(Editor’s Note.  Various forms of strategic alliances are becoming much more common with government contractors and the following case demonstrates that traditional cost and contracting requirements may apply differently to these new arrangements.)

Pratt and Whitney (P&W) manufactures jet engines and formed a collaboration with several foreign firms to develop an advanced engine.  The relationship stipulated that each party, called independent contractors, would bear their own expenses and risk and would be compensated at fixed percentage rates out of the revenue of any sales with P&W contributing and receiving over 80%.  When revenue was distributed to the firms the government maintained these were costs and hence should be included in P&W’s allocation base for distributing general and administrative and independent research and development expenses.  Since they were excluded from the bases, DCAA questioned the higher costs resulting from a higher G&A rate and cited P&W for noncompliance with CAS 410 and 418.

In its appeal the government asserted the revenue payments to the collaborators were payments for parts, equivalent to prime contractor payments to subcontractors, and hence should be considered costs included in the G&A and IR&D bases.  P&W asserted there was no CAS noncompliance because CAS did not address collaboration revenue share distributions but that generally accepted accounting principles (GAAP) explicitly said they are not a cost.  Further, P&W asserted (1) the collaboration agreement was a form of strategic alliance not a prime/subcontractor relationship (2) the parts provided to P&W were the same as customer furnished parts and (3) P&W obtained the parts at no cost making exclusion of the disputed amounts mandatory by CAS.

The Appeals Board sided with P&W stating (1) the agreement, in spite of the words “independent contractors”, was not a prime/subcontractor relationship but rather was a “collaborative partnership” because of the sharing of risk and revenue (2) the share distributions were not a “cost” under either GAAP or CAS but was more a consignment of parts and (3) further proof a cost did not exist is evidenced by the fact P&W did not take title to the parts nor was the price fixed or determinative in advance because payment was contingent on sale of the engine (United Technology Corp., Pratt and Whitney, ASBCA Nos. 47416, et al).   

{TAG_FORM_TITLE}