               ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of --                                  )
                                              )
A-T Solutions, Inc.                           )      ASBCA No. 59338
                                              )
Under Contract No. W91 CRB-09-C-0043          )

APPEARANCES FOR THE APPELLANT:                       Terry L. Albertson, Esq.
                                                     Robert J. Sneckenberg, Esq.
                                                      Crowell & Moring LLP
                                                      Washington, DC

APPEARANCES FOR THE GOVERNMENT:                      Raymond M. Saunders, Esq.
                                                      Army Chief Trial Attorney
                                                     MAJ Elinor J. Kim, JA
                                                      Trial Attorney

               OPINION BY ADMINISTRATIVE JUDGE O'SULLIVAN

       Appellant A-T Solutions, Inc. (ATS) appeals a contracting officer's final
decision denying its claim to recover commercial catalog prices for training equipment
used in connection with improvised explosive device (IED) training provided under an
Army contract. Only entitlement is at issue. We have jurisdiction under the Contract
Disputes Act, 41 U.S.C. §§ 7101-7109. We sustain the appeal.

                                 FINDINGS OF FACT

Solicitation and Award

        1. In December 2008, the U.S. Army Research, Development and Engineering
Command (RDECOM) solicited proposals for a contract to provide training for armed
forces to proactively defeat the IED threat. The solicitation was issued on behalf of the
Department of Defense Joint IED Defeat Organization (JIEDDO), Joint Center of
Excellence (JCOE), Joint Asymmetric Threat Awareness and Counter (JATAC)
training program. It contemplated a single award of a cost-plus-fixed-fee (CPFF)
contract. (R4, tab 1 at 15, tab 3 at 1, 5, 15) The awardee was to provide professional
training services and training materials and equipment, both inside the Continental U.S.
(CONUS) and outside the Continental U.S. (OCONUS), for a base year and up to four
option years (R4, tab 3 at 23 ).

     2. Previously, in 2007, the Army awarded the first JATAC training contract to
ATS on a firm-fixed-price, sole source, "gap-filler" basis to meet urgent training needs
(tr. 29-30; R4, tab I at 16). This first contract was followed by a competitive contra¢t
award to ATS pursuant to the GSA Schedule in 2008 (tr. 30). Under both the first and
second contract, A TS provided its training materials and equipment as commercial
items and was paid for them at its catalog prices (id.). These items included various
different types of IEDs, training kits, and IED defeat tools (R4, tab I 0). The Army
decided to use a CPFF contract for the third procurement, which was competitive, with
four offerors submitting proposals (app. supp. R4, tab 12 at 16).

        3. ATS submitted its proposal on 30 January 2009 (R4, tabs 4-11). It proposed a
total estimated cost across five years of $198,920, 794, which included a fixed fee of
$I 0,391, 146 (R4, tab 4 at 5). In the narrative portion of its cost/price proposal, it spelled
out the assumptions on which its proposal was based. Among them were the following:

              Fixed Fee -ATS proposes a fixed fee of9% on all direct
              labor, consultants and subcontractors. ATS proposes a
              fixed fee of 0% on all other cost elements.



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



              Training Materials and Equipment - ATS is a
              manufacturer, distributor and supplier of training products
              to a wide variety of customers. Training Materials and
              Equipment listed in this proposal include IED products,
              IED training devices, training kits, training manuals and
              commercial software products. These items are priced at
              the ATS commercial catalog price, per FAR 52.2 I 5-
              2 I (a)(ii)(2)(B) and FAR 31.205-26. Quantity discounts
              have been applied where appropriate based on the total
              quantity of each item required by the SOW. Any purchase
              of quantities less than indicated in the SOW may result in a
              higher unit price charged to the Government. A complete
              set of ATS product catalogs, including photos and
              descriptions, is included with this proposal.




                                              2
              Consumable Items - In order to support a dynamic and
              relevant training program, each training program requires
              local procurement of consumable items. These items
              cannot be specifically identified or priced in advance. ATS
              will procure these items locally at the training location, to
              save shipping and handling costs. The total cost of
              consumable items is a relatively small component of the
              training program. In this proposal, we have identified a
              "budget" for locally procured consumable items for each
              training program. When directed by the Government, ATS
              will locally procure appropriate items and invoice them at
              actual incurred cost (no fee).

(R4, tab 7 at 3-5) Examples given of consumable items included emerging threat IED
components, electronics, and booby trap materials, repair parts, stage props to simulate
field IED fabrication cells, and items used to conceal IEDs (id. at 5-6).

       4. In summary, ATS proposed to bill direct labor, consultants, and
subcontractors at cost plus a fixed fee calculated at 9% of estimated cost. A TS
proposed to bill travel at cost (no fee). ATS proposed to charge for its commercial
item training materials and equipment at the catalog prices attached to the proposal
(R4, tabs 10-11). Finally, consumable items bought locally would be billed at incurred
cost (no fee).

       5. The government's Pre-Negotiation Objective Memorandum (POM)
noted that ATS' s proposal was "indicative of a superior understanding of the
requirements," demonstrated "unique expertise required to execute JATAC
requirements" and "superior vision," and offered lower hourly rates than the other
offerors (app. supp. R4, tab 12 at 26). With respect to ATS's proposed training
material and equipment costs, proposed as part of Other Direct Costs (ODCs), the
government's evaluation stated:

             ODCs - Proposed a total ODC amount of$73,072,471.00.
             The amount includes CONUS and OCONUS travel,
             equipment, weapons, weapon supplies, clothing, training,
             subcontractor non-labor costs. ATS' ODC amount is the
             third highest among offerors. However, ATS provided
             detailed back up documentation to show their calculations
             at arriving at their ODCs total and it appears they fully
             understand the requirements of the SOW so the costs are
             considered realistic.

(Id. at 37) The government further determined as follows:


                                           3
             8. The price proposal from ATS is determined to be
             realistic, fair and reasonable based on the cost realism/price
             analysis performed, their technical proposal is rated
             Excellent, and they received a very low performance risk
             rating; therefore, no further negotiations are necessary by
             the Government. Since two of the four proposals submitted
             are competitive and considered fair and reasonable, it is
             recommended the Price-Negotiation Memorandum be
             waived.

             9. The total contract price [proposed by A TS] of
             $198,920, 794.00 should be accepted by the Government
             without further negotiations for the services requirement
             under this CPFF contract.

(Id. at 46) Based on the foregoing, the POM concluded that award should be made to
ATS without further negotiation (id. at 29-30).

       6. Contract No. W91CRB-09-C-0043 (the contract) was awarded to ATS on
19 May 2009, with an effective date of 1May2009 (R4, tab 1). The award stated that
ATS's January 2009 proposal was accepted and that the contract consisted of''the
following documents: (a) the Government's solicitation and your offer, and (b) this
award/contract. No further contractual document is necessary." (Id. at 1)

Contract Clauses

       7. The contract contains the following clauses incorporated by reference:
FAR 52.215-2, AUDIT AND RECORDS-NEGOTIATION (JUN 1999); FAR 52.215-8,
ORDER OF PRECEDENCE-UNIFORM CONTRACT FORMAT (OCT 1997); and
FAR 52.244-6, SUBCONTRACTS FOR COMMERCIAL ITEMS (MAR 2007). The contract
also incorporates, in full text, FAR 52.216-7' ALLOWABLE COST AND PAYMENT
(DEC 2002). (R4, tab 1 at 59-60, 62-65)

      8. FAR 52.215-2 provides, in relevant part:

                    (b) Examination of Costs. If this is a
             cost-reimbursement, incentive, time-and-materials,
             labor-hour, or price redeterminable contract, or any
             combination of these, the Contractor shall maintain and the
             Contracting Officer, or an authorized representative of the
             Contracting Officer, shall have the right to examine and
             audit all records and other evidence sufficient to reflect



                                           4
             properly all costs claimed to have been incurred directly or
             indirectly in performance of this contract.

FAR 52.244-6 provides, in relevant part:

                    (a) Definitions. As used in this clause-

                   ''Commercial item" has the meaning contained in
             Federal Acquisition Regulation 2.101, Definitions.

                    "Subcontract" includes a transfer of commercial
             items between divisions, subsidiaries, or affiliates of the
             Contractor or subcontractor at any tier.

                      (b) To the maximum extent practicable, the
             Contractor shall incorporate, and require its subcontractors
             at all tiers to incorporate, commercial items or
             nondevelopmental items as components of items to be
             supplied under this contract.

FAR 52.216-7 provides, in relevant part:

                     (a) Invoicing. (1) The Government will make
             payments to the Contractor when requested as work
             progresses, but (except for small business concerns) not
             more often than once every 2 weeks, in amounts determined
             to be allowable by the Contracting Officer in accordance
             with Federal Acquisition Regulation (FAR) subpart 31.2 in
             effect on the date of this contract and the terms of this
             contract....



                   (b) Reimbursing costs. (1) For the purpose of
             reimbursing allowable costs ... , the term "costs" includes
             only-

                    (i) Those recorded costs that, at the time of the
             request for reimbursement, the Contractor has paid by cash,
             check, or other form of actual payment for items or services
             purchased directly for the contract;




                                            5
                     (ii) When the Contractor is not delinquent in paying ·
              costs of contract performance in the ordinary course of
              business, costs incurred, but not necessarily paid, for-

                     (A) Supplies and services purchased directly for the
              contract and associated financing payments to
              subcontractors, provided payments determined due will be
              made-

                    ( 1) In accordance with the terms and conditions of a
              subcontract or invoice; and

                   (2) Ordinarily within 30 days of the submission of
             the Contractor's payment request to the Government;

                    (B) Materials issued from the Contractor's inventory
             and placed in the production process for use on the contract;

                    (C) Direct labor;

                    (D) Direct travel;

                    (E) Other direct in-house costs; and

                    (F) Properly allocable and allowable indirect costs,
             as shown in the records maintained by the Contractor for
             purposes of obtaining reimbursement under Government
             contracts; and

                   (iii) The amount of financing payments that have
             been paid by cash, check, or other forms of payment to
             subcontractors.

Contract Performance, Invoicing, and Audit

        9. At a kick-off meeting following award of the contract, ATS sought and
received government approval to invoice for the training materials and equipment
separately from the training services. Starting in October 2009, ATS began invoicing
for the training materials and equipment at catalog prices, and the government paid the
invoices promptly and in full. (Tr. 48-50)

      10. In February 2010, ATS received notice that the Defense Contract Audit
Agency (DCAA) would be conducting an audit of contract cost. DCAA requested to


                                           6
review A TS' s material costs after it had reviewed, and approved, A TS' s labor costs.
(Tr. 46-48) Because DCAA did not accept ATS's position that it need not provide cost
information for items that had been proposed and accepted at price, and the Army
deferred to DCAA, A TS suspended its billing for the training materials and equipment
in February of 2010 (tr. 47, 67). ATS continued to provide all services and equipment
required under the contract. It resumed billing, but only provisionally, at direct
material cost for the training aids and devices in September of 2010. (Tr. 67)
Thereafter, in mid-2013, ATS began billing for delivered training materials at fully
burdened cost (tr. 86).

      11. DCAA finalized and issued its audit report on 7 July 2011 (R4, tab 17).
The subject of the audit, as described by DCAA, was as follows:

                    As part of our comprehensive audit of A-T
             Solutions, Inc. (ATS), we examined the contractor's
             accounting system as of March 10, 2011, to determine
             whether it is adequate for accumulating costs under
             Government contracts and whether the billing procedures
             are adequate for the preparation of cost reimbursement
             claims, i.e., interim public vouchers and progress
             payments.

                    ATS is responsible for establishing and maintaining
             an adequate accounting system for accumulating and billing
             costs under Government contracts. Our responsibility is to
             express an opinion on the adequacy of the accounting
             system based on our examination.

Based on its examination, DCAA concluded that:

                     In our opinion, ATS' accounting system is
             inadequate for accumulating and billing costs under
             Government contracts. Our examination disclosed a
             significant deficiency that is considered to be a material
             weakness in the design or operation of the accounting
             system. We determined the contractor is not currently
             billing material at cost as required under a cost
             reimbursable contract. In our judgment, this deficiency
             could adversely affect the organization's ability to initiate,
             authorize, record, process, and/or report costs in a manner
             that is consistent with applicable Government contract
             laws and regulations. As a result, we recommend you



                                            7
                pursue suspension of a percentage of reimbursement of
                costs in accordance with DFARS 242.7502.

(R4, tab 17 at 4-6)

         12. DCAA explained the basis for its determination as follows:

                        We determined ... the contractor is billing costs
                associated with its training aids at catalog price rather than at
                actual unit cost. During discussions with Ms. Debbie Ricci,
                chief financial officer, [I] we determined the contractor is
                continuing a practice started under the original firm-fixed-price
                contract. However, the contractor's current contract, which
                began in late 2009, is cost-plus-fixed-fee. Cost reimbursable
                type contracts require materials to be tracked and billed at the
                base cost level, unless otherwise stated in the subject contract.
                ATS asserts its material billings are in accordance with
                FAR 31.205-26(e), which allows for material costs to be billed
                at price when costs are transferred and recorded between
                company segments at price. We reviewed the contractor's
                submissions provided in support of its assertion and performed
                an additional field visit on March 10, 2011. Based on the
                information provided, we do not believe ATS meets all the
                requirements of FAR 31.205-26(e). Although, the contractor
                has established the commerciality of its products and has
                adequately demonstrated a physical transfer of material goods
                between Mission Support and Training (Warfighter), its
                accounting system documentation does not show a transfer of
                material at price between divisions as specifically required by
                FAR 3 l.205-26(e)(l)(2), which states:

                              However, allowance may be at price when-
                      (1) It is the established practice of the transferring
                      organization to price interorganizational
                      (underlined for emphasis) transfers at other than
                      cost for commercial work ofthe contractor or any
                      division, subsidiary or affiliate of the contractor
                      under a common control; and
                              (2) The item being transferred qualifies for
                      an exception under [FAR] 15.403-1 (b) and the


1
    Ms. Ricci succeeded Mr. Wise as CFO of ATS in June of 2010 (tr. 60).

                                              8
                     contracting officer has not determined the price to
                     be unreasonable.

                      The transfer occurs at cost between the A TS Mission
              Support and ATS Training Divisions. ATS' proposed
              practice of billing material costs based on a commercial
              price, if permitted, would result in significant overbillings
              to the Government in excess of the contractor's cost for the
              material.

(R4, tab 17 at 7)

       13. ATS disagreed that its accounting records showed a transfer at cost rather
than price and that its accounting system was therefore inadequate. In its rebuttal
provided to DCAA prior to issuance of the final audit report, A TS stated:

              The Company disagrees with DCAA's comment that the
              accounting records do not reflect the transfer of commercial
              products from Mission Support Solutions to Warfighter
              Solutions at price. DCAA's comment is based on the fact
              that Warfighter Solutions' Project Summary Report ("PSR")
              for this contract, a Deltek CostPoint management report,
              does not reflect Mission Support Solutions' price as the cost
              to the project and Warfighter Solutions. This reporting
              practice was a result of an intentional setup selection in the
              initial implementation ofDeltek Costpoint. In response to
              the audit comment by DCAA, the Company has modified
              the capture ofprice related to intercompany [sic] transfers
              on the PSR report and has f1Xed the exception noted by
              DCAA. The Company does not believe this reporting
              exception invalidates the Company's interorganizational
              transfers pursuant to FAR 31-205-26(e).

             The Company is confident that ( 1) the transfers were
             properly recorded by the Mission Support business unit at
             price in accordance with FAR 31-205-26(e), and (2) the
             financial results of Mission Support Solutions and
             Warfighter Solutions reflect the economics of this
             transfer at price. Based on these facts, the Company
             believes all requirements of FAR 31.205-26(e) have
             been met. In analyzing FAR 31.205-26(e ), the FAR
             states that the established practice relative to
             interorganizational transfers must be that the transferring


                                            9
              organization have an established practice to price these
              transfers at other than cost. Based on the FAR definition
              the Company met this requirement. The Company was
              able to document that since 2007, the Mission Support
              Solutions business unit has consistently done just that -
              price all transfers at catalog price.

(R4, tab 17 at 15) ATS further noted DCAA's agreement that the products sold by
Mission Support were commercial products (id. at 14 ).

       14. DCAA responded to ATS's rebuttal:

                      Based on the documentation reviewed during our
              field visits, we determined the intercompany [sic] transfers
              were being recorded at cost rather than price. We contend
              that the Project Summary Reports are an integral part of
              ATS' ability to demonstrate its material transfer practices as
              they reflect recorded job costs. Therefore, ATS' inability to
              show material transfers at price does not support its
              assertion of an established practice. Moreover accounting
              system modifications made in response and subsequent to
              DCAA's findings does [sic] not constitute a historically
              established practice as defined by FAR.

(R4, tab 17 at 8)

       15. Following issuance of the audit report, A TS continued performing the
contract and seeking resolution of the issue with the government. Discussions took
place throughout 20 I 0 and 2011 that included the possibility of modifying the contract
to add a firm-fixed-price contract line item number (CLIN) to facilitate ATS's billing
the commercial training materials at price. Ultimately, the Army decided not to modify
the contract. (Tr. 64; R4, tab 15 at I, 10-11, tab 20 at 5 n.l)

       16. In December of 2012, ATS representatives met with the Defense Contract
Management Agency (DCMA) administrative contracting officer (ACO) for the
JATAC contract and other DCMA personnel to follow up on the status of ATS's
accounting system in the wake of DCAA' s recommendation that ATS' s accounting
system be found inadequate. A TS representatives at this meeting included its President,
Dennis Kelly, and its CFO, Deborah Ricci. DCMA informed ATS at the meeting that it
would have to prove it was capable of accumulating costs on the JAT AC contract to
prevent its accounting system from being found inadequate. (Tr. 73-74) ATS
thereafter, in order to avoid an adverse determination of inadequacy, submitted a
"Corrective Action Plan" to provisionally bill its products at fully burdened cost until


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

ATS Business Units and Accounting Practices

        17. At all times relevant hereto, A TS was a small business that provided
counter-terrorism training services and solutions, including training related to how to
identify, defuse, and evaluate IEDs. In providing the training, ATS relied on the
experience and expertise of its personnel and on training materials and equipment,
primarily JED replicas, manufactured by ATS. (Tr. 21-22) At the time of contract
award, ATS had two business units involved in delivering JED training. Its Training
Solutions business unit (later renamed Warfighter Solutions) contracted for and
provided the training, while the Logistics and Production unit (later renamed Mission
Support), under its Technical Solutions business unit, manufactured the training aids
and devices used to provide the training. (Tr. 22-23; app. supp. R4, tab 11)

        18. Training materials and equipment produced by ATS' s Mission Support unit
were sold commercially for several years prior to award of the contract. Customers
included state and local law enforcement agencies and private companies. ATS sold
its products on the GSA Schedule and developed its first commercial catalog in the
2005/2006 timeframe. The products were sold either with or independently of the
training services offered by ATS. (Tr. 24-25; R4, tabs 10-11)

         19. Prior to 2009, ATS employed accounting software known as Peachtree. In
January 2009, it switched over to more sophisticated cost accounting software
developed specifically for companies doing business with the federal government,
De Itek CostPoint. Peachtree was characterized by ATS' s former chief financial
officer, Michael Wise, as "kind of a low-end software for small businesses," similar to
QuickBooks in that it "basically gives you a nice profit and loss statement and keeps
track of your balance sheet. But it doesn't really go into a lot of details on how every
transaction that happens within the company occurs." (Tr. 50-51) Successor ATS
CFO Deborah Ricci agreed that Peachtree "has a balance sheet, income statement, and
... transactions and journal entries. When you get to Costpoint, Costpoint is just much
more dimensional." In particular, Costpoint "operates on different levels called
organizations .... [Y]ou can establish the Training Division versus Mission Support
Division. Each one of these groups has what's called an organization within
[Cost]point. And you can generate any type of details you need at that level." (Tr. 62)

       20. ATS witnesses testified that DCAA's conclusion that the transfer of training
materials between divisions occurred at cost was erroneous and contradicted by the


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

                    Q And what value would the products be signed
             over to the Training Division?

                    A Effectively bill price, the catalogue price. Now
             within Logistics and Production we kept track of both-you
             know, how much it cost us to build it and how much we
             were selling it for. Because we needed to know how we
             were doing. Are we doing this right? Are we losing money
             or are we making money?

                    So we kept track of both within Logistics and
             Production. But from the training perspective, all they saw
             was the price, whatever it cost them to deliver that training.

                    Q And did that transfer or assigned payment to
             divisions price, was that, did that accounting practice
             change whatsoever between the Peachtree and the Deltek
             systems?

                     A It got more sophisticated. It didn't change. I
             mean, the intent, the process, didn't change. We just had
             better tools, better documents, better controls over the
             process, but it was still the same process.

                    Q And that process was that price?

                    A That price, yes. Keep in mind, you know, we
             were-in our industry the leaders of our divisions are all
             generally Type A personalities. And I've got the best
             division, I'm going to be this-so there was a little bit of
             competition there, you know.

                   Logistics and Production, they wanted to be the most
             successful. Training, they wanted to be the most
             successful. And so, you know, when we sold a device we


                                           12
              wanted Logistics and Production to have the credit for that
              sale at the catalogue price.

(Tr. 54-56)

       21. Ms. Ricci testified that DCAA' s conclusion that the transfers occurred at
cost was incorrect:

                    A That's not correct. The transfer's at price.
              Everything [that] Mission Support transfers is at price.
              Nothing leaves Mission Support at anything other than
              pnce.

                     Q And how did-do you know how DCAA got the
              idea that the transfer was at cost?

                     A Yes, the one report they had asked for was called
              the project summary report. And we had provided it at the
              highest level. So they integrated ... at our A-T Solutions, Inc.
              level and all the costs, both sides of everything, were just
              loaded into this same report.



                    Q Were there subsidiary records in the Deltek
              accounting system that showed where the revenue for the
              products at issue were recorded?

                      A Absolutely. As I explained, Costpoint has
              different organizations. So we had separate organizations
              for training versus a separate organization for Mission
              Support. Both of those organizations have their own P&Ls
              and basically you can just run at that level.

                    Or revenue summaries, you can run revenue details
              by each organization. And within those revenue summaries
              you can see that.. .Mission Support transferred those
              products at price.

(Tr. 70-71) Ms. Ricci explained that there were business reasons to record revenues by
division, including determining whether goals had been met for purposes of
management compensation (tr. 72).



                                            13
        22. Fiscal year 2009 revenue summaries by division are included in a package
of information Ms. Ricci prepared and delivered to DCAA in February of 2011 to
document how the revenues from interdivisional transfers were recorded in A TS' s
accounting system (tr. 88; supp. R4, tab 34). These summaries show revenue for both
the Training Solutions division (CIED, organization 1.1.01.0.5.20.0), and the Logistics
and Production division (later renamed Mission Support, organization 1.1.01.0.5.60.0)
(tr. 89-92; supp. R4, tab 34, exs. 3-4). The summaries show that revenues from both
JATAC II (predecessor contract) and JATAC III (the contract involved in this appeal)
sales are recorded for the Mission Support division of ATS at catalog price (tr. 91-93;
R4, tab 34, ex. 4 at 2). Attached to the revenue summary for the Mission Support
division are over twenty pages of detail listing the equipment sold by invoice at catalog
price (R4, tab 34, ex. 4 at 4-27). However, ATS was unable to convince DCAA to
examine these subsidiary records (tr. 70-71, 92).

        23. ATS's expert witness, Mr. James Thomas, 2 testified and provided an expert
report concerning ATS's books and records for 12 transactions that took place in
2007-2008 when ATS was still using Peachtree accounting software (tr. 96-99; app. supp.
R4, tab 18). Mr. Thomas characterized Peachtree as a small business software application
based on a single organizational structure with a one dimensional chart of accounts, and
stated that A TS used separate accounts within Peachtree to record sales related to the
Training division (40xxx series) and the Logistics and Production division (41xxx series)
(app. supp. R4, tab 18 at 4-5). In particular, Mr. Thomas examined ATS's accounting
records relating to training services provided to the Pennsylvania State Police under
invoice No. 523 dated 19 September 2008 (id. at 4 ).

         24. Mr. Thomas's report summarizes his examination and conclusions:

               The ATS accounting records for the PA State Police for
               invoice number 523 show the following:

                      1. The PA State Police agreed to a fixed price of
                         $49,912 for training services to be provided by
                         ATS. The fixed price of $49,912 included
                         $7,800 of training equipment at ATS'
                         commercial prices.



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

                                           14
       2. The Training division of ATS had responsibility
          for providing the training fur the PA State Police
          and, as part of the training,. furnishing training
          equipment such as student guides, training kits
          and electronic supplement kits supplied by the
          Logistics & Production division of ATS.

       3. ATS issued invoice number 523 to the PA State
          Police dated 19 September:2008 for $49,912.
          The invoiced amount included training services
          totaling $42, 112 and training equipment at
          commercial prices totaling $7,800.

       4. The training equipment was shipped by the
          Logistics & Production division to the PA State
          Police facility for use by the Training division in
          conducting the training on 22-26 September
          2008.

       5. ATS recorded the invoice and sale of $49,912 on
          19 September 2008. The $7,800 consisted of
          three training equipment items valued at
          commercial prices - 16 Electronics Training Kits
          ($4,800), 16 Electronics Student Guides ($2,000)
          and an Electronics Class Supplement Kit
          ($1,000). The $7,800 of training equipment was
          recorded as a Logistics & Production division
          sale in general ledger account 41000 - ATS
          Product Sales [-]to account for the physical
          transfer of training equipment to the Training
          division. The remaining $42, 112 for training
          services was recorded as a Training division sale
          in general ledger account 40500 - State/Local
          Sales ....

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


                             15
              goods sold for the equipment [as shown by A TS' s
              accounting records].

(App. supp. R4, tab 18 at 6-7) Mr. Thomas evaluated 11 other transactions in the 2007-2008
time frame and found the accounting for those transactions to be consistent with that for the
PA State Police sale. He also looked at later ATS accounting records generated by the
Deltek Costpoint software and found no indication that training equipment transferred
between the two A TS divisions was ever recorded by the transferring division (Logistics and
Production) at anything other than price. (Id. at 7-8; tr. 99)

        25. The ATS Peachtree accounting records that Mr. Thomas reviewed are
listed in exhibit B to his expert report:

             Tab 1-ATS invoices pertaining to 12 sales to commercial
             customers in 2007-2008 (including invoice number 523 for
             $49,912 to the PA State Police);

             Tab 2-2007 ATS general ledger trial balance;

             Tab 3-2008 ATS general ledger trial balance;

             Ta\> 4-2007 general ledger detail for Account 41000, ATS
             Product Sales;

             Tab 5-2008 general ledger detail for Account 11000,
             Accounts Receivable (showing $49,912 as both a debit to
             invoice 58031287 and a credit to invoice 523, both
             associated with the PA State Police sale at 21 );

             Tab 6-2008 general ledger detail for Account 14000,
             Inventory-Logistics (showing $1,094.40 as the cost
             of goods sold for the student guides sold on invoice 523
             at 253);

             Tab 7-2008 general ledger detail for Account 14200,
             Inventory-Production Finished Goods (showing $2359.52
             and $414.72, respectively, as the cost of goods sold forthe
             Electronics Training Kits and the Electronics Class
             Supplement Kit at 55);

             Tab 8-2008 general ledger detail for Account 40500,
             Training division sales (showing a sale of$42,112 for
             training services on invoice 523);


                                          16
              Tab 9-2008 general ledger detail for Account 41000, ATS
              Product Sales (showing a total sale of $7,800 on invoice
              523 to the credit of ATS's Logistics and Production
              division at 60);

              Tab 10-2008 general ledger detail for Account 56200, Cost
              of Goods Sold (showing the total cost of goods sold for the
              three items sold under invoice 523 to be $3,868.64 at 68).

        26. In summary, under the Peachtree accounting system employed by ATS in
2007-2008, a sale of training services by the Training division that incorporated
training materials produced by the Logistics and Production division was accounted for
as follows: when the sale was made, ATS issued an invoice to the customer for both
the training services and the training materials, the latter at catalog price. The amount
representing training materials at catalog price was recorded as a credit to Product Sales
in the Logistics and Production general ledger account 41000. The amount
representing the training services was recorded separately as a credit to the Training
division (in the case of the PA State Police sale, account 40500, state/local sales). At
the same time, ATS would record a debit to accounts receivable in the full amount of
the sale, and a credit to Logistics and Production inventory accounts for cost of goods
sold. (Findings 23-25; tr. 83)

        27. Under the Costpoint accounting system employed by A TS starting on
1January2009, a sale of training services by the Training division that incorporated
training materials produced by the Logistics and Production division was accounted for
as follows: when the sale was made, the Training unit would issue an invoice to the
customer for both the training services and the training materials, the latter at catalog
price. The sale amount representing training materials at catalog price was recorded as
Logistics and Production division (organization 1.1.01.0.5.60.0) revenue, but posted to
accounts receivable for the Training division (organization 1.1.01.0.5.20.0), which
"owned" the contract and had the responsibility for collecting revenue from the sale.
(Supp. R4, tab 34 at 1-2, exs. 1, 4) The revenue summary for the Training division
would be credited with the sale price for the training services (id., ex. 1 at 4-5), but its
profit and loss statement for the period would not contain either revenue or cost related
to the training materials since the materials were passed through to the end customer at
the same catalog price credited as revenue to the Logistics and Production division and
the net impact to the training organization was zero (id. at 2, ex. 3 ).

      28. ATS witnesses testified, and the government does not contest, that
ATS accounted for both external sales and internal transfers by the Logistics and
Production division the same way, both before and after ATS adopted the Costpoint
accounting system (findings 20-22; gov't br., proposed findings of fact (PFF) ~ 13).


                                             17
The predecessor Peachtree system, however, did not allow for the degree of visibility
into transactions at the interdivisional level that Costpoint made possible (finding 19).

Contracting Officer's Final Decision and this Appeal

        29. On 26 March 2014 ATS submitted a certified claim to contracting officer (CO)
Ofelia Rivera asserting entitlement to payment of catalog prices for A TS' s commercial
item training materials and equipment (R4, tab 30 (ltr. dtd. 2013 in error)). ATS stated in
its claim that the difference between the amount billed and paid by the government and the
prices to which it was entitled was $8,717,958 as of 31January2014, and likely to grow to
an estimated $9,832,565 by the end of the contract term (id. at 1).

        30. CO Rivera issued a final decision (COFD) denying ATS's certified claim
on 22 May 2014 (R4, tab 31 ). In her decision, she acknowledged that ATS proposed
to provide its commercial training materials at catalog price (id. at 2-3). However, she
found this fact insufficient to overcome the terms of the solicitation and resulting
CPFF contract, in particular the Allowable Cost and Payment clause, FAR 52.216-7
(see finding 8), which sets forth the terms under which payments will be made to
the contractor (id.). She observed that using catalog pricing ''to support a
proposed estimated cost in a competitive acquisition" was "appropriate" but would not
influence "how payments are actually disbursed on a CPFF contract." (R4, tab 31 at 3)
She also found the commerciality of the materials not relevant, since the government's
requirement "as a whole" was non-commercial. While commercial materials could be
provided under the contract, she stated, A TS' s accounting for the cost of materials
must conform to the cost principles and procedures of FAR Part 31 and the terms of
the cost-type contract. (Id.)

       31. CO Rivera also found that A TS' s training materials did not come within the
FAR 31.205-26(e) exception allowing materials transferred between divisions of a
company to be billed at price if it is the established practice of the transferring division to
price such transfers at other than cost. Her finding in this regard was based on DCAA' s
conclusion that A TS' s inter-organizational transfers were recorded at cost, not price, and
on the misimpression that DCAA had "determined ATS's accounting system [to be]
inadequate" to meet the FAR requirement for billing at price. (Id. at 3)3

       32. Finally, CO Rivera rejected the possibility of modifying the contract to add a
firm-fixed-price CLIN to allow ATS to bill, and the government to pay, for the training
materials at catalog price. In her opinion, such a modification would not be in the best

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

                                             18
interest of the government, as it would "circumvent" FAR 52.216-7, "nullifying a
contracting officer's ability to control costs." (R4, tab 31 at 4)

      33. ATS timely appealed the COFD to the Board on 27 May 2014, and its appeal
was docketed on 28 May 2014. A hearing was scheduled for 3-5 February, 2015. On
4 November 2014, the government filed a motion for partial summary judgment on
Count 1 of ATS's complaint. Because less than three months remained until the hearing,
the Board deferred ruling on the government's motion.

                                      DISCUSSION

Contentions of the Parties

         ATS contends that the government agreed to pay commercial item catalog prices
for its training materials by accepting its offer to provide those items at its catalog prices
and incorporating its proposal into the contract. A TS points out that, consistent with such
an agreement, the government accepted and paid A TS' s invoices for the materials at
catalog price until February of 2010 when DCAA questioned the allowability of ATS' s
billings under the contract. Alternatively, ATS asserts that its interdivisional transfers of
the training materials were at price, thus entitling it to bill the government for those
materials at price pursuant to the cost principle at FAR 31.205-26( e).

       The government presented no testimony or other evidence regarding whether
the government agreed to pay A TS' s commercial prices for its training materials,
but contended that ATS cannot be paid for its training materials at its commercial
catalog prices because the solicitation and resulting contract were unambiguously
cost-plus-fixed-fee (CPFF) and ATS submitted a CPFF proposal. 4 The government
points out that there were only two line items in the contract, both of which were CPFF
and one of which was not separately priced. Thus, it states, the government was
obligated to pay ATS for its training materials at the allowable cost thereof, unless
ATS satisfied the requirements of FAR 31.205-26(e) for billing at price. The
government further contends that the record in this appeal demonstrates that ATS did
not meet those requirements because ( 1) its interdivisional transfers of training
materials were mere physical transfers lacking economic substance and thus did not
qualify as interorganizational transfers under FAR 31.205-26(e ); or, (2) even if the
transfers qualified as interorganizational transfers under FAR 31.205-26(e), the
transfers were recorded at cost, not price.

      When the government disallows a cost on the basis of a FAR cost principle, the
burden is on the government to prove that the costs are unallowable. SRI International,

4
    This is also the gist of the government's motion for partial summary judgment on
          Count 1 of ATS's complaint.

                                            19
ASBCA No. 56353, 11-1BCA~34,694 at 170,865-66, modified in unrelated part, 11-2
BCA ~ 34,853. Both parties in this appeal agree that the government bears the burden of
proving that A TS' s interdivisional transfers did not qualify to be billed at price under
FAR 31.205-26( e) (gov't br. at 11; app. br. at 20).

        The "at price" exception to the material cost principle's requirement that
materials be billed at cost under cost-reimbursement contracts applies to "materials,
supplies and services that are sold or transferred between any divisions, subdivisions,
subsidiaries, or affiliates of the contractor under a common control" when (1) it "is the
established practice of the transferring organization to price interorganizational transfers
at other than cost for commercial work of the contractor or any division, subsidiary or
affiliate of the contractor under a common control"; (2) the item being transferred
qualifies for an exception to the requirement to submit cost or pricing data under
FAR 15.403-l(b); and (3) the contracting officer has not determined the price to be
unreasonable. FAR 31.205-26(e). The government concedes that elements 2 and 3 are
met by the training materials at issue.

       The government's position is that element 1 is not met in this appeal, for two
reasons. First, because ATS' s transfers of training materials between the Logistics and
Production division and the Training division lacked "economic substance" and
therefore do not qualify as transfers within the meaning of the relevant cost principle
(gov't br. at 12-16). Second, because even ifthe transfers qualify as such under the
cost principle, the transfers were at cost, not price (id. at 16-17).

       As to the alleged lack of economic substance, the cost principle does not impose
a requirement that the transfers in question have "economic substance," and the
government's support for urging us to adopt such a test is thin: a bare citation to a
section of a cost accounting treatise that purportedly lists examples of
interorganizational transfers (neither the text of the treatise nor the context was
supplied to the Board) and a citation to a Cost Accounting Standards regulation that
addresses when transfers between affiliates will be deemed "subcontracts" for
purposes ofCAS coverage (gov't br. at 14). We decline the government's invitation to
read an "economic substance" requirement into the cost principle at issue. The
government has failed to establish the existence of such a requirement or to suggest
how a court or Board could tell if it had been met in a particular case.

       While we do not accept the government's posited "economic substance"
requirement, we also do not hold that the transfers were mere "physical transfers"
lacking economic substance, as the government has argued. Instead, we find that the
government has not met its burden to show that the transfers of commercial A TS
training materials between A TS divisions were not the sort of transfers contemplated
by FAR 31.205-26(e). The government argues that there could not have been a
transfer between divisions based on (1) accounting entries in the 2007-2008


                                            20
(Peachtree) ATS accounting records which it argues demonstrate that "[t]he training
materials never entered the inventory of the Training Unit" (gov't br. at 14), and that
the training materials were sold directly to the customer out of A TS product inventory
(id.), and (2) the lack of accounting entries recording a sale or transfer from one
division to another (gov't br. at 7, PFF ,-; 22).

        The government offered no testimony or other evidence (other than the Peachtree
accounting records) in support of its argument. Moreover, the government's argument
relies on a negative-what ATS's 2007-2008 accounting records do not show. Those
accounting records were the product of an unsophisticated small business accounting
software application that did not provide visibi-lity into transactions at the divisional
level (finding 19). ATS witnesses testified credibly that the Training division
determined what materials would be needed for a particular training and ordered the
materials from the Logistics and Production division, the training materials were then
transferred from the Logistics and Production division to the Training division at price,
and that training materials never left Logistics and Production at anything other than
commercial catalog price, whether on a direct sale to a customer or as part of a sale of
training services. (Findings 20-23) Their testimony is uncontradicted.

        ATS began to use more sophisticated accounting software (Deltek Costpoint) in
January of 2009 that did provide visibility into transactions at the business unit level, but
could not convince DCAA to review the subsidiary records detailing those transactions
(finding 22). The Costpoint records show that when a sale of training services and
materials was made, the Training unit issued an invoice to the customer that included the
training materials at catalog price, and the sale amount for training materials at catalog
price was recorded as Logistics and Production division revenue, but posted to accounts
receivable for the Training division, which "owned" the contract and had the
responsibility for collecting revenue from the sale (finding 27). The revenue summary
for the Training division would be credited with the sale price for the training services,
but its profit and loss statement for the period would not contain either revenue or cost
related to the training materials since the materials were passed through to the end
customer at price with a net impact to the Training division of zero (id.). The
government failed to address the Costpoint records in its argument.

        The fact that training materials never left the Logistics and Production division
at anything other than price, and that there were valid business reasons for crediting that
division with a sale at commercial price whether the transaction was external or
internal,.carries great weight. Additionally, we do not see how the accounts receivable
amount for sales of training materials could be posted to the Training division account
rather than the Logistics and Production account if there had not been a transfer of the
materials. That the transfer may be essentially pass-through in nature does not prevent
its recognition. See, e.g., Pacific Gas & Electric Company v. United States, 838 F.3d
1341, 1351-52 (Fed. Cir. 2016) (under the Uniform Commercial Code (UCC), a


                                            21
middleman contract for purchase and sale is valid though the middleman will never
have title to the goods, as title is to pass directly from the supplier to the customer of
the middleman); Rumsfeld v. United Technologies Corp., 315 F.3d 1361, 1371 (Fed.
Cir. 2003) (applying UCC in determining whether suppliers sold parts to contractor
prior to sale to government, court held that contractor acquired title from the suppliers
and conveyed it instantaneously to the government when the engine sale was made).
Thus, we find on the record before us that the training materials were transferred
between ATS divisions within the meaning of the cost principle. The government has
not met its burden to show otherwise.

       We also find that the transfers were recorded by the transferring division at price,
thus satisfying FAR 31.205-26(e). The government's argument that the transfers were
recorded at cost rests on the proposition that any transfer between divisions would have
had to take place before ATS sold the materials and issued the invoice, but since the first
and only time the transaction is recorded at price is when the sale is made to the
customer, ipso facto, if a prior transfer occurred at all, it must have occurred at cost. The
government produced no evidence or law in support of this proposition. To the contrary,
the United States Court of Appeals for the Federal Circuit has recognized in its United
Technologies decision that more than one valid transaction may take place
simultaneously, 315 F.3d at 1371, and ATS has produced credible evidence that such
transfers were recorded by the transferring division at commercial catalog price.

        The government has failed to carry its burden of proof to justify the disallowance
under FAR 31.205-26( e). Because we have decided that ATS is entitled to recover its
commercial catalog prices for training materials pursuant to FAR 31.205-26(e), we do not
reach ATS' s Count I claim that the contract, properly interpreted, also authorized ATS to
bill and be paid for its training materials at commercial catalog prices. Our decision also
moots the Army's motion for partial summary judgment, which was directed at Count I of
ATS' s complaint.

                                        CONCLUSION

       The appeal is sustained and returned to the parties for determination of quantum.

       Dated: 8 February 201 7



                                                   Administrative Judge
                                                   Armed Services Board
                                                   of Contract Appeals

(Signatures continued)


                                            22
 I concur                                          I concur




~ifat~ff==
 Administrative Judge
                                                   RICHARD SHACKLEFORD
                                                   Administrative Judge
 Acting Chairman                                   Vice Chairman
 Armed Services Board                              Armed Services Board
 of Contract Appeals                               of Contract Appeals



       I certify that the foregoing is a true copy of the Opinion and Decision of the
Armed Services Board of Contract Appeals in ASBCA No. 59338, Appeal of A-T
Solutions, Inc., rendered in conformance with the Board's Charter.

       Dated:



                                                  JEFFREY D. GARDIN
                                                  Recorder, Armed Services
                                                  Board of Contract Appeals




                                           23
