Indirect Doesn’t Mean Exempt: ASBCA Rejects Cross‑Motions Over U.S.-Flag Transportation Costs

Key Takeaways

• U.S.-flag clauses are performance duties, not accounting classifications
• Government must prove each shipment violated contract clauses
• Indirect cost pools do not exempt contractors from transport mandates
• Waiver processes must be documented well in advance
• Compliance programs should track shipments to individual contracts

Pulse Analysis

The ASBCA’s decision in Lockheed Martin Aeronautics Co. underscores a foundational principle in federal contracting: performance obligations are governed by contract language, not by how a contractor later allocates costs. By treating international freight as an indirect expense, Lockheed hoped to avoid the Fly America Act and Cargo Preference Act requirements. The Board rejected that logic, emphasizing that the clauses trigger when any portion of a shipment supports a contract containing the provisions, irrespective of cost‑pool treatment. This interpretation aligns with FAR Part 31’s focus on actual compliance rather than accounting convenience, sending a clear signal to all prime contractors.

Beyond the doctrinal clarification, the ruling reshapes the evidentiary burden in cost‑allowability disputes. The Government cannot rely on audit summaries alone; it must tie each unallowable charge to a specific foreign‑flag shipment tied to a covered contract. This heightened proof requirement protects contractors from blanket disallowances while demanding more granular record‑keeping. Auditors and contracting officers will need to collaborate closely, ensuring vouchers, shipping logs, and contract clauses are cross‑referenced to substantiate any claim of non‑compliance.

Practically, contractors must redesign compliance workflows. Shipping decisions should be documented at the point of execution, with clear links to the contract(s) they support, even when costs flow through pooled overhead rates. Waiver requests for foreign‑flag transport must be initiated early, with robust justification packages ready for review. By integrating shipment‑level tracking into indirect rate calculations, firms can mitigate the risk of costly disputes and maintain eligibility for full cost recovery under FAR and DFARS. The decision thus drives a shift toward more transparent, performance‑based cost management in defense contracting.