           In the United States Court of Federal Claims
                          Nos. 09-844C & No. 10-741C (consolidated)

                               (Filed Under Seal: March 22, 2013)
                                   (Reissued: March 27, 2013)

**************************************                    Post-trial decision on government’s
                                       )                  claim for damages based upon alleged
SIKORSKY AIRCRAFT CORPORATION, )                          misallocation of indirect costs to
                                       )                  government contracts; statute of
                  Plaintiff,           )                  limitations; 41 U.S.C. § 7103(a)(4)(A);
                                       )                  Cost Accounting Standards; scope and
      v.                               )                  thrust of 48 C.F.R. § 9904.418–50;
                                       )                  criteria for proper cost-accounting
UNITED STATES,                         )                  allocation of indirect costs; significance
                                       )                  of costs of management and supervision
                  Defendant.           )                  of activities related to direct labor or
                                       )                  materiel costs; applicability of 48
**************************************                    C.F.R. § 9904.418–50(e); proper use of
                                                          a surrogate to allocate indirect materiel
                                                          costs

        Jeffrey A. Hall, Bartlit Beck Herman Palenchar & Scott LLP, Chicago, Illinois, for
plaintiff. Of counsel were Shayna S. Cook, Allison W. Freedman, Georgia N. Alexakis, and
Katherine M. Swift, Bartlit Beck Herman Palenchar & Scott LLP, Chicago, IL; Karen L. Manos,
Gibson, Dunn & Crutcher LLP, Washington, D.C.; and Ariel R. David, Sikorsky Aircraft
Corporation, Stratford, CT.

       James W. Poirier, Attorney, Commercial Litigation Branch, Civil Division, United States
Department of Justice, Washington, D.C., for defendant. Of counsel were Stuart F. Delery,
Principal Deputy Assistant Attorney General, Civil Division, Jeanne A. Davidson, Director, and
Steven J. Gillingham, Assistant Director, Commercial Litigation Branch, Civil Division, United
States Department of Justice, Washington, D.C., and Kathleen Malone, Defense Contract
Management Agency, Boston, MA.

                                    OPINION AND ORDER1

LETTOW, Judge.


       1
         Because this opinion might have contained confidential or proprietary information
within the meaning of Rule 26(c)(1)(G) of the Rules of the Court of Federal Claims (“RCFC”)
and the protective order entered in this case, it was initially filed under seal. The parties were
requested to review this decision and to provide proposed redactions of any confidential or
proprietary information. The resulting redactions are indicated by brackets enclosing asterisks,
e.g., “[***].” Several minor changes to citations have also been made.
                                                 1
        This post-trial decision concerns the allocation of indirect costs to contracts under which
Sikorsky Aircraft Corporation (“Sikorsky”) provided aircraft and spare parts to the United States
Government (“government”). The government claims that Sikorsky should reimburse it
approximately $80 million plus interest because Sikorsky’s accounting method misallocated
indirect costs to the company’s contracts with the government in contravention of the Cost
Accounting Standards (“CAS”) set out at 48 C.F.R. Chapter 99, Subchapter B, Part 9904.
Sikorsky avers that its accounting practices were compliant with the CAS, and alternatively
relies upon the affirmative defenses that the government’s claim is barred by the six-year statute
of limitations set forth in the Contract Disputes Act (“CDA”), see 41 U.S.C. § 7103(a)(4)(A),
and that the parties reached an accord and satisfaction late in 2005 that resolved all their
outstanding issues.2

       The court held a five-day trial on the CAS-compliance and statute-of-limitations issues in
October 2012. Post-trial briefing was then provided, and on January 25, 2013, the parties
presented their closing arguments. The case is accordingly ready for disposition.3

                                             FACTS4

        The parties addressed two issues at the October trial: the applicability of 48 C.F.R.
§ 9904.418 (“CAS 418”), particularly the standards for allocation of direct and indirect costs
codified at Sections 9904.418–20 to 9904.418–63, and the pertinence of the six-year statute of
limitations in the CDA requiring “each claim by the [f]ederal [g]overnment against a contractor
relating to a contract [to] be submitted within 6 years after the accrual of the claim.” 41 U.S.C.

       2
         This opinion and order does not address Sikorsky’s second affirmative defense based on
an accord and satisfaction that arguably occurred in late 2005 when the government’s
administrative contracting officer and a Sikorsky representative allegedly agreed to consider the
CAS 418 noncompliance resolved in exchange for Sikorsky’s decision to alter its accounting
practice going forward. See Compl. in No. 09-844 ¶¶ 45-50; Sikorsky Aircraft Corp. v. United
States, 105 Fed. Cl. 657, 674 (2012) (“Sikorsky II”). The court denied the government’s motion
for summary judgment on this affirmative defense after a lengthy examination, see Sikorsky II,
105 Fed. Cl. at 674-78, noting that there “is a genuine dispute as to the parties’ understanding of
the purported agreement between [the parties’ representatives],” id. at 678. Although the accord-
and-satisfaction issue was not tried with the CAS-applicability and statute-of-limitations issues,
it has not been waived and remains a potentially viable affirmative defense. As this opinion
indicates, however, resolution of these two consolidated cases is possible without reaching the
accord-and-satisfaction defense.
       3
        Sikorsky filed a third, separate action, docketed as 12-898C, in this court on December
20, 2012 regarding a follow-on claim made by the government on December 21, 2011. See
Compl. in No. 12-898C, ¶¶ 1-7.
       4
        This recitation of facts constitutes the court’s principal findings of fact in accord with
RCFC 52(a). Other findings of fact and rulings on mixed questions of fact and law are set out in
the analysis.



                                                 2
§ 7103(a)(4)(A). The relevant statutory and regulatory framework for these issues was
canvassed in several prior opinions of the court in these cases, see Sikorsky Aircraft Corp. v.
United States, 102 Fed. Cl. 38 (2011) (“Sikorsky I”);5 Sikorsky II, 105 Fed. Cl. 657; Sikorsky
Aircraft Corp. v. United States, 106 Fed. Cl. 571 (2012) (“Sikorsky III”), and that framework, as
an initial matter, will be described briefly to provide a context for the factual findings that
follow.

                               A. Statutory and Regulatory Framework

         The CAS are a set of nineteen cost-accounting criteria6 promulgated by the Cost
Accounting Standards Board (“CASB”), a five-member entity that has “exclusive authority to
prescribe, amend, and rescind cost accounting standards, and interpretations of the standards,
[which govern] measurement, assignment, and allocation of costs to contracts with the [f]ederal
[g]overnment.” Sikorsky I, 102 Fed. Cl. at 41 (citing 41 U.S.C. § 1502; 48 C.F.R. §§ 9900.000
to 9904.420–63; Darrell J. Oyer, Accounting for Government Contracts — Cost Accounting
Standards, § 1.01 to .05 (2010)). This case centers on CAS 418, which governs government
contractors’ distribution of indirect costs among their contracts.7 CAS 418 specifies accounting
practices for “consistent determination of direct and indirect costs,” “the accumulation of indirect
costs . . . in indirect cost pools,” and “the selection of allocation measures based on the beneficial
or causal relationship between an indirect cost pool and cost objectives.” 48 C.F.R. § 9904.418–
20. A direct cost is “any cost which is identified specifically with a particular final cost
objective[, e.g., a contract]. . . . Costs identified specifically with a contract are direct costs of
that contract.” 48 C.F.R. § 9904.418–30(a)(2). An indirect cost is “any cost not directly
identified with a single final cost objective, but identified with two or more final cost objectives

       5
         Sikorsky first brought suit in this court on December 8, 2009, seeking a judgment
declaring that the contracting officer’s final decision requiring the company to pay $80 million
plus interest was null and of no effect, and that Sikorsky’s challenged allocation method
complied with CAS 418. See Sikorsky I, 102 Fed. Cl. at 40. It also pleaded statute- of-
limitations and accord-and-satisfaction affirmative defenses. In light of the Federal Circuit’s
decision in M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010),
Sikorsky thereafter submitted a claim to a contracting officer seeking a decision regarding the
merits of those affirmative defenses. Id. When the contracting officer rejected the claim
respecting defenses, Sikorsky brought a second suit seeking review of the denial. The court
consolidated the two cases on Nov. 19, 2010, see ECF No. 26, and thereafter denied the
government’s motion to dismiss the second case. See Sikorsky I, 102 Fed. Cl. at 47-48 & n.14
(distinguishing Maropakis).
       6
        The nineteen standards are collected at 48 C.F.R. §§ 9904.401 to 9904.420 (CAS 419
does not exist).
       7
         The CASB, which was established by Congress in 1970, undertook numerous
proceedings and considered several drafts of, and proposals for, CAS 418 before settling on the
current text of the regulation in 1980. For a more detailed recounting of the published regulatory
history concerning CAS 418, see Sikorsky I, 102 Fed. Cl. at 56-58.



                                                  3
or with at least one intermediate cost objective.” Id. § 9904.418–30(a)(3).8 Indirect costs are
grouped together in “indirect pools.” Id. § 9904.418–40(b). Both direct and indirect costs are
allocated to cost objectives.9 Indirect costs are to be apportioned according to an allocation
method (also termed an allocation base, allocation basis, or cost driver), which guides how an
indirect cost is to be distributed among multiple cost objectives.

        Section 418–50 provides a framework for acceptable allocation methods. It first provides
two definitions of “homogenous indirect cost pools”: (1) pools where “each significant activity
whose costs are included therein has the same or a similar beneficial or causal relationship to
cost objectives as the other activities whose costs are included in the cost pool;” or (2) pools
where “the allocation of the costs of the activities included in the cost pool result in an allocation
to cost objectives which is not materially different from the allocation that would result if the
costs of the activities were allocated separately. 48 C.F.R. § 9904.418–50(b).10 These

       8
         “Cost objective” is defined as “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.” 48 C.F.R. § 9904.410–
30(a)(4). In turn, “[f]inal cost objective means a cost objective which has allocated to it both
direct and indirect costs, and, in the contractor's accumulation systems, is one of the final
accumulation points.” Id. § 9904.410–30(a)(5). These definitions apply to CAS 418. See id.
§ 9904.418–30(a), (b).
         An “intermediate cost objective” is not defined in Part 9904, but a definition is supplied
in 48 C.F.R. Chapter 99, Part 9905, which establishes CASB’s cost accounting standards for
educational institutions. The definition in Part 9905 specifies that “[i]ntermediate cost objective
means a cost objective that is used to accumulate indirect costs or service center costs that are
subsequently allocated to one or more indirect cost pools and/or final cost objectives.” 48 C.F.R.
§ 9905.502-30(a)(7). Although the definition of “intermediate cost objective” was the subject of
some dispute at trial, see, e.g., Tr. 512:16 to 513:7 (Test. of Joseph Chancio, Sikorsky’s former
Assistant Controller, Government Accounting); Tr. 697:7 to 701:10 (Test. of Joan Sherwood,
Contract Specialist, Defense Contract Management Agency (“DCMA”), previously the
Corporate Administrative Contracting Officer (“CACO”) for the government at Sikorsky); see
also H’rg Tr. 65:12 to 68:16 (Closing Arg. (Jan. 25, 2013)), the definition in Part 9905 applies to
CAS 418, see § 9904.418-30(a) (“Other terms defined elsewhere in this chapter 99 shall have the
meanings ascribed to them in those definitions unless [subsection] (b) of this []section [] requires
otherwise.”). No pertinent exceptions or modifications are stated in Subsection 9904.418–30(b),
so the definition of “intermediate cost objective” in Part 9905 appertains to CAS 418. Here, in
context, the term arguably can be said to encompass indirect costs associated with production or
development of a component, part, or function that contributes to the final contractual result.
       9
        “Allocate means 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.” 48 C.F.R. § 9904.418–30(a)(1).
       10
         In turn, “[t]he determination of materiality shall be made using the criteria provided in
[48 C.F.R. §] 9903.305.” 48 C.F.R. § 9904.418–50(b)(2). That provision sets out six factors, of
which “no one criterion is necessarily determinative.” 48 C.F.R. § 9903.305. Those factors


                                                  4
definitions are a prelude to Subsections 418–50(d) and (e), which set forth acceptable allocation
methods for certain indirect cost pools.

        Subsection 418–50(d) governs allocation measures for indirect cost pools that include a
“material amount of the costs of management or supervision of activities involving direct labor
or direct materi[e]l costs” and specifies that “[t]he costs of the management or supervision of
activities involving direct labor or direct materi[e]l costs do not have a direct and definitive
relationship to the benefiting cost objectives and cannot be allocated on measures of a specific
beneficial or causal relationship.” 48 C.F.R. § 9904.418–50(d)(1) (emphasis added).11 Thus,
“the base selected to measure the allocation of the pooled costs to cost objectives” for indirect
cost pools that include a material amount of the costs of management or supervision of activities
involving direct labor or direct materiel costs “shall be a base representative of the activity being
managed or supervised.” Id. (emphasis added). By contrast, Subsection 418–50(e) governs
pools that do not include significant costs of such management or supervision, and it specifies
that these pools, by definition, are homogeneous and do “have a direct and definitive relationship
between the activities in the pool and benefiting cost objectives.” Id. § 9904. 418–50(e). In
short, the allocation methods for indirect cost pools which do not include significant amounts of
the costs of management or supervision of activities involving direct labor or direct materiel
costs are dictated by Subsection 418–50(e). The allocation methods for pools that do contain
significant amounts of the costs of management or supervision of activities involving direct labor
or direct materiel costs are governed by Subsection 418–50(d). See Sikorsky I, 102 Fed. Cl. at
58.12

                     B. Sikorsky’s 1999 Accounting Change, Audit, and Review

       In the course of Sikorsky’s manufacture and overhaul of aircraft, Sikorsky allocates
materiel overhead costs to contracts with the government and commercial customers. See JX 11-


include “[t]he absolute dollar amount involved,” id. § 9903.305(a), and “[t]he amount of contract
cost compared with the amount under consideration,” id. § 9903.305(b).
       11
          As noted in Sikorsky I, 102 Fed. Cl. at 43 n.7, the text of the subsections of Section
9904.418–50 can be confusing at first reading because the word “material” is used in two
distinctly different ways. In the first usage in each of the subsections, “material” is an adjective
meaning significant, and in the second usage, “material” refers to a component or supplied item,
and is equivalent to the noun “materiel.” For the sake of clarity, each subsequent use of
“material” as a noun in this opinion will refer to “materiel.”
       12
          “[P]ools containing significant costs of management over ‘activities involving only
indirect costs’ are not governed by either Subsection 418–50(d) or (e), because ‘[a] base
representative of the activity being managed or supervised[, i.e., one of the bases set out in
Subsection 418–50(d),] is not suitable.’ Instead, these pools are governed by CAS 410.”
Sikorsky I, 102 Fed. Cl. at 58 (quoting Allocation of Direct and Indirect Costs; Cost Accounting
Standard, 45 Fed. Reg. 31,929, pmbl. at 31,931 (May 15, 1980) (“CAS 418 Preamble”) and
citing 48 C.F.R. § 9904.410–30(a)(6)).



                                                 5
14 to -15 (2004 Defense Contract Audit Agency (“DCAA”) Audit Report).13 Materiel overhead
costs are considered “indirect” and include the costs of purchasing materiel used by Sikorsky to
manufacture and assemble aircraft and spare parts,14 storing the materiel in warehouses awaiting
use, and supplying the materiel to the manufacturing labor force at assembly points. See JX 2-16
to -17 (Sikorsky CASB Revised Disclosure Statement); Tr. 940:8 to 949:23 (Test. of Stephen A.
Kopchick, Sikorsky’s former Director, Manufacturing Services); Tr. 266:16 to 267:13 (Test. of
Paul J. Trompetter, Sikorsky’s Controller, U.S. Government Accounting/Compliance).15 Before
1999, Sikorsky, with the blessing of the government, used an accounting method that allocated
materiel overhead costs using a hybrid allocation base: direct materiel costs minus the costs of
commercial engines and used helicopters. Tr. 493:21-24, 594:21-23, 608:16-18, 629:5-25
(Chancio). Sikorsky employed this particular scheme in an effort to mitigate the distortive
effects of government furnished materiel (“GFM”). Tr. 864:1-7 (Test. of Robert Boyer, DCAA’s
Technical Specialist (auditor), assigned at Sikorsky). In Sikorsky’s production of aircraft for the
government, it installs components supplied by the government, which the government
purchases from other manufacturers. Sikorsky’s only costs associated with GFM are materiel
storage and handling expenses. Tr. 271:10 to 272:8 (Trompetter); see also Tr. 682:9-16
(Sherwood). GFM encompasses a wide range of components, including engines, the hovering
infrared suppression system and auxiliary power units, crash seats, support equipment, and
radios. Tr. 271:6-19 (Trompetter); Tr. 682:13 to 683:3 (Sherwood); Tr. 859:15-20 (Boyer); see
also PDX 302 (Depiction of UH-60 Black Hawk Helicopter GFM). The government does not
allow Sikorsky to assign any accounting value to GFM, see Tr. 503:1-4 (Chancio); Tr. 866:6-11
(Boyer), although Sikorsky estimates the value of GFM it receives to be between $[***] million
to $[***] million annually, PX 63-2 to -6 (Government Furnished Equipment Receipts, 2001-
2005); Tr. 285:1-24 (Trompetter). Sikorsky’s pre-1999 allocation base tried to ameliorate the

       13
          The designation “PX __-__” refers to plaintiff’s trial exhibits, “DX __-__” refers to
defendant’s trial exhibits, and “JX __ - __” refers to joint exhibits. The number before the
hyphen designates the particular exhibit being cited, and the number after the hyphen refers to a
specific page of the exhibit. “PDX __” and “DDX __” refer to plaintiff’s and defendant’s
demonstrative exhibits, respectively.
       14
         Purchasing activities include issuing requests for price quotations to suppliers,
negotiating pricing, drafting purchase orders, and coordinating parts delivery schedules with
suppliers. Tr. 983:9 to 984:6 (Test. of Albert Altieri, Vice President and Chief Operating
Officer, Sikorsky Aerospace Services). In some cases, purchasing activities related to
government contracts must be tailored to comply with certain government regulations, including
the Federal Acquisition Regulations (“FAR”) set out in Title 48 of the Code of Federal
Regulations and the CAS. Tr. 812:14 to 813:4, 813:23 to 814:7, 815:10-13 (Test. of John
DeCesare, DCAA’s Supervisory Auditor, Pratt & Whitney Resident Office); Tr. 986:6-10,
986:25 to 987:13 (Altieri).
       15
         The latter two types of cost are captured under the umbrella term “materiel logistics”
and include master scheduling, parts and requirements planning, receiving, internal
transportation, trucking, traffic, warehousing, kitting, area control stations, and expediting. Tr.
940:8-949:23 (Kopchick); see also Tr. 267:2-13 (Trompetter).



                                                  6
GFM distortion by also removing the cost of commercial engines from the calculus of materiel
costs.

        Still, Sikorsky officials felt that the pre-1999 compromise was not entirely effective
because the company used substantial amounts of GFM beyond engines, and the removal of the
cost of commercial engines from the base did not “deal with the remaining GF[M] that
[Sikorsky] still [had] in [its] factory that [was] still being handled and moved around and not
receiving any allocations.” Tr. 510:19 to 511:2 (Chancio). Effective January 1, 1999, Sikorsky
changed its accounting practices to better address the perceived distortion and, among other
things, began allocating indirect materiel costs using a direct labor cost base. See JX 4-3 (1999
Final Audit Report); see also Tr. 501:1-5 (Chancio); Tr. 867:1-8 (Boyer). Sikorsky notified the
government of these accounting changes before they took effect, submitting a revised cost-
accounting Disclosure Statement to Ms. Sherwood, then its CACO, on August 12, 1998. JX 2-2
(Sikorsky CASB Revised Disclosure Statement). Government officials, including the CACO,
Ms. Sherwood, 16 and DCAA’s auditor, Robert Boyer, met on February 4, 1999 to discuss the
cost effects of these changes, in particular the adoption of a method that allocated materiel
indirect costs using a direct labor base. PX 13 (Handwritten Meeting Notes of Robert Boyer);
Tr. 885:17-24 (Boyer); see also Tr. 822:10-11 (Boyer). According to Mr. Boyer’s handwritten
meeting notes, the cost impact of the accounting change appeared to be $11.8 million in 2001
and $54.1 million in 2008, and the total cost impact from 1999 to 2003 appeared to be $140
million in increased costs for the government, “mostly due to” the accounting change regarding
indirect materiel costs. PX 13-3 (Handwritten Meeting Notes of Robert Boyer); Tr. 887:22 to
888:1 (Boyer). Mr. Boyer also noted that he showed these figures to Ms. Sherwood at the
meeting. See PX 13-3 (Handwritten Meeting Notes of Robert Boyer); Tr. 887:9-21 (Boyer).

        On April 22, 1999, DCAA submitted to Sikorsky a draft audit of the company’s revised
Disclosure Statement. JX 3-1 to -3 (1999 Draft Audit Report). The draft audit, authored by
Mr. Boyer, Tr. 874:7-11 (Boyer), would have concluded that Sikorsky’s revised accounting
practice was “in noncompliance with CAS 418,” JX 3-4 (1999 Draft Audit Report), resulting in
increased costs to the government of approximately $8 million in 2001 and $30 million in 2008,
JX 3-10 (1999 Draft Audit Report); Tr. 876:16 to 877:10 (Boyer). In the draft audit, Mr. Boyer
also took the position that the materiel overhead pool included “significant costs of management
and supervision of activities involving direct materiel costs.” JX 3-7 (1999 Draft Audit Report);
Tr. 875:1-18 (Boyer). In making this determination, Mr. Boyer treated all purchasing activity as
a cost of management and supervision of activities involving direct materiel costs. JX 3-7 (1999
Draft Audit Report); Tr. 875:19 to 876:15 (Boyer).17 He also believed that Sikorsky could avoid

       16
          As noted previously, see supra, n.8, Ms. Sherwood was the CACO who served as the
government’s contracting officer for accounting purposes at Sikorsky. The FAR and the parties
refer to this same responsible government officer as, variously, the CACO, the Divisional
Administrative Contracting Officer (“DACO”), the Administrative Contracting Officer (“ACO”),
and the Cognizant Federal Agency Official (“CFAO”).
       17
         In Mr. Boyer’s view, the purchasing activity constituted approximately 54 percent of
the materiel operations in direct salaries and wages and related occupancy costs. Tr. 875:19-23
(Boyer).


                                                7
GFM distortion and remain compliant with CAS 418 by using an accounting practice that
included two materiel overhead pools, one of which contained all of the materiel overhead costs
incurred in connection with GFM. Tr. 924:5-21 (Boyer); see also JX 3-5 (1999 Draft Audit
Report).

         Sikorsky responded to the draft audit two months later, writing that its accounting change
would have resulted in an increased cost to the government of about $1.7 million in 1998 and
that it would reassess the accounting change during the latter part of 1999 to determine the extent
of the accounting changes’ effect on future years. JX 4-9 (reproducing letter from Frank Errato,
then Sikorsky’s Vice President, Compliance and Government Accounting, to Anthony J. O’Falt,
DCAA (June 28, 1999)); Tr. 722:4-19 (Sherwood). DCAA then issued its final audit on July 22,
1999. The audit concluded:

       Our audit procedures disclosed no instances [of] noncompliance with CAS 418.
       However, instances of noncompliance not detected during this audit may be
       discovered during our continuous audit of the contractor’s cost accounting
       practices.

       This opinion is primarily based on the fact that there is no material impact on
       CAS covered contracts for CY[, i.e., calendar year] 1999 due to the [accounting]
       change. . . .

       . . . DCAA and the contractor have agreed to reassess the impact of this change on
       future years during the last half of CY 1999. The future production of RAH-66
       Commanche [sic] and S-92 helicopters coupled with Sikorsky’s announced and
       unannounced restructuring plans may alter our opinion regarding the present
       immateriality of this change on CAS covered contracts.

       We accordingly recommend that you [Ms. Sherwood] notify Sikorsky that our
       opinion regarding its compliance with CAS 418 is based on the fact that its above-
       described cost accounting change does not at this time result in a material impact
       on CAS covered contracts. Further, should there be a shift due to the type or mix
       of future business or restructuring, we reserve the right to reopen this issue.

JX 4-4 (1999 Final Audit Report). Accordingly, Ms. Sherwood determined that the revised
Disclosure Statement was “both adequate and compliant with the caveat that a condition that
could result in a potentially material CAS 418 noncompliance will be continually monitored and
may require redress in the future.” JX 4-1 (1999 Final Audit Report). Ms. Sherwood also
requested that Sikorsky submit a cost-impact proposal within 60 days of receipt of the final audit.
Id. Sikorsky did so on February 3, 2000, reporting a net benefit to the government of $2.35
million through 2003. JX 5 (February 2000 Cost Impact Proposal).18 Sikorsky revised this

       18
         A change that increases the amount of costs that are allocated to the contractor’s fixed-
price, CAS-covered contracts is considered to be a decreased cost to the government. See Tr.
732:6-10 (Sherwood). When costs allocated to such a fixed-price contract increase, the
government does not pay a higher price. Correspondingly, an accounting change that results in a


                                                8
estimate in September 2000, with a slightly decreased net benefit to the government of $2.34
million through 2003. JX 6 (September 2000 Cost Impact Proposal). DCAA completed its audit
of these cost-impact estimates on September 27, 2000 and found that Sikorsky was shifting
increased costs to government fixed-price contracts under the January 1, 1999 accounting
changes. JX 7-3 (2000 Audit of Cost Impact Proposals); Tr. 749:3 to 750:2 (Sherwood).

                        C. The 2004 Audit and 2006 Accounting Changes

        The record does not disclose the positions of the parties in the months after DCAA issued
its audit on September 27, 2000. Nearly two years passed. Then, in August 2002, DCAA
initiated another audit of Sikorsky’s compliance with CAS 418. JX 8 (Notice to Sikorsky of
DCAA CAS 418 Compliance Review). Two years after that, on October 29, 2004, DCAA
issued its final report for this audit. JX 11 (2004 Final Audit Report). Mr. Boyer was a principal
author of this final audit report. See id. at -18. In the report, DCAA found that Sikorsky’s use of
a direct labor cost base to allocate materiel overhead was “in potential noncompliance” with
CAS 418, id. at -5 (2004 Final Audit Report), and that Sikorsky was in fact “in noncompliance
with CAS 418” during the calendar year 2003, id. at -3. The audit report did not address the
materiality of the potential noncompliance because “it would be difficult or nearly impossible for
the auditor to determine” certain aspects of Sikorsky’s costs. Id. at -13.

        Although Sikorsky did not believe its accounting method was noncompliant, see Tr.
513:8-19, 616:19 to 617:1 (Chancio), it began to consider a change to the materiel overhead
allocation method as part of a broader accounting overhaul that was to take effect on January 1,
2006. PX 40-3 to -4 (Memorandum on Resolution/Disposition of DCAA Finding of
Noncompliance; CAS 418 (Aug. 15, 2005)); see also Tr. 617:2-7, 619:16 to 620:1 (Chancio). In
2005, Sikorsky discussed these proposed changes with Mr. Edward Weisman, the CACO who
had replaced Ms. Sherwood in that position. See PX 40 (Memorandum on Resolution/Dispo-
sition of DCAA Finding of Noncompliance; CAS 418 (Aug. 15, 2005)); JX 13-1 (Letter from
Weisman to Chancio (Sept. 2, 2005)). Those discussions encompassed both DCAA’s 2004 audit
report finding Sikorsky in noncompliance with CAS 418 and Sikorsky’s newly proposed system.
JX 13-1 (Letter from Weisman to Chancio (Sept. 2, 2005)). Mr. Weisman advised that

               [I]n view of the impending implementation of the SAP and ERP
               systems and the change from a Standard Cost to a Job Order
               Cost system in January, 2006, and your agreement to establish a
               Materi[e]l Handling rate under the next system, the CACO has
               determined that it would be neither cost-effective, nor of any
               substantial benefit to the [g]overnment, to require implemen-
               tation of the changes recommended by DCAA at this time.


decrease in costs allocated to fixed-price government contracts is considered to be an increase in
cost to the government, because the decrease is not reflected in the agreed-upon fixed price. Tr.
731:17-732:5 (Sherwood); see also 48 C.F.R. § 30.604(h)(3)(ii).
          Negotiations over future fixed-price contracts, however, would take account of the
higher allocation of indirect costs, and might, accordingly, result in higher costs to the
government for those contracts.


                                                9
Id. Sikorsky adopted a new materiel overhead allocation method, effective Jan. 1, 2006. Tr.
619:16 to 620:1 (Chancio).
        Under the new accounting method, Sikorsky established a new materiel overhead pool
that included purchasing, receiving, inspection, and supplier quality costs, but not materiel
handling costs, which remained in the manufacturing overhead pools. Tr. 612:22 to 614:6
(Chancio). The new materiel overhead pool was allocated using a hybrid base of direct materiel
costs less the costs of commercial engines. Tr. 614:7-10 (Chancio). The manufacturing
overhead pools continued to be allocated using a direct labor base. Tr. 615:10-19 (Chancio).
Officials at DCAA issued an audit report on February 15, 2006, opining that Sikorsky’s revised
methods “comply[] with applicable Cost Accounting Standards.” PX 46-4 (2006 DCAA Audit
of Sikorsky Revised Disclosure Statement); Tr. 909:8-10 (Boyer). A few days later,
Mr. Weisman approved the new accounting method as compliant with CAS. PX 48 (Letter from
Weisman to Chancio (Feb. 21, 2006)); Tr. 779:16-19 (Colandro).19

                                    D. The Noncompliance Claim

         Mr. Weisman was succeeded by Mr. Frank Colandro as the government’s contracting
officer for Sikorsky in June 2006. Tr. 766:7-11, 773:9-10 (Test. of Frank Colandro, former
Contracting Officer for DCMA, Cost and Pricing Center, assigned to Sikorsky). In early 2007,
Mr. Colandro became aware of the 2004 audit finding noncompliant the accounting practice
Sikorsky followed from 1999 to 2005, Tr. 773:21-23, 782:21 to 783:7 (Colandro); PX 54
(Boyer’s worksheets), and began pursuing a potential claim against Sikorsky. Mr. Colandro
issued a notice of potential CAS 418 noncompliance to Sikorsky in late March 2007, more than
two years after DCAA issued the October 2004 audit report. See Tr. 782:4-7 (Colandro)
(referring to a notice of potential noncompliance issued by him in April [sic] 2007).20 Twenty
months thereafter, on December 11, 2008, Mr. Colandro issued a final determination, asserting a
claim against Sikorsky for $64,450,256 in principal and $15,263,164 in interest as of that date,
pursuant to 48 C.F.R. § 30.605(b)(3)(ii). JX 17 (CACO’s Final Decision). This decision had
not been vetted by a DCMA review board. Id.; see also Tr. 798:6 to 799:3 (Colandro). DCMA
waived action by a review board because it was concerned that it would not be able to assert its
claim against Sikorsky within the CDA’s prescribed statute of limitations. See JX 17-3
(CACO’s Final Decision) (noting the “time[-]sensitive nature of this matter”); Tr. 798:3-5,
799:1-3 (Colandro) (stating that the matter was time sensitive because of “concern about the
statute of limitations”).



       19
         The parties could not adduce any testimony from Mr. Weisman because he
unfortunately died shortly after the first of these two consolidated lawsuits was filed. See
Sikorsky II, 105 Fed. Cl. at 665.
       20
          This delay violated the FAR. See 48 C.F.R. § 30.605(b)(1) (“[W]ithin 15 days of
receiving a report of alleged noncompliance from the auditor, the CFAO shall . . . [n]otify the
auditor that the CFAO disagrees . . . [or] [i]ssue a notice of potential noncompliance to the
contractor.”).


                                                10
        The final decision found that Sikorsky’s cost accounting practice from 1999 through
2005 was noncompliant and that the noncompliance became material in 2003. JX 17 (CACO’s
Final Decision). In particular, “the manner in which [Sikorsky] allocated [m]ateri[e]l
[o]perations expenses to final cost objectives using a base of direct labor did not comply with
CAS 418.” Id. at -1. The decision further stated that Sikorsky’s method violated CAS 418–
40(b) and CAS 418–40(c) because “the pool costs, which included significant costs associated
with the management of activities involving direct materi[e]l, were not being allocated using a
base that was representative of the activity being managed or supervised.” Id. at -4. Sikorsky
filed suit in this court to challenge this claim on December 8, 2009.

                               STANDARDS FOR DECISION

        The government made its demand for approximately $80 million under the CDA, 41
U.S.C. §§ 7101-7109. As that Act requires, the government’s claim against Sikorsky was “the
subject of a written decision by the contracting officer.” Id. § 7103(a)(3). This court addresses
the contracting officer’s decision de novo. Id. § 7104(b)(4). The government bears the burden
of proof to establish that the accounting method Sikorsky used from 1999 to 2005 did not
comply with the CAS. See Raytheon Co. v. United States, 105 Fed. Cl. 236, 270 (2012) (citing
General Dynamics Corp., ASBCA No. 56744, 11–2 BCA ¶ 34,787, 2011 WL 2624447, at *11
(June 21, 2011) (in turn citing Ball Corp., ASBCA No. 49118, 00–1 BCA ¶ 30,864, 2000 WL
362429, at *12 (Apr. 3, 2000))).21 The government must make this showing by a preponderance
of the evidence. See, e.g., Thomas v. Nicholson, 423 F.3d 1279, 1283 (Fed. Cir. 2005) (“‘The
“preponderance of the evidence” formulation is the general burden assigned in civil cases for
factual matters.’” (quoting St. Paul Fire & Marine Ins. Co. v. United States, 6 F.3d 763, 769
(Fed. Cir. 1993))); Gingerich v. United States, 77 Fed. Cl. 231, 240 (2007) (applying this burden
to a claim for a tax refund).

        Sikorsky contends the government’s claim is barred by the six-year statute of limitations
set forth in the CDA. See 41 U.S.C. § 7103(a)(4)(A) (“Each claim by a contractor against the
[f]ederal [g]overnment relating to a contract and each claim by the [f]ederal [g]overnment
against a contractor relating to a contract shall be submitted within 6 years after the accrual of
the claim.”). Sikorsky carries the burden of proving the elements of this affirmative defense, see
Brunswick Bank & Trust Co. v. United States, 707 F.2d 1355, 1360 (Fed. Cir. 1983); Eden Isle
Marina, Inc. v. United States, 89 Fed. Cl. 480, 523 (2009), and must establish the defense by a
preponderance of the evidence, see Thomas, 423 F.3d at 1283.




       21
         Although decisions of the Armed Services Board of Contract Appeals (“ASBCA”) “are
not accorded stare decisis effect, the court may find the reasoning contained therein persuasive.”
West Bay Builders, Inc. v. United States, 85 Fed. Cl. 1, 29 n.29 (2008) (quoting Universal
Restoration, Inc. v. United States, 16 Cl. Ct. 214, 218 (1989)) (internal quotations omitted); see
also Raytheon, 105 Fed. Cl. at 270 n.65.


                                                11
                                           ANALYSIS

                                    I. Statute of Limitations

         The CDA requires the federal government to submit each claim against a contractor
relating to a contract “within 6 years after the accrual of the claim.” 41 U.S.C. § 7103(a)(4)(A).
The government submitted its claim on December 11, 2008, the date the CACO’s final decision
was issued; therefore, the government’s claim is barred if it accrued before December 11, 2002.
The CDA’s statute of limitations reflects the general rule that “a cause of action accrues when all
events necessary to state a claim have occurred.” Chevron U.S.A., Inc. v. United States, 923 F.2d
830, 834 (Fed. Cir. 1991) (citing Kinsey v. United States, 852 F.2d 556, 557 (Fed. Cir. 1988)).
As such, a government claim accrues under the CDA, as defined in the FAR, “when all events[]
that fix the alleged liability of . . . the contractor and permit assertion of the claim, were known
or should have been known.” 48 C.F.R. § 33.201.

        “For liability to be fixed, some injury must have occurred[, but] monetary damages need
not have been incurred.” 48 C.F.R. § 33.201. In addition, “[t]o determine when liability is fixed,
we start by examining the legal basis of the particular claim.” Gray Personnel, Inc., ASBCA No.
54652, 06–2 BCA ¶ 33,378, 2006 WL 2390292, at *8; see also, e.g., Franconia Assocs. v.
United States, 536 U.S. 129, 141 (2002) (applying “applicable principles of general contract
law” to determine when a government’s claim for breach of contract accrued (internal quotation
marks omitted)). In this instance, Sikorsky’s alleged noncompliance with CAS 418 was the legal
basis for the government’s claim. For a CAS 418 noncompliance claim to accrue, the
government must have actual or constructive notice of the CAS 418 violation. Sikorsky II, 105
Fed. Cl. at 672. Whether events fixing potential liability have occurred is “determined under an
objective standard; a [party] does not have to possess actual knowledge of all the relevant facts in
order for the cause of action to accrue.” FloorPro, Inc. v. United States, 680 F.3d 1377, 1381
(Fed. Cir. 2012) (quoting Fallini v. United States, 56 F.3d 1378, 1380 (Fed. Cir. 1995)). The
question of when a claimant should know of its claim is an inquiry that depends on the
reasonableness of the claimant’s actions. See Holmes v. United States, 657 F.3d 1303, 1320
(Fed. Cir. 2011) (citing Ingrum v. United States, 560 F.3d 1311, 1315-16, n.1 (Fed. Cir. 2009)).

        Mr. Boyer, DCAA’s auditor, was the principal author of an April 1999 draft audit report
that would have concluded that Sikorsky’s allocation of materiel overhead using a direct labor
base was in noncompliance with CAS 418, resulting in increased costs to the government of
approximately $8 million in 2001 and $30 million in 2008. JX 3-10 (1999 Draft Audit Report);
Tr. 876:16 to 877:10 (Boyer). Mr. Boyer noted that there were “a number of uncertainties”
regarding both of his estimates, because they primarily reflected Sikorsky’s own estimates
contained in its full pricing rate proposal. Tr. 829:22 to 830:6 (Boyer). In addition, he did not
include estimates of cost impacts for 1999 and 2000 because “there wasn’t a significant impact”
for those years. Tr. 829:12-21 (Boyer). Mr. Boyer’s superiors, Ms. Sherwood, the CACO, and
Mr. Anthony O’Falt, the resident DCAA auditor for Sikorsky, decided not to issue this April
1999 draft report because they did not believe that the accounting change materially affected
government cost at that time. See Tr. 883:9-12 (Boyer); see also PX 20-7 (Facsimile of 1999
Draft Audit Report to Anthony O’Falt); Tr. 892:1-18 (Boyer); Tr. 675:5-12 (Sherwood). Rather,



                                                12
in July 1999, Ms. Sherwood issued a final audit report which determined that Sikorsky was
compliant with CAS 418 because its “cost accounting change does not [in 1999] result in a
material impact on CAS covered contracts.” JX 4-4 (1999 Final Audit Report). The audit report
requested that Sikorsky submit a cost-impact proposal. Id. at -1. Sikorsky submitted that
proposal in September 2000, reporting a net benefit to the government of $2.34 million through
2003. JX 6-1 (September 2000 Cost Impact Proposal). DCAA audited this proposal and found
that Sikorsky was shifting increased costs to government fixed-price contracts under the January
1, 1999 accounting changes. JX 7-3 (2000 Audit of Cost Impact Proposals). However, no
evidence was proffered to demonstrate that the government viewed Sikorsky’s cost-impact
proposal as anything more than a correction to a previous maladjustment. Ms. Sherwood could
only say that the increased costs were “possibly” due to noncompliance. Tr. 750:18-24
(Sherwood). In short, although government officials responsible for the 1999 audit believed that
Sikorsky’s allocation method resulted in an indirect cost pool that changed the causal
relationship to cost objectives, those officials had only seen Mr. Boyer’s and Sikorsky’s
estimates reflecting potential future contracts. Because they did not have reliable evidence of a
significant effect on present government costs, they reasonably could decide that Sikorksy’s
allocation method was then appropriate, or at least not inappropriate. As such, the government
did not have actual or constructive notice of any CAS violation at that time.22

        In August 2002, nearly two years after the 2000 Cost Impact Proposal, DCAA initiated
another audit of Sikorsky’s compliance with CAS 418. JX 8 (Notice to Sikorsky of DCAA CAS
418 Compliance Review). DCAA waited until this time to reexamine whether the allocation
practice for material overhead was having a significant effect because “according to the
information that [they] had [in 2000], that would be the first year that would be really worth
looking at.” Tr. 846:1 to 847:2 (Boyer); DX 21 (E-mail from Boyer to Thomas Maher, Manager
of Sikorsky’s Government Contract Accounting (Aug. 30, 2002)). Mr. Boyer authored this audit
report, and he worked throughout 2003 to gather information about direct materiel costs from
Sikorsky personnel to perform calculations for the audit. See, e.g., DX 31 (E-mail from Boyer to

       22
          The government claimed that its knowledge of a CAS 418 violation turned on the
knowledge of the CACOs, Ms. Sherwood and Mr. Weisman, arguing that “the standard . . . is
what would a reasonable man know or should have known. And the relevant reasonable man in
this case . . . is the contracting officer because it’s the contracting officer that has to make the
decision about whether to assert a claim.” H’rg Tr. 9:7-13 (Closing Arg. (Jan. 25, 2013)). The
government’s position in this regard has been criticized and rejected in other cases on the ground
that such a rule would permit “both contractors and the government [to] suspend accrual by
internally compartmentalizing relevant information and insulating senior decision makers from it
for as long as they choose. Nothing in FAR § 33.201, which commences accrual of a claim when
the events fixing alleged liability ‘were known or should have been known’ by a party,
contemplates permitting such gamesmanship.” Raytheon Missile Sys., ASBCA No. 58011, 2013
WL 685219, at *5 (Jan. 28, 2013). In this instance, the court need not rule on the government’s
contention because the facts show that Ms. Sherwood was cognizant of the pertinent
circumstances. She was aware of Mr. Boyer’s calculations regarding the cost impact of
Sikorsky’s accounting change, as well as Sikorsky’s own cost-impact proposals, which she
requested. See PX 13-3 (Handwritten Meeting Notes of Robert Boyer); Tr. 887:9-21 (Boyer);
see also JX 4-1 (1999 Final Audit Report).


                                                13
Heather Biewald, a manager in Sikorsky’s government accounting group (Mar. 12, 2003)); DX
38 (E-mail from Biewald to Boyer (Mar. 25, 2003)); DX 58 (E-mail from Biewald to Boyer
(Sept. 26, 2003)); see also 838:24 to 843:15 (Boyer). Mr. Boyer had made an assessment of the
cost effects of Sikorsky’s accounting change by December 2003. See Tr. 844:1-22 (Boyer).
DCAA released the final audit report in October 2004, finding that Sikorsky’s use of a direct
labor cost base to allocate materiel was “in potential noncompliance” with CAS 418, JX 11-5
(2004 Final Audit Report), and that Sikorsky was in fact “in noncompliance with CAS 418”
during the calendar year 2003, id. at -3. The report did not address the materiality of the
potential noncompliance because “it would be difficult or nearly impossible for the auditor to
determine” certain aspects of Sikorsky’s costs. Id. at -13. Although a definitive calculation of
the effect on government costs was not made, the government was nonetheless aware that
Sikorsky’s allocation method had affected government costs in 2003 and would likely do so for
future years as well. Accordingly, at that point, perhaps in December 2003 and certainly by
October 2004, the government assuredly was put on notice of Sikorsky’s potential CAS 418
violation, and its claim that Sikorsky had violated CAS 418 had accrued.

        Ordinarily, however, “[a]ccrual of a contracting party’s claim is not suspended until it
performs an audit or other financial analysis to determine the amount of its damages.” Raytheon
Missile Sys., ASBCA No. 58011, 2013 WL 685219, at *5 (emphasis added); see also Raytheon
Co. v. United States, 104 Fed. Cl. 327, 330-31 (2012) (addressing but rejecting the government’s
contention that its claim accrued “when it completed the initial audit and assessment of
Raytheon’s costs”). Rather, “[t]he fact of an injury must simply be knowable,” Raytheon Missile
Sys., 2013 WL 685219, at *5, which is “determined under an objective standard,” FloorPro, 680
F.3d at 1381. Because knowledge is dependent upon the reasonableness of the claimant’s
actions, Holmes, 657 F.3d at 1320, the court must examine whether DCAA had reasonable
grounds to know of a potential violation of CAS 418 by Sikorsky prior to gathering detailed
information from Sikorsky in 2003 and undertaking an audit in 2003 and 2004.

        Sikorsky argues that the cost-impact report it provided in February 2000 sufficed to put
the government on notice that in 2001 approximately $4.7 million in costs would shift to existing
government contracts from commercial contracts as a result of the accounting change made in
1999. Pl.’s Post-Trial Br. at 74 (citing JX 5-2 (February 2000 Cost Impact Proposal)). Because
existing fixed-price contracts were involved, this change in allocation of indirect costs was
deemed a “benefit” to the government. See supra, at 8 & n.18. When and if new CAS-covered
contracts came into being, the shift in cost allocations to the government would likely result in
higher prices for those contracts. In approving the accounting change made in 1999, Ms.
Sherwood advised Sikorsky that the effects of the accounting change would “be continually
monitored” and “m[ight] require redress in the future.” JX 4-1 (1999 Final Audit Report). In
that respect, although Sikorsky’s cost-impact submission in 2000 sufficed to confirm the effect
of the accounting change on existing contracts, the run-off of existing contracts and the advent of
new contracts would provide a more significant test of the change. Through 2003, Sikorsky’s
cost-impact proposal submitted in September 2000 still showed a net benefit to the government
of $2.34 million. See JX 6-1 (September 2000 Cost Impact Proposal). At that point, DCAA’s
auditor, Mr. Boyer, was seeking further contemporaneous cost information from Sikorsky in
2003 to conduct an audit that would examine actual results in 2003 and look beyond that year to
the future. In these specific circumstances, the government was under a duty to inquire, but it



                                                14
had no actual or constructive knowledge of a potential CAS violation at Sikorsky until the new
information was gathered and assimilated.

        As a consequence, the government’s claim in these cases is distinguishable from those in
the Raytheon cases insofar as the statute of limitations in the CDA is concerned. In those cases,
the government made the claim that the statute of limitations did not begin to run until it had
completed an audit reflecting “evidence new to the government.” Raytheon Co. v. United States,
105 Fed. Cl. 351, 352 (2012), denying reconsideration of the prior ruling at 104 Fed. Cl. 327;
see also Raytheon Missile Sys., ASBCA No. 58011, 2013 WL 685219, at *5-6. Both the court
and the Armed Services Branch of Contract Appeals found that the information necessary to, and
sufficient for, the government’s determination of the claim was available well before the audit
was performed. Raytheon, 105 Fed. Cl. at 353; Raytheon Missile Sys., 2013 WL 685219, at *6.
The requisite information was not available to the government in this instance.

        In short, Sikorsky has not met its burden to show that the government had actual or
constructive knowledge of a potential claim under CAS 418 prior to December 2002, and Mr.
Colandro’s assertion of the government’s claim on December 11, 2008, was within the six-year
statute of limitations prescribed by the CDA. The court must therefore proceed to address the
merits of the government’s claim.

                                         II. CAS 418

                      A. Significance of Costs of Management and Supervision

        CAS 418 contains two subsections, 418–50(d) and 418–50(e), that govern the allocation
methods that may be used for indirect cost pools. These subsections separate “indirect cost pools
by inclusion, or not, of significant costs of management or supervision of activities related to
direct labor or materiel costs.” Sikorsky I, 102 Fed. Cl. at 58. Subsection 418–50(d) applies to
pools containing such significant costs, while Subsection 418–50(e) applies to pools in which
such significant costs are absent. “Consequently, whether Sikorsky’s materiel overhead pool
falls under Subsection 418–50(d) or under Subsection 418–50(e) turns on whether the pool
contained significant costs of management or supervision of direct-cost activities.” Id. The
government concurs that this is the manner in which CAS 418 operates. Tr. 875:6-14 (Boyer)
(agreeing that “[t]he question of whether an overhead pool includes significant costs of
management and supervision of activities involving direct labor or direct materi[e]l . . .
determines whether 50(d) or 50(e) applies”). As to significance, i.e., materiality, 48 C.F.R.
§ 9903.305 provides criteria that “shall be considered where appropriate” in “determining
whether amounts of cost are material or immaterial.”23 The first three of these factors specified
are relevant to determining whether Sikorsky’s materiel overhead pool contained significant
direct-activity management and supervision costs:

       (a) The absolute dollar amount involved. The larger the dollar amount, the more
           likely that it will be material.

       23
         As discussed supra, at n.11, the word “material” as an adjective is used in the text of
CAS 418–50(d) and 50(e), but the synonym “significant” is used by the court for the sake of
clarity.


                                                15
       (b) The amount of contract cost compared with the amount under consideration.
           The larger the proportion of the amount under consideration to contract cost,
           the more likely it is to be material.
       (c) The relationship between a cost item and a cost objective. Direct cost items,
           especially if the amounts are themselves part of a base for allocation of
           indirect costs, will normally have more impact than the same amount of
           indirect costs.

48 C.F.R. § 9903.305(a)-(c). Sikorsky’s materiel overhead pool from 1999 through 2005
encompassed two categories of indirect costs: those that fell under the materiel logistics umbrella
and those incurred through purchasing activities. The costs of management and supervision
associated with each category will be addressed separately.

       Materiel logistics costs encompass the receipt and storage of materiel and the subsequent
supply of materiel to the manufacturing labor force at assembly points. See Tr. 940:8 to 949:23
(Kopchick); Tr. 266:16 to 267:13 (Trompetter). Of the approximately 350 to 375 Sikorsky
employees in the materiel logistics group, only six to eight were managers, and fifteen to twenty
were supervisors. Tr. 959:17 to 961:14, 962:16-963:1 (Kopchick). At most, then, managers and
supervisors comprised seven percent of the materiel logistics department workforce. See PDX
326; see also Tr. 958:19 to 962:15 (Kopchick). Moreover, these managers and supervisors did
not confine their activities to the traditional tasks of overseeing other employees and the
department. For parts of their workdays, some supervisors “actually did the same job that the
people under [them] did,” such as issuing work orders to the manufacturing floor to make a part
or providing the purchasing department with a purchase requisition to specify what parts must be
bought. Tr. 964:16-25 (Kopchick); see also Tr. 941:6 to 942:1 (Kopchick).

         The first materiality factor considers the absolute dollar amount involved. In 2005, the
last year Sikorsky used the allocation method at issue, the salaries and wages of “all the people
. . . engaged in the materi[e]l overhead activities” totaled about $[***] million, while the total
materiel operations pool encompassed about $[***] million in costs. Tr. 106:1-9 (Trompetter);
see JX 38-126 (December 2005 NAVAIR Report). The salaries and wages of the materiel
logistics workforce represent only a portion of the $[***] million figure, and the salaries of the
twenty-eight materiel logistics supervisors and managers are necessarily a smaller fraction of that
portion. See Tr. 106:10-12 (Trompetter) (noting that the “supervisory costs would be embedded”
in the $[***] million figure). Even the salaries of those twenty-eight employees cannot be
counted in full as management and supervision costs, because some managers and supervisors
performed standard materiel logistics tasks in addition to supervisory duties. In short, the
absolute dollar amount that can be attributed to materiel logistics management and supervision is
relatively small, especially considered in the context of Sikorsky’s overall business revenues.

        The second factor weighs the “amount of contract cost compared with the amount under
consideration.” 48 C.F.R. § 9903.305(b). The total cost of Sikorsky’s government contracts at
issue exceeded $2 billion, see generally PX 54 (Boyer’s Worksheets); Tr. 910:2-20 (Boyer), with
the result that the total materiel logistics costs were less than one percent of this amount, even
disregarding commercial revenues, and the total management and supervision costs for material
logistics were much smaller than that, even disregarding the work directly performed by



                                                16
managers and supervisors. The third factor provides that direct costs should be weighted more
heavily than indirect costs. In the circumstances, that weighting is manifestly apparent.
Therefore, the evidence, as applied to all three factors, demonstrates that the management and
supervision costs associated with materiel logistics were insignificant.

       Purchasing activities comprise the remainder of the materiel overhead pool costs. From
1999 through 2005, there were about 140 employees in Sikorsky’s purchasing group. Tr. 987:24
to 988:3 (Altieri). About twenty of those employees, or 14 percent of the purchasing group staff,
were managers or supervisors. See Tr. 988:4 to -25 (Altieri). The twenty employees in question
were “definitely not” engaged in traditional management activities full time; they undertook
complex “negotiations with suppliers . . . [that] couldn’t get done at the lower level.” Tr. 993:7-
22 (Altieri).

        The government took a categorical approach to purchasing costs, asserting in its October
2004 audit report that 54 percent of Sikorsky’s materiel operations pool represented costs of
management or supervision. JX 11-4 (2004 DCAA Audit Report). This percentage was chosen
“[b]ecause purchasing activity was approximately 54 percent of the [pool’s] indirect salaries and
wages and related occupancy.” See Tr. 876:8-15 (Boyer). In short, DCAA equated all
purchasing activity with management or supervision. To accord with the CAS, however,
materiality should be determined by focusing on the salaries and wages of those purchasing
personnel who held the title of manager or supervisor and deducting the portion of their salaries
and wages attributable to the time they spent conducting purchasing tasks themselves. See
Sikorsky I, 102 Fed. Cl. at 52-53. When these adjustments are made, management and
supervision costs related to purchasing constitute less than ten percent of the purchasing costs
included in the 2005 materiel overhead pool, and are a lesser fraction of the total indirect pool
cost. And, as is the case with materiel logistics, the management and supervision costs for
purchasing are indirect costs that represent a small absolute dollar amount relative to the total
cost of the contracts at issue. As such, they are insignificant.

         At trial, the parties disputed the effect on management and supervision costs of a change
to Sikorsky’s traditional business model that occurred during the period of 1999 through 2005.
During the 1990s and early 2000s, Sikorsky experienced a “paradigm shift” in its business
model, Tr. 70:18-21 (Trompetter), moving from a “make” house that “prided itself on making
everything but tires, windshields, and engines” to a “buy” operation that “would be buying parts
for [its] helicopters that don’t come in a box on a truck where you can’t tell what it is.” Tr. 72:25
to 73:5, 70:23-25 (Trompetter); see also Tr. 773:21 to 774:4 (Colandro) (agreeing that Sikorsky
was increasingly outsourcing and evolving from a make to a buy operation from 1999 through
2005). A “make part is something that is assembled, made within Sikorsky,” while a buy part is
“[a] part that’s . . . purchased from an external supplier.” Tr. 994:1-6 (Altieri). The shift to buy
parts was conceived in the mid-1990s and implemented during the 1999 through 2005 period,
during which Sikorsky purchased [***] for two commercial aircraft, the S-92 and S-76, from
outside suppliers. Tr. 994:18 to 996:10 (Altieri); see also 356:10 to 357:23 (Trompetter).
Although outsourcing, or the buying of completed components, occurred in connection with both
military and commercial aircraft, the outsourcing programs for commercial aircraft were
“deeper[ and] more concentrated.” Tr. 996:14-15 (Altieri). As a result, Sikorsky outsourced
more commercial than military components from 1999 through 2005, and consequently made



                                                 17
more parts for military aircraft than for commercial ones during that time period. Tr. 997:7-14
(Altieri); Tr. 358:7-10 (Trompetter).

         Fewer materiel overhead resources were expended on “buy” parts. Tr. 379:14-20
(Trompetter); Tr. 956:7-10 (Kopchick); Tr. 1000:3-8 (Altieri). During the initial outsourcing of
a “buy” component, costs were incurred as Sikorsky assessed and qualified the new supplier. Tr.
376:7-17, 381:2 to 382:7 (Trompetter); Tr. 1001:12-21, 1002:6-20 (Altieri). The assessment
process involved purchasing department employees, whose associated costs would be included
within materiel overhead. These employees performed standard purchasing tasks, not
management or supervisory functions. See Tr. 997:22 to 998:10 (Altieri). In addition,
assessment required the work of engineering and other departments, whose costs were not
allocated to the materiel overhead pool, but rather to engineering and other direct-cost categories.
See Tr. 381:2 to 382:14 (Trompetter); Tr. 997:15 to 999:21 (Altieri). Once the make-to-buy
transition was complete for a component, materiel overhead costs dropped drastically, with
purchasing costs requiring “one full-time employee or less” for a substantial component. Tr.
999:22 to 1000:2 (Altieri); see also Tr. 376:7 to 377:4 (Trompetter). Consequently, Sikorsky’s
shift from a wholly “make” house to a partially “buy” house had the effect of reducing, not
increasing, total indirect costs in the materiel overhead pool, as well as the relative proportion of
management and supervisory costs. In sum, the make-to-buy shift that occurred did not result in
the management and supervision of activities involving direct labor or direct materiel costs
becoming significant where they were not previously so.

       In light of this factual showing, Subsection 418–50(e), not 418–50(d), applies to
Sikorsky’s materiel overhead pool.

                                  B. A Direct-Labor Cost-Surrogate

        CAS 418–50(e) notes that “[h]omogeneous indirect cost pools of this type have a direct
and definitive relationship between the activities in the pool and benefiting cost objectives. The
pooled costs shall be allocated using an appropriate measure of resource consumption. This
determination shall be made in accordance with the following criteria taking into consideration
the individual circumstances.” 48 C.F.R. § 9904.418–50(e). The Subsection then lists three
possible measures. The first measure in the hierarchy, according to Subsection 418–50(e)(1), is
“a measure of resource consumption of the activities of the indirect cost pool.” Id. As applied to
Sikorsky’s materiel overhead pool, this would have required Sikorsky to track the time spent by
each materiel overhead employee on each activity for the benefit of a particular contract. Tr.
953:11-14 (Kopchick); see also Tr. 519:16 to 520:3 (Chancio). Such a method was impractical
because there was “quite a bit of commonality” between contracts. Tr. 954:1-2 (Kopchick); see
also Tr. 267:19 to 268:7 (Trompetter). For example, logistics employees moved multiple parts
for multiple contracts at the same time, and frequently, different parts would be suitable for use
in more than one particular contract. Tr. 952:24 to 954:2 (Kopchick). It was not reasonable to
expect Sikorsky to adopt such a cumbersome, inefficient recordkeeping system, and thus the
method outlined in the first option in the hierarchy was not an appropriate way to allocate pooled
costs.




                                                 18
         Alternatively, CAS 418–50(e)(2) instructs that “a measure of the output of the activities
of the indirect cost pool” is “the next best representation of the beneficial or causal relationship
for allocation.” 48 C.F.R. § 9904. 418–50(e)(2)(i). Tracking output rather than resources
consumed would require Sikorsky to monitor closely the purchasing and logistic groups’
activities. Sikorsky did account for the number of boxes received on a weekly basis, and the
number of work orders and purchase requisitions issued by each of the parts planners weekly, but
it did not “keep track of the output of its employees’ activities in terms of what contract that
output was for.” Tr. 954:5-9, 954:12 to 955:1 (Kopchick); see also Tr. 268:8-16 (Trompetter)
(explaining that Sikorsky does not track the number of boxes associated with each contract that a
truck delivers to an assembly line). Such recordkeeping would be impractical, as each box,
truck, and work order could easily contain parts or information for multiple contracts, making it
difficult accurately to allocate indirect materiel costs to an individual contract.

        “If neither resources consumed nor output of the activities can be measured practically, a
surrogate that varies in proportion to the services received shall be used to measure the resources
consumed” to allocate the pooled costs. 48 C.F.R. § 9904.418–50(e)(3). “Generally, such
surrogates measure the activity of the cost objectives receiving the service.” Id. A proper
surrogate under CAS 418–50(e)(3) is one that “varies in proportion to the services received.” Id.
As that language suggests, Sikorsky thus had some discretion in choosing a surrogate. See
Rumsfeld v. United Techs. Corp., 315 F.3d 1361, 1369 (Fed. Cir. 2003) (alluding to the
discretion provided within the CAS by noting that “[a contractor] elected to use a form of total
cost input accounting based on ‘materi[e]l costs’” and that “[h]aving chosen a base composed of
‘materi[e]l costs,’” the contractor was required to include all significant elements of the cost of
the materiels (emphasis added)). In this instance, Sikorsky elected to use a direct labor surrogate
because materiel overhead activities are closely coordinated with direct labor, see Tr. 949:24 to
950:12 (Kopchick), Tr. 251:5-11 (Trompetter), such that direct labors costs should vary in
proportion to materiel overhead.

       Much of the evidence at trial focused on whether direct labor was a proper surrogate,
with the government contending that Sikorsky should have instead relied upon a direct materiel
base. See, e.g., Tr. 780:2-12 (Colandro); Tr. 872:11 to 873:9, 912:1 to 914:12 (Boyer).24

       24
           The government’s witnesses took the position that a “direct materi[e]l base should be
used for materi[e]l handling expenses,” Tr. 780:4-5 (Colandro), relying on CAS Subsections
418–50(b) and (d), Tr. 780:11-12 (Colandro). Those Subsections address, respectively,
homogeneity and pools that include significant costs of management or supervision of activities
related to direct labor or materiel costs.
           The government maintains that CAS 418 “requires a final overhead pool for materi[e]l
overhead costs separate from manufacturing costs,” Def.’s Post-Trial Br. at 51, and posits that
Sikorsky’s pools were not homogeneous because the company included materiel overhead within
final manufacturing overhead pools. Id. at 48. Because the government posits that these pools
were not homogeneous, it argues that CAS 418–50(e), which assumes homogeneity, cannot
apply. See id. at 61 (“Sikorsky seeks to reply upon CAS 418–50(e). And CAS 418–50(e) does
not fit the two relevant final pools.”). It then concludes that CAS 418–50(d) must apply to
Sikorsky’s materiel overhead costs, and contends that only one method in that Subsection may
be used — CAS 418–50(d)(iv), because it states that “[a] materi[e]l cost base is appropriate if the


                                                19
Materiel overhead and direct labor costs generally followed a similar pattern from 1999 through
2005, increasing from 2000 to 2002, decreasing in 2003, and increasing in 2004 and 2005. See
PX 85 (Summary of Sikorsky’s Costs, 1993-2005); Tr. 308:7-15, 309:24 to 310:9 (Trompetter);
see also PDX 309 (Graph of Direct Labor and Materiel Overhead Costs, 1999-2005), reproduced
infra.25 Contrastingly, from 1999 through 2005, Sikorsky’s direct materiel costs increased
consistently and substantially, from about $[***] million in 1999 to $[***] billion in 2005, see
PX 89 (Excerpt from Sikorsky’s Contract Cost Database); see also Tr. 313:8-14 (Trompetter)
(explaining that the contract cost database tracked direct materiel costs charged to contracts), but
during that same time period, materiel overhead costs remained relatively constant, ranging from
$[***] to $[***] million, DX 1017 (Summary Exhibit of Data from 1999-2005 NAVAIR
Reports).26

        The sharp uptick in direct materiel costs can be attributed to Sikorsky’s shift from making
most parts in-house to buying a portion of finished components from suppliers, as discussed
supra. See Tr. 378:2 to 379:20 (Trompetter); Tr. 863:9-15 (Boyer). A shift toward buying more
finished parts created higher direct materiel costs because the price Sikorsky paid for finished
components reflected the suppliers’ cost of production, including direct materiel costs and
materiel overhead costs incurred in manufacturing those components, as well as profit. Tr.
957:23 to 958:14 (Kopchick); see also Tr. 377:5 to 378:1 (Trompetter). Although some materiel
overhead costs were incurred during the transition to buying a component, see 376:7-17, 381:2 to
382:7 (Trompetter); Tr. 1001:12-21, 1002:6-20 (Altieri), the materiel overhead costs associated
with buy parts decreased once the transition was complete, because only minimal purchasing and
logistics resources were needed to manage purchased components, see Tr. 999:22 to 1000:2
(Altieri); Tr. 208:9-22, 376:7 to 377:4 (Trompetter).



activity being managed or supervised is a materi[e]l-related activity.” See id. at 64 (“[T]he CAS
Board decided that a direct materi[e]l cost base is appropriate for materi[e]l overhead costs, and
prescribed that base in an effort to bring some uniformity to contractor accounting.”). This line
of reasoning assumes that CAS 418 by its terms requires materiel overhead costs to be allocated
only by direct materiel costs, without any textual support for this contention. It ignores the plain
text of CAS 418 which provides that Subsection 418–50(e) governs pools that do not include
significant costs of management or supervision, and specifies that these pools, by definition, are
homogeneous. See Sikorsky I, 102 Fed. Cl. at 58.
       25
          The two variables do not track each other in 1999, an aberration explained by an output
decline in 1999 during which fewer aircraft deliveries were made. See PX 85 (Summary of
Sikorsky’s Costs, 1993-2005); Tr. 310:20 to 311:12 (Trompetter). The lull caused direct labor
costs to decrease, and also resulted in a layoff of more than [***] employees. See id.
Subsequently, materiel overhead costs decreased in 2000 due to the loss of employees involved
in materiel overhead operations. PX 85 (Summary of Sikorsky’s Costs, 1993-2005); Tr. 311:18-
24 (Trompetter).
       26
          Sikorsky’s materiel overhead costs increased modestly from 1999 through 2005 due in
large part to increased aircraft deliveries during that time period. Tr. 394:14-24 (Trompetter).



                                                20
        In response to these data, the government proffered expert testimony from a statistician,
Dr. Ali Arab, who attempted to demonstrate that a direct materiel base was a more appropriate
surrogate than a direct labor base.27 Dr. Arab presented several regression analyses performed
on Sikorsky’s cost accounting data. He analyzed the correlation between direct labor and
materiel overhead costs from 2003 through 2005, DX 1016 (Excerpt of Arab Report), as well as
the relationship between those costs for the years 1999 to 2005, DX 1017 (Excerpt of Arab
Report). Dr. Arab found that there was no statistically significant relationship between the
variables in both of those instances. Tr. 418:16-17, 419:18-19 (Arab). A third analysis, looking
at the years 1993 to 1998, compared Sikorsky’s net materiel overhead with the allocation base
used during those years — direct materiel costs less the cost of commercial engines and used
helicopters. See DX 1019(a) (Excerpt of Arab Report); Tr. 420:6 to 421:11 (Arab). Dr. Arab
concluded that the relationship between these two variables during those years was statistically
significant. Tr. 421:8-11 (Arab). Dr. Arab also examined the relationship between a direct labor
base and materiel overhead costs for those years, and found that it was not statistically
significant. See DX 1020(a) (Excerpt of Arab Report); Tr. 423:7-20 (Arab). Lastly, Dr. Arab
analyzed the relationship between labor costs and net materiel overhead from 1993 to 2005, and
found there was no statistical significance. See DX 1018(a) (Excerpt of Arab Report); Tr. 424:3-
11 (Arab).

        Questions arose respecting these analyses, however. First, because relatively few data
points were available, the analyses had a lower “power” value than that which is typically needed
to “reliably conduct statistical inference.” Tr. 426:10-19, Tr. 433:12-15 (Arab).28 Normally,
“[w]hen a statistical study with low power fails to show a significant effect, the results are more
fairly described as inconclusive than negative.” Tr. 433:16-20 (Arab). Accordingly, Dr. Arab’s
low-power analyses have limited utility. The 1993 to 2005 analysis is problematic for other
reasons. It relied on “net” materiel overhead costs, which from 1993 to 1998 were adjusted for
inventory write-downs or transfers to other accounts, but were unadjusted for 1999 to 2005. Tr.
457:2-5 (Arab). The adjustments were made for accounting purposes and did not measure
materiel overhead resource consumption. Tr. 344:21 to 345:12, 345:20-24, 346:7-10
(Trompetter). Consequently, it is inappropriate to use adjusted or “net” materiel overhead when
considering whether direct labor costs vary in proportion to materiel overhead costs.
Furthermore, the 1993 to 2005 analysis failed to take account of an influential point, i.e., “a data
point that behaves differently than the majority of the data and thereby dominates the analysis.”
Tr. 457:17-23 (Arab). The direct-labor-cost data point for 1999 was influential, Tr. 458:11-20
(Arab), and was significantly lower than the data points for other years because of a decrease in
aircraft deliveries during 1999 and a substantial reduction in the work force in that year, see
supra, at n.25. Without this influential data point, “the relationship between direct labor costs
and materiel overhead would be stronger.” Tr. 458:25 to 459:4 (Arab). Indeed, Dr. Herbert I.
Weisberg, Sikorsky’s expert statistician, performed an “alternative version of the analysis that

       27
        At the same time, the government acknowledged that distortions due to GFM arise
when a direct materiel base is used, but not when a direct labor base is employed. See Tr. 867:1-
8 (Boyer).
       28
           The standard practice is to require a power value of 0.8 or above to draw reliable
statistical inferences. Tr. 426:16-19 (Arab).


                                                 21
removed that influential point” from the period of 1993 through 2005, using direct labor as the
independent variable and materiel overhead as the dependent variable. Tr. 1033:19 to 1034:15
(Weisberg); see also PDX 320 (Weisberg Graph of 1993-2005 Direct Labor and Materiel
Overhead With 1999 Removed). With the data from 1999 removed, the relationship between the
two variables was statistically significant. See PDX 319 (Weisberg Analysis of 1993-2005
Direct Labor and Materiel Overhead With 1999 Removed); Tr. 1034:25 to 1035:11 (Weisberg).

         Second, the relative stability of materiel overhead costs from 1999 to 2005, which varied
within an annual range of $[***] to $[***] million, as discussed supra, further constrains the
value of the statistical analyses performed. See Tr. 1039:12-23 (Weisberg). Regression analyses
measure the proportion of variation in a dependent variable, here, materiel overhead costs, that
can be explained by an independent variable, here, either direct labor or direct materiel costs.
See Tr. 1039:24 to 1040:12 (Weisberg). Thus, “if there isn’t much variation to explain in the
first place,” the importance of a measure of a statistical relationship between the two variables
“may be quite small.” Tr. 1040:9-12 (Weisberg). In this instance, because the dependent
variable, materiel overhead costs, did not fluctuate greatly, there was not much variation to
explain, and any statistical relationship between materiel overhead costs and direct labor or direct
materiel costs was relatively unimportant. In short, the statistical analyses are of little value in
determining whether a particular base was an appropriate allocation measure for materiel
overhead costs.

        The demonstratives that follow graphically depict the relationship between direct materiel
costs and materiel overhead, as well as direct labor costs and materiel overhead. The first, PDX
309, illustrates Sikorsky’s direct labor and materiel overhead costs from 1999 through 2005. See
Tr. 307:8-15 (Trompetter). The second, PDX 310, compares the increase in direct materiel costs
with the relative stability of materiel overhead costs for those years. See Tr. 332:16 to 333:6
(Trompetter).




                                                22
23
       The government also claimed at trial, for the first time in the course of this litigation, that
Sikorsky should have segregated GFM-related materiel overhead costs from other materiel
overhead costs, collected the GFM-related costs in a separate indirect cost pool, and directly
allocated those expenses to the government. See Tr. 389:14 to 390:19 (Trompetter). Such a
method is not required by CAS 418–50(e), nor would it be practical for Sikorsky to track GFM-
related materiel overhead costs separately, as materiel overhead activities often involved the
concurrent handling and transportation of GFM and non-GFM. Tr. 607:4-21, 636:1-13
(Chancio); Tr. 953:1-10 (Kopchick).

                                             C. Synopsis

        The government failed to carry its burden of proof and did not demonstrate that Sikorsky
violated CAS 418. The evidence presented at trial established that the management and
supervision costs contained within the materiel overhead pool were insignificant relative to the
entire pool, and therefore CAS 418–50(d) did not apply to Sikorsky’s allocation of its materiel
overhead. Instead, Sikorsky was required to comply with CAS 418–50(e) when choosing an
allocation base for its materiel overhead pool. In that respect, Sikorsky reverted to the third
alternative base, a surrogate, because the first two bases were impractical. A proper surrogate
would “var[y] in proportion to the services received.” CAS 418–50(e)(3). The government did
not establish that Sikorsky’s method of allocation, direct labor, was not an appropriate allocation
method under CAS 418–50(e). The government did not adequately support its contention that
direct materiel should have been used to allocate the materiel overhead pool, nor did it provide
any evidence to establish that CAS 418 required the use of an alternate method of allocation
involving the segregation of GFM-related costs in a distinct indirect cost pool. In contrast, the
evidence presented at trial demonstrated that Sikorsky’s choice of a direct labor base complied
with CAS 418–50(e) because direct labor varied in proportion to materiel overhead costs from
1999 through 2005 and thus was an acceptable means of measuring the resources consumed in
connection with pool activities.

                                          CONCLUSION

        Although the government’s contracting officer timely asserted a claim against Sikorsky
contending that a violation of CAS 418 had occurred, the government did not prove by a
preponderance of the evidence that Sikorsky’s materiel overhead allocation method from 1999
through 2005 actually violated CAS 418. The government’s failure of proof negates its claim for
approximately $79.7 million plus interest that it alleged Sikorsky owed due to the claimed
violation. Sikorsky thus prevails on its challenge to the government’s claim. The clerk
accordingly is directed to enter judgment for Sikorsky and against the government in these
consolidated cases.

       No costs.

       It is so ORDERED.
                                                    s/ Charles F. Lettow
                                                    Charles F. Lettow
                                                    Judge



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