Free Response to Motion - District Court of Federal Claims - federal


File Size: 10,510.9 kB
Pages: 209
Date: September 10, 2008
File Format: PDF
State: federal
Category: District
Author: unknown
Word Count: 9,444 Words, 65,537 Characters
Page Size: Letter (8 1/2" x 11")
URL

https://www.findforms.com/pdf_files/cofc/99/78.pdf

Download Response to Motion - District Court of Federal Claims ( 10,510.9 kB)


Preview Response to Motion - District Court of Federal Claims
Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 1 of 28

No. 00-129C (Judge Allegra) IN THE UNITED STATES COURT OF FEDERAL CLAIMS ______________________________________________________________________________ LOCKHEED MARTIN CORPORATION, Plaintiff, v. UNITED STATES, Defendant. DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT AND OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT PETER D. KEISLER Assistant Attorney General DAVID M. COHEN Director OF COUNSEL: Gregory T. Allen Raymond J. M. Wong Defense Contract Management Agency DORIS S. FINNERMAN Trial Attorney Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 8th Floor 1100 L Street, N.W. Washington, D.C. 20530 Tele: (202) 307-0300 Fax: (202) 305-7643 Attorneys for Defendant

October 22, 2004

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 2 of 28

TABLE OF CONTENTS PAGE(S) STATEMENT OF THE ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 I. II. Nature Of The Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Statement Of Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 A. Dispute Between The Government And LMC As To The Requirements Of The Cost Accounting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 LMC's Allocation Of Its CRAY Computer Costs . . . . . . . . . . . . . . . . . . . 8

B.

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 I. II. III. IV. Summary Judgment Is Appropriate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Lockheed's Allocation of Costs Did Not Comply With CAS 418 . . . . . . . . . . . . 10 Lockheed's Failure To Comply With The CAS Resulted In Increased Costs Paid By The United States . . . . . . . . . . . . . . . . . . . 17 Lockheed's Contention, Raised For The First Time In Its Motion For Summary Judgment, That It Is Entitled To An Offset Or An Equitable Adjustment For Costs It Incurred In Disposing Of Its CRAY Computers, Must Be Stricken . . . 19

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

i

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 3 of 28

TABLE OF AUTHORITIES CASES PAGE(S)

Allegheny Teledyne Inc. v. United States, 316 F.3d 1366 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Braughler Co., Inc. v. United States, 127 F.3d 1476 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Celotex Corp. v. Catrett, 477 U.S. 317 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 James M. Ellett Construction Co. v. United States, 93 F.3d 1537 (Fed. Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Mingus Constructors, Inc. v. United States, 812 F.2d 1387 (Fed. Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Perry v. Martin Marietta Corp., 47 F.3d 1134 (Fed. Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 13 Sweats Fashions, Inc. v. Pannill Knitting Co., 833 F.2d 1560 (Fed. Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 STATUTES and REGULATIONS 41 U.S.C. 602 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 41 U.S.C. 605 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 48 C.F.R. 9903.202-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 48 C.F.R. 9903.306 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 20 48 C.F.R. 9904.402-30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 48 C.F.R. 9904.407-30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 48 C.F.R. 9904.407-50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 16 ii

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 4 of 28

48 C.F.R. 9904.409-40 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 TABLE OF AUTHORITIES (continued) 48 C.F.R. 9904.418-20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 48 C.F.R. 9904.418-20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 48 C.F.R. 9904.418-40 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 48 C.F.R. 9904.418-50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 12, 14, 16 48 C.F.R. 9904.418-60 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 14 MISCELLANEOUS Restatement (Second) of Contracts, 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

iii

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 5 of 28

INDEX TO APPENDIX Description Page

Letter from A.M. DiPasquale to James Rose, dated April 1, 1994, w/ excerpt from enclosed Disclosure Statement . . . . . . . . . . . . . . . . . . . . . 1 Audit Report No. 3121-94J19200015, dated September 19, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Audit Report No. 3121-94J19200016, dated September 9, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Memorandum from Kenneth L. Hill, Branch Manager, DCAA to Commander, Defense Contract Management Command, dated February 13, 1996 . . . . . . . . . . 29 DCAA Supplemental Audit Report No. 3121-95J10250174-S1, dated September 16, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Letter from A.M. DiPasquale to Louis G. Becker, dated December 6, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Letter from Louis G. Becker to A.M. DiPasquale, dated January 8, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Letter from A.M. DiPasquale to Louis G. Becker, dated March 7, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Letter from Louis G. Becker to A.M. DiPasquale, dated March 17, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Letter from A.M. DiPasquale to Louis G. Becker, dated March 21, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Letter from Louis G. Becker to A.M. DiPasquale, dated April 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Letter from Louis G. Becker to A.M. DiPasquale, dated June 17, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Letter from Carolyn R. McGrath to Don Wheatley, dated June 16, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

iv

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 6 of 28

Letter from Louis G. Becker to A.M. DiPasquale, dated April 21, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 INDEX TO APPENDIX (continued) Letter from A.M. DiPasquale to Louis G. Becker, dated May 21, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Excerpt from Plaintiff's Objections and Responses to Defendant's Second Set of Interrogatories, Second Request for Production of Documents, and First Request for Admissions, dated June 25, 2001 . . . . . . . . . . . . . . . . . . . . . 55 Service Level Agreement for LADC, January 1994 through December 1994, signed August 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Service Level Agreement for LASC, January 1994 through December 1994, signed February 18, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Facsimile from Ron Kercher to Carolyn McGrath, attaching Interdepartmental Communication from W. Bernstein, dated September 24, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 Letter from Jeri Kaylene Somers to Doris Finnerman, attaching Plaintiff's Responses to Defendant's Fifth Set of Interrogatories and Second Requests for Admissions, dated March 13, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . 134 LITC Actual Cray Utilization vs. Budget Commitment, 1994-1996 . . . . . . . . . . . . . . . . . . . . . 156 Excerpt from "Issues Raised March 14, 2001" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 Letter from Renee Varin Potratz to William Bernstein, attaching DCAA audit report no. 3121-96J10601001, dated April 5, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

v

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 7 of 28

IN THE UNITED STATES COURT OF FEDERAL CLAIMS LOCKHEED MARTIN CORPORATION, Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) No. 00-129C (Judge Allegra)

DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT AND OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT Pursuant to Rules 56 and 83.2(e) of the Rules of the United States Court of Federal Claims, defendant, the United States, respectfully requests the Court to deny Lockheed's motion for summary judgment and to grant summary judgment in favor of the United States upon the ground that there is no genuine issue of material fact in dispute and the Government is entitled to judgment as a matter of law. In support of this motion, we rely upon the pleadings, the defendant's Proposed Findings of Uncontroverted Fact and exhibits thereto, the exhibits submitted in support of plaintiff's motion for summary judgment, and the following brief. Plaintiff's motion for summary judgment raises, for the first time, a counterclaim (although not described as such) which, according to Lockheed Martin Corporation ("LMC" or "Lockheed"), is an offset against the cost impact of the Cost Accounting Standard ("CAS") violation alleged in plaintiff's complaint and defendant's counterclaim. According to Lockheed, any legal analysis as to whether, in 1994 and 1995, it properly allocated the costs associated with its CRAY computers in accordance with CAS is irrelevant because any cost impact resulting from an improper allocation of costs is offset by an allocation of costs associated with the disposition of those assets.

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 8 of 28

In addition and as an alternative to its offset claim, Lockheed, for the first time, asks this Court to award an equitable adjustment of an indeterminate sum. The basis for this award is an alleged agreement between the United States and Lockheed. The alleged agreement, however, was apparently silent as to the amount of the adjustment, as Lockheed has provided no liquidated sum for the Court's consideration. Rather, Lockheed seeks an equitable adjustment of "the allocable portion of Lockheed's loss on the disposition of the CRAY computers." These claims (1) that Lockheed is entitled to allocate the costs associated with the disposition of the CRAY computers, and (2) that Lockheed is entitled to an equitable adjustment have not only not been raised previously in this proceeding, they have never been raised with the contracting officer. This is evidenced by, among other things, the absence of a single reference in any document filed in support of Lockheed's motion to the allocation of costs associated with the disposition of the CRAY computers, and the absence of a certified claim submitted to the contracting officer. As a procedural matter, Lockheed's failure to properly raise these issues in this Court has seriously prejudiced the Government. Absolutely no discovery was conducted on these issues. The Government has no knowledge of the costs associated with the disposition of the CRAY computers or any knowledge of how Lockheed has already allocated these costs. As a jurisdictional matter, Lockheed's failure to bring these claims to its contracting officer prevents this Court from exercising jurisdiction over these issues. As a result, the Court should strike all of Lockheed's arguments that rely upon the alleged offset or seek an award of damages from the Government.

2

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 9 of 28

DEFENDANT'S BRIEF STATEMENT OF THE ISSUES 1. Whether Lockheed's allocation of costs associated with the usage of CRAY

computers to its operating companies violated CAS 418 because the allocation was not based upon the actual usage of the computers by the operating companies. 2. Whether Lockheed's failure to comply with the CAS failure resulted in increased

costs paid by the United States. 3. Whether Lockheed's claims that it is entitled to allocate the costs associated with

the disposition of the CRAY computers, and that it is entitled to an equitable adjustment should be stricken because the claims were not presented to the contracting officer or previously raised in this proceeding. STATEMENT OF THE CASE I. Nature Of The Case

Lockheed filed this action in order to seek relief from a final decision issued by the Defense Corporate Executive ("DCE"), which demanded payment for the failure of Lockheed to comply with the Cost Accounting Standards in allocating to its business segments its costs for supercomputing services. Therefore, the only issues before the Court are the proper allocation of those costs and the increased costs paid by the United States as a result of Lockheed's improper allocation.

3

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 10 of 28

II.

Statement Of Facts A. Dispute Between The Government And LMC As To The Requirements Of The Cost Accounting Standards

In 1992, then Lockheed Corporation formed the Lockheed Information Technology Company ("LITC") to consolidate the process of providing mainframe and supercomputing services to its business segments. In April 1994, Lockheed revised its disclosure statement. Def. App. 1. See 48 C.F.R. 9903.202-1. Item 8.3.1.R of the disclosure statement describes the allocation of LITC costs to Lockheed's business segments. One of the expense pools allocated to Lockheed's business segments was the HPCC/Super Computer pool. As its name implies, this pool contained costs related to supercomputer services that were provided to the business segments.1 The relevant portion of the Disclosure Statement giving rise to this lawsuit provides as follows: Services provided to customers will be governed by service level agreements and documents of understanding. In these agreements customers commit to forecasts of resource usage. LITC plans on asset expenditures and support requirements based on assessments of the workload requirements. Each company is billed for resources forecast by them, and allocated on their behalf. A penalty is assessed on any company that significantly over-forecasts their support and resource requirements. A company, depending on the overall mix of work forecast variances, may be liable of 90% of their forecast. Those companies whose needs exceed their forecast will be accommodated subject to available capacity. Incremental spending

HPCC stands for High-Performance and Classified Computing, which included specialized computing performed on CONVEX, CRAY, and VAX systems. Def. App. 88. Costs in the pool included "CRAY computer hardware, maintenance, software, labor support, facility, administrative, service, and telecommunications." Pl. Brief at 6. 4

1

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 11 of 28

to meet unforecasted needs will be borne exclusively by the company necessitating the investment. Direct charges- . . . HPCC processing is being billed to the companies at standard rates per CPU hour for committed share processing and standard rates per wall clock hour for committed dedicated processing. Available capacity above these levels is at no cost, to ensure maximum use of available resources. ... For cost pools allocated on a usage rate basis, standard rates will be set at the start of the year and remain throughout the year provided over/under liquidation does not exceed 10%. Within this range the over/under liquidation will be rolled into the next year's rates. If the over/under liquidation exceeds 10%, rates will be adjusted to actuals a minimum of once a year, usually at year end. Def. App. 3-4 (emphasis added). This allocation method addressed the allocation of both IBM computer costs and HPCC/Supercomputer Costs. Id. In the summer of 1994, the Defense Contract Audit Agency ("DCAA") reviewed LITC's compliance with the rules of the Cost Accounting Standards Board. As a result of this review, the DCAA issued two audit reports: Audit Reports Nos. 3121-94J9200015 ("Audit Report 15") and 3121-94J9200016 ("Audit Report 16"). Def. App. 5-28. Audit Report 15 addressed the allocation of costs related to LITC's IBM mainframe computers. It opined that Lockheed's practice of allocating these costs based on commitments by the operating segments violated CAS 418 because that standard "recommends that the allocation of the costs be based on resource consumption." Def. App. 7. Audit Report 16 expressed the same opinion for the allocation of costs related to LITC's CRAY supercomputers. Def. App. 15. There was a significant difference, however, relating to the cost impact of the noncompliance. The auditors found that the difference between the projected 1994 allocation of IBM computer costs based upon the commitments of the segments and the projected allocation of those costs based upon the recorded

5

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 12 of 28

usage for the first six months of 1994 was not significant. Def. App. 7. In the case of the CRAY supercomputers, the difference between the two allocation methods was estimated to have a cost impact to the Government of $1,236,010 over the course of the year. Def. App. 15. On November 22, 1994, James Rose, the Defense Contract Executive ("DCE") for Lockheed, wrote to the DCAA Resident Auditor at Lockheed Corporation concerning the CAS 418 noncompliance issue raised in Audit Report 15, which addressed the IBM computer costs. Pl. App. 18-19. Mr. Rose took particular note of DCAA's finding that the differences between the cost allocations using the LITC forecasting method and the allocation of the costs based on recorded usage were not significant. Based upon that information and a regulation providing that a change in allocation base is not required if the proper allocation base would not result in a material difference, Mr. Rose made a determination that "LITC's current practice of allocating cost meets the intent of CAS 418 requirement. Therefore, with this letter the issue of noncompliance with CAS 418 is resolved and disposed with no additional action required." A copy of the letter was sent to LMC. Mr. Rose never addressed the recommendations of Audit Report 16, nor can his letter reasonably be interpreted as resolving the allocation of the CRAY costs, as the estimated differences between LITC's forecasting method and recorded usage were significant. Following the merger of Lockheed with Martin Marietta in March 1995, Mr. Rose's responsibilities transferred to the DCE for Lockheed Martin Corporation, Louis G. Becker. Two further audit efforts concerning the CRAY cost issue at LITC were conducted by DCAA in 1996. A memorandum dated February 13, 1996, reflected that the estimated impact of the CAS 418 noncompliance on cost-reimbursable contracts was $1,077,075 in 1994. Def. App. 29. A report 6

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 13 of 28

of a supplemental audit of fiscal year 1994 recorded costs was issued on September 16, 1996. This report reflected the final variance in cost allocations for 1994 between the allocation used by Lockheed and an allocation based on actual usage by the various Lockheed segments. Def. App. 32. On May 31, 1996, Mr. Becker issued a notice of noncompliance with CAS 418 to Lockheed Martin based upon the recommendations in Audit Report 16. Pl. App. 23-24. Mr. Becker also requested that LMC provide a cost impact proposal as required by Federal Acquisition Regulation ("FAR") 52.230-6 (mistakenly cited as 52.230-5). LMC responded that there was no CAS noncompliance and, therefore, no cost impact proposal was required. Def. App. 34-35. Over the next several months, the parties exchanged correspondence setting forth their respective opinions as to the requirements of CAS. Def. App. 36-44. On June 17, 1997, Mr. Becker issued a final determination of noncompliance with CAS 403 and CAS 418, and he again requested that LMC submit a cost impact proposal within 60 days. Def. App. 45-47. Thereafter, representatives of LMC and the DCE conducted negotiations in an attempt to resolve the CAS noncompliance issue. On December 19, 1997, LMC outlined a "compromise approach" with a description of how adjustments to the CRAY computer billings in 1994 and 1995 would be made "if an agreement is reached." Pl. App. 25; Def. App. 48. On June 16, 1998, Lockheed Martin submitted its final settlement offer. Def. App. 48-49. On March 16, 1999, Mr. Becker issued his final decision and demand for payment. Pl. App. 26-27A. When no response was received from LMC, Mr. Becker sent a follow-up letter renewing the demand for payment and advising Lockheed that it could submit a proposal for 7

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 14 of 28

deferment of collection if it disputed the amount demanded. Def. App. 50-51. On May 21, 1999, LMC requested deferment of collection of the amount demanded while LMC appealed the final decision. Def. App. 52-53. On March 16, 2000, this action was filed by Lockheed Martin seeking an appeal of the DCE's final decision. B. LMC's Allocation Of Its CRAY Computer Costs

Notwithstanding the provision in the disclosure statement that Lockheed's business segments would commit to a level of usage in a service level agreement or document of understanding, Lockheed could not produce a single such document reflecting such a commitment. Nevertheless, Lockheed documents reflect that Lockheed billed several of its business segments allegedly based upon a forecast or commitment of CRAY computer usage in 1994 and 1995. Additional Lockheed documents reflect actual billings for CRAY usage by LITC to various business segments. Finally, Lockheed documents indicate the actual usage of the CRAY computer by the business segments and the actual cost at standard rates used by Lockheed. These documents reflect the following: 1994 Amount Billed By LITC $ 6,382,491 2,136,000 1,469,892 8,113 $ 9,996,496 Actual CPU Hours 7,245.5 7,537.3 188.6 112.8 30.1 15,114.4 Billing If Based Upon Actual Usage @ $270/hr. $1,956,285 2,035,071 50,922 30,456 8,127 $4,080,861

Customer LMSC LASC LADC LTOC Sanders TOTAL

Committed Amount $ 6,376,000 2,188,550 1,469,000 $ 10,033,550

Usage % 47.9 50.0 1.2 .7 .2 100.0

Def. App. 139-147.

8

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 15 of 28

Customer LMSC LASC LMTO LMIT Sanders TOTAL

Committed Amount $ 2,318,000 1,144,000

1995 Amount Billed By LITC $2,318,000 1,144,000 11,785

$3,462,000

$3,473,785

Actual CPU Hours 4,959.5 6,186.8 27.3 111.2 79.9 11,364.7

Usage % 43.6 54.4 .3 1.0 .7 100.0

Billing If Based Upon Actual Usage @ $270/hr. $1,339,065 1,670,436 7,371 30,024 21,573 $3,068,469

Def. App. 147-153. Notwithstanding the accounting practice described in the disclosure statement that "rates [would] be adjusted to actuals a minimum of once a year" if "the over/under liquidation exceeds 10%," Def. App. 4, Lockheed did not adjust the amounts charged to its business segments, or to affected Government contracts, to reflect the variance between the preestablished rate and the actual usage rate of the computer services. Def. App. 144, 147-50 (Plaintiff's Response to Request for Admissions, Nos. 14, 15, 23-30). ARGUMENT I. Summary Judgment Is Appropriate

Summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1390 (Fed. Cir. 1987). The moving party must identify the legal and factual bases for its motion and specify those portions of the record that demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Sweats Fashions, Inc. v. Pannill Knitting Co., 833 F.2d 1560, 1563 (Fed. Cir. 1987). The claims at issue may then be resolved on

9

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 16 of 28

summary judgment unless the responding party establishes there is a factual dispute which must be tried. Anderson, 477 U.S. at 247-48; Sweats Fashions, 833 F.2d at 1562-63. In this case, the material facts are either not in dispute, or are not subject to a genuine dispute, and the Government is entitled to judgment as a matter of law. Accordingly, summary judgment should be granted in favor of the United States. II. Lockheed's Allocation of Costs Did Not Comply With CAS 418

The issue before the Court is the proper allocation of costs associated with the usage of CRAY computers. Allocation of costs '"is an accounting concept involving the ascertainment of contract cost; it results from a relationship between a cost and a cost objective such that the cost objective appropriately bears all of a portion of that cost.' . . .[A]llocability is simply a determination of what portions of a cost are assigned to what party." Allegheny Teledyne Inc. v. United States, 316 F.3d 1366, 1370-71 (Fed. Cir. 2003) (citation omitted). CAS 418 provides guidance for allocating indirect costs to "cost objectives," that is, organizational subdivisions or contracts, based upon their "beneficial or causal relationship."2 48 C.F.R. 9904.418-20; see also 48C.F.R. 9904.418-40(c) ("Pooled costs shall be allocated to cost objectives in reasonable proportion to the beneficial or causal relationship of the pooled costs to cost objectives. . . . "); Perry v. Martin Marietta Corp., 47 F.3d 1134, 1137 (Fed. Cir. 1995) (Pursuant to CAS 418, cost pools are "allocated back to the segment base and their corresponding cost objectives (the CAS-covered contracts the segments are performing) in proportion to the relative benefits received on the basis of an established methodology"). 48 C.F.R. 9904.402-30 defines "cost objective" as "a function, organizational subdivision, contract, or other work unit for which cost data are desired and for which provision is made to accumulate and measure the cost to processes, products, jobs, capitalized projects, etc." 10
2

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 17 of 28

With respect to its CRAY computers, Lockheed allocated the costs associated with the use of these computers by utilizing a preestablished rate: "standard rates per CPU hour for committed share processing." Def. App. 3, 157. The cost accounting standards specifically address the allocation of indirect costs when the contractor uses a preestablished rate: (g) Use of preestablished rates for indirect costs. (1) Preestablished rates, based on either forecasted actual or standard cost, may be used in allocating an indirect cost pool. (2) Preestablished rates shall reflect the costs and activities anticipated for the cost accounting period except as provided in paragraph (g)(3) of this subsection. Such preestablished rates shall be reviewed at least annually, and revised as necessary to reflect the anticipated conditions. (3) The contracting parties may agree on preestablished rates which are not based on costs and activities anticipated for a cost accounting period. The contractor shall have and consistently apply written policies for the establishment of these rates. (4) Under paragraphs (g) (2) and (3) of this subsection where variances of a cost accounting period are material, these variances shall be disposed of by allocating them to cost objectives in proportion to the costs previously allocated to these cost objectives by use of the preestablished rates. (5) If preestablished rates are revised during a cost accounting period and if the variances accumulated to the time of the revision are significant, the costs allocated to that time shall be adjusted to the amounts which would have been allocated using the revised preestablished rates. 48 C.F.R. 9904.418-50. An illustration of the allocation of costs using preestablished rates is provided: During a cost accounting period, Business Unit I allocates the cost of its flight services indirect cost pool to other indirect cost pools and final cost objectives using a preestablished rate. The 11

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 18 of 28

preestablished rate is based on an estimate of the actual costs and activity for the cost accounting period. For the cost accounting period, Unit I establishes a rate of $200 per hour for use of the flight services activity. In March, the contractor's operating environment changes significantly; the contractor now expects a significant increase in the cost of this activity during the remainder of the year. Unit I estimates the rate for the entire cost accounting period to be $240 an hour. Pursuant to the provisions of 9904.418-50(g)(4), the Business Unit may revise its rate to the expected $240 an hour. If the accumulated variances are significant, the business unit must also adjust the costs previously allocated to reflect the revised rates. 48 C.F.R. 9904.418-60(i). In this case, the actual utilization of CRAY computers changed significantly from the projected usage. Lockheed, however, did not revise its rates as required. See 48 C.F.R. 9904.418-50(g)(2) ("Such preestablished rates shall be reviewed at least annually, and revised as necessary to reflect the anticipated conditions"); 48 C.F.R. 9904.418-50(g)(4) ("where variances of a cost accounting period are material, these variances shall be disposed of by allocating them to cost objectives. . . ."). Nor did it revise its rates as required by Lockheed's own disclosure statement. Def. App. 3 ("rates [would] be adjusted to actuals a minimum of once a year" if "the over/under liquidation exceeds 10%"). Revised rates would have addressed the material variances between the amount billed by LITC to its business segments based upon the amounts "committed" and the amounts that would have been billed if actual usage had been considered. In addition, the costs previously allocated should have been adjusted to reflect the revised rate based upon the actual costs and activity for the cost accounting period. Lockheed's failure to make any adjustment was a violation of CAS 418.

12

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 19 of 28

The requirement to base the allocation upon actual costs is supported by analogy to CAS 407, which governs the use of "standard costs" for direct material and labor. See Preambles to Cost Accounting Standard 418, Preamble A (Preamble to Original Publication, 5-15-80) ("the Board decided to apply to same criteria to average and pre-established direct labor rates that are used in CAS 407 for labor rate standards"). In this CAS provision, "standard cost" is "any cost computed with the use of pre-established measures." 48 C.F.R. 9904.407-30(a)(8). Where there is a variance between the pre-established measure and the actual measure of the cost, see 48 C.F.R. 9904.407-30(a)(9), such variances must be allocated to the cost objectives, generally as costs are incurred, but at least annually. 48 C.F.R. 9904.407-50(b), (c), (d)(1).3 In this case, Lockheed allocated its costs based upon "commitments" made by the business segments, with no consideration of any variance between this measure of forecasted costs and the actual costs associated with usage of the computers. The use of this "commitment" methodology allows a contractor to pick and choose the pre-established or "committed" rate for various cost elements (rent, computer services, copying services, home office costs, etc.) with no Government input or approval required. Thus, using Lockheed's methodology, the Government pays whatever "commitment" rate the contractor elects to charge, and ignores the mandate in CAS 418.40(c) that costs be allocated to cost objectives "in proportion to the relative benefits received." Perry v. Martin Marietta Corp., 47 F.3d at 1137.

See also CAS 401-30(a)(2), which provides: "Actual costs means an amount determined on the basis of cost incurred (as distinguished from forecasted costs), including standard cost properly adjusted for applicable variance." 13

3

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 20 of 28

This possible abuse was addressed in CAS 9904.418-50(g), which requires that (1) the pre-established rates reflect the costs and activities anticipated for the cost accounting period, CAS 9904.418-50(g)(2), and (2) the pre-established rates be adjusted where variances of a cost accounting period are material, CAS 9904.418-60(g)(4). As illustrated by the following example, without the protection of CAS 418-50(g)(2) and (4), contractors would be able to charge whatever they desired, regardless of what the actual costs were: EXAMPLE: The corporate home office of Johnson Company estimates the amount of home office personnel and space it will need based on the estimated work of its segments for the coming year. All of the contracts with Segment C of Johnson Company are Government costreimbursable contracts. For 2005, Johnson Company decides to hold each of its segment managers "accountable." Thus, the corporate home office requires that each segment manager provide a "commitment" of how much work that segment will perform during the coming year. By holding the segment managers accountable, the Company believes that this will motivate the segment managers to achieve that goal and eliminate having idle personnel or space at the corporate home office. The "commitment" provided by each segment for 2005 was as follows: Segment A (Commercial) B (Commercial) C (Government) Total Work Commitment (% of Total) $ 20 million (20%) 30 million (30%) 50 million (50%) $100 million Actual Work (% of Total) $20 million (33%) 30 million (50%) 10 million (17%) $60 million

Based on these "commitments," the Corporate Office estimates that total rental and personnel costs for 2005 will be $10 million. It therefore allocates $2 million to Segment A

14

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 21 of 28

(using a pre-established rate of 20% x $10 million), $3 million to Segment B (using a preestablished rate of 30% x $10 million), and $5 million to Segment C (using a pre-established rate of 50% x $10 million). The actual rental and personnel costs for 2005 total $10 million, which is the same as the estimated costs. However, if Johnson Company used the actual work instead of the "committed work," Segment A would be allocated $3.3 million (the actual percentage of 33% x $10 million), Segment B would be allocated $5 million (the actual percentage of 50% x $10 million), and Segment C would be allocated $1.7 million (the actual percentage of 17% x $10 million). A summary of the difference is as follows: Segment Amount Charged Using Work Commitment $2 million 3 million 5 million Amount Charged Using Actual Work $ 3.3 million 5 million 1.7 million Overcharge (Undercharge) By Using Commitment $(1.3 million) (2 million) 3.3 million

A (Commercial) B (Commercial) C (Government)

Even though the actual amount of work for the Government division was much less than anticipated, and the actual amount of work for the commercial divisions met their projections, Johnson Company claims that it is not required to adjust the amount of costs allocated because this is a "pre-established" rate that was "committed" to by its segment managers. In other words, the Government must pay the $3.3 million of increased costs resulting from the failure of the manager of Segment C to meet his/her "commitment." This result occurs regardless of whether the original "commitment" was even a valid estimate. The Government has no input into the amount of the "commitment." Moreover, because the Government is paying these additional costs, the managers are not held "accountable," as Lockheed contends.

15

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 22 of 28

To further illustrate Lockheed's position, one could argue that the concept of "commitments" can be applied to pre-established direct labor rates. However, CAS 9904.40750(d) requires that the contractor adjust the pre-established rate to reflect actual costs when the variances are material. Similarly, CAS 9904.418-50(a)(2) provides that "in accounting for direct costs a business unit shall use actual costs" unless a pre-established rate is used as provided in CAS. Further, if pre-established rates are used, CAS 9904.418-50(a)(2)(ii)(B) requires that the contractor adjust its rates to reflect actual costs when the variances are material. Thus, CAS is consistent in its requirement that when pre-established rates are used, there must be an adjustment for any variances that are material in amount. In the case of direct labor, the absence of such an adjustment could lead to instances such as the following: EXAMPLE: All of Smith Company's contracts are cost-reimbursable, Government contracts. Smith Company uses standard rates. The standard rates are based on the "commitment" rates submitted by its division managers. The division managers are held responsible for assuring that the"commitment" rates are recovered on the contract. At the beginning of 2005, Division X of Smith Company was comprised of highly experienced engineers, technicians, and computer programmers. However, early in 2005, Division X experienced a large unexpected turnover when many of its experienced personnel left the division. This resulted in a lower actual average rate than was "committed" to by the division manager of Division X. The results are summarized as follows:

16

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 23 of 28

Direct labor Category Engineer Technician Computer Programmer Total

Division X Commitment Rate $65 $50 $40

Division X Difference Actual Rates $40 $30 $25 $25 $20 $15

Hours Worked 10,000 10,000 10,000

Amount of Overcharge $250,000 $200,000 $150,000 $600,000

Smith Company argues that the amount charged to each contract must use the "commitment" rate. Since the division manager of Division X must be held to his/her "commitment," Smith Company contends that Government is not entitled to recover the $600,000 of overcharges. The result is the same as using Lockheed's methodology: the Government must pay the additional costs resulting from the failure of Lockheed's managers to meet their "commitment." CAS clearly reflects that the use of any pre-established rate must account for actual costs, and adjustments are required when the variance between the pre-established rate and actual costs is material. Lockheed's methodology, which did not account for any variance, is a violation of CAS. III. Lockheed's Failure To Comply With The CAS Resulted In Increased Costs Paid By The United States

The provisions of Title 41, United States Code, section 422(h) require that the contractor and the United States "agree to a contract price adjustment, with interest, for any increased costs paid" to the contractor by the United States because of a failure by the contractor comply with applicable cost accounting standards. See also 48 C.F.R. 9903.306(a) (defining "increased costs").

17

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 24 of 28

In a document prepared by Lockheed, Lockheed admits that the impact of its CAS noncompliance on cost-reimbursement contracts resulted in an overpayment by the Government of $540,000. Def. App. 158. However, Lockheed also contends that a reallocation of costs would impact firm, fixed-price contracts, resulting in an underpayment by the Government of $1,740,000. Id. In addition, Lockheed contends that the Government owes Lockheed $9,650,000 for losses associated with the disposition of the CRAY computers.4 Our opposition to Lockheed's claims arising from the disposition of the CRAY computers is discussed below, at pages 19-20. We disagree with Lockheed's contention that its CAS noncompliance had a cost impact on fixed-price contracts. CAS 9903.306(b) provides as follows: If the contractor under any fixed-price contract, including a firm fixed-price contract, fails during contract performance to follow its cost accounting practices or to comply with applicable Cost Accounting Standards, increased costs are measured by the difference between the contract price agreed to and the contract price that would have been agreed to had the contractor proposed in accordance with the cost accounting practices used during contract performance. The determination of the contract price that would have been agreed to will be left to the contracting parties and will depend on the circumstances of each case. According to the document prepared by Lockheed, the amounts allegedly allocable to the Government include $23.48 million for costs associated with usage of the CRAY and $8.45 million for costs associated with the disposition of the CRAYs, for a total amount of $31.91 million allegedly allocable to the Government. This document also indicates that the Government has paid $22.26 million of these costs, leaving a balance allegedly owed of $9.65 million. Lockheed's current position is that the Government has paid $20.79 million of the $30.27 million costs associated with the CRAYs. Pl. Br. at 11. Lockheed has provided no explanation of these figures, nor has it provided any documentation from which these numbers were allegedly derived. The sole evidentiary support provided by Lockheed is the declaration of Mr. Blue, which demonstrates that Mr. Blue has no personal knowledge of the costs incurred by LITC for usage and disposition of the CRAY computers or of the amounts paid by the Government. 18
4

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 25 of 28

Thus, for Lockheed to claim that its CAS noncompliance resulted in cost impact on its fixedprice contracts, Lockheed must establish "the contract price that would have been agreed to" had Lockheed's proposal been in accordance with compliant cost accounting practices. In this case, the best estimate of computer costs was the amount committed to by each operating segment. This best estimate was presumably used by Lockheed in determining the price for its fixed-price contracts, and it would not have changed even if Lockheed had used a compliant method for allocation of costs (that is, a pre-established rate adjusted for actual costs). Since any adjustment for variances are made at the end of the accounting period, they generally do not affect firm, fixed-price contracts negotiated during the accounting period. Here, Lockheed has not established that the contract price that would have been agreed to is any different from the contract price agreed to. Therefore, Lockheed cannot demonstrate that its CAS noncompliance resulted in a cost impact on fixed-price contracts. Pursuant to FAR 32.610, the Government is also entitled to interest from the date of the demand, March 16, 1999. IV. Lockheed's Contention, Raised For The First Time In Its Motion For Summary Judgment, That It Is Entitled To An Offset Or An Equitable Adjustment For Costs It Incurred In Disposing Of Its CRAY Computers, Must Be Stricken

Lockheed's motion for summary judgment advances two arguments: (1) that it is entitled to allocate its costs associated with the disposition of CRAY computers, which allocation should offset any cost impact resulting from an allocation of costs associated with the usage of the CRAY computers, and (2) that it is entitled to an equitable adjustment equal to "the allocable portion of Lockheed's loss on the disposition of the CRAY computers." The first time that

19

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 26 of 28

Lockheed raised these issues in this proceeding is in its motion. It did not raise them in its complaint, in its reply to the Government's counterclaim, or in the joint preliminary status report. Because Lockheed did not raise these issues, the Government did not propound any discovery as to the facts underlying the claims or the merits of the claims. Even more importantly, Lockheed has not raised these issues with the contracting officer. The contracts at issue in this case are contracts in effect during 1994 and 1995 and are subject to the Contract Disputes Act ("CDA"). See Complaint, 3; 41 U.S.C. 602(a). The CDA expressly requires that "all claims by a contractor against the government . . . shall be in writing and shall be submitted to the contracting officer for decision." 41 U.S.C. 605(a). Compliance with this provision is a jurisdictional prerequisite to the filing of a complaint in this Court. Braughler Co., Inc. v. United States, 127 F.3d 1476, 1480 (Fed. Cir. 1997). Thus, for the Court to possess jurisdiction pursuant to the CDA, there must be a valid claim presented to the contracting officer for a decision. James M. Ellett Constr. Co. v. United States, 93 F.3d 1537, 1541 (Fed. Cir. 1996).

20

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 27 of 28

As already noted, Lockheed has never presented to its contracting officer any claim relating to the costs associated with the disposition of its CRAY computers.5 Accordingly, the Court lacks jurisdiction to entertain any such claim.6

Even if Lockheed had submitted such a claim to its contracting officer, Lockheed wrongly represents that it disposed of the CRAY computers in 1995. See Pl. PFUF 8. First, the evidence upon which Lockheed relies does not support its proposed finding of fact. The declaration of Mr. Blue, asserts only the following: "Due in part to the operating companies' underutilization of the CRAY computers in 1994 and 1995, Lockheed disposed of the two CRAY computers." Pl. App. 3. Second, a contemporaneous Lockheed document states that the "CRAYs were removed from service in 1996," Def. App. 40, and a DCAA audit report dated April 5, 1996, discussed the possible replacement of LITC's CRAY computers, Def. App. 16063. These documents demonstrate that the CRAY computers were not disposed in 1995. CAS 9904.409-40(a)(4) provides that "[t]he gain or loss which is recognized upon disposition of a tangible capital asset "shall be assigned to the cost accounting period in which the disposition occurs." If the disposition occurred in 1996, then the gain or loss must be assigned to 1996. Nothing in CAS permits the contractor to offset a loss incurred in 1996 against the increased costs paid by the Government in 1994 and 1995. Cf. 48 C.F.R. 9903.306(e) (when the failure to follow CAS increases costs paid under one or more contracts but decreases costs under other contracts, no adjustment to the contract price is required "so long as the cost decreases . . . are at least equal to the increased cost under the other affected contracts'). Lockheed's claim for an equitable adjustment is based upon an alleged agreement with the Government. As evidence of the alleged agreement, Lockheed cites a single letter from Lockheed dated December 19, 1997. Pl. Br. 14. This letter states: "The purpose of this letter is [to] document how [the business segments] will handle an adjustment to their CRAY billings generated in 1994 and 1995 if an agreement is reached." Pl. App. 25 (emphasis added). A subsequent letter from Lockheed describes the December 1997 letter as "a compromise approach." Def. App. 48. "An agreement is a manifestation of mutual assent on the part of two or more persons." Restatement (Second) of Contracts, 3. Absent a shred of evidence that an authorized representative of the Government accepted Lockheed's "compromise approach," Lockheed has fallen far short of proving the existence of an agreement, and Lockheed's claim must fail. 21
6

5

Case 1:00-cv-00129-FMA

Document 78

Filed 10/22/2004

Page 28 of 28

CONCLUSION For the foregoing reasons, defendant respectfully requests the Court to deny Lockheed's motion for summary judgment, grant defendant's cross-motion for summary judgment, and enter judgment in favor of the Government in the amount of $540,000 plus interest from March 16, 1999. Respectfully submitted, PETER D. KEISLER Assistant Attorney General s/ David M. Cohen DAVID M. COHEN Director s/ Doris S. Finnerman DORIS S. FINNERMAN Attorney Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 8th Floor 1100 L Street, N.W. Washington, D.C. 20530 Tel: (202) 307-0300\ Fax: (202) 305-7643 Attorneys for Defendant October 22, 2004

OF COUNSEL: Gregory T. Allen Raymond J. M. Wong Defense Contract Management Agency

22

Case 1:00-cv-00129-FMA

Document 78-2

Filed 10/22/2004

Page 1 of 10

IN THE UNITED STATES COURT OF FEDERAL CLAIMS LOCKHEED MARTIN CORPORATION, Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) )

No. 00-129C (Judge Allegra)

DEFENDANT'S PROPOSED FINDINGS OF UNCONTROVERTED FACT Pursuant to RCFC 56(h)(1), defendant respectfully submits the following proposed findings of uncontroverted fact in support of Defendant's Motion For Summary Judgment: 1. In April 1994, Lockheed Corporation ("Lockheed") revised its disclosure

statement. Def. App. 1. 2. Item 8.3.1.R of the disclosure statement sets forth Lockheed's description of its

allocation of LITC costs to Lockheed's business segments. One of the expense pools to be allocated was the HPCC/Super Computer pool. As its name implies, this pool contained costs related to supercomputer services that were provided to the business segments. Def. App. 3-4. 3. The disclosure statement provides, in part: Services provided to customers will be governed by service level agreements and documents of understanding. In these agreements customers commit to forecasts of resource usage. LITC plans| on asset expenditures and support requirements based on assessments of the workload requirements. Each company is billed for resources forecast by them, and allocated on their behalf. A penalty is assessed on any company that significantly over-forecasts their support and resource requirements. A company, depending on the overall mix of work forecast variances, may be liable of 90% of their forecast. Those companies whose needs exceed their forecast will be accommodated subject to available capacity. Incremental spending

Case 1:00-cv-00129-FMA

Document 78-2

Filed 10/22/2004

Page 2 of 10

to meet unforecasted needs will be borne exclusively by the company necessitating the investment. Direct charges- . . . HPCC processing is being billed to the companies at standard rates per CPU hour for committed share processing and standard rates per wall clock hour for committed dedicated processing. Available capacity above these levels is at no cost, to ensure maximum use of available resources. ... For cost pools allocated on a usage rate basis, standard rates will be set at the start of the year and remain throughout the year provided over/under liquidation does not exceed 10%. Within this range the over/under liquidation will be rolled into the next year's rates. If the over/under liquidation exceeds 10%, rates will be adjusted to actuals a minimum of once a year, usually at year end. Def. App. 3-4 (emphasis added). 4. Item 8.3.1.R was intended to address the allocation of both IBM computer costs

and HPCC/Supercomputer Costs. Id. 5. In the summer of 1994, the Defense Contract Audit Agency ("DCAA") reviewed

LITC's compliance with the rules of the Cost Accounting Standards Board and issued two audit reports: Audit Reports Nos. 3121-94J9200015 ("Audit Report 15") and 3121-94J9200016 ("Audit Report 16"). Def. App. 5-28. Audit Report 15 dealt with the allocation of costs related to LITC's IBM mainframe computers. Audit Report 16 dealt with the allocation of costs related to LITC's CRAY supercomputers. 6. Audit Report 15 opined that Lockheed's practice of allocating IBM computer

costs based on commitments by the operating segments violated CAS 418 because that standard "recommends that the allocation of the costs be based on resource consumption." Def. App. 7. The auditors also found that the difference between the projected 1994 allocation of IBM computer costs based upon the commitments of the segments and the projected allocation of

2

Case 1:00-cv-00129-FMA

Document 78-2

Filed 10/22/2004

Page 3 of 10

those costs based upon the recorded usage for the first six months of 1994 was not significant. Id. 7. Audit Report 16 opined that Lockheed's practice of allocating CRAY

supercomputer costs based on commitments by the operating segments violated CAS 418 because that standard "recommends that the allocation of the costs be based on resource consumption." It also found that the difference between the allocation of costs based on commitment and the allocation of costs based on resource consumption would result in an estimated cost impact to the Government of $1,236,010 over the course of the year 1994. Def. App. 15. 8. On November 22, 1994, James Rose, the Defense Contract Executive ("DCE") for

Lockheed, wrote to the DCAA Resident Auditor at Lockheed Corporation concerning the CAS 418 noncompliance issue raised in Audit Report 15, with respect to IBM computer costs. Mr. Rose took note of DCAA's finding that the differences between the cost allocations using the LITC forecasting method and the allocation of the costs based on recorded usage were not significant. Based upon that information and a regulation providing that a change in allocation base is not required if the proper allocation base would not result in a material difference, Mr. Rose made a determination that "LITC's current practice of allocating cost meets the intent of CAS 418 requirement. Therefore, with this letter the issue of noncompliance with CAS 418 is resolved and disposed with no additional action required." A copy of the letter was sent to LMC. Pl. App. 18-19. 9. Mr. Rose never addressed the recommendations of Audit Report 16.

3

Case 1:00-cv-00129-FMA

Document 78-2

Filed 10/22/2004

Page 4 of 10

10.

Following the merger of Lockheed with Martin Marietta in March 1995,

responsibility for the cost accounting practices at Lockheed transferred to the DCE for Lockheed Martin Corporation, Louis G. Becker. Plaintiff's Proposed Findings of Uncontroverted Fact, 16. 11. A DCAA memorandum dated February 13, 1996, reflected the estimated impact

of the CAS 418 noncompliance on cost-reimbursable contracts in 1994 was $1,077,075. Def. App. 29. 12. DCAA issued a report of a supplemental audit of fiscal year 1994 recorded costs

on September 16, 1996. This report reflected the final variance in cost allocations for 1994 between the allocation used by Lockheed and an allocation based on actual usage by the various Lockheed segments. Def. App. 30-33. 13. On May 31, 1996, Mr. Becker issued a notice of noncompliance with CAS 418 to

Lockheed Martin based upon the recommendations in Audit Report 16. Mr. Becker also requested that LMC provide a cost impact proposal. Pl. App. 23-24. 14. LMC responded that there was no CAS noncompliance and, therefore, no cost

impact proposal was required. Def. App. 34-35. 15. For several months, the parties exchanged correspondence setting forth their

respective opinions as to the requirements of CAS. Def. App. 36-44. 16. On June 17, 1997, Mr. Becker issued a final determination of noncompliance with

CAS 403 and CAS 418, and he again requested that LMC submit a cost impact proposal within 60 days. Def. App. 45-47.

4

Case 1:00-cv-00129-FMA

Document 78-2

Filed 10/22/2004

Page 5 of 10

17.

During the next several months, representatives of LMC and the DCE conducted

negotiations in an attempt to resolve the CAS noncompliance issue. Plaintiff's Proposed Findings of Uncontroverted Fact, 18. 18. On December 19, 1997, LMC outlined a "compromise approach" with a

description of how adjustments to the CRAY computer billings in 1994 and 1995 would be made "if an agreement is reached." Pl. App. 25; Def. App. 48. 19. App. 48-49. 20. On March 16, 1999, Mr. Becker issued his final decision and demand for payment On June 16, 1998, Lockheed Martin submitted its final settlement offer. Def.

in the amount of $2,669,534. Pl. App. 26-27A. 21. Mr. Becker sent a follow-up letter renewing the demand for payment and advising

Lockheed Martin that it could submit a proposal for deferment of collection if it disputed the amount demanded. Def. App. 50-51. 22. On May 21, 1999, LMC requested deferment of collection of the amount

demanded while LMC appealed the final decision. Def. App. 52-53. 23. According to Lockheed, there were three "service level agreements and

documents of understanding" such as are referenced in Lockheed's disclosure statement submitted to James Rose on April 1, 1994: (1) an Interdepartmental Communication from W. Bernstein, dated September 24, 1993; (2) a Service Level Agreement for LADC, January 1994 through December 1994, dated August 1994; and (2) a Service Level Agreement for LASC, January 1994 through December 1994, dated February 18, 1994. Def. App. 57.

5

Case 1:00-cv-00129-FMA

Document 78-2

Filed 10/22/2004

Page 6 of 10

24.

The Interdepartmental Communication from W. Bernstein, dated September 24,

1993, projected CRAY costs for 1994 as follows: LADC LASC LMSC $2,800,000 2,189,000 6,376,000.

Def. App. 124, 127, 129, 132. 25. The Service Level Agreement for LADC, January 1994 through December 1994,

dated August 1994, stated, "LADC has no work forecasted for the LITC, HPCC processors in 1994." Def. App. 85. 26. There were no "service level agreements and documents of understanding"

reflecting commitments for CRAY usage in 1995. Def. App. 57 (Pl. Resp. to Interrog. No. 6). 27. For 1994, LMSC, LASC, and LADC committed to a certain level of costs based

on anticipated CRAY usage. LMSC, LASC, and LADC committed to cost levels as follows: Customer LMSC LASC LADC Total Dollar Commitment $ 6,376,000 2,188,550 1,469,000 $ 10,033,550

Def. App. 139-40 (Plaintiff's Responses to Requests for Admissions, Nos. 1-3); 156. 28. For 1994, the total costs billed by LITC for CRAY computers was as follows: Customer LMSC LASC LADC Sanders Total 6 Amount Billed $ 6,382,491 2,136,000 1,469,892 8,113 $ 9,996,496

Case 1:00-cv-00129-FMA

Document 78-2

Filed 10/22/2004

Page 7 of 10

Def. App. 140-42 (Plaintiff's Responses to Requests for Admissions, Nos. 4-7). 29. For 1994, actual CRAY usage was as follows: Customer LMSC LASC LADC LTOC Sanders Actual CPU Hours 7,245.5 7,537.3 188.6 112.8 30.1 15,114.3 Usage % 47.9 50.0 1.2 .7 .2 100.0%

Def. App. 142-43 (Plaintiff's Responses to Requests for Admissions, Nos. 8-12). 30. For 1994, LMSC and LADC did not utilize the CRAY computers in accordance

with their respective commitments, but they were billed for the full amount of their commitment. Def. App. 144 (Plaintiff's Response to Request for Admissions, No. 14). 31. For 1994, LASC was not billed for the difference between its commitment and its

actual usage of the CRAY. Def. App. 144 (Plaintiff's Response to Request for Admissions, No. 15). 32. LADC included the $1,469,882 costs billed by LITC in its fiscal year 1993

overhead claim. LADC was billed by LITC for its committed amount of $1,469,882 evenly over the 12 months of 1994. Def. App. 144-45 (Plaintiff's Responses to Requests for Admissions, Nos. 15-16). 33. Although LITC billed Sanders for CRAY usage, Sanders had not previously made

any hour or dollar commitment for CRAY usage. Def. App. 145-46 (Plaintiff's Response to Request for Admissions, No. 18).

7

Case 1:00-cv-00129-FMA

Document 78-2

Filed 10/22/2004

Page 8 of 10

34.

For 1995, LMSC and LASC each committed $634,000 for CRAY computer

usage. Def. App. 147-48 (Plaintiff's Responses to Requests for Admissions, Nos. 23, 25); 156. 35. For 1995, LMSC also committed $2,154,000 for excess capacity for CRAY

computer usage. Def. App. 147-48 (Plaintiff's Response to Request for Admissions, No. 24); 156. 36. For 1995, LASC also committed $757,000 for excess capacity for CRAY

computer usage. Def. App. 148 (Plaintiff's Response to Request for Admissions, No. 26); 156. 37. For 1995, LITC billed LMSC $634,000 for CRAY computer usage. Def. App.

148-49 (Plaintiff's Response to Request for Admissions, No. 271). 38. For 1995, LITC billed LMSC $1,684,000 for excess capacity. Def. App. 149

(Plaintiff's Response to Request for Admissions, No. 281). 39. For 1995, LITC billed LASC $634,000 for actual CRAY computer usage. Def.

App. 149 (Plaintiff's Response to Request for Admissions, No. 291). 40. For 1995, LITC billed LASC $510,000 for excess capacity. Def. App. 149-50

(Plaintiff's Response to Request for Admissions, No. 301). 41. For 1995, LMIT's actual CRAY usage cost was $11,785. Def. App. 150

(Plaintiff's Response to Request for Admissions, No. 31). 42. For 1995, LMSC actually used the CRAY computers for 4,959.5 CPU hours.

Def. App. 150 (Plaintiff's Response to Request for Admissions, No. 32).

Lockheed neither admitted nor denied this request for admission, although the information is within the possession of Lockheed. Therefore, pursuant to Rule 36, the request is deemed admitted. 8

1

Case 1:00-cv-00129-FMA

Document 78-2

Filed 10/22/2004

Page 9 of 10

43.

For 1995, LASC actually used the CRAY computers for 6,186.8 CPU hours. Def.

App. 150-51 (Plaintiff's Response to Request for Admissions, No. 33). 44. For 1995, LMTO actually used the CRAY computers for 27.3 CPU hours. Def.

App. 151 (Plaintiff's Response to Request for Admissions, No. 34). 45. For 1995, LMIT actually used the CRAY computers for 111.2 CPU hours. Def.

App. 151-52 (Plaintiff's Response to Request for Admissions, No. 35). 46. For 1995, Sanders actually used the CRAY computers for 79.9 CPU hours. Def.

App. 152 (Plaintiff's Response to Request for Admissions, No. 36). 47. Although LITC billed LMIT for CRAY computer usage in 1995, LMIT had not

previously made any hour or dollar commitment for CRAY computer usage. Def. App. 152 (Plaintiff's Response to Request for Admissions, No. 371). Respectfully submitted, PETER D. KEISLER Assistant Attorney General s/ David M. Cohen DAVID M. COHEN Director s/ Doris S. Finnerman DORIS S. FINNERMAN Attorney Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 8th Floor 1100 L Street, N.W. Washington, D.C. 20530 9

OF COUNSEL: Gregory T. Allen Raymond J. M. Wong Defense Contract Management Agency

Case 1:00-cv-00129-FMA

Document 78-2

Filed 10/22/2004

Page 10 of 10

Tel: (202) 307-0300\ Fax: (202) 305-7643 Attorneys for Defendant October 22, 2004

10

Case 1:00-cv-00129-FMA

Document 78-3

Filed 10/22/2004

Page 1 of 15

Case 1:00-cv-00129-FMA

Document 78-3

Filed 10/22/2004

Page 2 of 15

Case 1:00-cv-00129-FMA

Document 78-3

Filed 10/22/2004

Page 3 of 15

Case 1:00-cv-00129-FMA

Document 78-3

Filed 10/22/2004

Page 4 of 15

Case 1:00-cv-00129-FMA

Document 78-3

Filed 10/22/2004

Page 5 of 15

Case 1:00-cv-00129-FMA

Document 78-3

Filed 10/22/2004

Page 6 of 15

Case 1:00-cv-00129-FMA

Document 78-3

Filed 10/22/2004

Page 7 of 15

Case 1:00-cv-0