What does the ASBCA decision on U.S.-flag transportation costs mean for contractors’ indirect cost recovery? 2026

According to GSA guidelines, contractors must update accounting policies to document how U.S.-flag transportation differentials are identified, allocated, and billed to government contracts. The ASBCA decision (Archirodon JV, Feb. 26, 2025) emphasizes that allocation to an indirect pool is permissible only when costs meet FAR Part 31 allocability and allowability tests and when the contractor’s accounting practice treats similar costs consistently. Per FAR Subpart 47.5, ocean transportation by U.S.-flag vessels carries statutory preference; however, that preference does not automatically determine accounting treatment. The DCAA FAR Cost Principles Guide (Jan 2017) requires adequate supporting documentation, consistent treatment, and traceability from invoice to cost pool. Under OMB M-25-21, agencies will expect stronger internal controls and transparency for line-item transportation charges, and DoD auditors will look for compliance with DFARS 247.572 policy and 252.247-7000 where applicable. The SBA reports that 78% of small contractors ship via commercial carriers at least quarterly, so this ruling affects both large contractors and small-business subcontractors who must clarify pass-throughs and markups.

According to GSA guidelines, contractors must treat U.S.-flag differential consistently across contracts and disclose the method in their incurred cost submissions and forward pricing. Per FAR 19.502, small businesses can rely on streamlined accounting only if their method yields the same allocability and allowability results; otherwise, they must revise practices. The ASBCA made clear that simply noting a compliance preference for U.S.-flag vessels in procurement files does not replace cost-specific support needed for contract reimbursement. Under OMB M-25-21, agencies will demand audit-ready documentation for any allocations claimed in indirect pools. The DCAA guide instructs auditors to test whether the allocation base fairly distributes the benefit; if not, questioned costs will follow. DoD's CMMC framework requires contractors holding controlled unclassified information to retain records that demonstrate allocation decisions; this means accounting ledgers and supporting bills of lading must be preserved for at least contract audit periods.

According to GSA guidelines, contractors must change proposal language to identify whether U.S.-flag differentials will be billed as a direct reimbursable, a separately billed item, or included in indirect rates. The SBA reports that 78% of federal subcontractors rely on prime contractors to set billing practices, so primes must communicate accounting changes by a defined date. Per FAR 31.205 and FAR Subpart 47.5, allowability depends on verifiable, reasonable, and allocable cost treatment; an unsupported indirect allocation invites disallowance. Under OMB M-25-21, agencies will track whether awardees comply with stated billing positions. DoD's DFARS 247.572-policy ties agency transportation policy to contractual clauses (e.g., 252.247-7000 Hardship Conditions); contractors must reconcile policy clauses with accounting treatment to avoid contradictions during audit.

According to GSA guidelines, prime contractors should notify subcontractors and update flow-downs to reflect revised accounting for U.S.-flag differentials; inconsistent subcontract pass-throughs can create questioned costs for the prime. Per FAR Part 31, allocability requires that a cost be incurred specifically for a contract, benefit both the contract and others in proportion, and be assignable; contractors must test differential charges against those criteria. The SBA reports that 78% of subcontracted shipping costs historically were processed as direct pass-throughs without detailed allocation; primes must now request line-item carrier invoices. Under OMB M-25-21, agencies will expect documentation demonstrating that the chosen billing method minimizes risk, and DoD auditors will verify that forward pricing rate proposals reflect the same treatment. DoD's CMMC and record-retention expectations mean that electronic records, bills of lading, and routing instructions must be preserved, indexed, and retrievable for audit review.

According to GSA guidelines, contracting officers should review cost allowability in light of the ASBCA decision when evaluating final indirect cost rate submissions. Per FAR Subpart 47.5, contracting officers must still enforce U.S.-flag statutory requirements, but they must also evaluate contractor accounting treatment for consistency and support. The DCAA FAR Cost Principles Guide advises auditors to sample transactions and test allocation bases; contractors should anticipate sampling of 5-10% of shipments in a contested year. Under OMB M-25-21, agencies will demand reconciliation between contract clauses that reference U.S.-flag requirements and the contractor’s accounting entries. DoD's DFARS 247.572-policy and clause 252.247-7000 require contractors to identify any hardship exceptions and related costs separately; failure to do so risks reductions during provisional billing or final indirect cost rate audits.

According to GSA guidelines, contractors should update proposal checklists and contract clauses to reflect whether U.S.-flag differentials are direct reimbursables, pass-throughs, or part of an indirect pool; this change should be implemented before the next proposal cycle, typically within 90 days. The SBA reports that 78% of small businesses lack written policies for freight allocation, putting them at higher risk; primes should require subcontractor certification of billing detail. Per FAR 19.502, small businesses can use simplified procedures only when they meet allocability rules; otherwise they must adopt the same documentation standards as larger firms. Under OMB M-25-21, agencies will increasingly require transparent cost line items and may withhold provisional payments for unexplained allocations. DoD's CMMC and DFARS requirements mean security and procurement teams must coordinate so that cost accounting changes do not conflict with classified or CUI handling obligations.

According to GSA guidelines, agencies including DoD and NASA will want an auditable trail from purchase order to bill of lading to general ledger entry; contractors should create a standardized mapping within their ERP system within 120 days. Per FAR Subpart 47.5 and DFARS 247.572-policy, contracting officers must reconcile contract language with the contractor’s accounting method at the time of award and at final indirect cost rate settlement. The DCAA FAR Cost Principles Guide suggests sampling 5-10% of shipments for audit; prepare for that scope by organizing documents and indexing them for quick retrieval. Under OMB M-25-21, better documentation improves government confidence and reduces the likelihood of multi-year reopeners or audit exceptions tied to transportation differentials.