(Editor’s Note. In the last couple of years we have been focusing on cases addressing “benefit to the government”. This elusive, evolving concept has great practical significance on what costs are deemed to be allocable and hence allowable government contract costs. The following is a summary of a most recent case addressing this issue where it illustrates some of the factors that need to exist for an indirect cost to be allocable to a contract.)

Basic Facts

Teknowledge is an internet transaction company providing service solutions for the government. (Full disclosure – we have provided consulting services to the company unrelated to the current case.) In 1999, Teknowledge began developing the TekPortal software program, a customer information aggregation service used in the financial services industry. The company intended for the TekPortal program to be dual use software for both commercial and governmental customers.

At the time, Teknowledge had two reporting segments – commercial and government. The commercial segment oversaw development of TekPortal and Teknowledge allocated a portion - $285,000 - of the amortized development costs of $885,000 to the government segment’s G&A pool based on headcount of the two segments. From 2001 to 2005, Teknowledge proposed use of TekPortal software in response to three Government RFPs but the government never purchased the program. The Contractor admitted that none of the government contracts utilized the TekPortal technology “per se.”

The Government asserted the costs associated with developing the TekPortal program were not allocable to the Government and even if allocable, they are not allowable because they are not reasonable and do not comply with generally accepted accounting principles (GAAP). The contractor argued the costs are allocable because (1) they benefit the government and can be distributed to the government in reasonable proportion to the benefit received and (2) are necessary to the overall operation of its business. Further, it states the costs are allowable because they are reasonable and comply with GAAP. In July 2005 the Defense Contract Management Agency issued a notice of intent to disallow the amortized software costs from TekPortal and issued a final decision Jan. 2006 where upon in April 2006 Teknowledge filed a compliant to the Court challenging the disallowed amortized software costs of $285,000.

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