Petition — Bethlehem Steel Corp. v. United States

Supreme Court brief1975

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74-1640 | - y |

In THE

Supreme Court of the United States

October Term, 1974

No. 74-

BETHLEHEM STEEL CORPORATION,

Petitioner,

Vv.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS

—_—— EERE _—

— —— ——---~— _—

ALBERT R. CONNELLY,

One Chase Manhattan Plaza,

New York, N. Y. 10005

Attorney for Petitioner

Of Counsel:

GEORGE VRADENBURG III,

One Chase Manhattan Plaza,

New York, N. Y. 10005 | /

June 26, 1975

TABLE OF CONTENTS

NY SN So writ hs Soh eS KR Mie ee ee eRe

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SL NID 05.55 0:0 6 0006s encceuecaneene

Constitutional Provision, Statute and Regulations

ER ee ee ae Pe eee ame

ae art rune

Regulations Applicable to Determining ‘Fair

and Reasonable Profit” ...............4.

I ag De ee

reper reer errr rrr Terr rT TT Tre rrr

1. The Government Must Conform to its Own

Regulations and, During the Pendency of

Litigation, May Not Apply, Ad Hoc and

Retroactively, More Onerous Administra-

tive Rules In Order to Improve Its Liti-

GOR FUSE 6ncccccscncccevecsneses

2. The Department of Defense May Not Fi-

nally Determine Issues in Litigation Before

the ASBCA Upon Ex Parte Application of

a Military Department and Without Af-

fording the Contractor an Opportunity to

Pe PE i van wi books enedesewheubeny

SE A ERE POON Fe EEO POE EE ee

TABLE OF AUTHORITIES

PAGE

CASES:

Appeal of Newport News Shipbuilding and Dry

Dock Co., 71-1 BCA § 8705 (ASBCA 1971) .. 6,

Berends v. Butz, 357 F.Supp. 143 (D. Minn. 1973)

Gonzales vy. United States, 348 U.S. 407 (1955) ..

Greene v. United States, 376 U.S. 149 (1964) ...14, 15,

Gutknecht v. United States, 396 U.S. 295 (1970) .. 9Y,

Lynch v. United States, 292 U. S. 571 (1934) ....

Morgan vy. United States, 304 U.S. 1 (1938) .....

Newport News Shipbuilding & Dry Dock Co. v.

United States, 374 F.2d 516 (Ct. Cl. 1967) ..... 5.

S « E Contractors, Inc. v. United States, 406 U.S. 1

[gaara BAe Sate ee Es ce nae 16,

Service v. Dulles, 354 U.S. 363 (1957) ...........

Union Pac Ry. v. Laramie Stock Yards Co., 231

a8 oe 36! ere ree er rre yr

United States ex rel. Accardi v. Shaughnessy, 347

La ee RD Sass s ene die caatee sess 14, 15, 16,

United States v. Anthony Grace & Sons. Inc., 384

TOE °F) a ee near 16,

United States v. Heffner, 420 F.2d 809 (4th Cir.

err rrr errr rrr err re

Vitarelli v. Seaton, 359 U.S. 535 (1959) .........

IVillner v. Committee on Character and Fitness, 373

a ee talks adn ceeeeneeescaeeees cus

STATUTES:

y Boe tome o>. § ) PPrereeereeeerTe eT rieree

41 U.S.C. § 321-322 (The Wunderlich Act) .....

ili

OTHER:

PAGE

Armed Services Board of Contract Appeals, Part

1—Charter, ASPRA Part 1 (4CCH Govern-

ment Contracts Reporter § 35,551) .......... 10

Armed Services Procurement Regulations, 32

eS | eer rere ie eee rrre 2-3, 6

DoD Instruction 5126.3, December 20, 1961 (1

CCH Government Contracts Reporter § 825) ... 10,21

we ne ee vr ees

In THE

Supreme Court of Che United States

October Term 1974

No. 74-

BETHLEHEM STEEL CORPORATION,

Petitioner,

Vv.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS

Petitioner, Beth’ehem Steel Corporation (‘‘Bethle-

hem’’), respectfully prays that a Writ of Certiorari issue

to review the judgment of the United States Court of

Claims entered in this action on February 19, 1975. The

action involves a Wunderlich Act appeal from decisions

of the Armed Services Board of Contract Appeals.

Opinions Below

The opinion of the Court of Claims, dated February 19,

1975 (“Bethlehem IT’), is reported at 511 F.2d 529 (1975)

and is reproduced at App. 133*. The decisions and opin-

* References to “App.” are to pages of the concurrently-filed

separate Appendix. The Table of Contents to the Appendix lists the

page of the Appendix at which each separate opinion or order set

forth therein begins.

ions of the Armed Services Board of Contract Appeals

(“ASBCA”’) affirmed by the judgment of the Court of

Claims are reported at 71-1 BCA {§ 8640 and 73-1 BCA

earlier opinion of the Court of Claims in this case, dated

March 20, 1970, (“Bethlehem I’) and reported at 423

F.2d 300 (1970), is at App. 1 and an unreported Order of

the Court of Claims, dated July 1, 1971, is at App. 41.

Jurisdiction

The judgment of the Court of Claims was entered on

February 19, 1975 (App. 133). Bethlehem’s timely motion

for rehearing and reconsideration was denied on March 28,

1975 (App. 161). This Court has jurisdiction to issue the

prayed-for Writ under 28 U.S.C. § 1255(1).

Question Presented

Whether the Department of Defense, acting through an

administrative committee not authorized by contract or

regulation to hear or determine contract disputes, upon the

ex parte application of a military department then in dis-

putes clause litigation with a privaie contractor, has the

power to require the Armed Services Board of Contract

Appeals to apply, ad /ioc and retroactively, rules-of-decision

in that litigation favorable to the military department.

Constitutional Provision, Statute and

Regulations Involved

The decision below determined an appeal of decisions

of the ASBCA to the United States Court of Claims pur-

suant to the Wunderlich Act, 41 U.S.C. §§ 321-322. The

decision below raises issues under the Fifth Amendment

and concerns the application of certain provisions of the

Armed Services Procurement Regulations, 32 C.F.R.

§§ 3-808. The text of the Fifth Amendment, the Wunder-

lich Act and the relevant portions of the Armed Services

Procurement Regulations are set forth at the end of this

petition.

Statement of the Case

This case presents important questions concerning the

fair and impartial administration of contract disputes

procedures as to two contracts (NObs-3556 and NObs-

3648) between Bethlehem and the Navy for the construc-

tion of five destroyers.

The Contracts

The contracts are two of seven contracts awarded by

the Navy between December 15, 1952, and January 27,

1956, to four shipbuilding contractors* for the construc-

tion of a total of eighteen DD931-type destroyers. (App.

51) The facts concerning the award of the contracts and

Bethlehem’s performance are not in issue and are set forth

in detail in the opinion of the ASBCA at App. 42.

Each of those contracts contained a provision which

required the contractor to exclude from its proposed price

any provision for anticipated inflation in labor and material

costs which could be expected to occur during the life of

the contract. In consideration for the reduced contract

price resulting from such exclusion, the Government

contracted to reimburse the contractor, according to an

agreed formula, for such increases in labor and material

costs. Such contract price “escalation” was to be an auto-

matic adjustment, subject only to Article 6(e) of the con-

tracts, which provided:

“(e) The Contracting Officer may deny, in whole

or in part, any upward adjustment in the contract

price required under this Article if the Contracting

Officer finds that such adjustment is not required, in

* Bath Iron Works, Bethlehem Steel Corporation, Ingalls Ship-

building and Puget Sound Bridge and Dredging Co.

whole or in part, to enable the Contractor to earn a

fair and reasonable profit under this contract.”

The construction and delivery of the destroyers pur-

suant to these contracts was completed by 1959. Bethle-

hem completed its deliveries to the Navy pursuant to its

contracts in a timely manner, delivering the last destroyer

in February 1958. There is no dispute that the destroyers

delivered by Bethlehem were of “very good quality.”

(App. 103)

As anticipated by the parties, Bethlehem and other

contractors in the DD931 program suffered significant

inflationary increases in costs of labor and material. As

a consequence, they submitted claims for escalation in con-

tract prices. In January 1960 Bethlehem submitted to the

Contracting Officer a claim for escalation in the contract

price to cover its inflationary increases in labor and material

costs. The amount of Bethlehem’s claim, determined pur-

suant to the escalation formula in the contract, was

$3,347,500 on NObs-3556 and $2,404,900 on NObs-3648.

With the full escalation sought by Bethlehem, contract profit

margins would have been 9.3 percent (NObs-3556) and

9.6 percent ( NObs-3648).

In August 1964, four years later, the Contracting Officer

refused any reimbursement whatsoever of LBethlehem’s

cost increases on the grounds that no escalation in contract

price was required “to enable the Contractor to earn a fair

and reasonable profit” within the meaning of Article 6(e)

of the contracts. As matters then stood, Bethlehem would

have obtained a profit on the two contracts of 3 percent

(NObs-3556) and 2.3 percent (NObs-3648). In at least

three out of the other five contracts, other shipbuilding

contractors constructing DD931-class destroyers received

escalation sufficient to recover profits of 15.2 percent, 15.32

percent and 10.1 percent. (App. 63)

Regulations Applicable to Determining “Fair and Reason-

able Profit”

At the time the contract was awarded, there were no

published guidelines in the Armed Services Procurement

Regulations (“ASPR”) as to how procurement officials

were to determine what constituted a ‘“‘iair and reasonable

profit”’.*

In July, 1957, published guidelines for determining the

fairness and reasonableness of profit levels were adopted

by the Department of Defense. Those guidelines consisted

of a number of factors which procurement officials were

directed to “consider” in evaluating the proper level of

profit in a Government contract. 22 F.R. 5930 (July 26,

1957). However, there was no direction or guide to Con-

tracting Officers as to how they were to arrive at an

appropriate dollar or percent-of-cost profit once they had

“considered” those factors. Accordingly, the 1957 guide-

lines (amended in 1960) have generally been referred to

as the “unweighted” guidelines.**

- * However, as the Court of Claims stated in Bethlehem I (App.

__ “..,. Since Government officials are presumed to act properly,

it is reasonable to suppose that the Pentagon would not have prom-

ulgated clauses such as Article 6(e) unless contracting officers

could employ established techniques and guidelines, even if un-

published, and therefore would not act arbitrarily.”

_ ** Those were the guidelines in effect at the time of the ASBCA

decision which was subsequently reviewed by the Court of Claims, in

Newport News Shipbuilding and Dry Dock Co. v. United States, 374

F.2d 516 (Ct. Cl. 1967) (“Newport News”). Newport News in-

volved a shipbuilding contract for the aircraft carrier USS Ranger

which contained an escalation clause identical to that in Bethlehem’s

contract. The ASBCA in its initial decision in Newport News in

1962 had failed to apply the unweighted guidelines. The Court of

Claims held, 374 F.2d at 530, the “failure to apply [profit] guidelines

prescribed by authority in a regulation [to] be an error of law”. Al-

though at the time of the Court of Claims decision in Newport News

in 1966, the unweighted guidelines at issue had been superseded by

the weighted guidelines, the Court noted that their discussion “of

course relates to the guidelines as th "

rendered its opinion]”” Id. s they were [when the ASBCA

By the time of the Contracting Officer’s decision in this

case (August, 1964), the unweighted regulations had been

superseded by more detailed, remedial guidelines. Adopted

in August 1963 for immediate use, these regulations di-

rected procurement officials to weigh the factors previously

applicable according to certain standards set forth in detail

in the regulations. 28 F.R. 12546, amending 32 C.F.R.

Part 3, § 3-808; see “Notes and Filing Instructions”

quoted at App. 156. These “weighted” guidelines were

designed “to reduce the impact of subjective factors in the

mind of the administering official[s|”. (Bethlehem / App.

17; see also App. 8-9, 157) The Assistant Secretary of

Defense recommended the adoption of the weighted guide-

lines to the Secretary of Defense as a “quantifying of

existing policy” intended to force contracting officers “to

give discriminating and analytical attention” to the weight-

ing of the previous unweighted factors.* Jd.

Decisions Below

ASBCA

The ASBCA, in August 1966, ruled that Bethlehem was

restricted to a five percent profit under each of its contracts

as “fair and reasonable’. (App. 7) The ASBCA fixed on

five percent on the theory that that was the profit to which

the parties had agreed in the negotiation of the contracts.

The ASBCA did not apply or advert to the weighted guide-

lines, then in effect and published in 32 C.F.R. § 3-808, or

to the superseded unweighted guidelines.

*The memorandum reflecting that recommendation was quoted in

the Appeal of Newport News Shipbuilding and Dry Dock Co., dated

February 9, 1971, 71-1 BCA § 8705. The ASBCA stated in that

appeal that the “weighted” guidelines were an implementation of

historical Government profit objectives, stating:

“The ultimate policy objectives of the Department of Defense

with respect to profit, while not explicitly made public in the

1960 guidelines, were subsequently disclosed in 1963 in terms

which leave no doubt that they had been present all along.”

(71-1 BCA £ 8705, at 40,455)

Bethlehem I

Bethlehem brought this action in the Court below as-

serting as an error of law the ASBCA’s failure to apply the

weighted guidelines in effect in 1966 at the time of the

ASBCA’s decision. The Court, following the rationale of

Newport News, agreed with Bethlehem:

“

.... Plaintiff [Bethlehem] desires to take its

chances under the ‘weighted guidelines method’ and

it has a legal right to do so.” Bethlehem J, App. 1, 17.

The Court saw “no injustice or anomaly in applying

profit limitation techniques, as the Pentagon may have

amended and prescribed them from time to time, up to the

date of the determination” (App. 17), and stated:

.... The involved regulations, however, when

made, appeared to be remedial, meant to safeguard

defense contractors against determinations as to a

reasonable profit level, arbitrary, perhaps biased, or

founded on ‘seat-of-the-pants intuition’, which con-

tracting officers might take without proper guidelines.

There is no reason to postulate an intent to withhold

such safeguards from parties to then existing con-

tracts, nothing to that effect appearing either in the

contracts or the regulation.” (App. 8-9)

The Navy did not argue that the weighted guidelines

should not be applied to contracts entered into prior to

their effective date, nor did it argue that the unweighted

guidelines should apply to Bethlehem’s contract.

Rather, the Navy argued that this case was an “excep-

tion” and fell ‘clean outside all published guidelines’ be-

cause Bethlehem had not been the low bidder on NObs-3556

and NObs-3648. (App. 10-11) The Court rejected that

argument, noting:

“Tf defendant’s postulated exemption exists, it

must be a large one. The record shows that all of

plaintiff’s above named competitors in the shipbuilding

industry were awarded major contracts at one time or

another between World War II and 1954, when they

were not the low bidders, for reasons the same as those

which animated the award of NObs-3556 to plaintiff.

The situation recurs so commonly in our litigation

with other industries heavily dependent on defense

work, that we may take judicial notice of it: a rigid

adherence to procurement from the lowest bidder

only is viewed in the Pentagon as gradually freezing

out the competition’ and leading into single-source

procurement.” (App. 12)

Upon examination of the weighted guidelines, the

Court held that the “exception” sought by the Navy was

nowhere mentioned.

.... To put it succinctly, the alleged exception

has every earmark of having originated in the active

mind of defense counsel herein, not in the perhaps

more rigid thinking of the Pentagon.”” (App. 12)

The Navy also argued that the weightcd guidelines

were not applicable because (i )the parties in the negotiation

of the contract had agreed that a 5 percent profit was “iair

and reasonable” and (11) the ‘“‘weighted”’ guidelines method

would produce a higher, unintended result and thus be

“so unfair that an exception to the method must be implied”.

(App. 13) The Court rejected that argument:

‘

‘.... Lhe contracts, however, reflect that plaintiff

[Bethlehem] agreed only upona price....” (App. 13)

For the second time, the Court directed strong language at

the lack of any factual or record basis for the Navy’s argu-

ments:

“'.. The alleged agreement to a 5% level, in a

contract that viewed prospectively could have resulted

in anything from a loss to a windfall profit level,

}

according to its terms, must be regarded as located in

defendant’s counsel's eyes alone.” (App. 14)

Having adjudicated Bethlehem’s “legal right” to the

application of the weighted guidelines, the Court went on

to say:

“Tf we have erred in thinking the ‘Weighted guide-

lines method’ is feasible to apply to the instant con-

tracts, the Pentagon even now could amend or supple-

ment its regulation, and the Board would be bound,

provided no impairment of vested rights was at-

tempted. Any amendment purporting to reaffirm the

position now claimed, that officials determining a rea-

sonable level of profit under clauses such as Article

6(e) are not subject to any published guidelines what-

ever in certain cases, at least would advisedly be made

in light of the recent statement of the Supreme Court:

“‘* * * a broad, roving authority, a type of adminis-

trative absolutism [is] not congenial to our law-mak-

ing traditions.’ Gutknecht v. United States, 396 U.S.

295, 90 S.Ct. 506, 24 L.Ed.2d 532.” (App. 17-18)

ASPR Committee

Seizing upon the Court’s reference to the possibility that

the Pentagon might further “amend or supplement’ its

regulation, attorneys for the Navy sought and obtained

ex parte* a declaration by an administrative committee in

* The ex parte proceedings were commenced by a memorandum

originating in the Office of the General Counsel of the Navy. That

memorandum stated that it had been prompted by the Court of

Claims decision in Bethlehem I and that the instructions of the ASPR

Committee sought by the Navy would be presented to the ASBCA

for use in contract disputes procedures with respect to Bethlehem’s

contract. It is clear that Navy attorneys initiated the ex parte pro-

ceedings and drafted the instructions (styled ‘‘Minutes”) of the

ASPR Committee; the Court below so found. Bethlehem II, App.

140. Indeed, the memorandum referred to above bears the initials of

Morris Amchan, the Navy attorney immediately responsible for the

conduct of the contract disputes proceedings for the Navy before the

ASBCA. Bethlehem has stated in its papers in the Court below, with-

out contravention by the Navy, that Mr. Amchan wrote the ex parte

application and drafted the ASPR Committee “Minutes”.

OOO eee

the Pentagon called the Armed Services Procurement

Regulation Committee (the “ASPR Committee”) that the

weighted guidelines were not applicable to these contracts

because such application would result in an increase in the

profits of the contractor beyond that “considered by the

parties in the negotiation of the contract to be fair and

reasonable”. Navy attorneys did not advise the ASPR

Committee that they had made precisely that argument to

the Court of Claims in Bethlehem I and that the Court of

Claims had rejected it as having been “located in defend-

ant’s counsel’s eyes alone”. (App. 14) Although Navy-

attorneys submitted to the ASPR Committee selected ex-

cerpts from the Court of Claims decision in Bethlehem I,

they did not provide the Committee with a complete copy of

the decision.

“Minutes” of the ASPR Committee meeting embodying

its decision were drafted by Navy attorneys, were presented

to the Committee and were adopted substantially ver-

batim.* Those “Minutes” stated that the “weighted”’

*The ASPR Committee is made up of two persons appointed by

the Assistant Secretary of Defense (Installations and Logistics) and

two persons (one a procurement policy representative and one a legal

representative) appointed by each of the military departments and

by the Defense Supply Agency. The Committee’s primary function

is to act in an advisory capacity to the above-named Assistant Secre-

tary on matters pertaining to the Armed Services Procurement Regu-

lations. DoD Instruction 5126.3, December 20, 1961 (1 CCH Gov-

ernment Contracts Reporter § 825).

The ASPR Committee has been delegated no authority to partici-

pate in contract disputes appeal procedures, either under DoD Regu-

lations or pursuant to the disputes clause. The Secretary of Defense

and the Secretaries of each of the military departments have designated

the ASBCA as the only “authorized representative” to hear appeals in

contract disputes proceedings ({ 1, Armed Services Board of Contract

Appeals, Part 1—Charter (4 CCH Government Contracts Reporter,

ASPR A Part 1, § 35, 551)) and the contract disputes clause only

authorizes disputed questions to be determined by such “authorized

representative”. DoD Instruction 5126.3, supra., establishing the

ASPR Committee, does not prescribe any rules of procedure and does

not by its terms provide for notice to be given to affected parties of

its proceedings, for affected parties to be given an opportunity to be

heard or for proceedings not to be conducted ex parte.

guidelines” effected a substantive change in the standards

existing at the time the contracts were entered into and

were intended for the development of a profit objective for

negotiation of future contracts’. (As the dissent below

pointed out, “... there is no evidence in the record to sup-

port the ASPR committee’s statement that only prospective

application was intended’ (App. 155); there is nothing in

the majority opinion to the contrary.)

The “Minutes” of the ASPR Committee directed a

“deviation”, i.e., a non-standard procurement procedure,

with respect to this contract clause, and instructed the

ASBCA that the superseded unweighted guidelines should

be applied in determining what level of profits was “fair

and reasonable” under Article 6(e) of Bethlehem’s contract.

Bethlehem was not given notice of the pendency of these

collateral proceedings or opportunity to be heard.

ASBCA

The ASBCA believed itself to be “bound” by the ASPR

Committee action (App. 38) and, as a result, did not pass

on such questions (raised by Bethlehem) as the authority

of ASPR under its charter to decide this issue absent

approval of higher Department of Defense officials (App.

33) or the absence of any factual basis for the assertions

of the Navy attorneys and thus for the committee’s action

(App. 33).*

Applying the unweighted guidelines, the ASBCA deter-

mined that Bethlehem was entitled to full escalation on

NObs-3648 (resulting in a 9.6 percent profit) but restricted

Bethlehem’s escalation on NObs-3556 to a 6.3 percent profit

level. (App. 130-131). Believing itself aggrieved on

NObs-3556 by the failure of the ASBCA to apply the

* Bethlehem immediately appealed the ASBCA decision to the

Court of Claims asking that Court to clarify and reaffirm its earlier

opinion adjudicating Bethlehem’s “legal right” to the application of the

weighted guidelines. The Court of Claims declined to review the deci-

sion at that time. (App. 41) .

appropriate weighted guidelines, Bethlehem sought further

review as to that contract in the Court of Claims.

Bethlehem II

In Bethlehem II (App. 133), the Court of Claims in

a sharply-divided opinion,* approved the retroactive appli-

cation of the ASPR Committee “Minutes” in Bethlehem’s

contract disputes proceedings. As with the ASBCA, the

inajority below did not go behind the Navy’s assertions to

review the basis for the ASPR Committee instructions.

The Court held two factors as “favoring retroactive

application” of the ASPR Committee “‘decision’’: first, the

“jong lapse of time” between the original contract award

and final disposition; second, the remedial effect of apply-

ing “a guideline regulation, any regulation” as opposed to

interpreting the contract without reference to any guide-

lines. (App. 137-8)

The Court condemned as “not. . . entirely cricket’’, as

‘“deplor[able]”, and as “outrageous” the ex parte conduct

of Navy attorneys but refused to provide Bethlehem with

a remedy in order not “to prolong this already inordinately

prolonged litigation, to the advantage of no one knows

whom”’.** (App. 142-3)

The dissent below pointed out that consistent with Beth-

lehem I the only question open to the Court was whether

application of the weighted guidelines was “feasible”, in

the sense of either “possible” or “reasonable” or “suitable”.

*The Court of Claims was divided four-to-three, Judge Nichols

writing the majority opinion for Judges Davis, Skelton and Kashiwa,

with Judge Bennett writing a strong dissent, in which Judges Durfee

and Kunzig concurred.

**It is clear to whose “advantage” the abrupt and arbitrary halt

in this litigation has accrued—the Navy. Condoned in the interests of

expediency are ex parte methods, agreed by all seven judges below to

have been “outrageous”, which are an anathema to notions of funda-

mental fair play and procedural due process. In its desire to stop this

lawsuit, the majority has permitted the Navy attorneys and the ASPR

Committee to engage in precisely that “administrative absolutism”

verbally condemned, but effectively condoned, by the Court.

(App. 153) The dissent noted, first, that there ‘can be no

dispute” that it was possible to apply the weighted guide-

lines (App. 153)—the Navy had done so and had clearly

not liked the results. Second, the application of the

weighted guidelines would not be “unreasonable’’ when

“used appropriately” to take account of the fact that Beth-

lehem was not the lowest bidder. (App. 153-4). Finally,

the dissent dealt with each of the Navy’s arguments that

application of the weighted guidelines was “unsuitable”,

dismissing each as lacking support in the record and as

having been previously rejected in Bethlehem I. (App.

154-7)

Reasons for Granting the Writ

The judgment sought to be reviewed holds that the De-

partment of Defense, acting through the Armed Services

Procurement Regulation Committee, upon ex parte appli-

cation of a military department then in disputes clause

litigation and without notice to the private contractor in-

volved, has the power to require the ASBCA to apply, ad

hoc and retroactively, rules-of-decision in that litigation

favorable to the military department. In so holding, the

judgment (i) is inconsistent with decisions of this Court

which impose contractual and constitutional requirements

of procedural regularity and basic fair play on the Govern-

ment in its dealings with private parties and (ii) poses

important questions and raises substantial problems in the

impartial administration of disputes clause appeals before

the ASBCA.

Argument

The power of the ASPR Committee, under the deci-

sion below, is “a broad, roving authority, a type of adminis-

trative absolutism not congenial to our law-making tradi-

tions’. Gutknecht v. United States, 396 U.S. 295, 306

(1970). The power was invoked by the Navy here, not to

facilitate ongoing procurement of goods or services, but to

depress the recovery of moneys earned by Bethlehem under

a contract which had been fully performed twelve years

earlier.

Similar to the power of the Selective Service under its

delinquency regulations, at issue in Gutknecht, such power

has no statutory standard or even guidelines. The power

of the ASPR Committee is exercised entirely at its own

discretion — stimulated no doubt by the ex parte approaches

of the military departments with pending contract disputes.

The decision below resolves the question presented here

in a manner which is fundamentally inconsistent with deci-

sions of this Court which are designed to protect private

contractors in litigation with the Government from the

retroactive application of unilateral, litigation-oriented

changes in Government regulations.

1. The Government Must Conform to its Own Regulations

and, During the Pendency of Litigation, May Not Apply,

Ad Hoe and Retroactively, More Onerous Admiuistrative

Rules Designed To Improve Its Litigating Posture.

This Court has held in a number of decisions through

the years that due process requires that the Government

conform to its established regulations and procedures and

not deviate therefrom on an ad hoc basis when it believes

its interests so dictate. Greene v. United States, 376 U.S.

149 (1964); Vitarelli v. Seaton, 359 U.S. 535 (1959);

Service vy. Dulles, 354 U.S. 363 (1957); United States ex

rel. Accardi v. Shaughnessy, 347 U.S. 260 (1954) ; see also

United States v. Heffner, 420 F.2d 809, 811-13 (4th Cir.

1970); Berends v. Butz, 357 F.Supp. 143, 151 (D. Minn.

1973).

The Department of Defense has failed in this case to

conform to its own regulations in two different ways. In

the first place, the Department of Defense, acting through

the ASPR Committee, has deviated on an ad hoc basis in

a pending contract disputes litigation from its published

weighted guidelines method of evaluating the fairness and

reasonableness of profit levels in negotiated contracts. In

the second place, the Department of Defense, by acting

through the ASPR Committee in determining the issue of

what guidelines are applicable in making determinations

under Article 6(e) of Bethlehem’s contract, has failed to

conform to its own regulations designating the ASBCA

as the “authorized representative’ in hearing and deter-

mining appeals in contract disputes cases “as fully and as

finally” as might the Secretaries of Defense and of the

military departments.

The Greene case is instructive on the first point. In that

case Greene’s employment was terminated in 1953 based on

the administrative revocation of his security clearance by

the Department of the Navy. Following this Court's deter-

mination that Greene’s security clearance revocation had

been improper, Greene sought to recover compensation for

the Government’s unauthorized action based on a regulation

adopted in 1955. In 1960, while Greene’s claim was pending,

the Department of Defense “amended” its 1955 regulation

so as to subject Greene’s recovery to administrative discre-

tion and to other impediments not present in the 1955 regu-

lation. This Court held that Greene could not be forced to

proceed under the amended, 1960 regulation, citing Union

Pac. Ry. v. Laramie Stock Yards Co., 231 U.S. 190, 199

(1913), to the effect that:

. +. a retrospective operation will not be given to a

statute which interferes with antecedent rights . . .

unless such be the “unequivocal and inflexible import

of the terms, and the manifest intention of the legis-

lature”’”.

The Accardi case is instructive on the second point. There

the Attorney General had included Accardi on a confidential

list of “unsavory characters” whom he wished to deport,

prior to the decision of a Board of Immigration Appeals

on Accardi’s application for suspension of deportation pro-

ceedings. Applicable regulations then in effect delegated

to the Board of Immigration Appeals such discretionary

authority “‘as is appropriate and necessary for the disposi-

tion of the case’. 8 C.F.R., 1949, § 90.3(c), cited at United

States ex rel. Accardi v. Shaughnessy, supra., 347 U.S. at

266. Accardi sought to block his deportation and offered to

prove that the Board of Immigration Appeals’ later denial

of Accardi’s application was the result of the Attorney

General’s instructions, but the District Court refused to

accept Accardi’s offer of proof. This Court reversed, hold-

ing that had the decision of the Board of Immigration

Appeals resulted from the Attorney General’s instruction,

it would have been in error:

“In short, as long as the regulations remain opera-

tive, the Attorney General denies himself the right to

side-step the Board or dictate its decision in any man-

ner”. United States ex rel. Accardi v. Shaughnessy,

supra., 347 U.S. at 267.

This Court then noted:

“It is important to emphasize that we are not here

reviewing and reversing the manner in which dis-

cretion was exercised. If such were the case we would

be discussing the evidence in the record supporting or

undermining the alien’s claim to discretionary relief.

Rather we object to the Board’s alleged failure to

exercise its own discretion, contrary to existing valid

regulations.” Jd., at 268 (Emphasis in original. )

See also, S & E Contractors, Inc. v. United States, 406

U.S. 1 (1972); United States v. Anthony Grace & Sons,

Inc., 384 U.S. 424 (1966).

The decision below is inconsistent with both Greene and

Accardi. Under the decisions of the Court of Claims in

Newport News and Bethlehem I, Bethlehem was entitled to

the application by the ASBCA of published DoD profit

guidelines in effect at the time of ASBCA’s decision in

1966, 1.e., the weighted guidelines. Immediately after

Bethlehem I, and prompted by that decision, the Depart-

ment of Defense, through the ASPR Committee issued an

administrative instruction, considered binding by the

ASBCA, that the subjective and superseded unweighted

guidelines which had been discarded nine years earlier by

the Department of Defense would be applied in this case

in lieu of the more objective and remedial weighted guide-

lines. That administrative decision, issued by the ASPR

Committee, was a “deviation” from published regulations

of the Department of Defense, favorable to the military

department—the Navy—in this litigation. And ‘that admin-

istrative decision, on an issue in a disputes appeal pending

before the ASBCA, was rendered by a committee not au-

thorized by Department of Defense regulations to determine

disputed questions in contract disputes appeals.

The change in the rules-of-decision was not effected by

statute or by a general change in the overall administrative

scheme. Here, the change in the rules-of-decision was a

“deviation” from standard procurement practices prompted

by, and intended to effect the outcome of, pending litigation.

The “‘deviation” itself was not a more precise explication of

ambiguous terminology; the “deviation” was not the exten-

sion of the regulatory scheme to areas of application not

anticipated when the regulation was adopted. The “devia-

tion” was the ad hoc repeal of an entire body of remedial

guidelines in favor of subjective superseded guidelines.

Unlike Accardi there is no question that the administra-

tive “deviation” was made to effect the outcome of this liti-

gation. The Navy stated that it had been prompted to start

the ex parte proceedings by the Court of Claims decision in.

Bethlehem I; the Navy claimed that the Court of Claims

had invited the ASPR Committee to determine the applica-

bility of the weighted guidelines to Bethlehem’s contracts;

the Navy asserted that a higher profit would result from

application of the weighted rather than unweighted guide-

lines; the Navy asked that the ASPR Committee instruc-

tions apply to the contract clause whose applicability was at

issue only in this litigation with Bethlehem; and the Navy

stated explicitly that it intended to present the ASPR Com-

mittee instructions to the ASBCA panel hearing Bethle-

hem’s appeal.

It is clear that the Navy sought to do what it did be-

cause it believed that it had a better chance at depressing

Bethlehem’s recovery under the discretionary and unpre-

dictable unweighted guidelines than it did under the objec-

tive and predictable weighted guidelines. Although applica-

tion of the unweighted guidelines consistent with historical

DoD profit policies should have produced the same result

as application of the weighted guidelines, see supra. at 6n*,

as indeed it did in Newport News, 71-1 BCA § 8705 and

with respect to Contract NObs-3648 below, App. 129-30,

the greater subjectivity in the application of the unweighted

guidelines gave the Navy the leverage of greater adminis-

trative discretion than if the weighted guidelines were

applied. The Navy was successful in its strategy to the

extent of $1,595,009 as to the contract still at issue in this

case. Bethlehem submits that the Government cannot be

permitted to manipulate published guidelines in such a

manner as to achieve an improved litigating posture.

And Bethlehem submits further that protection from

such arbitrary manipulation by administrative officials is

precisely the objective that the weighted guidelines were

designed to achieve and precisely this Court’s objective in

such cases as United States ex rel Accardi v. Shaughnessy,

supra., and Greene v. United States, supra. The Govern-

ment simply cannot be permitted to manipulate “the law”

in ways that serve its interest and quash the rights of con-

tractors.

2. The Department of Defense May Not Finally Determine

Issues in Litigation Before the ASBCA Upon Ex Parte

Application of a Military Department and Without Afford-

ing the Contractor an Opportunity to Be Heard.

The “deviation” from standard procedure mandated by

the ASPR Committee was obtained through an ec. parte

application of the attorneys for the Navy in this litigation.

The decision of the ASPR Committee was taken by the

ASBCA as “binding”, not advisory. As a consequence, the

Navy has not yet been forced to prove its assertions con-

cerning the merits of the guideline substitution in an ad-

versary hearing in which Bethlehem has had notice and an

opportunity to be heard and to present its evidence.

With respect to the decision of the ASPR Committee,

the Court of Claims held that such an ex parte approach

was not improper because the ASPR Committee was a

“rule-making” body to whom ex parte procedures were

“normal”, App. 144

In the context of this case, that holding is fundament-

ally at odds with this Court’s repeated condemnations of

ex parte procedures as inconsistent with “underlying con-

cepts of procedural regularity and basic fair play”. Gon-

sales v. United States, 348 U.S. 407, 412 (1955); sce also

Willner v. Committee on Character and Fitness, 373 U.S.

96 (1963); Morgan v. United States, 304 U.S. 1 (1938).

The “deviation” sought and obtained by Navy attorneys

in the ASPR Committee proceedings was not a “rule-mak-

ing” in any sense of that word. The ASPR Committee de-

cision did not involve any particular expertise or legislative

or political judgment. The ASPR Committee had to draw

on no particular management or procurement background

or sources in deciding that question. There was no complex

“business” decision required. There was no “amendment”

to existing regulations, in the sense of a clarifying, simply-

ing or elaborating construct on existing regulations in-

tended to be widely applied. The “deviation” from standard

procedures was not the product of dissatisfaction with the

ex.sting regulations arising out of experience with the

weighted guidelines.

The proposal submitted to the ASPR Committee by the

Navy requested a determination that the weighted guide-

lines not be applied retroactively to Bethlehem’s contract

because the effect of application “would be to increase the

profit of the contractor beyond that considered by the parties

in the negotiation of the contract, to be fair and reasonable.”

That question is the kind of question regularly and routinely

adjudicated by quasi-judicial bodies or by courts themselves.

And the “deviation” that was adopted by the ASPR Com-

mittee was no more than a decision of the question of

whether the requested guidelines would be applied retro-

actively in this case. Indeed, the ASPR Committee deter-

mined one of the precise issues which was then pending

before the ASBCA.

Under these circumstances the ex parte action of the

ASPR Committee would appear to be wholly improper and

the ASPR Committee action a nullity. But if any effect

be ascribed to that action, the ASBCA must be given the

opportunity to redetermine the issue independently, i.e.,

completely de novo. Here, the ASBCA felt itself “bound”

by the ASPR Committee action and consequently did not

itself inquire into the adequacy of the basis for the ASPR

Committee action.

Bethlehem was entitled to participate, to offer evidence

and to be heard on the merits of its position before the de-

cision to change the guidelines had been administratively

determined. That right derives in the first instance from

its contract with the Navy wherein it is agreed that:

“In connection with any appeal proceeding under

this Article, the Contractor shall be afforded an op-

portunity to be heard and to offer evidence in support

of its final appeal.” (Article 33. DISPUTES.)

Bethlehem contracted for the right to be heard and to

offer evidence in support of its appeals with respect to all

disputed questions of fact and incidental questions of law

heard before the ASBCA, S & E Contractors, Inc. v.

United States, supra., 406 U.S. at 9 n. 6; Armed Services

Board of Contract Appeals, Part 1—Charter 1 5 (4 CCH

Government Contract Reporter § 35,551) (‘When an

appeal is taken pursuant to a disputes clause in a contract

which limits appeals to disputes concerning questions of

fact, the Board may nevertheless in its discretion hear,

consider, and decide all questions of law necessary for the

complete adjudication of the issue.” ), and Bethlehem was

entitled to have the benefit of the administrative procedures

it had bargained for. United States v. Anthony Grace &

Sons, Inc., supra., 384 U.S. at 429.

The question of what is a “fair and reasonable profit”

under Article 6(e) is a disputed fact, and the issue of what

guidelines are applicable in determining that disputed fact

is a question involving both fact and law, but in any event

a matter coming within the jurisdiction of the ASBCA.

This implies, at the very least, that Bethlehem was

entitled “to be heard and to offer evidence” in an ASBCA

proceeding in which the Navy was required to prove de novo

its assertions that the “weighted” guidelines were not in-

tended to be applied to existing contracts.

Bethlehem was entitled to a hearing as well because

of the strictures of the Due Process Clause of the Fifth

Amendment. Bethlehem has, in effect, been deprived of

an important contractual right without essential due

process requirements of notice and opportunity to be heard.

See Lynch v. United States, 292 U.S. 571, 579 (1934).

(“Valid contracts are property, whether the obligor be a

private individual, a municipality, a State or the United

States. Rights against the United States arising out of a

contract with it are protected by the Fifth Amendment.” )

Thus, where the Navy, in litigation with a private con-

tractor, initiates and participates in ASPR Committee

proceedings in order to obtain ad hoc instructions binding

on the ASBCA on the particular legal and factual ques-

tions then pending before the ASBCA, the contractor must

be given notice of those proceedings and an opportunity to

respond to the Navy’s contentions and, if any effect be

given to such ASPR Committee action in later ASBCA

proceedings, the issues resolved by the ASPR Committee

must be redetermined de novo by the ASBCA.

The end result of the chain of procedural horrors dis-

cussed above is that Bethlehem has had what the Court in

Bethichem I characterized as a “legal right” dissolved with-

out any administrative or judicial body deciding the merits

of its side of the story.

The practice approved below is not a one-time injustice.

The ASPR Committee is a continuing body whose military

department members have an on-going interest in the out-

come of contract disputes before the ASBCA. There is no

reason to suppose the ASPR Committee and its military

department members will voluntarily renounce the broad,

roving authority granted by the Court below to the ASPR

Committee to issue “deviations” from standard procure-

ment procedures in pending contract disputes proceedings.

In order to preserve the orderly and impartial ad-

ministration of contract disputes under the quasi-judicial

structure fostered by this Court, the decision below must

be reversed.

Conclusion

For the reasons stated above, petitioner Bethlehem

Steel Corporation prays that a Writ of Certiorari issue to

the United States Court of Claims to review its decision of

February 19, 1975.

Respectfully submitted,

ALBERT R. CONNELLY,

One Chase Manhattan Plaza,

New York, N. Y. 10005

Attorney for Petitioner

Of Counsel:

GEORGE VRADENBURG III,

One Chase Manhattan Plaza,

New York, N. Y. 10005

Constitutional Provision, Statute and

Regulations Involved

The Fifth Amendment to the Constitution provides:

‘“‘No person shall be held to answer for a capital,

or otherwise infamous crime, unless on a present-

ment or indictment of a Grand Jury, except in cases

arising in the land or naval forces, or in the Militia,

when in actual service in time of War or public

danger ; nor shall any person be subject for the same

offense to be twice put in jeopardy of life or limb;

nor shall be compelled in any criminal case to be a

witness against himself, nor be deprived of life,

liberty, or property, without due process of law; nor

shall private property be taken for public use, with-

out just compensation.” (U. S. Const. Amend. V)

2. The Act of May 11, 1954, 68 Stat. 81 (The Wunder-

lich Act), 41 U.S.C. §§321-322, provides:

“$321. Limitation on pleading contract-provisions

relating to finality; standards of review

‘‘No provision of any contract entered into by the

United States, relating to the finality or conclusive-

ness of any decision of the head of any department or

agency or his duly authorized representative or board

in a dispute involving a question arising under such

contract, shall be pleaded in any suit now filed or to

be filed as limiting judicial review of any such deci-

sion to cases where fraud by such official or his said

representative or board is alleged: Provided, how-

ever, That any such decision shall be final and

conclusive unless the same is fradulent [sic] or

capricious or arbitrary or so grossly erroneous as

necessarily to imply bad faith, or is not supported by

substantial evidence.

“$322. Contract-provisions making decisions final

on questions of law

“No Government contract shall contain a provi-

sion making final on a question of law the decision

of any administrative official, representative, or

board.”’

Relevant provisions of the Armed Services Procure-

ment Regdlations, Title 32 (Cum. Supp. as of January 1,

1960) (the “unweighted” guidelines) provide:

“$3.808-1 General.

“A fair and reasonable provision for profit or fee

cannot be made by simply applying a certain pre-

determined percentage to the cost estimate or selling

price of a product. Rather, the profit or fee should

be first established as a dollar amount, after con-

sidering the factors set forth in this section. There-

fore, where a fee is involved and it is necessary to

determine the percentage relationship between the

fee and the estimated cost of the contract in order

to comply with administrative and statutory limita-

tions on fees for cost-reimbursement type contracts,

the percentage shall be determined only after the

dollar amount of the fee has been established for

negotiation purposes. [Amdt. 49, 24 F.R. 10631,

Dec. 24, 1959]

“§3.808-2 Factors for Determining Fee or Profit.

“The factors set forth in subparagraphs (a)

through (i) below should be per in determin-

ing profit or fee in all contracts, whether for supplies

or services; for construction work; or for experi-

mental, developmental, or research work; and

whether of the fixed-price type or of the cost-reim-

bursement type unless otherwise specified in the par-

ticular factor. All of the following factors, as set

forth in paragraphs (a) through (i) of this section

should be evaluated in the light of the basic policy

set forth in §3.801-1 which provides that supplies

and services shall be procured from responsible

sources at fair and reasonable prices calculated to

result in the lowest overall cost to the Government:

(a) Effect of Competition. Where competi

tion is adequate and effective and proposals are

on a firm fixed-price basis, the contracting officer

normally need not consider in detail the amount

of estimated profit included in a price. Where ef-

fective competition is lacking, the estimate for

profit for the proposed fixed fee should be ana-

lyzed in the same manner as all other elements

of price, applying the factors set forth in this

section.

(b) Degree of Risk. (1) The degree of risk

assumed by the contractor should influence the

amount of profit or fee a contractor is entitled to

anticipate. For example, where a portion of the

risk has been shifted to the Government through

cost-reimbursement or price redetermination pro-

visions, unusual contingency provisions, or other

risk-reducing measures, the amount of profit or

fee should be less than where the contractor as-

sumes all risk.

(2) Some cost-plus-a-fixed-fee contracts and

task orders for research and development call for

the delivery of prototypes of other “hardware.”

Other such contracts or task orders require only

that the contractor exert its “best efforts’’ to de-

liver the required end item. Frequently this is

because the contractor is not willing to assume

NN EEEEEEEO—yE——EEEEE————__=_&_@_veaaaaQGEE_

the additional burden of incuring substantial cost

overruns without additional fee in order to com-

plete performance. When the contract calls for

delivery of developed models in accordance with

well-defined performance or design characteris-

tics or a predetermined delivery schedule, or both,

in contrast to an obligation only to exert its

“best efforts” to develop and deliver such models,

payment of the fee should be conditioned on per-

formance in accordance with the contractor’s ob-

ligation to deliver, and in such cases the contrac-

tor may be entitled to a larger fee both because

of the risk inherent in its commitment and be-

cause of the successful completion of the work.

major consideration in the determination of the

amount of profit or fee, particularly in connec-

tion with experimental, developmental, or re-

search work, is the difficulty or complexity of the

work to be performed and any unusual demands

of the contract, such as whether the project in-

volves a new approach unrelated to existing

equipment or only refinements on existing equip-

ment, whether the caliber or class of engineer

involved is that of an “idea-man,”’ or whether the

contractor is to be required by the contract to

assign to the work unusually skilled talent.

(d) Extent of Government Assistance. The

Department of Defense encourages its contrac-

tors to perform their contracts with the mini-

mum of financial, facilities, or other assistance

from the Government. Where extraordinary fi-

nancial, facilities, or other assistance must be

furnished to a contractor by the Government,

such extraordinary assistance should have a

modifying effect in determining what constitutes

a fair and reasonable profit or fee. (See also

§3.404-3(d).)

(e) Extent of the Contractor's Investment.

The extent of a contractor’s total investment

(i.e., both equity and borrowed capital) in the

performance of the contract will be taken into

consideration in determining the amount of the

fee or profit.

(f) Character of Contractor's Business.

Recognition must be given to the type of busi-

ness normally carried on by the contractor, the

complexity of manufacturing techniques, the rate

of capital turnover, and the effect to each individ-

ual procurement upon such business. For ex-

ample, where a contractor is engaged in an indus-

try where the turnover of working capital is low,

generally the profit objective on individual con-

tracts is higher than in those industries where

the turnover is more rapid.

(g) Contractor's Performance. In addition

to the factors set forth in §3.101, the contrac-

tor’s past and present performance should be

evaluated in such areas as quality of product,

quality control, scrap and spoilage, efficiency in

cost e»ntrol (including need for and reasonable-

ness of cost incurred), meeting delivery sched-

ules, timely compliance with contractual provi-

sions, creative ability in product development

giving consideration to commercial potential of

product), engineering (including inventive, de-

sign simplification, and development contribu-

tions), management of subcontract programs,

and any unusual services furnished by thie con-

tractor. Where a contractor has consistently

achieve? excellent results in the foregoing areas

in comparison with other contractors in similar

circumstances, such performance merits a pro-

portionately greater opportunity for profit or

fee. Conversely, a poor record in this regard

should be reflected in determining what consti-

tutes a fair and reasonable profit or fee.

(h) Subcontracting. In negotiating the profit

or fee, the nature and extent of any subcontract-

ing should be considered, particularly as it bears

on the contractor’s performance, administrative

responsibility, financial investment, and degree

of risk as outlined above. The degree and nature

of subcontract programs vary on a broad spec-

trum. While it is not possible to define precisely

the exact profit or fee treatment to be accorded

each situation, the general guidelines which fol-

low will be taken into consideration. The evalua-

tion of a contractor’s subcontracting program

should not consist merely of applying arbitrary

percentages of profit to subcontract prices in

negotiating the prime contract price. A relatively

large amount of subcontracting need not make

for negotiation of a lesser profit or fee—the

character and circumstances of the subcontract-

ing and the effect on the prime contractor’s costs

must be taken into account. Although purchased

material and subcontracted work are usually

properly included in the base upon which profit

is computed, instances may arise in which a sig-

nificant portion or portions of a contract are sub-

contracted in such a way that only a minimum

amount of responsibility or risk remains with

the prime contractor. In such a case, the amount

of fee or prcefit should be less than where the

contractor assumes substantial risk. Of primary

importance is the degree to which the subcon-

tracting provides a better product and lower

costs, with timely delivery, and in which the

contractor assumes heavy managerial effort, re-

sponsibility and risk. In this connection, consid-

eration should be given to the contractor’s past

and present effectiveness in offering to qualified

small business concerns and to firms in labor

surplus areas an opportunity to compete for sub-

contracts (see for example §1.707-3) and to the

contractor’s furnishing assistance to such con-

cerns as they require or as the Government may

specifically request. A contractor’s effectiveness

in furnishing such opportunity or assistance to

an unusual or exceptional degree, should be given

favorable consideration in determining the

amount of fee or profit.

(i) Unrealistic Estimates. If records reveal

that a contractor’s actual costs are consistently

lower than his estimated costs (indicating a prac-

tice of excessive estimates ), and if the contractor

refuses to provide what seems to be reasonable

estimate of costs, a lower profit or fee should be

considered.” [ Amdt. 49, 24 F.R. 10632, Dec. 24,

1959}

* * *

4. Relevant portions of the Armed Services Procure-

ment Regulations, Title 32 (Cum. Supp. as of January 1,

1966) (the “weighted” guidelines) provide:

“$3.808 Profit, including fees under cost-reim-

bursement type contracts.

[28 F.R. 12555, Nov. 23, 1963]

“$3.808-1 Policy.

“(a) General. It is the policy of the Department

of Defense to utilize profit to stimulate efficient con-

tract performance. Profit generally is the basic mo-

tive of business enterprise. The Government and

defense contractors should be concerned with har-

nessing this motive to work for more effective and

economical contract performance. Negotiation of

very low profits, the use of historical averages, or

the automatic application of a predetermined per-

centage to the total estimated cost of a product, does

not provide the motivation to accomplish such per-

formance. Furthermore, low average profit rates on

defense contracts overall are detrimental to the pub-

lic interest. Effective national defense in a free enter-

prise economy requires that the best industrial

capabilities be attracted to defense contracts. These

capabilities will be driven away from the defense

market if defense contracts are characterized by low

profit opportunities. Consequently, negotiations

aimed merely at reducing prices by reducing profits,

with no realization of the function of profit cannot

be condoned. For each contract in which profit is

negotiated as a separate element of the contract

price, the aim of negotiation should be to employ the

profit motive so as to impel effective contract per-

formance by which overall costs are economically

controlled. To this end, the profit objective must be

fitted to the circumstances of the particular procure-

ment, giving due weight to each of the performance,

risk, and other factors set forth in §§3.808-3.808-6.

This will result in a wider range of profits which

in many cases, will be significantly higher than pre-

vious norms.

(b) Contracts priced on the basis of cost analy-

sis. When cost analysis is performed pursuant to

§3.807-2, profit considerations shall be in accordance

with the objectives set forth below. As an induce-

ment for broad reduction in defense costs, the Gov-

ernment should establish a profit objective for con-

tract negotiations which will:

(1) Reward the contractor who undertakes

more difficult work requiring higher skills;

(2) Allow the contractor an opportunity to

earn profits commensurate with the extent of the

cost risk he is willing to assume—the greater the

risk assumption, the greater the profit objective

established ;

(3) Reward those contractors who have an

excellent record of past performance and con-

versely penalize those contractors whose per-

formance has been poor ; and

(4) Reward contractors who provide their

own facilities and financing or who have estab-

lished their competence through prior develop-

ment work undertaken at their own risk.

The weighted guidelines method set forth in §3.808-

2 for establishing profit objectives is designed to

provide reasonably precise guidance in applying

these principles. This method, properly applied, will

tailor profits to the circumstances of each contract in

such a way that long range cost reduction objectives

will be fostered, and a wider spread of profits will be

achieved.

many contracts and subcontracts, good pricing does

10a

not require an examination into costs and profits.

Where adequate price competition exists and in other

situations where cost analysis is not required (see

§3.807), fixed-price type contracts will be awarded

to the lowest responsible offerors without regard to

the amount of their profits. Under these circum-

stances, the profit which is anticipated, or in fact

earned, should not be of concern to the Government.

In such cases, if a low offeror earns a large profit,

it should be considered the normal reward of effici-

ency in a competitive system and efforts should not

be made to reduce such profits.

[30 F.R. 5981, Apr. 29, 1965]

“$3.808-2 We'ghted guidelines method.

“(a) General. (1) The weighted guidelines

method provides contracting officers with (i) a tech-

nique that will insure consideration of the relative

value of the appropriate profit factors described in

§3.808-4 in the establishment of a profit objective

and the conduct of negotiations; and (ii) a basis for

documentation of this objective, including an ex-

planation of any significant departure from this ob-

jective in reaching a final agreement. The contracting

officer’s analysis of these profit factors is based on

information available to him prior to negotiations.

Such information is furnished in proposals, audit

data, performance reports, pre-award surveys and

the like. No more data on or analysis of costs should

be required in the establishment of a profit objective

than is required to determine if costs are reasonable.

The weighted guidelines method shall be used in all

contracts where cost analysis is performed except as

set forth in paragraph (b) of this section.

lla

(2) The contractor’s proposal will include cost

information for evaluation and a total profit figure.

Contractors shall not be required to submit the de-

tails of their profit objectives but they shall not be

prohibited from doing so if they desire. Elaborate

and voluminous presentations are neither required

nor desired and may indicate a low index of cost

effectiveness, which fact itself should be taken into

consideration by the contracting officer in the ap-

propriate section of the weighted guidelines.

(3) The negotiation process does not contem-

plate or require agreement on either estimated cost

elements or profit elements, although the details of

analysis and evaluation may be discussed in the fact-

finding phase of the negotiation. If the difference

between the contractor’s profit objective and the

contracting officer’s profit objective is relatively

small, no discussion of individual factors may be

necessary. If the negotiating parties’ objectives are

relatively far apart, a disclosure of weightings and

rationale by both parties may be made concerning

the total assigned to Input to Total Performance,

Assumption of Cost Risk, Performance, Selected

Factors and Special Profit Consideration. By thus

developing a mutual understanding of the logic of

the respective positions, an orderly progression to

final agreement should resu!t. Simultaneous, not se-

quential, agreement will be reached on cost, any

incentive profit-sharing formulas, or limitation on

profits, and price. The profit objective is a part of an

overall negotiation objective which, as a going-in

objective, bears a distinct relationship to the target

cost objective and any proposed sharing arrange-

ment. Since the profit is merely one of several inter-

12a

related variables, the Government negotiator shall

not complete the profit negotiation without simul-

taneously agreeing on the other variables. Specific

agreement on the exact weights or values of the in-

dividual factors is not required and should not be

attempted.

(b) Exceptions. (1) Under the following cir-

cumstances, other methods for establishing profit

objectives may be used. Generally, it is expected that

such methods will accomplish the two features of the

weighted guidelines methods set forth in paragraph

(a)(1) of this section. These circumstances are:

(i) Architect-engineering contracts;

(ii) Personal or professional service con-

tracts;

(iii) Management contracts, e.g., for main-

tenance or operation of Government facilities ;

(iv) Contracts with non-profit organizations

where fees are involved;

(v) Termination settlements ;

(vi) Engineering services, labor-hour, time-

and-material, and overhaul contracts providing

for payment on a man-hour, man-day or man-

month basis, and where the contribution by the

contractor constitutes the furnishing of person-

nel rather than the output of an integrated re-

search, engineering, or manufacturing organiza-

tion; and

(vii) Cost-reimbursement construction con-

tracts.

13a

(2) Other exceptions may be made in the nego-

tiation of contracts presenting unusual pricing situa-

tions when specifically authorized by the head of a

procuring activity. Such exceptions shall be justified

in writing and authorized only in situations where

the weighted guidelines method is determined to be

unsuitable.

method would result in establishing a fee objective

in violation of limitations established by statute or

this subchapter, the maximum fee objective shall be

the percentage allowed pursuant to such limitations.

(See §3.405.) No local administrative ceilings on

profit shall be permitted.

[30 F.R. 5981, Apr. 29, 1965]

“$3.808-3 Profit objective.

“(a) A profit objective is that part of the esti-

mated contract price objective or value which, in the

judgment of the contracting officer, is appropriate

for the procurement being considered, covering the

profit or fee element of the price objective. This

objective should realistically reflect the total overall

task to be performed and the requirements placed

on the contractor. Prior to the negotiation of a con-

tract, change order, or contract modification, where

cost analysis is undertaken, the negotiator shall de-

velop a profit objective. The weighted guidelines

method, if applicable, shall be used for developing

this profit objective. If a change or modification is

of a relatively small dollar amount and is basically

the same type of work as required in the basic con-

tract, the application of the weighted guidelines

method will generally result in a profit objective

l4a

similar to the profit objective in the basic contract,

and therefore this basic rate may be applied to the

contract change or modification. However, in cases

where the change or modification calls for substan-

tially different work, then the basic contract profit

and the contractor’s input to total performance may

be radically changed and a detailed analysis is neces-

sary. Also, if the dollar amount of the change or

contract modification is very significant in compari-

son to the contract dollar amount, a detailed analysis

should be made.

(b) Development of a profit objective should not

begin until after a thorough (1) review of proposed

contract work; (2) review of all available knowledge

regarding the contractor, pursuant to Subpart I,

Part 1 of this chapter, including performance, capa-

bility reports, audit data, pre-award survey reports

and financial statements, as appropriate; and (3)

analysis of the contractor’s cost estimate and com-

parison with the Government’s estimate or projec-

tion of cost.

[30 F.R. 5982, Apr. 29, 1965]

“§3.808-4 Profit factors.

“(a) The factors set forth below shall be con-

sidered in all cases in which profit is to be specifically

negotiated. The weight ranges listed after each fac-

tor shall be used in all instances where the weighted

guidelines method is used.

l5a

W eight

ranges

Profit factors (percent)

Contractor’s input to total performance—

Direct materials:

is |, rare lto4

Subcontracted items ............ lto5

cic cn duw keene lto4

Engineering labor ................ 9to15

Engineering overhead ............. 6to9

Manufacturing labor ............. 5 to9

Manufacturing overhead .......... 4to7

General and administrative expenses. 6to8

Contractor’s assumption of contract cost

Pi acatdunaswipuscedsneceneue Oto7

Type of contract.

Reasonableness of cost estimate.

Difficulty of contract task.

Record of contractor’s performance ~—2 to +2

Management.

Cost Efficiency.

Reliability of cost estimates.

Cost reduction program accom-

plishments.

Value engineering accomplish-

ments.

Timely deliveries.

Quality of product.

Inventive and developmental con-

tributions.

Small business and labor surplus

area participation.

DE occa decktaweene —2to +2

Source of resources.

Government or contractor source

of financial and material

resources.

Special achievement.

Otlier.

l6a

(b) Under the weighted guidelines method, the

contracting officer shall first measure the “Contrac-

tor’s Input to Total Performance” by the assign-

ment of a profit percentage within the designated

weight ranges to each element of contract cost recog-

nized by the contracting officer. Such costs are multi-

plied by the specific percentages, which have been

selected in accordance with §3.808-5(b), to arrive

at specific dollar profits.

tor’s Input to Total Performance are similar to those

on the Cost and Price Analysis Form (DD Form

633). Often, individual proposals will be in a differ-

ent format; but, since these categories are broad and

basic, they provide sufficient guidance to evaluate all

other items of cost.

(d) Although certain classifications of accept-

able cost, including travel, subsistence, facilities, test

equipment, special tooling, federal manufacturers

excise taxes, and royalty expenses, may have been

historically excluded from the base upon which profit

has been computed, they shall not be excluded when

using the weighted guidelines method.

(e) After the contracting officer has computed a

total dollar profit for the Contractor’s Input to Total

Performance, he shall divide this amount by the total

recognized costs to determine the composite profit

percentage for this factor. To this composite per-

centage, he shall then add the specific percentages

assigned for cost risk, performance, and the other

selected factors, to arrive at a total profit percentage.

He shall then multiply the total recognized contract

costs by this total profit percentage to determine the

profit objective. A cardinal principle of the weighted

17a

guidelines method is that the specific percentages

assigned for cost risk, performance, and other fac-

tors are applied to total recognized costs in establish-

ing the profit objective.

[30 F.R. 3982, Apr. 29, 1965]

“$3.808-5 Assignment of values to specific factors.

“(a) General. In making his judgment of the

value of each factor, the contracting officer should

be governed by the definition, description, and pur-

pose of the factors together with considerations for

evaluating them as set forth herein.

(b) Contractor’s input to total performance.

This factor is a measure of how much the contractor

himself is expected to contribute to the overall effort

necessary to meet the contract performance require-

ments in an efficient manner. This factor, which is

apart from the contractor’s responsibility for con-

tract performance, takes into account what resources

are necessary and what the contractor himself must

do to accomplish a conversion of ideas and materials

into the final product called for in the contract. This

is a recognition that within a given performance out-

put, or within a given sales dollar figure, necessary

efforts on the part of individual contractors can vary

widely in both value and quantity, and that the profit

objective should reflect the extent and nature of the

contractor’s contribution to total performance. The

evaluation of this factor requires an analysis of the

cost content of the proposed contract as follows:

(1) Direct materials (purchased parts, sub-

contracted items and other material).

* x x

(2) Engineering labor and manufacturing

labor.

= - -

18a

(3) Engineering overhead, manufacturing

overhead, and general and administrative ex-

penses.

* x x

risk. (1) This factor reflects the policy of the De-

partment of Defense to shift the risk of contract

costs to the fullest extent practicable to contractors

and to compensate them for the assumption of this

risk. Evaluation of this risk requires a determina-

tion of (i) the degree of cost responsibility the con-

tractor assumes, (ii) the reliability of the cost

estimates in relation to the task assumed, and (iii)

the chances of the contractor’s success or failure.

This factor is specifically limited to the risk of con-

tract costs. Thus, such risks on the part of the

contractor as reputation, losing a commercial mar-

ket, risk of losing potential profits in other fields,

or any risk on the part of the purchasing activity,

such as the risk of not acquiring an effective

weapon, are not within the scope of this factor.

(2) The first and basic determination of the

degree of cost responsibility assumed by the con-

tractor is related to the sharing of total risk of

contract cost by the Government and the contractor

through the selection of contract type. The extremes

are a cost-plus-fixed-fee contract requiring only that

the contractor use his best efforts to perform a task,

and a firm fixed-price contract for a complex item.

Such cost-plus-fixed-fee contract would reflect a

minimum assumption of cost responsibility, whereas

such firm fixed-price contract would reflect a com-

plete assumption of cost responsibility. Therefore, in

the first step of determining what value is to be

19a

given for the contractor’s assumption of contract

cost risk, a zero rating shall be given to a proposed

cost-plus-fixed-fee best efforts contract, and a 7-per-

cent rating shall be given to a closely priced firm

fixed-price contract for a new, complex item.

(3) The second determination is that of the

reliability of the cost estimates. Sound price negotia-

tion requires well-defined contract objectives and

reliable cost estimates. Prior production experience

assists the contractor in preparing reliable cost esti-

mates on new procurements for similar equipment

and does not in any way reduce his cost responsibility

in a firm fixed-price contract. An excessive cost

estimate reduces the possibility that the cost of per-

formance will exceed the contract price, thereby

reducing the contractor’s assumption of contract

cost risk.

(4) The third determination is that of the dif-

ficulty of the contractor’s task. The contractor’s

task can be difficult or easy, regardless of the type

of contract.

(5) Contractors are likely to assume greater

cost risks only if contracting officers objectively

analyze the risk incident to proposed contracts and

are willing to compensate contractors for it. Gen-

erally, a cost-plus-fixed-fee ccatract would not

justify a reward for risk in excess of 1 percent, nor

would a firm fixed-price contract justify a reward

of less than 5 percent. Where proper contract type

selection has been made the reward for risk by con-

tract type would usually fall into the following per-

centage ranges:

20a

Percentage

Type of contract ranges

Cost-phus-fixed-fee .......sccccccccces Otol

Cost-plus-incentive-fee including cost

NINO GHEE oc ccdcnundeusceoseucees 1 to2

Cost-plus-incentive-fee including cost,

performance, and delivery incentives .. 1% to3

Fixed-price-incentive including cost

ONIN GU cc cccessvccecsediesun 2 to4

Fixed-price-incentive including cost,

performance, and delivery incentives .. 3to5

Prospective price redetermination ...... 4to5

oo ,. Preererrrrrrrrrr ry 5to7

* * *

(d) Record of contract performance. (1) The

purpose of this factor is to motivate contractors to

improve their performance by rewarding them for

excellent past performance and penalizing them for

poor performance. Effective use of this factor re-

quires that (i) reports on the various aspects of

past performance be obtained and evaluated; and

(ii) this information be used in such a way as to

motivate contractors to improve their performance.

* * *

(6) The following factors are to be considered

in evaluating a contractor’s performance record:

(1) Management.

x x ~

(ii) Cost efficiency.

*x * *

(iii) Reliability of cost estimates.

* * *x

2la

(iv) Cost reduction program accomplish-

ments.

* * *

(v) Value engineering accomplishments.

* * *

(vi) Timely deliveries.

*x * *

(vii) Quality of product.

*x * *

(viii) Inventive and developmental contribu-

tions.

* * *

(ix) Small Business and Labor Surplus

Area Participation.

x * *

(e) Selected factors. The purpose of these fac-

tors, which may enter into a particular procurement

situation, is to discourage reliance upon Government

resources, and to encourage contractors to outstand-

ing performance. Therefore, in assigning a com-

posite profit percentage within the range of —2 to

+2 for these Selected Factors, the Source of Re-

sources factor will always be rated from 0 to —2

percent and the Special Achievement factor will

always be rated from 0 to +2 percent. The Other

factor may be rated with either a plus or a minus.

These factors will rarely be of equal weight in a

specific procurement. They should be assigned a

weight as a group, in accordance with the following

criteria:

(1) Source of resources (Government or pri-

vate). Application of this factor calls for an

22a

analysis of the contractor’s dependence on Gov-

ernment financial assistance or material assistance

in the form of facilities. Contractor reliance upon

Government resources shall be discouraged by pro-

viding for less favorable profit consideration. Com-

mercial facilities to be rented by the contractor will

be evaluated as contractor furnished. Customary

progress payments and guaranteed loans with

normal guarantees (90 percent or less) shall not be

weighted in this evaluation. However, other forms

of financial assistance such as extraordinary prog-

ress payments, guaranteed loans with abnormal

guarantees, or advanced payments shall be con-

sidered a minus factor. Similarly, the reliance on

any other type of Government assistance, including

facilities shall be evaluated as a minus from zero.

The contractor who uses new Government resources

for the performance of a contract will be penalized

to a greater degree than the contractor who uses

existing Government resources.

(2) Special achievement, if any, required in the

contract. This factor indicates the need for extra

profit consideration when outstanding performance

is required. Such achievement may be in the form

of a special technical requirement, such as produc-

tion of some remarkable first, or achievements

involving non-technical objectives, such as an ex-

traordinarily fast delivery schedule.

(3) Other. Particular procurement situations

may give rise to the desirability of using a profit

factor other than those in subparagraphs (1) and

(2) of this paragraph. Such factor shall be identi-

23a

fied; and the reason for its use shall be documented

in accordance with § 3.811.

[30 F.R. 5982, Apr. 29, 1965, as amended at 30 F.R.

14086, Nov. 9, 1965]

“$ 3.808—6 Special profit consideration.

“Contractors who develop military items without

Government assistance are entitled to special profit

consideration on those items. This consideration

shall be in addition to the profit objective arrived at

through the weighted guidelines method. One to

four percent of recognized cost is established as the

normal range of value for this profit factor. The

criteria for selection of the specific percentage shall

be the importance of the development in furthering

defense purposes, the demonstrable initiative in de-

termining the need and application of the develop-

ment, the extent of the contractor’s cost risk, and

whether the development cost was recovered directly

or indirectly from Government sources.”

[30 F.R. 3985, Apr. 29, 1965]

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.