AM manufactured High Mobility Multipurpose Wheeled Vehicles (HMMWVs) for the Army and similar vehicles sold commercially under the trade name "Hummer." AM negotiated three fixed price contracts to provide X units of the HMMWVs to the Army. The proposed price was based on an accounting change that altered its method of allocating indirect costs to its government contracts. When the accounting change was divulged to the government, DCAA issued a draft audit report asserting the change violated CAS 418, Allocation of direct and indirect costs. Accordingly, the government included a "reopener clause" in the three contracts that provided for an adjustment of the prices in the event the accounting change was CAS non-compliant and resulted in a higher price than an otherwise compliant method.

Prior to September 1995 AM allocated manufacturing overhead using a direct labor base and allocated its material overhead using direct material cost base. In May 1995 it informed its ACO that effective September 1995 it would accumulate all manufacturing costs, including fixed and variable costs for both its military and commercial vehicles, into one singe indirect cost pool (called the "one pool" method). In addition, as of September 1995, it would allocate its manufacturing and material overhead costs using the number of vehicles manufactured, no matter whether they were HMMWVs or HUMMERs (called the "unit-method"). The single overhead pool consisted of indirect costs incurred at two of its manufacturing facilities. The majority of its production efforts for both vehicles were conducted at its Mishawaka, IN plant where all the assembly and finishing work for the HMMWVs were performed there while the finishing work on the HUMMERs were performed at another plant in Armour, IN. The cost of the Armour facility, which were easily identifiable, represented about 11 percent of the total manufacturing overhead pool. It included the costs from both facilities in its overhead pool and used a unit of production method of allocating the indirect costs to each unit. So, there was $X dollars for each.

The government asserted that the negotiated price was based on a methodology of allocating indirect costs that was non-compliant with CAS 418 and based upon an analysis conducted by DCAA, invoked the reopener clause provision of its contracts and claimed a price adjustment of $18 million plus $5.7 million in interest. AM asserted its practices were compliant with CAS.

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