Appendix — Sun Shipbuilding & Dry Dock Co. v. United States

Supreme Court of the Unit

October Term, 1976.

No. 76-284

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS.

international Printing Co., 711 So. Sth St, Phile., Pa. 19143 — Tel. (216) 727-6711

INDEX TO APPENDIX.

Page

Section One, Wunderlich Act ..............000000e0e Al

es CS Or SD cviveecescnddcoscedcccncnncees A2

Court of Claims, Trial Division Opinion .............. A5

Order, Secretary of Commerce, dated January 20, 1972 A26

Order, Secretary of Commerce, dated February 15, 1972 A29

Final Opinion and Order of the Maritime Subsidy Board,

Se GUE Eile MII Se bdicccccnnccoccecussses A31

Order of the Maritime Subsidy Board Determining Final

EEE Seusnicedideecundaducnedeseeccasveenenes A115

Recommended Decision of Paul N. Pfeiffer ............ A120

Excerpts From Testimony:

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Be NE Soc keccdcecednncesessiceceseceseuan A222

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BE ED. Scaddddcccenducecutddccceconaneeses A230

Bh EE 5 Sova cecececccescddnvdsoucesscesuces A231

Bk PL od ocanudddsccdtnceeassecessnseus A233

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Be EY en. 66060:6060s sai ceekennehessanceiags A236

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Appendix.

Section One, Wunderlich Act, 41 U. S. C. 321.

No provision of any contract entered into by the

United States, relating to the finality or conclusiveness of

any decision of the head of any department or agency or

his duly authorized representative or board in a dispute

involving a question arising under such contract, shall be

pleaded in any suit now filed or to be filed as limiting

judicial review of any such decision to cases where fraud

by such official or his said representative or board is al-

leged: Provided, however, That any such decision shall be

final and conclusive unless the same is fra[u]dulent or

capricious or arbitrary or so grossly erroneous as neces-

sarily to imply bad faith, or is not supported by substantial

evidence.

(Al)

A2 Order (Court of Claims)

IN THE

United States Court of Claims.

No. 61-73.

SUN SHIPBUILDING & DRY DOCK CO.

v.

THE UNITED STATES.

Before Davis, Judge, Presiding, LaraMore, Senior

Judge, and Kasutwa, Judge.

ORDER.

This case comes before the court on the three parties’

(plaintiff, defendant, third-party United States Lines) re-

quests for review of the recommended decision of Trial

Judge Mastin G. White, filed October 14, 1975, with re-

spect to the parties’ cross motions for summary judgment

on Count II of the petition which is governed by the

Wunderlich Act. Oral argument has been had and the

briefs have been considered.

The court agrees with the Trial Judge’s opinion

(copies of which have been furnished to the parties) and

adopts that opinion as the basis for its judgment, except

for the so-called “Hire-Fire Costs” issue.

On that question the court does not agree with and

does not accept the Trial Judge’s opinion and conclusion,

but determines instead that the final refusal of the Depart-

Order (Court of Claims) A3

ment of Commerce to grant “hire-fire costs” was not arbi-

trary, capricious, or unsupported by substantial evidence.

The Trial Judge relied mainly on the testimony of Sun's

high officials to the effect that Sun had contemplated using

the laid-off outfitting men on the first United States Lines

vessel, that it was the delay in launching of the first ship

to be constructed under this contract which made it neces-

sary for Sun to lay off these outfitting personnel in late

December of 1963 and January and February of 1964, and

that such delay was due to the disruption caused by the

issuance of Change Orders 23 and 48. We conclude, on

the other hand, that the Board and the Secretary of Com-

merce could permissibly find this conclusory and summary

testimony outweighed by (1) the inability of Sun’s Man-

ager of Industrial Relations, who was supposed to support

with detail the conclusions of the high officials, to tie the

lay-offs specifically to Changes 23 and 48; (2) the fact

that under its own original schedule Sun had anticipated

a long delay (so long as to make it unlikely that it would

have retained the workers in question) between the

launching of the next previous vessel (the Atlantic

Heritage) and the first of the five ships involved in the

present contract; and (3) other simultaneous delay factors

(including the interchange of the first two hulls), not at-

tributable to Changes 23 and 48, for which Sun was itself

responsible, and which would have made it improbable

that the first United States Lines vessel would have been

ready in time to receive the laid-off outfitting personnel

from the Atlantic Heritage.

This disposition makes it unnecessary under the

court’s en banc order of May 31, 1974, to consider the

arguments made by the United States Lines and the

amicus as to the bearing on this case of United States v.

Rice, 317 U. S. 61 (1940), and United States v. Blair, 321

U. S. 730 (1942), and the problem of so-called “delay

A4 Order (Court of Claims)

damages.” Since we affirm the administrative award with-

out adding to it, there are no possible offsets available in

this court to the United States Lines; therefore we need

not reach (and we take no position on) those issues.

It Is THEREFORE ORDERED AND CONCLUDED that the

determination of the Secretary of Commerce, insofar as

properly challenged by the parties, was neither arbitrary,

capricious, unsupported by substantial evidence, nor le-

gally erroneous, and accordingly that the summary judg-

ment motions of the defendant and the third party are

granted, the plaintiff's motion is denied, and Count II

of the petition is dismissed.

By THE COURT

Oscar H. Davis

Judge, Presiding

May 28, 1976

———————————

Opinion (Court of Claims, Trial Division) A5

IN THE

UNITED STATES COURT OF CLAIMS

TRIAL Drvision

No. 61-73

(Filed October 14, 1975)

SUN SHIPBUILDING & DRY DOCK CO.

vo.

THE UNITED STATES

On PLAINTIFF’s Motion, DEFENDANT'S Cross-MOTION, AND

Tuirp-Party’s Cross-MoTion For SUMMARY JUDGMENT

John J. Runzer, attorney of record for plaintiff. Pep-

per, Hamilton & Scheetz, of counsel.

Edward J. Friedlander, with whom was Acting As-

sistant Attorney General Irving Jaffe, for defendant. James

F. Ford, of counsel.

‘ Russell T. Weil, attorney of record for third party,

United States Lines, Inc. James P. Moore and Kirlin,

Campbell & Keating, of counsel.

Robert T. Basseches, attorney for amicus curiae, The

Liner Council, American Institute of Merchant Shipping.

Anthony A. Lapham and Shea & Gardner, of counsel.

A6 Opinion (Court of Claims, Trial Division)

OPINION.°

Wurte, Senior Trial Judge: The court has the task in

this case of reviewing, pursuant to the standards pre-

scribed in the Wunderlich Act (41 U. S. C. §§ 321, 322),

administrative determinations that were made on certain

aspects of a claim for additional compensation which Sun

Shipbuilding & Dry Dock Company (“Sun”) submitted

under Contract No. MA/MSB-11 (“the contract”).

The contract was a tripartite agreement that was en-

tered into on October 10, 1962, by the United States (act-

ing through the Maritime Subsidy Board), by United

States Lines Company (“USL”), and by Sun. It obligated

Sun to construct five single-screw cargo vessels in ac-

cordance with prescribed plans and specifications, and to

deliver such vessels to USL on or before specified dates:

ie., September 29, 1964, for the first vessel (Hull 628);

December 13, 1964, for the second vessel (Hull 629);

February 25, 1965, for the third vessel (Hull 630); May

12, 1965, for the fourth vessel (Hull 631); and July 26,

1965, for the fifth vessel (Hull 632). The contract obli-

gated USL and the United States to pay the plaintiff the

sum of $52,950,000 for constructing the five ships, of which

sum USL was to pay 51.4 percent and the Government

was to pay 48.6 percent as a construction-differential sub-

sidy pursuant to section 501 et seq. of the Merchant Ma-

rine Act, 1936, as amended (46 U. S. C. § 1151 et seq.).

Under the original plans and specifications of the con-

tract, the five cargo ships were to be constructed as con-

ventional vessels.

On May 15, 1963, Sun laid the keel of Hull 628, the

first of the five cargo vessels covered by the contract.

* The trial judge’s recommended decision and conclusion of

law are submitted in accordance with Rule 166(c). The necessary

facts are stated in the opinion.

ee °

Opinion (Court of Claims, Trial Division) A7

Then, on May 31, 1963, USL, with the approval of the

Maritime Subsidy Board (“the Board”), issued Change

Order 23, which changed certain of the prescribed plans

so as to provide for the automation of the engine room in

each of the five ships by enabling throttle control and cer-

tain other control functions to be performed directly from

the bridge of the ship and by centralizing, in a large con-

sole located on the bridge, temperature readings and other

data originating in the engine room.

Thereafter, as the automation of the engine room pur-

suant to Change Order 23 would reduce the size of the

crew needed to operate each of the five vessels, Change

Order 48 was issued on October 1, 1963, to change the

plans for the crew quarters so as to rearrange and reduce

the size of the quarters in each of the vessels. Still later,

in February 1964, Change Order 48 was modified, and

this made a further change in the plans for the crew

quarters.

Sun constructed the five vessels in accordance with

the contract, as changed, and delivered them to USL on

the respective dates of November 12, 1964, January 15,

1965, April 14, 1965, June 29, 1965, and September 24,

1965. These delivery dates were 44, 33, 47, 48, and 60

days beyond the respective delivery dates specified in the

contract for the five vessels.

ADMINISTRATIVE PROCEEDINGS.

As Sun and the representatives of the contracting

officer involved in the administration of the contract were

unable to agree on the amount of the additional compen-

sation to which Sun was entitled because of the extra work

occasioned by Change Orders 23 and 48, Sun submitted

to the contracting officer a formal claim in the amount

(as revised) of $5,218,516, plus a profit of 10 percent,

A8 Opinion (Court of Claims, Trial Division)

or a total of $5,740,368. The contracting officer’s decision

on the claim was rendered under the date of August 21,

1969. He concluded “that $2,200,000 including applicable

profit represents fair and reasonable value for the work.”

Both Sun and USL appealed to the Board from the

contracting officer’s decision. The appeals were referred

by the Board to its Chief Hearing Examiner for the hold-

ing of a hearing and the preparation of a recommended

decision. A lengthy hearing before the Chief Hearing

Examiner was held during the period December 1, 1969-

January 20, 1970. Sun and USL, and also staff counsel

representing the Maritime Administration, participated in

the proceedings before the Chief Hearing Examiner.

During the course of such proceedings, Sun increased the

amount of its claim, including profit, to $6,688,893. The

Chief Hearing Examiner submitted a recommended deci-

sion under the date of June 1, 1970; and the recommended

decision was supplemented in July 1970 by a recommended

order, proposing that the sum of $3,820,120, including

profit, be awarded to Sun.

Exceptions to the Chief Hearing Examiner's recom-

mended decision and order were taken by Sun, by USL,

and by staff counsel representing the Maritime Adminis-

tration. The Board’s decision on the exceptions was

rendered on August 11, 1971; and this decision was sup-

plemented by an order dated September 24, 1971. Under

the Board’s decision and order, Sun was awarded the

sum of $2,798,882.35.

Sun, USL, and the American Institute of Merchant

Shipping filed petitions with the Secretary of Commerce,

asking that he review the Board’s decision and order.

The result of the Secretary's review was incorporated in

an order dated January 20, 1972, which modified the

Board's decision and order to the extent of awarding Sun

the sum of $3,070,547.95.

ote ee ee ~

Opinion (Court of Claims, Trial Division) A9

The United States thereafter paid Sun on the basis

of the former’s 48.6 percent share of the $3,070,547.95

which the Secretary's order awarded Sun. However, USL

did not accept the Secretary's determination as correct.

Prion Court PROCEEDINGS

Sun filed its petition in this court on February 14,

1973; and a first amended petition was filed on May 4,

1973.

On July 5, 1973, the United States filed a motion

asking that a notice regarding the pendency of the litiga-

tion be issued to USL under Rule 41(a), so that USL

would be afforded an opportunity to appear as a party

and assert its interest (if any) in the action. The defend-

ant’s motion was allowed; the requested notice was issued

and served on USL; and USL on September 25, 1973,

filed a document which it denominated an “answer” to

Sun’s first amended petition.

The plaintiff's first amended petition contained two

counts. Count I sought a judgment against the United

States in the amount of $847,704.09 on the basis of an

alleged breach of the contract by the Board. Count II

of the first amended petition requested a review of the

Secretary's order of January 20, 1972, under the provi-

sions of the Wunderlich Act, and sought a determination

by the court that the order should have awarded Sun an

amount “in excess of” $7,000,000. If a proper award had

been made, the amount due Sun from the Government

under the award “would have exceeded” $3,500,000, ac-

cording to Count II of the first amended petition.

On July 27, 1973, Sun filed a motion for summary

judgment on count | of the first amended petition; and

on October 2, 1973, the United States filed a cross-motion

for summary judgment on count I. These motions were

Al0 Opinion (Court of Claims, Trial Division)

disposed of by the court in an order dated May 31, 1974,

which denied Sun’s motion, granted the Government's

cross-motion, dismissed count I from the first amended

petition, and remanded the case to the trial judge for

further proceedings relative to count II of the first amended

petition. Sun subsequently petitioned the Supreme Court

for a writ of certiorari, but the petition was denied by

the Court (419 U. S. 1021 (1974) ).

On January 6, 1975, Sun filed a motion for summary

judgment on count II of the first amended petition. The

United States and USL each filed a cross-motion for

summary judgment on April 7, 1975.

Sun contends that the factual findings on three mat-

ters at the administrative level are not supported by

substantial evidence, and, therefore, that they are not

entitled to finality under Wunderlich Act standards.

THe “Dexay’ Issue

One of Sun’s contentions is that there is a lack of

substantial evidence supporting the administrative deter-

mination concerning the extent of the delay in the delivery

of the five cargo ships under the contract that was at-

tributable to the issuance of Change Orders 23 and 48.

On this point, the Chief Hearing Examiner concluded

in his recommended decision that, but for the issuance

of Change Orders 23 and 48, Sun could have delivered

each of the five vessels 15 days prior to the respective

delivery dates specified in the contract; and, since the

actual delivery dates for the five ships were a total of

232 days beyond the contract delivery dates, the issuance

of Change Orders 23 and 48 thus caused 307 (75 plus

232) days of delay in the delivery of the five ships. The

Board, in its consideration of this particular matter, con-

cluded that only the 232-day period of delay subsequent

ee ee Se See eee :

Opinion (Court of Claims, Trial Division) All

to the contract delivery dates was attributable to the

issuance of Change Orders 23 and 48. Finally, the Secre-

tary of Commerce, in his order of January 20, 1972, rein-

stated and adopted the Chief Hearing Examiner's recom-

mended decision with reference to the extent of the delay

that was attributable to the issuance of Change Orders

23 and 48.

Therefore, the administrative determination before

the court for review on this aspect of the case is to the

effect that the issuance of Change Orders 23 and 48 caused

a total of 307 days of delay in the delivery of the five cargo

vessels under the contract, with 75 days of the delay oc-

curring prior to the contract delivery dates and 232 days

of the delay occurring after the contract delivery dates.

In its brief supporting the motion for summary judg-

ment on count II of the first amended petition, Sun con-

tends that the evidence in the administrative record proves

that, but for Change Orders 23 and 48, each of the five

ships would have been delivered 75 days before the

pertinent contract delivery date, instead of only 15 days

before the contract delivery date, as determined by the

Secretary of Commerce in adopting the recommended de-

cision of the Chief Hearing Examiner on this point. It is

thus Sun’s contention that Change Orders 23 and 48

caused a total of 607 days of delay (375 days prior to the

contract delivery dates and 232 days after the contract de-

livery dates) in the delivery of the five ships, instead of

307 days of delay, as determined by the Secretary of

Commerce.

The United States, in the brief supporting the Gov-

ernment’s cross-motion for summary judgment, asserts that

the administrative determination on this issue—i.e., that

Change Orders 23 and 48 caused a total of 307 days of

delay (75 davs prior to the contract delivery dates and

Al2 Opinion (Court of Claims, Trial Division)

232 days after the contract delivery dates)—is based on

substantial evidence and, therefore, is entitled to finality.

USL states in the brief supporting its cross-motion for

summary judgment that it does not contest that portion of

the administrative determination which attributed 232 days

of delay to the issuance of Change Orders 23 and 48—.e.,

the delay that occurred after the contract delivery dates—

but that the evidence in the administrative record does not

support the part of the administrative determination which

found that each of the five ships would have been de-

livered 15 days prior to the contract delivery date in the

absence of Change Orders 23 and 48, and these change

orders were thus responsible for 75 days of delay prior to

the contract delivery dates for the five ships.

All portions of the administrative record cited by the

parties in their briefs have been carefully considered in

passing upon their respective contentions regarding the

extent of the delay caused by the issuance of Change

Orders 23 and 48, and also in passing upon their conten-

tions relative to the other issues in the case. However, no

independent examination of the entire administrative rec-

ord (which is enormous) has been undertaken in a search

for evidence bearing upon this—or any other—aspect of

the case. Rule 163 places upon litigants in this type of

case the obligation of citing with specificity the portions

of the administrative record containing the evidence on

which they rely as supporting or refuting an adminis-

trative finding that is submitted to the court for review.

It must be assumed, as a practical matter in view of the

large size of the present administrative record, that the

parties in this case have fulfilled their obligations under

Rule 163.

The evidence cited by Sun in its brief relative to the

“delay” issue was to the effect that Sun’s bid on the con-

ae ee ee ee

;

:

3

Opinion (Court of Claims, Trial Division) 13

tract was based upon a plan to deliver the first ship in

July 1964, the second ship in October 1964, the third ship

in January 1965, the fourth ship in April 1965, and the

fifth ship in July 1965; that in November 1962, Sun pre-

pared and delivered to the Maritime Administration a

written construction schedule which called for the delivery

of the vessels in accordance with the plan just mentioned;

that at the time of the preparation of the November 1962

schedule, Sun had sufficient manpower and sufficient

physical facilities available to enable it to meet the

scheduled delivery dates; that the keel of Hull 628 (the

first vessel ) was laid on May 15, 1963, which was 2 weeks

ahead of the scheduled date of June 1, 1963, for the first

keel laying; that if Change Orders 23 and 48 had not been

issued, Sun would have been able to deliver the first vessel

by mid-July of 1964 and the succeeding four vessels at

intervals of 75 days each thereafter; that if Change Orders

23 and 48 had not been issued, none of the other develop-

ments which occurred during the construction program

would have prevented such early deliveries; and that the

extra work and the disruption of the construction schedule

caused by Change Orders 23 and 48 were the only reasons

why the first vessel was not delivered in mid-July of 1964,

with deliveries of the other four vessels following at in-

tervals of 75 days each.

As will be explained more fully later in the opinion,

the Government cites the testimony of the witness Edward

Scott Dillon in connection with the “delay” issue. Mr.

Dillon testified as an expert witness; and he expressed the

opinion that the first ship would have been delivered

“somewhere between 30 and 0 days prior to contract de-

livery date had it not been for Changes 23 and 48,” and

that “under these circumstances, I would say 15 days

prior to the delivery date.”

Al4 Opinion (Court of Claims, Trial Division)

The evidence summarized in the two immediately pre-

ceding paragraphs, if considered together and accepted as

correct, would certainly be sufficient to establish that, but

for the issuance of Change Orders 23 and 48, Sun would

have been able to deliver each of the five ships at least 15

days prior to the contract delivery date and, therefore,

that the issuance of these change orders caused at least

75 days of delay prior to the contract delivery dates for

the five ships. It necessarily follows that the administra-

tive record contains, in the form of the evidence cited and

relied on by Sun and by the Government, the requisite

“substantial” evidence needed under Wunderlich Act

standards to support the administrative determination in-

sofar as it finds, in effect, that Change Orders 23 and 48

caused at least 75 days of delay prior to the contract de-

livery dates for the five ships.

For the purpose of the Wunderlich Act, substantial

evidence is “such evidence as might convince a reasonable

man, to support the conclusion reached by the agency

officials” (T. C. Bateson Construction Co. v. United States,

140 Ct. Cl. 514, 518 (1960) ), or “evidence which could

convince an unprejudiced mind of the truth of the facts

to which the evidence is directed” ( Koppers Co. v. United

States, 186 Ct. Cl. 142, 149, 405 F. 2d 554, 558 (1968) ).

If the evidence cited and relied on by Sun and by the

Government, as previously summarized, is considered to-

gether, it qualifies as substantial under these definitions

and supports the administrative conclusion that the issu-

ance of Change Orders 23 and 48 caused at least 75 days

of delay prior to the contract delivery dates for the five

ships.

' It thus becomes unnecessary—and, indeed, it would

be improper under Wunderlich Act standards—for the

court at this point to evaluate the evidence cited by USL

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BAR SN

Opinion (Court of Claims, Trial Division) Al15

in its brief as tending to show that delay factors other than

Change Orders 23 and 48 would have prevented Sun

from delivering the ships prior to the contract delivery

dates, even if these change orders had not been issued.

It is not the court’s prerogative in a Wunderlich Act case

to weigh conflicting evidence and make an independent

determination on a factual issue, once it has been decided

that the administrative determination is supported by evi-

dence that can properly be characterized as substantial.

T. C. Bateson Construction Co. v. United States, supra,

149 Ct. Cl. at 518.

- Accordingly, the crucial question on the “delay” issue

is whether there is substantial evidence in the administra-

tive record supporting the administrative determination

insofar as it finds, in effect, that even if Change Orders

23 and 48 had not been issued, Sun would have been able

to deliver each of the five ships only 15 days prior to the

contract delivery date and, therefore, that the issuance of

these change orders caused only 75 days of delay prior

to the contract delivery dates for the five ships.

The Government's initial brief did not cite any evi-

dence as supporting the administrative determination that

the issuance of Change Orders 23 and 48 caused only 75

days of delay prior to the contract delivery dates for the

five ships. The Government's reply brief, however, states

that the “testimony of Mr. Dillon” clearly supports the

administrative finding on this point, and cites 42 pages

of the transcript, containing the direct testimony of the

witness Edward Scott Dillon. At the time of the hearing,

Mr. Dillon was Deputy Chief, Office of Ship Construction,

Maritime Administration.

It appears from an examination of the transcript pages

cited by the Government that Mr. Dillon did not testify

from personal knowledge of the facts pertaining to the

present controversy. Indeed, it was not until June or July

Al6 Opinion (Court of Claims, Trial Division)

of 1967 that he became involved in the controversy (the

last of the five ships having been completed and delivered

on September 24, 1965). He testified as an expert witness;

and his testimony was based upon an examination of docu-

ments which were referred to generally as the “U. S. Lines

submission” to the Maritime Administration and as the

“discovery data” obtained by the Maritime Administra-

tion from Sun. The documents were not otherwise identi-

fied, with the exception of a graph depicting “man hours

versus time” and a series of production analysis reports

covering the period from January 4, 1963, through October

16, 1964. Qn the basis of the documents which he ex-

amined (most of them unidentified ), Mr. Dillon expressed

the opinion that the first ship would have been delivered

“somewhere between 30 and 0 days prior to contract de-

livery date had it not been for Changes 23 and 48,” and

that “under these circumstances, I would say 15 days

prior to the delivery date.”

It was principally on the basis of Mr. Dillon’s opinion

testimony, as summarized in the preceding paragraph, that

the Chief Hearing Examiner and the Secretary of Com-

merce concluded that even if Change Orders 23 and 48

had not been issued, each of the five ships would have

been delivered only 15 days prior to the contract delivery

date, and that these change orders thus caused only 75

days of delay prior to the contract delivery dates for the

five ships. However, Mr. Dillon’s opinion testimony,

being based largely on undisclosed documents, could not,

if standing alone, reasonably be regarded as “substantial”

in the face of conflicting evidence from Sun’s witnesses

who were in charge of the construction of the five ships

and testified from personal knowledge of the facts in-

volved in the construction program.

On the other hand, USL’s brief cites evidence of many

delay factors which developed during the course of the

Opinion (Court of Claims, Trial Division) A17

construction of the five ships and which were unrelated to

Change Orders 23 and 48. Consideration of such evi-

dence, in connection with the opinion testimony of Mr.

Dillon, might convince “a reasonable man” or “en un-

prejudiced mind” that even if Change Orders 23 and 48

had not been issued, other delay factors would have pre-

vented Sun from delivering each of the five ships at an

earlier date than 15 days prior to the contract delivery

date, and, therefore, that the issuance of Change Orders

23 and 48 did not cause more than 75 days of delay prior

to the contract delivery dates for the five ships. Conse-

quently, it must be concluded that the administrative

determination to this effect is supported by “substantial”

evidence, even though there is contrary evidence from

Sun’s witnesses in the record. As stated earlier in the

opinion, the court is not permitted in a Wunderlich Act

case to weigh conflicting evidence on a disputed question

of fact, once it has been decided that the administrative

determination on a particular point is supported by evi-

dence that can properly be regarded as substantial.

It necessarily follows that Sun is not entitled to any

recovery against the Government in the present litigation

on the ground that, but for Change Orders 23 and 48, each

of the five ships under the contract could have been com-

pleted and delivered more than 15 days prior to the con-

tract delivery date. Accordingly, Sun’s petition should be

dismissed as to this aspect of the claim.

With the failure of this aspect of Sun’s claim, it be-

comes unnecessary to discuss USL’s contention that “de-

lay associated damages” or “consequential costs” attrib-

utable to the issuance of Change Orders 23 and 48 cannot

properly be assessed because of the so-called “Rice doc-

trine,” derived from the Supreme Court’s decision in the

case of United States v. Rice, 317 U. S. 61 (1942).

Al8 Opinion (Court of Claims, Trial Division)

Tue “Hie-Fire Costs” Issue

Sun argues that the administrative finding relative to

the absence of a causal connection between Change

Orders 23 and 48, on the one hand, and certain “hire-

fire” costs involved in Sun’s claim, on the other hand, is

not supported by substantial evidence.

In the proceedings before the Chief Hearing Exam-

iner, Sun contended that because of the delay occasioned

by Change Orders 23 and 48, it had been compelled to lay

off many workmen in the outfitting trades; that later, when

the first ship under the contract was ready for outfitters

to work on it, Sun in many instances had to employ less

experienced workmen as replacements for those who had

been laid off; and that Sun experienced a loss of efficiency

and increased costs due to this situation.

The Chief Hearing Examiner found that 669 men

were laid off by Sun during the latter part of December

1963 and the months of January and February 1964; that

such layoffs were directly related to the construction de-

lays caused by Change Orders 23 and 48; and that the

award to Sun should include the sum of $236,222 because

of the “hire-fire” costs growing out of Sun’s loss of

efficiency.

The Board’s decision reversed the Chief Hearing

Examiner's recommended decision on Sun’s entitlement to

“hire-fire” costs. The Board said that Sun had “failed to

establish a causal connection between the changes [23

and 48] and the layoffs.” The Secretary of Commerce, in

his order of January 20, 1972, affirmed and adopted the

Board's determination on this point.

The evidence in the administrative record shows, as

found by the Chief Hearing Examiner, that 669 men were

laid off by Sun during the period extending from the lat-

ter part of December 1963 through the months of Janu-

Pocee at)

hare it naatiet Ie ie a re

(ice aad 3, Oe apie

te © a he

Opinion (Court of Claims, Trial Division) A19

ary and February 1964. Sun’s officials testified that these

layoffs involved ou*fitting personnel; that Sun had in-

tended to use such personnel in the outfitting work on the

first vessel to be constructed under the contract, and

would have done so if Sun had been able to carry out the

scheduled launching of such vessel on February 28, 1964;

that the layoffs of outfitting personnel became necessary

because Sun was compelled to delay the launching of the

first vessel under the contract from February 28, 1964, until

May 13, 1964; and that such delay in the launching of the

first vessel under the contract was attributable to the dis-

ruption occasioned by the issuance of Change Orders 23

and 48.

Neither the Government nor USL has cited any evi-

dence in the administrative record which actually con-

tradicts the testimony of Sun’s officials to the effect that it

was the delay in the launching of the first ship to be con-

structed under the contract which made it necessary for

Sun to lay off outfitting personnel in late December of

1963 and January and February of 1964, and that such

delay was due to the disruption caused by the issuance of

Change Orders 23 and 48.

The Government cited evidence to the effect that

Sun, in its previous construction schedules, had cus-

tomarily maintained an interval of from 60 to 90 days be-

tween ship launchings; that such an interval permitted an

orderly and efficient transfer of outfitting personnel from

one ship to the next ship in the construction sequence;

that in Sun’s construction program for 1963-64, a ship

known as the ATLANTIC Herrrace was the one next pre-

ceding the first ship to be constructed under the contract;

and that there was an interval of at least five months be-

tween the launching of the ATLantic Herrrace and the

date, February 28, 1964, on which Sun originally planned

A20 Opinion (Court of Claims, Trial Division)

to launch the first ship to be constructed under the con-

tract. In addition, the Government cited evidence indi-

cating that Sun’s personnel records did not give any

specific reason for the layoffs during the winter of 1963-64,

other than lack of work.

However, the circumstance that there was a longer-

than-usual interval between the launching of the ATLANTIC

Henitace and the originally scheduled date for the launch-

ing of the first ship under the contract does not refute the

evidence clearly showing that Sun retained outfitting per-

sonnel in its employ into the winter of 1963-64 (they pre-

sumably were working on the ATLANTIC HeritaceE until

its completion and delivery in December 1963); that Sun

intended to use such personnel on the first ship to be con-

structed under the contract, and would have done so if

that ship had been launched at the time originally planned;

that it became necessary to lay off the outfitting personnel

when the launching of the first ship under the contract

was delayed from February until May of 1964; and that

such delay was due to the disruption caused by Change

Orders 23 and 48. Also, the circumstance that Sun’s per-

sonnel records merely indicated lack of work as the reason

for the layoffs does not refute the testimony of Sun’s of-

ficials that the lack of work for outfitting personnel de-

veloped because of the delay in the launching of the first

ship under the contract, which, in turn, was caused by the

disruption resulting from the issuance of Change Orders

23 and 48.

USL criticized Sun’s evidence concerning the rela-

tionship between Change Orders 23 and 48, on the one

hand, and the layoffs during the winter of 1963-64, on the

other hand. USL did not, however, cite any negating

evidence. USL’s brief did refer in a footnote to “Other

delay factors (unrelated to changes 23 and 48) which

Opinion (Court of Claims, Trial Division) A21

were found to have delayed the launching of USL’s first

hull beyond the end of February 1964,” and listed five

such purported delay factors, but did not cite any evidence

as furnishing the facts concerning these matters. This

reference did not conform to the specificity requirement

imposed on parties by Rule 163.

When the evidence cited by the parties in their briefs

on the “hire-fire costs” issue is considered, it must be con-

cluded that the administrative determination by the Board

and the Secretary of Commerce regarding the lack of a

causal connection between Change Orders 23 and 48, on the

one hand, and Sun’s layoffs during the winter of 1963-64, on

the other hand, is not supported by evidence sufficient to

convince “a reasonable man” or “an unprejudiced mind,”

and, therefore, that such administrative determination is

not entitled to finality under Wunderlich Act standards.

On the contrary, the only reasonable conclusion to be

reached, on the basis of the cited evidence, is that there

was such a causal connection, as found by the Chief Hear-

ing Examiner. Therefore, the existence of the causal con-

nection can properly be determined by the court, without

remanding the case to the Department of Commerce for

further administrative proceedings on this point. Maxwell

Dynamometer Co. v. United States, 181 Ct. Cl. 607, 631,

386 F. 2d 855, 870 (1967).

The Chief Hearing Examiner's finding as to the

amount of the extra “hire-fire” costs incurred by Sun—

$236,222—has not been challenged by any of the parties.

Accordingly, Sun is entitled to recover an amount repre-

senting 48.6 percent of $236,222, or $114,803.89, in the

present suit against the United States.

It may be noted that we are not dealing here with an

alleged failure by the Government to take affirmative

action in aid of Sun’s efforts to accomplish an early launch-

A22 Opinion (Court of Claims, Trial Division)

ing of the first ship under the contract in order to complete

and deliver the five ships prior to the contract delivery

dates. Cf. United States v. Blair, 321 U. S. 730, 733

(1944). Rather, we are dealing with actions which the

Government took and which adversely affected Sun’s ef-

forts to accomplish an early launching of the first ship,

thus necessitating layoffs of outfitting personnel.

The extra “hire-fire” costs are recoverable because

they were “the direct and necessary result” of Change

Orders 23 and 48, in a situation where such changes “di-

rectly ° * ° [led] to disruption, extra work, or new pro-

cedures.” Paul Hardeman, Inc. v. United States, 186 Ct.

Cl. 743, 752, 406 F. 2d 1357, 1363 (1969; concurring

opinion of Judge Davis).

Tue “Norma Hui Propuctrion Rate” Issve.

Sun contends that there is a lack of substantial evi-

dence supporting the administrative determination to the

effect that six hulls represented the normal capacity of

Sun’s yard to work on new-hull construction, and Sun

objects to the use of this figure in calculating the amount

due Sun as reimbursement for unabsorbed overhead costs

that continued during the period o! delay attributable to

Change Orders 23 and 48.

In his recommended decision, the Chief Hearing Ex-

aminer said that the unabsorbed overhead costs incurred

during the period of delay attributable to Change Orders

23 and 48 should be determined upon the basis of a

formula containing these “four basic elements”:

1. Continuing overhead attributable to non-hull

production is subtracted from the total continuing

overhead for the entire yard producing continuing

overhead attributable to new hull production.

Opinion (Court of Claims, Trial Division) A23

2. The latter is divided by the number of new

hulls normally produced per year X 365 days pro-

ducing continuing overhead (new hull)/vessel days.

3. This figure is multiplied by the vessel days

delay due to changes to produce the continuing over-

head due to change caused delay.

4. The continuing overhead absorbed by Sun’s

hardware claim is subtracted from this result to pro-

duce the continuing overhead recoverable as a cost

under the contract changes clause.

The Chief Hearing Examiner made a factual finding

to the effect that Sun had “a normal hull production of 4.8

vessels per year,” or “a rounded off five hulls per year

normal new construction experience”; as stated previously

in this opinion, the Chief Hearing Examiner found as a

fact that Change Orders 23 and 48 were responsible for a

total of 307 days of delay in the delivery of the five ships

under the contract. On the basis of the formula and his

factual findings, the Chief Hearing Examiner recom-

mended that Sun be awarded $529,000 for unabsorbed

overhead costs.

In reviewing the Chief Hearing Examiner's recom-

mended decision on this point, the Board approved the

formula that had been used by the Chief Hearing Ex-

aminer. The Board said, however, that it was not “fair

and reasonable that USL and MarAd | Maritime Admin-

istration] should be subjected to the vicissitudes of Sun’s

past experiences,” and that “A fairer and more reasonable

measure is the use of a normal capacity rate which may

or may not be greater or less than the historically based

production rate.” The Board then made a factual finding

that six hulls represented the normal capacity of Sun’s

yard to work on new-hull construction. Also, as pre-

A24 Opinion (Court of Claims, Trial Division)

viously stated, the Board made a factual finding that 232

days of delay (rather than 307 days, as determined by

the Chief Hearing Examiner ) were attributable to Change

Orders 23 and 48. On the basis of these factual determi-

nations and the formula previously mentioned, the Board

awarded Sun the sum of $232,172.45 for unabsorbed over-

head costs.

In the final administrative decision on the matter

now under consideration, the Secretary of Commerce

affirmed the Board’s position that the normal capacity of

Sun’s yard to work on new-hull production, rather than

Sun’s historical experience in the actual production of

hulls, should be used in the formula for determining un-

absorbed overhead costs; and the Secretary also affirmed

the Board’s factual finding that six hulls represented Sun’s

normal yard capacity. However, the Secretary rejected

the Board’s factual finding that Change Orders 23 and 48

were responsible for only 232 days of delay in the delivery

of the five ships, and instead reinstated and adopted the

Chief Hearing Examiner's factual finding that Change

Orders 23 and 48 were responsible for 307 days of delay.

On the basis of the pertinent formula and his factual de-

terminations, the Secretary awarded Sun $384,024.03 for

unabsorbed overhead costs.

The final administrative determination that six hulls

represented the normal capacity of Sun’s yard to work on

new-hull construction was based on a tabulation which

was prepared and introduced into evidence by represen-

tatives of USL, and which purported to show the opera-

tions in Sun’s yard during a certain period of time. Sun’s

principal contention on this aspect of the case is, in effect,

that the Board and the Secretary of Commerce should not

have relied on USL’s tabulation, because it included hulls

that were not new hulls but old vessels which were being

repaired in Sun's yard, it included hulls that were small

Opinion (Court of Claims, Trial Division) A25

barges, and it included hulls that were being delayed by

reason of extensive changes. However, Sun’s argument

calls for a weighing of the evidence that was before the

Board and the Secretary, and for a rejection of USL’s tabu-

lation on the basis of other evidence presented by Sun.

As stated elsewhere in this opinion, the Court of Claims

is not vested with authority to weigh evidence in a

Wunderlich Act case, so long as there is substantial evi-

dence supporting an administrative determination; and

the USL tabulation qualifies as substantial evidence on

the “normal hull production rate” issue.

Therefore, Sun’s petition should be dismissed as to

this aspect of the case.

CONCLUSION.

The plaintiff's motion for summary judgment is al-

lowed, and the cross-motions for summary judgment are

denied, insofar as the motions relate to the portion of the

plaintiff's claim which seeks reimbursement for extra

“hire-fire” costs, and it is adjudged and ordered that the

plaintiff recover of and from the United States the sum

of one hundred fourteen thousand eight hundred three

dollars and eighty-nine cents ($114,803.89) on this aspect

of the plaintiff's claim. Otherwise, the plaintiff's motion

for summary judgment is denied, the cross-motions for

summary judgment are allowed, and the petition is dis-

missed as to other aspects of the plaintiff's claim.

A26 Order (Secy. of Commerce, 1/20/72)

THE SECRETARY OF COMMERCE

WasuinctTon, D.C. 20230

ORDER.

In the Matter of: Compensation for

Changed Work under Contracts for

Construction of Five Ships, MSB Dock-

ets Nos. CA-62 and CA-63.

The petitions of United States Lines, Sun Shipbuild-

ing & Dry Dock Company, and American Institute of

Merchant Shipping for review of the Maritime Subsidy

Board decision in the above-entitled matter have been

considered, and I have determined to modify that decision

for the reasons and in the manner hereinafter indicated:

The departmental regulations governing Secretarial

review provide that such review “. . . will not be granted

unless significant and important questions of over-all policy

requiring the Secretary's attention are involved or factual

error in the Board’s action.” Accordingly Secretarial re-

view of contract dispute determinations should be and is

regularly denied because they usually involve considera-

tions of a technical nature pertaining to ship construction

or operation. |

However, in this case with respect to certain items in

dispute, the shipbuilder particularly protests that the

Board’s determinations differ from those recommended by

the Board’s representative who conducted the required

proceedings for the presentation of evidence. In effect

thereby a policy question has been raised as to the extent

Order (Secy. of Commerce, 1/20/72) A27

to which the Board should be influenced by the examiner's

recommendations.

It is my view with respect to a few of these claims

which are not easily susceptible to mathematical or other

precise calculation that the Board should not have de-

parted from the examiner’s findings for which there was

substantial factual support. I recognize that in each of

these instances the Board has set forth good reasons for

its diftering views but I am not persuaded under the par-

ticular circumstances that reversal of the examiner's con-

clusions is warranted. I have concluded, therefore, that

the claim items relating to the extent of pre-contract de-

livery date delay, the estimated number of service hours

per month during the delay period, and the estimates of

disruption effect in terms of production and congestion,

should be disposed of in accordance with the examiner's

views. In all other respects, I affirm the Board’s decision

including the several other instances in which it departed

from the examiner's recommendations.

I would further state that this decision and the rea-

sons therefore relate only to contract dispute cases and

not to any other matters coming before the Board and its

examiners in the administration of the merchant marine

program.

Pursuant to this decision petitioner, Sun Shipbuilding

& Dry Dock Company, is entitled to award in the amount

of $3,070,547.95, as follows:

Services

Unabsorbed Overhead

Overtime

Engineering Disruption

Order (Secu. of Commerce, 1/20/72)

$1,966,307.47

15,378.00

54,185.00

106,888.73

384,024.03

80,800.00

58,824.00

Production Disruption and Congestion 125,000.00

Sub-Total

10% Profit

TOTAL

So ORDERED

Date: January 20, 1972

825,099.76

2,791,407.23

279,140.72

$3,070,547.95

Maurice H. STANns

Maurice H. Stans

Secretary of Commerce

Order (Secy. of Commerce, 2/15/72) A29

THE SECRETARY OF COMMERCE

Wasuincton, D.C. 20230

ORDER.

In the Matter of: Petitions for Recon-

sideration of the Secretarial Order dated

January 20, 1972, regarding compensa-

tion for changed work under contracts

for construction of five ships, MSB

Dockets Nos. CA-62 and CA-63.

The petitions of United States Lines, Inc (USL),

dated February 7, 1972, and the Liner Council, American

Institute of Merchant Shipping (AIMS), dated February

8, 1972, for reconsideration of the Order of the Secretary

in the above-entitled matter have been reviewed.

Both petitioners complain that the Order does not

expressly treat with the legal issue between the petitioners

and the Sun Shipbuilding & Dry Dock Company (Sun)

concerning the allowability only of the direct cost of

changed work as distinguished from disruption or delay

costs. USL’s petition for reconsideration similarly refers

to the separate legal issue whether the contractual require-

ment for a shipbuilder to furnish preliminary estimates of

the cost of proposed changes precludes the ultimate re-

covery of additional costs.

Both of these legal issues among several others were

set forth at considerable length by AIMS and USL in their

original petitions for Secretarial review as well as in the

challenged decision of the Maritime Subsidy Board. In

my Order I stated that I had considered such petitions and

had concluded to modify the Board’s decision only as it

related to three specified claim items, and went on to say:

A30 Order (Secy. of Commerce, 2/15/72)

“, . - In all other respects, I affirm the Board's deci-

sion including the several other instances in which it

departed from the examiner's recommendations.”

I have not overlooked the further statement in the

AIMS petition for reconsideration to the effect that my

Order contained only a partial quotation from the regula-

tions concerning the scope of Secretarial review and that

the omissions possibly reflected an intention to limit such

review contrary to the regulations. I would, therefore,

now affirm that such was not my intention, that in fact

the petitions were considered in their entirety, and that

except as related to the three claim items, I intended and

did uphold the Board’s decision as indicated above, “In

all other respects, . . .”

So ORDERED

Maurice H. Stans

Maurice H. Stans

Secretary of Commerce

Date: February 15, 1972

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A31

DEPARTMENT OF COMMERCE

MARITIME ADMINISTRATION

MARITIME Sussipy BOARD

Docxet Nos. CA-62 anp CA-63

SUN SHIPBUILDING AND DRY DOCK COMPANY

v.

U. S. LINES, INC.

In the matter of cross appeals from a decision of the Con-

tracting Officer concerning the fair and reasonable

value of work performed by Sun Shipbuilding and

Dry Dock Company pursuant to Changes Nos. 23

(centralized control of engine room and bridge con-

trol of main engine). and 48 (modification of crew

accommodations ) on five C4-S-64a design type vessels

constructed for United States Lines, Inc. under Con-

tract No. MA/ MSB-11.

Submitted: April 5, 1971 Decided: August 11, 1971

FINAL OPINION AND ORDER OF THE

MARITIME SUBSIDY BOARD.

Andrew E. Gibson, Chairman; Robert J. Blackwell,

Member; and Roy G. Bowman, Alternate Member

A32 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

Served Upon:

John J. Runzer, Esq., c/o Pepper, Hamilton and

Scheetz, 123 South Broad Street, Philadelphia, Pennsyl-

vania 19101 for Sun Shipbuilding and Dry Dock Company

Louis J. Cusmano, Esq., William J. O’Brien, Esq., and

John P. Geraghty, Esq., c/o Kirlin, Campbell & Keating,

120 Broadway, New York, New York for United States

Lines, Inc.

Robert A. Garske, Esq., Staff Counsel, Maritime Ad-

ministration, Washington, D. C.

INTRODUCTION.

This proceeding before the Maritime Subsidy Board

(“Board”) involves cross appeals by Sun Shipbuilding and

Dry Dock Company (“Sun”) and United States Lines,

Inc. (“USL”) pursuant to the disputes provision, Article

36, of the General Provisions of Contract No. MA/ MSB-11

(the “Contract” ) from a final decision by the Acting Chief,

Office of Ship Construction (“Contracting Officer”), Mari-

time Administration. That final decision held that the

fair and reasonable value of the work Sun was entitled to

recover for performing work in accordance with Changes

Nos. 23 and 48 on five C4-S-64a design type cargo vessels

constructed for USL amounted to $2,200,000 including

profit. The cross appeals from that decision were referred

to the Chief Hearing Examiner (and thereby the au-

thorized Representative of the Board) for hearing and

recommended decision. The Maritime Administration

(“MarAd” ), represented by Staff Counsel, has also been a

party to this proceeding since the Board has authorized

subsidy participation in these changes at the construction-

differential subsidy (“CDS”) rate of 48.6%. The proceed-

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A33

ing is presently before the Board upon certification of the

record by the Board’s Representative on October 2, 1970.

This dispute essentially concerns the cost of automat-

ing these five vessels of USL, which were among the first

United States-flag automated cargo vessels. Initially,

under the Contract signed on October 10, 1962, for

$52,950,000 these vessels were designed to be constructed

as conventional vessels. Addendum No. | to the Contract,

however, executed on February 25, 1963, increased the

maximum-continuous shaft horsepower from 16,000 to

18,000, changed the engine configuration to single plane,

and increased the contract price to $53,199,000. Actual

automation of these vessels was directed by Change 23

which the Board approved on May 31, 1963, “based on an

estimate of $300,000 per ship, the final cost thereof to be

subject to adjudication . . . .” In the official notification

to Sun of that action, Sun’s estimate of 60 days delay in

delivery of the vessels was noted. In brief, this change

enabled certain control functions, most notably throttle

control, to be made directly from the bridge and it cen-

tralized in a large console located on the bridge certain

data, such as temperature readings, originating in the

engine room.

Although automation would enable more efficient op-

eration of these vessels the real savings to the ship operator

would be realized only with concomitant crew reductions.

At the time Change 23 was authorized, it was con-

templated that there would be crew reductions and, most

likely, consequent rearrangement of crew quarters on these

vessels. However, for various reasons including negotia-

tions with labor unions it was not until October 1, 1963,

that a representative of the Contract Officer approved

Change 48 based on a preliminary estimate of $38,000 per

vessel and an estimated delay of work “in the affected

areas of the vessel” of 90 days. Change 48 occurred when

A34 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

Sun had almost completed the original general arrange-

ment plan, resulting in the scrapping of most of that plan.

It required single occupancy quarters for 12 less men and

mostly entailed an engineering task to accommodate the

rearranged crew quarters and changes in auxiliary equip-

ment to those quarters. It also required significant

changes to the galley and to pantry equipment.

Subsequently, due to the insistence of labor unions,

USL authorized a further change in the arrangement of

quarters in the first or second week of February 1964, so

as to restore two of the crew members formerly elim-

inated.’ This was a year and a half after contract award

and only five months from the scheduled contract delivery

date for the first vessel. Sun indicated in a letter dated

February 14, 1964, to Friede & Goldman, Inc., USL’s de-

sign agent under this Contract, that the additional cost

would be approximately $5,000 per vessel with a delay of

6 to 8 weeks “in development of the area.” Sun warned

that the change could affect delivery of the first vessel.

Five days later Sun explained that the cost estimate in its

earlier letter “was a considerable underestimate” and that

a revised “preliminary estimate” of costs would be for-

warded. On March 13, 1964, USL was advised by tele-

phone that Sun’s preliminary estimate of $5,000 per vessel

was revised to $58,000 total.

After completing work relating to automating these

vessels and the other contract work, Sun delivered the five

in briefs before the Board. We agree that the matter is moot since

it is clear from the record that Sun relied on the actions of the Con-

tracting Officer and USL, both of whom acted as the modi-

fication had been approved and authorized or no approval

or authorization.

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A35

vessels, Sun Hulls 628 to 632, on November 12, 1964, Jan-

uary 15, 1965, April 14, 1965, June 29, 1965 and September

24, 1965.7 Since the Contract required delivery of the

vessels at 75 day intervals commencing September 29,

1964, the actual delivery dates were respectively 44, 33,

47, 48, and 60 days beyond the scheduled contract de-

livery date for each of the five vessels.

Thereafter, Sun submitted the required detailed esti-

mates for Changes 23 and 48. The estimates were divided

into three parts relating to the basic “hardware” costs for

Changes 23 and 48 respectively and to the costs of delay,

disruption and other factors caused by performance of the

changes. In its originally filed detailed estimates, Sun

claimed a total cost of $4,738,516 excluding profit, on ac-

count of the changes. This claim was subsequently in-

creased by $480,000 exclusive of profit prior to the Con-

tracting Officer’s final decision.

As noted previously, the Contracting Officer's final

decision held that the fair and reasonable value of the

work caused by the changes was $2,200,000 inclusive of

profit. This decision was not rendered until August 21,

1969, nearly four years after Sun completed submittal of

the detail estimates in late 1965. The processing of Sun’s

detailed estimates was prolonged by the following: con-

current, protracted, and inconclusive negotiations to settle

this dispute; upward adjustments in the position of the

Maritime Administration Staff (“Staff”) on Sun’s detailed

estimates; frequent postponements of Staff decisions to

permit Sun and USL to make additional submissions re-

lating to the dispute; changes in the persons authorized to

2. USL’s vessel bearing Sun’s Hull number 629 was delivered

before that Hull number 628. Sun switched the hulls in

August 1963 to advantage of better crane facilities at No. 8

way.

A36 Final Opinion & Order (Mar. Sub. Bd., 8/ii/71)

act as the Contracting Officer; * and delay in the Contract-

ing Officer's decision to allow Sun to obtain and analyze

government files relating to the Staffs position on this

dispute.

After the Contracting Officer's decision was finally

rendered, Sun and USL appealed by letters dated Sep-

tember 9 and 24, 1969, respectively. Pursuant to Article

35 of the General Provisions of the Contract, these cross

appeals, as already noted, were referred to the Board's

Representative for hearing and recommended decision.

Lengthy public hearings were held in Philadelphia,

Pennsylvania, New York City, and Washington, D. C. from

December 1, 1969, to January 20, 1970. Extensive briefs

on the issues were filed and oral argument by counsel for

all parties was held on March 6, 1970. On June 9, 1970,

the Board’s Representative served a Recommended De-

cision in which he recommended seventeen findings and

conclusions which, as calculated in a Recommended Order

served July 16, 1970, would award $3,820,120 including

profit, to Sun and would deny the balance of Sun's then

requested claim of $6,688,893, which included profit.

USL and Staff Counsel filed Exceptions to nearly all

the findings and conclusions of the Recommended Deci-

sion. USL’s position is that Sun’s recovery must be lim-

ited to no more than $1,954,730 while Staff Counsel's

position would permit a slightly larger recovery of

$2,041,429. Sun filed Exceptions only to that part of the

Recommended Decision recognizing 307 days of delay in

3. The followi i i

ender the Contract 2 Chict or Acting Chict Ofc of Ship Com

Sar Sr mates feet cee

ber 31, 1965); Ludwig C. Hoffmann (July 1 1986 to ok

Sevan fees ce ie yy a 21, 1969): E. Scott Dillon

eh 0 June 30. ; November 28, 1967 to February

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A37

delivery of the USL ships caused by the changes rather

than 607 delay days. Sun also requested payment of in-

terest from USL on part of Sun’s claim. Replies to Sun’s

Exceptions were filed by USL on September 16, 1970. Sun

filed its Answer to Staff Counsel's and USL’s Exceptions

on September 30, 1970, and on the next day by telegram

requested oral argument before the Board.

On March 17, 1971, due to the significant and com-

plex issues involved in this proceeding the Board heard

oral argument from counsel for all parties. Subsequently,

the Board received certain responses dated March 26,

1971, and a reply thereto dated April 5, 1971, from Sun

and USL, respectively, that were generated by discussion

during oral argument.

After careful review and study of the entire record

and after much deliberation, the Board, for the reasons

set forth hereinbelow, adopts some of the findings and

conclusions of the Recommended Decision and renders

independent findings and conclusions on the remaining

unsettled issues in this proceeding.

DISCUSSION

I. Basic “Harpware Costs

Sun claimed in its detailed estimates a total of

$2,094,116 and $242,518, both figures excluding profit, for

basic “hardware” costs arising from performance of

Changes 23 and 48 respectively. The parties have agreed

to $950,000 representing the cost (without profit) of ma-

terial expended in the automation change. With respect

to several costs claimed by Sun to have been incurred due

to the changes, no exception has been taken to their im-

plied recommended award in full by the Board’s Repre-

sentative. These costs are insurance and guarantee

costs for the automation change and material costs, sub-

A38 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

contractor charges, and insurance costs for the quarters

change. No serious effort was made by USL and Staff

Counsel throughout the proceeding to contest these

claimed costs and at least with regard to the guarantee

costs the Contracting Officer recognized the entire $50,000

claimed. Accordingly, we accept these costs totalling

$63,226 as fair and reasonable.

There remains disagreement over the labor and over-

head costs associated with Changes 23 and 48 and certain

other costs associated with Change 23. Specifically, the

areas of disagreement are engineering labor, time and

material for electrical cable installation, production labor

(excluding electrical labor ), service rate, overhead rate or

burden, and the cost relating to the second sea trial for

the first vessel. The Board’s Representative recommended

award of $2,099,927 for the total basic “hardware” costs.

A. Engineering Labor or “Additional” Engineering

In its detailed estimates Sun claimed 48,863 man-

hours of engineering labor were performed on the changed

work as a result of Changes 26 and 48‘ and it tabulated

the various plans that were modified or redrawn in the

development of the changes. Under the Contracting Of-

ficer’s decision only about 27,190 hours were recognized.

4. The Board's vrcYr and the parties in their briefs

refer to Sun’s claim of 40,236 (rather than 48,863) engineering

labor hours caused by directly performing the changes. However

Sun’s engineering labor claim is based solely on its detailed esti-

mates (Tr. 732, 874), and a review of those estimates in Sun Ex-

hibit 24 reveals that Sun claimed only a total of 48,863 such hours—

17,025 such hours as a result of Change 23 (14,500 plus 2.475 for

other a and development and a net 50 hours for supplements

1 to 4) and 31,838 such hours as a result of Change 48 (31,500 plus

338 for modification 1 and supplements 2 to 4). The error appears

to have been originally made on January 13, 1970, when in the

course of this proceeding Sun's position was erroneously explained

as a sum of 17,525, 31,500 and 238 hours (Tr. A-1875).

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A39

In addition $163,500 (approximately 25,000 hours) of

“additional” engineering was recognized, but the $163,500

was not identified as to whether it consisted of only engi-

neering disruption to unchanged work or whether it con-

sisted of some mixture of engineering disruption to changed

and unchanged work.

The Board’s Representative recommended with re-

spect to this matter:

“Shipbuilder’s estimate of additional engineering pro-

duction . . . caused by changes found reasonable

except for 10% disallowance for overstatement of

plans redrafted ... .”

This recommendation was based 1) on a conclusion that

at the Contracting Officer's level the Staff intended to

allow Sun approximately the amount of engineering labor

it claimed and 2) on a jury verdict judgment that the testi-

mony of USL’s experts that Sun’s engineering labor was

overstated justified reducing Sun’s hardware engineering

hourly estimate by 10%.

Sun and Staff Counsel take no exception to this recom-

mendation. USL takes exception to the recommendation

and claims only $81,780 should be allowed for this item.

Its position is that the documentary proof established that

only 230,000 total engineering labor hours were expended

on the Contract rather than 280,000 hours, and conse-

quently total engineering labor expended supported its

contention that no more than $81,750 of engineering labor

costs was caused by the changes. Further, USL contends

that testimony of USL’s experts, underestimated and mis-

interpreted by the Board’s Representative. supports an

award of $81,750.

Throughout the hearing in this proceeding it was

acknowledged that a MarAd audit had establishe.. that

A40 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

approximately 280,000 man-hours of engineering labor

were expended by Sun under the Contract. Almost at the

end of the hearing, however, USL’s counsel requested, as

a result of testimony of Sun’s former supervisor of elec-

trical engineering department, data processing records of

engineering hours which were later identified as USL

Exhibit 51-B. Sun’s counsel indicated that figures in USL

Exhibit 51-B totaled approximately 280,000 of engineering

time; however, USL 51-B totals only about 230,000 hours.

The explanation for the discrepancy is that USL 51-B

is on its face incomplete. The exhibit has no ascertainable

beginning or concluding page; it has no explanation of

what it purports to tabulate; and it has nothing that would

indicate it is a complete document. On each page, it is

stamped February 7, 1965. The last three vessels under

the Contract were delivered after this date on April 14,

1965, June 29, 1965, and September 24, 1965, respectively.

Therefore, it is possible that some additional engineering

hours for those vessels were not recorded on USL 51-B.

Further, even as of February 7, 1965, the document is

patently incomplete since the hours indicated for some of

the codes (notably code 38) when added, total consider-

ably fewer hours than the sum indicated for those codes.

Moreover, there is no explanation or assurance that there

are not other codes that recorded engineering hours than

those indicated. On this point, Sun’s counsel warned: “I

should add that it is my understanding that the record is

neither complete in the sense it is not final, which we do

not have, and that there may well be pages missing.” (Tr.

A-2324). Since the final records are not available, we

must conclude that USL Exhibit 51-B represents only

some vague, incomplete statement of the engineering hours

and does not contradict the statements in the record that

MarAd audit established that Sun performed approximately

280,000 engineering hours under the Contract.

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A411

USL’s other contention is that the Board’s Representa-

tive failed to weigh properly the testimony of USL’s two

independent experts on the engineering labor required by

Changes 23 and 48. The experts, Norman W. Penney and

Henry W. Tiedmann, examined the plans which Sun as-

serted were affected by the changes and calculated for

each plan the fair and reasonable engineering hours re-

_ quired for a total of 15,158 hours. Their testimony em-

phasized the techniques used to reduce the redrafting

effort and the plans which were either superseded by the

changes or were not drawn at the time the changes were

authorized and as such did not require redrafting. The

testimony of these experts was corroborated by a repre-

sentative of Friede & Goldman, Inc., Daniel Costello, Jr.,

who testified that the changes added 15,500 to 19,000 en-

gineering hours to the Contract. On cross examination of

these witnesses, it was brought out that the two experts

were not apprised of relevant circumstances involved in

the plan development (such as the extensive involvement

of relevant regulatory bodies in the plan approval process

and the conference time required by some of Sun’s non-

overhead engineering personnel ); that one of the experts

included time for drawing and supervising drawings but

no time for plan approval, yard consultation, study and

conference time, while the other gave a minimum of eight

hours for each plan and included some time for first/level

supervision; that the Freide & Goldman representative gave

merely a rough estimate based upon his memory as plan

approval agent and not based on a detailed review of the

plans. .

Sun did not attribute to each plan a set number of

hours because of the problems of consultations, investiga-

tions, studies, et cetera, peculiarly troublesome under this

Contract in the plan development which were in addition

A42 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

to the actual drafting of plans. For this reason, it is dif-

ficult to evaluate the effect of the testimony of USL’s wit-

nesses on Sun's engineering labor claim. The Board's

Representative, presented with these positions of the

parties on this issue, had to exercise his judgment as to

the weight to be attributed to the testimony of USL’s

witnesses. We are not persuaded that there is sufficient

basis to set aside his recommendation that Sun’s engineer-

ing labor claim for Changes 23 and 48 should be reduced

by 10%. USL’s witnesses were unfamiliar with the signifi-

cant nondrafting problems associated with performing the

changed engineering work. On the other hand, their testi-

mony did contribute to an understanding of the amount

of time drafting and supervision should have taken. We

consider that the Board’s Representative properly weighed

this evidence. Therefore, we find and conclude that Sun

is entitled to recover additional engineering labor costs

incurred due to the changes, based on its claimed 48,863

man-hours, less 10% thereof.

B. Production Labor.

(1) Time and Material for Electrical Cable Installation.

According to the Board’s Representative, Sun claimed

in its detailed estimates approximately 135,000 hours of

production labor required to accomplish Changes 23 and

48. Over half of those hours related to production labor

required to instali the electrical cable required by Change

23. The agreed upon calculation to compute installation

costs for the electrical cables is to apply a labor coefficient

(hours/footage of cable) to total cable footage. There

is disagreement, however, over the labor coefficient—which

in this context includes hookup of equipment, testing and

calibration—and the total cable footage, which is the

length of cable drawn from the shop as required by Change

A ——

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) 43

23 before installation aboard the vessels. Before the

Board’s Representative, Sun advocated a 8 labor coef-

ficient and 19,300 feet per vessel of gross cable footage.

Staff Counsel and USL advocated a .39 labor coefficient

and 17,195 feet per vessel of gross cable footage.

The Board’s Representative recommended the follow-

ing:

“Dispute over time and material for electrical

cable installation resolved on median basis of

multiplying 18,150 feet per vessel < .6 hour labor

coefficient. Jury verdict approach sanctioned by

Court of Claims and Board of Contract Appeals

decisions followed . . . .”

The Board’s Representative reasoned that since there

was disagreement among Staff Counsel and his witnesses

and disagreement between Staff Counsel and Sun, and due

to the “inherent nature of the dispute,” the subject matter

was not susceptible to precise determination without ac-

tually measuring the cable installed, which could not be

conveniently accomplished. Hence, under these circum-

stances, the Board’s Representative felt it appropriate, pur-

suant to relevant administrative and judicial precedent, to

make a judgment determination, much as would a jury in

a contract damage suit.

Sun takes no exception to the recommendation. Staff

Counsel in his exceptions continues to contend for a labor

coefficient and gross cable footage of .39 and 17,195 feet

respectively. USL agrees with this position. Exception

is also taken to Sun’s use of uncorroborated estimates and

to the use of the jury verdict method when there were

available methods for ascertaining the labor coefficient and

gross cable footage and when testimony of Staff Counsel’s

witnesses was not in conflict.

A44 _ Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

Based upon this record we are not convinced by the

exceptions of Staff Counsel and USL that the recommenda-

tion must be set aside and their position adopted.

Staff Counsel’s labor coefficient of .39 is indisputably

derived from Sun’s cost structures (average of 76,802 hours

per vessel) and testimony of Sun’s witnesses on pur-

chased cable footage used per vessel (roughly 200,000

feet). Also, indisputably the gross cable footage of 17,195

feet was derived by the usual MarAd procedure of measur-

ing the cable to be installed as indicated by working draw-

ings and with allowances for three dimensional movements,

obstructions, etc. (12,737 feet) and applying a waste

factor thereto (35% as suggested by Sun's witness).

We have several problems with this approach. It

ignores conflicting evidence by the Contracting Officer

that notwithstanding other testimony by MarAd witnesses

he would use .6 labor coefficient (including hookup and

testing ) as he had done in his decision. It accepts without

documentary proof the approximation by Sun’s witnesses

of the total purchased cable footage used per vessel. It

does not take into account that the changed work was

more difficult than new construction work. Finally, the

method of deriving total cable footage from working plans

can only be a rough estimate and, at best, accurate within

a given estimating range.

On the other hand, we have problems with Sun's

position of a .8 labor coefficient and total cable footage of

19,300 feet. This position was not explained or scrutinized

in depth at the hearing by Sun, and Sun did not put into

evidence the cutting records, from which the total cable

footage was derived.

5. There is controversy, however, over the exclusion of 2000

hours of calibration, test and checkout on the console by non-

electrical personnel.

oe es

—, ee

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A45

Given the imperfections of both Sun’s and Staff Coun-

sel’s positions, the numerous allowances involved in the

estimates and the judgment involved of the difficulty and

scope of the changed work, we conclude this issue is not

susceptible of precise resolution. Further, it is impractical,

if not impossible, to measure the electrical cable actually

installed aboard these USL vessels, and even if such

measurement were undertaken the controversy that has

marked this proceeding to date indicates that dispute

would remain over the difficulty and scope of the changed

work. For the same reason we have serious doubts that

any further proceeding would produce any better founda-

tion for an award. Under Article 36 of the General Pro-

visions of the Contract, the parties have agreed to this

Board resolving disputes. Once Sun demonstrates that it

is entitled to recover for a particular cost that it, in fact,

incurred because of a change, we consider it our obliga-

tion, in circumstances such as these, to resolve the amount

of recovery on a reasonable basis. In similar circum-

stances, the Court of Claims in breach of contract cases *

and in cases reviewing appeals from the Boards of Con-

tract Appeals" have used the “jury verdict method,” al-

though it is sometimes remarked that the standard is not

favored and is only used when no more reliable method

for computing costs or damages is available.*

Staff Counsel’s objections to the use of the jury verdict

method by the Board’s Representative are based upon the

asserted reliability of Staff Counsel's position on this issue

6. E p Spectaty Acsomiiag Co, 0 United Staten, 276 Cr Ch

153, 184, 385 . 2d 572 (1966); Western Contracting Corp. v.

United States, 144 Ct. Cl. 318, 336, 373 ( 1958).

7. E.g., Electronic & Missile Facilities, Inc., 189 Ct. Cl. 237,

253, 416 F. 2d 1345 (1969).

8. E.g., . United States, 185 Ct.

wus Cl. 528, 401 F. 2d

A46 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

and the asserted weaknesses in Sun’s position. We have

already covered both objections and concluded that neither

approach is productive of an adequately supported award,

or in other words, under the circumstances there is avail-

able no more reliable method than the jury verdict method

for computing these costs.

Using the jury verdict method for computing these

costs, we find and conclude that as fairly as possible under

these circumstances a labor coefficient of .6 and a total

cable footage of 18,248 feet represents the reasonable value

of performing this changed work. This resulting award

for the total cable footage is roughly within the estimating

range of both positions and for the labor coefficient corre-

sponds to the judgment of the Contracting Officer which

remained unchanged during this proceeding. Further, in

effect, this resolution permits the previously discussed im-

perfections of both Sun’s and Staff Counsel’s positions to

be offset.

(2) Other Production Labor.

The balance of the total hours for production labor

claimed by Sun in its detailed estimates, according to Staff

Counsel, approximates 50,000 man-hours. This subject

concerns such matters as installation of the console, re-

visions in the galley, and installation of sensors. The pre-

cise total number of production hours involved is not

indicated in the briefs or in Sun's detailed estimates.

The Board’s Representative allowed without com-

ment all the claimed production labor hours. Staff Coun-

sel takes exception to this recommended award and would

allow only 26,385 hours based on adjustments of the origi-

nal staff evaluation of Sun’s total production labor claim

to reflect the positions of the Chief of the Division of

Estimates, the Contracting Officer, and Staff Counsel.

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A47

USL agrees with Staff Counsel's position. Staff Counsel

argues that Sun’s claim was not supported by backup data

or cost returns, that the Board’s Representative should

have given the Staff estimate some credence, and that “it

may be that if ever a jury verdict approach were appli-

cable, it might well apply here.” In support of Staff

Counsel's position MarAd’s Assistant Chief of Division of

Estimates testified on a few of the items included in pro-

duction labor, specifically, the handling and installation of

the console in the engine room, the installation of tempera-

ture and pressure sensors, and the installation of the fuel

and cargo oil tank heating and supply return lines. The

stated purpose of his testimony was to show a “great dis-

parity’ between the amount Sun claimed and the amount

indicated by the evidence and more broadly to cast doubt

on the credibility of Sun’s entire claim.

We are persuaded upon a review of the entire record

that Sun’s detailed estimates of the production labor (ex-

cluding electrical labor) are fair and reasonable.

The first item to which the MarAd’s Assistant Chief

of Division of Estimates testified concerned production

labor needed to handle and install the console as required

by Change 23. Initially, he argued that Sun’s estimate of

|

|

ite

il

witness then contended that the average ‘figure per vessel

should be 600 hours. On cross examination, it was brought

out that this represented about a 13% difference and the

Staff witness admitted this was “within the normal range

of estimating.” (Tr. A-1686.) Therefore, since Sun's esti-

A48 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

mates are within the conceded normal range of estimating

we perceive no basis to reduce Sun's production labor

estimate in regard to handling and installing the console.

The next matter raised concerned the production

labor involved in installing pressure sensors and gauges

61 hours per senior or gauge or 1100 hours total be reduced

regular calibration. It is obvious, therefore, that the

(and Staff Counsel) were estimating installation costs for

different sensors and gauges than required by Change 23.

Staff Counsel in its post hearing brief raised another

issue on this matter as a result of testimony of Sun's re-

buttal witness. A question was directed to Sun's

just the time spent on mounting and foundation and weld-

ing, et cetera.” (Tr. A-2346.) Since 20 hours were esti-

mated for installation of each original sensor or gauge Staff

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A49

Counsel argued this testimony indicated 40 hours for such

installation rather than the 61 hours claimed in Sun’s de-

tailed estimates. We are not persuaded the testimony

concerned conflicts with Sun's detailed estimates. Sun's

rebuttal witness principally testified on the technical re-

quirements for installation of the different sensors and

gauges with which he was most familiar. The record is

silent with respect to his familiarity with or expertise in

;

g25

B28

Fre

Hid:

|

it

ji

if

originally the condensate returns were to run on the ex-

posed main deck whereas according to the speci-

fication the lines should have been run “through the cargo

spaces .. . through brackets to afford protection.” How-

ever, since there were no such brackets for these ships the

original was admittedly ambiguous. Friede

& Goldman who drafted the specification stated the speci-

:

i

}

|

A’ Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

contended “the tank level may be considered as a deck in

shipbuilding terminology.” (Tr. A-1681. Emphasis added.)

While the tank top may be considered a deck, it is undis-

puted that the main deck is a deck. Sun so

Freide & Goldman's understanding of their specification.

We consider that that interpretation by Sun is reasonable.

Based on the foregoing discussion of selective con-

tested elements of Sun’s claim for production labor hours

(excluding electrical labor), we find and conclude that

Sun is entitled to recover for these elements of its claim.

Further, since Sun has presented detailed estimates of the

remaining elements of its claim which have not been seri-

ously questioned by USL or Staff Counsel other than by

certain exhibits that were not explained or scrutinized in

depth at the hearing, we find and conclude that Sun is

entitled to recover its entire claim for production labor

(excluding electrical labor) resulting from performance

of Changes 23 and 48.

(3) Service Rate

Production labor hours are used as a basis for cal-

culating the cost of Sun's services. Sun's services cover

lighting, crane service, cleaning time, material handling,

and transportation. “Traditionally,” MarAd and Sun have

agreed to a 10% service rate. That rate was applied to all

other change order settlements under the Contract which

were relatively minor. As a part of adjudicating Sun's

detailed estimates for Changes 23 and 48, and apparently

after settlement of other change orders under the Contract,

it was determined that Sun actually experienced a 7%%

service rate on this Contract.

The Board’s Representative recommended the follow-

ing with respect to this matter:

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A51

“Service rate computed at 10% of direct labor tradi-

tionally allowed by MarAd authorized rather than

74% Staff recommendation .. . .”

reasonable service rate figure.

As between a traditionally allowed service rate and a

service rate established by audit for this Contract, the lat-

ter must be allowed in determining the cost Sun is en-

titled to recover for actual work caused by Changes 23

and 48. Sun has presented no other arguments why the

audited rate should not be allowed and we know of no

reason why it should not be permitted. We note that the

audited data as presented in Staff Counsel’s Exceptions

would indicate a service rate of less than 74% but that it

:

:

the

period. When these service hours are taken into

account, a service rate closer to 74% is indicated. We,

therefore, find and conclude that Sun is entitled to recover

its changes-caused production labor costs based on a 7%%

service rate.

C. Overhead Rate

Sun’s overhead rate or burden is a ratio of indirect

expenses to total direct engineering and production labor

expenses. The overhead rate established by MarAd audit

for the Contract averaged slightly under 72%. Apparently,

A52 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

prior to that audit MarAd had agreed to a 75% overhead

rate and had settled all other change orders under the

Contract (which were relatively insignificant) on that

basis.

The Board's Representative recommended the follow-

ing on this issue:

“Overhead for changed work allowed at 75% of direct

labor, the rate previously established on other settled

changes, rather than 72% average of entire contract

including unchanged work... .”

The basis for this recommendation was that due to the

complexity and novelty of the automation change and the

extensive reworking involved in the successive quarters

changes the changes required significant management in-

volvement and “skull” sessions over a long period of time,

justifying the higher burden. Further, it was reasoned

that the 72% average rate was insufficient conipensation for

overhead expended on changed work alone and, thereivic,

the Staff was not justified in commingling changes costs

with costs for unchanged work. Finally, the Government

was rebuked for putting Sun in a position of receiving a

larger allowance for settling a dispute than it would re-

ceive if it had litigated.” USL was understood to have

expressed willingness in its written presentation to pay the

75% rate.

9. The concern of the Board’s Representative over the Staff's

willingness to concede a greater overhead rate for settlement pur-

than for formal ——e —y is difficult to f=

The Staff may have a multitude of good and sufficient reasons for

settling a matter that are not entirely related to its position for

a? purposes, including, of course, the hazards of “litiga-

tion” itself. Naturally the Staff should, in its unbiased, independent,

and fair judgment, have a sound, reasoned basis for formally ad-

judicating a matter.

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A53

Staff Counsel and USL take exception to this recom-

mendation stating that the basis given for the recommen-

dation is irrelevant to the concept and function of the

overhead rate. Staff Counsel argues that Sun’s overhead

rate is calculated by placing into an overhead pool all

indirect expenses such as salaries of high level manage-

ment and conference time of supervisory personnel and

then allocating the overhead pool 100% to all contracts in

the yard for a given time period based on their respective

total direct labor incurred for that period. Hence, it is

argued, to allow more than the actual overhead rate would

be to permit Sun to recover more than 100% of the over-

head expenses. As for the commingly of changed and un-

changed work in the 72% average rate it is c »tended that

Sun does not segregate overhead costs on a changed work

basis and that the very use of an overhead rate is con-

firmation of that fact. Therefore, any distinction between

overhead costs for changed versus unchanged work would

make no sense at all. USL adds a denial of ever having

expressed willingness to pay a 75% overhead rate.

We are persuaded that Sun is entitled to recover its

costs based on a 72% burden rather than a 75% burden.

Further, we find that the 72% rate most probably reflects a

higher than the normal rate experienced on the unchanged

contract work.

Staff Counsel has pointed out that Sun’s overhead

rate is calculated by pooling all indirect expenses and al-

locating them to all work in the yard for a given time

period based on the amount of total direct labor incurred.

More specifically, the 72% rate established by MarAd

audit on this Contract was computed from ratios of direct

and indirect labor expenses experienced in all the shops

in Sun's yard for 1963, 1964 and 1965. Significantly, all

shops are included in this process even though the rocket

A54 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

fabrication shop handled no new vessel construction work

and even though most of the other shops handled work

in addition to new vessels. Further, the shops are taken

as an aggregate with no division between work for vessel

construction and other work. Sun’s accounting practice

during this period did not permit further breakdown on

the composite overhead rate. Hence, the relationship be-

tween the 72% rate and new vessel construction work, let

alone work under this Contract, is difficult, if not impos-

sible to ascertain. The only evidence on the relationship

of the 72% rate and the rate for contract work was testi-

mony by MarAd’s Chief of the Audit Branch in the East-

ern District that the overhead rate on contract work was

possibly closer to 70%."° Under that view, the 72% rate

includes compensation for more overhead expenses in-

curred on changed work than unchanged work. In any

event, it makes no sense to award a higher overhead rate

for changed work than for other contract work, in this

instance, because the very concept of an ove head rate,

as used by Sun, is to permit allocation of overhead ex-

penses, such as those incurred in performing the changed

work, that are not susceptible with any fair degree of

accuracy or reasonableness to direct allocation. More-

over, if in fact there were more indirect expenses expended

for changed work, the continuing overhead portion would

be recouped through Sun’s unabsorbed overhead claim,

since under that claim Sun recovers its total continuing

overnead expenses incurred in performing the entire con-

tract work during the changes—caused delay period less

those continuing overhead expenses reflected in the 72%

overhead rate on the changed work.

10. Tr. A-2228. ta. - b, Dh dg. represented the

ee the changed work, but it

no testimony this point and it neither stated nor ex-

a od this geatuen tot context of the composite overhead rate.

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) ASS

As for MarAd’s use of an estimated 75% overhead rate

to settle change orders under this Contract prior to fixing

the actual rate, the overhead rate Sun actually incurred

under the Contract may be more or less than the estimate

of that rate. Once the actual overhead rate was estab-

lished there is no authority to award Sun the estimated

rate. Accordingly, we find and conclude that Sun is en-

titled to recover a 72% overhead rate on the direct labor

Se nS ae ee Wy Sage oe

D. Other Costs—Second Sea Trial.

The only other contested basic hardware costs claimed

by Sun is the cost of pierside testing and the second sea

trial of the first vessel to be delivered.

The Board’s representative recommended the follow-

ing:

“Cost of second sea trial allocated two-thirds to

automation Pe and one-third to single plane

engine addendum .

Sun and Staff Counsel take no exception to this

recommendation. USL’s sole objection is that such alloca-

tion is in direct conflict with Article 11 of the General

Provisions of the Contract which provides that “All ex-

penses of such trials . . . shall be borne by the Contractor.”

Article 11 covers “trials and tests provided in the

Plans and Specifications, in the Special Provisions, and in

these General Provisions” and is intended to assure com-

pliance with those contractual terms. But, when a change

is authorized which necessitates additional expense for

trial and test, Article 4(a) of the General Provisions of the

Contract, which provides for recovery of 110% of the esti-

mated cost of changed work, would include recovery of the

AS56 _—~ Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

expense allocable to the extra trials and tests required by

the change. Therefore, we are of the opinion that Article

4(a) is controlling in this circumstance where the pierside

testing and second sea trial primarily resulted from the

automation change. Since no exception is taken to the

two-thirds/ one-third allocation we adopt the above recom-

mendation of the Board’s Representative on this issue.

I. Decay Associatep Costs—Lecau Issues.

Sun in its detailed estimate separately claimed cer-

tain costs other than basic hardware costs (referred to here-

inafter as “delay associated costs” for convenience of iden-

tification ) which it asserted were incurred in performance

of the unchanged work by reason of Changes 23 and 48.

These delay associated costs are delay costs (labor and

material escalation, financing, services, insurance, and

“unabsorbed” overhead costs) and disruption, congestion,

“hire-fire” or layoffs, and acceleration costs. All of these

types of delay associated costs are sometimes referred to

as “indirect” or consequential costs. USL, but not Staff

Counsel, takes exception to the recommendation of the

Board’s Representative that as a matter of law the Rice

doctrine does not apply to the changes clause of this

Contract and that under this Contract delay associated

costs may legally be recovered. Additionally, USL and

Staff Counsel take exception to the recommendation of

the Board’s Representative that as a matter of law Sun

can recover any “delay” costs allegedly incurred prior to

the scheduled contract delivery dates.'' The exceptions

11. Staff Counsel within such “delay costs” only

those costs referred to herein as delay costs. USL’s how-

ever, on the Rice doctrine and cases that draws

no distinction between such delay costs and congestion,

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A57

taken to the factual recommendations of the Board's Rep-

resentative with respect to delay associated costs are con-

sidered in Parts III and IV.

A. The “Rice” Doctrine.

The Rice doctrine has developed out of four Supreme

Court cases * and their application and most particularly

United States v. Rice. In that case, the Supreme Court

held that a contractor was not entitled to recover certain

costs arising from delay caused by the Government be-

cause the “changes clause” contained in that contract was

not broad enough to include damages for delay. In Rice,

the respondent was a contractor who had agreed to install

plumbing, heating and electrical equipment in a Veterans’

Home to be constructed by another contractor. When

unforeseen conditions were encountered, it became neces-

sary for the Government to stop the work of the general

contractor while changes were being prepared and ordered.

During the period of delay, the respondent was unable to

proceed with the plumbing, heating and electrical work.

This delay resulted in increased overhead costs for re-

spondent. The Supreme Court held that the respondent

was only entitled to an extension of time for the perform-

ance of his contract and that he could not recover his costs

ee

Court recognized that recovery was dependent

upon the rights of the parties as set forth in the contract

in question. It stated:

“If there are rights to recover damages where the

Government exercises its reserved power to delay,

12. United States v. Howard P. Foley Co., 329 U. ,

United States oF Rice, 317 U.S él (1 ); H. E. Crook ra

U.S. 61 (1877). — nin ax

ASS Final Opinion & Order (Mar, Sub, Bd., 8/11/71)

they must be found in the particular provisions fixing

the rights of the parties.” (317 U. 8, at 66)

The changes clause in the Rice contract provided that if a

change caused “an increase or decrease in the amount due

under this contract, or in the time required for its perform:

ance, an equitable adjustment shall be made... .” (Em.

phasis added.) The Supreme Court interpreted that lan-

guage to mean that

“‘an increase or decrease in the amount due’ should

be met with an alteration of price, and that ‘an in-

crease or decrease . . . in the time required’ should

be met with alteration of the time allowed; for ‘in-

crease or decrease of cost’ plainly applies to the

changes in cost due to the structural changes required

by the altered specifications and not to consequential

damages which might flow from delay taken care of

in the ‘difference in time’ provision.” (317 U. S,

at 67)

The legal principle enunciated in the Rice casethat

“an increase . . . in the time required” for completion

which is caused by a change under a contract should be

met only “with alteration of the time allowed” and not

with a cost adjustment—has been followed and applied by

the Court of Claims,"® the Boards of Contract Appeals,"

and the Comptroller General." Commentators have fre-

13. Eve, John MeShain, Ine. vo, United States, 412 F, 2d 1281

(o Cl. 1969); Jefferson Constr, Co, 0. United States, 902 F. 2d

006 (Ct, Cl), cert, denied, 303 U, 8, 842 (1968),

14, Eg, Murray-Sanders & Associates, ASBCA No, 6873, 1062

BCA, par, M08, Peter Kiewit Sons’ Co, INCA No, 405, 65-2 BCA

5157; Wilkins Co, Ine,, BAACAB No, 16, 66-13, 65-2 BCA par,

boa, Terminal Constr, Corp,, CSBCA No, 2603, 68-2 BCA par,

7284, aff'd on reh,, 60-1 BCA par, 7426,

15. Eg, Comp, Cen, Deo, B-161170 (Aug, 7, 1967 (Unpub-

lished) (standard form 23A construction contract-Rice bits

Final Opinion & Order (Mar, Sub, Bd., 8/11/71) A59

quently criticized the doctrine as leading to harsh and

unfair results by ignoring the effect of delay on the cost

of performance." The doctrine does not apply to situa-

tions involving breach of contract by the Government or

unreasonable delay caused by the Government," neither

of which situation is herein involved, In two fairly recent

cases, Paul Hardeman, Ine, v, United States, 406 F. 2d

1357 (Ct. Cl. 1969), and Electronic & Missile Facilities,

Ine, v0, United States, 416 F, 2d 1345 (Ct. Cl, 1969), the

Court of Claims further distinguished the Rice doctrine

by permitting recovery of disruption to unchanged work

and cost of labor inefficiency, respectively, arising from

delay caused by changes or changed conditions on the

basis that in those cases such costs “were the direct and

necessary result of the change.” "" Hence, even though

the Rice doctrine continues to be viable law some recent

cases permit recovery of delay associated costs if they

“were the direct and necessary result of the change.”

As the Rice doctrine applies to this dispute and to

MarAd shipbuilding contracts, the Board's Representative

recommended the following:

“Rice Doctrine held not applicable to changes clause

in MarAd shipbuilding contract due to language dif-

15, (Con't,)

of costs attributable to delay in work which was not

cha but ity such wit to

on ab t perm . recovery respect to delay in work

16, FE. » Ghode, The Rice Doetrine and The R

Cc %, { Geo, Wash, L. Rev, 62, 60 (1969); ash E Bie of of

The ng Clause in Federal Construction Contracts, 35 Geo.

Wash, L. Rev, 008, 097.48 (1067); Note, The Rice Doctrine

‘eee Years: Bloody But Unbowed, 99 U, Colo, L. Rev,

17. See Laburnum Constr, Corp. v. United Stotes, 295 F.

451, 458, 109 Ct. Cl. 330, 350 (1063). ore

18. In Electronic & Missile Facilities the Court of Claims

versed the ASBCA on this very point. ASBCA No, 0866, 66-1 BCA

par, 5307, at 24,953.

A60 Final Opinion & Order (Mar, Sub, Bd., 8/11/71)

ferences, the rule of construction that ambiguities in

contracts are construed against the draftsman, and

the FMC [sie] policy continued by MarAd recogniz-

ing delay, disruption and rip-out as foreseeable and

legitimate costs of changes under contract...”

Only USL takes exception to this recommendation arguing

that the Rice doctrine bars recovery of “consequential de-

lay costs to unchanged work,” that the Rice doctrine is

applicable to this Contract, that Articles 4, 5 and 8 of the

General Provisions of this Contract clearly indicate that

recovery of delay associated costs is not intended, that the

Federal Maritime Board policy was adopted for reasons

other than recognition of delay associated costs and that

MarAd’s and Sun's prior interpretation of the Contract is

irrelevant inasmuch as it was not communicated to USL,

We are persuaded by the decision of the Board's

Representative and the presentation of Staff Counsel and

Sun that the Rice doctrine is not controlling for MarAd

shipbuilding contracts such us herein involved," As recog:

nized by the Supreme Court in Rice and subsequent cases

developing and applying the Rice doctrine, whether the

costs in question are recoverable is determined by con-

tractual interpretation, As noted hereinabove, the changes

clause in the Rice contract provided that if a change causes

“an increase. . . in the amount due under this con-

tract, or the time required for its performance, an

equitable adjustment shall be made | 7

The changes clause of the MarAd Contract, Article 4, pro-

vides in part; Se ceab ae J

19, Because of this conclusion, we need not decide whether

the precedents of Hardeman, supra, and Electronic & Missile

Facilities, supra, are controlling in this instance and whether under

those cases the cases incurred to unchanged work claimed herein

by Sun were under the facts of this dispute “the direct and neces

sary result of the change[s),”

Final Opinion & Order (Mar. Sub, Bd., 8/11/71) A6l

“(e) [With respect to any changes proposed by the

Owner] the Owner may request . . . the Contractor

to submit to the Owner the Contractor's preliminary

estimate of the change in cost, weight, moments and

centers and delay in delivery of the Vessel...”

[and]

“(d) Promptly and within a reasonable time . . . after

receipt of directions from the Owner . . . to make a

change in the Plans and Specifications . . . the Con-

tractor shall furnish to the Owner, in writing, a state-

ment of its detailed estimate of the net increase or

decrease in the cost of the contract work and probable

delay in delivery of the Vessel to result from such

change.” (Emphasis added, )

“(e) [Thereafter]. . . One hundred and ten per cent

(110%) of the net increase in estimated cost, if any,

resulting from all change cost estimates, as approved

or as finally determined, shall be added to the con-

mes price as an adjustment thereof.” (Emphasis

added.)

Articles 5 and 6 of the General Provisions of the Contract,

respectively, provide for extension of time and liquidated

damages for unexcused delay in delivery, The important

differences between the MarAd Contract and the Rice

contract and cases following the Rice doctrine is that 1)

whereas the latter provides for an equitable adjustment in

terms of cost or time for a change, the MarAd provision

provides only for an adjustment in terms of cost and 2)

the cost adjustment in MarAd contracts is founded on

change cost estimates which detail the net increase or de-

crease in the “cost of the contract work” and not just the

changed work.

AG2 ‘Final Opinion & Order (Mar, Sub, Bd., 8/11/71)

USL retorts that it matters not at all whether the cost

adjustment and time extensions are in the same or different

provisions or even if there is a time provision because

under the Rice doctrine there must be a specific provision

for recovery of consequential delay costs.

We are persuaded, however, that even if specific lan-

guage must be incorporated in a change clause to permit

recovery of delay associated costs that Article 4 of MarAd

contracts such as this Contract expressly and positively

permits such recovery in providing only for a cost (not

“equitable”) adjustment based on the change in cost of

“the contract work.” We acknowledge, of course, that the

language is not so pristine clear as to prevent any and all

arguments to the contrary, but we consider that this inter-

pretation is the plain meaning of the words involved,

This interpretation of Article 4 of this and other simi-

lar MarAd shipbuilding contracts has been consistently

applied and has been, to our knowledge, virtually unchal-

lenged until this present dispute. Thus, countless settle-

ments of change disputes under these contracts have in-

cluded recovery for ieee types of costs with the exception

of pre-contract delivery date delay costs, which will be

discussed infra, A further indication of this consistent ac-

ceptance of this interpretation of MarAd’s changes clause

is the policy of the Federal Maritime Board from Novem-

ber 1960 limiting construction-differential subsidy partici-

pation in major changes not resulting in an advance in the

art of vessel construction to th» cost based on the change

having been included in the original bid at the time of

contract award,.”” In explaining this policy in 1964 this

20, This x was instituted by a letter dated November

1960, from the Peder Maritime Bon to the Committee of >

Steamship Lines, The t policy on CDS jcipation

one which ‘Chan Pyty pty £ fA Hn 46

WPF. RK, 18) pr

C. F. K., Part 251, Appendix No, 1 (see

vides for full subsidy participation under certain criteria incl

Final Opinion & Order (Mar. Sub, Bd., 8/11/71) A63

Board stated in a published Final Decision that among

the problems of vessel construction changes subject to

subsidy participation is that:

“Disruption, delay and rip-out necessarily accompany

changes directed in the latter stages of construction

and have the effect of substantially increasing the

ultimate cost of the vessel.”

A final indication of consistent Agency interpretation of

this contract clause is the Staff position throughout this

dispute recognizing some engineering disruption and some

delay costs,

USL argues that MarAd’s prior interpretation of the

Contract, unknown to USL, and Sun's and Staff Counsel's

ex post facto characterization of the Contract are totally

irrelevant. Assuming USL’s lack of knowledge of MarAd's

interpretation, USL's argument is still inapplicable,

MarAd's and Sun's interpretation comports with the plain

meaning of Article 4 and that interpretation is available

to all who have knowledge of the Contract. A subjective

personal interpretation of the Contract, however, by any

party, including USL, is irrelevant,

USL also argues that Article 4(b) supports their con-

tention that delay associated costs are not recoverable

under the Contract, Article 4(b) provides that the con-

tractor is not required to proceed with a major owner-

20, (Cont'd, )

generally changes that are “necessary to optimize the economic

utilization of mechanization and labor h A. equipment with the

potential of reducing operating-differential subsidy (ODS),” Sub-

sidy participation limited to the original bid baste is restricted to

where the subsidy participation ia epproved only on the basis that

with reasonable certainty the a investment will produce a

return to the owner of at least 10 percent per annum after taxes

over the life of the investment.

21. American E Lines, Ine.—Contract SOS ARK

a) xport s, Ine Appeal AA

AGA Final Opinion & Order (Mar, Sub, Bd., 8/11/71)

directed change unless the owner agrees to pay “damages

from the consequent delay or other work of the contractor

then under contract... .” USL contends that by ew

pressly limiting recovery of these consequential delay

costs to the “other work of the contractor,” this Article in-

dicates that recovery of delay costs to the work of the

subject contract is not intended. We do not, however,

read this provision as a limitation on recovery of delay

costs for work performed under the Contract. Article

4(b) specifically provides for recovery of delay costs for

other work of the contractor because such costs would

clearly not be recoverable under Article 4(@) as increased

costs of performing this Contract.”

We, therefore, find and conclude that because of the

differences in language between the contract in Rice and

cases following Rice and the instant Contract, the Rice

doctrine is not applicable to MarAd shipbuilding contracts

such as this Contract and does not bar recovery of delay

associated costs,

B. Entitlement to Pre-Contract Delivery Date Delay Coste

Probably the most important legal issue presented in

this dispute is whether Sun is entitled to changes-caused

“delay” costs incurred prior to the scheduled contract de-

livery dates (referred to herein as “pre-contract [or

ili a i SES A ST A EE SEE Si NN ES eR NT AT

22. USL attempts to raise another argument under Article

dic). It, however, misstates that that Article requires certain con

tractors estimate of delay to its other work to be in terms of cost,

ut its estimate of delay to the work under the subject contract to

be in terms of delay in delivery of the vessel, In facet, Article 4(¢)

requires that such contractor's estimate for its “other work” be in

terms of “the damage cost referred to in 4(b) above” and that the

estimate for work under the subject contract to be in terms of “the

change in cost and delay in delivery of the Vewel.” Purther,

since Article 4(b) ts concerned with work other than the subject

contract It concerns only damages and obviously not an extension

of time

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A65

precontract] delivery date delay costs”), if Sun can sus-

tain the burden of proving that but for the changes it

would have delivered the vessels before the delivery dates

provided in the Contract. Assuming that pre-contract

delivery date delay costs are recognized as “delay” costs

_ notwithstanding they occur prior to scheduled contract

delivery dates, such costs are only a specialized form of

delay associated costs and as such the preceding discussion

on the Rice doctrine would a fortiori apply to these costs.

However, because of the special nature of these costs

occurring prior to the scheduled contract delivery dates

separate legal issues on entitlement are raised.

The Board’s Representative recommended with re-

spect to this issue that

“Where the contract calls for vessel delivery upon

completion and testing after five days notice to the

Owner Shipbuilder is entitled to recover established

delay associated costs under the changes clause even

though arising before scheduled contract delivery

dates ....”

His discussion of the issue shows that besides the contract

language and its interpretation by MarAd he was influ-

enced by certain rules of contract interpretation and by

certain peculiar facts surrounding this Contract which are

set forth hereinbelow.

USL and Staff Counsel take exception to this recom-

mendation and argue that as a matter of law Sun is not

entitled to recover such delay costs for the period between

the dates Sun would have delivered the USL vessels but

for the changes and the original scheduled contract de-

livery dates.

We find this issue intrinsically difficult to resolve. On

the one hand, there are the following strong arguments

for denying recovery:

é

A66 Final Opinion & Order (Mar. Sub. Bd., 8/11/71) Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A67

1. Logic and Policy—In submitting bids to perform con- conjunction with Articles 1(b) and 13 does not au-

tract work within a given length of time and no later

than the scheduled contract delivery dates, ship-

builders agree to bear all costs that might be incurred

in performing the contract work (including any

changes work) until the scheduled contract delivery

dates. MarAd and USL have a unilateral right to

impose changes that produce no recoverable delay

costs until after the scheduled contract delivery dates.

The incentive to delivery early is unaffected by this

approach because the yard has its facilities and man-

power available earlier for other work. A contrary

result would dilute the authority to issue change

orders and would create havoc in determining the

low responsive bidder. Neither MarAd nor the owner

would be able to determine which bid is really low-

est because they would not know what the subjective

intent of the bidder is with respect to early delivery.

On the other hand, if a contractor is basing his low

bid on the possibility of early delivery, he can ex-

pressly make the early delivery date an element of

the bid and thereby accept the risk of failing to meet

the early delivery date.

2. Contract Theory—Article 1(b) does not provide a con-

tractor a “right” to deliver early. It merely provides

an inchoate right to deliver early after performance

of “contract work,” including work resulting from

change orders. This is confirmed by Article 13 of the

General Provisions of the Contract which provides

that the Owner shall accept a vessel if, after requisite

trials, “. . . the requirements . . . of the Special Pro-

visions, these General Provisions and the Plans and

Specifications and changes thereto have been met

... (Emphasis added.) Article 4(e) when read in

thorize recovery of pre-contract delivery date delay

costs. Article 4(e) provides for recovery “of the net

increase in estimated cost,” namely the net increase

“in the cost of the contract work.” Under Articles

1(b) and 13 the “contract work” is inclusive of work

resulting from changes and no right to early delivery

attaches until after performance of the non-changed

contract work and performance of the work resulting

from changes. If the work resulting from the changes

extends until the scheduled contract delivery dates or

thereafter the right to early delivery never arises. In

other words, under the Contract the “contract work”

is not increased, within the meaning of Article 4 and

on the basis of the contractor’s bid for the Contract,

in the situation of work resulting from a change ex-

tending the time for completion of the Contract at

least to the scheduled contract delivery dates. In

that situation there has only been a frustration of the

contractor's plans to deliver early. Moreover, to per-

mit recovery under this fixed price Contract would

create an inequality in mutuality; the yard would

have the unexpressed and unspecified right to early

delivery but no obligation and no penalty for failing

to do so. The owner, on the other hand, could only

make plans and commitments in the expectation of

an early delivery date at his peril.

3. Precedent—There is no precedent to support such re-

covery. In the context of the Rice doctrine and pos-

sibly of broader applicability, United States v. Blair,

321 U. S. 730 (1944), which has not been overruled,

denied such recovery based on lack of explicit lan-

guage in the contract to cover such costs. In that

case, the Court said:

A68

Final Opinion & Order (Mar. Sub. Bd., 8/11/71 )

“The Government and respondent covenanted

that the construction work would be completed

within 420 days. . . . They cannot be said to

have executed these contracts in contemplation

of the then unrevealed intention of respondent to

complete his work three and one-half months

early. The fact that respondent subsequently

gave notice of this intention to all the other

parties concerned could not give rise to a new

obligation on the Government to compel accele-

rated performance from Redman.

Respondent had the undoubted right to finish his

construction work in less time than the stipulated

420 days, but he could not be forced to do so

under the terms of the contract. To hold that he

can exact damages trom the government for fail-

ing to cooperate fully in changing the contract

by shortening the time provisions would be to

imply a grossly unequal obligation. We cannot

sanction such liability without more explicit lan-

guage in the contract.”

4. Circumstances of this Contract—USL and MarAd did

not learn of Sun’s expected early delivery date at the

time of bidding on this Contract or at the time of

award of that Contract. Sun did not apprise USL or

MarAd of these costs at the time issuance of these

changes was being discussed. Further, heretofore

such costs have not been recognized and USL and

MarAd had no basis to expect such costs. Moreover,

Sun’s proof consists of back-tracking from actual de-

livery dates or of relying on very broad estimates or

schedules drawn up as a management technique to

spur production.

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A69

On the other hand, strong arguments have been pre-

sented by the Board's Representative and Sun that would

permit recovery:

1. Logic—These costs occur because of the passage of

time and are the direct consequence of the delay in-

duced by the changes; the daily costs of delay are the

same whether occurring before or after scheduled

completion date. Therefore, these costs, as costs

directly related to the changes, should be compen-

sable under Article 4 of the contract. Moreover, re-

covery would allow equal treatment where there is a

delay induced by a change for a contractor who

would have delivered early and a contractor who

would have delivered on the contract scheduled dates.

2. Contract Theory—Article 4(e) of the General Provisions

of the Contract provides that “One hundred and ten

per cent (110%) of the net increase in estimated cost,

if any, resulting from all change cost estimates, as

approved or as finally determined, shall be added to

the contract price as an adjustment thereof.” This

clause broadly permits recovery of costs incurred by

reason of a change and does not preclude award of

pre-contract delivery date delay costs. As for the

scheduled delivery dates, these only established the

outside limits of delivery for liquidated damages pur-

poses. They do not prescribe a right to early delivery

and do not support the concept that the yard is leased

for a definite time period. Article 1(b) of the Con-

tract’s Special Provisions refutes such interpretations

by its provision that, upon five days notice after vessel

completion, the owner must accept delivery.

3. Precedent—While there is precedent to support award

of such costs in the event of a breach of contract or

unreasonable delay, it has not been decided whether

A70 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

such costs are recoverable in the absence of either

event. However, the reasoning of the Court of Claims

in Metropolitan Paving Co. v. United States, 325 F. 2d

241 (1963), a breach of contract case involving pre-

contract delivery date delay, appears to be pertinent.

The Court stated:

“While it is true there is not an ‘obligation’ or

‘duty of defendant to aid a contractor to com-

plete prior to completion date, from this it does

not follow that defendant may hinder and pre-

vent a contractor’ early completion without in-

curring liability. It would seem to make little

difference whether or not the parties contem-

plated an early completion, or even whether or

not the contractor contemplated an early com-

pletion.” (325 F. 2d at 242).

Logically, it is difficult to distinguish the situation

where pre-contract delivery date delay is due to un-

reasonable conduct on the part of the Government

and the situation where the Government and ship-

owner exercise their right to unilaterally order

changes without the consent of the contractor which

results in pre-contract delivery date delay and the

contractor is entitled to recover “the increase .

cost of the contract work.”

4. Circumstances of this Contract—According to Sun, its

bid for this Contract was low and was based on the

expectation of early delivery in order to be profitable.

Sun scheduled its work accordingly and alleges to

have had the capacity to follow that schedule or some

other that would have produced early delivery but

for the changes.

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A71

After considering these arguments on both sides of

the issue, it is our opinion and we find and conclude that

these costs are legally recoverable. There seems little

doubt that these costs are incurred and that a bid predi-

cated on early delivery does not cover these costs. Con-

ceptually, insofar as incurrence of costs, there seems little

difference between delays before or after the scheduled

contract delivery date, as has been recognized thus far in

cases relying on breach of contract or unreasonable delay.

United States v. Blair, supra, is distinguishable.” More-

over, the Contract in Article 1(b) of the Special Provisions

expressly permits early delivery and in Article 4 of the

General Provisions recognizes “the increase in the cost of

the contract work . . . to result from such change” and

as such expressly provides for recovery of these types of

early delivery delay costs. We consider increased work

resulting from changes to be obviously an increase in the

contract work within the meaning of Article 4. We are

not persuaded that permitting entitlement to these costs

will result in inexorable difficulty in determining the lowest

responsive and responsible bidder.

We would caution, however, that because of the prob-

lem of mutuality, the problem of notice of the early de-

livery date to the parties concerned, and the problem of

proof of that date, such costs can only be recoverable in

appropriate cases where very strong proof is offered of

such early delivery date. By a strong showing of proof we

intend something more than self-serving schedules of a

yard. Possibly corroboration by independent experts, ac-

knowledgement by the owner and MarAd or substantial,

23. Blair is distinguishable either on the ground that it merely

applied the language of Rice to a substantially similar contract,

which differs materially from the instant Contract, or on the ground

that the Rice-Blair rule is limited to cases where the delay is due

to “factors outside the Government control.” Laburnum Constr.

Corp. v. United States, 325 F. 2d 451, 458 (Ct. Cl. 1963).

A72 Final Opinion & Order (Mar, Sub, Bd., 8/11/71)

reasonable actions on the yard’s part in reliance on such

date would constitute such proof, Also, bearing on the

question of proof would be the extent to which the parties

affected were apprised prior to issuance of the change that

such costs would be levied against them as part of the

cost of the change order,

Since we have determined that there is no broad legal

bar to recovery of delay associated costs Sun claims it in-

curred as a result of Changes 23 and 48 we turn to the

issue of whether Sun has sustained its burden of proof that

it did in fact incur such costs and did incur them to the

extent claimed,

Ill, Detay Associaren Costs—Detay Costs.

The delay associated costs considered herein are delay

costs and certain other costs incurred in performing un-

changed work due to the changes. The delay costs

claimed by Sun in its detailed estimate for the changes

were labor and material escalation, financing, services, in-

surance, and unabsorbed overhead, The Board's Repre-

sentative recommended award of $871,037, exclusive of

profit, for these costs, Of this recommended award, agree-

ment was reached only with respect to the cost of insur-

ance caused by the changes ($15,378 exclusive of profit),

Further, no exception has been taken to the recommenda-

tion that Sun's claimed financing costs were included in

the unabsorbed overhead claim, Some issues remain, how-

ever, concerning these financing costs, With respect to

each of the other delay costs no agreement was reached

on the amount Sun is entitled to recover.

(A) Factual Findings of Delay in Delivery.

The exact sum for which Sun is entitled to recover for

each of the delay costs requires a determination of the

Final Opinion & Order (Mar, Sub, Bd., 8/11/71) A73

exact number of days of delay in delivery of the USL

vessels caused by the changes. Sun claims and the Board's

Representative recommended that Sun would have de-

livered the USL vessels prior to the scheduled contract de-

livery dates but for Changes 23 and 48, Therefore, we

must determine whether there was pre-contract and/or

post contract delivery date delay caused by the changes.

(1) Pre-Contract Delivery Date Delay,

The Board's Representative concluded that but for

Changes 23 and 48 each USL vessel could have been de-

livered 15 days prior to the scheduled contract delivery

date, He was persuaded by three factors in reaching this

conclusion,

First, a November 1962 building schedule, initiated

by the President of Sun, projected delivery of the first

USL, vessel in July 1964, about 60 days prior to the

scheduled contract delivery date of September 29, 1964,

The Board's Representative found that this intention to

delivery early, expressed one month after contract signing,

was supported by the fact that Sun had to delivery early

in order to maximize its opportunity to earn a profit be-

cause of its low contract price.’ Also, the award to Sun

on June 14, 1963, of the follow-on Grace Line contract

for construction of four vessels at $52,600,000 provided

Sun with an additional motive to expedite delivery of the

USL vessels. The Board's Representative, however, recog:

Ss alitedlieest i illiaeiieemeealiineinal

M4. The assumption or finding that Sun's contract price was

low for these five USL vessels is apparently based on the following

facts. The Chief of the Office of Ship Construction operas in a

memorandum to the Seoretary of the Board dated July 16, 1

that a reasonable fixed price bid for each of the USL vessels wou

be $12,500,000 but that due to the competitive nature of the ship-

building industry and past bidding experience the low bid was ex-

to be in the range of $10,500,000 to $11,000,000, Sun

me the low bidder at a bid price of $10,590,000 per vessel, It

is of interest that the next lowest bid was $10,786,000 per vessel,

AT74 Final Opinion & Order (Mar, Sub, Bd., 8/11/71)

nized that even absent the changes the early delivery

dates contained in the November 1962 building schedule

could not have been met.

The second factor that persuaded the Board's Repre-

sentative of 15 days of pre-contract delivery date delay

per vessel was the testimony of Mr, E, Scott Dillon, to the

effect that Sun could have delivered the vessels early

absent the changes. Prior to the hearing, it was Mr, Dil-

lon’s opinion that the first vessel could have been delivered

at least 30 days prior to the scheduled contract delivery

date absent the changes, After reviewing the discovery

material and superficially studying the evidence presented

at the hearing prior to his testifying, Mr, Dillon modified

his opinion to suggest probable delivery of the first vessel

within a range of 0 to 30 days prior to the contract date

and if a precise date had to be selected, then 15 days prior

to the scheduled contract delivery date, Mr, Dillon's

conclusion was primarily based on his assessment that the

disruptive effect of the changes could normally be ex-

pected to cause a total delay of at least 75 days for the

five vessels,

The final factor that persuaded the Board's Repre-

sentative was his own analysis of some of the “other events”

which delayed the construction of these vessels: (1) the

addendum to the Contract signed on February 25, 1963,

providing for a single plane turbine engine; (2) tardiness

in the preparation of engineering and working plans for an

Atlantic Refining tanker, Hull 627, which delayed the en-

gineering effort of the USL, vessels; (3) 16 days of rain

in April 1964; (4) inoperation of one crane in October

1963; and (5) repair work on the Cuvanoca during June,

July, and August 1964, which diverted workers from the

USL, vessels,

The Board's Representative concluded that these in-

cidents substantially reduced the prospect of Sun's ful-

Final Opinion & Order (Mar, Sub, Bd., 8/11/71) A75

filling its intention of delivering the vessels 60 days early,

He decided that it was “not possible, or indeed proper, to

conduct an independent investigation of the facts.” There-

fore, he accepted Mr, Dillon's conclusion that but for the

changes each vessel could have been delivered 15 days

prior to the contract delivery date as the “most objective,

carefully considered and impregnable evidence of record.”

All parties take exception to this recommendation,

Sun argues that the evidence supports a finding that the

changes caused an average per vessel of 75 days of pre-

contract delivery date delay, Sun's position is based on

1) Sun's history of delivering MarAd vessels early; 2) the

necessity to Sun of early delivery in order to make its bid

competitive and the Contract profitable; 3) the November

1962 building schedule setting delivery for each vessel

75 days in advance of the scheduled contract delivery

dates; 4) the motivation of the Grace Line contract to de-

livery the USL, vessels early; 5) testimony of Sun's wit-

nesses that Sun intended and had the capacity to ac-

complish the intention of delivering the USL vessels

according to the November 1962 delivery schedule, 6) the

changes added four months of work to the Contract, USL

and Staff Counsel contend that the preponderance of evi-

dence shows that Sun could not have delivered the USL

vessels prior to the scheduled contract delivery dates even

if the changes had not been made, Their position is based

on some of the evidence relied on by the Board's Repre-

sentative in his recommendation and on additional alleged

delay factors,

We are not persuaded by either the recommendation

of the Board's Representative or by Sun's position,

First, we find that Sun’r intention during the early

stages of the Contract to attempt to deliver the USL ves-

sels early, as evidenced by the November 1962 building

A76 Final Opinion & Order (Mar, Sub, Bd., 8/11/71)

schedule, to be of little, if any, probative value with respect

to Sun's actual ability to deliver early absent the changes.

We view this highly optimistic and ambitious schedule as

an attempt by the contractor to set forth challenges for its

staff to meet in the performance of the Contract and to

provide a time cushion to protect against contingencies

which might, and in fact did, arise during construction.”

We do not believe that the dates contained in that sched-

ule, were realistic predictions of future performance but

rather were designed to provide an incentive for increased

production by shipyard personnel,”

Second, we disagree with the unwarranted reliance by

the Board's Representative on the 15 days of pre-contract

delivery delay testimony of Mr, Dillon to the exclusion of

the testimony of other witnesses.” Messrs, Hoffman,

McGowan, and Lowry, all of whom were at least and

probably more familiar with the relevant facts, testified

that even absent the changes Sun would not have delivered

the vessels in advance of the «cheduled contract delivery

dates. Two USL witnesses, Mr. Young and Mr, Snow,

both supported the testimony of MarAd's witnesses that

the vessels could not have been delivered early, Further-

EE [=

25. Mr. Dillon stated with respect to this schedule that it

“represents an optimistic schedule, one which sets forth ——

to the shop foreman and all supervisory personnel,” (Tr, A-1492,)

26. Mr, Grant, a MarAd witness, testified that Mr, Hutchinson,

Superintendent of Production Control for Sun, expressly told him

that Sun used its schedule for this purpose, (Tr, A- 1389.)

27. For example, the Board's Representative states that Mr,

Lowry’s testimony “failed to address itself to the possibility of any

re-contract delivery date delay.” (Recommended Decision, p, 00)

Vet, in reviewing the record we find Mr. Lowry testified,

“It was my conclusion that based on the degree of

that existed immediately prior to the authorization the

change 23 and Sun's ormance on other work for the Mari-

time Administration and the status of material deliveries that it

was unlikely that they would have delivered these vessels in

advance of the contract delivery date.” (Tr, A-1235,)

Final Opinion & Order (Mar, Sub, Bd., 8/11/71) AT7

more, Mr, Dillon in his testimony conceded that the vessels

could have heen delivered zero dave early even absent the

changes. It should also be noted that Dr, Dillon qualified

his testimony because he had not made a detailed study

of the production analysis reports obtained during dis-

covery and because he was not familiar with all of the

prior testimony at the hearing. Under these circumstances

we think the Board's Representative erred in attaching so

much significance to the figure—15 days prior to the sched-

uled contract delivery date—chosen by Mr. Dillon when

he was urged to pick a precise date for delivery,

Third, although the Board's Representative listed

some of the “other events” which delayed performance

of this Contract he did not take into account other events

which also delayed the performance of the Contract. A

complete review of the record with respect to the facts

concerning the delay caused by other than the changes

discloses that there was delay in the engineering for these

vessels both prior to and after the change orders were

issued, These engineering problems were not entirely re-

lated to the changes, Sun's material procurement was “so

late as to jeopardize completion on the [scheduled] con-

tract delivery date.” (Tr, A-1743), The Board's Repre-

sentative concluded that the late material procurement

did not affect delivery because Sun was aware of the prob-

ability of the changes and had no need to press suppliers

of materials, Sun's witnesses at the hearing, however,

testified that Sun did not delay material procurement be-

cause it knew of the probability of changes. Thus, we

think the late material procurement is a factor to be con-

sidered in determining whether Sun would have delivered

early but for the changes. Our review of the record also

indicates that Sun's production effort on the Contract was

adversely affected by the diversion of manpower for repair

A78 Final Opinion & Order (Mar, Sub, Bd., 8/11/71)

work, All of these factors together with the incidents con-

sidered by the Board's Representative support the conclu-

sion of Messrs. Hoffmann, MeGowan and Lowry that even

absent the changes Sun could not have delivered the USL

vessels prior to the scheduled contract delivery dates, In

any event, it is our conclusion, on the basis of the record,

that Sun has not sustained its burden of proving that it

not only intended to deliver early but that absent the

changes it would in fact have delivered the vessels prior

to the scheduled contract delivery dates. Any deficiencies

or ambiguities in the record in this regard must be resolved

against Sun, the party bearing the burden of proof, and

consequently Sun must bear the onus of failing to meet

that burden proof.

(2) Post Contract Delivery Date Delay

The Board's Representative recommended that Sun

was entitled to recover delay costs for the full 232 days

of actual post contract delivery date delay, Deliveries of

the vessels occurred as follows:

Contract Actual Days

Hull Delivery Date Delivery Date Late

629 )-20-64 11-12-04 4

628 12-13-04 1-15-65 33

630 2-26-65 4-14-65 47

631 5-12-65 6-29-65 48

632 7-26-65 9-24-65 60

The Board's Representative based his conclusion on

the finding that the changes involved 75 days additional

work, which was more than the amount of actual post

contract delivery date delay on any of the vessels, and on

the further finding that $80,800 of overtime was necessary

to expedite delivery of the first two vessels. He also in-

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A79

dicated that while deliveries of the last three vessels might

have been accelerated by incurring additional costs Sun

was under no contractual obligation to do so.

Staff Counsel and USL contend that the Contracting

Officer was correct in allowing recovery for 209 days or a

maximum of 44 days per vessel, leaving 3, 4 and 15 days

of unexcused delay for the last three vessels respectively.

Staff Counsel argues that it is well established that there

is a “learning curve” in the production of successive vessels

and therefore, the last vessels should have been delivered

sooner. He also contends that Sun’s decision to devote

manpower to the CuyaHoca repair project diverted labor

from the USL vessels and that Sun’s decision to delay the

start of construction of the last two vessels delayed their

delivery. Such conduct, it is argued, demonstrated a lack

of due diligence in the construction of the last two vessels.

We reject these contentions and adopt the finding of

the Board’s Representative that Sun is entitled to recover

delay costs for the entire post contract delivery date delay

' period. We note that construction of the first two vessels

entailed a total of 16% and 20 months from keel laying to

delivery respectively; the third vessel 21% months; the

fourth vessel 16% months; and the fifth vessel only 15%

months. Thus, the shorter construction time for the last

two vessels clearly reflects the effect of the learning curve.

The reason why these vessels were delivered later than the

first vessel was a decision by Sun to delay keel laying for

the last two vessels. This decision was made for two rea-

sons: 1) the difficulties experienced in installing the

changes-related equipment through the double bottoms

encountered in the first three vessels induced management

to delay the keel laying of the last two vessels to prevent

this problem from arising; and 2) a desire by Sun to lessen

the additional amount of services required by the last two

A80 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

vessels and thereby lessen the expenses caused by the

changes. Thus, the delay in the keel laying of the last

two vessels was designed to reduce changes-caused ex-

penses and was not due to lack of due diligence on the

part of Sun.

While we agree with Staff Counsel that the diversion

of manpower to the repair work on the Cuyanoca signif-

icantly impaired Sun’s ability to perform on the USL Con-

tract, we have already taken this factor fully into account

in denying Sun’s claim for pre-contract delivery date delay

costs. Therefore, we do not believe that Sun’s recovery

for post contract delivery date delay should be reduced

because of the diversion of manpower due to the repair

work.

Accordingly, we agree with the Board’s Representa-

tive that Sun’s recovery of delay costs should be based on

the full 232 day period of post contract delivery date

delay.

B. Costs of Delay.

(1) Labor Escalation.

This issue concerns the increased labor cost to Sun

of performing unchanged work in a later time period due

to the changes-caused delay. There is no dispute that

under Sun’s collective bargaining agreements labor costs

escalated during the period of the Contract and that Sun

did perform a number of labor hours on the “unchanged”

work in higher wage periods as a result of the changes-

caused delay. The dispute centers on the time in con-

struction when changes-caused labor escalation occurred,

the exact number of labor hours expended in higher wage

periods due to the changes-caused delay, and the appro-

priate total contract labor input to be used in the labor

escalation formula.

al, lhe

)

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A8l

The Board’s Representative found that delays were

caused to both non-outfitting and outfitting production.

Therefore, he concluded that Sun should recover $72,185

for labor escalation computed by using both outfitting and

non-outfitting labor hours and the 15 days precontract de-

livery date delay plus the actual post contract delivery

date delay for each vessel.

Staff Counsel takes exception to this recommendation

of the Board’s Representative contending that the changes-

caused delay occurred during and not prior to performance

of outfitting work and that the delay to pre-outfitting work

was due to causes under Sun’s control and not to the

changes. Hence, Staff Counsel argues that it was error to

accept Sun’s formula which applied Sun’s wage increase

trends to a total contract labor input of $28,600,000. Fur-

ther, Staff Counsel argues that even assuming the changes

threw performance of pre-outfitting labor into a later time

period, the recommended award of the Board's Repre-

sentative should be reduced by $18,000 to reflect Sun’s

optional undertaking of repair work on the Cuyanoca

which resulted in a diversion of manpower from USL ships

of 200,000 manhours and also by an additional $18,000 to

reflect the actual total contract labor input of $22,133,000

rather than Sun’s estimated $28,600,000. USL relies on

Staff Counsel’s exceptions.

We agree with the Board’s Representative that both

pre-outfitting and outfitting work were affected by the

changes. Change 23 was approved on May 31, 1963,

before outfitting took place on the first vessel. It is not

clear exactly when outfitting first occurred, but Staff Coun-

sel has maintained it was not until the time of launch

which was on May 13, 1964, for the first vessel. Certainly

by that time outfitting was significantly occurring. The

exact scope of Change 23 was not settled until long after

A82 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

May 1963 and the engineering for both changes was not

settled until May of 1964. Even assuming the changes

only directly affected outfitting work it is apparent that

once Sun became aware that the changes would cause

some delay in delivery of the vessels it had to readjust its

already scheduled construction sequence affecting pre-

outfitting work in order to deliver the vessels as timely as

possible and in order to reduce the overall cost of both the

changed work and basic contract work. Otherwise, the

unchanged work would have proceeded at the originally

scheduled pace and the changed work at the delayed pace,

most likely producing even greater disruption and delay

in delivery of the vessels than actually occurred.

We consider that Staff Counsel’s contention that the

recommended award should be reduced because of the

failure to consider the effect of Sun’s optional undertaking

of repair work on the Cuyanoca is relevant to the num-

ber of days of changes-caused delay subject to labor

escalation. In denying Sun’s factual claim for pre-contract

delivery date delay, we fully took into account the diver-

sion of men to perform repair work on the Cuyanoca.

Therefore, this factor is taken into account in our deter-

mination of 232 days of changes-caused delays. The

Board’s Representative based his award for labor escala-

tion on utilization of a delay period of 307 days—75 days

of precontract delivery date delay and 232 days of actual

post contract delivery date delay. Since we have decided

that there was no precontract delivery date delay, the

award for labor escalation must be reduced by 75/307 or

24.4 percent.

We agree with Staff Counsel’s contention that Sun’s

formula improperly utilized a figure for total contract

labor input of $28,600,000. That figure improperly in-

cluded allocation of all overhead expenses, including cost

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A83

of rent, depreciation, electricity, insurance, etc. An actual

audit demonstrated that the total direct labor input to the

Contract was only $17,163,000. Indirect labor was estab-

lished at the hearing as being equal to 29% of direct labor

or approximately $4,970,000. Thus the total labor input

which would be subject to escalation was only $22,133,000.

On this basis, the Board’s Representative overstated the

amount of labor subject to escalation by approximately

$6,500,000. As calculated by Staff Counsel under the

formula for labor escalation this overstatement requires a

reduction of $18,000 in the recommended award of the

Board’s Representative.

Accordingly, the award of $72,185 for labor escalation

must be reduced by 24.4 percent because of our denial

of the claim for precontract delivery date and by $18,000

for the use of the improper amount of labor input. There-

fore, we award the sum of $38,111.86 for labor escalation.

(2) Material Escalation

The Board’s Representative recommended award of

$82,125 for material escalation. He based this award on

the $22.5 million value of material which Sun claimed it

purchased late because of the changes. Although the total

amount of materials purchased under the Contract was

valued at $27.5 million, Sun claimed that material commit-

ted by suppliers prior to the changes was valued at only

$5 million. The Board’s Representative accepted Sun’s

method of computation based on the application of the

increase in the wholesale price of metals and products

index to the $22.5 million dollar figure for the period of

the delay.

Staff Counsel, supported by USL, raises several ob-

jections to this finding of material escalation. Staff Coun-

sel notes that Sun submitted no evidence of material es-

A84 Final Opinion & Order (Mar. Sub. Bd., 8/11/71)

calation except for its citation of the wholesale price

index. No attempt was made by Sun to prove that ma-

terial procurement was thrown into a later time period

because of the changes and that increases in the prices of

the material required for the vessels did in fact occur.

Sun did not introduce a single invoice or purchase order

showing that the price of any item increased during the

period of delay caused by the changes. Indeed, Sun’s

President, Mr. Atkinson, testified that Sun did not delay

the purchase of material when it learned that the changes

would be directed. (Tr. A-2353.) Moreover, Mr.

McGowan, Chief of the Division of Estimates at MarAd,

testified that the cost of much of the steel was not subject

to escalation because it was purchased at the same time it

would have been purchased absent the changes and the

cost of the main boilers and engines were not subject to

escalation because the costs of these items were committed

before the changes were authorized. (Tr. 639, 640).

Finally, Staff Counsel argues that as for material

directly related to the changes, the increased cost of such

material has been included in the award for hardware.

The $950,000 which was agreed to by the parties as the

added material cost for the five vessels required by the

changes actually covers material purchase orders and sub-

contracts having a total value of approximately $10 million.

Therefore, Staff Counsel contends no escalation should be

awarded for this material.

We agree with Staff Counsel and USL that Sun’s

failure to introduce material procurement records to prove

what material escalation, if any, in fact occurred consti-

tutes a failure to sustain the burden of proof. Indeed,

under these circumstances where direct proof of material

procurement records was available, reliance on the whole-

sale price index represents a classic example of the failure

Final Opinion & Order (Mar. Sub. Bd., 8/11/71) A85

of a litigant to satisfy the requirement of the burden of

proof. We cannot accept Sun’s uncorroborated assertion

that material escalation occurred and that the wholesale

price index is the correct measure of that escalation in

view of Sun’s failure to introduce any affirmative evidence

and the contrary testimony by Mr. McGowan. Accord-

ingly, we deny Sun’s claim for material escalation for its

failure to sustain its burden of proof.

(3) Services.

The Board’s Representative awarded $172,349 * for

additional services performed during the changes-caused

delay period including such items as crane service, clean-

ing and caretaking, temporary lights, and water and air

services. The Board’s Representative based this award

on the following computation: the number of days delay

(7% months) x 3500 hours per month x $5.78 per hour

labor cost. His computation of the number of delay days

for this item was based on his finding of 15 days pre-

contract delivery date delay plus the actual post contract

delivery date delay for the first three vessels and the

agreement of the parties that construction time for the

last two vessels was only extended one month because of

the changes.”

28. Although the Board’s Representative in his Recommended

Decision awarded $159,210 for services, Staff Counsel in his com-

putation of the award based on that decision pointed out that be-

cause the Board’s Representative disallowed part of the claim for

production labor for installing electrical cable the service amount

contained in the hardware claim must be reduced by $13,139 and

this amount added to the award for services during the delay

period. The Board’s Representative in his Recommended Order

accepted this suggestion.

29. Keel laying for the last two vessels was delayed by man-

agement in order to reduce expenses, supra at pp. A79-A80. Thus,

construction time for the last two vessels was decreased. Since

services are a function of construction time, only one month of

additional services was necessary for each of the last two vessels.

A86 Final Opinion & Order (Mar, Sub, Bd., 8/11/71)

The 3500 hours per month was based on Sun's esti-

mate of 3500 hours of additional services per month, It

was derived from a “combination of accounting records

and other information” and allegedly reflected a deduction

for the service increment contained in the basic hardware

claim, The Board's Representative rejected Staff Counsel's

contention that only 1870 hours per month should be

allowed for additional services based upon the lowest

number of hours per month actually experienced for crane

service, cleaning and caretaking, and temporary lights, air

and water service, He stated that Staff Counsel's reliance

on the minimum rather than the average number of hours

did not seem to be fair and reasonable.

Staff Counsel argues that the Board's Representative

erred in his acceptance of Sun’s unsubstantiated claim that

total services averaged 5000 man-hours per month, (Sun

reduced this amount to 3500 hours in its claim to take

into account services claimed as part of the hardware

claim.) Staff Counsel urges that based on Sun's own

records the service averaged did not exceed 3,720 man-

hours, Staff Counsel also asserts that both Sun and the

Board’s Representative did not deduct enough hours from

the service average to take into account all the services

which are not time oriented and, therefore, are not affected

by the delay, Such services include crane service to

fabricate and erect steel hulls which depends on the

quantity of steel and not time, the installation and removal

at the completion of construction of temporary lighting,

piping and ventilation, and the cleaning of ship tanks,

cargo holds and accommodation space, prior to delivery

of the ships. Staff Counsel concludes that when appro-

priate deductions are made to reflect the exclusion of these

services, Staff arrived at the figure of 1870 hours per month

per vessel,

Final Opinion & Order (Mar, Sub, Bd., 8/11/71) A87

Since Staff Counsel contended that the additional

construction period during which additional services were

rendered was six months, Staff Counsel arrived at the

following calculations for additional services:

6 months x 1870 hours x $5.68 per hour = $63,729.60,

From that figure Staff Counsel deducted $30,625 for the

dollar amount of the services contained in the hardware

award, Therefore, Staff Counsel concludes that Sun is

entitled to only $33,104.60 for additional services due to

the delay. USL relies on Staff Counsel's argument in its

exception,

We agree with Staff Counsel that Sun and the Board's

Representative have inflated the amount of hours of addi-

tional services per month provided during the period of

delay by Sun because they rely on a base of an average

of 5000 service hours per month whereas actual audit re-

turns reveals a figure closer to an average of 3700 such

hours. On the other hand, we agree with the Board's

Representative that Staff Counsel's use of the figure 1870

hours per month is unrealistic because, as Staff Counsel

argued before the Board's Representative, it is based on

the minimum amount of hours of additional service, Ac-

cordingly, and in the exercise of our best judgement, we

have decided to increase Staff Counsel's figure by one-

third to 2500 hours per month which we believe to be a

fair and reasonable evaluation of the amount of hours per

mouth of additional services rendered by Sun.

Based on our prior determination that there was no

pre-contract delivery date delay, we find that for pu

of additional services the delay period for the first three

vessels was the actual post contract delivery date delay or

a total of 124 days. We accept the agreement of the

parties that construction of the last two vessels was ex-

tended by only 30 days each because of the delay, Thus,

A8S Final Opinion & Order (Mar, Sub, Bd., 8/11/71 )

the delay period during which additional services was pro-

vided was 184 days or 6 and & months,

Therefore, the following computation is used to de-

rive our award for additional services:

6% months X 2500 hours = 15,313 hours

15,313 hours X $5,676 per hour =~ $86,916.59

From which amount there must be deducted $44,589.52

awarded for services in the hardware award, Accordingly,

we award $42,327.07 for additional services,

(4) Financing,

The Board's Representative denied Sun's claim of

$51,875 as its cost of financing due to the delay caused by

the changes. The claim was based on the Government's

delay in payment of the contractual five per cent holdback

until delivery which was delayed by the changes, The

Board's Representative based his denial of the claim on

the ground that the cost of financing is included in un-

absorbed overhead, No party takes exception to this de-

cision,

Staff Counsel, however, points out that the hardware

claim contained $101,500 for cost of financing due to the

delay in payment of the hardware costs by USL and

MarAd and that this amount should be deducted from

the award for hardware based on the same rationale used

by the Board’s Representative for denying financing costs

in performing unchanged work,

We agree with Staff Counsel that this amount should

ve deducted from the hardware claim, Our reason is that

Sun's present claim for these costs is actually an attempt

to recover interest under another name. In a document

entitled “Time/Magnitude Relationship of Sun Ship's

Cost” which was filed by Sun after oral argument before

the Board's Representative at his request Sun states that

these financing costs

Final Opinion & Order (Mar. Sub, Bd., 8/11/71) A89

“were estimates to assess the financial impact of not

being paid for the changes within a medias. period

Z “yd — — have now been removed

rom the direct claim since they no longer the

elapsed time.” (Emphasis added.) _—

Sun substituted for the removed costs a clai

$1,515,000 for these “costs from 1965 through 1970.” fas

unabsorbed overhead claim does not cover that time

period; however, we view the claim of $1,515,000 (subse-

quently substantially increased) as an attempt to recover

interest which we discuss in Part V.

Since Sun has conceded that the sum of $101,500 for

cost of financing is no longer part of its direct claim, we

find and conclude that that sum t be d

the hardware claim. inline oe

(5) Unabsorbed Overhead.

Because Changes 23 and 48 delayed delivery of US

vessels beyond scheduled contract ys sedi dates, Sun “

curred “continuing or fixed” overhead costs during the

changes-caused delay period for which it was not compen-

sated by the fixed price Contract. Continuing or fixed

overhead costs are, according to Sun's accountants, the

essentially time-oriented costs of having a facility available

to do business at a determined level, They include prop-

erty taxes, depreciation, the management, and certain out-

side services, Sun claims that it is entitled to recover, as a

cost of performing the changes, those continuing overhead

costs (hereinafter referred to as “unabsorbed overhead”)

incurred during the delay period for which it will not re-

ceive compensation from the continuing cost portion of

the overhead rate applied to the changed work in the

hardware section, To compute the unabsorbed overhead

A90 Final Opinion & Order (Mar, Sub, Bd., 8/11/71)

Sun has advanced a daily rate method formula that is a

function of time. It argues that its normal method of

allocating overhead costs to direct labor costs does not

cover a delay period when there is either no direct labor

or reduced direct labor being applied. The daily rate

formula is as follows:

1. Continuing overhead attributable to non-hull pro-

duction is subtracted from the total continuing over-

head for the entire yard producing continuing

overhead attributable to new hull production.

2. The latter is divided by the number of new hulls

normally produced per year X 365 days producing

continuing overhead (new hull )/vessel days.

3. This figure is multiplied by the vessel days delay

due to changes to produce the continuing overhead

due to changes-caused delay,

4. The continuing overhead absorbed by Sun's hard-

ware claim is subtracted from this result to produce

the continuing overhead recoverable as a cost under

the contract changes clause,

With respect to Sun's claim for unabsorbed overhead

the Board's Representative recommended;

“Approximately $356,000 [corrected to $529,000 in

Recommended Order] recommended for unabsorbed

overhead based upon 307 days of changes-caused

delay by application of daily overhead rate formula

endorsed in decisions of Court of Claims and Armed

Services Board of Contract Appeals... .”

This recommendation was based on a determination

that Article 4 of the General Provisions of the Contract is

authority for recovering such cost. Sun takes no ex

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