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More Confusion On What Costs Are Allocable To Government Contracts


In a puzzling decision about what appear to be independent research and development (IR&D) costs associated with creating a new software product, Teknowledge Corp. v. U.S. (Jan. 7, 2009), neither party seems to have cited the relevant allocation and allowability rules in Cost Accounting Standard 420, incorporated by reference in FAR 31.205-18, and the CFC's opinion does not mention them, instead sustaining disallowance of the costs on the ground that they did not "benefit" the government. Under the provisions of CAS 420, IR&D costs of a business unit are generally allocable to the contracts of that business unit, and it is not clear based on the facts as described in the opinion whether the costs at issue were incurred in a commercial business unit, a home office, or a government contracts business unit, so it is impossible to determine whether the costs would have been allocable to and allowable on the contracts of the Government business unit if CAS 420 had been appropriately applied.

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Terry L. Albertson
Senior Counsel – Washington, D.C.
Phone: +1 202.624.2635