Dravo Corp. v. United States

Davis, Judge,

dissenting:

As the court acknowledges at the end of its opinion, there is no question in this case of the plaintiff’s being left with less gain than if it had performed the contract without the value engineering incentive change. It is bound (if its costs run according to plan) to have a greater profit, with respect to the deleted items, than if there had been no modification. 1 The sole issue here is the amount of that additional gain— *515 over and above the sum the contractor expected to receive as profit on the omitted work — which the contractor may properly retain. Under both of the competing interpretations of the Value Engineering Incentive clause, plaintiff will be allowed to keep as profit a sum considerably greater than the amount of gain allocated to the deleted items; the controversy is over how much more profit plaintiff should have as a result of the cost-saving. The dispute, then, is simply between a greater and a somewhat smaller amount of a very considerable added profit. 2

I stress this factor for two connected reasons. The first is that the decision of the case cannot comfortably be turned on the comparative “equity” or “fairness”, from the monetary standpoint, 'of the contractor’s or the Government’s reading of the Engineering Incentive article. Under both, the contractor does very well, ending up with a much enlarged profit — and the increased expense to the Government from the contractor’s interpretation is likely to be marginal at most. The second reason for emphasizing that, under both views, the contractor is left with a very substantial increased gain is that, as I see it, there is little ground for picking one interpretation over the other in order to encourage contractors to submit cost-reduction proposals; there seems an adequate profit spur whichever position is taken. Rather, the question before us should be answered primarily in terms of the wording of the clause, its general purpose, context, and history, as well as the impact of the relevant regulations.

Unlike the court, T do not find paragraph (d) of the article to be a clear directive. It commences with a square reference to “equitable adjustment”, with that term’s traditional exclu *516 sion of profit on work not done (General Builders Supply Co. v. United States, 187 Ct. Cl. 477, 482-83 , 409 F. 2d 246, 249-50 (1969)). The paragraph, also refers to the convenience-termination, changes, and other relief-granting clauses which use “equitable adjustment” in the same conventional sense the court now rejects. Like the changes and changed conditions articles, the second sentence of paragraph (d) links the “equitable adjustment” directly to the “Contractor’s cost of performance”, suggesting the comparability of the “equitable adjustment” under this clause with that authorized by the older provisions. This stress on “equitable adjustment” and the references to the other like clauses, in the first portion of paragraph (d), appear to me distinctly to braid this clause to the normal “equitable adjustment,” and thus to favor the defendant’s reading.

The only part of paragraph (d) supporting the contractor is the third sentence on which the court relies so heavily; without using “equitable adjustment”, 3 that sentence says that the price shall be reduced, in effect, by 50 percent of the “total estimated decrease in the Contractor’s cost of performance.” Granting that there is a tension between that phraseology (reading it strictly and literally) and the rest of paragraph (d), 'I do not see that the third sentence is so specific and so unequivocal, in and of itself, that, without more, it must be understood as necessarily overriding the remainder of the paragraph. It is quite possible that this particular phrasing is merely an accident of draftsmanship, without special substantive significance. Further guidance must be sought from other sources outside of paragraph (d), which show the general purpose of the clause and the spirit in which it should be applied.

This was a fixed-price contract, let after formal advertising, and the dominant objective of the Value Engineering Incentive article in such an agreement is revealed by its paragraph (a) (2) (ii) which says that the cost reduction proposals contemplated are those' 'that “would result in savings to the Government by providing a decrease in the cost of *517 performance of this contract * * The emphasis is on the “savings to the Government” which can, of course, be accomplished only by a decrease in the initial fixed price. It is noteworthy, too, that the related reference is to the “cost of performance of this contract”, which can mean the cost to •the Government of the contractor’s performance, not merely the contractor’s own costs in the strict sense. The saving to the defendant appears to be the fundamental element.

The same note is sounded in the pertinent Armed Services Procurement Regulations. 32 C.F.R. § 1.1702-1 (1972) (“Incentives”) says that to ¡be acceptable a value engineering change proposal must invoke some modification with “consequent reduction in the contract cost”, and even when the contract cost may be increased by a value engineering change the mechanism 'becomes operative if there are “overall savings” resulting from significant net reductions in collateral costs of Government-furnished property, etc. And § 1.1703-1, in discussing the types of savings to be shared with the contractor, declares that a ¡contractor must be assured of a fair proportion “of any savings realized by the Government as a result of his change proposal”, and also that the Defense Department policy reflects the premise that “the Government will benefit from any value engineering savings.” The aim is to maximize the savings to the Government without dulling the contractor’s incentive. That end is, ¡I believe, reached by accepting the defendant’s interpretation which leaves the contractor with plenty of incentive (as pointed out above) and at the same time gives the Government a greater over-all savings. 4

Plaintiff rests upon, and the court invokes, a piece of “legislative” (or background) history which appears to be both too obscure for solid reliance and, as best I can understand it, wide of the mark. The clause involved in the relevant interchange between the Comptroller General and the ASPR committee was not the Value Engineering Incentive article for firm fixed-price agreements — the clause we have before *518 us — but tbe separate articles for incentive-type contracts which contained quite different provisions for equitable adjustment for engineering incentive changes under those kinds of contracts. Those clauses called for increases in the target profit or the specified fees, and the General Accounting Office questioned whether those profits (and fees) should be increased even though the work was being reduced; in addition, the G.A.O. seems to have objected to the notion that the contractor should be allowed to retain any profit at all with respect to the work being deleted. The ASPE subcommittee rejected these G.A.O. criticisms in language I find quite cryptic 5 but which, on any reading, indicates on its face that the group was then considering only the incentive-type contracts (not the fixed-price form).

The majority of the court feels that the Comptroller General’s comments are pertinent to the contract form we have here, as well as to the incentive type to which it was actually directed, but it is significant that the Comptroller General, though asked to comment on all the forms, did not make a similar observation as to the fixed-price clause now before us; apparently, he did not consider that provision to have the same vice. Conversely, the subcommittee’s ambiguous remarks can be read as restricted to the incentive-type forms, or, as the court prefers, extended more broadly. 'In any event, insofar as the G.A.O. may have been proposing the complete elimination of all profit on the deleted work, the subcommittee’s rejection would be consistent with the defendant’s position that half of the original profit should be retained. On the whole, I see this segment of the fixed-price Value Engineering Incentive article’s background as too tenuous and infirm to ground any sturdy conclusions, one way or the other. Help must come from the other aids to interpretation.

In the end I remain with and apply the standard we set in General Builders Supply Co., supra, 187 Ct. Cl. at 482-88 , *519 409 F. 2d at 250 : that “equitable adjustment” has become a term of art in federal contracts, with a commonly understood meaning with respect to profits, and “that accepted content should be followed unless there are very strong counterbalancing reasons.” The only substantial “counterbalancing reason” I see here is the literal wording of the third sentence of paragraph (d) of the Value Engineering Incentive clause, and to my mind the impact of that phraseology is much diminished by the factors of, first, the wording of the rest of paragraph (d), second, the controlling purpose of the Value Engineering Incentive article to produce savings to the Government, and, third, the absence of any solid evidence that the drafters intended to depart from the normal understanding of “equitable adjustment.” My conclusion is that the third sentence is not a “strong counterbalancing reason” but, rather, an accident of draftsmanship which is best understood by reading “the total estimated decrease in the Contractor’s cost of performance” in slightly expanded form as “the total estimated decrease in the cost to the Government of performance by the Contractor.” That is not a difficult transposition and it seems to me to fit better than the strict and literal construction. 6

Skelton, Judge, and Bennett, Judge, join in the foregoing dissenting opinion.

la this context I use the words “profit” and “gain” in their colloquial sense — an excess of receipts over costs and expenses. The ASPR Committee which drafted the various Value Engineering Incentive clauses made it clear that cost-savings payments to contractors under these provisions are to be excluded from the fee or profit paid under the contract for either statutory or administrative control purposes. They are payments for services in the same sense as profit is intended, partially, as compensation for the service of being efficient and reducing costs.

This is illustrated by the tables plaintiff itself uses in its brief: it is agreed the profit on the excised work would have been $11,392; according to defendant’s calculation, the cost-savings to the Government amounted to $191,808 (including the profit item) and Dravo is entitled to half ($95,904) ; the contractor’s computation is that the cost-savings to the contractor (excluding the profit) came to $180,028, of which plaintiff can retain half ($90,014) plus the originally-expected $11,392 profit (a total of $101,406). The simple comparison between $11,392, the profit Dravo would have made (on the deleted work) if the contract had been performed as originally written, and the competing figures of $101,406 or $95,904 shows that in either event plaintiff will have a very greatly enlarged profit allocable to the segment of the work cut out under the Value Engineering Incentive provision.

Of tlie four sentences in the paragraph, this is the only one not using “equitable adjustment”.

In this instance the parties have agreed upon the amount of profit allocable to the deleted -work, but in the absence of such a stipulation there would be no more difficulty in calculating that amount than in an ordinary change decreasing work under the changes article.

For instance, tlie subcommittee seems to assume that there are two separate facets to distributing cost-savings to the contractor ((1) profit or fee; (2) share in savings) under the incentive-type clauses, but the texts of the provisions appear to contemplate that the contractor’s share of the cost-savings will be distributed to him only through increases in his fee or profit. The short answer to the Comptroller General’s objection is that, unless the profit (or fee) is increased, the contractor will not share at all In the cost-savings under this type of contract.

The contra proferentem canon is inapplicable because there is no showing, and no reason to believe, that plaintiff relied to its detriment, before controversy arose, on the interpretation of the Value Engineering Incentive article now espoused. See Young Associates, Inc. v. United States, 200 Ct. Cl. 438, 442-43 , 471 F. 2d 618, 620-21 (1973).