Follow-Up…

Court Affirms Costs Without Government Benefit are Unallocable

The US Court of Appeals affirmed the Court of Federal Claims decision that Teknowledge Corp. failed to show a connection between software development costs and a government contract. Teknowldege developed TekPortal software, a customer information tool for the finance industry intended for use by both commercial and government customers. However the government never purchased the software. The company amortized costs related to developing the software in its overhead pool where 31 percent was allocated to the government contract. The government held the costs were not allocable under FAR 31.201-4 and found the costs were not necessary to the overall operation of Teknowledge’s business. Teknowledge argued (1) the lower court erred in requiring proof of a concrete, present benefit to the government where potential benefits could be sufficient to allocate the costs to the contract (2) since the costs were “indirect” they were not subject to disallowance under FAR 31.201-4 and (3) the costs indirectly benefited the government and was necessary for Teknowledge’s overall business. The Court disagreed stating that under the Boeing No. Am. Case, the contractor had to show a “nexus” between its costs and its government work where there was no such nexus here. Further, there were no underlying government contracts that were related to the software that would allow these costs to be properly allocated as indirect costs. Finally, the court held that because the costs resulted from work done in anticipation of acquiring government purchase orders and contracts, any benefit to the government from the software development would be “remote and insubstantial” (Teknowledge Corp. v US Fed. Cir No. 2009-5053)

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