 410, several relevant developments in implementing the Standard occurred. Certain of these developments involved pronouncements and guidance concerning Cost Accounting Standard 410 prepared and issued by the Department of Defense's Cost Accounting Standard Steering Committee and Cost Accounting Standards Working Group. Department of Defense (“DOD”) Instruction 5126.45, issued on 23 June 1976 and reissued in reverse form on 2 November 1978, “prescribes the role, mission and composition of the …(CAS) Steering Committee and Working Group …and outlines procedures for administering CAS.” (R4B, tab 23) As stated in the Instruction, as revised, the CAS Steering Committee “is charged with developing and disseminating DOD policy and guidance essential to the smooth integration of CAS rules and regulations into Defense procurement practices.” The CAS Working Group operated “under the general guidance and direction of the CAS Steering Committee for the purpose of carrying out the detailed work of the committee” (id.). Guidance papers (normally prefaced by the initials W.G.) issued by the CAS Steering Committee and Working Group for internal DOD use are conceded by the Government not to be directions to contractors or binding on them. (Exh. G-6; tr. 549-50; R4B, tab 21) The composition of the CAS Steering Committee and implementation of policies prescribed by it were described in the Instruction as follows (id.): B. COMPOSITION 1. The members of the CAS Steering Committee shall include the Deputy Under Secretary of Defense (Acquisition Policy), OUSDR&E, who will serve as Chairman; a designee of the Assistant Secretary of Defense (Comptroller); the Principal Deputy of the Assistant Secretary of the Army (Research, Development and Acquisition); the Principal Deputy of the Assistant Secretary of the Navy (Manpower, Reserve Affairs and Logistics); the Deputy Assistant Secretary (Programs/Acquisition), Office of the Assistant Secretary of the Air Force (Research, Development and Logistics); and the Director of the Defense Logistics Agency. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 15 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… a. The Director (Contracts and Systems Acquisition), OUSDR&E, will be Deputy Chairman and the Executive Secretary. The Director, Defense Contract Audit Agency and the Assistant General Counsel (Logistics), OSD, shall act as advisors to the Committee. Members and advisors will designate alternates to act for them in their absence. b. At the invitation of the Committee, representatives of other interested Federal Agencies shall be requested to participate in Committee deliberations.

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C. OPERATION 1. Steering Committee

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d. Policies approved by the Steering Committee will be implemented as follows: (1) Interim guidance will be published in memoranda to the members signed by the Chairman. Members will be responsible for further dissemination within their respective organizations. When appropriate, such memoranda will be further published in the Defense Acquisition Circulars. (2) Items requiring permanent DAR guidance will be referred to the DAR Committee. Any interim guidance previously published will besuperseded by such DAR policy when it is promulgated. 19. The DOD's CAS Steering Committee issued Interim Guidance W.G. 78-21 (hereinafter W.G. 78-21), addressed specifically to CAS 410, on 16 January 1978 (R4, tab 60, R4B, tab 21). Although termed “interim”, the guidance was intended to remain in affect until superseded or rescinded (exh. G-6). The guidance presented in the paper was not coordinated with industry and it was recognized expressly that, “In some instances, contractors may not agree with the approach that has been taken and dispute the matter with an ACO [Administrative Contracting Officer] who follows the guidance. This is a normal situation and there are established administrative procedures for handling such cases” (R4B, tab 21). The portion of W.G. 78-21 relevant to this dispute provided, in question and answer format, as follows: 3. Question The standard says, “The cost input base selected to represent the total activity of a business unit during a cost accounting period may be: (1) total cost input, (2) value-added cost input, or (3) single element cost input.” Is the total cost input base preferred? Answer Yes, The standard says, “A total cost input base is generally acceptable as an appropriate measure of the total activity of a business unit.” The prefatory comments say, “…the term ‘total activity’ refers to the production of goods and services during the cost accounting period.” Thus, unless circumstances exist where a significant difference is apparent between the activity involved in the production of goods and services during the cost accounting period and the costs of such activity, a total cost input base should be used. When circumstances exist where total cost input does not appear to be an appropriate measure of total activity of the business unit, other bases available in the standard should be considered. However, the conditions involved should be carefully considered before departing from a total cost input base. The value-added base shall be used where inclusion of material and subcontract costs would significantly distort the allocation and where costs other than direct labor are significant measures of total activity. What constitutes a significant distortion in this context will be addressed as a separate question below. The criteria for use of a single element cost input base are very specific. The standard says, “A single element base may not produce equitable results where other measures of activity are also significant in relation to total activity. A single element base is inappropriate when it is “an insignificant part of the total cost of some of the final cost objectives.” Considering the criteria for the use of the value-added and single-element bases, the thrust of the standard is toward implementing a total cost input base in most situations. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 16 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… Purification of the G&A expense pool is the most viable approach to minimizing any potential inequities which may surface in implementing the total cost input base.

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5. Question What type of circumstance would meet the value-added base criteria that inclusion of material and subcontract costs would significantly distort the allocation of the G&A expense pool in relation to the benefits received? Answer Responding to this question requires consideration of the context in which the criteria is presented in the standard and of related comments published by the CAS Board. In describing the G&A base in 410.50(d), the CAS Board said, “The cost input base used to allocate the G&A expense pool shall include all significant elements of that cost input which represent the total activity of the business unit.” In the prefatory comments the CAS Board said, “…the term ‘total activity’ refers to the production of goods and services during a cost accounting period.” What is being pursued for the base is a flow of costs which bears a reasonable relationship with the production of good and services. The criteria for a value-added base appears to be referring to a significant distortion in that relationship. The production of goods and services requires material, labor, overhead, and other direct and indirect elements in varying amounts. The fact that a variance in amounts occurs usually reflects a variance in activity involved rather than a distortion in the relationship of costs and activity. However, when the activity involved in cost objectives is similar but the costs vary significantly, this usually indicates that a distortion exists for which use of a value-added base should be considered. Two examples of circumstances in which significant distortions would likely lead to a decision to use a valueadded base are described below: a. Government-furnished components. The Government may furnish engines in its contract for aircraft. Similar aircraft are sold to commercial customers, but the contractor issues subcontracts for the engines, including engine costs as part of the price. The same general management and administration of the business unit as a whole exists whether the customer furnishes the component or not. Consequently, including the component costs would significantly distort the results of using a total cost input base. Assuming no other circumstances of the contractor's activity would mitigate satisfaction of the standard's criteria for use of a value-addedbase, exclusion of material and subcontract costs would probably eliminate the distortion (the standard does not permit exclusion of engine costs only). b. Precious metals. Products with similar configuration may have as the only difference the fabrication of one in gold and the other in sheet metal. The result would be that one product would have such a substantially greater material cost level that total cost input would not be representative of the activity of the business unit. However, this type of circumstance should be reviewed with special care. Additional general management and administration costs may be necessary because of the greater cost level. For example, more financial accounting may be required to determine cash flow requirements and to support financing arrangements. Toplevel management may be expected to monitor highcost areas more than other elements of the business. Once a distortion has been identified, the CAS Board's published materiality criteria may be helpful in determining whether the distortion is significant. Equally important to assessing whether a significant distortion exists is considering whether use of a valueadded base would minimize the distortion and result in an allocation best representing the total activity of the business unit during a cost accounting period. If not, its use would not comply with the basic requirement of the standard. [Emphasis added] (id.) © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 17 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… 20. Following issuance of the guidance in W.G. 78-21, the Defense Contract Audit Agency (DCAA) Headquarters issued a directive to DCAA field offices instructing them to require contractors to justify use of a base other than total cost input (R4B, tab 22; Tr. 521-522). 21. By letter dated 27 February 1979, the Director of DCAA forwarded W.G. 78-21 to the Cost Accounting Standards Board. The letter, inter alia, advised the Board that “Cost Accounting Standard (CAS) 410 is generating more controversy than any of the other standards” and requested the CAS Board “to issue interpretations to avoid prolonged and costly litigation” primarily due to “contractor failure to accept DOD guidance as representing the correct interpretation of the Standard.” (R4, tab 61). 22. On 9 March 1979, at a meeting of the CAS Board attended by Mr. Staats, the CAS Board chairman; CAS Board members Bevis, Shillinglaw, Wacker and Walker; the Director of DCAA; and others, the CAS Board responded to DCAA's request and reviewed the DOD guidance paper. Of the CAS Board members in attendance at the 9 March 1979 meeting, members Staats, Bevis, and Walker were on the CAS Board at the time CAS 410 was promulgated in 1976. Members Shillinglaw and Wacker joined the Board after its promulgation. (R4, tab 66) The minutes of the meeting state in pertinent part as follows (R4, tab 61): In light of the number of questions which have arisen in the implementation of CAS 410 regarding the selection of the proper allocation base for the G&A expense pool, the Defense Contract Audit Agency asked the Board to review the implementation guidance in the Department of Defense WG 78-21. Based on its discussion, the Board concluded that guidance contained in WG 78-21 reflected the Board's intent with respect to the provisions of CAS 410 concerning the selection of the allocation base. The Board asked the Defense Contract Audit Agency to continue to monitor this area and to report as appropriate to the Board on the status of this issue. (Id.) 23. By letter dated 14 June 1979, the Council of Defense and Space Industry Associations (“CODSIA”) requested that the CAS Board rescind the action taken at the 9 March meeting concerning W.G. 78-21. (R4B, tab 27) The CODSIA letter stated in relevant part: P.L. 91-379 requires that promulgations of Standards and modifications thereof be published in the Federal Register and that parties affected shall be afforded a period of time to submit views and comments, and that the Board give full consideration to views and comments so submitted. The Board's May 1977 Restatement of Objectives, Policies and Concepts states that the Board may, at its discretion, respond to requests for authoritative interpretation, and when it does so such interpretations will be published in the Federal Register and will be considered by the Board as an integral part of the Rules, Regulations and Standards to which the interpretations relate. The Board's action of March 9 therefore cannot be construed as the promulgation or modification of a Standard as that term is stated in P.L. 91-379, or as an interpretation of the Board's Rules, Regulations and Standards as described in the Board's Restatement of Objectives, Policies and Concepts. Although the action was not a promulgation, modification or interpretation, the words the Board expressed in its meeting minutes have been widely distributed and interpreted as having the “same force and effect as a Standard”. Consequently, the Board's action already has had considerable influence on the course of disagreements and disputes between the contracting parties involved in the administration and implementation of Cost Accounting Standards, Rules and Regulations. (Id.) 24. In response to CODSIA, by letter dated 9 July 1979, the CAS Board Chairman stated in pertinent part (R4B, tab 28): The quotation accurately reflects what transpired at the Board's meeting. Therefore there is no basis for its rescission. We agree with you that the quoted excerpt does not constitute the promulgation or modification of a Standard nor does it constitute an interpretation of a Standard. The excerpt clearly is addressed only to the Board's conclusion concerning the guidance contained in W.G. 78-21. Whether implementation of CAS 410 based on © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 18 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… the guidance in the Defense paper will in fact bring about the results the Baord intends will only be known after W.G. 78-21 has been applied in actual contract situations. For this reason the Board requested, as shown in the minutes, that DCAA monitor the area and report as appropriate to the Board on the status of the issues involving selection of allocation bases under CAS 410. If reports are received indicating that CAS 410 is not clearly understood, the Board will of course act to remedy the problem. At that time an interpretation, as contemplated in the Board's Restatement of Objectives, Policies and Concepts may be appropriate. The Board will continue to consider all matters presented to it whether they are presented by government agencies, industry associations, individual contractors or anyone else. The disposition of any particular matter will of course be in keeping with whatever the Board determines to be appropriate under Public Law 91-379. A similar reply was furnished to the Financial Executives Institute (“FEI”) on September 19, 1979, in response to FEI's letter of August 21, 1979, in which the FEI asserted positions comparable to those advanced by CODSIA. (R4B, tabs. 29, 31). 25. The subject of the 9 March 1979 meeting was again addressed in the CAS Board's 14 September 1979 meeting. During the September meeting, Board Member Walker dissented from the CAS Board's endorsement of W.G. 78-21 on the basis that it constituted an interpretation or modification that should have been published in the Federal Register. Mr. Walker stated (R4B, tab 30): The CASB conveys its conclusion with respect to relevant accounting issues in the form of published written standards, interpretations and prefatory comments following certain procedures, some required by P.L. 91-379 and some set forth in the CASB's Restatement of Objectives, Policies and Concepts. The contracting parties, who must abide by the rules and concepts conveyed by the language of such standards, interpretations and prefatory comments, are entitled to construe them in a way favorable to themselves so long as their construction is a reasonable one. In most instances the readings by the Government and its contractors are sufficiently close that a common understanding is reached relatively easily. However, if the language can be read with diverse meanings and if this situation produces widespread disagreement or problems, the CASB under its written policies and practices may issue an interpretation of the standard or modify it. Any recorded statement by the CASB which narrows the range of meanings which can reasonably be construed from the language of an issued standard and/or its prefatories in fact constitutes an interpretation or a modification of the standard regardless of whether or not we, the CASB, describe it as such. Moreover, in the event any action is underway between the Government and a contractor, pursuant to the contractual and administrative procedures for resolving disputes, any such statement constitutes an act of intervention, contrary to the CASB's Restatement of Objectives, Policies and Concepts. Intervention is not limited to becoming a formal party to the proceedings but may occur when an action of the CASB significantly affects the specific factual issues under dispute and/or the ground rules by which such a dispute is to be judged. I have thoroughly reviewed the language of the answer to question 3 in WG78-21 as well as CAS 410 together with its prefatory comments and have concluded that endorsement of WG78-21 does indeed narrow the construction which could reasonably be placed on CAS 410 and its prefatory comments. CAS 410.40(b)(1) states that “the cost input base selected shall be the one which best represents the total activity.” CAS 410.50(d) states that “the cost input base selected to represent total activity…may be: (1) total cost input, (2) value-added cost input, or (3) single element cost input. The determination of which cost input case best represents the total activity …must be judged on the basis of the circumstances of each business unit.” Also the prefatory comments to CAS 410 discussed a commentator's view that “a contractor should be required to demonstrate that the use of a total cost input base would not result in an appropriate allocation before the use of another base is permitted.” In response, the CASB stated that “the individual circumstances of a given business unit must be analyzed, and a cost input base selected that best represents the total activity…” When Standard 410 was originally proposed the use of total cost input base was mandatory (410.50(c)) unless one of two limited exceptions was present. The proposed standard stated: “A total cost input allocation base © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 19 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… generally is an appropriate measure of the total activity of the business unit and shall be used except that”— [thereafter subparagraph 1 and 2 specified the conditions under which value added and single element bases are permitted. The language is similar to 410.50(d)(2) and (3) of the final version.] After receiving public comment, the Board modified this language to its present form, removing the mandatory language. Viewed from this historical context, it is clear the Board changed the expressed intent of the Standard from mandatory use of total cost input unless two specifically defined criteria were met to an alternative selection of one of three allocation bases governed by the overall criteria of which base best represents the total activity of that particular business unit. Therefore, it is clear that CAS 410 requires that the individual circumstances of the business unit govern selection of the appropriate cost input base. It does not specify a preference for total cost input, but only that such a base is generally acceptable. WG78-21, Question 3, clearly and unequivocally states that the total cost input base is preferred. It further requires that total cost input be considered first and dismissed as an inappropriate base before other cost input bases may be considered. This position is virtually identical to the initial version of CAS 410 which was subsequently rejected by the CASB. In view of the above facts, it is clear that WG78-21 conveys a preference for the total cost input base which CAS 410 does not. Whether the Board's statement is classified as an interpretation or modification, the Board is required to publish it for public comment before promulgating it. In light of the conclusion above that the statement narrows the construction which could reasonably be placed on CAS 410 and its prefatory comments, I believe the statement constituted a modification of CAS 410 as clearly as if the Board had amended 410.50(d) to expressly state its preference for the total cost input base [indeed, at least one Government implementing memorandum shows this is precisely how the Board's statement is being interpreted]. In this event, Section 719(h)(3)(i)(A) of P.L. 91-379 expressly requires the Board to publish the modification in the Federal Register, to afford a period for public comment, and to fully consider those comments before promulgating the modification. Even if the statement does not constitute a modification, but only an interpretation, our own Restatement of Objectives, Policies and Concepts requires publication for public comment. Both requirements for publication for public comment are grounded on the sound policy of obtaining and considering public views before taking what may otherwise be precipitous action. It is my firm belief that extensive public objections would have been submitted if the Board had expressed a “preference” for the total cost input base in the final proposal. Objections from industry and the decided increase or probability of increase in litigation since our March 9 statement strongly reinforces my belief. Therefore, regardless of the fact that some members of the Board might believe this preference was a part of the Board's original intent, the question before us now is whether it was a part of our “expressed intent.” I think it is clearly not. Consequently, the Board should solicit the public's view of this “preference” before it is made (formally or informally) a mandatory part of the standard. Moreover, on March 9, 1979, I was not aware of the fact that a contractor had previously filed an appeal with the ASBCA. The Government's reply to the contractor's filing uses the CASB's endorsement of WG78-21 to support its position. Based on the above, I believe that (a) WE, the CASB, unintentionally violated our own policy which requires that interpretations and standard modifications be issued for public comment before finalization, and we may have violated the requirement of the law with respect to public disclosure of proposed standards and modifications to standards. (b) Also contrary to our written policy, we have intervened in a contractor-Government dispute, unknowingly. The CASB policy with respect to intervention as written in the Restatement of Objectives, Policies and Concepts is not confined to matters of fact in the particular dispute; it simply refers to “intervention.” Changing the range of © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 20 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… reasonable construction which can be placed on the language of the standards and their prefatory comments which is precisely the issue currently before the ASBCA, certainly constitutes intervention. I, therefore, dissent from the action the CASB took with respect to the letter from the Financial Executives Institute dated August 21, 1979. We should have rescinded our action of March 9, 1979 and, as deemed necessary, initiated action on the CAS 410 matters which would be consistent with CASB written policy and Public Law 91-379. [Emphasis added] 26. The published minutes of the 14 September 1979 CASB meeting also reflect the views of Chairman Staats and Members Bevis, Wacker and Shillinglaw who stated the following in response to Mr. Walker's dissent, (R4B, tab 30): The Chairman and the other members of the Board do not agree with the view asserted in the dissent that the statement in the minutes of the March 9, 1979 Board meeting is an interpretation. In a July 9, 1979, letter to the Council of Defense and Space Industry Association (CODSIA) the Board specifically stated that the minutes do not constitute an interpretation of the Standard. In that letter the Board pointed out that the minutes did nothing more than report the Board's conclusions regarding the guidance contained in W.G. 78-21.This action is no different in substance from an action taken by the Board at its meeting on December 15, 1978. At that meeting the Board unanimously approved a letter to CODSIA which stated in part “The Board has also reviewed the guidance [in the same W.G. 78-21] covering intersegment transfers issued by the Department of Defense for implementation of the Standards. After reviewing the information presented, the Board concluded that the application of the Standard with respect to intersegment transfers is consistent with the requirements of the Standard. As such, the Board sees no need to issue an interpretation of CAS 410. We will continue to monitor this subject and in the event circumstances warrant, will reopen this issue.” Until now, none has suggested that such an action constitutes an improper interpretation. In neither of the above instances did the Board engage in the process of issuing an interpretation as described in the Board's Restatement of Objectives, Policies and Concepts. Moreover, in view of the doubts expressed in the dissent concerning the legality of the Board's March 1979 action, the minutes on this point have been carefully reviewed by the Board's General Counsel. In his opinion, they are clearly within the scope of authority conferred on the Board by Public Law 91-379 and fully in conformity with the policies of the Board. In part, the dissent states: “Therefore, it is clear that CAS 410 requires that the individual circumstances of the business unit govern selection of the appropriate cost input base. It does not specify a preference for total cost input, but only that such a base is generally acceptable.” The majority of the Board believes that if this thinking is followed the statement itself can be construed as an interpretation of CAS 410 which is being used without publication for comment. The correspondence of the Board with FEI should not be used as a vehicle for such action. Because it will be viewed in juxtaposition on the March 9 minutes, the effect of the dissent will be tantamount tantamount to raising the status of the March minutes to that of an interpretation. To avoid contributing further to this appearance, the majority of the Board deems it necessary to refrain from discussion of the substance of the conceptual issues outlined in the dissent. Rather these issues will be reviewed as part of the Board's continuous monitoring of activities dealing with the allocation of G&A expenses. The majority of the Board does not consider its action to violate its policy against intervention as set forth in the Restatement of Objectives, Policies and Concepts. The March minutes do not in any way intervene in, or attempt to supersede, contract provisions or dispute procedures. Rather the minutes reflect only the Board's concern and views respecting an issue of general interest. The Board has always considered and disposed of such general questions when they have been presented to it. The December 18, 1978, letter to CODSIA referred to above is illustrative of this practice. The fact that the disposition may incidentally affect a specific contract does not in our view constitute intervention. Consequently, we do not see the dissent or this reply as an intervention. [Emphasis added] © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 21 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… 27. In 1981, the CAS Steering Committee issued Amendment 1 to W.G. 78-21, revising the prior guidance as indicated in the following extract (R4B, tab 43): QUESTION #3 The question of whether the total cost input allocation base is the preferred base under CAS 410 has been emphasized beyond its relevance to the proper implementation of this standard. Therefore, the guidance contained in W.G. 78-21 is restated as follows: ANSWER There is no specific statement of preference in the standard. The standard says, “A total cost input base is generally acceptable as an appropriate measure of the total activity of a business unit.” The prefatory comments say, “…the term, ‘total activity’ refers to the production of goods and services during the cost accounting period.” Thus, unless circumstances exist where a significant difference is apparent between the activity involved in the production of goods and services during the cost accounting period and the costs of such activity, a total cost input base would satisfy the requirements of the standard. When circumstances exist where total cost input does not appear to be an appropriate measure of total activity of the business unit, other bases available in the standard should be considered. The value-added base shall be used where inclusion of material and subcontract costs would significantly distort the allocation and where costs other than direct labor are significant measures of total activity. What constitutes a significant distortion in this context will be addressed as a separate question below. The criteria for use of a single element cost input base are very specific. The standard says, “A single element base may not produce equitable results where other measures of activity are also significant in relation to total activity. A single element base is inappropriate when if is an insignificant part of the total cost of some of the final cost objectives.” A perfect reflection of total activity may not be reasonably expected from any of the three cost input bases available in the standard. The selection of a cost input allocation base which best represents total activity must be predicated on an analysis of the relevant circumstances at each business unit. Considering the criteria forselecting an allocation base, the thrust of the standard is toward accepting a total cost input base in most situations. Purification of the G&A expense pool is the most viable approach to minimizing any potential inequities which may surface in implementing the standard. QUESTION # 5 The criteria for establishing the existence of a significant distortion appears to have been confined in practice to the two examples contained in the W.G. 78-21 guidance: Government-furnished components and precious metals. These two examples had not been intended to be all-inclusive as instances where the value-added base must be selected. To illustrate this point the answer to Question #5 in W.G. 78-21 is amended to include another example where a significant distortion may exist, as follows: ANSWER c. Disproportionate Material and Subcontract Content. The existence of a wide range of material and subcontract content among contracts may signal the precondition for potential significant distortion. For example, suppose that a contractor's material and subcontract content for most of a business unit's total activity normally ranges from 20% to 70% of total contract costs. This situation, in and of itself, does not prove that a significant distortion exists. Such a distortion may exist, however, if a large portion of the material and subcontract content fell at the range's extremes. In contrast, no significant distortion would likely exist if the material and subcontract content fell within a relatively narrow band within the range (e.g., 30% to 50%). It should be noted that the percentages used in this example are for illustrative purposes only and are not intended to be uniform guidelines. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 22 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… Whenever there is an indication that a significant distortion exists, further consideration of the circumstances is necessary to arrive at a conclusion. Disproportionate cost ratios may merely represent variations in activity. For example, analysis of the activity on the contracts with extremely high material cost content may disclose that the costs represent subcontracts which are designated procurements and dropshipped to the customers. Such circumstances would support a determination that the costs do not fairly represent the activity performing the contract. On the other hand, the analysis may disclose that the costs represent subcontracts for work that is subject to make-or-buy decisions and in fact is being performed in-house on other contracts. Such circumstances would support a determination that the material costs are representative of the activity of performing the contract. Consideration of the particular circumstances is essential before making a determination. [Emphasis added] D. OTHER PERTINENT DAR, CAS AND DCAM PROVISIONS 28. Other provisions of the Defense Acquisition Regulations and Cost Accounting Standards Board Regulations (4 CFR 331, et. seq.) have been cited by the parties as relevant to this dispute. For ease of reference in subsequent portions of this opinion, findings concerning these provisions are made below. 29. The Cost Accounting Standards Board's regulations at 4 CFR §331.20(m)(2)(iii)(1) set forth the following pertinent illustration describing a change in the contractor's “method of allocating G&A expenses under the requirements of Cost Accounting Standard 410:” 1.(a) Before change: The contractor operating under Cost Accounting Standard 410 has been allocating his general and administrative expense pool to final cost objectives on a total cost input base in compliance with the Standard. The contractor's business changes substantially such that there are significant new projects which have only insignificant quantities of materials. (b) After change: After the addition of the new work, an evaluation of the changed circumstances reveals that the continued use of a total cost input base would result in significant distortions in the allocation of the G&A expense pool in relation to the benefits received. To remain in compliance with CAS 410, the contractor alters his G&A allocation base from a total cost input base to a value added base. 30. Cost Accounting Standards Board Regulation 4 CFR §331.70, prior to its revision on 18 September 1980, and as relevant to this dispute, provided: §331.70 Interpretation. (a) Increased costs paid by the United States as referred to in paragraph (a)(5) of the Cost Accounting Standards Clause in §331.50 shall be deemed to have resulted whenever the cost paid by the Government results from application of practices other than the contractor's disclosed practices or from failure to comply with applicable Cost Accounting Standards, and such cost is higher than it would have been had the disclosed practices been followed or applicable Cost Accounting Standards been complied with.

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(g) Where, through inadvertence, the contractor has failed to use applicable Cost Accounting Standards or to follow his disclosed practices and has not notified his contracting officer or officers of the failure, if the result of that failure is to increase costs paid under one or more contracts, while decreasing costs paid under one or more contracts, the contracting officer or officers of the agency or agencies concerned areurged, in the interest of administrative convenience, to negotiate the adjustment of the contract price or cost allowances, as appropriate, of the affected contracts by requiring repayment of only the difference between the estimated price increases and the estimated price decreases, together with any applicable interest. 31. Section 3-1213 of the July 1976 edition of the Armed Services Procurement Regulation (ASPR) now Defense Acquisition Regulation (DAR) governed administration of certain defined equitable adjustments for implementation of new standards. Subparagraphs (b) through (e) of that provision stated: © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 23 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… (b) Requirement for Equitable Adjustment. Contracts and subcontracts containing the Cost Accounting Standards clause (7-104.73(a)) may require equitable adjustments to comply with new cost accounting standards. Such adjustments are limited to contracts and subcontracts awarded prior to the effective date of each new standard. A new standard becomes applicable prospectively to these contracts and subcontracts when a new contract or subcontract containing the clause is awarded on or after the effective date of such new standard. Contractors are encouraged to submit to the ACO any change in accounting practice in anticipation of complying with a new standard as soon as practicable after the new standard has been finally promulgated by the Cost Accounting Standards Board. Equitable adjustment is limited to these circumstances when a change in cost accounting practices is required to implement a new standard. (c) Review of Contractor Change. Upon receipt of information required pursuant to paragraph (a) of the Administration of Cost Accounting Standards clause (7-104.83(b)) from the contractor indicating an accounting change is required to comply with a new standard, the ACO shall review the proposed change concurrently for adequacy and compliance in accordance with 3-1205(d). Upon completion of the review indicating that the change is both adequate and in compliance, the contractor shall be notified and requested to submit the cost impact proposal required pursuant to paragraph (b) of the Administration of Cost Accounting Standards clause (7-104.83(b)). It shall be in sufficient detail to permit evaluation and negotiation of the cost impact upon each contract and subcontract containing the Cost Accounting Standards clause. It shall contain as a minimum the following information: (i) identification of each additional standard, together with contract and subcontracts containing the Cost Accounting Standards clause having an award date prior to the effective date of such standard; and (ii) the effect on each contract and subcontract from the date the contractor is required to follow the standard until completion of the contract or subcontract. (d) Receipt of Cost Impact Proposal. Upon receipt of an acceptable proposal from the contractor, the ACO shall promptly analyze the proposal with the assistance of the auditor and negotiate the contract price adjustments pursuant to 3-1207. (e) Failure to Submit Cost Impact Proposal or Reach Agreement Concerning Cost Impact. (1) If the contractor does not submit a proposal in the form and time specified or if the parties fail to agree concerning the cost impact, the ACO, with the assistance of the auditor, shall estimate the cost impact on contracts and subcontracts containing the Cost Accounting Standards clause. (2) Upon completion of the estimate indicating the effect on contract costs, the ACO shall request agreement from the contractor as to the cost or price adjustment. The contractor shall also be advised that in the event no agreement on the cost or price adjustment is reached within 20 days, action may be taken in accordance with the Disputes clause of the conract. If the ACO issues a unilateral determination under the Disputes clause, he shall consider appropriate action to protect the interests of the Government, with respect to the amount demanded from the contractor, pursuant to Appendix E, Part 6. 32. With respect to G&A allocation procedures application to contracts not covered by the Cost Accounting Standards, the Defense Contract Audit Manual provides at ¶4-305.4(f) as follows (R4B, tab 45): (f) Direct Labor plus Manufacturing Overhead may be an acceptable basis for allocation when material costs on the Government contract products are significantly disproportionate to the material costs on commercial products or where the extent of subcontracting is disproportionate, in which case the use of methods of allocation mentioned above [including the total cost input method] would not be suitable. To be considered as an acceptable base for apportionment, costs of direct labor plus manufacturing overhead on Government contracts must be comparable to such costs on commercial products. [Emphasis added] 33. Paragraph L-410.1(a)(1) of the Defense Contract Audit Manual, containing guidance to Government auditors concerning the composition of the G&A pool under CAS 410, also provides in pertinent part: © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 24 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… (1) The G&A expenses must be grouped in a separate indirect cost pool and allocated only to final cost objectives. For an expense to be classified as G&A, it must be incurred for managing and administering the whole business unit. Therefore, those management expenses that can be more directly measured by a base otherthan cost input should be removed from the G&A expense pool. For example, expenses such as program management, procurement, subcontract administration, G&A-type expenses incurred for another segment, etc. should not be identified as G&A expenses. They should be the subject of a separate distribution in reasonable proportion to the benefits received. [Emphasis added] E. APPELLANT'S IMPLEMENTATION OF CAS 410 AND GENESIS OF THE DISPUTE 34. Beginning in 1973, the appellant utilized what was characterized by the parties as a “modified” value-added allocation base for G&A expenses of direct labor and overhead. (Tr. 43, 408; R4, tab 3) The term “modified” refers to the fact that the appellant excluded from its value-added base certain “other direct costs.” (Id.) In 1973, the appellant established a G&A expense pool comprised only of corporate office assessments, independent research and development (“IR&D”) and bid and proposal (“B&P”) costs. (R4, tab 1; Tr. 49) Certain other costs, that eventually were classified as G&A when Cost Accounting Standard 410 was implemented by appellant (as discussed infra), were included in overhead staff pools (Tr. 44). 35. CAS 410 applied to appellant beginning 1 January 1978. For purposes of formulating forward pricing rates, appellant was to apply CAS 410 from 1 October 1976, the effective date of the Standard, to insure compliance for performance periods after 1 January 1978 under earlier-awarded contracts. (R4B, tab 1, R4, tab 5) 36. The basic dispute between the parties in this appeal developed during implementation of the Standard in the second half of 1976. Appellant first reviewed the final promulgation of CAS 410 in July 1976. It interpreted the Standard as authorizing alternative approaches for allocating G&A expense, and as permitting use of the appellant's existing allocation base. It further concluded that the Standard did not require any changes in its allocation base, since the only cost elements excluded from the base were “other direct costs.” “Other direct costs” at the time were less than 5 percent of the complete value-added base. Appellant based its position on language in the preamble to the Standard indicating that minor exceptions to the composition of a particular base could be made if they were insignificant. (Tr. 45, 127-9) 37. In August 1976, appellant advised the DCAA resident auditor of its conclusions concerning implementation of CAS 410 (Tr. 130-31). Subsequently, by letter dated 10 September 1976, appellant furnished to the resident auditor preliminary written justification for its position that no changes were necessary to its existing G&A practices (R4, tab 2). The letter stated in relevant part (id.): We have reviewed the requirements of Cost Accounting Standard 410 (Published April 16, 1976 in the Federal Register), as they relate to Aeronutronic Division's accounting system and believe that no changes are necessary. In our opinion, reclassifying certain general management expenses from the overhead pool to the general and administrative expense pool serves no useful purpose in that the allocation bases for both pools result in essentially the same amount of costs being allocated to the various types of contracts. Likewise, we believe that our present labor and overhead base, used to allocate G&A expenses, is essentially a value-added base as defined by the standard and is the base which best represents total activity of Aeronutronic Division. General and administrative expense is defined in section 410.30 (a)(6) of the standard as follows: Any management, financial, or other expense which is incurred by or allocated to a business unit and which is for the general management and administration of the business unit as a whole. Strictly following this rather broad definition, certain expenses presently classified in the staff overhead pool could be reclassified to G&A expense. Projected 1976 staff pool expenses and those considered to fit the above definition are shown in Attachment I. The second attachment shows the impact on overhead and G&A rates and the third attachment shows the cost impact by contract type. As you will note, there would be virtually no impact to total contract costs if Aeronutronic were to change its accounting system.

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We believe use of a total cost input base would distort the allocation of G&A expenses for the following reasons: © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 25 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… 1. Using a total cost input base penalizes contractors whose “administrative” costs related to material and subcontracts (purchasing and production control) are identified and charged directly to contracts. Since purchasing and production control have already been charged to the contract, a further allocation of general management expenses constitutes a double charge of administration costs to the material and subcontract portion of the contract. 2. Using the present G&A allocation base, Non-DOD contracts are allocated new business expenses which exceed the amount of new business expenses actually spent for Non-DOD business. Using a total cost input base would result in significantly more new business expenses being allocated to Non-DOD work orders. A summary is provided as Attachment V for your review. [Emphasis added]

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Section 410.50 (d)(2) defines a value-added cost input base as total cost input less material and subcontract costs. However, in item 1 of the introductory remarks, commentators suggestedthat minor variations from the specific bases presented should be allowed. In response, the CAS 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 representation of total activity, this is acceptable under the standard. In our opinion, exclusion of other direct charges from the value-added base does not invalidate the chosen bases representation of total activity. A comparison of allocated G&A expenses using a value-added base, as defined in the standard, and the present labor and overhead base is shown in Attachment VI. As you will note, the allocated expenses vary less than 2% between types of contracts. Therefore, we believe that continued use of labor and overhead base is in compliance with this standard. [Emphasis added] 38. By memorandum to the Regional Manager for the DCAA Los Angeles Region dated 28 September 1976 (R4, tab 3), the resident auditor stated in part (id.): The contractor's current G&A pool is comprised of only B&P and IR&D expenses plus an allocation of corporate office expenses. These expenses are allocated on a modified “value added” base (direct labor dollars plus labor overhead). All other expenses of a managerial or administrative nature are either direct charged or a part of the overhead pools. These methods have been consistently accepted by this office in rate negotiations. The contractor believes that their current practice reasonably meets all the requirements of this standard.

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In our opinion, the current practices do not meet the requirements of CAS 410 in the following areas: a. The G&A expense pool does not include the expenses incurred for the management and administration of the business unit as a whole. For example, Costs associated with the offices of the General Manager, Controller, Industrial Relations and other service departments are collected in a Division staff pool, and allocated monthly to the two labor overhead pools, i.e., Manufacturing and Engineering. b. The allocation base used is not a proper measure of the total activity of the work performed, as the contractor does not include in the base costs incurred for material, subcontracts and other direct costs (ODC), computer services, technical publications, travel, and premium time. There appears to be some merit in the contractor's practice of excluding material and subcontract costs from the G&A base. However, it is our feeling that ODC should be a part of the G&A base. We have verbally apprised the contractor of our position in this matter. However, the contractor persists that any change would have an immaterial impact and therefore a change is not warranted. [Emphasis added] 39. On 22 October 1976, a meeting between Aeronutronic representatives, DCAA's Regional Supervisory Auditor, and the DCAA resident auditor, was held (Tr. 132, 133). At the meeting, the Government representatives informed appellant that the Government intended to require the inclusion of “other direct costs” in appellant's valueadded base, and reclassification of general management expenses from overhead to the G&A © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 26 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… pool. (Tr. 133: R4B, tab 54) At the conclusion of the meeting, the DCAA Regional Supervisory Auditor stated that he wished to discuss the matter further with the DCAA's Los Angeles Region CAS specialist (id.). 40. On 2 November 1976, the head of appellant's Accounting Department again discussed the status of the CAS 410 issue with DCAA's Regional and Resident Auditors. (Tr. 133, 134; R4B, tab 54) The resident auditor at that time advised him that, if other direct costs were included in the allocation base, and the general management expenses were reclassified to the G&A pool, the appellant would be “home free” without need to switch to a total cost input base. (Tr. 134; R4B, tab 54) On 3 November 1976, the head of the appellant's Accounting Department recommended to the Aeronutronic Controller, that appellant make the two changes desired by the Government as expressed at the meeting of the previous day. The Controller agreed and the Government was informed that appellant would institute the changes. (Tr. 134; R4B, tab 54) 41. On 4 November 1976, a meeting of several Government representatives was held at Aeronutronic. Attendees included the Resident Cost Accounting Standard Monitor, the Administrative Contracting Officer (“ACO”); the DCAA's Regional Cost Accounting Standard Specialist and Regional Supervisory Auditor. The appellant was informed at the meeting that the DCAA's Resident CAS Monitor would have to review further which staff pool expenses were to be reclassified to the G&A pool, and whether the total cost input base, rather than the value-added base, was appropriate. (Id.) The head of appellant's Accounting Department told the Government representative that use of a total cost input base would be contrary to the decision reached by the Resident Auditor. (Tr. 133, 135; R4B, tab 54) 42. On 18 November 1976, the DCAA Resident Auditor presented to the appellant a draft audit report detailing appellant's “potential noncompliance” with CAS 410 (Tr. 136; R4b, tab54). The draft audit report stated in part (R4, tab 5): We believe that the contractor's allocation base of direct labor dollars and overhead does to represent the total activity of the division's typical cost accounting period. The use of the contractor's present allocation base versus a total cost input base results in significant differences in the allocation of G&A expense to final cost objectives. b. Significance of Conditions. The overall cost impact experienced in calendar year 1975 shows an increased cost allocation to Government work in favor of allocation bases (direct labor dollars and overhead rather than total cost input) of approximately $592,000. The auditor estimates that during CY 1967 it would have been necessary to reclassifiy approximately $10 million from direct labor overhead to the G&A expense pool in order to comply with the requirements of CAS 410. [Emphasis added] 43. On 22 November 1976, a meeting between appellant, the ACO and various DCAA officials was convened to discuss the draft audit report. The DCAA's position at the meeting was that the total cost input base should be used since “it most often best represents …total activity,” and that method is “the preferred base to use” under CAS 410. However, the Government indicated that it would seek clarification from DCAA Headquarters on numerous aspects of the Standard and any decision as to Aeronutronic “would be an ‘Agency’ decision.” Appellant contested DCAA's position, arguing that the total cost input base, according to appellant's preliminary analysis, would distort the allocation of G&A expense at Aeronutronic, by unrealistically showing 47% of G&A expense allocated to procurement effort, as contrasted with “a more realistic figure of 8%” using a valueadded base. Appellant also expressed concern as to the potential impact of noncompliance audit reports on contract awards. Although the resident auditor dismissed these concerns, the ACO acknowledged that receipt of such reports “leaves him undecided as to the Contractor's status.” Appellant advised Government representatives that Aeronutronic would appeal the matter in the event of an adverse decision. (Tr. 137; R4B, tab 55) 44. In an audit report of 7 December 1976, the DCAA reviewed a price proposal submitted by appellant in response to RFP DAAHO1-77-R-0024 dated 25 October 1976 which ultimately resulted in award of Contract 0236 to appellant. The audit report stated at Section 2b (R4, tab 7): © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 27 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… We are currently in the process of reviewing proposed changes to the contractor's accounting system submitted as a result of CAS 410. The changes, as proposed, will have an effect on overhead and G&A rates for calendar years 1978 and subsequent. Our review to date indicates that the proposed changes do not adequately meet the requirements of CAS 410. We expect to complete our review and issue a potential noncompliance audit report by 8 January 1977. It is suggested that you contact our office prior to completing negotiation of this proposal. 45. On 15 December 1976, DCAA issued a second draft audit report like the draft report furnished on November 18, this report recommended that the appellant reclassify to the G&A pool certain general management expenses included in overhead staff pools, and that the appellant change to the total cost input base. (R4, tab 9) On the issue of which allocation base to use, the second draft audit report stated in part (id.): (2) G&A Allocation Base. In our opinion, the present G&A base of total direct labor dollars plus direct labor overhead is not representative of the contractor's total activity. Exhibit B summarizes calendar year 1975 total cost incurred by cost element and by types of contracts. A review of this exhibit discloses that the present G&A base is significantly disproportionate between Government engineering type contracts and commercial and Government production type contracts. Additionally, the contractor's present method of allocating G&A expenses results in essentially the same dollar distribution as direct labor overhead. That is, for all practical purposes, these expenses are being distributed on the basis of direct labor dollars. Analysis of the contractor's present system discloses that Government contracts with substantial amounts of engineering effort are participating in an inequitable portion of the “staff pool” as well as presently identified G&A expenses.

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Obviously, direct material at this location is significant and should, under normal circumstances, be judged as a representative portion of the total activity. The use of the present allocation base versus a total cost input base results in significant differences in the allocation of G&A expense to final cost objectives. Refer to Exhibit B where specific percentage relationships are detailed. We estimate that approximately $1.4 million would have been properly shifted from Government work to commercial work assuming the requirement of CAS 410 had been operative during CY 1975. [Emphasis added] 46. Contract 0236 was negotiated between 11 January 1977 and 10 February 1977 based on the appellant's proposal submitted on 25 October 1976. (Stip. B-1, B-2; R4, tabs 15, 16). The appellant's proposal and final negotiated prices for the basic contract, as well as for the contract option quantities, were based on the appellant's then current “modified” value-added method of allocating G&A expenses (Stip. B-2). The effectivedate of Contract 0236 was 25 February 1977 (R4, tab 16). 47. On 19 January 1977, appellant responded to the 15 December 1976 audit report in part as follows (R4, tab 10): We agree, in part, with your recommendations contained in Exhibit A of the referenced report, dated December 15, 1976. We have analyzed the “staff pool” accounts and have developed interim overhead pools in order to better distribute the individual “staff pool” elements on the basis of the benefits accruing to the several cost objectives.

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We believe that the value-added cost input base should be used since inclusion of material and subcontract costs would significantly distort the allocation of the G&A expense pool in relation to the benefits received. …[I]ndividuals and functions with the G&A pool dedicate less than 10 percent of their time and effort to the division's material and subcontract costs. Therefore, use of a value-added base, which includes Purchasing and Production control costs comprising about 7 percent of the base, results in an equitable allocation of general management expenses in relation to benefits received. Conversely, use of a total cost input base, which includes purchasing and Production Control costs plus material, subcontract, and inter-divisional expenses amounting to 47% of the base, significantly distort the allocation of general management expenses in relation to benefits received. Use of a total cost input base would result in an inequitable allocation to U.S. Government and commercial fixed price contracts, which have a high content of material and subcontract costs. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 28 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… For the sake of keeping this response brief, we will not restate our points regarding the inequitable allocation of new business expenses to commercial contracts which results by the use of a total cost input base and the lack of correlation in period-to-period comparisons between the G&A expense pool and a total cost input base …. In summary, we are firm in our position that our approach to allocation of G&A is based on the benefits received and is consistent with CAS 410.50 (d) (2). On the other hand, the Government's recommendation to use total incurred cost appears to be based on the fact that this approach shifts more costs from U.S. Government defense work to the contractor's commercial efforts which are almost entirely fixed price foreign contracts. We also offer …suggestions regarding Exhibit B of our letter dated December 15, 1976: (1) “Other Direct Costs” should be included in the “Present G&A Base” because we have already revised our forward bidding rates for this CAS 410 change.

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In conclusion, we would like to reiterate one point that we have made several times during DCAA/Contractor meetings on CAS 410—These accounting changes plus the accounting changes made in our December 15, 1976, forward bid rate submission were made to comply with CAS 410 and therefore are subject to upward and downward equitable adjustments, in accordance with ASPR 3-1213. Hopefully, the changes we have made and these justifications we have provided you for the use of a valueadded allocation base will conclude the many months of discussion and correspondence on this subject. We hope this matter can be quickly decided to minimize the impact in negotiating outstanding proposals. 48. On 8 February 1977, DCAA issued its final audit report. This report was substantially similar to the second draft audit report except for two additional sections headed “Contractor's Reaction” and “Auditor's Rejoinder”. (R4, tab 12) The final audit report was coordinated with the DCAA Los Angeles Region, and it was reviewed and edited by both appellant's resident auditor and the regional DCAA CAS specialist, in accordance with “guidance” provided by DCAA Headquarters. This guidance was “more or less” what appeared in W.G. 78-21 one year later (see finding 13, supra). (Tr. 420-421, 428) Based on the guidance received, the auditor inquired into “abnormal or unusual” conditions at Aeronutronic warranting departure from a total cost input base, and found none. (Id.) In Section (e) of the report, entitled “Auditor's Rejoinder”, the auditor responded to the appellant's position in part as follows (R4, tab 12): The contractor has proposed the use of a value-added cost input base. Although there has been an increase in the level of commercial business, it has not been established that the inclusion of material and subcontract costs would significantly distort the allocation of G&A expenses to contracts. In our opinion, material and subcontract costs are composed of normal procurements and are properly includable in the allocation base for the equitable allocation of G&A expenses. The contractor's reaction did not refute the auditor's findings that material and subcontract costs are composed of normal procurement items. As set forth in Exhibit B, Note 3, our review disclosed no unusual or unique characteristics in the types and kinds of materials used at this division. For example, there were no disproportionate amounts of Government furnished material between the various types of contracts that would invalidate a total cost input base. [Emphasis added] The contractor's argument relating to the effort expended by general management personnel is not subject to audit verification. The CAS 410 prefatory comments state “where a beneficial orcausal relationship between certain management expenses and final cost objectives can be determined using an allocation base other than the base used for the expense pool, then by difinition, these management expenses are not G&A expenses and should be excluded from the G&A pool.” Therefore, if adequate accounting records are maintained and the contractor can demonstrate a beneficial or causal relationship then these expenses should be in a pool other than G&A. Regarding the contractor's references to his previous letter of 23 November 1976, …we do not concur with its contention that commercial work is allocated an inequitable portion of IR&D and B&P costs. The contractor's rationale does not consider potential relevancy of IR&D to foreign commercial sales of military related products. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 29 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… The contractor's commercial sales are largely military related items, therefore, we believe that these sales should participate in IR&D and B&P costs. In conclusion, we believe the contractor's rationale does not support the position that total cost input is materially inequitable, but rather identifies one specific area where total cost input will correct prior inequities. We do not take exception to the contractor's data …however, we do question its relevancy and the implication of a direct causal relationship between a value-added base and the contractor's historical G&A pool. CAS 410 does not require a causal relationship between the G&A base and G&A pool. Additionally, for the years the contractor's correlation data are presented, the G&A expenses consisted entirely of IR&D and B&P expenses and corporate office allocation, neither of which would appear to be more related or dependent to a value-added base than to a total cost input base. [Emphasis added] 49. Exhibit B to the final audit report of 8 February 1977 compared appellant's costs incurred during calendar year 1975 by cost element and by major contract categories (R4, tab 12). The conclusions developed by the Government auditors included the following (id.): 2. The present G&A base of direct labor plus labor overhead has substantially different patterns between the major contract categories and that of the entire business. The following percentages represent the ratio of the present G&A base (direct labor and overhead expense) to the total costs incurred within the major categories as well as the entire business: Commercial Contracts ($8,778 ÷ $24,341) = 36% Government Contracts: Fixed-Price Type ($12,673 ÷ $29,623) = 43% Cost Type ($19,499 ÷ $28,721) = 68% Entire Business Totals ($40,950 ÷ $82,685) = 49% The above ratios are typical in a dual development/production type environment. A major portion of this division's commercial work is direct foreign sale of defense products. Therefore, the present G&A base results in a decreased allocation of G&A expense to mature fixed type and commercial programs with a corresponding increased allocation to new development type contracts. 3. The ratio of direct material costs to total cost incurred on commercial contracts (39%) is somewhat higher than the comparable ratio on Government cost-type contracts of 22%. However, the pattern of material cost for the entire business (39% ratio) is the same as the pattern on commercial contracts because of the high usage of materials on Government fixed price contracts. Our review of material and subcontract items did not disclose any unusual conditions, such as inordinate use of Government furnished property or extensive drop shipment sales. In summary, it is our opinion that purchased and subcontract items are a representative part of this division's total activity. 50. There are no statistics maintained by the Defense Contract Audit Agency or any other Government agency relative to defining a “normal” contractor, or “normal” proportions of material, subcontract, labor and overhead costs in Government or commercial contracts of defense contractors. (Tr. 288-290; 377-379; 492-493; 572-573) There are no standardized statistics in DCAA to indicate what is a “typical” contractor “dual development/ production” environment. This evaluation was purely the judgment of appellant's resident DCAA auditor. (Tr. 422-423) 51. On 13 February 1977 an audit report was issued to supplement the 7 December 1976 audit of the appellant's 5 October 1976 proposal. This report incorporated the results of the final audit finding that the proposed use of a value-added cost input base for the allocation of G&A expenses was not in compliance with CAS 410 and would have a cost impact beginning in January 1978. (R4, tab 14) © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 30 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… 52. During various conversations in late 1976 and early 1977, the ACO admitted to appellant that he was not convinced the total cost input base was appropriate in Aeronutronic's circumstances (Tr. 141, R4B, tab 54). After DCAA issued its final report on 8 February 1977, appellant had further discussions with the ACO during which the ACO stated that he supported use of appellant's value-added base but had requested legal advice on the issue (Tr. 129-130, 189-92; R4B, tab 54). 53. On 22 March 1977, the ACO informed appellant that DCAS Regional legal counsel was of the opinion that a total cost input base was appropriate. (Tr. 143) 54. On 28 March 1977, the Administrative Contracting Officer made an initial determination based on his legal and accounting advice that appellant's accounting practices failed to comply with the intent and purpose of Cost Accounting Standard 410. The audit report of 8 February 1977 specifically was cited as detailing the relationale for the finding of noncompliance. The ACO requested that the appellant advise him, within 30 days, of its agreement with the finding or reasons why the appellant considered its existing practices to be in compliance. (R4, tab 21) 55. By letter dated 28 March 1977, appellant's Controller requested that the ACO provide further reasons why a total cost input base for allocating G&A expense was appropriate in Aeronutronic's circumstances (R4, tab 22). By letter dated March 30, 1977, the ACO responded to the Controller's request in pertinent part as follows (R4, tab 23): a. I think that paragraph 2.a.(2) of the aforementioned Audit Report provides an explanation of why a total cost input base for allocating G&A expense is appropriate in Aeronutronic's circumstances. When I first reviewed this explanation, I too had difficulty understanding it, because I approached this CAS 410 problem from the other end and asked, “why not value-added?” In response to your request for “specific reason …” I submit that total cost is representative of your total activity and is in conformance with the intent and purpose of CAS 410. b. The answer to my question of why not value-added was provided by …[the] DCAA Regional CAS Specialist, [at a previous meeting between appellant and the Government]. It was explained that the value-added alternative was provided with Lockheed and McDonnell Douglas situations in mind, whose contracts for aircraft include significant costs associated with Government furnished engines. It was further explained that these aircraft manufacturers built other aircraft for commercial sales wherein the engines were purchased. As a result, the material and subcontract costs on commercial sales were considerably greater than on Government sales. Using a total cost input base in such a situation would result in an inequitable allocation of G&A expense. This then is the basis for my finding that a value-added base for Aeronutronic would not be in conformance with the intent and purpose of CAS 410. 56. By letter of April 6, 1977, to the CAS Board, Ford Aerospace & Communications Corporate headquarters requested “some form of relief” and a meeting with “appropriate CASB representatives” concerning the Aeronutronic CAS 410 issue. (R4, tab 25) 57. On 7 April 1977, appellant submitted a letter to the Administrative Contracting Officer disagreeing with the 28 March 1977 initial finding of noncompliance (R4, tab 26). Appellant, in addition to elaborating on its reasons for disagreement, outlined optional courses of action as follows (id.): Aeronutronic plans to meet with CASB representatives to ascertain whether the Board agrees with DCAA's interpretation of the Board's intent with respect to use of the value-added allocation base. In the meantime, however, if you conclude after receipt of this letter that you must adhere to the position of noncompliance as stated in your letter of 28 March, we request that you promptly advise us informally, before issuing your final decision. Also, we request your views on the following course of action: 1. Solely to facilitate contract negotiations and to minimize administrative problems, the Division will switch to total cost to comply with your initial finding of noncompliance, at the same time expressly reserving its disagreement including the right to receive your final determination and to appeal therefrom under the Disputes clause. We would expect to be able to make this change by April 15, 1977. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 31 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… 2. If the advice we receive from the CAS Board confirms to us that the DCAA position accurately reflects the Board's intent with respect to CAS 410, and we decide to withdraw our disagreement, we will submit a cost impact proposal as contemplated by ASPR 3-1213. Note that this proposal is called for under paragraph (b) of the clause, Administration of Cost Accounting Standards, ASPR 7-104.83(b), and that it may be submitted within 60 days or as agreed. This cost impact proposal will cover contract adjustments under paragraph (a)(4)(A) of the CAS clause (i.e., adjustments upward or downward (see ASPR 3-1213(b)) on all CAS-covered contracts with effort in calendar year 1978 and later, which are in existence at the time of the switch-over in 1 above. 3. If we decide not to withdraw our disagreement, as contemplated in 2 above, we will nevertheless, under numbered paragraph 1 above have complied with your initial finding, even though under the reservation of rights. Accordingly, we would expect you to review our G&A base and allocation method under numbered paragraph 1 above, advise us that we were in compliance, and request the cost impact proposal for equitable adjustments. 4. After receipt of our cost impact proposal under either 2 or 3 above, the parties would proceed as provided in ASPR 3-1213; that is, after Government analysis of our proposal, we wouldnegotiate contract price adjustments. These will be adjustments to comply with CAS 410, as interpreted by your as our cognizant ACO, and would be subject to adjustment pursuant to ¶ASPR 3-1207(a) and CAS clause paragraph (a)(4)(A). 5. If we decide not to withdraw our disagreement as contemplated in 2 above, and assuming that you do not change your initial finding of noncompliance to a finding of compliance in the meantime, you will proceed to your final decision of noncompliance under the Disputes clause. Aeronutronic may appeal from that decision, and if it does, it will nevertheless continue in compliance with your interpretation of CAS 410, and will proseecute its appeal. If the outcome should be that Aeronutronic can change back to the value-added cost input method under CAS 410, and Aeronutronic promptly elects to do so, the ACO and Aeronutronic will agree on effective and applicable dates for the change back to value-added, such dates to be selected so as to minimize the need for contractual adjustments. Such adjustments would be upward or downward to achieve an equitable result. If the outcome should be that there will be not change back to the value-added method, no adjustments or further action would be necessary. In either case, the interests of the Government and of the contractor are protected. See Section X of DPC 76-1. We would appreciate receiving your concurrence or comment on the above-described course of action as soon as possible, and in any event before April 15th. We will be glad to discuss these matters with you at any time. As you know, we are not only faced with significant cost impact with respect to contracts already in existence, but we have proposals in preparation and it becomes increasingly more difficult to conduct business without having a firm understanding on which to base our day to day actions. Pending the results of the meeting with the CASB representative, the appellant concluded the letter by stating in the event the ACO did not withdraw its disagreement, it would comply with the ACO's finding by changing to the total cost input base and then appeal the matter (id.). On 19 April DCAA informed the ACO it took no exceptions to this approach (R4, tab 30). 58. In an interoffice memorandum, dated 14 April 1977, appellant's Controller advised various officials in appellant's organization of steps to be taken by Aeronutronic regarding the ACO's finding of noncompliance (R4, tab 27): (1) We intend to revise our 1977 and 1978 rates using a value added base for allocation of G&A. These rates are to be used in proposals and in contract negotiations effective April 18, 1977. We also will prepare 1978 rates using a total cost input basis for allocation of G&A consistent with DCAA's and the ACO's position. These rates will also be available for use with the clause described in (2) below on April 18, 1977. (2) Mr. Herget has developed a clause to be used in all proposals submitted and contracts negotiated until such time as we decide our next course of action or until such time as we receive a final decision from the ACO (clause attached). (3) We intend to meet with the CAS Board on April 27, 1977, to discuss our CAS 410 problem. Our next action will depend on the outcome of that meeting. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 32 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… (4) We will be meeting with our Tri Services Representative on April 26, 1977, to discuss our 1977 New Business Expenditures Agreement. It is our objective to obtain at this meeting an agreement to remove IR&D and B&P from the G&A pool and to allocate these items on labor and overhead beginning in 1978 if it becomes necessary to use the total cost input base for allocation of the G&A pool. 59. On 15 April 1977, the Air Force Aeronautical Systems Division, Wright-Patterson Air Force Base, Ohio advised appellant that, “[f]ailure to achieve an acceptable solution to your CAS 410 non-compliance would unquestionably have an adverse effect on the successful conduct [of] negotiations [for several] PAVE TACK requirements” (emphasis added) (R4, tab 31). 60. In a response dated 20 April 1977 to the Department of the Air Force concerning the effect of the preliminary finding of noncompliance with CAS 410, appellant stated in part (R4, tab 32): Nevertheless, Aeronutronic shares your concern that the issue of potential non-compliance with CAS 410 could have an adverse effect on the successful conduct of negotiations for Pave Tack requirements. Accordingly, a 27 April 1977 meeting has been scheduled with the Cost Accounting Standards Board wherein Corporate-level management for Ford Aerospace & Communications Corporation will present to the CAS Board our Company's position on its merits. Should the CAS Board concur with Aeronutronic's current accounting methodology, we feel certain that the DCAS ACO will expeditiously withdraw his preliminary finding of CAS 410 non-compliance. Should the CAS Board disagree with our Company's position, we would expect the ACO to issue immediate formal direction for Aeronutronic to revise its accounting methods to effect compliance with CAS 410, an action which Aeronutronic would undertake immediately upon receipt of such direction pending possible future appeals to appropriate authorities. 61. The requested meeting with CASB representatives was held in Washington, D.C. on 27 April 1977 (tr. 62-63; 103-104; 146-148; R4, tab 69, R4B, tab 51). Mr. Clark Adams, the CAS 410 Project Director, a CAS Board staff member and theCAS Board's Executive Secretary were present. (R4, tab 37) A DCAA Headquarters representative also attended. (Id.) the appellant was represented, inter alia, by Ford Aerospace Communication Corporation's Vice President/Controller, and its Assistant Controller; appellant's Controller; the head of appellant's Accounting Department; and Division counsel. (Id.) The substance of the meeting was stated by the CAS Board staff member to be as follows (R4B, tab 51): Ford Aeronutronic currently uses a value-added base to allocate G&A expenses and wished to continue to do so. The Government through its ACO and local auditors has told Ford it must change to a total cost input base. Both parties attempted to sustain their positions based on the provisions of CAS 410. We explained to the representatives of Ford that the intent of the Standard is to use a cost input base, preferably a total cost input base in most circumstances. We pointed out that the use of a value-added or single element base is expected to be very limited. We discussed the arguments presented in the Ford letter of April 6, and pointed out our exceptions and disagreements with the reasoning and interpretation of CAS 410 as expressed therein. Ford's major problem is that they had accepted a long term (through 1979) FPI contract price using the value-added base, and they are now being held in noncompliance. They bid the contract using this base in spite of a continuing discussion (argument) with DCAA and the ACO over the prioriety [sic] of it use. The impact of a noncompliance and required use of a total cost input base would, according to Ford, significantly (approximately $1.5 million) increase costs allocated to the contract and is the cause for their strong desire to meet with us. We, of course, pointed out that the resolution of the issue as to whether a total cost input base or a value-added base is appropriate must be decided by the field people in administering the contract.” [Emphasis added] 62. The DCAA representative reported the following in a memorandum of 9 May 1977 regarding the 27 April 1977 meeting: The CASB staff had reviewed the analysis prepared by the contractor. Based on this review, the staff indicated agreement with the DCAA position. They support our view that the Ford analysis is inconsistent with the requirements of the standard. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 33 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… At this point, the Ford representative asked for some clarification for when the value-added base should be used. According th the staff, G&A is not allocated to individual elements of a base. A base is a mechanical means of getting G&A to cost objectives. Consequently, the kind of exercise Ford went through in its analysis, where they attempted to show a beneficial relationship between the G&A pool and the elements of the base, was not fruitful. Further, the staff attempted to explain what they considered to be distortion in the allocation of G&A. They cited as an example of a condition that may result in a distorted allocation; a contractor having several contracts with an unusually high incidence of large subcontracts, while typical orders had substantially little or no subcontracts assigned. Nevertheless they emphasized that the Board intended a very limited use of the value-added base and consideration for using such a base will be done on a case-by-case basis. (R4, tab 69) 63. By letter of 3 May 1977, appellant informed the Administrative Contracting Officer of the results of the 27 April meeting and appellant's intended course of action (R4, tab 35): Reference is made to our letter (G060-77-064 dated 7 April 1977 and our request of 15 April 1977 in which we advised that we had scheduled a meeting with CAS Board representatives on 27 April. We met with those representatives in Washington on the 27th as planned. We were informed that it was indeed the Board's intent under CAS 410 that all contractors should allocate G&A on the basis of total cost input, except in unusual circumstances, and that unusual circumstances might then justify use of the value-added or single element basis of allocation …. The lack of clairty of CAS 410 to express the board's intent as explained above misled us in the October 1976-March 1977 period and may also have misled Government personnel concerned. We mentioned this in discussions on ways to mitigate the adverse effect on Aeronutronic Division of changing now on the desired total cost input allocation base. The Board representatives indicated that the Board's policy was to leave adjustments up to the contracting agencies; to draft its regulations in terms less specific than some might prefer so as to afford flexibility to the administrative contracting officer in negotiations for adjustments. As an example, it was suggested that the Government and/or the contractor could use a clause reserving a right to adjustment until questions or misunderstandings over a Standard were settled.

• * *

We explained the circumstances pertaining to the award of [contract 0236] and inquired as to the remedies available for obtaining equitable adjustment in this situation. It was mentioned that the Government and/or the contractor should have included a clause in this particular contract which would have protected Aeronutronic's and the Government's rights until his situation was resolved. It was suggested that even without such a clause it was reasonable forthe parties to request the PCO to grant a price adjustment on this particular contract. If it becomes necessary to take this course of action, our request will be coordinated through you. Based on this meeting, we intend to take the following course of action: (1) We will henceforth follow the total cost input method applicable to work on and after 1 January 1978. (2) We will reconstitute our G&A expense pool. The precise changes which will be involved have not yet been resolved, but we are reviewing certain expenses currently in our G&A pool, e.g., IR&D, B&P and portions of our Central Office Assessment which we believe may be more properly allocated to final cost objectives or included in an established overhead pool for allocation on a base other than total cost input. We would expect that these changes would all be found acceptable from the viewpoint of all cognizant Government parties. however, to guard against the possibility of non-acceptance we plan to use a clause providing for adjustments, if necessary, once Aeronutronic and the cognizant Government representatives have reached agreement. (3) We will submit cost impact proposals to you as soon as reasonably possible. Because these will depend in part upon acceptability to you and other cognizant Government parties of the changes described in (2) above, © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 34 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… we request your concurrence in a tentative submission date of 24 June 1977 (earlier if possible). We note that the clause, Administration of Cost accounting Standards, mentions 60 days or other date as mutually agreed. As we have indicated to you previously, Aeronutronic believes it is entitled to equitable treatment on all contracts with effort in 1978 and beyond. Although we are convinced that our entitlement to equity could be established through the disputes process, that course of action would be costly for the Government as well as Aeronutronic. In light of this, we trust that it will be possible to work out necessary adjustments by agreement. 64. Appellant's Controller explained the decision to comply with the ACO's ruling as follows (Tr. 63-4): We had sort of run the complete course and had decided that in order to avoid further complications in our business, that we better make the changes necessary …[W]e felt the problems [in disputing the matter with the Government and retaining the value-added base] would be enormous. We are really in a competitive business. You run the risk of—in competitive situations—of being thrown out. We were constantly threatened—well, maybe “threatened” isn't the exact word—we were constantly advised that CAS noncompliances could be reasons for not receiving awards. DCAA reminded us and CAS reminded us that we'd have to get—correct our situation and get in compliance or billings could be delayed. All these kinds of problems made it, in our opinion, to be impossible really to work in that environment. Although the controller was in favor of appealing the CAS 410 issue immediately, review and consideration within the company, and concurrence at the corporate level, were required before this action could be taken (Tr. 85). 65. On 9 May 1977, the appellant requested advance agreement to continue allocating IR&D and B&P costs on a value-added base, pursuant to CAS 410.40(d)(2) (finding 15 above) which, at the time, permitted such costs to be allocated separately from G&A as provided for in ASPR 15-105.3(c). (R4, tab 39; R4B, tab 1) By letter dated 24 May 1977, the Trik-Services Negotiation Staff notified the appellant of its concurrence in the request because “[w]e believe that these costs correlate with the Value Added Base better than the [Total] Cost Input Base” (R4, tab 39). The DCAA resident auditor disagreed with this result, on the ground the appellant's IR&D and B&P costs “are incurred for the purpose of expanding sales and, therefore, should be allocated using a broad base such as total cost input” (R4, tab 41). The ACO approved continued use of the value-added base for the IR&D and B&P costs on 10 June 1977 and inclusion of such costs in the G&A base. (R4, tab 42) 66. Also on 10 June 1977, the ACO wrote to the Aeronautical Systems Division at Wright-Patterson AFB to inform them that, as a result of the actions taken by appellant and pending receipt of appellant's cost impact proposal, appellant was no longer considered to be noncompliant with CAS 410 (R4, tab 43). 67. Appellant submitted its CAS 410 cost impact proposal on 11 July 1977 (R4, tab 46). Revisions to the proposal were forwarded to the Government on 30 August 1977 (R4, tab 49). 68. DCAA reviewed the cost impact proposal (involving some 22 contracts) in an audit report issued 19 December 1977 (R4, tab 50). The audit report asserted that the contractor's total proposed claim for an upward adjustment under all affected contracts was overstated by $457,876 (id. at Exh. A). The report further concluded that the offsetting total downward adjustment claimed by appellant was understated by $15,578, bringing the total amount of the proposed adjustment that was questioned by DCAA to $473,451. Of the $457,876 upward adjustment questioned, $240,315 related to the impact of the changes to a total cost input base on Contract 0236. (Id.) The DCAA rationale for questioning the impact on Contract 0236 wasexplained in the Report as follows (Id.) The DCAA rationale for questioning the impact on Contract 0236 was explained in the report as follows (Id.): 2. Contract [0236], was set out in its entirety according to the provisions of ASPR 7-104.83(a)(3) which states in part that the contractor shall comply with all Cost Accounting Standards in effect on the date of the final agreement of price. The contractor negotiated the contract on 14 February 1977 which is a date subsequent to the effective date of CAS 410 (1 October 1976). The contractor was notified prior to negotiations that DCAA took © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 35 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… exception to Aeronutronic Division's G&A allocation base. Our audit findings concerning potential noncompliance are covered in Audit Report No. 4741-35-7-0027, dated 8 February 1977. Accordingly, it is our conclusion that the resultant noncompliance for this contract was deliberate rather than inadvertent and, therefore, not subject to offsets. F. Revision of Options and Final Decision 69. The contract contained provisions for some thirty-one options for various additional services and supplies (R4, tab 16). During May 1978, the Government advised the appellant of its desire “to restructure the option quantities, prices, and the method and period for exercising the options” (R4, tab 52) set forth in the contract. (Stip. B-5; R4, tab 52, 53; R4B, tabs 46-49) 70. Negotiations on the options were held in late May 1978 (Stip. B-7). During these negotiations, appellant stated its position that the option prices should be adjusted upward to reflect the impact of the change to a total cost input base. (Id.) Prior to repricing the options, (Stip. B-6). The ACO informed the appellant of his opinion that restructuring of the options amounted to a renegotiation, and stated that the appellant should resolve the CAS 410 issue with the Procurement Contracting Officer (“PCO”) prior to accepting the modifications. (Id.) The PCO refused to permit such an adjustment, stating his position that the matter should be resolved with the ACO (Stip. B-7). 71. By Modification P00062 effective 31 May 1978, the parties to the contract agreed to revised quantities, prices, and the method and period for exercising the options set forth in the basic contract. By Modification P00066, also effective 31 May 1978, the Government exercised Option Number 0003A. Under this Option, 850 additional missiles were ordered for $17,106,250 under contract line item number (CLIN) 0007AA. (R4, tabs 52, 53) Both modifications contained the following Special Provision J-32 (id.): SPECIAL PROVISION—COMPLIANCE WITH COST ACCOUNTING STANDARD 410 (a) CAS 410, Allocation of Business Unit General and Administrative Expenses to final Cost Objective, became applicable to Aeronutronic Division of Ford Aerospace and Communications Corporation as of 1 Jan 78. The standard provides in 4CFR 410.50(d) for allocation of G&A expenses on one of three bases: (i) Total Cost input, (ii) Value-Added cost input, or (iii) Single element cost input. (b) The prices included in the basic contract (effective date 25 Feb 77) were computed by Aeronutronics on the value-added cost input basis. (c) The prices set forth in CLIN 0007AA, 0007AB, and 0007AC are based on the Option prices set forth in CLIN's 0005, 0006, or 0007 of the basic contract, and also exclude any amount for the impact of changing to the total cost basis of G&A Allocation. In the event the Government exercises either the option under CLIN 0007AA or the options under CLIN's 0007AA, 0007AB, and 0007AC, any recovery of any CAS 410 cost impacting granted by the ACO shall be based on Aeronutronic's proposal letter G060-77-107, dated July 11, 1977, and G060-77-129, dated August 30, 1977, addressed to the ACO. 72. Appellant's proposed price adjustment following exercise of the option became the subject of a DCAA audit report dated 6 July 1978 (R4, tab 55). The requested equitable adjustment was questioned in the report for the following reasons (id.): a. In our opinion, the contractor has not correctly interpreted the provisions of DAR 3-1213(b) and 7-104.83(a) (3) and we question the propriety of the requested adjustment totaling $270,383 for the basic contract including fee of $30,039, and $683,772 for the option quantity (1,700), including fee of $89,187. The cited provisions provide (i) for equitable adjustments on contracts and subcontractors awarded prior to the effective date of a new standard and (ii) that contractors shall comply with all Cost Accounting Standards in effect on the date of the award, or if the contractor has submitted cost or pricing data on the date of final agreement on price. Since the subject contract was negotiated about 41/2 months after the effective date of CAS 410, we believe that the contractor was in noncompliance with the standard and that an equitable price adjustment is inappropriate under © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 36 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… CAS rules and regulations. It is the effective date of the standard—not the date of the contracting officer's official notice—that governs in this situation. Although the date of formal notice is not the important date in this issue, we emphasize that the contractor was fully aware of the auditor's recommendation on the CAS 410 issues prior to negotiation of the subject contract. During the preceding months, there were several communications among representatives of Ford Aerospace, DCAS, and DCAA concerning this subject and there should have been no question concerning the auditor's position. In fact, the contractor was formally apprised of our position on 15 December 1976 and then we issued our report to the contracting officer, formally pointing out the potential noncompliant conditions on 8 February 1977, one week prior to the subject contract negotiations. Costs questioned are calculated on the basis of deliberate noncompliance. Should the ACO determine inadvertent noncompliance, the contractor could use the increased cost on the subject contract to offset decreased costs on other CAS covered contracts. The offsets would be allowable only to the extent of decreases on other CAS covered contracts. b. On 20 June 1978, the contractor issued a letter to your office adjusting the proposed cost impact of the 1,700 quantity option. The proposed adjustment of $683,772 was reduced to $380,192 in order to reflect the recent contract modification exercising only 850 of the 1,700 option quantity. The balance of the 1,700 units may be exercised at a later date. We reviewed the proposed adjustment for the reduced quantity and take no exceptions to the computations. However, we question the adjusted amount for the same reasons as stated in subparagraph a. above. 73. By letter to appellant dated 21 September 1978, the ACO declined to offer the appellant its requested upward price adjustments substantially for the same reasons set forth in the 6 July 1978 audit report. However, the ACO agreed to consider offsets for appellant's “inadvertent” noncompliance on the basis of W.G. 77-12 which states that, “If the noncompliance is inadvertent, the increased costs may be offset to the extent the noncompliance results in decreased costs on other CAS contracts.” (R4, tab 56) 74. By Modification P00102, dated 30 November 1978, the Government exercised further options for an additional 850 missiles and 21 guidance sections in the total amount of $15,120,712 (R4, tab 57). Following exercise of these options, appellant's proposed price increase estimate for the entire quantity of 1700 missiles, originally set at $683,772 (finding 68), was revised downward to $615,463 as a result of several adjustments (R4, tab 62). 75. On 21 February 1979, the appellant requested a final decision of the Administrative Contracting Officer stating in part as follows (R4, tab 59): CAS 410 permits the use by FACC of a value-added base; the Government direction to change to a total cost base constitutes a change to various defense contracts; and FACC is entitled to an equitable adjustment for the increase in cost resulting from such an accounting change …FACC requests appropriate equitable adjustments in all contracts impacted by the change or, in the alternative, a final decision. FACC anticipates your response to this request within 30 days. (Id.) 76. By final decision dated 30 March 1979, the ACO denied the appellant's request for an equitable adjustment for contract-0236. His conclusions were summarized in the decision as follows (R4, tab 63): In summary, it is my final decision that FACC was in inadvertent noncompliance with CAS 410 at the time that contract DAAH01-77-C-0236 was negotiated. Because of the fact that FACC was in noncompliance at the time that the contract was negotiated, it is my decision that FACC is not entitled to an upward equitable adjustment in the basic contract price. Because of the fact that the noncompliance was inadvertent, offsets are permitted for increased costs on the basic contract to the extent that the noncompliance resulted in increase costs to other CAS contracts. Additionally, it is my decision that FACC was in deliberate noncompliance at the time that the options were renegotiated. Because of the fact that FACC renegotiated, it is my decision that FACC is not entitled to an upward equitable adjustment in the price for the option quantities as well. Because of the fact that the noncompliance was deliberate, offsets are not permitted for the increased costs on the option quantities. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 37 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… 77. The appellant appealed the ACO's final decision on 19 April 1979. (Strip. B-10; R4, tab 64) G. DETAILS CONCERNING APPELLANT'S G&A EXPENSE PRACTICES 78. Appellant has submitted excellent posthearing briefs in support of positions advocated by it in this appeal. As a result, the Board has been able to adopt in significant part appellant's proposed findings describing and analyzing the nature of its G&A expenses and the effect on appellant of alternative allocation procedures. Although the Government contests the general method, assumptions, and relevance of the analyses performed by appellant, it does not challenge the mechancial details of appellant's computations. The DCAA resident auditor at appellant's plant conceded at the hearing that he had no “reason to doubt” the accuracy of the detailed percentages and figures contained in appellant's trial exhibits discussed below (tr. 457-8). 79. The parties have stipulated that there have been no changes in appellant's underlying economic circumstances that would require use of different allocation base than appellant was required to use pursuant to CAS 410 as of 1 January 1978 (Strip. A-1). Thus, even though the accounting data discussed below pertain principally to calendar (fiscal) year 1978, the data, nevertheless, are acknowledged to be representative of a “typical accounting period” for appellant within the meanings of CAS 410 (id.). The parties also have agreed by stipulation that appellant will begin using a value-added base within two calendar years after the year in which our decision is issued if the Board finds that appellant is required or permitted by CAS 410 to use such an allocation base (Stip. A-2). 80. The parties have stipulated that the composition of the appellant's G&A expense pool, as set forth on appellant's exhibit A-5, is not in issue in this appeal (Stip. A-5). The G&A expense pool, as constituted from 1 January 1978—forward, is comprised of the following cost elements (exh. A-5): General Manager's Office Controller Controller's Office Proposal Pricing Contract Administration Financial Analysis Profit and Budget Analysis Accounting Industrial Relations Director Marketing Ford Motor Corporate Assessment Ford Aerospace Corporate Assessment State and Local Taxes Interim Pool Allocations Industrial Relations Building and Occupancy Data Systems 81. Appellant excludes from its G&A pool the accounts payable function. This function relates to the processing, auditing and payment of subcontractor and supplier invoices. (Tr. 157, 158) © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 38 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… 82. The value-added allocation base sought by appellant in this appeal includes the following significant elements (exh. A-5); Contract Labor Engineering Fabrication and Assembly Program Management Purchasing Production Control Quality Control Manufacturing Engineering and Plans New Business IR&D B&P Overhead Depreciation, Taxes, Insurance, Rents Utilities Data Systems Industrial Relations Maintenance Metrology Lab Material Administration Business Area Support Other Other Direct Costs Service Centers (Data Systems and Tech Pubs) Travel and Business Expense Overtime and Shift Premium Consultant Services Other 83. The total cost input base advocated by the Governor and currently used by appellant is comprised of the same elements included in the value-added base, plus appellant's payments to subcontractors and suppliers. (Exh. A-5) 84. Appellant's primary “in-house” activities related to its material and subcontracts (including Governmentfurnished material) are the purchasing, production control, and receiving and source inspection functions (Tr. 155, 156; exh. A-4). Costs of these functions are charged directly to contracts and are included in appellant's current and proposed G&A allocation base (finding 78) (Tr. 156; exh. A-5). The material administration function, including the Director of Material, is also included in the allocation base, as part of overhead (finding 78) (exh. A-5). © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 39 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… 85. Appellant estimated the portion of its G&A expenses in 1978, alleged to be related to material and subcontract activity, to determine the percentage of Aeronutronic's G&A management efforts and expenses directed to its “in-house” activities, in comparison to the percentages beneficially related to the material and subcontract activity of its management. (Exh. A-3; Tr. 155) Material and subcontracts activity was defined by appellant to include interaction between general management and the people in Aeronutronic, such as purchasing, production control, and receiving and source inspection, who perform the appellant's material and subcontract-related functions (Tr. 155, 156). At the hearing, appellant's top level management personnel testified as to the estimated portion of the total costs incurred and classifiable as G&A expenses by their respective offices that was attributable to material and subcontract activity. Appellant summarized the substance of its conclusions in Exhibit A-3. The exhibit, with bracketed references to the related explanatory findings infra added, provided in pertinent part (exh. A-3): G&A EXPENSES PORTION RELATED TO MATERIAL/ SUBCONTRACTS ACTIVITY & AMOUNT GENERAL MANAGER'S OFFICE [finding 86] $ 298 10% $ 30 CONTROLLER [finding 87] 149 10% 15 CONTROLLER'S OFFICE: [finding 87] PROPOSAL PRICING 855 33% 282 CONTRACT ADMINISTRATION 637 15% 96 FINANCIAL ANALYSIS 690 10% 69 PROFIT & BUDGET ANALYSIS 379 5% 19 ACCOUNTING [finding 89] 515 28% 144 INDUSTRIAL RELATIONS DIRECTOR [finding 89] 149 10% 15 MARKETING [finding 90] 1,188 5% 59 FORD MOTOR CORP ASSESSMENT [finding 91] 1,297 7% 91 FORD AEROSPACE CORP ASSESSMENT [finding 91] 2,241 2% 45 STATE AND LOCAL TAXES [finding 92] 749 26% 195 SUBTOTAL $ 9,147 $1,060 INTERIM POOL ALLOCATIONS [finding 93] INDUSTRIAL RELATIONS $ 233 10% $ 23 BUILDING & OCCUPANCY 218 10% 22 DATA SYSTEMS 550 26% 143 SUBTOTAL $1,001 $ 188 TOTAL G&A EXPENSES $10,148 12% $1,248 86. As noted, the basis for deriving the estimated portion of each constitutent cost comprising the G&A pool, alleged by appellant to be attributable to material and subcontract activity, was substantiated by the virtually unrebutted testimony of the head of the office in question. Mr. Louis Heiling, appellant's General Manager and Vice President of Ford Aerospace & Communications Corporation since 1970, testified that the 10 percent estimate stated on Exhibit A-3 for the General Manager's office represented “the maximum percentage of my © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 40 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… time that I would spend on material and subcontract related activity.” (Tr. 28) He corroborated this estimate by reviewing his daily appointment calendar for a five month period in 1982 (Tr. 31, 230). Mr. Heiling testified that the actual time spent related to materials and subcontracts would likely be closer to five percent, inclusive of program reviews, where subcontractor performance is reviewed; contact with subcontractors and approval of larger subcontracts (Tr. 28, 29, 36). He considered his percentage estimate to be “typical” throughout his twelve year tenure as General Manager at Aeronutronic (Tr. 29, 32). With respect to the remainder of his time, unrelated to materials and subcontracts activity, Mr. Heilig testifed: …my time is allocated in two broad categories; current operations and future operations. In current operations …about 30 percent of my time is spent on program review and management; about 10 percent on personnel and organization matter; about five percent on current proposal reviews; five percent in industrial and civil associations; and about 10 percent in short-range planning. So overall about 60 percent of my time is spent in current operations. In future operations, planning is about 10 percent; marketing, about 15 percent; and proposals for new business, about 10 percent, for a total of about 35 percent. (Tr. 30) The Government has not introduced evidence rebutting or impugning the validity of the assumptions, figures or conclusions used by Mr. Heiling in preparation of his estimates. We find Mr. Heilig's estimates for the General Manager's Office to be an accurate reflection of the material and subcontract related activity of that office. 87. Mr. Dampman, appellant's Controller, explained the estimates stated on Exhibit A-3 for the Controller and Controller's Office, with the exception of accounting. The Controller's Office performs the five activities noted on Exhibit A-3 supra, i.e., proposal pricing, contract administration, financial analysis, profit and budget analysis, and accounting. The amount expended by appellant in connection with each of these activities in 1978 also are set forth in the exhibit. To prepare the estimates, Mr. Dampman requested that the functional manager of each activity estimate the percentage of time related to material and subcontract activity. The estimates were judgmental, point-in-time approximations that were prepared by managers who had worked in appellant's organization over a number of years. Several different points-in-time were used by each manager in deriving the estimate for the activity involved, however, the estimates developed did not differ significantly. The estimate derived was asserted by Mr. Dampman to be accurate within a possible variance or tolerance span of 9 to 10% ofthe percentage figure stated on Exhibit A-3. For example, instead of the 33% estimate for proposal pricing, the actual material and subcontract related activity could have been anywhere from 29-30% to 36-37%. Mr. Dampman also detailed the types of tasks performed in connection with each of the five broad activities. The proposal pricing activity involves the pricing of all Government and commercial contracts. Approximately 33% of the effort involved in proposal pricing is related to material and subcontract activity. Although this effort often includes pulling together vendor prices to develop a final price, there is no direct contact between proposal pricing personnel and suppliers. Instead proposal pricing obtains needed vendor information through appellant's separate Material Directorate. The costs of this Material Directorate are charged to contracts as part of appellant's overhead and are not classified as G&A expenses (see finding 78). With respect to the contract administration function, only prime contract administration, not subcontract administration is involved. Again, the material Directorate has responsibility in appellant's organization for subcontract administration. However, the 5% estimate recognizes that some assistance is given to the Material Directorate by the Controller's Office contract administration personnel. The financial analysis function also is concerned primarily with controlling, budgeting and monitoring the in-house effort. The principal control over subcontract expenditures is exercised by the Material Directorate, although the financial status of subcontractor activity is reviewed monthly by financial analysis personnel in the Controller's Office. The profit and budget analysis department administers appellant's capital budget and is involved only marginally with procurement activity. The estimates developed by Mr. Dampman and set forth on appellant's Exhibit A-3 have not significantly been challenged or rebutted by the Government. We find them to be an accurate reflection of the material and subcontract related activity at the above-described activities of the Controller's Office. (Tr. 66-9, 71-4) © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 41 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… 88. Mr. Ryan, appellant's Manager for Operations and General Accounting, explained the 28% estimate for Accounting on Exhibit A-3. In deriving the estimate, Mr. Ryan reviewed the functions of the 39 people under his supervision during 1978. Of the total of 39 employees, 14 were in accounts payable functions. Since accounts payable related costs were separately allocated and were not part of G&A, these 14 employees first were excluded and only the responsibilities of the remaining 25 employees considered. As to the remaining 25 employees, Mr. Ryan estimated the number of employees or fraction of each employee's work that in any way involved tasks related to accounting for material and subcontract transactions. He then added the results for each employee to determine that a total of 7 (or 28%, i.e., 7 divided by 25) were involved in material and subcontract activity. The remaining 18 employees performed work related primarily to labor and payroll as well as e.g., accounting for fixed assets, plant and equipment. The results estimated by Mr. Ryan have not been impeached substantively by the Government. Accordingly, we find his estimate of 28% to be an accurate representation of the degree to which the work of the According Department relates to material and subcontract activity. (Tr. 213-19) 89. Mr. Thomas Morrissey served as Directory of Industrial Relations for Aeronutronic from 1970 to 1981. (Tr. 106, 107) He described the primary functions of industrial relations to be the recruitment and placement of employees, benefits administration, labor relations, employee services, and employee relations (Tr. 107). As Director, Mr. Morrissey was responsible for the overall direction of those activities and policy decisions (id.). According to Mr. Morrissey, the only relationship industrial relations had with material and subcontracts was to provide the industrial relations service described above for the benefit of Aeronutronic offices and personnel involved in material and subcontract activity, for the clerical level through the subcontract administrators, buyers, production control personnel, and receiving personnel (Tr. 108). Accordingly, he based the 10 percent estimate for industrial relations shown on Exhibit A-3 on the proportion of those people serviced by Industrial Relations that served in materials and subcontracts functions, in relation to the total Division population (Tr. 108, 109). Mr. Morrissey also testified that persons involved with materials and subcontracts probably occasioned a lesser expenditure of his time than did employees in engineering (Tr. 110). There is no basis in the record that warrants our finding Mr. Morrissey's percentage estimate to be inaccurate. Thus we find it to be representative of the material and subcontract related activity of the Industrial Relations Director. 90. Mr. John L. Ruby served as Director of Marketing for Aeronutronic from May 1976 through May 1978. (Tr. 113) The marketing office is responsible to the division General Manager for the initiation, coordination, and support of the division's new business and follow-on business activities. (Id.) Included in its charter are identification of new business and follow-on business opportunities, the collection and dissemination of marketing information, and the overall marketing plans for the division. (Tr. 114) Mr. Ruby stated marketing “differs perhaps from some of the other general management of the Division, in that it is more involved with new business activities as opposed to the day-to-day operations.” (Id.) Nonetheless, marketing is involved with appellant's current business, through program reviews, continuing coordination with program managers, interface with engineering, and involvement “to a reasonabledegree” in IR&D and B&P activities. (Tr. 115) Mr. Ruby recalled that “only on a very few occasions would the marketing office or myself have any direct relationship with vendors or subcontracts.” (Id.) Accordingly, he estimated from one percent to a conservative maximum of no more than five percent of the marketing activity related to materials and subcontracts. (Tr. 116) We find that Mr. Ruby's 5% estimate accurately represents the material and subcontract related activity of appellant's marketing office. 91. The Ford Motor Company (FMC) corporate office assessment represents an allocation for the services provided by the parent company, and in particular by several functional staffs at corporate headquarters such as the industrial relations staff, supply staff, finance staff, and legal staff. (Tr. 15) A similar assessment is made for services provided by Ford Aerospace. (Id.) Both assessments are allocated to Aeronutronic on the basis of the three-part formula of CAS 403. (Id.) The only staff at FMC that deals with material and subcontracts activity is their supply staff which accounts for 7% of the Ford Motor assessment. Similarly, the only evidence of record concerning the degree of FACC's involvement in material and subcontract activity is that it “was © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 42 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… almost nonexistent” (Tr. 162). We have no basis in the record to disbelieve the 7% and 2% estimates offered by appellant.[1] (Tr. 161-2) 92. State and local taxes likewise are allocated to Aeronutronic on the basis of the three-part formula of CAS 403 (Tr. 162). The 26 percent estimate for taxes stated on Exhibit A-3 also was explained by Mr. Ryan (Tr. 163-4): Essentially on the three-part formula you have three factors; one for payroll, one for sales and one for assets. The three are weighed equally. With respect to assets there are two classes of assets, inventories and fixed assets or capital assets. So we broke that category down farther into—gave it an equal weighting of on sixth each. So we have payroll at one third, sales at one third, inventories at one sixth and fixed assets at one sixth. Then we analyzed each element as it related to materials and subcontracts. With respect to payroll, they're responsible for paying the employees at Aeronutronic Division. The number of employees at Aeronutronic Division that are related to the materials and subcontracts activities is about 10 percent, so we used 10 percent for payroll. With respect to sales, we started with a sales base of 100 percent, if you will, removed 10 percent as a profit margin, which left us a 90 percent base for cost, and said about half of the cost base is materials and subcontracts so, therefore, half of the 90 percent or 45 percent was assigned to sales. With respect to inventories, again, we said inventories were about half materials and subcontracts, so we used 50 percent for inventories. With respect to fixed assets, we assigned zero. Now, if you take a weighted average by multiplying one third times 10 percent, you arrive at three percent. One third for sales times 45 percent, you get 15 percent. One sixth times 50 percent for inventories gives you eight percent. One sixth of the zero assigned to fixed assets gives you zero. Adding up the three, the fifteen and the eight, you arrive at 26 percent. We find the 26% estimated by appellant to reflect accurately the relationship of this cost to appellant's material and subcontract activity. 93. Appellant maintains three “interim pools,” portions of which eventually are allocated to the G&A pool for final allocation to cost objectives. In the case of allocation of the costs of industrial relations activities (other than the cost of the Industrial Relations Director discussed in finding 85, above) and buildings and occupancy from the related interim pools a head count base for allocation is used. That is, the percent allocated to G&A is the ratio of the total head count in the G&A pool to the total division head count. Of the amount of industrial relations and building and occupancy costs allocated from the interim pools to G&A, the percentage of the expenses related to material and subcontract activity also was determined by head count. Of the amount of industrial relations and building and occupancy costs allocated from the interim pools to G&A, the percentage of the expenses related to material and subcontract activity also was determined by head count. Specifically, appellant estimated that 10% of the personnel at Aeronutronic performed material and subcontract functions. Thus, 10% of the cost allocated to G&A from the interim industrial relations and building and occupancy pools were estimated to relate to material and subcontract activity. The portion of the data systems interim pool apportioned to G&A was allocated on the basis of usage. The portion if this cost related to material and subcontract activity was estimated by Mr. Ryan to be 16% on the basis of relative usage. Absent any evidence to the contrary, we find that these percentages accurately reflect the material and subcontract related portion of G&A costs allocated from interim pools. (Tr. 164-5, 211) © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 43 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… 94. Based on its prepared estimates, the appellant determined that approximately 12 percent, or $1.2 million, of Aeronutronic's G&A expenses for calendar year 1978 related to material and subcontract activities. (Tr. 165, 166; exh. A-3) Basedon this record, the above analysis, and the opinions of appellant's expert supporting our conclusion (see findings 101 and 102, infra), we find that Aeronutronic's G&A expenses are strongly related to inhouse activities, and only marginally related to materials and subcontracts activities (Tr. 166). 95. The appellant also prepared an analysis of the portion of a value added base related to materials and subcontract activities for calendar year 1978 (exh. A-6). This was compared with the portion of the total cost input base advocated by the Government attributable to materials and subcontract-related activities. As depicted on appellant's Exhibit A-6 and as noted above, the cost of the principal “in-house” materials and subcontractsrelated activity within the Division (purchasing, production control, and receiving an source inspection) already are included in the value-added base and total $10.7 million, or 10 percent, of a total value-added base. (Id.; Tr. 168) As shown below, addition of payment to suppliers and subcontractors to derive the total cost input base increase the total to $88.3 million, or 49 percent of a total cost input base. (Ibid.) The assignment of costs by Division activity using each base is depicted as follows: Value Added Base Total Cost Input Base Costs in Allocation Base Activity as % of Total Costs in Allocation Base Activity as % of Total Division & Supplier Activity Related to Materials and Subs $10.7 10% $88.3 49% Engineering $56.0 55% 56.0 31% Manufacturing $29.6 29% $29.6 17% Program Management $5.9 6% $5.9 3% [Emphasis added] 96. The use of appellant's proposed value-added base, as set forth in finding 95, supports a conclusion that 10% of general management expenses are related to or “benefit” material and subcontract activity. Alternatively, use of the total cost input base implies that 49% of general management expenses are related to or benefit material and subcontract activity. Based on this analysis and the supporting testimony of appellant's experts (findings 101 and 102), we conclude that use of a total cost input base would indicate incorrectly that Aeronutronic general management allocates a greater percentage of time, or “benefit,” to material and subcontract related activity than to both engineering and manufacturing activity combined. (exh. A-6; Tr. 171, 220) This exhibit also indicates that use of a value-added base results in an approximately $1.2 million, the allocation of approximately $1.0 million of G&A expense using a value-added base—as opposed to an allocation over four times that amount with use of a total cost input base—best approximates the G&A “benefits received” by final cost objectives and therefore most accurately assigns G&A expense to contract. (Tr. 172, 173) The appellant's contracts fall into two major categories: (1) production and spares and (2) engineering and development (exh. A-7; Tr. 30, 31, 44, 173-175). The material and subcontract content of each contract class, as a percentage of total cost input for calendar years 1975-1978 and 1981 is as follows (exh. A-7): Material/Subs as % of ICI Production & Spares Development & Engineering 1975 57% 30% 1976 53% 29% 1977 52% 37% 1978 50% 34% © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 44 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… 1981 51% 34% 98. The above exhibit illustrates that the two types of appellant's contracts are not homogenous insofar as their material and subcontract content is concerned. Aeronutronic general management effort is focused more heavily on the engineering-development work than its production contracts, since the engineering-development contracts are the “front end of [appellant's] business”, and its production contracts result from prior engineeringdevelopment contracts (Tr. 31,44, 47, 128-9). We find that the presence of the disproportionate material and subcontract pattern between the two classes of Aeronutronic contracts, together with the “in-house” focus of Aeronutronic G&A management effort and expense, results in a proportionally greater allocation of G&A expense to material-intensive contracts with use of a total cost input base and, therefore, distorts G&A allocations in relation to benefits received (Tr. 175). 99. Based on Amendment 1 to W.G. 78-21 (finding 27), the DCAA resident auditorinvestigated into the ratio of material and subcontract content to total cost input of each of appellant's calendar year 1980 contract pricing proposals received by DCAA, to determine if there was any “clustering” of material and subcontract content (outside the 20 to 70% range suggested in the amendment. (Tr. 429-438; exh. G-1) He stated he found a wide range of material and subcontract content among these proposals, from less than one percent to as much as 97 percent, with an average of 60 percent for the year. The auditor concluded there was no “clustering” warranting use of a value-added base. (Tr. 431, 434; exh. G-1) An analysis of material and subcontract costs related to total cost input for “selected” contracts having total cost input exceeding $3 million for calendar years 1978 through 1980 also was made by the resident auditor. The auditor's central conclusion was that the cost data “shows a consistently wide range of material and subcontract content among contracts. There are no material and subcontract percentages by contract clustered at the extremes of the material content ranges. Therefore, the precondition for significant distortion is not present.” (exh. G-2, Tr. 436-438) H. EXPERT TESTIMONY 100. Both parties submitted pretrial expert testimony with further examination of the experts conducted at the hearing. The appellant offered as experts Mr. Alan E. Peterson and Mr. Herbert D. Goodwin. Mr. Fred J. Newton and Mr. Clark Adams provided expert testimony for the Government. Important opinions of these experts are detailed below. 101. Mr. Alan E. Peterson is the founder and managing partner of Peterson and Company, consultants and accountants, Chicago, Illinois. Prior to founding his firm in 1980, Mr. Peterson was a partner in the international accounting firm of Arthur Anderson and Company for 23 years where he specialized in Government contracts accounting. Mr. Peterson is a licensed CPA in Illinois and several other states. Opinions stated in his testimony include the following: a. When materials and subcontract costs are included in the allocation base, those contracts with higher material content generally absorb proportionately more general and administrative expense than more labor intensive contracts. This is true even though the actual general and administrative benefits to contracts may be relatively unaffected by the percentage of their material content. Stated alternatively, inclusion of materials and subcontract costs in the allocation base suggests that general and administrative efforts are expended at the same rate dollar for dollar between supervision of in-house work and out-of-house work i.e., material and subcontractor related activities. (exh. A-11 at 45-6, 73-4) b. In this case it is a distortion of benefit and effort allocations at Aeronautics to use the total cost input allocation base that includes material and subcontract costs. Appellant's value-added method produces more accurate general and administrative expense allocations to contracts. Aeronutronic's value-added method produces allocation base-driven results more representative of the division's total activities. Moreover, Aeronutronic's value-added method produces allocation results which are far more in line with beneficial relationships among contracts and among programs than does the total cost input method. Therefore, Aeronutronic was, as of 1978, and currently is required by CAS 410 to use the value-added cost input allocation base in the division's particular circumstances. In addition, in Aeronutronic's circumstances, the total cost input method of allocating G&A © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 45 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… expenses produces great distortion of expenses allocated to contracts due to the disproportionate influence of material and subcontract costs. (exh. A-11 at 73-4, 80) The specific reasons why significant distortion is created by use of the total cost input base and why use of the value-added base best represents appellant's total activity include the following: (1) Aeronutronic's general and administrative expense pool does not contain significant procurement-related activity and effort. Virtually all material and subcontract related costs, except top management, have been removed from the pool and are allocated more directly to contract. By removing purchasing-related functions from the G&A expense pool, the incidence of G&A effort concerned with procurement-related activities becomes limited to more general supervision. The general and administrative “benefit” related to such activities is properly represented and accounted for, since the division's procurement activities are included in the value-added base and thus they receive their pro rate share of G&A expense. In this regard, it was the witness's opinion that there were many companies who had a much greater proportion of material-related costs in their G&A expense pools. (exh. A-11 at 70, 97; Tr. 313) (2) Aeronutronic's major G&A efforts are directed toward in-house activities in the allocation base and are only modestly directed toward procurement activities. Use of the total cost input base where, as at Aeronutronic, material and subcontractor related efforts of the general and administrative management are limited, and where the G&A effort is heavily focused on “in-house” activity, will produce distortions in allocations of G&A expenses to contracts. Where the contractor's G&A effort is heavily directed to its own “in-house” activities, inclusion of material and subcontract costs expended by the contractor generally is not representative of that contractor's “total activity” for purposes of CAS 410 allocations. (Exh. A-11 at 45-6, 61, 70-71, 81) (3) Material-intensive work exists side by side with labor-intensive work at Aeronutronic in varying proportions from contract to contract. In particular, Aeronutronics' engineering/development contracts are largely laborintensive. Such contracts require as well as receive general administrative attention and hence “benefit” in reasonableproportion to the value added effort. Many of the labor-intensive contracts at Aeronutronic represent the “tip-of-the-iceberg” of future production backlog. Therefore, those labor-intensive contracts receive considerable top management effort and benefit. The division's value-added method is representative of that activity, and it reflects relative benefits effectively. Because there is disparate material content among contracts as well as between classes of the contracts, G&A allocations to appellant's contracts using a total cost input base would distort the allocation. This is because, at Aeronutronic, very little G&A management effort is actually directed to the out-of-house administrative effort. Instead, appellants material and contract related activity primarily is handled elsewhere and is either direct charged to appropriate contracts or allocated more directly through overhead which is already in the Division's value-added allocation base. (exh. A-11 at 68, 71-74) c. Mr. Peterson supervised the preparation of certain additional trial exhibits which are based on the same data analyzed and discussed in section G of the findings above except that they conservatively postulate a broader estimated range of 6% to 15% ($700,000 to $1,600,000) of total G&A expense to Aeronutronic material and subcontract-related activities. Based on his analysis, Mr. Peterson observed “the Total Cost Input Method says, in essence, that about half, or $5,000,000 of the Aeronutronic [G&A] expense pool supervises or otherwise benefits procurement.” The value-added method, on the other hand, results in assignment of $1 million of G&A expense to material and subcontract related activities, i.e., an amount which much more closely approximates the 6% to 15% range of G&A benefit postulated by Mr. Peterson (exh. A-11 at 76-82; exhs. P-6, A-12). d. The concept of benefit is present in Government contract pricing to further full costing and to avoid undue tracing requirements for jointly caused costs. But this does not suggest that there is no meaningful beneficial relationship between G&A expenses and contracts. Investigation of the efforts of persons in the G&A expense pool, as well as the nature of G&A expenses, may disclose some costs that are fairly directly caused by contractor program. However, more often, G&A expenses are jointly caused. Nonetheless, most often there is good correlation of those efforts and their causes with underlying contract work. Of course, these correlations would not be perfect nor will they generate close-tolerance statistical results. But they are significant. CAS 410 indicates that allocations of G&A expenses to contracts should be based © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 46 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… on “their beneficial or causal relationship.” In this appeal, the word “beneficial” is more relevant because the benefit from G&A expenses to contracts is reasonably demonstrable. Causal relationships for many general and administrative expenses are hard to demonstrate, since the premise of a causal relationship in the sense of contract-by-contract cost determination is that elements in the allocation base generate expense in the pool. While no directly traceable relationship between any one contract and the G&A expense pool is identifiable, a broad analysis of “beneficial relationships” in determining the allocation method to use is nonetheless feasible, appropriate, and consistent with the language and requirements of CAS 410. CAS 410 requires a reasonable judgment about the relative benefits contracts receive from the contractor's general and administrative expense pool. The Standard does not require, for each day or each hour of contract performance, a close statistical measurement of where effort or cost in the G&A pool creates direct and clearly traceable benefits to contracts. Only reasonable benefit need be shown to meet the requirements oof CAS 410. To comply with CAS 410, it is essential in evaluating individual company circumstances to examine the nature of the expenses being allocated, the activities represented in the allocation base being considered, and the resulting allocation. (exh. A-11 at 18-19, 49-50, exh. P-3 at p. 12; Tr. 241) e. The techniques employed by Aeronutronic to estimate beneficial relationships between G&A and cost objectives and to evaluate “significant distortion” were evaluated by Mr. Peterson and others of his accounting firm. Mr. Peterson concluded that Aeronutronic estimates are ‘reasonable, well prepared, defensible, highly useful for the purposes of this hearing and, I believe, accurate under the circumstances.” (Tr. 270) It is both necessary and appropriate to determine whether or not distortion exists for purposes of CAS 410 and to assess, by reasonable estimates, as did appellant, the nature and focus of general and administrative effort and activity as between “in-house” and “out-of-house” functions. In this regard, the test for “significant distortion” with use of a total cost input base is an “internal” test, i.e., a test based on individual company circumstances, rather than an “external” test involving comparisons between or among contractors. The preparation of detailed time records or other contemporaneous, manually prepared records that would show time expenditures of top-level Aeronutronic personnel on a daily basis would be highly impractical. Moreover, other possible approaches, such as pricing of G&A effort, have “a wider range of error and probably wouldn't have been as informative for the purposes of this appeal.” (Tr. 316) (exh. A-11, at pp. 19, 109; Tr. 269) f. At the very least, Aeronutronic is permitted by CAS 410 use their value-added cost input allocation base. Any one of the three bases specified in CAS 410 may be selected so long as it comports with the governing criterion of representing a contractor's total activity and leads to allocation having a reasonable beneficial relationship among contracts, programs and time periods. The requirement in CAS 410.50(d)(2) to use the value-added method in thespecified circumstances does not preclude use of that method in the absence of those stated circumstances so long as the value-added method otherwise best represents the contractor's total activity in relation to benefits received. (exh. A-11 at p. 17) g. The Cost Accounting Standards Board's regulations at 4 CFR §331.20 (finding 29) recognize that contractors encounter fluctuations in the labor and material content of their contracts and indirectly illustrate the accuracy advantage of using a value-added base in the presence of such fluctuations. (exh. A-11 at p. 75) h. The total cost input base would be most appropriate for “contractors with relatively homogenous cost patterns, that is, relatively constant proportions of material and subcontracts content among the contracts, with similarly relatively constant proportions of labor, with no Government-furnished material or drop shipments and where the contractor's general and Administrative effort is directed proportionately among contracts…” (exh. A-11 at pp. 43-44) That base is described in CAS 410 as “generally acceptable,” among other things because it “is sometimes quite acceptable as an allocation method 1) where the contractor is small and not sophisticated, 2) for some contractors where purchasing management and similar effort is pointed heavily toward materials and subcontracts and 3) where the cost patterns are quite consistent and homogenous.” (exh. A-11 at p. 47) i. The phrase “generally acceptable” in CAS §410.50(d)(1) does not state a preference for use of that base. Such a “preference” is without basis in the standard itself, its history or its preamble. CAS 410 expressly identified three cost input allocation bases, any one of which the contractor may select provided that the base best © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 47 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… represents the total activity of the particular business and the resulting allocations to contracts based on a causal or beneficial relationships. The contractor is not required by CAS 410 first to demonstrate that its use of total cost input would result in an inappropriate allocation. The total activity of the business unit must be judged on the basis of the circumstances of that individual business unit. (exh. A-11 at pp. 34, 117-120; tr. 244, 262-3) 102. Mr. Herbert B. Goodwin is the director of the Government Contracts Group in the Washington, D.C. Management Consulting Unit of Coopers and Lybrand, an international accounting and consulting firm. Immediately prior to joining Coopers and Lybrand in 1980, he served as Director of the Financial Analysis Division for the Department of Energy and as its Chief of Contract Finance. From July 1971 to March 1976, Mr. Goodwin was Chairman of the Department of Defense ASPR Section XV, Part 2, Cost Principles Subcommittee, and was also the Defense Contract Audit Agency representative on that subcommittee. Among other things, this Subcommittee formulated the Department of Defense position on proposed Cost Accounting Standards, including CAS 410. From February 1970 to July 1971, Mr. Goodwin was the Chief of the Policy Formulation Branch at Defense Contract Audit Agency Headquarters, and from 1953 to 1970 held several positions within that Agency. Among the opinions expressed in Mr. Goodwin's testimony were the following: a. Aeronutronic is required or at least permitted by CAS 410 to use the value-added allocation base. It is required to use the value-added base pursuant to the provisions of CAS 410.50(d) because that base best represents Aeronutronic's total business activities in its particular circumstances. Aeronutronic is also required by CAS 410.50(d)(2) to use the value-added base because the inclusion of material and subcontract costs significantly distorts the allocation of G&A expense in relation to the benefits received. Additionally, costs other than direct labor are significant measures of Aeronutronic's total activities. The reasons that the inclusion of material and subcontract costs distorts the G&A expense allocation at Aeronutronic are that (1) the nature of Aeronutronic's operation is not homogenous, and (2) G&A management effort is devoted almost entirely to in-house activities and not to external activities, i.e., the activities related to the subcontractors and material suppliers. (exh. A-13 at pp. 38, 41-42) 1. Aeronutric's operations are not homogeneous. Instead they are quite disparate in character. This lack of operational homogenity is evidenced by the disproportionate cost patterns that have been experienced throughout the period under consideration. Specifically, Aeronutronics operational mix basically is comprised of production contracts, normally fixied-price in nature, advanced development contracts and engineering contracts. The production contracts require the incurrence of very significant subcontract and material costs in most instances. The incurrence of high subcontracting and material costs in connection with its production contracts occurs because Aeronutronic is, to a substantial extent, a systems integrator. As such, subcontractors account for the production of a major portion of the end items. When subcontractors deliver, Aeronutronic basically assembles a completed item which it then ships to the Government. (exh. A-13, at p. 42; tr. 388-9) 2. A major thrust of Aeronutronic's G&A management effort is internal. It is directed toward the accomplishment of in-house activity, rather than dealing with major subcontractors and material suppliers. The incidence of Aeronutronic's G&A effort toward subcontract and material related functions approximates 12% of total G&A expense. Contributing in no small measure to the factor of 12% is the fact that the expense pool in this case does not include many of those material and subcontract related expenses commonly found in most G&A pools, such as purchasing, accountspayable, etc. These latter types of expenses are either charged directly to final cost objectives, or to manufacturing or engineering overhead. Whereas here, the contractor's general and administrative effort is heavily directly to its own in-house activities, the inclusion of material and subcontract costs expended by the contractor generally will not be representative of that contractor's “total activity” for purpose of CAS 410 allocations. Where disproportionate cost patterns exist and G&A management effort is heavily oriented to “in-house” activities as in the case of Aeronutronic, subcontract and material costs will not be truly reflective of business activities. Nor will they realistically measure the G&A management effort that is required to be devoted to subcontracts and material activities. Therefore, if a total cost input base is used to allocate G&A expense under the circumstances of this case, material-intensive contracts would absorb an inordinate share of the expense. This inordinate share would be far out of proportion to the cost of G&A effort © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 48 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… actually expended on subcontract and material-related activities. The evidence in this case demontrates that for a typical year about $1.2 million of appellant's G&A expenses are applicable to subcontract and material activity. However, the contractor's trial exhibits (discussed above) indicate that allocation of G&A expenses to final cost objectives on the total cost input base would assign about $5 million in G&A to subcontract and material-related functions. This latter amount is totally out of proportion to the value of the services rendered or to the benefits received by final cost objectives. Conversely, by using a value added base, the resulting figure of $1 million is much more representative of the causal or beneficial relationship that exists between G&A expense and final cost objectives. (exh. A-13 at pp. 24-26, 45-47, 49) b. Appellant's circumstances reflect a chronic condition for significant distortion with inclusion of material and subcontract costs in a total cost input allocation base. Disproportionate material and subcontract content of final cost objections was cited frequently by commentators asked to review the various drafts of CAS 410 in connection with commenting on the use of the value-added base. It is a well recognized condition warranting use of a value-added base. In fact, the Defense Contract Audit Manual ¶4-305.4(f) (see finding 32) provides that direct labor costs plus manufacturing overhead, which is essentially a value-added base, may be an acceptable basis for allocaton of G&A expenses when the extent of subcontracting is disproportionate among major areas of the contractor's business (exh. A-13 at 24-25, 44) c. From a practical point of view there will always be a certain amount of distortion in even the best G&A expense allocation procedure. What CAS 410 seeks to achieve is to establish criteria that will result in the selection of an allocation method which will not necessarily yield the ultimate theoretical result, but will result in the least amount of distortion. (exh. A-13 at p. 41) d. Selection of any one of the three permissible cost input bases will provide an equitable distribution of G&A expense where the cost mix of the contractor's operation, i.e., the various significant cost elements involved in the contractor's activity (such as materials, subcontracts, direct labor costs, and overhead) is proportionately the same in all contracts or final cost objectives, and where the G&A resources are directed proportionately to the activities represented by the significant cost elements included in those final cost objectives. In essence, any of the three permissible bases will produce an equitable allocation if the contractor's operation is “homogenous”. The Board's statement in §410.50(d) is “predicated on the proposition that contractor operations are essentially homogenous in nature …[and] where you have a homogenous operation, it usually follows that the cost patterns in the various cost objectives in contracts generally will be proportionally similar, with G&A effort expended on contracts usually flowing in proportion to costs.” (exh. A-13 at pp. 16-17, 22) e. The term “total activity” means the production of goods and services during the cost accounting period as stated in the prefatory comments to CAS 410. “To the extent that the allocation base truly represents a particular contractor's total activity within the meaning of CAS 410, then it will provide an equitable method of allocating the G&A expense to a contractor's activity based on the beneficial or causal relationship. The ultimate test, then, of whether a cost input base represents total activity in a given set of circumstances, is whether that base results in allocations of G&A expenses to contracts based on their beneficial or causal relationship.” (exh. A-13 at p. 15) The Government position equates total activity with total cost. “The logical extension of this erroneous proposition would be effectively to outlaw the use of any allocation base other than total cost input, notwithstanding the entirely appropriate provision in the standard authorizing any one of three allocations that best represent total activities. Although the [audit report is qualified] to the effect that total cost input is the appropriate base ‘under normal circumstances’, [it] does not define what the term means, particularly within the context of the Standard.” (exh. A-13 at p. 54) f. Key accounting principles that were generally recognized prior to its promulgation are retained in the Standard. CAS 410 is not predicated on entirely new principles insofar as selection of an allocation base from among any of the identified cost input methods is concerned. (exh. A-13 at p. 51) g. The audit report recognizes that the valueadded base is significantly disproportionate between Government engineering type contracts andcommercial and Government production type contracts, and, as a result, Government contracts with substantial amounts of engineering effort allegedly participate in an “inequitable” © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 49 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… portion of G&A. “[It] further notes that government contracts would have been charged with $1.4 Million less in G&A expense in calendar year 1975, had a total cost input base been used, rather than value-added …. [T]his cost saving factor is not a criterion of CAS 410 …. [T]he auditor's primary motivation in opting for the total cost input base was the fact that it would reduce Government contract costs to the extent of the previously mentioned $1.4 million.” (exh. A-13, at pp. 52-3) The test of distortion, as set forth in CAS 410.50(d)(2), requires the contractor to make reasonable judgments of the G&A services rendered. Aeronutronic developed and produced data at the time predicated on reasonable judgmental estimates that illustrated that use for the total cost input base would result in distribution of G&A expense to final cost objectives totally disproportionate to the value of the services furnished. However, the auditors summarily rejected such data on two grounds: (1) if a beneficial or causal relationship can be established, then these are not G&A expenses; and, (2) the data are not subject to audit verification. In this regard, “[t]he auditor creates a ‘catch 22’ situation, because, while the Standard requires a determination of distortion which, in turn, entails the development of cost comparisons, the auditor, in effect, takes the position that if creditable cost data indicative of the value of services furnished is developed, albeit on a gross basis, then the expenses are not G&A in nature.” (exh. A-13 at pp. 56-7). The auditor's contention that cost data indicative of the distortion in G&A expense distribution should be ignored because it is not subject to audit verification is inappropriate since it “loses sight of the fact that we are dealing with G&A type expense, executive level in nature, to a very great extent, and that it is generally accepted accounting practice not to attempt to maintain detailed time keeping and related records tracing such expenditures to final cost objectives. It is simply impracticable and economically unfeasible to attempt to do this—which, of course, is the reason that we have indirect expense allocation procedures. In my judgment, the auditor's defense ‘not subject to audit verification’ is arbitrary, unrealistic, and not in keeping with generally accepted accounting practices.” (exh. A-13 at p. 59) h. The value-added method permissibly could be used even in the absence of the significant distortion circumstances stated in CAS 410.50(d)(2). (exh. A-13 at p. 26) 103. At the time of the hearing in this appeal, Mr. Fred J. Newton, was the Deputy Assistant Director for Policy and Plans at the Defense Contract Audit Agency Headquarters. From 1978 to 1981 he was the Chief of that agency's Cost Accounting Standards Division and represented DCAA on the DOD CAS Working Group during the development of guidance on CAS 410. Opinions stated by Mr. Newton included the following: a. The term total activity refers to the production of goods and services and means “everything operating, functioning, or serving to effectively accomplish the performance of the business unit's final cost objectives. Examples are raw materials which serve to form the physical substance of the product, subcontracts which must fit into the plan and design, assemblers who must put the pieces together, facilities which must protect and aid the organization of performance, and supervisors who must guide the melding of materials and labor into a finished product.” (exh. G-6 at lines 125-132) In this regard, “no differentiation is intended between work done within a contractor's plans and work performed elsewhere under the contractor's control. Production of goods and services require all elements of input: material, labor, and indirect expenses.” (exh. G-6 at lines 229-233) “If the Board intended that activity be confined to direct labor and overhead, its statement that total cost input is generally representative of total activity would not be accurate.” (exh. G-6 at lines 204-207) “The Appellant as a prime contractor is responsible for total performance of its contracts. That responsibility involves planning, scheduling, and other management concerns for all aspects of performance.” (exh. G-6 at line 322-324) b. “The CAS Board has in effect selected cost input as a surrogate for the total activity involved in producing goods and services. The surrogate may be described as those costs flowing through the contractor's system which bear a reasonable relationship to everything involved in performing contracts and subcontracts. Since it is merely a surrogate, cost input cannot be expected to follow an ideal relationship between the expense pool and all elements of the allocation base.” (exh. G-6 at lines 260-266) “Since total cost input is generally acceptable in representing the relationship between the flow of costs and activity, it is a logical base line from which to start in analyzing distortion; the test being whether performance elements have unsual characteristics bearing on the relationship of their recorded costs and their contribution to producing goods and services.” (exh. G-6 at lines 293-298) “The CAS Board's conclusion that total cost input generally is representative of total activity © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 50 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… reflects the normal environment of defense contractors. Production of various products and performance of a variety of services are routine circumstances. The variance and levels of types of costs, e.g., labor, material, and subcontracts, merely reflects the variance in types of activity.” (exh. G-6 at lines 212-217) c. In this appeal no significant distortion results from the use of a total cost input base because “The Appellant's activity required in performing contractual obligations includes integrating majorcomponents supplied by subcontractors, CAS 410 requires that the cost input base selected be the one which best represents total activity. Excluding material and subcontract cost input from the allocation base would result in a failure to allocate a proportionate share of G&A expenses to that significant part of the Appellant's activity.” (exh. G-6 at lines 367-373) d. The full-costing concept, that requires allocation of all G&A expenses to final cost objective despite their treatment as period costs for financial reporting purposes “conveys a strong connotation that allocations of G&A expenses …are expected to be based on a measure representing everything involved in performing those final cost objectives.” (exh. G-6 lines 195-98) e. “Those general administration and management functions required to assure accomplishment of business unit objective as a whole are required by CAS 410 to be accumulated by G&A expense pool and allocated to total activity. If the functions can be related directly, to either labor or materials, or to any other direct or intermediate categorization, the functions do not meet the CAS 410 definition of G&A” and should be excluded from G&A to the extent practical. (exh. G-6 lines 396-401). f. “[A]nalysis of the cost breakdown of the Appellant's 1980 contract pricing proposals [finding 99] shows a dispersion of material content with no particular cluster groupings. The nature of the purchases and their contribution to contractual performance appears to be similar to that of the labor involved. In other words, supervision, control and other indirect functions are required to assure that vendors and subcontractors meet schedules and other requirements. These functions are included in the material administration overhead. Similarly, supervision, control, and other indirect functions are required to assure that direct labor personnel accomplish their tasks properly and are included in overhead accounts. Whether more or less supervisory activity is needed for material or labor will be reflected in the amount of related overhead incurred. A difference in the level of material or labor cost input merely reflects a difference in the type of activity required to produce the goods or services called for in the contracts.” (exh. G-6 at lines 378-391). 104. Mr. Clark G. Adams is Director of the Cost Accounting Standards Monitoring Group at the General Accounting Office. He assumed this position in October 1980. Between 1971 and October 1980 he was a Project Director on the staff of the Cost Accounting Standards Board. Opinions expressed in his testimony are summarized below: a. “Of course, Ford Aerospace has material and subcontract costs. Most major defense contractors also have such costs. It only stands to reason that part of this business unit's activity is managing the functions that those costs represent. These costs at Ford are not so disproportionate or significant that the use of a total cost input base would be distortive.” (exh. G-5 at p. 15) b. Uniformity would be sacrificed if a company such as appellant were permitted to adopt a value-added base. (exh. G-5 at p. 15) c. “Based on my knowledge and experience in this area, I cannot quarrel with WG 78-21's recognition of the fact that the alternate cost input bases, namely value-added and single element are appropriate for use in but very limited circumstances.” (exh. G-6 at p. 12) d. “[Appellant] is a company that does not differ greatly, if at all, from the norm. To allow use of the value-added base under its circumstances, would in essence turn the Standard on its head. Value-added cost input base would become the generally acceptable base and only those companies with virtually no material or subcontract costs would use total cost input. This certainly is not the intent of the Standard as is clear from the history of its promulgation and the plain meaning of its language.” (exh. G-6 at p. 16) © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 51 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… e. Use of any of the allocation bases described in CAS 410 will achieve full costing of cost objectives. (Tr. 479-80) II. DECISION Three sets of issues are involved in this appeal: A. What factors and considerations govern the choice of the allocation base under Cost Accounting Standard 410 generally?; B. What allocation base “best represents total activity” in appellant's circumstances?; and C. Is appellant entitled to an equitable adjustment under the Changes clause? The two allocation bases in dispute are the total cost input base and the value-added cost input base, which is the total cost input base less material and subcontract costs. The composition of the appellant's G&A expense pool is not directly in issue. Additionally, what costs must be included in each of the alternative allocation bases advocated by the parties is not in dispute. The Government contends that the total cost input base is required. Appellant argues that it is required or permitted by Cost Accounting Standard 410 to use the value-added allocation base for distributing its general and administrative (G&A) expenses to final cost objectives. Finally, appellant contends that its change from a value-added to a total cost input base was at Government direction, was not required to comply with CAS 410, and, in fact, violated the Standard. Therefore, it asserts that it is entitled to an equitable adjustment for this change. A CHOICE OF THE ALLOCATION BASE GENERALLY 1 MEANING OF “TOTAL ACTIVITY” The Government argues that appellant defines and confines the term “activity” to “in-house” or labor and overhead activities of the business unit. It contends that the term “total activity” properly isnot limited to labor and overhead but includes materials and subcontracts. From its asserted permise that total activity includes material and subcontracts, the Government concludes that the allocation base should reflect and measure that activity by inclusion of its cost in the allocation base. The prefatory comments to CAS 410 (finding 16) state in pertinent part that “the term ‘total activity’ refers to the production of goods and services during a cost accounting period.” We agree with the Government that the broad concept of “production of goods” used by the Cost Accounting Standards Board to define the term “total activity” includes materials, subcontracts, labor and overhead. Appellant itself concedes that material and subcontract “activity” are responsible for the generation of an estimated 12% of its G&A costs. (See finding 85, 94) It also has incurred other direct and overhead costs, constituting approximately 10% of its proposed value-added base which it admits are related to material purchasing and subcontracting “activity.” (Finding 95) Moreover, as a general proposition, to exclude subcontracts and material from the definition of “total activity” on the ground that they represent the external activity of others would be inconsistent with CAS 410.50(d) (1) which provides that the total cost input base is “generally acceptable”. (See finding 104(a)) If materials and subcontracts were not considered by the CAS Board to be elements of the business unit's “total activity,” inclusion of often considerable material and subcontract costs (in Aeronutronic's case between 45 to 50% of its total cost input) in the base would imply that a base heavily reflective of the external activity of other business units was the “generally acceptable” base for best representing the total activity of the business unit in question. We do not believe that the base found to be “generally acceptable” by the CAS Board reasonably can be construed to consist in large part of the “activity” of other business units. The fallacy in the Government's argument is not its premise that material and subcontracts are includable in “total activity”. In our view, they are. Instead, the fallacy is the Government's conclusion that each dollar expended for materials and subcontracts necessarily bears the same beneficial relationship to incurrence of G&A expenses as each dollar of labor and overhead. To the contrary, the total of the cost of each element comprising total activity may or may not “best represent total activity” depending on the individual circumstances of each business unit. The crucial question is not what activity elements comprise “total activity” but what “best represents total activity”. CAS 410.50(d)(2) specifically recognizes that including the cost to the contractor of © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 52 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… what others have produced may result in a distortion of the “benefits received” by contracts from G&A expenses incurred. Defining “total activity” to include subcontracts and materials does not eliminate the necessity for analyzing the beneficial relationships between G&A costs and cost objectives. Although the term “total activity” encompasses all elements necessary for “production”, it does not and cannot refer to the total of the costs of those elements without rendering the other allocation bases superfluous. If “total activity” was the equivalent of the total of the costs of all elements of activity, only total cost input could “best represent total activity.” Cost Accounting Standard 410 makes clear that a contractor's “total activity” may be measured or “represented” by less than the contractor's “total cost input.” The Standard expressly authorizes cost input bases which include cost elements significantly less than total cost input, i.e., the value-added and single element cost input bases. In short, “total activity” and “total cost input” are not synonymous or interchangable under CAS 410 (see finding 102(e)) In particular, were “total activity” to be “represented” only by adding up all costs of activities connected with producing goods or services, the CAS Board's approval of a director labor base under the circumstances specified in CAS 410.50(d)(3) would present an irreconcilable incongruity. Each of the authorized bases properly may be the best surrogate for “total activity”, depending on the individual circumstances of each business unit. If a base other than total cost input properly is selected, this does not mean that the material and subcontract elements of “total activity” necessarily are not represented. It simply means that exclusion of the price paid for materials and subcontracts results in a better, more accurate, more equitable allocation of G&A costs in the individual circumstances of that particular business. 2. NECESSITY FOR ALLOCATION BASE TO REPRESENT “CAUSAL OR BENEFICIAL” RELATIONSHIPS —AN EQUITY TEST a. The Purpose And Plain Words Of The Standard Require Examination Into “Causal or Beneficial” Relationships The Government contends that analysis of the “benefit” to cost objectives is not necessary to apply CAS 410. It suggests that the cost Accounting Standards Board has concluded that a “beneficial or causal relationship” exists and that G&A costs are allocable. However, in doing so, the Government contends that the Cost Accounting Standards Board recognized the highly attenuated relationship between G&A costs and cost objectives, a relationship that is “not direct and not definitive” with respect to a benefitting costs objectives according to the Government. Thus, the Government concludes that appellant's “persistence” in attempting to measure the estimated value of G&A management effort to contracts contradicts the intent of the Standard. Instead, the Government asserts the appellant's estimation of the relationship of G&A expenses to in-house activities is inappropriate since, as G&A expenses, they are the “most indirect of costs” andtheir relationship to cost objectives is not susceptible of analysis. (See Gov't Post-Trial Br. at pp. 19-20) The Government's position that there is no need for careful analysis of causal or beneficial relationships ignores the purpose of the Standard. CAS 410.20 provides that the Standard is intended to achieve allocations of G&A expenses to the contracts and programs of each business unit “based on their causal or beneficial relationship”. (Finding 16) Other important provisions of the Standard underscore this basic intent. CAS 410.50(d)(2) requires examination into the “benefits received” by cost objectives from the G&A expense pool to determine if “significant distortion” exists. If “significant distortion” exists, by CAS 410.50(d)(2)'s own requirements, a total cost input base will not “best represent total activity” and that base will not be “acceptable” for the contractor. In this sense, the benefits received criterion of CAS 410.50(d)(2) necessarily refers to the benefits of the G&A expenses being allocated as received by the final cost objective (or contracts), of the business unit. A single element base also may be used, among other things, where it produces “equitable” results. Traditionally, under the Defense Acquisition Regulations, the “equity” test generally has turned on careful analysis of causal or beneficial relationships between the G&A costs and cost objectives of the business unit. See General Dynamics Corporation, Convair Division, ASBCA No. 22461, 78-2 BCA ¶13,270 (finding that appellant's proposed direct labor base was “more equitable” under DAR 15-203 than the Government's proposed total cost input base notwithstanding that the single element base included cost elements representing less than one-third of the contractor's total cost input). © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 53 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… We agree with the Government that G&A expenses practicably cannot be traced to specific cost objectives. This characteristic distinguishes G&A expenses from most operating or production-related cost whose causal connection or benefit is associated more closely with particular cost objectives. Despite the absence of a direct, precise or more causal relationship between G&A expenses and particular cost objectives, it is reasonably possible and indeed necessary in applying CAS 410 to determine which allocation method will allocate G&A expenses most realistically to contracts consonant with the benefits received. Thus, under CAS 410, it is not a question of finding a direct, specific or clearly traceable relationship, it is a question of finding the best relationship. In this regard, the Government mistakenly focuses solely on the allocation base without consideration of the nature of the cost being allocated in any given case, or whether the actual allocations that result from using one or another of the authorized methods are consistent with the G&A “benefits received” by contracts of the business unit involved. The Government's construction of CAS 410 not only ignores key provisions of the Standard, it also departs from basic principles of cost allocation-principles that Cost Accounting Standard 410 incorporates and endoreses. The absence of a direct and precise or closely traceable relationship between G&A expenses and particular contracts does not render moot and unachievable the basic allocation objective to reflect the actual or beneficial relationship existing between allocated costs and costs objectives. So long as other criteria are satisfied, nothing in CAS 410 suggests that established Government contract accounting precepts of selecting that cost input allocation base that will distribute G&A expense most equitably to contracts was eliminated by the Standard. Reasonable contractor analyses directed at assessing equity, cause or benefit and taking into consideration the composition and interrelationship of costs, cost objectives and alternative allocation bases were not foreclosed by the Standard. Under CAS 410, that cost input base which “best represents” a contractor's “total activity” will or should result in allocations of G&A expense to contracts based on their causal or beneficial relationship. The standard contemplates that the base that “best represents total activity” will be the one which most closely and realistically approximates or represents the “beneficial or causal” relationship between G&A and final cost objectives. b. Cost Accounting Standard 410 Establishes No “Preference” for a Total Cost Input Base. 1. Plain Meaning and History of Standard The Government, if not directly at least by clear implication, attempts to elevate the total cost input base to a “preferred” status. The provisions of Cost Accounting Standard 410 noted above preclude any finding that a total cost input base is preferred. The Standard expressly authorizes three cost input allocation bases, and, subject to limited restrictions stated in CAS 410.50(d)(1-3), provides that the determination of which allocation base is to be used should be judged according to individual company circumstances and on the basis of causal or beneficial relationships. Under the plain wording of the Standard as promulgated there is no “preference” for a total cost input base where inclusion of material and subcontract costs produces significant distortion requiring use of the value-added base. Moreover, where the contractor can show that a single element base produces “equitable results” and otherwise satisfies CAS 410.50(d)(3), the contractor “may” use that base. In such circumstdances, there is no “preference” for the total cost input base that eliminates or seriously erodes this permission. If the “causal or beneficial” relationship almost always could be obtained through use of the total cost input base the Cost Accounting Standard Board could have so provided. It clearly did not do so. In this regard, where the plain meaning and intent of the Standard is clear there generally is not need to resort to the regulatory history of the standard. Grumman Aerospace Corporation and Grumman Corporation, ASBCA No. 23219, 81-2 BCA ¶15,661 at p. 77, 431 [CASG ¶8517]; Lockheed Corporation and Lockheed Missiles and Space Company, Inc., ASBCA No. 22451, 80-2 BCA ¶14,509 at p. 71,520 [CASG ¶8515]. Appellant contends that this rule appropriately may be invoked here. We agree with appellant that the plain meaning of various provisions of the Standard when read as a whole rejects any preference for the total cost input base. Nevertheless, the regulatory history strongly reinforces this conclusion. In fact, the history of the Standard demonstrates the Cost Accounting Standard Board's marked and decided evaluation away from requiring or preferring the total cost input base. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 54 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… The first widely circulated (but not formally published) draft of Cost Accounting Standard 410 transmitted in December 1973 mandated use of the total cost input base subject only to special allocation procedures for individual contracts. (Finding 10) This draft stated in pertinent part that “total cost input shall be used as the base by which general management expenses allocated to the final objectives of the business unit.” [emphasis added] (Finding 10) Numerous commentators responding to this draft objected to the mandatory use of the total cost input base. (Findings 11, 12) The conclusions of the staff of the Cost Accounting Standards Board, contained in a technical paper, prepared for the Cost Accounting Standards Board in August 1974, indicated that there was widespread agreement that total cost input had “a potential for resulting in an inappropriate allocation in situations where contracts had varying and disproportionate material and subcontracting costs …” (Finding 11). Following evaluation of these and other comments, the Cost Accounting Standard Board published a revised draft Standard in September 1974 (finding 13). This draft Standard retained a preference for the total cost input base but, nevertheless, required use of value-added or single element bases in defined circumstances. In September 1975, a further version of the standard was published for comment. Importantly, this version abandoned any preference for the total cost input base stated in the preceding draft and provided for alternative allocation bases to be selected based on individual company circumstances (finding 15). The final promulgation of Cost Accounting Standard 410, published in April 1976, retained the tsubstance of the 1975 draft (finding 16). Morevoer, use of the value-added base again was made mandatory rather than permissive in the specified circumstances. This review of the regulatory history demonstrates that the Cost Accounting Standards Board focused on the preference issue and unequivocally decided that no preference for the total cost input base should be retained in the Standard. cf. Texas Instruments, Inc., ASBCA No. 18621, 79-1 BCA ¶13,800 [COST ACCOUNTING STANDARDS GUIDE ¶8510] (where the Board emphasized that certain words contained in the first draft of the Standard were omitted from the final version and concluded that the CAS Board “had the opportunity to impose the requirements for …. reporting and estimating costs by individual contract but refrained from doing so when it omitted references to individual contracts from CAS 401 as it was promulgated …”) 2. Meaning of “Generally Acceptable” CAS 410.50(d)(1) states that, “a total cost input base is generally acceptdable as an appropriate measure of the total activity of the business unit.” [emphasis added] The Government places great importance on the meaning of the term “generally” in contending that a total cost input base is preferred. The origins of the term “generally acceptdable” in CAS 410.50(d)(1) are to be found in the preamble to Cost Accounting Standard 410. There the Cost Accounting Standards Board stated that its “research” indicated that “generally the total cost input base, because it is a broad measure of all the work done and includes all of the costs allocable to the contract of the period, will be a measure that is representative of the total activity …” (Findingd 17) The reference to “research” in the preamble appears to be to the early Cost Accounting Standard Board's survey of contractors that preceded the drafting of the initial version of the Standard (finding 7). The results of that research included Cost Accounting Standard Board findings that the proportion of material, labor and manufacturing overhead across all Government work and between Government and commerical work was the same for the majority of surveyed contractors (id.). In other words a majority of contractors had homogeneous operations, without significantly disproportionate amounts of material and subcontract content in any particular class of its contracts. The term “generally acceptable” must be interpreted in the context on this preliminary research. Since the majority of contractors were found to have homogeneous operations, use of the total cost input base would not distort the “benefits received” by cost objectives and would be “generally acceptable” to that majority of business units surveyed. However, the Cost Accounting Standards Board's conclusion that the total cost input base is “generally acceptable” for the majority of contractors is far different than the Government's contention that the total cost input base, therefore, is “preferred” for all contractors. CAS 410.50(d)(1) does not establish reliable criteria that can be applied in evaluating particular contractor circumstances. The evidence adduced in this appeal establishes that there are not other statistics or reliable objective standards on the basis of which a contractor conclusively may determine whether the total cost input base is “acceptable” without careful, subjective analysis of its ownindividual circumstances. Moreover, even if a © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 55 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… contractor had apparently homogeneous operations and uniformly distributed material and subcontract activity, CAS 410.50(d)(1) states only that the total cost input base is “acceptable”. The term “generally acceptable” reasonably cannot be contrued to mean “required” in any given case or as establishing an express or implied preference for the total cost input base. It also reasonably does not cannote that the method is “always” or “nearly always” acceptable. The term must be evaluated against the standard's requirement that the selection of allocation base be judged based on the circumstances of each business unit, as stated in CAS 410.50(d). In the overall context of CAS 410.50(d), “generally” logically cannot be interpreted to mean that the total cost inpute base is necessarily appropriate in any particular case. At most, therefore, CAS 410.50(d)(1) indicates that use of the total cost input base will be acceptable, provided its use does not produce significant distortion. It does not require a contractor first to disprove the appropriateness of such use before alternative bases may be considered. Nor does it otherwise establish a “preference” for the total cost input base. 3. Effect of W.G. 78-21 and Cost Accounting Standard Board Minutes In December, 1977, the Cost Accounting Standards Steering Committee of the Department of Defense issued W.G. 78-21 to provide guidance concerning implementation of CAS 410. W.G. 78-21 stated that CAS 410 contained a preference for a total cost input base. The Government concedes that W.G. 78-21 constitutes no more than an internal DOD guidance paper relative to CAS 410. This guidance is not incorporated into the Defense Acquisition Regulation and is neither directed to nor binding on contractors. The only link between W.G. 78-21 and the Cost Accounting Standards Board arises out of a 9 March 1979 Cost Accounting Standards Board meeting. Prior to the meeting the Director of the Defense Contract Audit Agency had advised the Cost Accounting Standard Board Chairman that CAS 410 was generating more controversy than any of the other standards and requested the Board “to issue an interpretation to avoid prolonged and costly litigation” primarily due to “contractor failure to accept DOD guidance as representing the correct interpretation of the Standard.” (Finding 21). At the 9 March 1979 meeting of the Cost Accounting Standard Board, the Board responded to DCAA's request and reviewed W.G. 78-21. The minutes state that “the Board concluded that guidance contained in W.G. 78-21 reflected the Board's intent with respect to the provisions of CAS 410 concerning the selection of the allocation base.” (Finding 22) The parties' arguments assume that this statement constituted a Cost Accounting Standard Board endorsement of all “guidance” contained in W.G. 78-21 and that the Board in its statement was referring to its “original” intent in promulgated Cost Accounting Standard 410 in 1976. There is nothing in the record that would lead us to conclude that the Cost Accounting Standards Board intended that the above-quoted language in its minutes should be interpreted more narrowly. Of the five Cost Accounting Standards Board members in attendance at the 9 March 1979 meeting, only three members were on the Board at the time Cost Accounting Standard 410 was promulgated in 1976, and one of the three later dissented from the Board's 9 March action and the guidance stated in W.G. 78-21 (finding 25). In 1981, the DOD CAS Steering Committee amended W.G. 78-21 to indicate “there is no specific statement of preference [for the total cost input base] in the standard” (finding 26). No Cost Accounting Standards Board action was taken with respect to this amendment. The Government in this appeal argues that we should give “substantial deference” to the statement of preference in W.G. 78-21 (presumably the unamended version) and the Cost Accounting Standards Board minutes endorsing that “guidance.” It contends that the guidance and minutes support a conclusion that a preference for the total cost input base should be found in the standard. Numerous infirmities associated with the guidance and minutes dictate against according them “substantial deference.” With respect to W.G. 78-21, the DOD CAS Steering Committee amended the guidance paper in April 1981 to eliminate its prior conclusion that total cost input base is preferred. As amended, it now recognizes that “no specific statement of preference” exists in CAS 410. It acknowleges that its prior conclusion to the contrary was incorrect. In any event, the Government concedes that the guidance is not binding on contractors. Similarly, with respect to the “minutes” neither the Cost Accounting Standards Board then or the Government in this appeal contends that they constitute a formal “interpretation” of Cost Accounting Standard 410 promulgated in accordance with that Board's required procedures. Therefore, statements contained therein cannot be considered binding or determinative as to the proper interpretation of the standard. McDonnell Douglas © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 56 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… Corporation, ASBCA No. 19842, on motion for reconsideration, 80-2 ¶14,508 [CASG ¶8514]. Furthermore, the minutes (if not the original guidance) were issued after actual or theretended litigation. This fact further detracts from the amount of deference due them. Moreover, the deference to be accorded the Cost Accounting Standards Board's apparently informal indorsement of W.G. 78-21 is dependent on the degree to which the minutes are consistent with a plain reading of the regulation in issue. See National Association of Greeting Card Publishers v. U.S.P.S., 569 F.2d 570, 598-600 (D.C. Cir. 1976) (and cases cited therein) (“a board, like a legislature, speaks through the final action taken”; the court on this basis refused to rely on meeting minutes recording post-promulgation statements of the agency board'soriginal “intent” in adopting the rules in question). As concluded above, the 1978 version of W.G. 78-21 considered by the Cost Accounting Standards Board at its 9 March meeting departs significantly from a plain reading of CAS 410. If the Cost Accounting Standards Board intended by the quoted language in its minutes to indorse the word “preference” in W.G. 78-21, the minutes also represent a departure from all objective indicia of the Cost Accounting Standards Board's intent during the history and development of the standard. As noted above, that history reveals a distinct evolution away from a preference for the total cost input base. These departures from the plain meaning and history of the standard are evidenced by the CAS Steering Committee's own amendment to W.G. 78-21 in which the preference for the total cost input base expressly was disavowed. We conclude that if the Cost Accounting Standards Board meant by its 9 March 1979 minutes that the standard contdained a preference for the total cost input base, this informal indorsement of W.G. 78-21 was contrary to the plain meaning of Cost Accounting Standard 410 itself, contrary to the only reasonable conclusion that can be drawn from the objective evidence attendant upon its development, and contrary to the CAS Steering Committee's own current position with respect to the matter. For the above reasons, among others, we cannot accord the original guidance and the Cost Accounting Standards Board minutes “substantial deference.” 4. Result Not Inconsistent With Full Costing Concept and Does Not Violate Uniformity Objective. The Government argues that not requiring the use of total cost input base in all but exceptional circumstances will erode the Cost Accounting Standards Board general objective of obtaining uniformity. The short answer to this argument is that the degree of uniformity sought by the Board can best be discerned from analysis of the language and history of CAS 410. Here we have concluded, based on such an analysis, that the Cost Accounting Standards Board did not intend to require greater uniformity insofar as the three authorized cost input bases were concerned. In fact, the Standard did achieve significant uniformity and alteration of existing practices by eliminating use of bases other than cost input, most importantly the cost of sales base. In all, approximately 53% of surveyed business units were required to change to one of the cost input bases assuming that the results of the CAS Board's preliminary survey in December 1973 continued to be reflective of G&A base selection practices of contractors when the standard was issued in 1976 (finding 10). With respect to the authorized cost input methods, however, CAS 410 in critical respects provides flexibility rather than a rigid approach to base selection. As discussed above, it retained important elements of pre-CAS 410 G&A allocation procedures by its emphases on minimizing distortion in allocations of such costs and achieving equitable results (see finding 102(f)). A Government expert witness, Mr. Newton, advanced the theory that the discussion by the CAS Board of the accounting concept of full costing, that requires allocation of all G&A expenses to final cost objectives despite treatment of many such costs as period expenses for final reporting purposes, “conveyed a strong connotation that allocation of G&A expenses …are expected to be based on a measure representing everything involved in performing those final cost objectives.” (Finding no. 103(d)) Apparently, the pertinent language referred to by Mr. Newton, was the Cost Accounting Standard Boards statement in the preamble to CAS 410, “that for contract costing purposes, the concept of period expenses is inapplicable. The Board has concluded that there is a beneficial or causal relationship between G&A expenses and all of the final cost objectives of the cost accounting period.” (Finding 17) In essence, this contention is merely another manifestation of the Government argument that “total activity” must be interpreted to mean the total cost of all elements of activity. As noted above in our discussion of the meaning of total activity, the base may represent material and subcontract activity as well © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 57 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… as other types of activity even if the price paid for materials and subcontracts is not included in the base. The above cited discussion in the preamble to Cost Accounting Standard 410 simply is intended to insure that G&A costs are allocated to contracts regardless of possible differing financial accounting practices. In fact, any one of the authorized allocation bases in CAS 410 accomplishes full costing of G&A expenses. As conceded by the Government's other expert, Mr. Adams, the concept of full costing has no bearing on the issue of selection of an allocation base. (Finding 104(e)) 3. NECESSITY FOR EXAMINING EACH CONTRACTOR'S CIRCUMSTANCES. The Government rejects as irrelevant any extensive, internal analysis, based on the contractor's judgment, directed to assessing actual distortion “in relation to the G&A benefits received” by final cost objectives or classes of final cost objectives through use of a total cost input base. Citing the decision in Martin Marietta Corporation, ASBCA No. 14159, 71-1 BCA ¶8776, the Government argues that the absence of “direct and precise” relationships between G&A expenses and the benefitting cost objectives renders such an assessment per se inapplicable in the context of CAS 410 requirements. We reject these Government arguments for reasons discussed below. a. Nature of Examination As emphasized in our discussion above, CAS 410 requires careful examination into the causal or beneficial relationship between costs and cost objectives. We need not repeat the details of that discussion here. However, the related question of thenature of the examination does warrant further elaboration. In our view, an analysis of which allocation base most accurately distributes G&A expense in relation to benefits received may, consistent with CAS 410, involve the application by the contractor of reasonable judgment. This element of judgment is written into the standard in CAS 410.50(d): “The determination of which cost input base best represents … total activity …must be judged on the basis of the circumstances of each business unit.” [Emphasis added] The term “best” in CAS 410.50(d) also requires a comparison of the causal or beneficial relationship provided by the various allocation bases. This comparison must be judged by the contractor on the basis of its own internal and individual business circumstances. The importance of the exercise of judgment in the contractor's individual circumstances also is emphasized by several portions of the preamble to CAS 410. Noting that some commentators suggested that minor variations from the permitted bases be allowed, the Cost Accounting Standards Board stated in its prefatory comments to CAS 410 that “The Board knows that these are the kinds of decisions which involve consideration of the individual circumstances of the business unit. Accordingly, the Standard provides the opportunity for exercise of judgment in these situations.” (See finding 16) The following extract from the prefatory comments supporting our conclusion also is particularly instructive as to the Cost Accounting Standard Board's intention with respect to selection of an allocation base (see finding 16): Commentators also asserted that the Standard was unduly rigid because it permitted only one base for the allocation of the G&A expense pool. The Standard is not limited to the use of one allocation base; rather, the scope of the base, the measurement of total activity, is limited to cost input as this is the measure of the total activity of the business unit. The Standard provides that the measure of cost input best representing the total activity of the business unit during a cost accounting period is to be the one chosen as the base. The Standard includes criteria for determining the cost input base which will best measure total activity. The criteria are provided so that the allocation base for the G&A expense pool can be selected giving consideration to the differing circumstances of individual business units. Under the Standard only a cost input base may be used. Three cost input bases have been provided and criteria have been established for selection of the appropriate base. The individual circumstances of a given business unit must be analyzed and the cost input base that best represents the total activity of that business unit would be the base selected. The pooled costs, the cost objectives, and their interrelationship with base elements all must be examined. Some areas of inquiry might include: reasons for incurrence of particular of G&A expenses; analysis of the activities © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 58 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… of managers whose costs are assigned to the G&A pool; factors influencing expansion and contraction of the G&A pool; and, whether beneficial relationships exist between G&A expenses and particular groups of final cost objectives. This examination process is not greatly simplified for CAS covered contractors and contracts. As noted above, the same examination procedure traditionally has been applied in resolving allocation disputes under the Defense Acquisition Regulations. Difficulties inherent in relating G&A costs to cost objectives through one of the alternative allocation bases prevent the establishment of a more direct allocation relationship. But these difficulties do not make impossible reasonable and logical judgments, supported by and subject to proof, as to the relative degrees of benefit to cost objectives provided by the alternative bases (see finding 101(d)). In this regard, evidence from the Government or the contractor bearing bearing on the relationship between cost and cost objectives may be considered, including estimates or “judgments” by the contractors' management personnel, time estimates, and statistical analyses. See General Dynamics Corporation, Convair Division, supra. Aside from its assertion that the standard contains a preference for the total cost base except in limited, “abnormal” or “unusual” situations apparently only defined in CAS Steering Committee guidance (discussed below), the Government suggests no methodology for assessing causal or beneficial relationships in individual contractor circumstances. Absent evaluation of actual “benefits received” in the individual circumstances of each contractor, there is ispo facto no logical basis by which to measure or evaluate distortion in cost allocations “in relation to the benefits received”, or which of the available methods best allocates G&A expenses to contracts “based on their causal or beneficial relationship.” As noted, the Government's “test” for distortion is premised on its view that elements in the allocation base have objectively ascertainable “usual” and “unusual” characteristics eliminating the need for careful analysis of the internal and subjective circumstances of each business. In essence, the Government attempts to eliminate judgment from the determination of which allocation base best represents total activity except in extreme “unusual” or “abnormal” situations where the abnormality objectively can be measured. The Government's limiting concept appears nowhere in CAS 410. Precisely how the contractor was to discern such a test, must less assess whether it is “normal”, or “unusual” is not explained by the Government. The Government admits that there are no statistics maintained by it relative to the defining a “normal” contractor, or “normal” proportions of materials, subcontracts, labor and overhead costs in Government or commercial contracts of defense contractors. Even were thisrelevant, the Government presented no evidence to prove what a “normal” contractor is. The only probative evidence relating to this point is the Cost Accounting Standards Board early research indicating that the final cost objectives of the majority of contractors surveyed had “homogenous” levels of materials and subcontractor costs. However, the concept of “homogeneity” expressed in the early CAS Board Research is far different than the extreme W.G. 78-21 criteria as discussed in greater detail infa. Morevoer, the Government's expert, Mr. Newton, concedes that the test for “significant distortion” for use of a value-added base is an “internal” test, i.e., a test based on individual company circumstances rather than an external test involving comparisons between or among contractors. We conclude that the ultimate determination of CAS 410 compliance must be on a case-by-case basis considering all relevant factors and does not turn as the Government has suggested, on whether a contractor is “normal” in the Government's opinion. This conclusion does not mean that the use of an allocation base would be merely optional depending on each year's impact as contended by the Government. This concern was fully addressed by the Cost Accounting Standards Board in the preamble to CAS 410: Commentators noted the Standard lacks an explicit consistency requirement for the use of the cost input base selected. It was pointed out that allocation bases once selected are then used for considerable periods of time, usually as long as the underlying economic circumstances do not change. In this situation the selected base would remain representative of the total activity of the business unit. The Board does not intend to change this practice. In fact, the Board notes that in concert with Cost Accounting Standard 401, the selection of the allocation base for the G&A expense pool should provide the basis for allocation of that pool until such time as the basic economic circumstances change. The standard has been modified to require that the base selected should be one that measures activity of a typical cost accounting period. b. Martin Marietta Inapposite © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 59 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… The Government argues that evaluation of actual G&A “benefits received” by cost objectives would be contrary to the Board's decision in Martin Marietta Corporation, ASBCA No. 14159, 71-1 BCA ¶8776. In Martin Marietta, the principal issue was whether the government correctly disallowed a portion of the contractor's G&A expense pool on the theory that a pro rate share of G&A expenses should be allocated to certain unallowable base costs. The Government reasoned that each element of the allocation base, in effect, causes the incurrence of a traceable share of the G&A expense pool. In rejecting this reasoning, the Board, inter alia, found erroneous the Government's theory “that each and every cost element in the G&A allocation bases generates its pro rate share of G&A expense.” (Id. at 71-1 BCA p. 40,794.) The Board instead emphasized that the G&A allocation base “is merely the vehicle by which the pool of allowable G&A expense is distributed” and therefore should be selected “so as to cause the pool of G&A expense to be equitable approtioned over the year's business activities.” Id. at p. 40,795. Whatever the continued validity of the Board's actual holding in Martin Marietta following promulgation of Cost Accounting Standard 405, the language cited by the Government merely supports a conclusion that, as pure G&A expenses, a closely identifiable and traceable, causal relationship between such expenses and elements in the base should not exist. If a traceable causal relationship can be found with respect to material elements of cost classified as G&A, presumably they would be removed from G&A pool. This is not the case here. There is no evidence and the Government does not contend that the appellant's G&A pool somehow should be further purified. Our holding does not dispute the difficulty in establishing equitable or beneficial relationships between G&A expenses and cost objectives. It only recognizes that CAS 410 requires that reasonable and supportable judgments, based on each individual contractor's circumstances, be made to insure, to the extent possible, that the chosen base reflects causal, beneficial or equitable relationships. This inquiry always has been considered porper by the Board, even after Martin Marietta. See, General Dynamics Corporation, Convair Division, supra. CAS 410 now requires it. c. The Distortion Test Is Not Limited To the Situations in W.G. 78-21 W.G. 78-21 originally set forth two examples of situations where inclusion of the cost of materials and subcontracts may produce distortion: Government-furnished material and high-cost precious metals. (Finding 19) Both of these original examples concerned unusual cost characteristics of the material, i.e., where they were free or extremely expensive. Amendment 1 to W.G. 7821 (finding 27) contained an additional example of circumstances conducive to significant distortion if a total cost input base was used, i.e., “clustering” associated with disproportionate material and subcontract content. The pertinent criteria for distortion formulated in W.G. 78-21, as amended, are merely broad general categories of objective, easily auditable circumstances where “significant distortion” presumptively could exist, according to the guidance. Thus, use of the value-added base in those situations should be considered. However, the conditions for distortion listed in W.G. 8-21 expressly are not intended to be exhaustive. The guidance does not render unnecessary or inappropriate inquiry into each individual contractor's circumstances. In any event, its conclusions and/or guidance are not binding. In some cases, it may be easier to assess whether abeneficial relationship or distortion exists than it is in other cases based on objective contractor to contractor comparisons. However, there is simply no support in the standard itself, its preamble, or its history for artificially restricting use of the value-added base to such circumstances as may involve Government-furnished material, precious metals, or “clustering”. If the circumstances for use of the value-added bases were so easily definable, surely the Cost Accounting Standards Board would have restricted the use of the value-added base to those limited circumstances. Neither the Standard nor the accompanying promulgation comments provide specific examples relative to conditions for distortion and allocations with use of a total cost input base. However, in a related illustration included in the Cost Accounting Standards Board regulations at 4 CFR 331.20 (finding 29), the Cost Accounting Standards Board clearly recognizes that contractors encounter fluctuations in the labor and material content of contracts as well as the accuracy advantages of use of a value-added base in the presence of such fluctuations. (See finding 101(g)) We consider the intent of the Standard to be clear that a property constituted value-added base may be used in any circumstances where it best represents a contractor's total activity and thus equitably distributes G&A expenses to contracts. Moreover, that base must be used where © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 60 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… evaluation of individual company circumstances discloses significant distortions in G&A expense allocations to contracts with the use of the total cost input base. B. SELECTION OF THE ALLOCATION BASE BEST REPRESENTING TOTAL ACTIVITY IN APPELLANTS CIRCUMSTANCES 1. INTRODUCTORY CONSIDERATIONS In Section A of this decision we have dealt with issues relating to the selection of the CAS 410 allocation base generally. The governing criteria and general methodology described above now must be applied to appellant's individual circumstances. We hold that in Aeronutronic's circumstances, use of the value-added base is required because inclusion of material and subcontract costs significantly distorts the benefits received by appellant's contracts from its G&A expenses. We reach this result for two [2] primary sets of reasons, viz: (1) The material and subcontract content of appellant's contracts is disproportionate and its general management expenses pertain much more substantially to its “in-house” activity than its material and subcontract activity; and, (2) Aeronutronic's general management expenses provide substantially more benefit to its labor intensive development contracts than its material intensive production contracts. Before expanding on our rationale for these conclusions, it is important to emphasize several matters that are not in dispute. First the Government does not argue that the additional criterion for required use of a valueadded base stated in CAS 410.50(d)(2), i.e., that costs other than direct labor constitute significant measures of total activity, has not been satisfied by appellant. Instead, the thrust of the Government's argument is that the “significant distortion” criteria of that provision has not been met. Secondly, since we conclude here that use of a total cost input base would produce distortion, and thus require use of the value-added base, we need not reach appellant's alternative argument that it is permitted by CAS 410 to use the value-added base even if it is unable to establish “significant distortion” under CAS 4010.50(d)(2) if that value-added base otherwise “best represents total activity” under CAS 410.50(d). Finally, this controversy directly [3] involves selection of the base not composition of the pool. In other words, the Government does not contend directly that appellant's G&A pool, as finally reconstituted and agreed to by the parties prior to the applicability date (i.e., 1 November 1978) of CAS 410, should be “purified” further. The costs in appellant's current G&A pool are conceded to be costs related to the general management of the business as a whole and properly classified as G&A expenses. It also should be noted by way of introduction that our conclusion that use of a value-added base is required in appellant's circumstances is based on virtually unrebutted and uncontroverted analyses performed by appellant as to the interrelationship between its G&A expenses and its cost objectives. Significantly, the Government does not dispute the accuracy of those analyses that are relied upon by us and discussed below. Indeed, the DCAA resident auditor assigned to appellant indicated that he had no reason to doubt their accuracy (finding 78). The Government directly challenges only their basic methodology and premise and only indirectly their result. For reasons explained more fully above, we believe that the types of judgmental analyses described in findings 85 through 98 are envisioned by the criteria established in CAS 410 for selection of the allocation base. Conclusory labeling of such management estimates as “very subjective”, “not auditable” and/or “inherently suspect” is not enough. Cf. General Dynamics Corporation, Convair Division, supra. The Government must counter such estimates with its own analyses and/or present cogent reasons why the contractor's estimates are inaccurate, incomplete, or otherwise substantively controvert the estimates. It has not done so in this appeal. Examination of the subjective, internal circumstances of each contractor generally cannot be avoided where analyses similar to those prepared by the appellant are introduced. The Standard does not permit the Government to substitute its own unsupported judgment, apparently tempered only by amorphous concepts of “normality,” with exceptions for use of the total cost input base strictly limited only to a few extraordinary circumstances, for the fully supported anduncontradicted judgment of the contractor's top level management. We turn now to a discussion of the duel rationable for our conclusion that a value added base is required in appellant's circumstances. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 61 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… 2. DISPROPORTIONATE MATERIAL AND SUBCONTRACT CONTENT OF FINAL COST OBJECTIVES AND “INHOUSE” ORIENTATION OF GENERAL AND ADMINISTRATIVE EXPENSES Appellant's contracts (final cost objectives) are heterogenous with respect to their material and subcontract content, not homogenous. Its contracts have substantially different proportions of material and subcontract content. The substantial disproportion is particularly apparent when comparing its two major categories of contracts (finding 97). We have found that, as a percentage of total cost input, an average of approximately 53% of its production contracts consisted of material and subcontract cost versus only 33% for its development and engineering contracts between 1975 through 1978. (See Id.) The material and subcontract content of all contracts also varied over wide ranges (finding 90). a. Value-Added Base Required Even Absent “Clustering” In this regard, Amendment 1 to W.G. 78-21 (finding 26) constitutes recognition by the DOD CAS Steering Committee that disproportionate material and subcontract content may lead to distortions in allocation of G&A expense where material and subcontract costs are included in the allocation base. However, the 1981 amendment, according to the Government, essentially presumes that significant distortion generally will not occur unless there is a ‘clustering” of the percentage of material and subcontract content of contracts outside the “extremes” of a 20-70% range. First, it should be noted that W.G. 78-21, as amended, does not itself require “clustering” as a prerequisite to establishment of significant distortion. The percentages used therein are stated to be for illustrative purposes only and are not intented to be mandatory guidelines. Irrespective of the nonmandatory nature of the percentages as guidance to auditors, appellant does not contest that the percentages of material and subcontract cost to total cost of its contracts are not “clustered” outside the 20-70% range. Instead, it argues that the “clustering” concept and the range posited by the CAS Steering Committee for guidance purposes are artificially restrictive, not a substitute for more careful subjective analyses of the interrelationship between G&A expenses and final cost objectives and, in any event, not binding on contractors. We agree. Criteria relating to extremes, pat ratios and “cookbook” formulas that artificially restrict the circumstances that may require use of a value-added base are without any basis in the standard. They may be useful guidance to auditors in objectively identifying likely instances of “significant distortion” but they are not dispositive or controlling on that issue. Additionally, the analyses performed by DCAA to support its finding of no “clustering” in this appeal are in themeselves fatally deficient and inconclusive. One DCAA analysis is of certain of appellant's proposals in calendar year 1980. Questions left to speculation include the following: What proposals were not reviewed by DCAA (e.g., those relating to appellant's commercial work); which of the proposals listed resulted in contracts; what other contracts were or were being performed in an accounting period together with contracts resulting from the proposals listed. A second analysis relates to a handful of “selected” contracts only, and therefore is similarly inconclusive with respect to the total contract activity of the appellant in a typical accounting period. Moreover, if anything, DCAA's analyses (finding 99) tend to support use of a value-added base in Aeronutronic's circumstances inasmuch as they reveal significantly disparate cost patterns among individual Aeronutronic contract. b. “In-House” Orientation of General Management Expenses Regardless of the presence or absence of “clustering” at the extremes, the inclusion of material and subcontract cost produces “significant distortion” in Aeronutronic's circumstances. As discussed below, the thrust of appellant's general management activities is toward “in-house” as opposed to subcontract-related functions. In this regard, we have adopted for ease of reference and discussion, the parties use of the term “in-house” to include only the labor and overhead portion of the contractor's total activity. In addition, the degree to which the classes of its major business activity benefit from G&A expenses is distinctly disparate between materialintensive and labor-intensive contracts. We have found based on uncontroverted testimony and evidence that the “benefit” of Aeronutronic's G&A management and related expense pertains most heavily to Aeronutronic's “in-house” or labor and overhead activities and only in small part to material and subcontract-related activities. That is, appellant's G&A expenses © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 62 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… are incurred primarily for the benefit of labor and overhead effort and general management activity is devoted primarily to managing that effort. Based on appellant's estimates, we have found that only an approximate 12% of Aeronutronic's G&A expenses related to material and subcontract activities. (Finding 94) Use of appellant's proposed value-added base implies that 10% of general management expenses relate to material and subcontract activity. (Finding 96) Use of the current, Government-advocated, total cost input base implies that 49% of general management expenses are related to or benefit such activities (finding 96). Due to this disparity, the total cost input base significantlydistorts the “benefits received by appellant's contracts from G&A expenses. Since the estimated and uncontroverted G&A “benefit” to material and subcontract related activity is approximately $1.2 million for 1978 (stipulated to be a “typical accounting period”), the allocation of approximately $1 million of G&A expense using a value-added base, as opposed to an allocation of approximately $5 million using the total cost input base, best approximates the “benefits received” by final cost objectives, most accurately assigns G&A expense to contracts, and “best represents total activity” in appellant's circumstances. (See findings 94-96, 101(c), 102(a)(2)) c. More Direct Allocation of Most Purchasing and Subcontract Related Costs. Contributing in part to this “in-house” focus of Aeronutronic's G&A management effort and expense, Aeronutronic's G&A expense pool excludes virtually all purchasing-related functions, including accounts payable, material administration, and the company's principal material and subcontract-related activities such as purchasing, production control, and receiving and source inspection (see finding 102(a)(2)). These material and subcontract related costs nevertheless are included in appellant's value-added base. Their conclusion from the pool tends to increase the homogeneity of appellant's G&A expenses with respect to the relationship of G&A cost to material and subcontract activity, reducing the “benefits received” by such activity from G&A expenses. This increased homogeneity also tends to facilitate selection of the proper base. At the same time, inclusion of the cost of most purchasing and subcontract related functions (other than the price of materials and subcontracts) in appellant's value added base recognizes and “represents” Aeronutronic's material and subcontract activity (finding 101(b)(1). Material and subcontract activity thus does receive its fair share of G&A expense. In this regard, the Government implicitly argues that the purchasing and subcontract related functions excluded from G&A are not G&A expenses in any event. Indeed, the guidance to auditors contained in the Defense Contract Audit Manual directs their renewal from G&A for purposes of allocation to CAS-covered contracts (Finding 34). Therefore, it is argued that their more direct allocation is irrelevant insofar as choice of the allocation base is concerned. We need not address the issue of whether such costs always should be excluded from G&A in accordance with the DCAA's interpretation to insure purification of the pool. The salient point is that here they are excluded from the pool and are included in appellant's value-added base. Thus, if such material related costs are allocated more directly rather than through G&A, it stands to reason that beneficial relationships between the G&A pool and the material and subcontract activity will decrease. This fact simply reinforces the validity of appellant's analyses of benefits received by cost objectives by material and subcontract activity in its G&A pool. It is not a wholly neutral characteristic of the composition of appellant's G&A pool and base. It is properly to be considered as one factor in the analysis of “benefits received” and “significant distortion”, which study necessarily involves examination of the types of costs included in the pool and in the base. 3. GREATER BENEFIT TO DEVELOPMENT CONTRACTS THAN PRODUCTION CONTRACTS Further supporting our conclusion that use of the total cost input base produces “significant distortion” is the disproportionate material and subcontract patterns existing between the two broad classes of appellant's contracts. The material and subcontract content of its production contracts consistently has been between 50 to 100% more than its development and engineering contracts (finding 97). However, we have found that Aeronutronic general management effort is focused more heavily on the “frontend” of its business, i.e., on labor intensive development and engineering contracts (finding 98, 101(b)(3). Considerably less general management involvement is devoted to material intensive production contracts that result from prior successful development contracts. Nevertheless, use of the Government-advocated total cost input base produces allocations that imply © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 63 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… just the opposite, i.e., that management effort primarily is concerned with production contracts. By including material costs in the base, production contracts receive increased G&A and development contracts decreased G&A, in comparison with allocations resulting from employment of a value-added base. Indeed, DCAA itself has described appellant's production contracts as “mature, fixed type and commercial [generally foreign military sales] program.” [Emphasis added] By clear implication, such “mature” programs for production of proven products do not require the same amount of general management involvement and properly are allocated a proportionately smaller amount of general management expense. Precedent for the technique of relating G&A benefit and related expense to classes of cost objectives is contained in General Dynamics Corp., Convair Division, supra and we consider that approach to be equally valid for purposes of selecting the allocation base under CAS 410. In General Dynamics, the Board found that Government contracts, particularly cost reimbursement contracts generated more G&A expense in relation to their dollar volume than did non-Government contracts. Thus, the contractor in that appeal was held entitled to use a single element (direct labor) base found more equitable in its circumstances, since “allocating appellant's G&A between its Government and commercial work on the basis of direct labor cost results in an allocation closer tothe G&A actually incurred for those two categories of work than does a distribution based upon total cost.” (78-2 BCA at 64,886) Similarly, here the testimony is unrebutted that appellant's development contracts bear a greater relationship to its G&A expenses incurred. Based on the disproportionate material and subcontract content of its contracts and the “in-house” and development contract focus of its general management activity, we conclude that inclusion of the cost of material and subcontracts (i.e., use of a total cost input base) results in a “significant distortion” of the “benefits received” by its contracts from G&A expenses. Accordingly, use by appellant of the value-added base is required. C. ENTITLEMENT TO AN EQUITABLE ADJUSTMENT UNDER THE “CHANGES” CLAUSE The contractor priced the contract in dispute based on the use of a value-added base for allocation of general and administrative expenses. It contends that the Government required it to use a total cost input base and that such Government direction constituted a constructive change to the contract. Accordingly, appellant asserts that it is entitled to an equitable adjustment of this fixed price contract. Appellant argues that since the contract price was based on the use of a value-added base, it was unable to recover the substantially greater general and administrative expense allocations to the contract derived from G&A allocations of actual cost derived through the directed use of the total cost input base. In other words, the contractor argues that the contract was underpriced because allocable G&A was computed for effort after January 1978, using a total cost input base rather than the value-added base used during the contract's negotiation. Thus, the contract price recovered substantially less G&A than it was actually allocated. In essence, the contractor asserts that if this material-intensive production contract had been priced using the total cost input base, the contractor would have negotiated a price substantially higher for performance after January 1978, i.e., the date Cost Accounting Standard 410 became applicable to appellant. The Government argues that the contract and regulations provide detailed guidance in this situation. Specifically, the Government asserts that under the Cost Accounting Standards clause and DAR 3-1213(b) (finding 31) the contractor is not entitled to an equitable adjustment unless a change in a cost accounting practice is required to implement a new standard. It further asserts that the equitable adjustment in such instances is limited to contracts awarded prior to the effective date of each new standard. In this case, the effective date of Cost Accounting Standard 410 is 1 October 1976. The contract in dispute was proposed initially on 25 October 1976, negotatiated during early February 1977, and bears an effective date of 25 February 1977. The Government contends, therefore, that since the contract was awarded after the effective date, the contractor was required to propose the contract taking into account any changes necessary for compliance with Cost Accounting Standard 410. Since it did not do so, it is entitled to no adjustment according to the Government. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 64 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… The above Government argument is premised upon its contention that appellant's value-added base was not in compliance with Cost Accounting Standard 410. We have rejected the basic premise of this argument above. We have held that appellant was not and is not required to use the total cost input base. Thus, no material change in the selection of an allocation base was required by the Cost Accounting Standards clause to implement the standard. In fact, the Government's insistence that the appellant use a total cost input base violated the Standard inasmuch as appellant was required to use the value-added base. In these circumstances, where the Government requires the contractor to implement a new standard erroneously, thus forcing the contractor into noncompliance with its provisions, the Cost Accounting Standard clause adjustment provisions are not controlling. The adjustment provisions of the Cost Accounting Standards clause are generally [4] available only with respect to contracts awarded prior to the effective date of each new standard regardless of whether later-awarded contracts are priced based on implementation of any revised allocation procedures that may be required. Since Contract 0236 was awarded after the effective date, the Government viewed the contract as not being subject to the adjustment provisions of the Cost Accounting Standards Clause and regulations, even though the Government knew the contract was priced using appellant's value-added base. [5] We agree with the appellant's assertions that the Government's actions in this appeal resulted in a constructive change to the contract in dispute. As argued by the appellant, this situation is fundamentally indistinguishable from appeals where the government insists that a contractor perform in accordance with the Government's erroneous interpretation of the requirements of contractual specifications and drawings and thus increase the contractor's cost of performance. Citations omitted. Here, the appellant's interpretation of the accounting requirements of Cost Accounting Standard 410 was correct and the Government's was incorrect. Moreover, there is no indication that the standard contract adjustment mechanism of the Changes clause was not intended by the Cost Accounting Standards Board or pertinent DOD implementing regulations to be applicable to all situations requiring adjustment of contract prices related to CAS implementation. In fact, that clause is invoked expressly with respect to both required and now “voluntary” changes. Moreover, under the Cost Accounting Standards clause generally andsubparagraphs (a)(4)(A) and (b) in particular, interpretive disputes concerning cost accounting standards are to be resolved pursuant to traditional disputes procedures and thus contemplate invocation of standard contractual, rather than extra contractual, remedies. We hold that the erroneous interpretation and constructive direction by the Government that appellant was required to use a total cost input base was a constructive change to the contract. Appellant's value-added base complied with contractual requirements and its change to a total cost input base, as constructively directed by the Government, was unnecessary and involuntary. The Government further asserts that the option negotiations in May 1978 foreclosed appellant's right to assert a claim for an equitable adjustment because they occurred after appellant had adopted a total cost input base. This argument is factually and legally incorrect. The option prices were not first negotiated in May 1978. The option quantity and prices remained materially unchanged from the time of contract award and appellant preserved its right to seek an equitable adjustment under Special Provisions J-32 (finding 71). Special Provision J-32 was negotiated and included in the modifications at a time when the appellant reasonably anticipated that Contract 0236 would participate in the adjustment process prescribed by the CAS clause and regulations. The Special Provision specifically referenced appellant's continuing claim for adjustment in two prior letters to the ACO and in no way compromised or settled that claim. It was not until months later that the ACO first adopted the position of the Government advanced in this appeal that the contract was not eligible for adjustment. Its present claim for an equitable adjustment is consistent with and not precluded by the results of the May 1978 negotiations. In fact, it was not until the options were exercised and the greatly increased scope of its postJanuary 1978 effort made apparent that the amount of the cost adjustment became clarified. We emphasize here that any possible effect on or status of any of appellant's other contracts has not been placed in issue. The sole issue presented by the parties involves entitlement to an upward adjustment only under © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved. 65 May 8, 2023 from VitalLaw® Cost Accounting Standards Guide, Ford Aerospace and Communications Corporation, Aeronutronic… the contract in dispute. The parties here have stipulated the amount of that adjustment to be $652,670, plus interest computed in accordance with the “Payment of Interest on Contractor's claims” clause. D. SUMMARY We have held above that appellant was and currently is required to use the value-added base by Cost Accounting Standard 410. The parties have agreed that appellant will implement this opinion and commence using the value added base within two calendar years following the date hereof. We also have held that appellant is entitled to an equitable adjustment under the contract in dispute. Footnotes

• The Board adopts the opinion of its duly appointed Trial Examiner, Robert T. Peacock, who presided at the

hearing of this appeal. 1 The Government, inter alia, has not challenged appellant's procedure of apportioning and including the FMC or the FACC corporate assessments in determining the material and subcontract activity within the division itself. Thus, we need not determine whether exclusion of such costs in evaluating the distortive effects of a total cost input base is preferable under CAS 410. We do note, however, that exclusion of such costs (except for state and local taxes) in this appeal does increase the alleged percentage of G&A attributable to material and subcontract activity only from 12% to 16% (i.e., $1112 divided by $6610) 2 Appellant also generally contends that its operations are characterized by amounts of Government-furnished material and some "drop shipments" which it argues also serve to distort significantly G&A expense allocations if a total cost input base is used. The Government contests the probativeness of the evidence presented by appellant and the significance of any distortion purportedly created by the existence of these two additional conditions. In view of the other uncontroverted evidence in this appeal that fully establishes that the "significant distortion" test of CAS 410.50(d)(2) is satisfied, we need not make detailed findings of fact and discuss at length these additional factors. 3 There is a discernable undertone in the Government audit reports, Government expert testimony and Government briefs that indirectly challenges the composition of appellant's G&A pool. In essence, the Government argues that, if the expenses are properly classified as G&A, their benefit cannot be measured. The corollary of this argument is that if benefit can be measured, the costs involved are not G&A according to the Government. Apparently the Government would have us conclude that if we believe the contractor's evidence concerning the extent and measurement of beneficial relationships, we must also conclude that the expenses involved are not G&A. This is the "Catch 22" referenced in Mr. Goodwin's testimony (finding 103(g)). We have fully explained in the body of this decision why we believe the analyses performed by appellant to be probative. However, several further comments should be mentioned. First, the Government has presented no specific evidence that any of the costs in appellant's pool are not properly classified as G&A. It should have done so if that is in fact its contention. In any event, CAS 410.40(d) now provides: 4 Where the noncompliance is "inadvertent", the Cost Accounting Standards Boards' regulations at 4 CFR 331.70 indicate that adjustments also are permissible. 5 Since we decide this appeal on a "Changes" clause rationale, we need not address possible estoppel consequences of the ACO's administration of the contract with respect to Cost Accounting Standard 410 implementation by appellant. Nor need we address whether the ACO properly complied with DAR provisions concerning CAS administration during the negotiations culminating in award of the contract in dispute.