# Petition — Bethlehem Steel Corp. v. United States

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_0614%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1975
- **Citation:** 423 U.S. 840

## Text

44-1640

—
—

IN THE

Supreme Court of the United States

Octoser TERM, 1974

No. 74-

BETHLEHEM STEEL CORPORATION,

Petitioner,
v.

UNITED STATES OF AMERICA,
Respondent.

APPENDIX TO
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF CLAIMS

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, New York 10005

June 26, 1975

APPENDIX

TABLE OF CONTENTS

Bethlehem Steel Corporation
v. United States, 423 F.2d.
300 (Ct. Cle 1970) soeeeeeeeeeeee l

Appeals of Bethlehem Corporation
Oration, ASBCA Nos. 10316 and
10317 (Reinstated),
Decision on Government's
Motion for an Order Establi-
shing that the ASPR Non-
Weighted Profit Guidelines
Are Applicable to Determining

Contract Price, dated January
Ds eee asdueeeeenesucececse 21

Order of the United States of Court
of Claims dated July 1, 1971,
denying Bethlehem's Motion for
an Order Terminating Stay and
POE GERGG Meligs .cccccccccs 41

Appeals of Bethlehem Steel
Corporation, ASBCA Nos. 10316

and 10317 (Reinstated), dated

WO Dale BOTS 6cecceesccéccs 42

Bethlehem Steel Corporation v.
United States, 511 F.2d. 529
Gome Ghe BOVE) ceccncesececncss 133

Order of the United States Court
of Claims, dated March 28,
1975, denying Bethlehem Steel
Corporation's Motion for
Rehearing and Reconsideration 161

BETHLEHEM STEEL CORPORATION

Vv.

UNITED STATES

No. 44-68.
United States Court of Claims

March 20, 1970.

Albert R. Connelly, New York City,
for plaintiff, James C. Hansen, New York
City, of counsel.

James F. Merow, Washington, D.C.,
with whom was Asst. Atty. Gen. William D.
Ruckelshaus, for defendant.

Before COWEN, Chief Judge, and
LARAMORE, DURFEE, DAVIS, COLLINS,
SKELTON and NICHOLS, Judges.

ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
AND DEFENDANT'S CROSS-MOTION FOR SUMMARY
JUDGMENT

NICHOLS, Judge:

This is an action to recover amounts
claimed to be due the plaintiff under
labor and material escalation clauses in
Contracts Nobs-3556 and Nobs-3648, under
which plaintiff built five destroyers for
the United States Navy at the shipyard
it then owned at Quincy, Massachusetts.
The contracting officer denied all escala-
tion but in disputes clause appeals the
Armed Services Board of Contract Appeals
(ASBCA) allowed upward adjustments under
the two contracts in the amounts of
$1,064,151 and $876,028, respectively,
which it computed as an allowance of 5%
profit on costs after restoring certain
cost disallowances the contracting offi-
cer had made, not here in issue. This
being less than plaintiff's claims, it
seeks review here under Wunderlich Act
standards, 41 U.S.C. §§ 321 and 322. The
parties have filed cross motions for sum-
mary judgment. We deny both motions and
suspend further proceedings in this
court to enable the parties to apply to
the ASBCA for further findings of fact,
pursuant to the opinion that follows.

The contracts were awarded by
negotiation and included standard provi-
sions requiring the contractor to exclude
from its cost estimates all contingency
allowances for increases in labor and
material costs from the levels then
obtaining, but on the other hand, allowing
price increases according to an agreed
formula reflecting labor and material
cost increases experienced in the con-
tract period by shipbuilders agreed upon
as representative. There is no dispute
that such cost increases did occur, nor
as to the contract price increases that
would result, except for Article 6(e),

o3eq

which reads as follows:

(e) The Contracting Officer may
deny, in whole or in part, any upward
adjustment in the contract price re-
quired under this Article if the Con-
tracting Officer finds that such ad-
justment is not required, in whole or
in part, to enable the Contractor to
earn a fair and reasonable profit
under this contract.

This contract language came before us for
interpretation three years ago in Newport
News Shipbuilding & Dry Dock Co. v. United
States, 179 Ct.Cl. 97, 374 F.2d 516 (1967).
The nub of the controversy here is how to
apply the rulings then made to the some-
what different facts and regulation before
us now. These facts are stipulated, so
far as they go, the Board having taken no
testimony. The refusal of any escalation
clause increases by the contracting offi-
cer, and the refusal of portions of the
amounts otherwise accrued, by the ASBCA,
resulted from their beliefs that the
amounts they denied were not required to
enable plaintiff to earn fair and reason-
able profits under the contracts. Both
decisions were, however, rendered before
ours in Newport News. Plaintiff would
remand for further Board proceedings in
light of Newport News, but defendant says
Newport News is not applicable and the
Board decision is entitled to finality.

The Navy decided to build three
destroyers (DD 936-938) in a private yard.
On or before January 25, 1954, it received
proposals for major east coast concerns as
follows, per ship:

~_

Bath Iron Works ....¢.-e-eeeeee+ $15,492,000
Newport NeWS .....eceeeeeeeee- 16,800,000
Quincy (plaintiff) ........... 18,674,000
Hew YOeR GRID .cccscsesceccees Beene

As usual in negotiated procurement, all
submitted cost estimates which showed that
they anticipated profits of 9.3% of cost,
in the case of one, to 9.4% for another,
and 10% in the cases of Quincy and the
fourth. Defendant, however, desired to
award the vessels to Quincy because

Quincy was about to run out of work and

if it did, management would probably close
down the yard, which was one of the largest
and best equipped in the world. Moreover,
plaintiff maintained at Quincy the design
and engineering staff for all its several
other shipbuilding and repair yards on
both coasts. The anticipated closure,
therefore, would have effected a material
reduction in the capacity of the shipbuild-
ing industry to produce for national defense
in case of any emergency. Since World War
II, the Navy had on one or more occasions
bailed all of the above named companies
out of potentially disastrous slumps in
their business by awarding them shipbuild-
ing contracts when they were not the
lowest bidders. They were painfully
dependent on the Navy, for all other cus-
tomers together accounted for but 35% of
their business, yet even the Navy's orders
were at a modest level pending the wearing
out or obsoletion of the vast tonnages
delivered in World War II. All four yards
were, therefore, operating at a minor
fraction of capacity. The three other
than Quincy, did have enough orders to
keep them busy at the then level of activ-
ity for a year or two to come, so it was
only Quincy that was in immediate danger

oS-

of shutdown. The Navy, accordingly, decided
to negotiate with Quincy.

To avoid making a bad situation worse,
the Navy asked plaintiff to reduce its
bid and it took $1,000,000 off the price
of each ship, and the award was made at
$17,674,000 per unit, which was still con-
siderably over the bids of Bath Iron Works
and Newport News. The revised cost esti-
mates remained unchanged, but showed that
plaintiff was now estimating a profit of
$698,000 instead of $1,698,000. There was,
however, no contract provision that plain-
tiff's profit would be any particular figure.

One asks next why plaintiff esti-
mated its costs so much above competitors
who were, by its account, no more efficient,
and had no better plant. The answer 1S_
that the three destroyers would have util-
ized only 5% of Quincy's capacity. In
estimating its costs, Quincy calculated
it would have no other business and the
contract for the destroyers would have
had to carry the overhead of that vast
establishment. Evidently the Navy had
to contribute towards this overhead if
it was to persuade plaintiff not to close
the plant down. Bath, being smaller and
busier, was far more favorably situated
with respect to overhead. We conclude
that in the events that materialized,
that is, Quincy's receiving other orders,
the allocable overhead would have been
less, and therefore the costs.

The circumstances of this award are
given because, as wili appear, they afford
the basis for defendant's argument that
Newport News is not applicable as a pre-

cedent. The facts stated above were either

_

found by the Board, or else appear as
testified in the prinvced transcript of a
hearing conducted by a subcommittee of
the House Armed Services Committee in
February and March, 1954, to inquire
into the award of Nobs-3556 and the re-
jection of the low bids. The parties
here attached it to their stipulation as
Exhibit 6, without restriction as to
relevarce or use, so we use it as uncon-
tradicted evidence.

The other contract in this litiga-
tion, Nobs-3648, was awarded plaintiff
later the same year and called for con-
struction of two additional destroyers,

DD 943 and 944, at a negotiated price of
$16,250,000 per ship, including an esti-
mated profit of $698,000. There was,
therefore, a cost saving estimated. It

had the same limited escalation as Nobs-
3556. There were other awards not involved
in this litigation while the five destroyers
were under construction, notably a nuclear
powered cruiser and three guided missile
frigates. Plaintiff delivered the first
destroyer on November 30, 1956, three more
in 1957, and the last on February 26, 1958.
There were, as usual, change orders and
equitable adjustments therefor, not now in
dispute. The costs, except for those
extras and escalatable labor and material,
were lower than estimated, plaintiff says
due to cost savings all along the line.

The financial results under the two
contracts are set forth in detail in the
Board findings and need not be repeated
here at this time, especially since the
case may come before us again. To pose
the legal problem it suffices to say that
labor and material escalation before any

ofo

Article 6(e) exclusion, totalled $3,347,500
and $2,404,900 under the two contracts,
respectively. The profit before anv esca-
lation, but reflecting the Board's decision
as to allowable costs, would be $1,597,000
under Nobs-3556 and $775,000 under Nobs-
3648, making 3% and 2.3% of cost respec-
tively. The profit with partial escalation
allowed by the Board as stated above would
be 5% of cost under both contracts. The
profit with full escalation would be
$4,990,000 under Nobs-3556 and $3,180,000
under Nobs-3648, being 9.3% and 9.6% of
cost respectively. That the profit with
full escalation is so much over the con-
tract estimate is due, as said above, to
savings in non-escalatable costs, but the
Board did not perform any analysis to
determine how these savings were accom-
plished. The Board also considered profits
as a percentage of price, but we need not
go into that here.

Our Newport News decision interprets
the Article 6(e) language together with a
Department of Defense regulation in effect
when the administrative decision was made,
22 F.R. 5927, 32 C.F.R. §§ 3.808 and ff.
The former we viewed as requiring an
administrative determination as to what
a fair and reasonable profit would be under
the contract incorporating the clause in
light of the performance history and
financial results. Such a determination
would be a finding of fact, final in this
court if supported by substantial evidence
and made in accordance with law. The
latter, the regulation, we found to con-
tain language telling how such a deter-
mination was to be made, whether related
to initial pricing or any sort of con-
tract repricing. There was nothing to

@8-

show that in making the findings there
involved, the Board had employed or
intended to employ the technique the regu-
lation prescribed, and several statements
in the Board opinion afforded indications
that the regulation was not deemed applic-
able. We suspend further action to allow
the parties to apply for further Board
findings, without intimating any opinion,
or indeed, having one, whether the level
of fair and reasonable profits as the Board
had determined was adequate or not.

That case has stood on the books for
three years now without any sort of chal-
lenge on defendant's part, not even a
motion for reconsideration. Since our
holdings deviated to some extent from those
urged upon us by either party, they may well
have come as somewhat of a surprise, and a
motion for rehearing on the ground of sur-
prise would not have lacked dignity. As
things are, this is the first chance we
have had to learn defendant's views.
Defendant apparently agrees with us to a
large extent, and appears in general will-
ing for Newport News to be followed in
cases that reproduce its facts. That carries
important implication.

The contracts here, as in Newport
News, were made before the Pentagon had on
the books any regulation prescribing,
except in redeterminations, any technique
of determining a level of reasonable profits
for a defense contractor. The involved regu-
lations, however, when made, appeared to be
remedial, meant to safeguard defense con-
tractors against determinations as to a
reasonable profit level, arbitrary, perhaps
biased, or founded on "seal-of-the-pants
intuition", which contracting officers might

-9-

make without proper guidelines. Tlere is
no reason to postulate an intent to with-
hold such safeguards from parties to then
existing contracts, nothing to that effect
appearing either in the contracts or the
regulation. Defendant refers, properly we
think, to Thorpe v. Housing Authority, 393
U.S. 268, 89 S.Ct. 518, 21 L.Ed.2d 474
(1969), as being in agreement with our
position. Since Government officials are
presumed to act properly, it is reasonable
to suppose that the Pentagon would not
have promulgated clauses such as Article
6(e) unless contracting officers could
employ established teghniques and guide-
lines, even if unpubliShed and therefore
would not act arbitrarily. If any con-
tractor supposed he had rights vested under
a contract which were substantially sub-
verted by a regulation later adopted as

to how to determine reasonable levels of
profits, he might come into court and show
it. See Thorpe, supra, at p. 283, 89
S.Ct. 518. In the absence of such a show-
ing we cannot assume it would occur.

Defendant passes over in silence
the fact noticed by the dissenting judges
in Newport News, that plaintiff there
had done nothing to alert the Board to
the fact it was not following the Depart-
ment of Defense's regulations. That is
equally true of the instant case. It is
indeed, generally, a salutary rule that a
party cannot assign an error here that
he has not given the administrative
tribunal a chance to correct. But the
points plaintiff did make below were of
a nature that should have alerted the Board
to test what it was doing against applica-
ble regulations. We think an exception
in such a case must be made in the interests

-10-

of fairness when the error consists of a
mutual ignoring of a whole body of appli-
cable agency regulations. Agency officials
have considerable practical power to steer
the choice of issues to ground of their
selection, in proceedings before their
agencies. If attention is totally diverted
from applicable regulations the responsi~
bility for this error is not equal. Agency
officials have the means and the duty to be
aware of their own regulations to a greater
extent than outsiders. It is not fair to
throw the consequences of such a mutual
mistake wholly on the party least respons-
ible for causing it. We say this not
meaning to impugn the good faith of the
Pentagon officials, who apparently quite
sincerely believed that a clause such as
Article 6(e) was somehow something other

than the kind of pricing and repricing power

the guidelines were meant to cover. The
arguments made to us by both sides in
Newport News reflected a state of great
confusion on both sides as to what Article
6(e) was meant to do. The requirement for
exhaustion of administrative remedies is
not inflexible in some exceptional circum-
stances. E.g., Mallow v. United States,
161 Ct.cl. 207, 212 (1963).

This brings us at length to the
difference which defendant says exists .
between this case and Newport News. It 1s
not that the regulations involved are new,
though they are, as set forth below.
Defendant says that this case falls clean
outside all published guidelines for deter-
mination of a reasonable level of profit,
because the contracts were awarded to other
than the low bidder for the purpose of con-
tinuing the existence of an essential
defense facility. This position does not
require defendant to take issue with our

-ll-

holding in Newport News and it does not, yet
it likewise does not require defendant to
argue, as indeed it could not, that the
Board here paid any attention to guidelines
or techniques for determining a reasonable
profit level, as published by the Depart-
ment of Defense or anyone else, and in
effect at the time the Board decided. No
such publication is ever alluded to in the
Board decision. It does indeed use guide-
lines, but they are "do-it-yourself" guide-
lines constructed by the Board itself out
of arguments and suggestions of counsel.
As already pointed out, counsel on neither
side suggested to the Board that it should
follow the published guidelines, and that
is the obvious reason why it did not do so.

A Department of Defense regulation
that was in effect at the time of the
instant Board decision, and also that of the
contracting officer, was published in 1963,
28 F.R. 12546, 12555, amending 32 C.F.R.

Part 3, §§ §§ 3.808 and ff. It supersedes the

one we construed in Newport News. It states
and describes, with copious illustrations,
the "Weighted guidelines method" of deter-
mining reasonable levels of contractor
profits. Defendant does not now deny that
it would govern most decisions limiting or
refusing otherwise justified labor and
material escalation under Article 6(e),

and there is nothing in it that suggests
an intent to narrow the former scope. But,
defendant says, this case is an exception.

However, the regulation itself in § 3.808-2(b),

enumerates the recognized exceptions to it,
and the situation here involved is not on the
list. Any other exception must be authorized
by the head of the procuring agency, and no
such authorization is asserted here. On
the other hand, the statute defendant says

@12<

authorized this type of procurement to
keep a contractor in business. The Armed
Services Procurement Act of 1947 § 2(c)
(16), now revised and codified as 10 U.S.C.
§ 2304{a) (16) (1964), does not speak in
terms of any exemption from profit guide-
lines ordinarily applicable.

If 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. The
subcommittee recognized the validity of
this view in its hearing on the instant
award, as did the whole Congress, of
course, in enacting 10 U.S.C. § 2304(a) (16).
It would be strange if so large an excep~
tion to the use of the "Weighted guidelines
method" went unmentioned in the enumeration
of exceptions in the regulation itself.
The new regulation requires use of the
guidelines if cost analysis is required.
§ 3.808-1(b). Cost analysis 1s required
with respect to negotiated fixed price con-
tracts with escalation, all of which these
are. § 3.807-3(a) (2). 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.

7 6 EEEEEeEeEeEeEee—e—Oeee

-l13-

Defendant says that plaintiff agreed
to accept a profit of arovnd 5% in consid-
eration of being awarded the contract,
though not the low bidder, and therefore
use of the "Weighted guidelines method"
to produce a higher profit would be so
unfair that an exception to the method
must be implied. The contracts, however,
reflect that plaintiff agreed only upon a
price. The alleged agreement upon a profit
came in the revised cost estimates, which
showed estimated costs only $698,000 per
unit below the agreed price. Both parties
must have been aware that this estimated
cost was a figure plucked from the atmos-
phere. Mr. Strohmeier, plaintiff's vice
president, testified at the Congressional
hearing, without contradiction, that the
entire excess of his company's cost esti-
mates over Bath's was due to the higher
allocation of overhead, and this difference,
in turn, resulted from the hypothesis,
that the Quincy yard would be operating at
but 5% of capacity, having no other work
than the three destroyers. Even so, on
that hypothesis, the estimated allocation
he thought was insufficient. If his com-
pany built the three destroyers and had no
other construction at the Quincy yard, he
expected it to suffer a loss. On the
other hand, if it received enough other
business so it could operate at a "normal"
level, its contract costs would fall to
approximately Bath's estimates. In that
event, which was surely always possible,
and wholly apart from any savings due to
efficient manufacture, there would have
been a large windfall profit under Nobs-
3556, for whose recapture the contract
made no provision if one disregards the
Statutory renegotiation article. Defend-
ant’ does not and could not regard that

o14@-

article as contributing in any way to its
argument that plaintiff agreed to a profit
level of exactly 5%. 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 coun-
sel's eyes alone.

As already noted, plaintiff in pre-
paring its cost estimates was required to
assume there would be no increases in
labor and material costs, and in analyzing
the possibilities of profit in the con-
tract, we have up to this point done so
likewise. In the more probable event
there were such increases, the escalation
clause became operative and in general
its effect would be, absent Article 6(e),
to stabilize the profit or loss at a fixed
dollar (not percentage) figure against any
degree of labor and material cost infla-
tion. There might be some small profit
or loss resulting from the escalation
clause itself, as the plaintiff's own
experienced labor and material costs might
be more or less than the general industry
experience used to fix the escalation
indices. There was nothing in the escala-
tion clause before Article 6(e), agreeing
to-a5% profit. In article 6(e) there was
certainly a possibility that the profit
would be cut, but 5% is not mentioned.

We have now examined every pertinent
part of the contract and nowhere find
agreement to a 5% profit level, while we
do find provisions that enable a profit
much exceeding 5%, whether or not esca-
lation was required, depending on con-
ditions which were perfectly foreseeable

-_= }

-15-

and which plaintiff would certainly exert
itself to bring about, i.e., a normal util-
ization of the yard. On the other hand,
the $698,000 profit estimate contemplated

a state of inadequate utilization which
could hardly have been expected or allowed
to be other than temporary.

While we say plaintiff did not agree
to 5%, we do consider that a high bidder
given a contract award purely to keep him
in business, might expect this fact to be
considered as unfavorable to him under any
rational system of profit limitation.
Defendant's view that the "Weighted guide-
lines method" would fail to give weight to
this apparently is basic to its argument
that the method is so unsuited to the
instant procurement that the exception of
it from the regulation must be implied.

We do not read the regulation that way.
The plaintiff's overhead allocated to
Contract Nobs-3556, was by the evidence
in the record entirely out of line with
that which the lower bidders would have
allocated. A Board applying the method
would be required by § 3.808-5(b) (3) to
analyze the overhead items of cost and
determine "how much they contribute to
contract performance." A range of 4-7%
is assigned to "manufacturing overhead"
and a range of 6-8% to general and ad-
ministrative expenses. We think the
Board would be within its charter in deny-
ing a return on that part of the overhead
which exceeded the allocation of other
shipbuilders. Moreover, under § 3.808-5
(e) (1) the Board is to make an analysis
"of the contractor's dependence on Gov-
ernment financial assistance * * *,"

If the dependence is great, it is a minus
factor in determining the allowable profit.

-16-

While the point may be débatable, we think
that the addition of a bonus to a contract
price to enable the contractor to maintain
uneconomically large facilities in being
is in reality a form of Government finan-
cial assistance and should be treated as
such.

On the other hand, the guidelines
attach favorable consideration in § 3.808-
5(e) to "Contractor's assumption of con-
tract cost risk." The guidelines here
look with least favor on a cost plus fixed
fee contract with full cost reimbursement,
and most favorably, at the other end of
the scale, on a "closely priced firm fixed
price contract" for a complex item, which
"would reflect a complete assumption of
cost responsibility." We have here a
firm fixed price contract for a complex
item, with only limited escalation, and
according to Mr. Strohmeier, a real pos-
sibility of loss prospectively considered,
if other business was not obtained. It
would appear Contract Nobs-3556 at least
is, on this factor, closer to the favor-
able than the unfavorable end-of the
scale. (Of course, we do not know from
the record to what extent,the loss would
have been an actual cash drain and to
what extent a paper wxite-off.) The
guidelines appear to be the Pentagon's
best thinking on the subject of the proper
administration of profit limitation
clauses, and this favorable consideration
of close pricing and assumption of risk
stands in stark contrast to the Board s
unfavorable consideration of what is
apparently the same thing: plaintiff's
willingness to accept a price shaved
close above the estimated cost.

It would, of course, be improper

-l7-

for us to make a determination ourselves
under the "Weighted guidelines method" for
the reasons explained in Newport News and
for the further reason that the record is
inadequate. To use the method one needs
to be well informed. The Board will no
doubt supplement the stipulation with
further evidence. We do not know whether,
by proper application of the method,
plaintiff will fare better or worse than
5%. Plaintiff desires to take its chances
under the "Weighted guidelines method" and
it has a legal right to do so.

As we have said, we see no injus-
tice or anomaly in applying profit limit-
ation techniques, as the Pentagon may
have amended and prescribed them from
time to time, up to the date of the deter-
mination. We would presume that changes
were intended to clarify and simplify, as
well as to reduce the impact of subjec-
tive factors in the mind of the adminis-
tering official. To some extent amend-
ments may reflect earlier departures in
actual practice, to a large extent no
doubt they are the product of experience.
If anything has been slipped in which
would impair vested rights unless limited
to prospective application only, let it
be pointed out. If we have erred in
thinking the "Weighted guidelines method”
is feasible to apply to the instant con-
tracts, the Pentagon even now could
amend or supplement its regulation, and
the Board would be bound, provided no
impairment of vested rights was attempted.
Any amendment purporting to reaffirm the
position now claimed, that officials
determining a reasonable level of profit
under clauses such as Article 6(e) are
not subject to any published guidelines

-18-

whatever 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 admin-
istrative absolutism [is] not congenial
to our law-making traditions."

Gutknecht v. United States, 396 U.S. 295,
90 C.ct. 506, 24 L.Ed.2d 532.

CONCLUSION

Plaintiff's motion for summary judg-
ment and defendant's cross motion for sum-
mary judgment are denied. Further proceed-
ings are stayed pursuant to Rule 167 for a
period of six months to enable the parties
to obtain further fact findings in accord-
ance with this opinion under the applicable
guidelines in published regulations. Plain-
tiff shall advise the commissioner of the
status of the case before the Armed Services
Board of Contract Appeals at intervals of
not less than 60 days beginning with the
date of this order, as prescribed in Ruie
167(e) and (f).

DAVIS, Judge (concurring):

Newport News, which I consider now
binding on me, settled the issue of whether
the ASPR guidelines were required to be
followed even though neither party invoked
them before the Board. That being so, I
agree with the court, for the reasons it
gives, that those regulations apply in
this case as well, and on that basis I
join in the disposition requiring them
to be applied here.

SKELTON, Judge (dissenting):

I respectfully Gissent. In my opinion,

|

-19-

Newport News Shipbuilding & Dry Dock Co.
v. United States, 179 Ct.Cl. 97, 374 F.2d
516 (1967), does not control this case
and it should not be sent back to the
board (ASBCA) in order to allow it to use
the guidelines of the Department of
Defense regulation published in 1963

(28 Fed. Reg. 12546, 12555, amending 32
C.F.R. §§ 3.808 and ff. (part 3)), to
determine the profit of the plaintiff in
this case, for the following reasons:

(1) This regulation was not in
existence at the time the contracts
involved here were executed and could
not have been contemplated by the parties.
Although the same situation existed in
Newport News, the facts in the two cases
are completely different. There the
court held that the regulation must be
applied to the original competitive
prices as well as to escalated prices,
but that cannot be done in the instant
case because the bids here were not com-
petitive. It is improper to apply the
regulation retroactively under these cir-
cumstances in our case. In fact, it is
impossible to apply the decision in
Newport News to the original prices here.

(2) The contracts before us were
negotiated between the parties and were
not the result of competitive bids. In
fact, they amounted to a subsidy by the
government, and without them the plain-
tiff would have had to have closed its
doors and gone out of business. Plain-
tiff was not the lowest bidder, as two
other companies submitted lower bids.
The government gave it the contracts
after negotiation to keep it in opera-
tion. As a result, the plaintiff has

-20-

been subsidized to the extent of a five
percent profit on the undertaking, but
instead of being grateful for this gener-
osity, now sues for more. It is imprac-
tical, if not impossible, to apply the
regulation to the prices thus negotiated
between the parties.

(3) The parties submitted guide-
lines to the Board that they wished it
to consider. The Board did consider them
fully, as indicated in its opinion. The
plaintiff did not ask the Board to con-
sider any additional guidelines and did
not mention those set forth in the regu-
lation which was in force at the time of
the Board's decision. No request was
made that the guidelines in the regula-
tion be considered. It is too late, in
my opinion, for the plaintiff to make
such a request, and it is error for us
to allow it to do so.

(4) The Board found as a fact
that the parties agreed that plaintiff's
profit would be five percent, and plain-
tiff has not challenged this finding.
Consequently, the finding is final and
we are bound by it and have no authority
to set it aside.

I would grant defendant's cross-
motion for summary judgment, deny plain-
tiff's motion, and dismiss plaintiff's
petition.

a

@2l-

ARMED SERVICES BOARD OF CONTRACT APPEALS

” Appeals of -- )

) ASBCA Nos.
Bethlehem Steel Corporation ) 10316 and
) 10317
Under Contract Nos. NObs-3556) (Reinstated)
and NObs-3648)

APPEARANCES FOR THE GOVERNMENT:
Samuel Pinn, Jr., Esq.
Counsel, Naval Ship Systems Command
Morris Amchan, Esq.
Associate Counsel

APPEARANCES FOR THE APPELLANT:
E. J. O'Brien, Esq.
Bethlehem Steel Corporation
Bethlehem, Pennsylvania

DECISION ON GOVERNMENT'S MOTION FOR AN
ORDER ESTABLISHING THAT THE ASPR
NON-WEIGHTED PROFIT GUIDELINES ARE
APPLICABLE TO DETERMINING CONTRACT

PRICE

STATEMENT OF FACTS

These appeals are here on remand
from the Court of Claims pursuant to the
order of the Court in Bethlehem Steel
Corporation v. United States, Ct. Cl. No.
74-68 (Decided March 20, 1970). The
appeals were previously decided by this

Board in an opinion dated 16 June 1966
reported in 66-1 BCA par. 5639.

The facts giving rise to this dis-
pute will not be repeated here since they
are set forth in the earlier Board

=22-

decision and in the opinion of the Court of

Claims. As the Board stated previously,
"The crucial proviso about which the dis-
pute arose is Article 6 of both contracts
entitled Price Adjustments and commonly
referred to aS an escalation clause,
which in pertinent part reads:

'(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
whole or in part, to enable the
Contractor to earn a fair and rea~
sonable profit under this con-
tract’.”

The two contracts called for a total of
five destroyers. After they had been
performed appellant made a claim for
price escalation pursuant to Article 6
which was denied by the contracting
officer as not required to enable appel-
lant to earn a fair and reasonable
profit under either contract. In decid-
ing the appeals subsequently taken from
the final decisions of the contracting
officer, this Board sustained appel-
lant's position in part, and allowed
escalation to the extent that appellant
would realize a 5% profit on costs.
Appellant had claimed escalation suffi-
cient to enable it to earn a profit of
9.3% on Contract NObs-3556 and 9.6% on

NObs-3648.

Appellant then filed suit in the
Court of Claims endeavoring to recover
a greater amount of escalation than had
been allowed by the Board. The Court

-23-

reached a result similar to its decision
in Newport News Shipbuilding and Dry
Dock Company v. The United States, 179
Ct. Cl. 97 (1967), 1.e., that the Board
had erred in not determining fair and
reasonable profit in accordance with what
the Court regarded as the applicable
guidelines for establishing profit
objectives set forth in the Armed Serv-
ices Procurement Regulations (ASPR) at
the time the Board rendered its decision.
For the purpose of determining the
Bethlehem appeals, the Court said that
the Board should have applied the so-
called "weighted guidelines" as set
forth in ASPR Part 3-803, effective 15
August 1963. In its Newport News
opinion the Court said that the Board,
in deciding the Newport News appeals
should have applied the so-called "non-
weighted guidelines" set forth in ASPR
3-808 effective January 1960. The

Board had decided the Newport News
appeals in 1962. The “non-weighted
guidelines" were superseded by the
"weighted guidelines" in 1963. The
“weighted guidelines" appear in the
presently effective ASPR 3-808.

In reaching its decision in the
Bethlehem case, the Court discussed the
type of analysis which it thought the
Board might undertake in applying the
"weighted guidelines" to determine fair
and reasonable profit on the basis of
relevant facts. However, the Court did
not purport to determine the amount of
profit to which appellant might be
entitled through application of the
weighted guidelines. In the language
most relevant to resolving the inter-
locutory question now before us, the

-24-

Court said:

"Tt would, of course, be
improper for us to make a determina-
tion ourselves under the "Weighted
guidelines method' for the reasons
explained in Newport News and for
further reason that the record is
inadequate. To use the method one
needs to be well informed. The
Board will no doubt supplement the
stipulation with further evidence.
We do not know whether, by proper
application of the method, plain-
tiff will fare better or worse than
5%. Plaintiff desires to take its
chances under the "Weighted guide-
lines method' and it has a legal
right to do so.

“as we have said, we see no in-
justice or anomaly in applying profit
limitation techniques, as the
Pentagon may have amended and pre-
scribed them from time to time, up
to the date of the determination.
We would presume that changes were
intended to clarify and simplify,
as well as to reduce the impact of
subjective factors in the mind of
the administering official. To
some extent amendments may reflect
earlier departures in actual prac~
tice, to a large extent no doubt
they are the product of experience.
If anything has been slipped in
which would impair vested rights
unless limited to prospective
application only, let it be pointed
out. If we have erred in thinking
the ‘Weighted guidelines method' is
feasible to apply to the instant

a

-25-

contracts, the Pentagon even now
could amend or supplement its regu-
lation, and the Board would be
bound, provided no impairment of
vested rights was attempted. Any
amendment purporting to reaffirm
the position now claimed, that offi-
cials determining a reasonable level
of profit under clauses such as
Article 6(e) are not subject to any
published guidelines whatever 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 administrative
absolution [is] not congenial to
our law-making traditions.’
Gutknecht v. United States 396 U.S.
295, (adecided January 19, 1970),
slip op. at p. 10.

CONCLUSION

"Plaintiff's motion for sum-
mary judgment and defendant's cross
motion for summary judgment are
denied. Further proceedings are
stayed pursuant to Rule 167 for a
period of six months to enable the
parties to obtain further fact
findings in accordance with this
opinion under the applicable guide-
lines in published regulations.
Plaintifff shall advise the commis-
sioner of the status of the case
before the Armed Services Board of
Contract Appeals at intervals of not
less than 60 days beginning with
the date of this order, as pre-
scribed in Rule 167(e) and (f)."

-26-

After the Court's decision was issued,

the Navy applied to the ASPR Committee
for a "deviation" providing for the
inapplicability of the weighted guide-
lines to ship construction contracts
executed prior to 1963 which contain the
profit limitation feature of the escala-
tion clause (Article 6(e)). Eleven such
contracts were listed, including the two
involved in these appeals. In his memo-
randum to the Chairman of the ASPR Com-
mittee dated 22 May 1970, the Navy Legal
Member of the Committee discussed the
Court of Claims and Board decisions in
Newport News and Bethlehem, quoted por-
tions of the Court's Bethlehem decision,
and advanced reasons for the Navy's
position that "the weighted guidelines

were not intended to be retroactive so -

as to affect contracts executed prior
to the promulgation of the Revision of
August 1963."

The ASPR Committee met on 3 June
1970 to consider Case No. 70-2-16
referred to in the minutes of the meet-
ing as "Deviation from ASPR 3-808,
Profit Guidelines." After considering
the memorandum submitted by the Navy
Legal Member, the Committee reached the
following decision as recorded in the
minutes:

"The Committee agreed that manda-
tory application of the weighted
guidelines retroactively to con-
tracts entered into before adop-
tion of such guidelines, partic-
ularly with respect to contracts
containing the . . . escalation
clause, was not intended and a
deviation is not required. The

PO eT ee ey

x=

Committee also agreed that applica-
tion of the weighted guidelines to
pre-existing contracts is not appro-
priate, and on a consensus basis that
it is not feasible, since they
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 negotia-
tion of future contracts. .. ."

The Committee referred, in this connec-
tion, to "Notes and Filing Instructions"
for promulgation of the weighted guide-
lines, which set forth the general
policy reasons for the issuance of these
guidelines, and prescribe mandatory use
of them to all “applicable procurements"
initiated after 1 January 1964.

In the final two paragraphs of the
minutes it is stated that:

"Notwithstanding the foregoing, the
Committee agreed that to the extent
that others may consider the appli-
cation of the weighted guidelines
to be mandatory in such circum-
stances, a deviation is approved.

"In taking this action the Committee
recognized that this would leave for
consideration, as applicable to the
listed contracts, the ASPR 3-808
non-weighted guidelines which pre-
ceded adoption of the weighted
guidelines. The former were not
regarded as effecting any signifi-
cant substantive change.”

The Executive Secretary of the ASPR

-28-

Committee has certified that the nine
Committee members present and voting
agreed unanimously on the above actions.

Under letter to the Board dated 26
June 1970, the Government filed a motion
seeking rulings by the Board:

"s. That the minutes of the ASPR
Committee meeting of 3 June
1970, re Case No. 70-2-16,
be admitted in evidence.

"hb, That by virtue of said action
of the ASPR Committee, the
Board enter an appropriate
order determining that the
procedural non-weighted
guidelines of ASPR 3-808,
rather than the weighted guide-
lines, in the regulation which
will be applied by the Board
to determine whether or the
extent to which, an upward
adjustment in the contract
price under the escalation
clause of the subject con-
tracts is required to enable
the contractor to earn a fair
and reasonable profit under
the contracts."

Appellant opposed the motion and tran-
scribed oral argument was presented by
both sides at a prehearing conference
held on 9 September 1970. Briefs on
issues raised by the motion were filed
by both parties and exchanged on 19
October 1970. Reply briefs were
exchanged on 19 November 1970.

-29-

DECISION

The Court of Claims has remanded
this case to the Board in order that the
parties may “obtain further fact find-
ings," in accordance with the Court's
opinion “under the applicable guidelines
in published regulations." The issue
raised by the Government's motion is the
narrow one of whether we are required by
the Court's decision to make those
"fact findings" through application of
the ASPR weighted guidelines, or whether
we are required by that decision to
apply the non-weighted guidelines as pro-
posed by the Government. The issue does
not involve an exercise of discretion by
the Board as to which guidelines to
apply, but rather involves a determina-
tion of what the Court has ordered it
to do.

Had the Court not said what appears
in the penultimate paragraph of its
opinion, which is the second of the
three paragraphs quoted in full above,
we would have no doubt that the Court
has required us to determine fair and
reasonable profit through application
of the weighted guidelines to the facts
as stipulated or found in a further
proceeding on the merits. Indeed the
Court said in the first paragraph
quoted in full above that "Plaintiff
desires to take its chances under the
'weighted guidelines method' and it
has a legal right to do so." However,
the Court immediately thereafter said
that:

" . . we see no injustice or
anomaly in applying profit

"=

limitation techniques, as the Penta-
gon may have amended and prescribed
them from time to time, up to the
date of the determination... If
we have erred in thinking the
"Weighted guidelines method' is
feasible to apply to the instant
contracts, the Pentagon even now
could amend or supplement its regu-
lation, and the Boari would be
bound, provided no impairment of
vested rights was attempted."

Appellant would have us ignore the lan-
guage just quoted as inconsequential
dicta. However, the Court's order con-
tained in the final paragraph of its
Opinion does not refer specifically to

the weighted guidelines, but instructs

the Board to make findings "in accord-
ance with its opinion under the appli-
cable guidelines in published regulations."
The penultimate paragraph of the Court's
opinion is a part of the opinion in

which the Court has stated that the Board
under certain conditions would be required
to apply guidelines other than those now
set forth in ASPR 3-808. We accordingly
ar2 obliged to accord that paragraph the
legal effect which it merits.

Appellant does not contend that the
non-weighted guidelines are not "“pub-
lished guidelines" in the sense meant by
the Court. However, appellant contends
that the Board should not consider itself
"bound" to give effect to the actions of
the ASPR Committee on the ground that
those actions did not amount to an "amend-
ment" or "supplement" to the weighted
guidelines by the "Pentagon." Appellant
further contends that even if the ASPR

ee ee ee

-31-

Committee's actions do amount to such an
amendment or supplement, the app} ication
of the non-weighted guidelines to the
“instant contracts" would deprive appel-
lant of a "vested right."

In using the term "Pentagon" we
think that the Court was referring to
those Department of Defense officials
authorized to establish or modify provi-
sions of the Armed Services Procurement
Regulations. DOD Instruction No. 5126.3
dated 20 December 1961, which prescribes
the compesition, functions and authority
of the ASPR Committee provides, in Para-
graph 825.50 that:

"A. With respect to matters, other
than major policy matters, as to
which the members are in accord,
action of the Committee shall be
considered as having the final
approval of the Military Depart-
ments and the Defence Supply
Agency without further review by
them . . «+ «”

Similarly, ASPR 1-109.3, applicable to
"Deviations Affecting More than One
Contract or Contractor" provides in
part that:

" . . deviations from this Regu-
lation or a Department of Defense
Directive will not be effected
unless approved in advance by the
Assistant Secretary of Defense
(Installations and Logistics) ;
provided, however, that unanimous
approval by the members of the
ASPR Committee will constitute
approval of the Assistant

a

=-32-

Secretary of Defence (installations
and Logistics) of all matters except
those involving major policy ..--: -

In ASPR 1-109.1, one type of deviation is
described as follows:

"“(yii) when a policy, procedure,
method or practice of conducting
procurement actions of any kind at
any stage of the procurement
process is covered by ASPR, any
policy, procedure, method or prac~-
tice which is inconsistent with
that set forth constitutes a devia-
efoms « & 6”

Moreover, ASPR 3-808.2(b) provides for
exceptions to applicability of the
weighted guidelines. Although ship con-
struction contracts containing the
escalation clause are not listed among
the specific exceptions in subparagraph
(b) (1), subparagraph (b) (2) provides
that:

"Other exceptions may also be made
in the negotiation 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."

We think that the ASPR Committee
possessed ample authority, pursuant to
the above regulatory provisions, to
determine on behalf of "the Pentagon,"
that the weighted guidelines are not

a ee

=33-

"feasible" for application to a retroac-
tive determination of fair and reasonable
profit as required by the escalation
clause, and that the non-weighted guide-
lines should be so applied in lieu
thereof. Appellant has suggested that
such determinations are matters of
"major policy" and that the ASPR Commit-
tee was not empowered to take final
action thereon. However, we are not
aware of any established criteria for
determining what is or is not "major
policy" for the purposes of ASPR Com-
mittee action. Such determinations are
within the purview of policy making
officials of the Department of Defense,
not this Board.

Appellant has also challenged the
propriety of the ASPR Committee actions
on the basis of what appellant regards
as procedural irregularities. Appellant
points to the ex parte nature of the
proceeding, a Feeling on the part of the
appellant that the Committee members
lacked sufficient information to arrive
at a considered decision, and the speed
with which the action was taken. How-
ever, we are not aware of any provision
of law that prohibits ASPR Committee
action on matters brought to its atten-
tion ex parte by a procuring agency.

The adequacy of the information presented
to the Committee, and the speed with
which it reached its decision are matters
within the discretion of the Committee.

Appellant has endeavored to demon-
strate to the Board that the weighted
guidelines are in fact feasible to apply
to the “instant contracts." In a proper
case we might so determine. Norair

-34-

Engineering Corporation, ASBCA No. 10856,
67-2 BCA par. 19. However, the Court
of Claims has left such a determination
to "the Pentagon" as distinguished from
the Board. We are obliged to observe
this distinction in the absence of evi-
dence that the ASPR Committee has acted
arbitrarily in making its determinations.
In this regard, appellant apparently
contends that the ASPR Committee ignored
a definition of "feasible" as including
what is "possible" or "practicable" or
"capable of being done." However, the
same dictionary also defines the word
"feasible" as including what is "suit-
able" or "reasonable." (Webster's New
International Dictionary, Second Ed.,

p. 926.) It is clear that the ASPR
Committee had the latter meaning in mind
when it determined that the weighted
guidelines were not feasible "since

they . . . were intended for the develop-

ment of a profit objective for negotia-
tion of future contracts." Even if it
were indeed "possible" or "practicable"
to apply the weighted guidelines, we do
not regard the Court as having used
"feasible" in the narrow sense proposed
by appellant. And we do not regard the
grounds cited by the ASPR Committee for
its actions as unreasonable.

Appellant has further contended
that the action of the ASPR Committee is
an attempt to overrule the decision of
the Court. In making this contention,
appellant assumes that the Court has
determined that the Board is obligated
to apply the weighted guidelines as
distinguished from any other guidelines
for the purpose of determining the
profit to which appellant is entitled.

EO

-35-

As indicated above, we do not read the
Court's opinion in that manner. The
Court was essentially determining how,
in its opinion, the Board erred in arriv-
ing at its initial result. In effect the
Court was telling the Board that it must
apply the weighted guidelines unless
"the Pentagon" were to determine that
the weighted guidelines are not feasible
and appropriately amends or supplements
its regulations without depriving appel-
lant of “vested rights." If “the Penta-
gon" were to acomplish such actions, the
Board would be "bound" to apply the
amended or supplemented regulations. It
might be contended that the ASPR Commit-
tee went beyond an "amendment" or "sup-
plement" when it determined that the
non-weighted guidelines should be made
applicable to determining profit under
contracts of the kind involved here.
However, from a reading of the last
sentence of the penultimate paragraph of
the Court's opinion, it is apparent that
the Court was not particularly concerned
with how one might characterize the
action taken by "the Pentagon,” but was
insistent upon the applicability of
"published guidelines" to the resolu-
tion of this controversy. From its
consideration of the Newport News casr,
the Court was well aware of the non-
weighted guidelines. And in its motion
for summary judgment, the plaintiff
(Bethlehem) further called the Court's
attention to the non-weighted guidelines
as well as to the weighted guidelines.
In this connection it is noteworthy that
in none of the papers which it filed
with the Court did Bethlehem specifi-
cally ask the Court to order application
of the weighted guidelines, as distin-

-36-

tinguished from any other guidelines which

Department of Defense officials might
regard as more suitable.

Appellant's final principal conten-
tion is that if we give effect to the
action of the ASPR Committee we would be
depriving appellant of a vested right, a
consequence not permitted by the Court.
Appellant is saying in effect that it has
a vested right to application of the
weighted guidelines. Both parties have
cited a variety of cases which bear on
the question of what might be character-
ized as a “vested” right in circum-
stances not analogous to the present con-
troversy, e.g., Greene v.- United States,

376 U.S. 149 (1964); Thorpe v. Housin
268 T1369) .

Authority of Durham, U.S.

The contracts involved in these appeals
do not provide for the calculation of
fair and reasonable profit in accordance
with the weighted guidelines or any
other ASPR profit guidelines. Appel-
lant's entitlement to the application of
"guidelines" springs from the direction
of the Court of Claims in remanding this
matter to the Board. In Lockheed Air-
craft Corporation v. The United States,
Ct. Cl. No. 46-65 (Decided May 15, 1970),
the Court characterized the ASPR profit
guidelines discussed by it in Newport
News and Bethlehem as ". . . changes in
procedural requirements and standards
during the determination of a claimant's
substantive rights." (Slip Op. P- 9;
emphasis by the Court)

Appellant correctly points out that
in Lockheed, the Court characterized its
Newport News and Bethlehem decisions as
favorabie to, or for the benefit of the

ale ee oUt eS Ne

Pe ee etal

o37~=

claimant. (See p. 9, text and footnotes
7 and 9) Appellant contends that unless
the weighted guidelines are applied it
would be deprived of the profit to which
it believes itself entitled. However,
there is no indication that in Lockheed,
the Court was referring to the applica-
tion of one set of ASPR profit guide-
lines as distinguished from another.

In Bethlehem, the Court expressed its
awareness that the profit to which appel-
lant might be found entitled on applica-
tion of even the weighted guidelines
could be less than the profit originally
determined by the Board. What was
“favyorable" to appellant in the Bethlehem
decision was the Court's determination
that "guidelines" must be appiied- to
determining profit, as distinguished

from no guidelines at all.

In considering the "feasibility" of
the weighted guidelines the ASPR Commit-
tee stated that they "effected a sub-
stantive change in the standards exist-
ing at the time the contracts were
entered into... ." (Emphasis supplied)
However, we have no basis to conclude
that the ASPR Committee was attempting
to dictate the ultimate result which the
Board might reach in further proceedings
on the merits. As stated previously,
the Court left the determination of
feasible standards to the authorized
Department of Defense policy makers.
Appellant points to indications that the
actions of the ASPR Committee were spe~
cifically intended for application to
the Board's resolution of these appeals,
even though contracts not involved here
were also considered. But such specific
applicability was foreseen by the Court

-38- 39

when it referred to the possible infeas-
ibility of applying the weighted guide-
lines to the “instant contracts." The
non-weighted guidelines are published
guidelines of general applicability prior
to 1964. They were regarded by the Court
as acceptable for resolution of the
Newport News controversy. The Court did
not determine that appellant was entitled
to any particular profit, and we accord-
ingly do not regard the application of

this interlocutory ruling. If appellant
does not intend promptly to make such
application, the Board will issue instruc-
, tions to the parties regarding further
proceedings on the merits of these
remanded appeals.

et DAP Ode wierd

Dated 23 December 1970.

the non-weighted guidelines to resolu- : Daniel M. Arons
tion of the instant controversy as impair- DANIEL M. ARONS
ing appellant's vested rights in the Member of Division No. 5
sense meant by the Court. Armed Services Board of

Contract Appeals

We conclude that we are bound pursu-
ant to the Court's directive, as imple-

mented by the ASPR Committee, to apply I Concur I Concur
the non-weighted guidelines, and not the anne
weighted guidelines, in determining the = Lee Bird William J. Ruberry
profit to which appellant may be entitled. Ra od —_ WILLIAM J. RUBERRY
Appellant has contended that such a +" Division No. 5 Member of Division No. 5
course of action would be improper for pe wes yo Board of Armed Services Board of
a number of reasons. We have consid- ontract Appeals Contract Appeals

“
ered appellant's objections in the con I Concur I Concur

text of determining the manner in which
the Court has directed us to proceed.
In opposing the Government's Motion Richard C. Solidakke

appellant has in large part taken issue Harris J. Andrews, Jr.

with the propriety of the course of RICHARD C. SOLIDAKKE, HARRIS J. ANDREWS , Jr.,

Chairman Vice Chairman

action suggested in the penultimate Armed Services Board of Armed Services Board of
aragraph of the Court's o imion. Our

paragrap P Contract Appeals and Contract Appeals and

decision herein would, of course, be
subject to change upon order or clari-
fication rendered by the Court.

Member of Division No. 5 Member of Division No. 5

For the foregoing reasons the Govern-
ment's Motion is granted. Appellant is
ordered to inform the Board within 30
days as to whether it intends to make
application to the Court for review of

-40-

I certify that the foregoing is a
true copy of the opinion and decision
by the Armed Services Board of Contract
Appeals in ASBCA Nos. 10316 and 10317
(Reinstated), appeals of Bethlehem Steel
Corporation, rendered in conformance
with the Board's Charter.

Dated: 13 January 1971.

George L. Hawkes

GEORGE L. HAWKES, Recorder
Armed Services Board of
Contract Appeals

o4le
°
IN THE UNITED STATES COURT OF APPEALS

BETHLEHEM STEEL CORPORATION
Vv.

THE UNITED STATES

Before LARAMORE, Acting Chief Judge,
DURFEE, DAVIS, COLLINS, SKELTON and
NICHOLS, Judges.

ORDER

This case comes before the court on
plaintiff's motion, filed May 10, 1971, for
an order terminating stay and for other
relief. Upon consideration thereof,
together with the opposition thereto,
without oral argument,

IT IS ORDERED that plaintiff's said
motion for an order terminating stay and
for other relief be and the same is denied.

BY THE COURT
JUDGE LARAMORE
Acting Chief Judge

JUL -1 1971

-42-

ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeals of --

)
)

Bethlehem Steel Corporation ) ASBCA Nos. 10316
) and 10317

Under Contract Nos. NObs-3556)
and NObs-3648)

(Reinstated)

APPEARANCES FOR THE APPELLANT:

E. J. O'Brien, Esq.,
Assistant General Counsel
Bethlehem Steel Corporation

Of Counsel:

George Vradenburg, III, Esq.
New York, New York

APPEARANCES FOR THE GOVERNMENT:

Samuel Pinn, Jr., Esq.
Counsel for the Naval Ship
Systems Command
Morris Amchan, Esq.
Assistant Counsel

OPINION BY MR. ARONS

History of the Dispute.

These appeals have been reinstated
following the decision of the United States
Court of Claims in Bethlehem Steel Corpora-
tion v. United States, 191 Ct. Cl. I41
(1970), in which the Court held that the
Board, when it initially decided these
appeals, erred in failing to consider the
provisions of the Armed Services Procure-

-43-

ment Regulation (ASPR) which the Court regarded

as applicable to resolving the matters in dis-
pute. In these appeals appellant seeks to
recover the amount of labor and material cost
escalation said to be due pursuant to Article
6 of the Special Provisions of the above
contracts, under which appellant built five
destroyers for the Navy at its shipyard
located in Quincy, Massachusetts. (Appellant
is sometimes referred to herein as "Quincy.")
Under Article 6(f) of the Special Provisions
appellant warranted that its price proposals
and other data submitted in connection with
negotiation of the contract,

". . . exclude any allowance for con-
tingencies to cover the possibility of
increased costs of performance for which
provision for price adjustment is made
in this Article."

In exchange for this warranty, other para-
graphs of Article 6 provided for adjustment
in the contract price to take account of
inflation in labor and material costs during
performance. However paragraph (e) of that
Article further 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 Con-
tracting Officer finds that such adjust-
ment is not required, in whole or in
part, to enable the Contractor to earn
a fair and reasonable profit under this
contract,"

Delivery of the last of the five ships
was accomplished in February 1958. On
5 January 1960 appellant submitted its formal
Claims for accrued labor and material escala-
tion, computed in accordance with the formula

-44-

specified in Article 6. Under NObs-3556 appel-
lant claimed a total of $3,347,500. Under
NObs~-3648 appellant claimed a total of
$2,404,900. Without escalation appellant had
earned profits of 3.0% under NObs-355€, which
covered three vessels, and 2.35% under NObs-
3648, which covered two vessels, computed as
percentages of cost. With full escalation
appellant would recover profits of 9.3% under
NObs-3556 and 9.6% under NObs-3648, computed
as percentages of cost.

In final decisions, both dated 18
August 1964, the contracting officer denied
appellant's escalation claims, after deter-
mining, pursuant to Article 6(e), that no
upward adjustment in the contract prices on
account of labor and material escalation was
required to enable appellant to earn a fair
and reasonable profit under either contract.
In making his determinations the contracting
officer excluded from the cost based used in
computing the profit percentages certain
costs which he did not consider allowable
under the contracts. By virtue of these
exclusions the contracting officer determined
that appellant had earned, without escalation,
a profit of 4.6% of contract costs under
NObs-3556, and a profit of 5.0% of contract
costs under NObs-3648.

Appellant then appealed to this Board
pursuant to the Disputes clause in both con-
tracts. In a decision dated 16 June 1966
(66-1 BCA par. 5639) the Board sustained
the appeals in part. It determined that the
contracting officer's cost disallowances were
improper, and that appellant was entitled to
escalation sufficient to enable it to earn a
profit of 5.0% of costs under both contracts,
with the cost amounts previously disallowed
included in the cost base. Under the Board's

-45-

decision, appellant was allowed to retain a
$1,000,000 partial escalation payment
($500,000 under each contract) which the
contracting officer had approved in December
1959. Appellant was allowed a further
$564,151 under NObs-3556 and $376,028 under
NObs-3648. Appellant was thus allowed total
escalation of $1,064,151 under NObs-3556 and
$876,028 under NObs-3648. ©

Appellant then brought an action in
the Court of Claims seeking to recover the
balance of the escalation claimed. In its
decision, dated 20 March 1970, the Court did
not allow any further escalation. However,
it followed the precedent which it set in
Newport News Shipbuseis & Dry Dock Co. v.
Unite tates, ae om C1967); a case
involving the same Article 6(e), and held
that in determining a fair and reasonable
profit under appellant's contract, the Board
erred as a matter of law in not resorting to
profit determination techniques or guidelines
prescribed by applicable published regula-
tions. In the original proceeding before
this Board, neither party relied on profit
guidelines prexucribed in ASPR or elsewhere,
and the Board did not specifically consider
any regulatory guidelines in determining the
profit to which appellant was entitled. No
such guidelines were in effect in 1954, when
NObs-3556 and -3648 were awarded. However,
the Court decided, as it did in Newport News,
that a proper determination of fair and
reasonable profit required consideration of
the applicable profit guidelines and sus-
pended proceedings to enable the parties to
obtain further fact findings in accordance
with its opinion. The appeals were thereupon
reinstated by this Board.

After the appeals were reinstated the
parties engaged in a preliminary controversy

-46-

over which set of ASPR profit guidelines
should be applied in deciding the appeals

on their merits. On the basis of certain
language in the Court of Claims' decision,
appeliant contended that the Court of Claims
required application of the so-called
"Weighted Guidelines" set forth in ASPR
Section 3-808 effective 15 August 1963. The
Government maintained that the Court did not
require use of the Weighted Guidelines,

but instead, allowed Department of Defense
policy makers to establish the applicability
of other guidelines if the Weighted Guide-
lines were not considered feasible for reso-
lution of this dispute, provided that no
impairment of vested rights was attempted.
In June 1970, the authoriZed Department of
Defense policy making body, the ASPR Com-
mittee, determined that the so-called "non-
weighted guidelines," set forth in ASPR
Section 3-808 effective January 1960 should
be considered applicable. The application
of the non-weighted guidelines had been
required by the Court for resolution of

the Newport News litigation. The Government
accordingly urged that the non-weighted
guidelines should similarly be applied for
disposition of the present appeals. For

the reasons stated in our decision on the
guidelines controversy, dated 23 December
1970 (71-1 BCA par. 8640), we agreed with
the Government.

Appellant then filed a motion in the
Court of Claims seeking termination of the
suspension of proceedings and other relief.
Appellant contended that the Board's decision
on the guidelines controversy was erroneous.
In an unpublished order dated 1 July 1971,
the Court denied appellant's motion without
stating any view as to which set of guide-
lines should be applied in deciding these
appeals on their merits. Our disposition

Ee

a

=

-47-

of these appeals herein is accordingly gov-
erned by application of the non-weighted
guidelines to the relevant facts. By agree-
ment of the parties the specific text of the
guidelines under consideration is that which
appeared in ASPR Section 3-808 as of November
1962.

With the permission of the Board,
appellant submitted for the record an offer
of proof as to profit it considers itself
entitled under application of the weighted
guidelines. Appellant's offer of proof is
not in evidence. With respect to appellant's
insistemuce upon application of the weighted
guidelines we note the memorandum dated 13
June 1963 by the Assistant Secretary of
Defense for Installations and Logistics
which indicated that the substitution of
the weighted for the non-weighted guidelines
was intended to quantify existing policy but
not to introduce any drastic changes. That
memorandum was quoted from extensively in our
decision in Newport News Shipbuilding & Dr
Dock Company, ASBCA No. 6565 (Reinstated) ,

-l BCA par. 8705, the decision on the
Newport News appeal which followed the
decision of the Court of Claims in Newport
News Shipbuilding and Dry Dock Company v.
United States, supra.

To a considerable extent the facts
relevant to deciding these appeals have
already been recited in the Board's original
decision and in the opinion of the Court of
Claims. In the original proceeding before
this Board no evidentiary hearing was held;
but the parties executed a lengthy stipula-
tion of facts which was reproduced in toto
in the Board's decision. Several exhibits
were attached to the stipulation. After the
appeals were reinstated, and following reso-
lution of the guidelines controversy, a

-48-

seven-day evidentiary hearing was held and
numerous additional documents, obtained through
mutual discovery, were submitted for the record.
The record now consists of the materials orig-
inally before the Board, which were also before
the Court, supplemented by the hearing tran-
script ana additional documents submitted fol-
lowing reinstatement of the appeals.

At the hearing in the reinstated appeals |
the Government stated that in its view the :
amount of escalation allowed by the Board in
its original decision resulted in a profit to
appellant which was within a fair and reason- '
able range upon application of the non-weighted
guidelines. Accordingly the Government does
not now contend that the amount of escalation
previously allowed by the Board should be
reduced. (Tr. 1-111, 2-7; Govt. Brief, p. 8)

The amount now in dispute is thus determined
as follows:

NObs- 3556 NObs-3648
(ASBCA No. (ASBCA No.
10316) 10317)

Accrued escalation $3,347,000 $2,405,000

Escalation allowed
per Board's

original decision 1,064,151 876,028
Difference now

claimed $2,282,849 $1,528,972
Total claimed .....-. oceeee cooce SSebaneeen

The Guidelines.

Ae A) ee wal

ASPR Section 3-808, entitled "Profit
or Fee," in effect as of November 1962,
included nine individual guidelines. They

-49-

were prefaced by the following introductory
paragraphs:

"3-808.1 General. A fair and rea-
sonable provision for profit or fee
cannot be made by simply applying a
certain predetermined 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 considering the factors
set forth in this 3-808. Therefore,
where a fee is involved and it is neces-
sary to determine the percentage rela-
tionship between the fee and the esti-
mated cost of the contract in order to
comply with administrative and statutory
limitations on fees for cost--reimburse-
ment type contracts, the percentage shall
be determined only after the dollar
amount of the fee has been established
for negotiation purposes.

"3-808.2 Factors for Determinin
Fee or Profit. The factors set forth

in subparagraphs (a) through (i) below
should be considered in determining
profit or fee in all contracts, whether
for supplies or services; for construc-
tion work; or for experimental, develop-
mental, or research work, and whether of
the fixed-price type or of the cost-
reimbursement type unless otherwise
specified in the particular factor.

All of the following factors, as set
forth in (a) through (i) below should

be evaluated in the light of the basic
policy set forth in 3-801.1 which pro-
vides that supplies and services shall
be procured from responsible sources

at fair and reasonable prices calcu-
late@ to result in the lowest overall
cost to the Government:

* * *

-50-

We now turn to consideration of the individ-
ual guidelines, as applied to the relevant

facts. The order of the following discussion

reflects the order in which the guidelines
are set forth in ASPR Section 3-808.

Factor (a) - Effect of Competition.
This factor is stated as follows:

"When competition is 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.
When effective competition is lacking,
and in ali cases where cost analysis is
performed in accordance with 3-807.2(c)
the estimate for profit, target profit
or fee, or the proposed fixed fee
should be analyzed in the same manner
as all other elements of price, eval-
uating the factors set forth in this

paragraph 3-808." 1/

The DD 931 Program.

The destroyers built by appellant
under NObs-3556 and NObs-3648 were five
of eighteen destroyers in the DD 931 class.
Table I which follows indicates the pattern
in which contracts were awarded for ships
within that class:

1/ ASPR 3-807.2(c) prescribes techniques
for performing a cost analysis. Neither
party has relied on this subparagraph and
we do not consider it material to the dis-
position of these appeals.

:

Ne ee

TABLE I

Date of Award

Contract Number

Contractor

Ship (Hull No.)*

15 December 1952

NObds-3371
RObs-3556

NObs -3615

Bath Iron Works

DD 931, 932, 933
DD 936, 937, 938

DD 940, 941, She

3 February 1954

Bethlehem Steel Corp.

1954

30 July

Bath Iron Works

-5l1-
tr wo
gq
si:
2 8
3%
p
S
% x
i 5
L i.
S$ 3
x a
5
a3
i
A &

27 January 1956

27 January 1956

NOds -3761

Ingalls Shipbuilding

DD 948, 9h9

NObs-3762

Puget Sound Bridge and

DD 950, 951

Dredging Co.

* No contracts were awarded for hull mumbers 934-5 and 939.

@82-

Preparation of Proposal.

As indicated by Table I, NObs-3556
required appellant to build the DD 936, DD
937 and DD 938 which constituted the second
group of three ships in the DD 931 class.
The requests for proposals ultimately
leading to award of NObs-3556 were issued
by the Navy Bureau of Ships on 21 October
1953 and 15 January 1954. Eight shipyards
were invited to submit proposals. Of those
eight, the following yards submitted pro-
posals in the amounts indicated (rounded
off to the nearest $1000):

TABLE II
Bath Iron Works $15,492,000 each of thre 4s
Newport News 16,800,000 " S "
Bethlehem-Quincy 18,674,000 " " "
New York Shipbuilding 19,234,000 " " "

These amounts did not include contingencies
for inflation. (Exh. A-2) Appellant also
submitted an alternative proposal in the
amount of $15,559,000 per ship conditioned
upon award to it of a contract for the air-
craft carrier CVA-61. The contract for the
CVA-61 was awarded to Newport News on 3
February 1954, and was the contract out of
which the Newport News litigation arose.
Appellant considered its proposal for the
CVA-61 high and noncompetitive since a
carrier of that size could not be entirely
built within the confines of the Quincy
yard. (Tr. 2 - 59-69%) Appellant's alter-
native proposal for the DD 936-8 was not
considered by the Bureau of Ships.

At the time proposals were submitted

-53-

with respect to the DD 936-8, the prospects
for future orders placed with American ship-
yards were considered bleak. (Exh. A-7) As
a result of this business outlook the com-
petition for available orders was intensi-
fied. (Tr. 2-19, 2 - 49-50) When appellant
prepared its proposal it was aware of the
workloads in other yards. Most signficantly
it was aware that Bath Iron Works (hereafter
"Bath") had been awarded NObs-3371, the con-
tract which covered theDD 931-3. In appel-
lant's view Bath had a considerable competi-
tive advantage in bidding on the DD 936-8 by
virtue of its experience under NObs-3371
involving similar ships.

Bath had submitted the low proposal
for the DD 931-3 and was awarded NObs-3371
on 15 December 1952 at a price of $15,425,000
per ship subject to escalation and excluding
the cost of design work. As the "lead yard"
for the DD 931 class of ships Bath, in pre-
paring its DD 936-8 proposal, did not have
to include the cost of jigs, fixtures,
scaffolding, etc. acquired for performance
under NObs-3371 and which could be reused
in constructing the DD 936-8. Furthermore
in performing under NObs-3371, Bath's labor
force acquired certain skills in construct-
ing the first three DD 931 class ships
which could be readily employed in the con-
struction of follow-on ships within the
same class. Bath thus had the advantage
of a "learning curve" effect in preparing
its proposal for the DD 936-8. (Tr. 1-53,

3 - 120-3) Furthermore delivery of the first
of the three NObs-3371 vessels was not
required until 1 November 1955. (Exh. G-6)
Appellant was thus aware that in computing

a per ship price for the DD 936-8, Bath was
able to take its work under NObs-3371 into
account in allocating fixed overhead.
Appellant was similarly aware that Newport

-54-

News, another of its competitors, would
most probably receive award of the con-
tract for the CVA-61, which would permit
a lower per ship overhead allocation by
Newport News in computing its price for
the DD 936-8.

In contrast with Bath and Newport
News, appellant's workload was rapidly
dropping off. Delivery of vessels then
on order was to be completed by October
1954. Without new orders, the Quincy
yard would have no shipbuilding work as
of October 1954. Appellant estimated an
irreducible overhead of about ten million
dollars a year for maintaining the Quincy
yard in a state of readiness. (Tr. 1-23)
Construction of the DD 936-8 would take
up approximately five percent of the
capacity of the Quincy yard. Appellant
did not anticipate other future business
which might absorb part of the fixed over-
head. Accordingly, in preparing its pro-
posal for the DD 936-8, appellant included
overhead dollars of $4,901,000 per ship,
or 107% of direct labor. (Exh. A-2) In
contrast, the proposal submitted by Bath
for the DD 936-8 included overhead at 97%
or $2,667,136 per ship (Exh. A-2). Fur-
thermore, the overhead dollars included
in appellant's proposed price for the DD
1936-8 represented only about two-thirds
of the total overhead that would have to
be allocated to the DD 936-8 if no other
business materialized during the construc-
tion period. In an effort to be competitive,
appellant included in its proposed price
overhead for only the first 27 months of
an anticipated 38-month construction
period. (Tr. 1-22, 24; ASBCA No. 10316,
Rule 4, Tab 2) From the evidence presented
we find that the disparity between the
Bath and Quincy prices for the DD 936-8

Se eee ed

@8S8e

was principally attributable to the compara~
tively large amount of overhead which appel-
lant considered as having to be absorbed by
the construction of the DD 936-8. We fur-
ther find that appellant's proposed price
was competitive in the sense that its
preparation took into account appellant's
dire need for new business, the lead yard
advantage gained by Bath under NObs-3371,
and the relatively favorable overhead pro-
jections prevailing for Bath and Newport
News.

Award of NObs-3556.

During the negotiations which fol-
lowed the submission of its proposal for
the DD 936-8, appellant informed the Navy
representatives that due to the absence
of orders for future ship construction,
the closing of the Quincy yard was imminent.
The Navy representatives offered to award
appellant the contract if appellant were
to reduce its proposed price by one million
dollars per ship. Appellant agreed to the
concession and was awarded the contract at
a price of $17,674,000 per ship. At this
price appellant's estimated profit was
$698,000 or about 3.7% of cost. (Exh.

A-2) In appellant's view it was con-
fronted with the choice of accepting the
award on the terms offered by the Navy or
closing the Quincy yard. (Tr. 1-34)

Even with the price reduction, the Navy
agreed to pay appellant, under the con-
tract, a price for the three ships which
was $6,546,000 greater than the price
proposed by Bath. From the evidence pre-
sented we find that during the negotiations
there was no specific discussion relating
to the profit, if any, which appellant
might reasonably earn under the contract,
nor was there any specific discussion

-56-

relating to the amount of escalation which
appellant might recover under Article 6.

The basis for the Navy's decision
to award the contract for the DD 936-8 to
appellant was explained in hearings con-
ducted on 26 February, 22 March and 29
March 1954 before the U.S. House of Repre-
sentatives, Committee on Armed Services,
Subcommittee on Defense Activities. Navy
representatives who testified at those
hearings included Mr. Robert B. Anderson,
then Secretary of the Navy, and Rear Admiral
Wilson D. Leggett, Jr., then Chief, Bureau
of Ships. On the basis of their testimony
we find that the Navy awarded NObs=3556 to
appellant in order to assure the continued
operation of the Quincy yard as a part of
the mobilization base for ship construction.
In making this decision, the Navy recognized
that appellant's Central Technical Depart~-
ment, located at the Quincy yard, included
personnel experienced in ship design and
construction, the dissipation of which would
be detrimental to the national security.
The maintenance of the Central Technical
Department contributed in some measure to
appellant's overhead disadvantage vis-a-bis
Bath. (Tr. 5-12; 13; Exh. A-1l, A-2) The
Navy also recognized that the Bethlehem
yards represented about sixty percent of
the Navy's commercial mobilization poten-
tial for surface combatant types of escort
size vessel and above. In deciding not to
award the contract to Bath, the Navy con-
sidered that as of 1 January 1954, employ-
ment at Bath was rising and that Bath had
work on its books until 1956. Moreover,
in deciding not to award the contract to
Newport News, which had submitted the
second lowest proposal, the Navy took into
account the contemporaneous award of the
carrier CVA-61 (RANGER) to that yard.

@8Jo

In awarding the DD 936-8 contract to appellant
the Navy was adhering to a well-established
policy of allocating ship construction work
to various yards in order to maintain a bal-
anced and widely dispersed mobilization
potential.

Award of NObs-3648.

By letter dated 29 July 1954, the
Bureau of Ships requested appellant to submit
a proposal for the construction of the DD 943
and 944. Appellant submitted a proposal in
the amount of $17,071,500 per ship, about
$600,000 per ship lower than that price
established in NObs-3556. The difference
was attributable to the learning curve
effect on direct labor output which was
anticipated by appellant. (Tr. 2 - 109-10)
For the DD 943 and 944 appellant estimated
1,762,000 labor hours per ship, while NObs-
3556 was based on a labor estimate of
1,903,000 hours per ship. Appellant's pro-
posal included $4,450,000 for overhead, or
104.4% of direct labor. (Exh. A-1) No
other proposals were solicited or submitted
with respect to the DD 943-4. At the time
appellant was invited to submit a proposal
for construction of the DD 943-4, the con-
struction of the DD 940-2 was allocated to
Bath under NObs-3615 at a price of
$15,492,320 per vessel, the price per ship
in the Bath proposal for construction of
the DD 936-8. (Tr. 6-35; Ex. A-11)

In negotiations which followed the
submission of appellant's proposal, Navy
representatives maintained that appellant
had overstated its overhead by failing to
take adequate account of the nearly con-
temporaneous construction of the DD 936-8.
The Navy offered a price of $16,250,000
per ship based upon estimated overhead of

-58-

$3,780,000, or 88.7% of direct labor. (Exh.

A-1) Appellant accepted this offer, and
NObs-3648 was awarded to appellant at that
price. A breakdown of the contract price
shows an estimated profit to appellant of
$698,000 per ship, or 4.5% of cost without
escalation. Although appellant was the
only source solicited for the DD 943-4, its
proposal, and the contract price agreed
upon, reflected the competitive considera-
tions and the need for additional business
which were taken into account in the prep-
aration of its previous DD 936-8 proposal.
However, the award was again made to appel-
lant pursuant to the Navy policy of allo-
cating ship construction work to various
yards.

Award of Contracts for DD 945-51.

The three contracts covering these
seven vessels were all awarded following
a single solicitation. As indicated above
in Table I, NObs-3760, covering the DD 945,
946, and 947, was awarded to Bath. Accord-
ing to a Navy recap of proposals received,
prepared prior to award, the following
prices subject to escalation were proposed
for each of three vessels (Exh. G-10):

TABLE III
Bath $16,280,070
Bethlehem - Quincy 16,440,000
Bethlehem - Staten Island 16,580,000
Bethlehem - San Francisco 16,784,000
Ingalls 16,528,000
Newport News 16,950,000

-59-

According to the Bethlehem - Quincy proposal
dated 28 December 1955 (Exh. A-25), appel-
lant's proposed price subject to escalation
for each of three vessels was $16,047,000.
However, construction of the DD 945-951
entailed some significant revisions to
working plans then being used for construc-
tion of previous DD 931 class vessels. The
Bethlehem - Quincy proposed price did not
include the cost of such plan revisions
which appellant proposed to accomplish as
design agent for all yards receiving awards
for construction of the DD 945-51. Appellant
estimated the cost of design services, includ-
ing fee to be $834,600.

The evidence does not clearly indicate
the reason for the difference between the
ship construction price shown in appellant's
proposal and appellant's price as shown in
the Navy recap. However, the Navy recap was
prepared for the purpose of comparing the
various proposed prices. Under the terms
of the Invitation for Bids, proposed ship
construction prices were to include the cost
of plan work. (Exh. G-20) The internal
Navy memorandum prepared as a basis for
making the award (called a business clearance)
indicates that, for evaluation purposes,
the cost of plan work was added to the pro-
posals submitted by Bethlehem - Staten
Island, and Bethlehem - San Francisco.

(Exh. G-20) On the basis of these adjust-
ments we infer that the Bethlehem - Quincy
price, as shown on the Navy recap, also
includes an adjustment for the cost of plan
work in order to render that price compara-~
ble to the prices submitted by other yards.

Also as indicated in Table I above,
NObs-3761, covering the DD 948 and 949,
was awarded to Ingalls Shipbuilding Corpo-
ration; and NObs-3762, covering the DD 950

-60-

and 951, was awarded to Puget Sound Bridge
and Dredging Company. According to the Navy
recap of proposals received (Exh. G-10), the
following prices subject to escalation were
proposed for each of two vessels:

TABLE IV

Bath Iron Works $17,152,080
Bethlehem - Quincy 16,769,500
Bethlehem - Staten Island 17,377,000

Bethlehem - San Francisco 16,784,000

Ingalls Shipbuilding 16,873,440
Puget Sound 16,800,000
Newport News 17,546,000

The Bethlehem - Quincy proposal (Exh. A-25)
quoted a price of $16,600,000 for each of
two vessels. We again infer that for pur-
poses of evaluation the Navy adjusted the
Bethlehem - Quincy price to take account

of the cost of plan work.

The contract prices subject to
escalation for the DD 945-51 were as follows:

a6j@

(Exh. G-20), we find that in making these
awards, the relative proposed prices were
taken into account, but that the controlling
consideration was the Navy policy of distrib-
uting work among various yards and geographic
locations.

In awarding contracts for the DD 945-
51, the Bethlehem - Quincy proposal was not
considered at all. At the time the Navy
solicited proposals for these destroyers,
it also solicited proposals for two frigates,
DL 7 and 8. Ships in the PL class were
larger and more powerful than the DD 931
class destroyers. (Tr. 3-64, 141) Appellant
submitted the lowest proposal for the DL 7
and 8. Bath already had a letter contract
for the DL 6, but the price proposed by Bath
for the DL 6 was considered to be high.
Accordingly, appellant was requested to
submit a proposal for the DL 6. A compari-
son between the Bath and Quincy proposals
indicated that Bath's proposed price,
including plans for the DL 6, 7 and 8, was
approximately $16,000,000 higher than the
price proposed by Quincy. Accordingly the
letter contract with Bath for the DL 6 was
terminated and appellant was awarded NObs-
3759 for the construction of the DL 6, 7
and 8. In the Navy's view, the award of
this contract to appellant precluded con-
sideration of appellant's DD 945-51 pro-

TABLE V posal. Appellant ultimately suffered a
loss of $3,990,000 under Nobs-3759. (Exh.

NObs-3760 (DD 945, 946, 947)- $16,223,000 per ship A~6; Tr. 4-53)

Escalation Allowed Under Contracts
for DD 931 Class Vessels.

NObs-3761 (DD 948, 949) - $16,225,000 per ship

NObs-3762 (DD 950, 951) - $16,445,000 per ship From the evidence presented we

have constructed the following table

On the basis of the above tabulation of pro~ which indicates the amount of escalation

posals and the business clearance document

' '
' ‘
' '
1
' '
' punos
T'OT | 06S‘ST2*E viv | tunfogot2 | 9° | 6TT*SET‘T 60LSLLL'TE | 33mg | T-056
(ssOT
lt°2 $§ 2e0%tsl TIV 612° LEQS2 (4°S) § Lnye*ngg*T) 6E9ESOHE | STTEZUI | 6-QrO6
' '
- | 2€°St | goeszoL'9 cfzzeg «| GgE* TESST «| 6TET t B46 *ELOTO 250° 9EL° Eh uyea | L-Sh6
! ' '
© S 1 sentts9‘t | gzof9lg | CoO*Son‘z | SErz + LOWS Shb ool‘gzo"ce | Aournd | t-fH6
2S°9T 000f E20 L TOU gig‘ Logf2e | 2es°9T 000% €L0£ 2 OLL‘ yIg* 2h uaa | 2-0t6
‘ '
S 1 o€z*og9f2 TST GOS TH | OOOS LHE*E € + 6L0°S6S*T oog*nozseS | AouTMy | g-9t6
'
2°st : 619' 069° 93 TIV neg‘ LLOSE$ | SES GEL‘ Z19°E$ ETE £ HG Eng uzyeg | €-TE6
' {
9809 1° 4uy 28TTOd 4509 1° my IBTTOG
jog jo%t
UoT4ZUTeoOsSyZ pe“OTTy | uoTpzeTeosy UOT RET OL" GOTPONAZSUOD prez "ON dd
TIWV FJOId uoTzyeTeosy | = penszooy aLojog YTIMd | JO 30D Tengoy
ooo nt ot maiinacmaemnaaaamatshcansittne - = ee eee
U
N
ie)
'

allowed ander each of the contracts for
DD 931 class vessels and the impact of
the escalation allowances on profits

earned under those contracts:

-6§4-

The escalation allowances shown above were
made by the contracting officer under NObs-
3371 (DD 931-3), NObs-3760 (DD 945-7),
NObs-3761 (DD 948-9), and NObs-3762 (DD
950-1). The escalation allowance shown

for Quincy reflects the result of the
Board's original decision in these appeals.

_ Where escalation was allowed by the
contracting officer, the reasons for the
allowance were stated in a business clear-
ance document. The allowance of full
escalatior under NObs-3371 was based in
large measure upon the fact that Bath had
submitted the lowest competitive price.
(Exh. A-l4a) Similarly the allowances of
full escalation under NObs03761 (DD 948-9)
and 3762 (DD 950-1) were justified on the
ground that these contracts were awarded
on the basis of competition. (Exh. A-18,
A-20) The allowance of partial escalation
to Bath under NObs-3760 was also justified
on the ground that the award was obtained
through competition. (Exh. A-16) Escala-
tion was denied under NObs-3615 on the
ground that payment of escalation would
result in an unreasonably high profit to
Bath. (Exh. A-15, G-14) Bath withdrew
its escalation claim under NObs-3615 on
26 August 1960, when it became aware that
partial escalation would be allowed under
NObs-3760 (DD 945-7). Although factors
such as competition, risk and performance
were considered in determining the escala-
tion allowed in 1960 under NObs-3760,

3761 and 3762, there is no evidence that
profit guidelines prescribed by ASPR were
specifically taken into account.

CONCLUSIONS UNDER FACTOR (a)

In our decision on the reinstated
Newport News appeal we found as a fact

— atte deities hia 3b

-65-

that "the award of the RANGER contract was
the result of ‘adequate and effective’ com-
petition." This finding was based in large
part on evidence establishing that the award
was made to Newport News because the differ-
ence between its proposal and the next
higher proposal (that of Bethlehem ~- Quincy)
was approximately $28,000,000. On the

basis of this finding we stated the follow-
ing conclusions as to the application of
Factor (a) (71-1 BCA at 40,453-4):

"Wwe have found that competition in
this instance was adequate and effec-
tive within the meaning of Factor (a),
and are of the opinion that such being
the case, attendant extrinsic condi-
tions, efficiencies or inefficiencies,
and agreed contract conditions such as
the present provisions for escalation,
must be allowed to operate without the
intrusion of judgments of reasonable-
ness based on other considerations.

In short, it is our view that under
Factor (a), what is fair and reason-
able is determined by the consequences
of competition and cannot be redeter-
mined under article 6(e) of the con-
tract. In our view, by operation of
Factor (a), appellant is entitled to
escalation to the full extent permitted
by article 6 of the special provisions."

In Newport News, the Board thus allowed full
escalation through application of Factor (a)
alone, although in an alternative holding
the Board also considered Newport News
entitled to full escalation through applica-
tion of the other eight guidelines.

Appellant contends that the awards
of both NObs-3556 and Nobs-3648 were based
on competition, pointing to the influence

-66-

of competitive factors on the preparation
of its respective proposals. Appellant
says that the competition for the award of
NObs-3556 was more severe than the competi-
tion considered in Newport News. Accord-
ing to appellant, the Court in Newport
Nev.- considered the Bethlehem - Quincy
proposal for the CVA-61 to be competitive
when in reality it was not competitive.
Appellant further notes that competitive
pressure enabled the Navy to insist upon
$1,000,000 per ship discount as a condition
to awarding appellant a contract for the
DD 936-8, which further increased the dis-
parity between appellant's proposal and
estimated costs.

We agree with appellant to the
extent that the prices for the DD 936-8
and 943-4 reflected competitive influences.
However, as indicated by ASPR 3-808.2,
quoted above, Factor (a) must be read in
the light of the basic policy which pro-
vides 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 Govern~
ment. Had this basic policy been observed,
NObs-3556 would have been awarded to Bath.
Although effective competition was present
in this procurement the overriding basis
for making this award was not the result
of such competition. The award was made
as the result of the Navy's decision to
assure continued existence of appellant
as a part of the mobilization base, and
further pursuant to the Navy's policy of
allocating its ship construction work
among various yards. The award of NObs-
3648 similarly resulted from the Navy's
policy of allocation. Considerations of
price played only a secondary role in
determining the award of these contracts
to appellant. In the case of NObs-3556,

-67-

it is clear that the Government paid con-
siderably more than if the award had been
made strictly as the result of price com-
petition. The circumstances of the

awards to appellant thus differed materi-
ally from the circumstances which we found
in Newport News to justify full escalation
under Factor (a).

Appellant further contends that in
determining whether it is entitled to
additional escalation under Factor (a),
we should take account of the escalation
allowed under other contracts for DD 931
class vessels. Appellant urges particu-
larly that we consider the escalation
allowed under NObs-3760, 3761 and 3762
covering the DD 945-51. Appellant sub-
mits that the escalation under those con-
tracts was allowed by the Navy on the
ground that the awards were obtained by
competition, although appellant had sub-
mitted the lowest proposed price. The
most striking comparison to be drawn
is that Bath was allowed sufficient
escalation to enable it to earn a
$6,702,308 profit for three vessels
under NObs-3760, whereas appellant, with
the escalation allowed by the Board,
earned a $2,160,230 profit for three
vessels under NObs-3556. Appellant
insists that if the award of NObs-3760,
3761 and 3762 were based on competition,
the relatively low escalation allowed
appellant under NObs-3556 and 3648
amounts to an unfair discrimination.

We have doubts as to the relevancy
of appellant's reliance upon the escala-
tion allowed under NObs-3760, 3761 and
3762 to the aplication of Factor (a) in
the present appeals. Factor (a) is
addressed to the extent of competition

-68-

prevailing in an individual procurement,
not to competition which might prevail in
future procurements. Furthermore, Factor
(a), along with the other factors, are
couched in terms of considerations to be
taken into account by a Government nego~
tiator when negotiating an individual
contract. As stated in ASPR 3-807.8,

in effect as of 26 November 1962, "Each
contract shall be priced separately and
independently, and no consideration shall
be given to losses or profits realized or
anticipated in the performance of other
contracts.”

Even if the extent of competition
which prevailed in the award of NObs-3760,
3761 and 3762 is relevant to the applica-
tion of Factor (a) in these appeals, the
facts do not support appellant's conten-
tion that the Navy has unfairly discrim-
inated against it. The Navy's decision
to award the contracts for three vessels
to Bath, two vessels to Ingalls, and two
vessels to Puget Sound, with appellant
obtaining the award for three DL's,
reflected the Navy's policy of allocation.
However, aS discussed above, appellant
was apparently not the low bidder if the
cost of plan work is taken into account.
Even if the inference which we drew from
the evidence in this regard is erroneous,
the differences between appellant's pro-
posed prices and the prices proposed by
Bath, Ingalls and Puget Sound for the
DD 945-51, indicated in Tables III and IV
above, were small compared with the dis-
parity between appellant's and Bath's
prices for the DD 936-8, even with the
$1,000,000 reduction in the price per
ship reached during appellant's negotia-
tions with the Navy. Appellant's reli-
ance upon the circumstances leading to

g
:
’
,
’

-69-

the award of NObs-3760, 3761 and 3762, and
the escalation eventually allowed there-
under lacks substantial merit.

We conclude that NObs-3556 and 3648
were awarded on the basis of considerations
other than the results of price competition.
In view of the disparity between appel-
lant's proposed price for construction of
the DD 936-8 and the lowest proposed price,
that of Bath, we further conclude that
appellant is not entitled to additional
profit under NObs-3556 on the basis of
Factor (a) alone. Since the award of NObs-
3648 did not involve competition between
various yards, and was based solely on the
Navy's decision to allocate the DD 943-4
to Quincy, appellant is not entitled to
additional profit under NObs-3648 on the
basis of Factor (a) alone. We must
accordingly apply the other guidelines
to the facts relevant thereto in order
to determine whether appellant is entitled
to additional profit.

Factor (b) - Degree of Risk. This
factor is stated as follows:

"(1) The degree of risk assumed
by the contractor should influence
the amount of profit or fee a con-
tractor is entitled to anticipate.
For example, where a portion of the
risk has been shifted to the Govern-
ment through cost-reimbursement or
price redetermination provisions,
unusual contingency provisions, or
other risk-reducing measures, the
amount of profit or fee should be
less than where the contractor
assumes all risk.

"(2) Some cost-plus-a-fixed-fee
contracts and task orders for research

-70-

and development call for the delivery
of prototypes ‘of other 'hardware.'
Other such contracts or task orders
require only that the contractor exert
his ‘best effforts' to deliver the
required end item. Frequently this is
because the contractor is not willing
to assume the additional burden of
incurring substantial cost overruns
without additional fee in order to
complete performance. When the con-
tract calls for delivery of developed
models in accordance with well-defined
performance or design characteristics
or a predetermined delivery schedule,
or both, in contrast to an obligation
only to exert his ‘best efforts' to
develop and deliver such models, pay-
ment of the fee should be conditioned
on performance in accordance with the
contractor's obligation to deliver,
and in such cases the contractor may
be entitled to a larger fee because

of the risk inherent in his commit-
ment and because of the successful
completion of the work."

As stated by the Court of Claims in

Newport News Shipbuilding and Dry Dock Co.
v. United States, supra, this factor is to

be applied prospectively, not with the

benefit of hindsight. Thus we are to exam-
ine the risks assumed by appellant at the
time it was awarded NObs-3556 and NObs-3648

without consideration of whether those
risks eventually materialized.

Non-inclusion of All Anticipated

Overhead Costs in Proposed Price.

As stated above, appellant's pro-
posal for the DD 936-8 included approxi-
mately two-thirds of overhead anticipated

-7l-

for the construction period on the assumption
that no further business would materialize.
Appellant's proposal for the DD 943-4 was
prepared on the same basis. (Tr. 1-22) At
the time appellant prepared its proposals
for the DD 936-8, and DD 943-4 it had no
reason to believe that it would receive sub-
stantial additional orders for ship construc-
tion. Its decision not to include full
anticipated overhead in its proposals .
emanated from its belief that such an omis-
sion was necessary in order for it to be
competitive. Appellant's proposed price

for the DD 936-8 was further reduced by
$1,000,000 per ship during negotiations.

We findthat at the time of award of NObs-
3556 and 3648, appellant assumed more than
the usual risk that anticipated costs would
overrun the contract prices for the five
ships, even allowing for escalation.
Fortunately for appellant, it eventually
obtained orders for tankers from oil com-
panies following the 1956 Suez crisis,
thereby expanding the direct cost base

over which it could distribute its fixed
overhead. (Tr. 3 - 64-8) However, the
eventual mitigation of appellant's risk

of loss under NObs-3556 and 3648 is
irrelevant to our consideration of the

risk which prevailed at the time of award.

Risk of Inadequate Lead Yard Plans.

Article l(c) of the Special Provi-
sions of NObs-3556 provided that:

"(c) The Contractor may, at its
own expense and at its election, obtain,
at the cost of reproduction, copies of
detail working plans, booklets, manuals,
and other plans and data relating to
the construction of Destroyers (DD931)
from Bath Iron Works Corporation, Bath,

=a72<

Maine. The Government does not guarantee,

nor does the Government make any repre-
sentations with respect to, the timeli-
ness of the delivery of such plans,
booklets, manuals, and other daté@ nor
the correctness and accuracy of any
details, dimensions or any other infor-
mation shown on such plans, booklets,
manuals and other data, nor does it
guarantee that such plans, booklets,
manuals and other data include all
plans, booklets, manuals and other data

necessary for the construction of the
vessels."

The comparable clause in NObs-3648 provided
in effect that appellant could use, at its
election, the working plans, etc. relating
to the construction of the DD 936-8. The
clause included similar disclaimers as to
Government responsibility for the accuracy
of the plans, etc.

Under NObs-3371 (Exh. G-6), Bath, as
the lead yard for the DD 931 class of
destroyers, had the responsibility for
preparing detail working plans, manuals,
booklets, etc. However, NObs-3371 further
provided that Bath would enter into an
agreement with Gibbs & Cox, Inc., a highly-
regarded naval architectural firm, for the
preparation of working plans. (Tr. 5-12)
The agreement with Gibbs & Cox was to be on
cost reimbursement basis, with the Navy
reimbursing Bath for the allowable costs
incurred by Gibbs & Cox. NObs-3371 stated
the total estimated cost for performing
such plan work at $6,967,500.00.

At the time appellant submitted its
proposal for the DD 936-8, the working
plans for the DD 931 were about 40 percent
complete. (Tr. 5-39, 126) At the time

ne Se ee

@*en_-«

.
¥
:
J
‘

«73

appellant was awarded NObs-3648, for con-
struction of the DD 943-4, the working
plans for the DD 931 were about 85 percent
complete. (Tr. 5 - 41-2) Based on the
testimony of the Government's engineering
witness (Mr. Miller), who served as project
engineer on the DD 931 program between
1957-9, we find that in general, a lead
yard incurs a greater risk than a follow
yard as to the adequacy of plans and work-
ing drawings. (Tr. 5-38) The DD 931 was
in effect a prototype ship, the construc~
tion of which involved extensive engineering
calculation and design work, and the order-
ing of major components which were being
specified for the first time. (Tr. 5-8)
Bath thus incurred the risk that inadequate
lead yard plans might augment its construc-
tion costs in terms of rework and delay.
However, Bath incurred virtually no risk
with respect to the additional costs of
architectural or engineering work neces~
sary to revise inadequate plans or working
drawings.

Appellant's proposal for the DD 936-8
was based on the assumption that the lead
yard plans would be timely and adequate.
(Tr. 2 - 99-100) Appellant's proposal
included an estimate of 96,000 manhours for
engineering. (Tr. 2-111) However, this
estimate substantially represented the
effort involved in reviewing and monitoring
the lead yard plans. (Tr. 2-100) Lead
yard plans can rarely be used by a follow
yard without some adjustments. (Tr. 5-144)
We are unable to find that appellant's pro-
posal for the DD 936-8 included a substan-
tial contingency for inadequate lead yard
plans. For the DD 943-4, appellant esti-
mated 130,000 engineering manhours, with
the increase attributable to appellant's
experience in working with the lead yard

-74-

plans under NObs-3556. (Tr. 2-111)

NObs-3556 did not include any spe~-
cial provision for reimbursement of
appellant's costs with respect to plan work.
Appellant thus assumed the risk, under its
fixed price contract, of both the cost of
plan revisions necessitated by inadequate
lead yard plans and attendant rework and
delay costs. Under Article l(c) of the
Special Provisions, appellant was assured
only of being able to obtain the lead yard
plans as they became available. The Gov~
ernment disclaimed all responsibility for
the timeliness or adequacy of the plans.
That the timeliness and adequacy of lead
yard plans has been a significant problem
to follow yards is evident not only from
the testimony of appellant's witnesses,
but also from a Comptroller General's
Report to Congress dated 28 February 1972
(Exh. A-31). In that report, late and
inaccurate lead yard working plans are
viewed as major sources of shipbuilders'
claims. Aside from the merits of indi-
vidual claims, the Navy has conceded the
significance of the problem.

From the record presented as it
relates to this matter we find that the
risk assumed by appellant under NObs~-3556
with respect to inadequate or untimely
lead yard plans was substantial and roughly
equal to the comparable risk assumed by
Bath under NObs-3371. We base this finding
principally on the non-existence of more
than half of the lead yard plans at the
time appellant submitted its proposal for
the DD 936-8. We also take into account
the risk assumed by appellant as a follow
yard that the Navy Superintendent of Ship-
building at Quincy might have views as to
adequacy of plans different from those of

)
:

=75-

the Superintendent of Shipbuilding at Bath,
Maine. (Tr. 3-126, 5-153) We further find
that appellant's risk under NObs-3648 with
respect to the timeliness or adequacy of
lead yard plans was considerably reduced.
However, its risk under that contract was
still greater than the comparable risk
assumed by Bath, Ingalls, and Puget Sound
under NObs-3760, 3761, and 3762. The DD
931 was delivered in November 1955, prior
to the award of those contracts. The con-
tractor under NObs-3760, 3761 and 3762 had
the benefit of a complete set of working
plans on which corrections or follow-up
actions had been made. They further had
the benefit of knowing the results of the
DD 931 acceptance trials. (Tr. 4 - 110-12,
5 - 40-41)

The DD 945-51 consisted of what Mr.
Miller described as a sub-class of DD 931
class vessels in that the plans and spe-
cifications were reissued by the Bureau of
Ships to include various changes that had
been made. (Tr. 5 - 43-4) To some extent
new working drawings had to be generated,
although the record in these appeals does
not reveal the extent of the changes. We
are unable to find that the need for prep~-
aration of some new working drawings
imposed a risk of plan unavailability or
inadequacy upon the contractors under NObs-
3760, 3761, and 3762 as great as the com-
parable risk imposed upon appellant under
NObs-3556 or 3648.

Effect on Risk of Various Standard
Contract Provisions.

In addition to the effect on risk
of the relative adequacy and availability
of lead yard plans, testimony and argument
has been addressed to the question of

-76-

whether certain provisions of the contract
tended to reduce the risks otherwise
imposed upon appellant. The clauses under
consideration appear to be similar or iden-
tical to the comparable clauses included
in NCbhs-3557, the contract for the CVA-61
(RANGER) awarded to Newport News, the con-
tract under which the Newport News litiga-
tion arose. The effect of these clauses
on a shipbuilder's degree of risk was dis-
cussed extensively in our opinion in the
reinstated Newport News appeal.

The Escalation Clause.

The escalation clause referred to
is Article 6 of the Special Provisions
which has been discussed above. In the
reinstated Newport News appeal we found
that the escalation clause did not, as
of the time of contracting, shift the
entire risk of economic inflation of
labor and material costs from the con-
tractor to the Government. We consid-
ered that subparagraph (e) raised the
specter of a protracted dispute even if
the contractor eventually prevailed in
overcoming an adverse determination under
that clause. We also considered that
Article 6 would not protect the contrac-
tor from actual material or labor cost
increases exceeding the levels stated
in the applicable Department of Labor
Indices. We find, on the basis of testi-
mony presented in the appeals now before
us, that even in the absence of any dis-
pute over escalation, payment of escala-
tion under Article 6 is less prompt due
to procedural delays, than in the case of
a firm fixed price contract where the fixed
price includes contingencies for inflation.
(Tr. 4-13)

2. te ee

5
>
3
:
:

@FJo

At the time NObs-3556 and 3648 were
awarded, there was no discussion of whether
the escalation clause would adequately pro-
tect appellant from the consequences of
inflation. Appellant assumed that it would
be protected by the applicable formulas.
(Tr. 3-9, 10) Nevertheless the risk of
inadequate protection still existed. Under
subparagraph (d) of Article 6, appellant
could ask the Navy to recognize another
formula if the formula prescribed by the
clause did not produce equitable results.
However, subparagraph (d) imposed the risk
that the Navy could not be so persuaded.
The Government contends that the facts in
the present appeals warrant a different
conclusion from that reached in the rein-
stated Newport News appeal as to the
implications of the escalation clause
on risk. We are unable to find any merit-
orious distinctions in this regard, and
accordingly conclude, as we did in Newport
News, that the escalation clause did not
entirely shift the economic risk of infla-
tion from appellant to the Government.

Changes and Suspension Clauses.

These are Articles 4 and 16, respec-
tively of both NObs-3556 and 3648. Identi-
cal clauses were commented upon in our
opinion on the reinstated Newport News
appeal. 2/ In Ne rt News, we concluded
that atthe time of contract award, the
Changes and Suspension clauses did not
tend to shift any substantial risk inher-
ent in changes and suspensions from
appellant to the Government.

The Government maintains that the

2/ These clauses were quoted in their
entirety in the Appendix to the Board's
decision in the reinstated Newport News

appeal.

-78-

obligation imposed by these clauses upon
the Government to negotiate equitable
adjustments on a "sole source" basis in
effect affords the contractor an improved
remedy as compared with the common law
remedy of bringing an action for breach

of contract. According to the Government
this improved remedy is risk reducing.
This type or argument was considered by
the Board in the reinstated Newport News
appeal where we observed that when these
clauses are read in conjunction with the
standard Disputes clause, the contractor
might lose bargaining power by having to
execute a direction prior to price adjust-
ment. We also observed that if the price
adjustment claimed is contested, the con-
tractor might suffer substantial delay

and expense under the disputes procedure.
Furthermore, as pointed out by appellant,
the power of the Government to issue
change or suspension orders under NObs-
3371 imposed a risk upon appellant as a
follow yard, dependent upon the timeliness
and adequacy of working plans generated by
Bath under NObs-3371. To some degree a
follow yard assumes the risk that changes
will be made in the lead ship with no com-
parable changes in the follow ship,
although the Navy's more common practice
was to direct changes in the follow ships
which were not made applicable to the lead
ships. (Tr. 5 - 140-1)

We conclude that the Changes and
Suspension clauses included in NObs- 3556
and 3648 did not have a risk reducing
effect. If anything, the authority of the
Government to change or suspend the work
performed under NObs-3371 augmented the
risk imposed upon appellant.

:
4
¥
:
4
8

+m, pete Peete cs A tht

|
2
?
4
4
*

-79=-

Insurance Clause.

Article 9 of the General Provisions
of both NObs-3556 and NObs-3648 was the
standard clause entitled "Insurance -
Property Loss or Damage ~ Liability to
Third Persons." This clause was commented
upon in our decision on the reinstated
Newport News appeal. In that decision we
stated that:

"Since the cost of insurance would
not be a negligible expense if incurred
on a project of this nature and size,
we regard article 9 of the general pro-
visions as tending to reduce the risk
of such costs."

In its most relevant respect the
Insurance clause provided (in subpara-
graph (a) thereof) that, unless otherwise
directed by the Navy, the contractor was
not to procure insurance against loss or
damage to vessels or materials or equip-
ment therein to the extent such risk of
loss or damage would have been assumed
by underwriters under standard marine
builder's risk policies. The Government
in effect became a self-insurer for such
risks.

At the hearing in the appeals before
us the vice-president who headed appellant's
Shipbuilding Division (Mr. Strohmeier)
testified that the Insurance clause adds
to the contractor's risk since a shipbuilder
can make more expeditious settlements with
the commercial insurance industry than
with the Government. He disagreed with
the above quoted statement from our Newport
News opinion, as it might be made applica-
ble to the present appeals, on the ground

-80-

that the magnitude of risks involved in
destroyer construction are readily insur-
able. (Tr. 3-28, 29) Mr. Strohmeier's
testimony was not contradicted.

Notwithstanding Mr. Strohmeier's
comments, the Insurance clause in effect
transferred to the Government risks asso-~
ciated with obtaining insurance in the
commercial market. For example, under
the clause the contractor is not confronted
with the risk of increases in insurance
premiums during the course of construction.
We accordingly find that the Insurance
clause tends to be risk reducing. However,
in view of Mr. Strohmeier's uncontradicted
testimony as to the availability of com-
mercial insurance and comparative experi-
ences in making settlements, we further
find that the Insurance clause has very
little effect on the overall allocation
of risks provided for in NObs-3566 and
NObs-3648.

Limitation on Liability for Defects
in Guaranty Period.

General Provision 6 of both NObs-3556
and 3648 provided in effect that appellant
was liable for correction of defects dis-
covered during the six month guaranty
period following the date of preliminary
acceptance of each vessel. However,
Article 7 of the Special Provisions of
each contract limited appellant's liability.
For the three vessels to be delivered under
NObs-3556 appellant's liability for such
defects was limited to $265,110. For the
two vessels to be delivered under NObs-

3648 appellant's liability was limited to
$162,500. When considering the effect

of similar provisions in the reinstated
Newport News appeal, we concluded for

i
3
4
3
4
:

-8l-

the reasons stated therein, that the limita-
tion on liability had a risk reducing
effect. In the record now before us there
is no basis to distinguish that conclusion.
We accordingly conclude that the limita-
tions on liability provided for in Article

7 of the Special Provisions of NObs- 3556

and 3648 respectively had a risk reducing
effect.

Government-Furnished Property.

The provisions in NObs-3556 and 3648
concerning Government-furnished property
were generally similar to those discussed
in our opinion in the reinstated Newport
News appeal. Article 31 of the General
Provisions was the standard Government~
Furnished Property clause. Article 1(d)
of the Special Provisions required the
Government to furnish the materials listed
on schedules (Schedule A) respectively
attached to each contract. Under Article
8 of the Special Provisions the Navy was
entitled to make changes in the list of
materials.

In the reinstated Newport News
appeal we concluded for the reasons stated
therein that,

"| . the Government-furnished
property arrangements in the contract
did not tend to shift any major risk
from the contractor to the Government
and for present purposes were neutral
in effect, the situation being analo-~
gous to that found. . .- in connection
with the changes and suspension
clauses."

-82-

There is no basis in the record now before :
us to distinguish this statement. Accord- )
ingly we conclude that the Government-

furnished property arrangements in NObs-
3556 and 3648 did not have a risk reducing
effect. 7

CONCLUSIONS UNDER FACTOR (b)

As indicated above, the manner in
which the NObs-3556 price was determined,
and the status of lead yard plans at the
time of award, resulted in the assumption
by appellant of greater than the normal risk
of loss assumed by contractors for DD 931
class vessels. The risk assumed by appel-
lant under NObs-3648 by reason of these
factors was somewhat less, but was still
greater than the norm. We further con-
clude that the various standard clauses
having a possible impact on risk were either
neutral in effect or had only a minimal ;
effect on alleviating appellant's overall
risk of loss. We accordingly determine ;
that considerations under Factor (b) tend
to support an allowance of additional
profit to appellant.

Factor (c) - Nature of Work to be |
Performed. This factor is stated as
follows:

"A major consideration in the deter-
mination of the amount of profit or fee,
particularly in connection with experi-
mental, developmental, or research work,
is the difficulty or complexity of the
work to be performed and any unusual
Gemands of the contract, such as whether
the project involves a new approach
unrelated to existing equipment o

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_0614%3A2. Public record. Not legal advice.