Development Costs Were Not Allocable to a Government Contract

Software development costs were not allowable, according to the Court of Federal Claims, because the costs were not allocable to a contract and any potential benefit to the government was merely speculative. The contractor appealed a contracting officer's final decision disallowing costs incurred in the development of an internet portal software program. The contractor argued the costs were allocable because they benefited the government by allowing the contractor to remain viable as a company and by enabling its commercial segment to absorb expenses it would otherwise have charged to the government. Under the cost principles in Part 31 of the Federal Acquisition Regulation, a cost is allocable to the government if it is "assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship" (FAR 31.201-4). Correspondingly, a cost must meet one of three factors to be deemed allocable: it is incurred specifically for a contract; it benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefit received; or it is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown (FAR 31.201-4(a)-(c)).
No Nexus
The contractor conceded it did not meet the first prong of the allocability test because it never entered into a contract with the government to develop, use, or provide the portal program. Instead, the contractor argued the development costs were indirect costs that met the second and third prongs of the test. According to the contractor, the costs allowed it to execute its plan of maintaining viability by both performing government contracts and developing software. However, the contractor failed to show a sufficient nexus between the development costs and a particular government contract (see Boeing North American, Inc., v. Roche, CA-FC, 46 CCF ś77,930). Thus, any benefit to the government resulting from the development costs was too remote and insubstantial to be allocable. Similarly, the contractor failed to demonstrate the costs were necessary to the overall operation of its business. The contractor argued the incurred costs were "necessary to create a product that could be sold in the marketplace." However, under the third prong of the allocability test, a contractor must still show some nexus to a government contract. Moreover, the contractor offered no evidence to indicate the portal program kept it in business. Because the development costs were not allocable to a particular contract, the costs were not allowable as a matter of law. (Teknowledge Corp. v. U.S., FedCl, 53 CCF ś79,050)

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