• First Prong - Is the Cost a Direct Cost

To determine allocability, the Court says it must first assess whether the costs are direct or indirect. The Government asserted the costs are direct costs and since it had never purchased the software there was no specific contract to charge the direct costs to. Teknowledge stated it could not meet the direct test because there was no contract for the software and argued the costs were indirect. The Court agreed that the costs were not direct and ruled the indirect costs must be subject to the second and third prongs of allocability.

• The Second Prong – Benefits the Contract and Other Work

Teknowledge claims the software development costs are allocable as indirect costs because they benefit the contract and other work and can be distributed in a reasonable proportion. Citing two cases, General Dynamics Corp.(ASBCA No 18503) and KMS Fusion v US (24, Cl. Ct 582), the contractor asserts the courts have taken a broad view of the meaning of “benefit” to the government that includes any cost that increases business or reduces indirect costs benefits the government. Teknowledge argued that the TekPortal costs allow it to both maintain its ability to perform government contracts and spread the financial risk of the development costs across both commercial and government segments. The government countered by saying the test for allocability is not “some vague, prospective benefit to the government” and cited FMC Corp. v US that held “remote and insubstantial benefits to the government” do not meet the benefit test. The government contended the government never purchased TekPortal and admits the costs were not related to any contract but was rather a speculation in anticipation of acquiring both commercial and government contracts.

The Court concludes the government did not receive benefit from the TekPortal technology. Citing two cases – Boeing and Lockheed – it stated the test for allocability is where there is a sufficient “nexus” between a given cost and a government contract and the word “benefit” for an allocability test requires some showing the cost relates to a government contract, not that it promotes the government public policy interests. The Court stated that in the cases Teknowledge put forth there was a nexus exiting between the cost incurred and some underlying government contract. In KMS Fusion, marketing consultant costs benefited the contract because additional business brought in reduces the indirect costs allocable to the contract. In FMC Corp the bid and proposal costs associated with an Arctic tanker program was allocable to the government because the B&P costs maintained the viability of the commercial enterprise of the company. In Lockheed, personal property taxes assessed on facilities were allocable because the government benefitted from Lockheed’s fulfillment of its responsibilities as a corporate citizen to the local community.

As opposed to these cases, the Court found no nexus. The only benefits cited by Teknowledge are the general viability of the company and reduced indirect costs to its government segments where the Court said Teknowledge misconstrued the definition of “benefit” under the FAR and failed to show any connection between the TekPortal program and a current government contract, concluding the asserted benefit to the government was too remote and insubstantial to be allocable.

• Third Prong – Necessary to the overall operation of the business

Citing FAR 31.201-4(c) and Caldera v Northrop Worldwide Aircraft Servs. Inc, (192 F.3d 962, 972)
Teknowledge asserted the development costs are allowable because they are “necessary to the overall operation of the business.” The contractor maintains the TekPortal costs were necessary to create a product that could be sold in the marketplace, which were similar to the KMS Fusion case where consultant costs were deemed allocable because they brought in new business. The government rejected this argument stating Teknowledge provided no factual evidence showing how the TekPortal program kept the company viable.

The Court ruled against Teknowledge. First, it omitted a key part of the allocability test even under the third prong where a nexus to a government contract must be shown. Unlike KMS Fusion where a benefit was shown how the consultant costs benefited the DOE contract by lowering indirect costs allocated to the government, no such nexus was shown here. Second, Teknowledge offered no evidence showing how the TekPortal keeps the company afloat or will bring in new business in the future. The Court concluded since the costs are not allocable to a government contract they are not allowable.

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