The government disallowed over $98 million is costs from various Lockheed Martin contracts. The government found that Lockheed had not complied with the clause mandating the use of U.S.-flag carriers for work under the contracts. Lockheed argued that the U.S. flag clauses do not apply to shipping expenses billed as indirect costs. The ASBCA rejected Lockheed's argument, reasoning that the requirements of these U.S.-flag clauses apply regardless of how the contractor categorizes the costs.
Appeals of Lockheed Martin Aeronautics Company, Armed Services Board of Contract Appeals, ASBCA Nos. 63621, 63622, 63671, 63697, 63698, 63742
- Background - The government disallowed $98 million in indirect costs claimed under several Lockheed contracts. The government alleged the contractor violated clauses requiring the use of domestic air and ocean transportation services. Specifically, the government asserted that foreign-flag transportation costs included in Lockheed's overhead pools were unallowable. Lockheed appealed to the ASBCA. Both Lockheed and the government moved for summary judgment.
- Indirect Costs - Lockheed's contract contained a clause requiring the company to use U.S.-flag air carriers for air transportation, or U.S.-flag vessels for sea transportation. The government could disallow transportation costs incurred with a foreign-flag vessel. Lockheed claimed that the U.S.-flag requirements only applied to the contract's direct costs. Lockheed believed that it spread foreign-flag transportation costs around various contracts as indirect costs, then those costs did not apply to direct contract costs, and thus the U.S.-flag requirements did not apply to those transportation costs. The Board disagreed, holding that the unambiguous language of the U.S.-flag clauses requires compliance whenever the contractor performs work under a contract containing the clause, regardless of how costs are categorized. The requirement to use U.S.-flag carriers applies to all international shipping activities tied to affected contracts,. A contractor's method of accounting for costs, whether direct or indirect, does not absolve it from complying with the U.S.-Flag requirements. The board denied Lockheed's motion for summary judgment.
- Government's Motion - The board also denied the government's cross-motion for summary judgment. While Lockheed may not be able to charge foreign transportation costs as indirect costs, the government has not presented any evidence that Lockheed had violated the clauses by using a foreign-flag carrier or vessel.
The contractor is represented by Erin N. Rankin, Catherine O. Shames, and Jessica R. Chao of Crowell & Moring LLP. The government is represented by Samuel W. Morris, Srikanti Schaffner, and Debra E. Berg of the Defense Contract Management Agency.