Costs for Items “Intended for Sale” Can’t be Considered MP&E Costs
Shortly after winning a cost type contract to build spacecraft components, TRW decided to design and manufacture a solar array panel (which absorbs sunlight and converts it to energy to power a spacecraft) where it capitalized the costs as manufacturing and production engineering expenses in accordance with FAR 31.205-25 (Manufacturing and production engineering) and charged the related depreciation expenses indirectly in accordance with FAR 31.205-11 (Depreciation). TRW’s intentions were twofold: it intended the solar array would be adapted as a component of a variety of spacecraft that TRW intended to build for the government and also thought the array could become the basis for a product line that could be sold outside spacecraft programs. The contractor asserted the costs were allowable MP&E expenses while the government denied the costs, saying the solar array costs were not depreciable because they were for a development item “intended for sale” and hence unallowable as MP&E costs.
The Board sided with the government noting TRW did not meet the “burden” to prove the solar array costs should be MP&E. Though the solar array panels proved to be “unflightworthy” for government spacecraft and TRW terminated the project as a separate product line, the Board found that TRW, from the start, contemplated it could develop a solar array subsystem product line for sale and it was “committed” to do so. Accordingly, TRW did not meet “the FAR criteria for allowability of MP&E costs”, namely that such costs must be for developing equipment, tools or systems expected to be used in producing products that are “not intended for sale.” Though it was true the solar array was intended as a component of TRW’s products it was also true it was intended as a separate product line and hence the company was not entitled to allocate the depreciated solar array costs as an indirect cost to its cost type contract (TRW Inc. ASBCA 51172).
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