ASBCA Scrutinizes Honeywell’s Interpretation of ‘Total’ in Total Cost Input

In June 2023, the Armed Services Board of Contract Appeals (ASBCA) denied Honeywell's motion to dismiss a $151 million claim alleging improper G&A allocation treatment under CAS 410. The Board affirmed that interdivisional cost transfers must be included in a total cost input base, contradicting Honeywell's position. Government contractors should review whether their G&A allocation bases are consistent with this ruling.

Highlights

• ASBCA Denied Honeywell’s Motion to Dismiss. The Armed Services Board of Contract Appeals denied Honeywell’s motion to dismiss a $151 million government claim alleging that Honeywell improperly excluded interdivisional cost transfers from its G&A total cost input base under CAS 410, allowing the case to proceed.
• CAS 410 Requires a Total Activity Base. CAS 410 permits the use of one of three allocation bases and requires government contractors to select a G&A allocation base that represents the total activity of the business during a cost accounting period.
• Honeywell’s Interpretation Was Rejected. Honeywell classified gyro costs transferred to its Coon Rapids segment as intermediate cost objectives and excluded them from its total cost input base. The Board, relying on CAS preamble language, found this interpretation inconsistent with the requirements of CAS 410 when a total cost input base is used.
• CAS Preambles Were Central to the Decision. The Board cited preamble language addressing that work performed at one segment and transferred to another should be treated as a final cost objective of the performing segment when a total cost input base is selected.
• Contractors Should Expect Increased DCAA Scrutiny. In light of this decision, government contractors with full CAS-covered contracts should anticipate heightened DCAA audit focus on CAS 410 compliance with their selected G&A allocation base and the treatment of interdivisional transfers.

On June 7, 2023, the Armed Services Board of Contract Appeals (ASBCA) issued its decision on the Honeywell International, Inc. ASBCA Case No. 63286. The Board denied Honeywell’s motion to dismiss and allow the Government to pursue a $151 million claim alleging improper treatment of G&A expense under CAS 410. This is an important case, as it may affect contractors with full CAS-covered contracts that use total cost as a base.

How Honeywell Applied Its G&A Allocation Base

Honeywell has performed CAS-covered government contracts since the 1980s. Within its Sensor & Guidance Products segment in Minneapolis, MN, Honeywell manufactured gyros that were incorporated into products delivered under government contracts. Honeywell also transferred gyros to its Coon Rapids segment, where they were incorporated into products for commercial customers. In its CAS Disclosure Statement, Honeywell reported that it used a total cost input base to allocate General & Administrative (G&A) expenses.

Why the Government Challenged Honeywell’s Cost Input Base

Honeywell excluded the gyros’ costs transferred to the Coon Rapids from its G&A total cost input allocation base. The Government claims the exclusion of the interdivisional costs reduces the total cost input base, increasing the G&A rate and therefore inflating the costs charged to Government contracts. The Government’s claim amounts to $151 million, consisting of $56 million in debt plus interest from the start date of January 1, 1980. Yes, 1980.

What are the Requirements of CAS 410?

CAS 410-40(b)(1) Fundamental requirement states that the cost input base selected shall be the one that best represents the total activity of a typical cost accounting period. It can be:

• Total cost input;
• Value-added cost input; or
• Single-element cost input.

Cost input refers to all costs, excluding G&A expense, which, for contract costing purposes, is allocable to the production of goods and services during a cost accounting period. CAS 410 further requires that G&A expenses are allocated over a cost input base that reflects the total activity of the business and is allocated to final cost objectives. Sounds pretty simple – total activity of the business excluding the costs included in the G&A expense pool.

How Honeywell Interpreted CAS 410

Honeywell asserts that CAS 410.40 states that G&A expenses shall be grouped in a separate indirect cost pool and allocated only to final cost objectives. Based on this interpretation, they classified the gyro costs as intermediate cost objectives rather than final cost objectives. As a result, they excluded the “intermediate” costs transferred to Coon Rapids from the total cost input base and did not allocate G&A costs to them. Honeywell also cited language from the CAS 410 preamble that allows contractors to make “minor variations from the specific bases…” when applying the standard.

Honeywell also pointed to Item 4.5.0, Application of Overhead and G&A Rates to Specified Transactions or Costs, in its CASB Disclosure Statement, which addresses “interorganizational transfers out” and allows the use of a code indicating that no overhead or G&A is applied. Based on Item 4.5.0, Honeywell maintains that CAS permits it to exclude the application of G&A on interorganizational transfers out.

ASBCA’s Review of CAS 410 and the Preambles

The ASBCA addressed the treatment of intersegment transfers in two CAS preambles. In the CAS 410 Preamble, the Board responded to a question regarding whether intersegment transfers should be included in the cost input base for allocating G&A. The Board explained that when a total cost input base has been selected, all significant costs other than the cost included in the G&A expense pool should be included in the total cost input base.

The Board also addressed situations in which one segment performs work for another in the Preamble to CAS 420 Accounting for Independent Research and Development Costs and Bid and Proposal. The Board stated, “... if work is performed at a segment and sold to or transferred to another segment directly, it should be considered a final cost objective of the performing segment. Allocating G&A expenses to such work would be consistent with CAS 410 …”. The Board believes the statements in the CAS preambles contradict the conclusions that Honeywell draws from Item 4.5.0 of the CASB DS-1 form.

The Board rejected Honeywell’s claim that excluding the cost transfers to Coon Rapids constituted a “minor variation” from the G&A base or that the base included all significant elements of cost input. The Board denied Honeywell’s motion to dismiss the claim and held that the Government’s claim was sufficiently supported to proceed.

Takeaways

Contractors should regularly review their allocation bases.

Contractors with contracts subject to full CAS coverage must comply with CAS 410 and must ensure that their G&A base includes both interdivisional cost transfers in and out.

In light of this ASBCA decision, we expect DCAA to increase its focus on CAS 410 compliance audits, with particular attention to contractor practices involving the G&A allocation base and the treatment of interdivisional transfers.

Reviewing G&A Allocation Bases for CAS 410 Compliance

Redstone GCI assists government contractors in reviewing G&A allocation methodologies and assessing whether current practices are consistent with CAS 410 requirements and each contractor’s disclosed cost accounting treatment. This includes evaluating whether interdivisional transfers and other significant cost elements are properly included in the allocation base, reviewing CASB Disclosure Statements for alignment with actual practices, and identifying where written policies and procedures may need to be updated to reflect how costs are accumulated and allocated in practice. Ongoing reviews in these areas can help contractors address DCAA audit inquiries, support disclosure consistency, and reduce the risk of government claims related to G&A allocation practices over time.

Frequently Asked Questions (FAQs)

• What is a total cost input base? A total cost input base is one of three allocation bases that CAS 410 permits for allocating G&A expenses. It includes all costs allocable to the production of goods and services during a cost accounting period, excluding G&A expenses.
• What did Honeywell do that the government challenged? Honeywell excluded the costs of gyros transferred to its Coon Rapids segment from its total cost input base for allocating G&A expenses. The government claims that this improperly reduced the base, inflating the G&A rate applied to government contracts.
• Why did the ASBCA deny Honeywell’s motion to dismiss the claim? The Board found that the CAS preamble language addressed that work transferred between segments should be treated as a final cost objective of the performing segment, contrary to Honeywell’s position.
• What does this decision mean for contractors? Contractors with full CAS-covered contracts must comply with CAS 410 and review their G&A allocation base and treatment of interdivisional transfers.
• How far back can government claims reach? The government’s claim in the Honeywell case dates to 1980, with interest accruing from that date. This illustrates that CAS noncompliances can impact prior years, reinforcing the importance of reviewing and complying with cost accounting standards.