Petition for Writ of Certiorari — Bethlehem Steel Corp. v. United States

Supreme Court brief1975

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SUPREME COURT, VU. &

JUN 26 1975

In THE

Supreme Court of the United States

October Term, 1974

No. 744-1640

BETHLEHEM STEEL CORPORATION,

Petitioner,

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS

ALBERT R,. CONNELLY,

One Chase Manhattan Plaza,

New York, N. Y. 10005

Attorney for Petitioner

Of Counsel:

GEORGE VRADENBURG III,

One Chase Manhattan Plaza,

New York, N. Y. 10005

June 26, 1975

TABLE OF CONTENTS

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Constitutional Provision, Statute and Regulations

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Regulations Applicable to Determining “Fair

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Reasons for Granting the Writ .................

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1. The Government Must Conform to its Own

Regulations and, During the Pendency of

Litigation, May Not Apply, Ad Hoe and

Retroactively, More Onerous Administra-

tive Rules In Order to Improve Its Liti-

RE Fi Ss a kx ivi kas een is

2. The Department of Defense May Not Fi-

nally Determine Issues in Litigation Before

the ASBCA Upon Ex Parte Application of

a Military Department and Without Af-

fording the Contractor an Opportunity to

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PRP LL ALR I ae ES a AR EE CD

TABLE OF AUTHORITIES

PAGE

CASES:

Appeal of Newport News Shipbuilding and Dry

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

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

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

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

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

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

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

Newport News Shipbuilding & Dry Dock Co, v.

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

S x E Contractors, Inc. vy. United States, 406 U.S. 1

DE ete nds ig rents ts tk iS Seka 16,

Service v. Dulles, 354 U.S. 363 (1957) 2... 2.000685

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

ess ira y oa baw ean ane

United States ex rel. Accardi v. Shaughnessy, 347

OM RE ee ee win 14, 15, 16,

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

Rap EE Hse 5 6 Gi EN aN cewek needs anes 16,

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

ee PE ERED Se ee De nr Pe a

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

IVillner v. Committee on Character and Fitness, 373

eee ald ie a enn KYA VO NRA A ACOs

STATUTES:

ay eg 6 ee er

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

ID oy iw

PRs IM OTS AT

iii

OTHER:

Armed Services Board of Contract Appeals, Part

1—Charter, ASPR A Part 1 (4CCH Govern-

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

Armed Services Procurement Regulations, 32

Ra iO A GANG UAS ENR Aa Seb 6 bs Kagececes

DoD Instruction 5126.3, December 20, 1961 (1

CCH Government Contracts Reporter § 825) ...

PAGE

2-3, 6

10, 21

: —— Re

BILEED THR

In THE

Supreme Court of Che United States

October Term 1974

No. 74-

BETHLEHEM STEEL CORPORATION,

Petitioner,

Uv.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS

Petitioner, Bethlehem Steel Corporation (“Bethle-

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

to review the judgment of the United States Court of

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

action involves a Wunderlich Act appeal from decisions

of the Armed Services Board of Contract Appeals.

Opinions Below

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

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

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

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

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

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

forth therein begins.

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ions of the Armed Services Board of Contract Appeals

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

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

{ 9898 and are at App. 21 and App. 42, respectively. An

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

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

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

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

Jurisdiction

The judgment of the Court of Claims was entered on

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

for rehearing and reconsideration was denied on March 28,

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

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

Question Presented

Whether the Department of Defense, acting through an

administrative committee not authorized by contract or

regulation to hear or determine contract disputes, upon the

ex par ~ application of a military department then in dis-

putes clause litigation with a private contractor, hes the

power to require the Armed Services Board of Contract

Appeals to apply, ad hoc and retroactively, rules-of-decision

in that litigation favorable to the military department.

Constitutional Provision, Statute and

Regulations Involved

The decision below determined an appeal of decisions

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

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

decision below raises issues under the Fifth Amendment

and concerns the application of certain provisions of the

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

THR OUGH

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

lich Act and the relevant portions of the Armed Services

Procurement Regulations are set forth at the end of this

petition.

Statement of the Case

This case presents important questions concerning the

fair and impartial administration of contract disputes

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

3648) between Bethlehem and the Navy for the construc-

tion of five destroyers.

The Contracts

The contracts are two of seven contracts awarded by

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

1956, to four shipbuilding contractors* for the construc-

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

51) The facts concerning the award of the contracts and

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

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

Each of those contracts contained a provision which

required the contractor to exclude from its proposed price

any provision for anticipated inflation in labor and material

costs which could be expected to occur during the life of

the contract. In consideration for the reduced contract

price resulting from such exclusion, the Government

contracted to reimburse the contractor, according to an

agreed formula, for such increases in labor and material

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

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

tracts, which provided:

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

or in part, any upward adjustment in the contract

price required under this Article if the Contracting

Officer finds that such adjustment is not required, in

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

building and Puget Sound Bridge and Dredging Co.

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

fair and reasonable profit under this contract.”

The construction and delivery of the destroyers pur-

* suant to these contracts was completed by 1959. Bethle-

hem completed its deliveries to the Navy pursuant to its

contracts in a timely manner, delivering the last destroyer

in February 1958. There is no dispute that the destroyers

delivered by Bethlehem were of “very good quality.”

(App. 103)

As anticipated by the parties, Bethlehem and other

contractors in the DD931 program suffered significant

inflationary increases in costs of labor and material. As

a consequence, they submitted claims for escalation in con-

tract prices. In January 1960 Bethlehem submitted to the

Contracting Officer a claim for escalation in the contract

price to cover its inflationary increases in labor and material

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

suant to the escalation formula in the contract, was

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

With the full escalation sought by Bethlehem, contract profit

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

9.6 percent (NObs-3648).

In August 1964, four years later, the Contracting Officer

refused any reimbursement whatsoever of Bethlehem’s

cost increases on the grounds that no escalation in contract

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

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

of the contracts. As matters then stood, Bethlehem would

have obtained a profit on the two contracts of 3 percent

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

three out of the other five contracts, other shipbuilding

contractors constructing DD93l-class destroyers received

escalation sufficient to recover profits of 15.2 percent, 15.32

percent and 10.1 percent. (App. 63)

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Regulations Applicable to Determining “Fair and Reason-

able Profit”

At the time the contract was awarded, there were no

published guidelines in the Armed Services Procurement

Regulations (“ASPR”) as to how procurement officials

were to determine what constituted a “fair and reasonable

profit”’.*

In July, 1957, published guidelines for determining the

fairness and reasonableness of profit levels were adopted

by the Department of Defense. Those guidelines consisted

of a number of factors which procurement officials were

directed to “consider” in evaluating the proper level of

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

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

tracting Officers as to how they were to arrive at an

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

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

lines (amended in 1960) have generally been referred to

as the “unweighted” guidelines.**

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

9):

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

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

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

could employ established techniques and guidelines, even if un-

published, and therefore would not act arbitrarily.”

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

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

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

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

volved a shipbuilding contract for the aircraft carrier USS Ranger

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

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

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

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

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

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

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

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

course relates to the guidelines as they were [when the ASBCA

rendered its opinion]”. Jd.

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

case (August, 196+), the unweighted regulations had been

superseded by more detailed, remedial guidelines. Adopted

in August 1903 {for immediate usc, these regulations di- |

rected procurement officials to weigh the factors previously

applicable according to certain standards set forth in detail

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

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

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

designed “to reduce the impact of subjective factors in the

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

17: see also App. &9, 157) The Assistant Secretary of

Defense recommended the adoption of the weighted guide-

lines to the Secretary of Defense as a “quantifying of

existing policy” intended to force contracting officers *‘‘to

give discriminating and analytical attention” to the weight-

ing of the previous unweighted factors.* Jd.

Decisions Below

ASBCA

The ASBCA, in August 1906, ruled that Bethlehem was

restricted to a five percent profit under each of its contracts

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

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

the parties had agreed in the negotiation of the contracts.

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

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

to the superseded unweighted guidelines.

*The memorandum reflecting that recommendation was quoted in

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

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

appeal that the “weighted” guidelines were an implementation of \

historical Government profit objectives, stating:

“The ultimate policy objectives of the Department of Defense

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

1960 guidelines, were subsequently disclosed in 1963 in terms

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

(71-1 BCA § 8705, at 40,455)

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Bethlehem I

Bethlehem brought this action in the Court below as-

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

weighted guidelines in effect in 1966 at the time of the

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

Newport News, agreed with Bethlehem:

“. . Plaintiff [Bethlehem] desires to take its

chances under the ‘weighted guidelines method’ and

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

The Court saw “no injustice or anomaly in applying

profit limitation techniques, as the Pentagon may have

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

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

“| The involved regulations, however, when

made, appeared to be remedial, meant to safeguard

defense contractors against determinations as to a

reasonable profit level, arbitrary, perhaps biased, or

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

tracting officers might take without proper guidelines.

There is no reason to postulate an intent to withhold

such safeguards from parties to then existing con-

tracts, nothing to that effect appearing either in the

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

The Navy did not argue that the weighted guidelines

should not be applied to contracts entered into prior to

their effective date, nor did it argue that the unweighted

guidelines should apply to Bethlehem’s contract.

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

tion” and fell “clean outside all published guidelines” be-

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

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

argument, noting:

“Tf defendant’s postulated exemption exists, it

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

SRA TRIO

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plaintiff’s above named competitors in the shipbuilding

industry were awarded major contracts at one time or

another between World War II and 1954, when they

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

which animated the award of NObs-3556 to plaintiff.

The situation recurs so commonly in our litigation

with other industries heavily dependent on defense

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

adherence to procurement from the lowest bidder

only is viewed in the Pentagon as gradually freezing

out the competition and leading into single-source

procurement.” (App. 12)

Upon examination of the weighted guidelines, the

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

nowhere mentioned.

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

has every earmark of having originated in the active

mind of defense counsel herein, not in the perhaps

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

The Navy also argued that the weighted guidelines

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

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

and reasonable” and (ii) the “weighted” guidelines method

would produce a higher, unintended result and thus be

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

(App. 13) The Court rejected that argument:

“ _. The contracts, however, reflect that plaintiff

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

For the second time, the Court directed strong language at

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

ments:

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

contract that viewed prospectively could have resulted

in anything from a loss to a windfall profit level,

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according to its terms, must be regarded as located in

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

Having adjudicated Bethlehem’s “legal right’’ to the

application of the weighted guidelines, the Court went on

to say:

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

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

tracts, the Pentagon even now could amend or supple-

ment its regulation, and the Board would be bound,

provided no impairment of vested rights was at-

tempted. Any amendment purporting to reaffirm the

position now claimed, that officials determining a rea-

sonable level of profit under clauses such as Article

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

ever in certain cases, at least would advisedly be made

in light of the recent statement of the Supreme Court:

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

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

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

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

ASPR Committee

Seizing upon the Court’s reference to the possibility that

the Pentagon might further “amend or supplement” its

regulation, attorneys for the Navy sought and obtained

ex parte* a declaration by an administrative committee in

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* The ex parte proceedings were commenced by a memorandum ‘

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

memorandum stated that it had been prompted by the Court of

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

Committee sought by the Navy would be presented to the ASBCA

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

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

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

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

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

Morris Amchan, the Navy attorney immediately responsible for the

conduct of the contract disputes proceedings for the Navy before the ,

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

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

application and drafted the ASPR Committee “Minutes”.

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the Pentagon called the Armed Services Procurement

Regulation Committee (the “ASPR Committee”) that the

weighted guidelines were not applicable to these contracts

because such application would result in an increase in the

profits of the contractor beyond that ‘considered by the

parties in the negotiation of the contract to be fair and

reasonable”. Navy attorneys did not advise the ASPR

Committee that they had made precisely that argument to

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

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

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

attorneys submitted to the ASPR Committee selected ex-

cerpts from the Court of Claims decision in Bethlehem: I,

they did not provide the Committee with a complete copy of

the decision.

“Minutes” of the ASPR Committee meeting embodying

its decision were drafted by Navy attorneys, were presented

to the Committee and were adopted substantially ver-

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

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

the Assistant Secretary of Defense (Installations and Logistics) and

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

representative) appointed by each of the military departments and

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

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

tary on matters pertaining to the Armed Services Procurement Regu-

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

ernment Contracts Reporter § 825).

The ASPR Committee has been delegated no authority to partici-

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

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

and the Secretaries of each of the military departments have designated

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

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

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

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

authorizes disputed questions to be determined by such “authorized

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

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

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

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

heard or for proceedings not to be conducted ex parte.

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guidelines” effected a substantive change in the standards

existing at the time the contracts were entered into and

were intended for the development of a profit objective for

negotiation of future contracts”. (As the dissent below :

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

port the ASPR committee’s statement that only prospective ;

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

the majority opinion to the contrary.) ‘

The “Minutes” of the ASPR Committee directed a :

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

with respect to this contract clause, and instructed the

ASBCA that the superseded unweighted guidelines should

be applied in determining what level of profits was “fair

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

Bethlehem was not given notice of the pendency of these

collateral proceedings or opportunity to be heard.

ASBCA

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

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

on such questions (raised by Bethlehem) as the authority

of ASPR under its charter to decide this issue absent

approval of higher Department of Defense officials ( App.

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

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

(App. 33).*

Applying the unweighted guidelines, the ASBCA deter-

mined that Bethlehem was entitled to full escalation on

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

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

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

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

* Bethlehem immediately appealed the ASBCA decision to the

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

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

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

sion at that time. (App. 41)

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appropriate weighted guidelines, Bethlehem sought further

review as to that contract in the Court of Claims.

Bethlehem II

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

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

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

contract disputes proceedings. As with the ASBCA, the

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

review the basis for the ASPR Committee instructions.

The Court held two factors as “favoring retroactive

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

“long lapse of time” between the original contract award

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

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

interpreting the contract without reference to any guide-

lines. (App. 137-8)

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

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

of Navy attorneys but refused to provide Bethlehem with

a remedy in order not “to prolong this already inordinately

prolonged litigation, to the advantage of no one knows

whom’’.** (App. 142-3)

The dissent below pointed out that consistent with Beth-

lehem I the only question open to the Court was whether

application of the weighted guidelines was “feasible”, in

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

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

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

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

and Kunzig concurred.

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

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

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

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

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

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

Committee to engage in precisely that “administrative absolutism”

verbally condemned, but effectively condoned, by the Court.

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

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

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

not liked the results. Second, the application of the

weighted guidelines would not be “unreasonable” when

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

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

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

application of the weighted guidelines was “unsuitable”,

dismissing each as lacking support in the record and as

having been previously rejected in Bethlehem I. (App.

154-7)

Reasons for Granting the Writ

The judgment sought to be reviewed holds that the De-

partment of Defense, acting through the Armed Services

Procurement Regulation Committee, upon ex parte appli-

cation of a military department then in disputes clause

litigation and without notice to the private contractor in-

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

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

favorable to the military department. In so holding, the

judgment (i) is inconsistent with decisions of this Court

which impose contractual and constitutional requirements

of procedural regularity and basic fair play on the Govern-

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

important questions and raises substantial problems in the

impartial administration of disputes clause appeals before

the ASBCA.

Argument

The power of the ASPR Committee, under the deci-

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

trative absolutism not congenial to our law-making tradi-

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

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

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14.

facilitate ongoing procurement of goods or services, but to

depress the recovery of moneys earned by Bethlehem under

a contract which had been fully performed twelve years

earlier.

Similar to the power of the Selective Service under its

delinquency regulations, at issue in Gutknecht, such power

has no statutory standard or even guidelines. The power

of the ASPR Committee is exercised entirely at its own

discretion — stimulated no doubt by the ex parte approaches

of the military departments with pending contract disputes.

The decision below resolves the question presented here

in a manner which is fundamentally inconsistent with deci-

sions of this Court which are designed to protect private

contractors in litigation with the Government from the

retroactive application of unilateral, litigation-oriented

changes in Government regulations.

1. The Government Must Conform to its Own Regulations

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

Ad Hoc and Retroactively, More Onerous Administrative

Rules Designed To Improve Its Litigating Posture.

This Court has held in a number of decisions through

the years that due process requires that the Government

conform to its established regulations and procedures and

not deviate therefrom on an ad hoc basis when it believes

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

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

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

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

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

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

1973).

The Department of Defense has failed in this case to

conform to its own regulations in two different ways. In

the first place, the Department of Defense, acting through

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

a pending contract disputes litigation from its published

PALE RY SLI EIVIL LF EE IO LILI OT TED RIE: ASAE TN LIE SE ELST ROE

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Pe POS RS Fe a I OS NT RRA NE AA ORIOL ATLL I OS EGR

weighted guidelines method of evaluating the fairness and

reasonableness of profit levels in negotiated contracts. In

the second place, the Department of Defense, by acting

through the ASPR Committee in determining the issue of

what guidelines are applicable in making determinations

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

conform to its own regulations designating the ASBCA

as the “authorized representative” in hearing and deter-

mining appeals in contract disputes cases “as fully and as

finally” as might the Secretaries of Defense and of the

military departments.

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

case Greene’s employment was terminated in 1953 based on

the administrative revocation of his security clearance by

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

mination that Greene’s security clearance revocation had

been improper, Greene sought to recover compensation for

the Government’s unauthorized action based on a regulation

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

the Department of Defense ‘‘amended” its 1955 regulation

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

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

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

proceed under the amended, 1960 regulation, citing Union

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

(1913), to the effect that:

“

. ‘a retrospective operation will not be given to a

statute which interferes with antecedent rights . . .

unless such be the “unequivocal and inflexible import

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

lature”’ ”,

The Accardi case is instructive on the second point. There

the Attorney General had included Accardi on a confidential

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

prior to the decision of a Board of Immigration Appeals

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on Accardi’s application for suspension of deportation pro-

ceedings. Applicable regulations then in effect delegated

to the Board of Immigration Appeals such discretionary

authority “as is appropriate and necessary for the disposi-

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

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

266. Accardi sought to block his deportation and offered to

prove that the Board of Immigration Appeals’ later denial

of Accardi’s application was the result of the Attorney

General’s instructions, but the District Court refused to

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

ing that had the decision of the Board of Immigration

Appeals resulted from the Attorney General’s instruction,

it would have been in error:

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

tive, the Attorney General denies himself the right to

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

”

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

supra., 347 U.S. at 267.

This Court then noted:

“It is important to emphasize that we are not here

reviewing and reversing the manner in which dis-

cretion was exercised. If such were the case we would

be discussing the evidence in the record supporting or

undermining the alien’s claim to discretionary relief.

Rather we object to the Board's alleged failure to

exercise its own discretion, contrary to existing valid

regulations.” /d., at 268 (Emphasis in original.)

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

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

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

The decision below is inconsistent with both Greene and

Accardi, Under the decisions of the Court of Claims in

Newport News and Bethlehem I, Bethlehem was entitled to

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the application by the ASBCA of published DoD profit

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

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

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

ment of Defense, through the ASPR Committee issued an

administrative instruction, considered binding by the

ASBCA, that the subjective and superseded unweighted

guidelines which had been discarded nine years earlier by

the Department of Defense would be applied in this case

in lieu of the more objective and remedial weighted guide-

lines, That administrative decision, issued by the ASPR

Committee, was a “deviation” from published regulations

of the Department of Defense, favorable to the military

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

istrative decision, on an issue in a disputes appeal pending

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

thorized by Department of Defense regulations to determine

disputed questions in contract disputes appeals.

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

statute or by a general change in the overall administrative

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

“deviation” from standard procurement practices prompted

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

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

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

sion of the regulatory scheme to areas of application not

anticipated when the regulation was adopted. The “devia-

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

guidelines in favor of subjective superseded guidelines.

Unlike Accardi there is no question that the administra-

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

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

the ex parte proceedings by the Court of Claims decision in

Bethlehem I; the Navy claimed that the Court of Claims

had invited the ASPR Committee to determine the applica-

bility of the weighted guidelines to Bethlehem’s contracts ;

er a ee Be eeete

the Navy asserted that a higher profit would result from

application of the weighted rather than unweighted guide-

lines; the Navy asked that the ASPR Committee instruc-

tions apply to the contract clause whose applicability was at

issue only in this litigation with Bethlehem; and the Navy

stated explicitly that it intended to present the ASPR Com-

mittee instructions to the ASBCA panel hearing Bethle-

hem’s appeal.

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

cause it believed that it had a better chance at depressing

Bethlehem’s recovery under the discretionary and unpre-

dictable unweighted guidelines than it did under the objec-

tive and predictable weighted guidelines. Although applica-

tion of the unweighted guidelines consistent with historical

DoD profit policies should have produced the same result

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

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

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

the greater subjectivity in the application of the unweighted

guidelines gave the Navy the leverage of greater adminis-

trative discretion than if the weighted guidelines were

applied. The Navy was successful in its strategy to the

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

case. Bethlehem submits that the Government cannot be

permitted to manipulate published guidelines in such a

manner as to achieve an improved litigating posture.

And Bethlehem submits further that protection from

such arbitrary manipulation by administrative officials is

precisely the objective that the weighted guidelines were

designed to achieve and precisely this Court’s objective in

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

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

ment simply cannot be permitted to manipulate “the law”

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

tractors.

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2. The Department of Defense May Not Finally Determine

Issues in Litigation Before the ASBCA Upon Ex Parte

Application of a Military Department and Without Afford-

ing the Contractor an Opportunity to Be Heard.

The “deviation” from standard procedure mandated by

the ASPR Committee was obtained through an ex parte

application of the attorneys for the Navy in this litigation.

The decision of the ASPR Committee was taken by the

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

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

cerning the merits of the guideline substitution in an ad-

versary hearing in which Bethlehem has had notice and an

opportunity to be heard and to present its evidence.

With respect to the decision of the ASPR Committee,

the Court of Claims held that such an ex parte approach

Was not improper because the ASPR Committee was a

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

“normal”, App. 144

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

ally at odds with this Court’s repeated condemnations of

ex parte procedures as inconsistent with “underlying con-

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

sales Vv. United States, 348 U.S. 407, 412 (1955); see also

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

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

The “deviation” sought and obtained by Navy attorneys

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

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

cision did nov involve any particular expertise or legislative

or political judgment. The ASPR Committee had to draw

on no particular management or procurement background

or sources in deciding that question. There was no complex

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

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

ing or elaborating construct on existing regulations in-

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

procedures was not the product of dissatisfaction with the

existing regulations arising out of experience with the

weighted guidelines.

The proposal submitted to the ASPR Committee by the

Navy requested a determination that the weighted guide-

lines not be applied retroactively to Bethlehem’s contract

because the effect of application “would be to increase the

profit of the contractor beyond that considered by the parties

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

That question is the kind of question regularly and routinely

adjudicated by quasi-judicial bodies or by courts themselves.

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

mittee was no more than a decision of the question of

whether the requested guidelines would be applied retro-

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

mined one of the precise issues which was then pending

before the ASBCA.

Under these circumstances the ex parte action of the

ASPR Committee would appear to be wholly improper and

the ASPR Committee action a nullity. But if any effect

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

opportunity to redetermine the issue independently, 1.e.,

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

by the ASPR Committee action and consequently did not

itself inquire into the adequacy of the basis for the ASPR

Committee action.

Bethlehem was entitled to participate, to offer evidence

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

cision to change the guidelines had been administratively

determined. That right derives in the first instance from

its contract with the Navy wherein it is agreed that:

—————

“Tn connection with any appeal proceeding under

this Article, the Contractor shall be afforded an op-

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portunity to be heard and to offer evidence in support

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

Bethlehem contracted for the right to be heard and to

offer evidence in support of its appeals with respect to all

disputed questions of fact and incidental questions of law i

heard before the ASBCA, S & E Contractors, Inc. v. 1

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

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

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

appeal is taken pursuant to a disputes clause in a contract

which limits appeals to disputes concerning questions of

fact, the Board may nevertheless in its discretion hear,

consider, and decide all questions of law necessary for the

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

entitled to have the benefit of the administrative procedures

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

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

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

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

guidelines are applicable in determining that disputed fact ‘

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

a matter coming within the jurisdiction of the ASBCA.

This implies, at the very least, that Bethlehem was

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

proceeding in which the Navy was required to prove de novo 5

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

tended to be applied to existing contracts.

Bethlehem was entitled to a hearing as well because

of the strictures of the Due Process Clause of the Fifth

Amendment. Bethlehem has, in effect, been deprived of

an important contractual right without essential due

process requirements of notice and opportunity to be heard.

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

a a

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

private individual, a municipality, a State or the United

States. Rights against the United States arising out of a

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

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

tractor, initiates and participates in ASPR Committee

proceedings in order to obtain ad hoc instructions binding

on the ASBCA on the particular legal and factual ques-

tions then pending before the ASBCA, the contractor must

be given notice of those proceedings and an opportsnity to

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

given to such ASPR Committee action in later ASBCA

proceedings, the issues resolved by the ASPR Committee

must be redetermined de novo by the ASBCA.

The end result of the chain of procedural horrors dis-

cussed above is that Bethlehem has had what the Court in

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

out any administrative or judicial body deciding the merits

of its side of the story.

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

The ASPR Committee is a continuing body whose military

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

come of contract disputes before the ASBCA. There is no

reason to suppose the ASPR Committee and its military

department members will voluntarily renounce the broad,

roving authority granted by the Court below to the ASPR

Committee to issue “deviations” from standard procure-

ment procedures in pending contract disputes proceedings.

In order to preserve the orderly and impartial ad-

ministration of contract disputes under the quasi-judicial

structure fostered by this Court, the decision below must

be reversed.

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—_—<—“— . . 4

Conclusion

For the reasons stated above, petitioner Bethlehem

Steel Corporation prays that a Writ of Certiorari issue to

the United States Court of Claims to review its decision of

February 19, 1975.

Respectfully submitted,

ALBERT R. CONNELLY,

One Chase Manhattan Plaza,

New York, N. Y. 10005

Attorney for Petitioner

Of Counsel:

GEORGE VRADENBURG III,

One Chase Manhattan Plaza,

New York, N. Y. 10005

£5 SEE TGR IER EE SAREB SE HAIL OEE SE ARE MA WE Pe

Constitutional Provision, Statute and

Regulations Involved

1. The Fifth Amendment to the Constitution provides:

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

or otherwise infamous crime, unless on a present-

ment or indictment of a Grand Jury, except in cases

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

when in actual service in time of War or public

danger ; nor shall any person be subject for the same

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

nor shall be compelled in any criminal case to be a

witness against himself, nor be deprived of life,

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

shall private property be taken for public use, with-

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

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

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

“§321. Limitation on pleading contract-provisions

relating to finality; standards of review

“No provision of any contract entered into by the

United States, relating to the finality or conclusive-

ness of any decision of the head of any department or

agency or his duly authorized representative or board

in a dispute involving a question arising under such

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

be filed as limiting judicial review of any such deci-

sion to cases where fraud by such official or his said

representative or board is alleged: Provided, how-

ever, That any such decision shall be final and

conclusive unless the same is fradulent [sic] or

capricious or arbitrary or so grossly erroneous as

necessarily to imply bad faith, or is not supported by

substantial evidence.

a Read ie le he.

Rei

Pare

YR:

“§322. Contract-provisions making decisions final

on questions of law

“No Government contract shall contain a provi-

sion making final on a question of law the decision

of any administrative official, representative, or

board.”

3. Relevant provisions of the Armed Services Procure-

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

1960) (the “unweighted” guidelines) provide:

“$3.808-1 General.

“A fair and reasonable provision for profit or fee

cannot be made by simply applying a certain pre-

determined percentage to the cost estimate or selling

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

be first established as a dollar amount, after con-

sidering the factors set forth in this section. There-

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

determine the percentage relationship between the

fee and the estimated cost of the contract in order

to comply with administrative and statutory limita-

tions on fees for cost-reimbursement type contracts,

the percentage shall be determined only after the

dollar amount of the fee has been established for

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

Dec. 24, 1959]

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

“The factors set forth in subparagraphs (a)

through (i) below should be considered in determin-

ing profit or fee in all contracts, whether for supplies

or services; for construction work; or for experi-

mental, developmental, or research work; and

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

bursement type unless otherwise specified in the par-

ticular factor. All of the following factors, as set

BLEED "

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

should be evaluated in the light of the basic policy

set forth in §3.801-1 which provides that supplies

and services shall be procured from responsible

sources at fair and reasonable prices calculated to

result in the lowest overall cost to the Government:

(a) Effect of Competition. Where competi-

tion is adequate and effective and proposals are

on a firm fixed-price basis, the contracting officer

normally need not consider in detail the amount

of estimated profit included in a price. Where ef-

fective competition is lacking, the estimate for

profit for the proposed fixed fee should be ana-

lyzed in the same manner as all other elements

of price, applying the factors set forth in this

section.

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

assumed by the contractor should influence the

amount of profit or fee a contractor is entitled to

anticipate. For example, where a portion of the

risk has been shifted to the Government through

cost-reimbursement or price redetermination pro-

visions, unusual contingency provisions, or other

risk-reducing measures, the amount of profit or

fee should be less than where the contractor as-

sumes all risk.

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

task orders for research and development call for

the delivery of prototypes of other “hardware.”

Other such contracts or task orders require only

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

liver the required end item. Frequently this is

because the contractor is not willing to assume

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the additional burden of incuring substantial cost

overruns without additional fee in order to com-

plete performance. When the contract calls for

delivery of developed models in accordance with

well-defined performance or design characteris-

tics or a predetermined delivery schedule, or both,

in contrast to an obligation only to exert its

“best efforts” to develop and deliver such models,

payment of the fee should be conditioned on per-

formance in accordance with the contractor’s ob-

ligation to deliver, and in such cases the contrac-

tor may be entitled to a larger fee both because

of the risk inherent in its commitment and be-

cause of the successful completion of the work.

major consideration in the determination of the

amount of profit or fee, particularly in connec-

tion with experimental, developmental, or re-

search work, is the difficulty or complexity of the

work to be performed and any unusual demands

of the contract, such as whether the project in-

volves a new approach unrelated to existing

equipment or only refinements on existing equip-

ment, whether the caliber or class of engineer

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

contractor is to be required by the contract to

assign to the work unusually skilled talent.

(d) Extent of Government Assistance. The

Department of Defense encourages its contrac-

tors to perform their contracts with the mini-

mum of financial, facilities, or other assistance

from the Government. Where extraordinary fi-

nancial, facilities, or other assistance must be

furnished to a contractor by the Government,

Tes i |

PEPE LING OO OI LL LIE EY ot , SPP ESE POP ‘ al me PAT

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such extraordinary assistance should have a

modifying effect in determining what constitutes

a fair and reasonable profit or fee. (See also

§3.404-3(d).)

(e) Extent of the Contractor’s Investment.

The extent of a contractor’s total investment

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

performance of the contract will be taken into

consideration in determining the amount of the

fee or profit.

(f) Character of Contractor’s Business.

Recognition must be given to the type of busi-

ness normally carried on by the contractor, the

complexity of manufacturing techniques, the rate

of capital turnover, and the effect to each individ-

ual procurement upon such business. For ex-

ample, where a contractor is engaged in an indus-

try where the turnover of working capital is low,

generally the profit objective on individual con-

tracts is higher than in those industries where

the turnover is more rapid.

(g) Contractor's Performance. In addition

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

tor’s past and present performance should be

evaluated in such areas as quality of product,

quality control, scrap and spoilage, efficiency in

cost control (including need for and reasonable-

ness of cost incurred), meeting delivery sched-

ules, timely compliance with contractual provi-

sions, creative ability in product development

giving consideration to commercial potential of

product), engineering (including inventive, de-

sign simplification, and development contribu-

tions), management of subcontract programs,

FRPP LIL LOPLI IEE PT :

BRD A Ps

and any unusual services furnished by the con-

tractor. Where a contractor has consistently

achieved excellent results in the foregoing areas

in comparison with other contractors in similar

circumstances, such performance merits a pro-

portionately greater opportunity for profit or

fee. Conversely, a poor record in this regard

should be reflected in determining what consti-

tutes a fair and reasonable profit or fee.

(h) Subcontracting. In negotiating the profit

or fee, the nature and extent of any subcontract-

ing should be considered, particularly as it bears

on the contractor’s performance, administrative

responsibility, financial investment, and degree

of risk as outlined above. The degree and nature

of subcontract programs vary on a broad spec-

trum. While it is not possible to define precisely

the exact profit or fee treatment to be accorded

each situation, the general guidelines which fol-

low will be taken into consideration. The evalua-

tion of a contractor’s subcontracting program

should not consist merely of applying arbitrary

percentages of profit to subcontract prices in

negotiating the prime contract price. A relatively

large amount of subcontracting need not make

for negotiation of a lesser profit or fee—the

character and circumstances of the subcontract-

ing and the effect on the prime contractor’s costs

must be taken into account. Although purchased

material and subcontracted work are usually

properly included in the base upon which profit

is computed, instances may arise in which a sig-

nificant portion or portions of a contract are sub-

contracted in such a way that only a minimum

PRED SERRE SR SSN ACR TIROENNE A: LOW IRN LO SUMMON

rVi i721

amount of responsibility or risk remains with

the prime contractor. In such a case, the amount

of fee or profit should be less than where the

contractor assumes substantial risk. Of primary

importance is the degree to which the subcon-

tracting provides a better product and lower

costs, with timely delivery, and in which the

contractor assumes heavy managerial effort, re-

sponsibility and risk. In this connection, consid-

eration should be given to the contractor’s past

and present effectiveness in offering to qualified

small business concerns and to firms in labor

surplus areas an opportunity to compete for sub-

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

contractor’s furnishing assistance to such con-

cerns as they require or as the Government may

specifically request. A contractor’s effectiveness

in furnishing such opportunity or assistance to

an unusual or exceptional degree, should be given

favorable consideration in determining the

amount of fee or profit.

(i) Unrealistic Estimates. If records reveal

that a contractor’s actual costs are consistently

lower than his estimated costs (indicating a prac-

tice of excessive estimates), and if the contractor

refuses to’ provide what seems to be reasonable

estimate of costs, a lower profit or fee should be

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

1959]

ok * *

4° Relevant portions of the Armed Services Procure-

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

1966) (the “weighted” guidelines) provide:

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

bursement type contracts.

a connate wrteece mere weresmeadl

POR WL 02 ANID OT TARR ABLE SRI IES DYN SBIR PPM ae

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

“§3.808-1 Policy.

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

of Defense to utilize profit to stimulate efficient con-

tract performance. Profit generally is the basic mo-

tive of business enterprise. The Government and

defense contractors should be concerned with har-

nessing this motive to work for more effective and

economical contract performance. Negotiation of

very low profits, the use of historical averages, or

the automatic application of a predetermined per-

centage to the total estimated cost of a product, does

not provide the motivation to accomplish such per-

formance. Furthermore, low average profit rates on

defense contracts overall are detrimental to the pub-

lic interest. Effective national defense in a free enter-

prise economy requires that the best industrial

capabilities be attracted to defense contracts. These

capabilities will be driven away from the defense

market if defense contracts are characterized by low

profit opportunities. Consequently, negotiations

aimed merely at reducing prices by reducing profits,

with no realization of the function of profit cannot

be condoned. For each contract in which profit is

negotiated as a separate element of the contract

price, the aim of negotiation should be to employ the

profit motive so as to impel effective contract per-

formance by which overall costs are economically

controlled. To this end, the profit objective must be

fitted to the circumstances of the particular procure-

ment, giving due weight to each of the performance,

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

This will result in a wider range of profits which

in many cases, will be significantly higher than pre-

vious norms.

SOLE EL LO RL Pe, RL MI Man EMA OBE LTE OND HELIN GE I ETN

BLEED

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

sis. When cost analysis is performed pursuant to

§3.807-2, profit considerations shall be in accordance

with the objectives set forth below. As an induce-

ment for broad reduction in defense costs, the Gov-

ernment should establish a profit objective for con-

tract negotiations which will:

(1) Reward the contractor who undertakes

more difficult work requiring higher skills;

(2) Allow the contractor an opportunity to

earn profits commensurate with the extent of the

cost risk he is willing to assume—the greater the

risk assumption, the greater the profit objective

established ;

(3) Reward those contractors who have an

excellent record of past performance and con-

versely penalize those contractors whose _per-

formance has been poor ; and

(4) Reward contractors who provide their

own facilities and financing or who have estab-

lished their competence through prior develop-

ment work undertaken at their own risk.

The weighted guidelines method set forth in §3.808-

2 for establishing profi’ objectives is designed to

provide reasonably precise guidance in applying

these principles. This method, properly applied, will

tailor profits to the circumstances of each contract in

such a way that long range cost reduction objectives

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

achieved.

many contracts and subcontracts, good pricing does

i... BPE LR IE LE LOLEL LIER LA GLA TIER AED NE SR IEEEE AAD IS I ms

THROUGH

10a

not require an examination into costs and profits.

Where adequate price competition exists and in other

situations where cost analysis is not required (see

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

to the lowest responsible offerors without regard to

the amount of their profits. Under these circum-

stances, the profit which is anticipated, or in fact

earned, should not be of concern to the Government.

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

it should be considered the normal reward of effici-

ency in a competitive system and efforts should not

be made to reduce such profits.

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

“§3,808-2 Weighted guidelines method.

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

method provides contracting officers with (i) a tech-

nique that will insure consideration of the relative

value of the appropriate profit factors described in

§3.808-4 in the establishment of a profit objective

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

documentation of this objective, including an ex-

planation of any significant departure from this ob-

jective in reaching a final agreement. The contracting

officer’s analysis of these profit factors is based on

information available to him prior to negotiations.

Such information is furnished in proposals, audit

data, performance reports, pre-award surveys and

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

be required in the establishment of a profit objective

than is required to determine if costs are reasonable.

The weighted guidelines method shall be used in all

contracts where cost analysis is performed except as

set forth in paragraph (b) of this section.

i Re BMY ROMS ROLLE SNES TANNA RES PRIS PMI

lla

(2) The contractor’s proposal will include cost

information for evaluation and a total profit figure.

Contractors shall not be required to submit the de-

tails of their profit objectives but they shall not be

prohibited from doing so if they desire. Elaborate

and voluminous presentations are neither required

nor desired and may indicate a low index of cost

effectiveness, which fact itself should be taken into

consideration by the contracting officer in the ap-

propriate section of the weighted guidelines.

(3) The negotiation process does not contem-

plate or require agreement on either estimated cost

elements or profit elements, although the details of

analysis and evaluation may be discussed in the fact-

finding phase of the negotiation. If the difference

between the contractor’s profit objective and the

contracting officer’s profit objective is relatively

small, no discussion of individual factors may be

necessary. If the negotiating parties’ objectives are

relatively far apart, a disclosure of weightings and

rationale by both parties may be made concerning

the total assigned to Input to Total Performance,

Assumption of Cost Risk, Performance, Selected

Factors and Special Profit Consideration. By thus

developing a mutual understanding of the logic of

the respective positions, an orderly progression to

final agreement should result. Simultaneous, not se-

quential, agreement will be reached on cost, any

incentive profit-sharing formulas, or limitation on

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

overall negotiation objective which, as a going-in

objective, bears a distinct relationship to the target

cost objective and any proposed sharing arrange-

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

$5 IRE STILE GES ELIOT ot

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12a

related variables, the Government negotiator shall

not complete the profit negotiation without simul-

taneously agreeing on the other variables. Specific

agreement on the exact weights or values of the in-

dividual factors is not required and should not be

attempted.

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

cumstances, other methods for establishing profit

objectives may be used. Generally, it is expected that

such methods will accomplish the two features of the

weighted guidelines methods set forth in paragraph

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

(i) Architect-engineering contracts ;

(ii) Personal or professional service con-

tracts;

(iii) Management contracts, ¢8-, for main-

tenance or operation of Government facilities ;

(iv) Contracts with non-profit organizations

where fees are involved ;

(v) Termination settlements ;

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

and-material, and overhaul contracts providing

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

month basis, and where the contribution by the

contractor constitutes the furnishing of person-

nel rather than the output of an integrated re-

search, engineering, or manufacturing organiza-

tion; and

(vii) Cost-reimbursement construction con-

tracts.

GTC PIE SAAT I a ac

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13a

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

tiation of contracts presenting unusual pricing situa-

tions when specifically authorized by the head of a

procuring activity. Such exceptions shall be justified

in writing and authorized only in situations where

the weighted guidelines method is determined to be

unsuitable.

method would result in establishing a fee objective

in violation of limitations established by statute or

this subchapter, the maximum fee objective shall be

the percentage allowed pursuant to such limitations.

(See §3.405.) No local administrative ceilings on

profit shall be permitted.

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

“§3.808-3 Profit objective.

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

mated contract price objective or value which, in the

judgment of the contracting officer, is appropriate

for the procurement being considered, covering the

profit or fee element of the price objective. This

objective should realistically reflect the total overall

task to be performed and the requirements placed

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

tract, change order, or contract modification, where

cost analysis is undertaken, the negotiator shall de-

velop a profit objective. The weighted guidelines

method, if applicable, shall be used for developing

this profit objective. If a change or modification is

of a relatively small dollar amount and is basically

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

tract, the application of the weighted guidelines

method will generally result in a profit objective

mt isn

rer

ALTOS LEL CLINE LL ED LLL OE LIES EL LO

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;

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14a

similar to the profit objective in the basic contract,

and therefore this basic rate may be applied to the

contract change or modification. However, in cases

where the change or modification calls for substan-

tially different work, then the basic contract profit

and the contractor’s input to total performance may

be radically changed and a detailed analysis is neces-

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

contract modification is very significant in compari-

son to the contract dollar amount, a detailed analysis

should be made.

(b) Development of a profit objective should not

begin until after a thorough (1) review of proposed

contract work; (2) review of all available knowledge

regarding the contractor, pursuant to Subpart I,

Part 1 of this chapter, including performance, capa-

bility reports, audit data, pre-award survey reports

and financial statements, as appropriate; and (3)

analysis of the contractor’s cost estimate and com-

parison with the Government’s estimate or projec-

tion of cost.

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

“§3.808-4 Profit factors.

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

sidered in all cases in which profit is to be specifically

negotiated. The weight ranges listed after each fac-

tor shall be used in all instances where the weighted

guidelines method is used.

ITNT STUER TERESA HAT ae ma eee LE EOE

BLEED TH

So ERTL, A Re LTE AO NSE Tie a

15a

Weight

ranges

Profit factors (percent)

Centractor’s input to total performance—

Direct materials:

oe: 1 to4

Subcontracted items ............ lto 5

NT NN Si oa ov kc cc lto4

Engineering labor ................ 9 to 15

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

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

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

General and administrative expenses . 6 to 8

Contractor’s assumption of contract cost

eg ED NRCS TON Oto7

Type of contract.

Reasonableness of cost estimate.

Difficulty of contract task.

Record of contractor’s performance —2 to +2

Management.

Cost Efficiency.

Reliability of cost estimates.

Cost reduction program accom-

plishments.

Value engineering accomplish-

ments.

Timely deliveries.

Quality of product.

Inventive and developmental con-

tributions.

Small business and labor surplus

area participation,

Ee eS —2to +2

Source of resources.

Government or contractor source

of financial and material

resources.

Special achievement.

Other.

Se aM - . — CELE EERE I LOTOP ESTELLA BV eH

OUGH

RARITY

CDR CEME mi | APT ERA IER NO Te BI es BS CIEE A eh Ce hy BH 22 write PRE IE DE yo Ons ito ao

16a

(b) Under the weighted guidelines method, the

contracting officer shall first measure the “Contrac-

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

ment of a profit percentage within the designated

weight ranges to each element of contract cost recog-

nized by the contracting officer. Such costs are multi-

plied by the specific percentages, which have been

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

at specific dollar profits.

tor’s Input to Total Performance are similar to those

on the Cost and Price Analysis Form (DD Form

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

ent format; but, since these categories are broad and

basic, they provide sufficient guidance to evaluate all

other items of cost.

(d) Although certain classifications of accept-

able cost, including travel, subsistence, facilities, test

equipment, special tooling, federal manufacturers

excise taxes, and royalty expenses, may have been

historically excluded from the base upon which profit

has been computed, they shall not be excluded when

using the weighted guidelines method.

(e) After the contracting officer has computed a

total dollar profit for the Contractor’s Input to Total

Performance, he shall divide this amount by the total

recognized costs to determine the composite profit

percentage for this factor. To this composite per-

centage, he shall then add the specific percentages

assigned for cost risk, performance, and the other

selected factors, to arrive at a total profit percentage.

He shall then multiply the total recognized contract

costs by this total profit percentage to determine the

profit objective. A cardinal principle of the weighted

LEAL STIL EELS at ; ae LETTER ELE EES ES Seatac iileeesibcie au

_—= . = — o_, =e i

RY Vag SNE os AAEM VAL ROARS NUTT SPN oe

17a

guidelines method is that the specific percentages

assigned for cost risk, performance, and other fac- ;

tors are applied to total recognized costs in establish- :

ing the profit objective.

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

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

PAMELA EES,

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

value of each factor, the contracting officer should

be governed by the definition, description, and pur-

pose of the factors together with considerations for

evaluating them as set forth herein.

(b) Contractor’s input to total performance.

This factor is a measure of how much the contractor

himself is expected to contribute to the overall effort

necessary to meet the contract performance require-

ments in an efficient manner. This factor, which is

apart from the contractor’s responsibility for con-

tract performance, takes into account what resources

are necessary and what the contractor himself must

do to accomplish a conversion of ideas and materials

into the final product called for in the contract. This

is a recognition that within a given performance out-

put, or within a given sales dollar figure, necessary

efforts on the part of individual contractors can vary

widely in both value and quantity, and that the profit

objective should reflect the extent and nature of the

contractor’s contribution to total performance. The

evaluation of this factor requires an analysis of the

cost content of the proposed contract as follows:

(1) Direct materials (purchased parts, sub-

contracted items and other material).

* ok x

(2) Engineering labor and manufacturing

labor.

x x *

Shine cemeecomeomnmiuemennen oo a Re er A a a a i eee |

OLIQH

18a

(3) Engineering overhead, manufacturing

overhead, and general and administrative ex-

penses.

* * *

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

partment of Defense to shift the risk of contract

costs to the fullest extent practicable to contractors

and to compensate them for the assumption of this

risk. Evaluation of this risk requires a determina-

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

tractor assumes, (ii) the reliability of the cost

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

the chances of the contractor’s success or failure.

This factor is specifically limited to the risk of con-

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

contractor as reputation, losing a commercial mar-

ket, risk of losing potential profits in other fields,

or any risk on the part of the purchasing activity,

such as the risk of not acquiring an effective

weapon, are not within the scope of this factor.

(2) The first and basic determination of the

degree of cost responsibility assumed by the con-

tractor is related to the sharing of total risk of

contract cost by the Government and the contractor

through the selection of contract type. The extremes

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

the contractor use his best efforts to perform a task,

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

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

minimum assumption of cost responsibility, whereas

such firm fixed-price contract would reflect a com-

plete assumption of cost responsibility. Therefore, in

the first step of determining what value is to be

sens ELAINE RIIRL LCL BING ZY scliaiietilenieliiaiiandameadauaalll

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19a

given for the contractor’s assumption of contract

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

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

cent rating shall be given to a closely priced firm

fixed-price contract for a new, complex item.

(3) The second determination is that of the

reliability of the cost estimates. Sound price negotia-

tion requires well-defined contract objectives and

reliable cost estimates. Prior production experience

assists the contractor in preparing reliable cost esti-

mates on new procurements for similar equipment

and does not in any way reduce his cost responsibility

in a firm fixed-price contract. An excessive cost

estimate reduces the possibility that the cost of per-

formance will exceed the contract price, thereby

reducing the contractor’s assumption of contract

cost risk.

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

ficulty of the contractor’s task. T he contractor’s

task can be difficult or easy, regardless of the type

of contract.

(5) Contractors are likely to assume greater

cost risks only if contracting officers objectively

analyze the risk incident to proposed contracts and

are willing to compensate contractors for it. Gen-

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

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

would a firm fixed-price contract justify a reward

of less than 5 percent. Where proper contract type

selection has been made the reward for risk by con-

tract type would usually fall into the following per-

centage ranges:

EEE ARF LN LD ELLE IE ILS RS LOLI BELL ES INIT

20a

Percentage

Type of contract ranges

Cost-plus-fixed-fee .........2..scs000. Otol

Cost-plus-incentive-fee including cost

NE NE se cha eke adie sas 1to2

Cost-plus-incentive-fee including cost,

performance, and delivery incentives .. 1% to3

Fixed-price-incentive including cost

COENEN ka ssacetss sasca nae sas 2 to 4

Fixed-price-incentive including cost,

performance, and delivery incentives .. 3to5

Prospective price redetermination ...... 4to5

RE PNUD cs wat he etiet wad seeds 5to7

* x *

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

purpose of this factor is to motivate contractors to

improve their performance by rewarding them for

excellent past performance and penalizing them for

poor performance. Effective use of this factor re-

quires that (i) reports on the various aspects of

past performance be obtained and evaluated; and

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

motivate contractors to improve their performance.

* * *

(6) The following factors are to be considered

in evaluating a contractor’s performance record:

(i) Management.

x * *

(ii) Cost efficiency.

* * *

(iii) Reliability of cost estimates.

* *

> SPRL

2la

(iv) Cost reduction program accomplish-

ments.

* * *

(v) Value engineering accomplishments.

* x *

(vi) Timely deliveries.

2k * *

(vii) Quality of product.

* * *

(viii) Inventive and developmental contribu-

tions.

* * *

(ix) Small Business and Labor Surplus

Area Participation.

2k * *

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

tors, which may enter into a particular procurement

situation, is to discourage reliance upon Government

resources, and to encourage contractors to outstand-

ing performance. Therefore, in assigning a com-

posite profit percentage within the range of —2 to

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

sources factor will always be rated from 0 to -2

percent and the Special Achievement factor will

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

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

These factors will rarely be of equal weight in a

specific procurement. They should be assigned a

weight as a group, in accordance with the following

criteria:

(1) Source of resources (Government or pri-

vate). Application of this factor calls for an

ATV aN ED RAEME ST IS ABTA ELIOT LEE RONEN it GA PILAR i. PNP A ANE ic BAN SLE LARUE at ONL ARAB

22a

analysis of the contractor’s dependence on Gov-

ernment financial assistance or material assistance

in the form of facilities. Contractor reliance upon

Government resources shall be discouraged by pro-

viding for less favorable profit consideration. Com-

mercial facilities to be rented by the contractor will

be evaluated as contractor furnished. Customary

progress payments and guaranteed loans with

normal guarantees (90 percent or less) shall not be

weighted in this evaluation. However, other forms

of financial assistance such as extraordinary prog-

ress payments, guaranteed loans with abnormal

guarantees, or advanced payments shall be con-

sidered a minus factor. Similarly, the reliance on

any other type of Government assistance, including

facilities shall be evaluated as a minus from zero.

The contractor who uses new Government resources

for the performance of a contract will be penalized

to a greater degree than the contractor who uses

existing Government resources.

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

contract. This factor indicates the need for extra

profit consideration when outstanding performance

is required. Such achievement may be in the form

of a special technical requirement, such as produc-

tion of some remarkable first, or achievements

involving non-technical objectives, such as an ex-

traordinarily fast delivery schedule.

(3) Other. Particular procurement situations

may give rise to the desirability of using a profit

factor other than those in subparagraphs (1) and

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

CEST aa eis lt Le al

oe os + . ae en are

PR IRS FL CREO EE RID NS OT ES

pest nidbortee

23a

fied; and the reason for its use shall be documented

in accordance with § 3.811.

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

14086, Nov. 9, 1965]

“§ 3.808—6 Special profit consideration.

“Contractors who develop military items without

Government assistance are entitled to special profit

consideration on those items. This consideration

shall be in addition to the profit objective arrived at

through the weighted guidelines method. One to

four percent of recognized cost is established as the

normal range of value for this profit factor. The

criteria for selection of the specific percentage shall

be the importance of the development in furthering

defense purposes, the demonstrable initiative in de-

termining the need and application of the develop-

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

whether the development cost was recovered directly

or indirectly from Government sources.”

[30 F.R. 5985, Apr. 29, 1965 |

Ea REEL A AN TCE OTE IE: LEI OPO: WCITIES AE OTE CT

a 4 ve ‘

T4-10°%

LiskARYT | MICHAE t

UPREME COURT, U: & In THE

Supreme Court of the United States

OctToBEerR TERM, 1974

JUN 26 1975 |

No. 74-

BETHLEHEM STEEL CORPORATION,

Petitioner,

UNITED STATES OF AMERICA,

Respondent.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF CLAIMS

ALBERT R. CONNELLY,

One Chase Manhattan Plaza,

New York, N. Y. 10005

Attorney for Petitioner

Of Counsel:

GEORGE VRADENBURG III,

One Chase Manhattan Plaza,

New York, New York 10005

June 26, 1975

APPENDIX

TABLE OF CONTENTS

Bethlehem Steel Corporation

v. United States, 423 F.2d.

300 (Ct. Cl. 1970) eeeeereser.e eeeee 1

Appeals of Bethlehem Corporation

oration, ASBCA Nos. 10316 and

10317 (Reinstated),

Decision on Government's

Motion for an Order Establi-

shing that the ASPR Non-

Weighted Profit Guidelines

Are Applicable to Determining

Contract Price, dated January

Ree SETA PeASh ORs E se eesneeene 21

Order of the United States of Court

of Claims dated July 1, 1971,

denying Bethlehem's Motion for

an Order Terminating Stay and

For Other Relief ........... 41

Appeals of Bethlehem Steel

Corporation, ASBCA Nos. 10316

and 10317 (Reinstated), dated

January 22, 1973 ..--..--. eeccee 42

Bethlehem Steel Corporation Vv.

United States, 5ll F.2d. 529

cet. Ci. 1975) ceeceveerereeree eee eee 133

Order of the United States Court

of Claims, dated March 28,

1975, denying Bethlehem Steel

Corporation's Motion for

Rehearing and Reconsideration 161

MCLEE LINE IS SIS POLY EMER IEE

PON REI en |

2 ARR IRE

BETHLEHEM STEEL CORPORATION

Vv.

UNITED STATES

No. 44-68.

United States Court of Claims

March 20, 1970.

Albert R. Connelly, New York City,

for plaintiff, James Cc. Hansen, New York

City, of counsel.

James F. Merow, Washington, D.C.,

with whom was Asst. Atty. Gen. William D.

Ruckelshaus, for defendant.

Before COWEN, Chief Judge, and

LARAMORE, DURFEE, DAVIS, COLLINS,

SKELTON and NICHOLS, Judges.

ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

AND DEFENDANT'S CROSS-MOTION FOR SUMMARY

JUDGMENT

PEL OSE TE INE IY OER LEH EIA NB LOO I SST Oe

NICHOLS, Judge:

This is an action to recover amounts

Claimed to be due the Plaintiff under

labor and material escalation clauses in

Contracts Nobs-3556 and Nobs-3648, under

which plaintiff built five destroyers for

the United States Navy at the shipyard

it then owned at Quincy, Massachusetts.

The contracting officer denied all escala-

the two contracts in the amounts of

$1,064,151 ana $876,028, respectively,

which it computed as an allowance of 5%

profit on costs after restoring certain

cost disallowances the contracting offi-

cer had made, not here in issue. This

being less than Plaintiff's Claims, it

seeks review here under Wunderlich Act

Standards, 41 U.S.c. §§ 321 and 322. The

Parties have filed cross motions for sum-

mary judgment. We deny both motions and

Suspend further Proceedings in this

court to enable the Parties to apply to

the ASBCA for further findings of fact,

pursuant to the opinion that follows.

The contracts were awarded by

negotiation and included standard provi-

sions requiring the contractor to exclude

from its cost estimates all contingency

allowances for increases in labor and

material costs from the levels then

obtaining, but on the other hand, allowing

price increases according to an agreed

formula reflecting labor and material

cost increases experienced in the con-

tract period by Shipbuilders agreed upon

as representative. There is no dispute

that such cost increases did occur, nor

as to the contract price increases that

would result, except for Article 6(e),

HAG a

SR Rt Fe

WD TITRE A

which reads as follows:

(e) The Contracting Officer may

deny, in whole or in part, any upward

adjustment in the contract price re-

quired under this Article if the Con-

tracting Officer finds that such ad-

justment is not required, in whole or

in part, to enable the Contractor to

earn a fair and reasonable profit

under this contract.

This contract language came before us for

interpretation three years ago in Newport

News Shipbuilding & Dry Dock Co. v. United

States, 179 Ct.Cl. 97, 374 F.2d 516 (1967).

The nub of the controversy here is how to

apply the rulings then made to the some-

what different facts and regulation before

us now. These facts are stipulated, so

far as they go, the Board having taken no

testimony. The refusal of any escalation

clause increases by the contracting offi-

cer, and the refusal of portions of the

amounts otherwise accrued, by the ASBCA,

resulted from their beliefs that the

amounts they denied were not required to

enable plaintiff to earn fair and reason-

able profits under the contracts. Both

decisions were, however, rendered before

ours in Newport News. Plaintiff would

remand for further Board proceedings in

light of Newport News, but defendant says

Newport News is not applicable and the

Board decision is entitled to finality.

The Navy decided to build three

destroyers (DD 936-938) in a private yard.

On or before January 25, 1954, it received

proposals for major east coast concerns as

follows, per ship:

RRS TT REN SOL RUAN REIT PPD SERS RATE SEER ENON IID Ha

~4-

Bath Iron Works Tete weeeeeeees $15,492,000

Newport News wrtceeeeeseeeeeee 16,800,000

Quincy (plaintiff) teeeeeseees 18,674,000

New York Ship Tete eeececeeeees 19,234,000

As usual in negotiated procurement, all

Submitted cost estimates which showed that

they anticipated Profits of 9.3% of cost,

in the case of One, to 9.4% for another,

and 10% in the cases Of Quincy and the

fourth. Defendant, however, desired to

award the vessels to Quincy because

down the yard, which was one of the largest

and best equipped in the world. Moreover,

Plaintiff maintained at Quincy the design

and engineering staff for all its several

other shipbuilding and repair yards on

both coasts. The anticipated closure,

therefore, would have effected a material

reduction in the Capacity of the shipbuild-

out of potentially disastrous slumps in

their business by awarding them shipbuild-

ing contracts when they were not the

lowest bidders. They were Painfully

dependent on the Navy, for all other cus-

out or obsoletion of the vast tonnages

delivered in World War II. All four yards

were, therefore, Operating at a minor

fraction of Capacity. The three other

than Quincy, did have enough orders to

keep them busy at the then level of activ-

ity for a year or two to come, so it was

Only Quincy that was in immediate danger

-5- k

of shutdown. The Navy, accordingly, decided

to negotiate with Quincy.

To avoid making a bad situation worse,

the Navy asked plaintiff to reduce its

bid and it took $1,000,000 off the price

of each ship, and the award was made at 3

$17,674,000 per unit, which was still con- e

siderably over the bids of Bath Iron Works

and Newport News. The revised cost esti- g

mates remained unchanged, but showed that

plaintiff was now estimating a profit of :

$698,000 instead of $1,698,000. There was,

however, no contract provision that plain-

tiff's profit would be any particular figure.

WET ATCT sa

Booey

One asks next why plaintiff esti-

mated its costs so much above competitors

who were, by its account, no more efficient,

and had no better plant. The answer is

that the three destroyers would have util-

ized only 5% of Quincy's capacity. In

estimating its costs, Quincy calculated

it would have no other business and the

contract for the destroyers would have

had to carry the overhead of that vast

establishment. Evidently the Navy had

to contribute towards this overhead if

it was to persuade plaintiff not to close

the plant down. Bath, being smaller and

busier, was far more favorably situated

with respect to overhead. We conclude

that in the events that materialized,

that is, Quincy's receiving other orders,

the allocable overhead would have been

less, and therefore the costs.

The circumstances of this award are

given because, as will appear, they afford

the basis for defendant's argument that

Newport News is not applicable as a pre-

cedent. The facts stated above were either

FED THR OLIGH

-6-

found by the Board, or else appear as

testified in the printed transcript of a

hearing conducted by a subcommittee of

the House Armed Services Committee in

February and March, 1954, to inquire

into the award of Nobs-3556 and the re-

jection of the low bids. The parties

here attached it to their stipulation as

Exhibit 6, without restriction as to

relevarce or use, so we use it as uncon-

tradicted evidence.

The other contract in this litiga-

tion, Nobs-3648, was awarded Plaintiff

later the same year and called for con-

struction of two additional destroyers,

DD 943 and 944, at a negotiated price of

$16,250,000 per ship, including an esti-

mated profit of $698,000. There was,

therefore, a cost Saving estimated. It

had the same limited escalation as Nobs-

3556. There were other awards not involved

in this litigation while the five destroyers

were under construction, notably a nuclear

powered cruiser and three guided missile

frigates. Plaintiff delivered the first

destroyer on November 30, 1956, three more

in 1957, and the last on February 26, 1958.

There were, as usual, change orders and

equitable adjustments therefor, not now in

dispute. The costs, except for those

extras and escalatable labor and material,

were lower than estimated, plaintiff says

due to cost Savings all along the line.

here at this time, especially since the

case may come before us again. To pose

the legal problem it suffices to Say that

labor and material escalation before any

-7-

Article 6(e) exclusion, totalled $3,347,500

and $2,404,900 under the two contracts,

respectively. The profit before anv esca-

lation, but reflecting the Board's decision

as to allowable costs, would be $1,597,000

under Nobs-3556 and $775,000 under Nobs-

3648, making 3% and 2.3% of cost respec-

tively. The profit with partial escalation

allowed by the Board as stated above would

be 5% of cost under both contracts. The

profit with full escalation would be

$4,990,000 under Nobs-3556 and $3,180,000

under Nobs-3648, being 9.3% and 9.6% of

cost respectively. That the profit with

full escalation is so much over the con-

tract estimate is due, as said above, to

savings in non-escalatable costs, but the

Board did not perform any analysis to

determine how these savings were accom-

plished. The Board also considered profits

as a percentage of price, but we need not

go into that here.

Our Newport News decision interprets

the Article 6(e) language together with a

Department of Defense regulation in effect

when the administrative decision was made,

22 F.R. 5927, 32 C.F.R. §§ 3.808 and ff.

The former we viewed as requiring an

administrative determination as to what

a fair and reasonable profit would be under

the contract incorporating the clause in

light of the performance history and

financial results. Such a determination

would be a finding of fact, final in this

court if supported by substantial evidence

and made in accordance with law. The

latter, the regulation, we found to con-

tain language telling how such a deter-

mination was to be made, whether related

to initial pricing or any sort of con-

tract repricing. There was nothing to

SELES OF EOE LIES RISA IOP SOI Sigs BO AED P SSMS Reyne te oR ta

corms =" LI ol ive i

-g8-

Show that in making the findings there

involved, the Board had employed or

intended to employ the technique the regu-

That case has Stood on the books for

three years now without any sort of chal-

lenge on defendant's Part, not even a

motion for reconsideration. Since our

Prise would not have lacked dignity. As

things are, this is the first chance we

have had to learn defendant's views.

large extent, and appears in general will-

ing for Newport News to be followed in

cases that reproduce its facts. That Carries

important implication.

except in redeterminations, any technique

of determining a level of reasonable profits

for a defense contractor. The involved regu-

lations, however, when made, appeared to be

remedial, meant to Safeguard defense con-

tractors against determinations as to a

reasonable profit level, arbitrary, perhaps

biased, or founded on "seal-of-the-pants

intuition", which contracting officers might

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;

-9-

make without proper guidelines. There is

no reason to postulate an intent to with-

hold such safeguards from parties to then

existing contracts, nothing to that effect

appearing either in the contracts or the

regulation. Defendant refers, properly we

think, to Thorpe v. Housing Authority, 393

U.S. 268, 89 S.Ct. 518, 21 L.Ed.2d 474

(1969), as being in agreement with our

position. Since Government officials are

presumed to act properly, it is reasonable

to suppose that the Pentagon would not

have promulgated clauses such as Article

6(e) unless contracting officers could

employ established techniques and guide-

lines, even if unpublished and therefore

would not act arbitrarily. If any con-

tractor supposed he had rights vested under

a contract which were substantially sub-

verted by a regulation later adopted as

to how to determine reasonable levels of

profits, he might come into court and show

it. See Thorpe, supra, at p. 283, 89

S.Ct. 518. In the absence of such a show-

ing we cannot assume it would occur.

Defendant passes over in silence

the fact noticed by the dissenting judges

in Newport News, that plaintiff there

had done nothing to alert the Board to

the fact it was not following the Depart-

ment of Defense's regulations. That is

equally true of the instant case. It is

indeed, generally, a salutary rule that a

party cannot assign an error here that

he has not given the administrative

tribunal a chance to correct. But the

points plaintiff did make below were of

a nature that should have alerted the Board

to test what it was doing against applica-

ble regulations. We think an exception

in such a case must be made in the interests

vig

mutual ignoring of a whole body of appli-

cable agency regulations. Agency officials

have considerable practical power to steer

the choice of issues to ground of their

Selection, in Proceedings before their

agencies. If attention is totally diverted

from applicable regulations the responsi-

bility for this error is not equal. Agency

officials have the means and the duty to be

mistake wholly on the Party least respons-

ible for causing it. We Say this not

meaning to impugn the good faith of the

Pentagon officials, who apparently quite

sincerely believed that a clause such as

Article 6(e) was scmehow something other

than the kind of Pricing and repricing power

the guidelines were meant to cover. The

arguments made to us by both sides in

Newport News reflected a state of great

confusion on both sides as to what Article

6(e) was meant to do. The requirement for

exhaustion of administrative remedies is

not inflexible in some exceptional circum-

stances. E.g., Mallow v. United States,

161 Ct.cl.~ 207, 212 (1963).

between this case and Newport News. It is

not that the regulations involved are new,

though they are, as set forth below.

Defendant says that this case falls clean

: : aaa = SS j

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holding in Newport News and it does not, yet

it likewise does not require defendant to

argue, as indeed it could not, that the

Board here paid any attention to guidelines

or techniques for determining a reasonable

profit level, as published by the Depart- \

ment of Defense or anyone else, and in :

effect at the time the Board decided. No

such publication is ever alluded to in the

Board decision. It does indeed use guide-

lines, but they are "do-it-yourself" guide- =

lines constructed by the Board itself out

of arguments and suggestions of counsel.

As already pointed out, counsel on neither

side suggested to the Board that it should

follow the published guidelines, and that

is the obvious reason why it did not do so.

OA oe eee

A Department of Defense regulation

that was in effect at the time of the

instant Board decision, and also that of the

contracting officer, was published in 1963,

28 F.R. 12546, 12555, amending 32 C.F.R.

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

one we construed in Newport News. It states

and describes, with copious illustrations,

the "Weighted guidelines method" of deter-

mining reasonable levels of contractor

profits. Defendant does not now deny that

it would govern most decisions limiting or

refusing otherwise justified labor and

material escalation under Article 6(e),

and there is nothing in it that suggests

an intent to narrow the former scope. But,

defendant says, this case is an exception.

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

enumerates the recognized exceptions to it,

and the situation here involved is not on the

list. Any other exception must be authorized

by the head of the procuring agency, and no

such authorization is asserted here. On

the other hand, the statute defendant says

CORY PELE OR IG EEE EN SEEN PL I TO EE BI

-12<

authorized this type of procurement to

keep a contractor in business. The Armed

Services Procurement Act of 1947 § 2(c)

(16), now revised and codified as 10 U.S.C.

§ 2304(a) (16) (1964), does not speak in

terms of any exemption from profit guide-

lines ordinarily applicable.

If defendant's postulated exemption

exists, it must be a large one. The

record shows that all of plaintiff's ubove

named competitors in the shipbuilding

industry were awarded major contracts at

one time or another between World War II

and 1954, when they were not the low

bidders, for reasons the same as those

which animated the award of Nobs-3556 to

plaintiff. The situation recurs so commonly

in our litigation with other industries

heavily dependent on defense work, that

we may take judicial notice of it; a rigid

adherence to procurement from the lowest

bidder only is viewed in the Pentagon as

gradually freezing out the competition and

leading into single-source procurement. The

subcommittee recognized the validity of

this view in its hearing on the instant

award, as did the whole Congress, of

course, in enacting 10 U.S.C. § 2304(a) (16).

It would be strange if so large an excep-

tion to the use of the "Weighted guidelines

method" went unmentioned in the enumeration

of exceptions in the regulation itself.

The new regulation requires use of the

guidelines if cost analysis is required.

§ 3.808-l1(b). Cost analysis is required

with respect to negotiated fixed price con-

tracts with escalation, all of which these

are. § 3.807-3(a) (2). To put it succinctly,

the alleged exception has every earmark of

having originated in the active mind of

defense counsel herein, not in the perhaps

more rigid thinking of the Pentagon.

-13-

Defendant says that plaintiff agreed

to accept a profit of around 5% in consid-

eration of being awarded the contract,

though not the low bidder, and therefore

use of the "Weighted guidelines method"

to produce a higher profit would be so

unfair that an exception to the method

must be implied. The contracts, however,

reflect that plaintiff agreed only upon a

price. The alleged agreement upon a profit

came in the revised cost estimates, which

showed estimated costs only $698,000 per

unit below the agreed price. Both parties

must have been aware that this estimated

cost was a figure plucked from the atmos-

phere. Mr. Strohmeier, plaintiff's vice

president, testified at the Congressional

hearing, without contradiction, that the

entire excess of his company's cost esti-

mates over Bath's was due to the higher

allocation of overhead, and this difference,

in turn, resulted from the hypothesis,

that the Quincy yard would be operating at

but 5% of capacity, having no other work

than the three destroyers. Even so, on

that hypothesis, the estimated allocation

he thought was insufficient. If his com-

pany built the three destroyers and had no

other construction at the Quincy yard, he

expected it to suffer a loss. On the

other hand, if it received enough other

business so it could operate at a "normal"

level, its contract costs would fall to

approximately Bath's estimates. In that

event, which was surely always possible,

and wholly apart from any savings due to

efficient manufacture, there would have

been a large windfall profit under Nobs-

3556, for whose recapture the contract

made no provision if one disregards the

statutory renegotiation article. Defend-

ant does not and could not regard that

PLAS ILL PID

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PERIL IEG

-14<-

article as contributing in any way to its

argument that plaintiff agreed to a profit

level of exactly 5%. The alleged agreement

to a 5% level, in a contract that viewed

prospectively could have resulted in

anything from a loss to a windfall profit

level, according to its terms, must be

regarded as located in defendant's coun-

sel's eyes alone.

As already noted, Plaintiff in pre-

Paring its cost estimates was required to

assume there would be no increases in

labor and material costs, and in analyzing

the possibilities of profit in the con-

tract, we have up to this point done so

likewise. In the more probable event

there were such increases, the escalation

Clause became operative and in general

its effect would be, absent Article 6(e),

to stabilize the profit or loss at a fixed

dollar (not percentage) figure against any

degree of labor and material cost infla-

tion. There might be some small profit

or loss resulting from the escalation

Clause itself, as the Plaintiff's own

experienced labor and material costs might

be more or less than the general industry

experience used to fix the escalation

indices. There was nothing in the escala-

tion clause before Article 6(e), agreeing

to-a5% profit. In article 6(e) there was

certainly a Possibility that the profit

would be cut, but 5% is not mentioned.

We have now examined every pertinent

Part of the contract and nowhere find

agreement to a 5% profit level, while we

do find provisions that enable a profit

much exceeding 5%, whether or not esca-

lation was required, depending on con-

ditions which were perfectly foreseeable

tReet

-15-

and which plaintiff would certainly exert :

itself to bring about, i.e., a normal util- ‘

ization of the yard. On the other hand, é

the $698,000 profit estimate contemplated §

a state of inadequate utilization which

could hardly have been expected or allowed

to be other than temporary.

While we say plaintiff did not agree

to 5%, we do consider that a high bidder

given a contract award purely to keep him

in business, might expect this fact to be

considered as unfavorable to him under any

rational system of profit limitation.

Defendant's view that the "Weighted guide-

lines method" would fa:.1 to give weight to

this apparently is basic to its argument

that the method is so unsuited to the

instant procurement that the exception of

it from the regulation must be implied.

We do not read the regulation that way.

The plaintiff's overhead allocated to

Contract Nobs-3556, was by the evidence

in the record entirely out of line with

that which the lower bidders would have

allocated. A Board applying the method

would be required by § 3.808-5(b) (3) to

analyze the overhead items of cost and

determine "how much they contribute to

contract performance." A range of 4-7%

is assigned to "manufacturing overhead"

and a range of 6-8% to general and ad-

ministrative expenses. We think the

Board would be within its charter in deny-

ing a return on that part of the overhead

which exceeded the allocation of other

Shipbuilders. Moreover, under § 3.808-5

(e) (1) tae Board is to make an analysis

"of the contractor's dependence on Gov-

ernment financial assistance * * *,"

If the dependence is great, it is a minus

factor in determining the allowable profit.

-16-

While the point may be débatable, we think

that the addition of a bonus to a contract

price to enable the contractor to maintain

uneconomically large facilities in being

is in reality a form of Government finan-

cial assistance and should be treated as

such,

On the other hand, the guidelines

attach favorable consideration in § 3.808-

S(e) to "Contractor's assumption of con-

tract cost risk." The guidelines here

look with least favor on a cost plus fixed

fee contract with full cost reimbursement,

and most favorably, at the other end of ot

the scale, ona "closely priced firm fixed.

price contract" for a complex item, which

"would reflect a complete assumption of

cost responsibility." We have here a

firm fixed price contract for a complex

item, with only limited escalation, and

according to Mr. Strohmeier, a real pos-

sibility of loss prospectively considered,

if other business was not obtained. It

would appear Contract Nobs-3556 at least

is, on this factor, closer to the favor-

able than the unfavorable end of the

scale. (Of course, we do not know from

the record to what extent the loss would

have been an actual cash drain and to

what extent a paper write-off.) The

guidelines appear to be the Pentagon's

best thinking on the subject of the proper

administration of profit limitation

clauses, and this favorable consideration

of close pricing and assumption of risk

stands in stark contrast to the Board's

unfavorable consideration of what is

apparently the same thing: plaintiff's

willingness to accept a price shaved

close above the estimated cost.

It would, of course, be improper

-17-

for us to make a determination ourselves

under the "Weighted guidelines method" for

the reasons explained in Newport News and

for the further reason that the record is

inadequate. To use the method one needs

to be well informed. The Board will no

doubt supplement the stipulation with

further evidence. We do not know whether,

by proper application of the method,

plaintiff will fare better or worse than

5%. Plaintiff desires to take its chances

under the "Weighted guidelines method" and

it has a legal right to do so.

As we have said, we see no injus-

tice or anomaly in applying profit limit-

ation techniques, as the Pentagon may

have amended and prescribed them from

time to time, up to the date of the deter-

mination. We would presume that changes

were intended to clarify and simplify, as

well as to reduce the impact of subjec-

tive factors in the mind of the adminis-

tering official. To some extent amend-

ments may reflect earlier departures in

actual practice, toa large extent no

doubt they are the product of experience.

If anything has been slipped in which

would impair vested rights unless limited

to prospective application only, let it

be pointed out. If we have erred in

thinking the "Weighted guidelines method"

is feasible to apply to the instant con-

tracts, the Pentagon even now could

amend or supplement its regulation, and

the Board would be bound, provided no

impairment of vested rights was attempted.

Any amendment purporting to reaffirm the

position now claimed, that officials

determining a reasonable level of profit

under clauses such as Article 6(e) are

not subject to any published guidelines

PTA DANG, te A

-18-

whatever in certain cases, at least would

advisedly be made in light of the recent

statement of the Supreme Court: "* * * a

broad, roving authority, a type of admin-

istrative absolutism [is] not congenial

to our law-making traditions."

Gutknecht v. United States, 396 U.S. 295,

90 C.Ct. 506, 24 L.Ed.2a ey

CONCLUSION

Plaintiff's motion for summary judg-

ment and defendant's cross motion for sum-

mary judgment are denied. Further proceed-

ings are stayed pursuant to Rule 167 for a

period of six months to enable the parties

to obtain further fact findings in accord-

ance with this opinion under the applicable

guidelines in published regulations. Plain-

tiff shall advise the commissioner of the

Status of the case before the Armed Services

Board of Contract Appeals at intervals of

not less than 60 days beginning with the

date of this order, as prescribed in Rule

167(e) and (f).

DAVIS, Judge (concurring) :

Newport News, which I consider now

binding on me, settled the issue of whether

the ASPR guidelines were required to be

followed even though neither party invoked

them before the Board. That being so, I

agree with the court, for the reasons it

gives, that those regulations apply in

this case as well, and on that basis I

join in the disposition requiring them

to be applied here.

SKELTON, Judge (dissenting) :

I respectfully dissent. In my Opinion,

a AES EI BOE, EEA SPOOL, PIPE lin

-19-

Newport News Shipbuilding & Dry Dock Co.

v. United States, 179 Ct.Cl. 97, 374 F.24

516 (1967), does not control this case

and it should not be sent back to the

board (ASBCA) in order to allow it to use

the guidelines of the Department of

Defense regulation published in 1963

(28 Fed. Reg. 12546, 12555, amending 32

C.F.R. §§ 3.808 and ff. (part 3)), to

determine the profit of the plaintiff in

this case, for the following reasons:

(1) This regulation was not in

existence at the time the contracts

involved here were executed and could

not have been contemplated by the parties.

Although the same situation existed in

Newport News, the facts in the two cases

are completely different. There the

court held that the regulation must be

applied to the original competitive

prices as well as to escalated prices,

but that cannot be done in the instant

case because the bids here were not com-

petitive. It is improper to apply the

regulation retroactively under these cir-

cumstances in our case. In fact, it is

impossible to apply the decision in

Newport News to the original prices here.

(2) The contracts before us were

negotiated between the parties and were

not the result of competitive bids. In

fact, they amounted to a subsidy by the

government, and without them the plain-

tiff would have had to have closed its

doors and gone out of business. Plain-

tiff was not the lowest bidder, as two

other companies submitted lower bids.

The government gave it the contracts

after negotiation to reep it in opera-

tion. As a result, the plaintiff has

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=-20-

been subsidized to the extent of a five

percent profit on the undertaking, but

instead of being grateful for this gener-

Osity, now sues for more, It is imprac-

tical, if not impossible, to apply the

regulation to the prices thus negotiated

between the parties.

(3) The parties Submitted guide-

lines to the Board that they wished it

to consider. The Board did consider them

fully, as indicated in its opinion. The

Plaintiff did not ask the Board to con-

sider any additional guidelines and did

not mention those set forth in the regu-

lation which was in force at the time of

the Board's decision. No request was

made that the guidelines in the regula-

tion be considered. It is too late, in

my opinion, for the Plaintiff to make

such a request, and it is error for us

to allow it to do so.

(4) The Board found as a fact

that the parties agreed that plaintiff's

profit would be five percent, and plain-

tiff has not challenged this finding.

I would grant defendant's cross-

motion for summary judgment, deny plain-

tiff's motion, and dismiss Plaintiff's

petition.

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ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeals of -- )

) ASBCA Nos.

Bethlehem Steel Corporation ) 10316 and

) 10317

Under Contract Nos. NObs~-3556) ‘Reinstated)

and NObs-3648)

APPEARANCES FOR THE GOVERNMENT:

Samuel Pinn, Jr., Esq.

Counsel, Naval Ship Systems Command

Morris Amchan, Esq.

Associate Counsel

APPEARANCES FOR THE APPELLANT:

E. J. O'Brien, Esq.

Bethlehem Steel Corporation

Bethlehem, Pennsylvania

DECISION ON GOVERNMENT'S MOTION FOR AN

ORDER ESTABLISHING THAT THE ASPR

NON-WEIGHTED PROFIT GUIDELINES ARE

APPLICABLE TO DETERMINING CONTRACT

PRICE

STATEMENT OF FACTS

These appeals are here on remand

from the Court of Claims pursuant to the

order of the Court in Bethlehem Steel

Corporation v. United States, Ct. Cl. No.

44-68 (Decided March 20, 1970). The

appeals were previously decided by this

Board in an opinion dated 16 June 1966

reported in 66-1 BCA par. 5639.

The facts giving rise to this dis-

pute will not be repeated here since they

are set forth in the earlier Board

ESOL EPR LE SLO LOL GONE RIE TET HCN BEE TG MRO Rs ES

~22

decision and in the opinion of the Court of

Claims. As the Board stated previously,

"The crucial proviso about which the dis-

pute arose is Article 6 of both contracts

entitled Price Adjustments and commonly

referred to as an escalation Clause,

which in pertinent part reads:

"(e) The Contracting Officer may deny,

in whole or in part, any upward

adjustment in the contract price

required under this Article if the

Contracting Officer finds that such

adjustment is not required, in

whole or in part, to enable the

Contractor to earn a fair and rea-

sonable profit under this con-

tract" .,*

The two contracts Called for a total of

five destroyers. After they had been

performed appellant made a claim for

price escalation Pursuant to Article 6

which was denied by the contracting

officer as not required to enable appel-

lant to earn a fair and reasonable

profit under either contract. In decid-

ing the appeals Subsequently taken from

the final decisions of the contracting

officer, this Board sustained appel-

lant's position in part, and allowed

escalation to the extent that appellant

would realize a 5% profit on costs.

Appellant had claimed escalation suffi-

cient to enable it to earn a profit of

9.3% on Contract NObs~-3556 and 9.6% on

NObs~-3648.,

Appellant then filed suit in the

Court of Claims endeavoring to recover

a greater amount of escalation than had

been allowed by the Board. The Court

RPELE GOLLN OTL CARE ELAM EE

~23=

reached a result similar to its decision

in Newport News Shipbuilding and Dr

Dock Company v. The United tates. £79

Ps 55 119677 i.e., that the Board

had erred in not determining fair and

reasonable profit in accordance with what

the Court regarded as the applicable

guidelines for establishing profit

objectives set forth in the Armed Serv-

ices Procurement Regulations (ASPR) at

the time the Board rendered its decision.

For the purpose of determining the

Bethlehem appeals, the Court said that

the Board should have applied the so-

called "weighted guidelines" as set

forth in ASPR Part 3-803, effective 15

August 1963. In its Newport News

opinion the Court said that the Board,

in deciding the Newport News appeals

should have applied the so-called "non-

weighted guidelines" set forth in ASPR

3-808 effective January 1960. The

Board had decided the Newport News

appeals in 1962. The "non-weighted

guidelines" were superseded by the

"weighted guidelines" in 1963. The

"weighted guidelines" appear in the

presently effective ASPR 3-808.

In reaching its decision in the

Bethlehem case, the Court discussed the

type of analysis which it thought the

Board might undertake in applying the

"weighted guidelines" to determine fair

and reasonable profit on the basis of

relevant facts. However, the Court did

not purport to determine the amount of

profit to which appellant might be

entitled through application of the

weighted guidelines. In the language

most relevant to resolving the inter-

locutory question now before us, the

a 2io

Court said:

"It would, of course, be

improper for us to make a determina-

tion ourselves under the 'Weighted

guidelines method' for the reasons

explained in Newport News and for

further reason that the record is

inadequate. To use the method one

needs to be well informed. The

Board will no doubt supplement the

stipulation with further evidence.

We do not know whether, by proper

application of the method, plain-

tiff will fare better or worse than

5%. Plaintiff desires to take its

chances under the “Weighted guide-

lines method' and it has a legal

right to do so.

"As we have said, we see no in-

justice or anomaly in applying profit

limitation techniques, as the

Pentagon may have amended and pre-

scribed them from time to time, up

to the date of the determination.

We would presume that changes were

intended to clarify and simplify,

as well as to reduce the impact of

subjective factors in the mind of

the administering official. To

some extent amendments may reflect

earlier departures in actual prac-

tice, to a large extent no doubt

they are the product of experience.

If anything has been slipped in

which would impair vested rights

unless limited to prospective

application only, let it be pointed

out. If we have erred in thinking

the ‘Weighted guidelines method' is

feasible to apply to the instant

BLE

D THROUGH

=2?5-

contracts, the Pentagon even now

could amend or supplement its regu-

lation, and the Board would be

bound, provided no impairment of

vested rights was attempted. Any

amendment purporting to reaffirm

the position now claimed, that offi-

cials determining a reasonable level

of profit under clauses such as

Article 6(e) are not subject to any

published guidelines whatever in

certain cases, at least, would

advisedly be made in light of the

recent statement of the Supreme

Court: ‘'* * * a broad, roving

authority, a type of administrative

absolution [is] not congenial to

our law-making traditions."

Gutknecht v. United States 396 U.S.

295, (decided January 19, 1970),

slip op. at p. 10.

CONCLUSION

"Plaintiff's motion for sum-

Mary judgment and defendant's cross

motion for summary judgment are

denied. Further proceedings are

stayed pursuant to Rule 167 for a

period of six months to enable the

parties to obtain further fact

findings in accordance with this

opinion under the applicable guide-

lines in published regulations.

Plaintifff shall advise the commis-

sioner of the status of the case

before the Armed Services Board of

Contract Appeals at intervais of not

less than 60 days beginning with

the date of this order, as pre-

scribed in Rule 167(e) and (f)."

. ar |

-26-

After the Court's decision was issued,

the Navy applied to the ASPR Committee

for a "deviation" providing for the

inapplicability of the weighted guide-

lines to ship construction contracts

executed prior to 1963 which contain the

Profit limitation feature of the escala-

tion clause (Article 6(e)). Eleven such

contracts were listed, including the two

involved in these appeals. In his memo-

randum to the Chairman of the ASPR Com-

mittee dated 22 May 1970, the Navy Legal

Member of the Committee discussed the

Court of Claims and Board decisions in

Newport News and Bethlehem, quoted por-

tions of the Court's Bethlehem decision,

and advanced reasons for the Navy's

position that "the weighted guidelines

were not intended to be retroactive so ..

as to affect contracts executed prior

to the promulgation of the Revision of

August 1963."

The ASPR Committee met on 3 June

1970 to consider Case No. 70-2-16

referred to in the minutes of the meet-

ing as "Deviation from ASPR 3-808,

Profit Guidelines." After considering

the memorandum submitted by the Navy

Legal Member, the Committee reached the

following decision as recorded in the

minutes:

"The Committee agreed that manda-

tory application of the weighted

guidelines retroactively to con-

tracts entered into before adop-

tion of such guidelines, partic-

ularly with respect to contracts

containing the . . . escalation

clause, was not intended and a

deviation is not required. The

The

nts

Committee also agreed that applica-

tion of the weighted guidelines to

pre-existing contracts is not appro-

priate, and on a consensus basis that

it is not feasiblle, since they

effected a substantive change in

the standards existing at the time

the contracts were entered into and

were intended for the development

of a profit objective for negotia-

tion of future contracts. ..."

Committee referred, in this connec-

tion, to "Notes and Filing Instructions"

for

promulgation of the weighted guide-

lines, which set forth the general

policy reasons for tme issuance of these

guidelines, and prescribe mandatory use

of them to all "applicable procurements"

initiated after 1 Jamuary 1964.

In the final two paragraphs of the

minutes it is stated that:

The

"Notwithstanding the foregoing, the

Committee agreed that to the extent

that others may consider the appli-

cation of the weighted guidelines

to be mandatory in such circum-

stances, a deviation is approved.

"In taking this action the Committee

recognized that this would leave for

consideration, as applicable to the

listed contracts, the ASPR 3-808

non-weighted guidelines which pre-

ceded adoption of the weighted

guidelines. The former were not

regarded as effecting any signifi-

cant substantive change."

Executive Secretary of the ASPR

=2R-

Committee has certified that the nine

Committee members present and voting

agreed unanimously on the above actions.

Under letter to the Board dated 26

June 1970, the Government filed a motion

seeking rulings by the Board:

"a. That the minutes of the ASPR

Committee meeting of 3 June

1970, re Case No. .70-2-16,

be admitted in evidence.

"b. That by virtue of said action

of the ASPR Committee, the

Board enter an appropriate

order determining that the

procedural non-weighted

guidelines of ASPR 3-808,

rather than the weighted guide-

lines, in the regulation which

will be applied by the Board

to determine whether or the

extent to which, an upward

adjustment in the contract

price under the escalation

clause of the subject con-

tracts is required to enable

the contractor to earn a fair

and reasonable profit under

the contracts."

Appellant opposed the motion and tran-

scribed oral argument was presented by

both sides at a prehearing conference

held on 9 September 1970. Briefs on

issues raised by the motion were filed

by both parties and exchanged on 19

October 1970. Reply briefs were

exchanged on 19 November 1970.

-29-

DECISION

The Court of Claims has remanded

this case to the Board in order that the

parties may “obtain further fact find-

ings," in accordance with the Court's

opinion “under the applicable guidelines

in published regulations." The issue

raised by the Government's motion is the

narrow one of whether we are required by

the Court's decision to make those

"fact findings" through application of

the ASPR weighted guidelines, or whether

we are required by that decision to

apply the non-weighted guidelines as pro~

posed by the Government. The issue does

not involve an exercise of discretion by

the Board as to which guidelines to

apply, but rather involves a determina-

tion of what the Court has ordered it

to do.

Had the Court not said what appears

in the penultimate paragraph of its

opinion, which is the second of the

three paragraphs quoted in full above,

we would have no doubt that the Court

has required us to determine fair and

reasonable profit through application

of the weighted guidelines to the facts

as stipulated or found in a further

proceeding on the merits. Indeed the

Court said in the first paragraph

quoted in full above that "Plaintiff

desires to take its chances under the

‘weighted guidelines method' and it

has a legal right to do so." However,

the Court immediately thereafter said

that:

" . - we see no injustice or

anomaly in applying profit

=36-

limitation techniques, as the Penta-

gon may have amended and prescribed

them from time to time, up to the

date of the determination. . . If

we have erred in thinking the

"Weighted guidelines methoc' is

feasible to apply to the instant

contracts, the Pentagon even now

could amend or supplement its regu-

lation, and the Boari would be

bound, provided no impairment of

vested rights was attempted."

Appellant would have us ignore the lan-

guage just quoted as inconsequential

dicta. However, the Court's order con-

tained in the final paragraph of its

opinion does not refer specifically to

the weighted guidelines, but instructs

the Board to make findings "in accord-

ance with its opinion under the appli-

cable guidelines in published regulations."

The penultimate paragraph of the Court's

opinion is a part of the opinion in

which the Court has stated that the Board

under certain conditions would be required

to apply guidelines other than those now

set forth in ASPR 3-808. We accordingly

are obliged to accord that paragraph the

legal effect which it merits.

Appellant does not contend that the

non-weighted guidelines are not “pub-

lished guidelines" in the sense meant by

the Court. However, appellant contends

that the Board should not consider itself

"bound" to give effect to the actions of

the ASPR Committee on the ground that

those actions did not amount to an "amend-

ment" or "supplement" to the weighted

guidelines by the "Pentagon." Appellant

further contends that even if the ASPR

—

-31-

Committee's actions do amount to such an

amendment or supplement, the application

of the non-weighted guidelines to the

"instant contracts" would deprive appel-

lant of a "vested right."

In using the term "Pentagon" we

think that the Court was referring to

those Department of Defense officials

authorized to establish or modify provi-

sions of the Armed Services Procurement

Regulations. DOD Instruction No. 5126.3

dated 20 December 1961, which prescribes

the composition, functions and authority

of the ASPR Committee provides, in Para-

graph 825.50 that:

"A, With respect to matters, other

than major policy matters, as to

which the members are in accord,

action of the Committee shall be

considered as having the final

approval of the Military Depart-

ments and the Defence Supply

Agency without further review by

aah «s+ 5

Similarly, ASPR 1-109.3, applicable to

"Deviations affecting More than One

Contract or Contractor" provides in

part that:

" | . deviations from this Regu-

lation or a Department of Defense

Directive will not be effected

unless approved in advance by the

Assistant Secretary of Defense

(Installations and Logistics);

provided, however, that unanimous

approval by the members of the

ASPR Committee will constitute

approval of the Assistant

Bi FEED THROUGH

~32=

Secretary of Defence (Installations

and Logistics) of all matters except

those involving major policy... ."

In ASPR 1-109.1, one type of deviation is

described as follows:

"(vii) when a policy, procedure,

method or practice of conducting

procurement actions of any kind at

any stage of the procurement

process is covered by ASPR, any

policy, procedure, method or prac-

tice which is inconsistent with

that set forth constitutes a devia-

CAO 5-2 a

Moreover, ASPR 3-808.2(b) provides for

exceptions to applicability of the

weighted guidelines. Although ship con-

struction contracts containing the

escalation clause are not listed among

the specific exceptions in subparagraph

(b) (1), subparagraph (b) (2) provides

that: ;

"Other exceptions may also be made

in the negotiation of contracts

presenting unusual pricing situa-

tions when specifically authorized

by the Head of a Procuring Activity.

Such exceptions shall be justified

in writing and authorized only in

situations where the weighted

guidelines method is determined

to be unsuitable."

We think that the ASPR Committee

possessed ample authority, pursuant to

the above regulatory provisions, to

determine on behalf of "the Pentagon,"

that the weighted guidelines are not

~33-

"feasible" for application to a retroac~

tive determination of fair and reasonable

profit as required by the escalation

clause, and that the non-weighted guide-

lines should be so applied in lieu

thereof. Appellant has suggested that

such determinations are matters of

"major policy” and that the ASPR Commit-

tee was not empowered to take final

action thereon. However, we are not

aware of any established criteria for

determining what is or is not "major

policy" for the purposes of ASPR Com-

mittee action. Such determinations are

within the purview of policy making

officials of the Department of Defense,

not this Board.

Appellant has also challenged the

propriety of the ASPR Committee actions

on the basis of what appellant regards

as procedural irregularities. Appellant

points to the ex parte nature of the

proceeding, a feeling on the part of the

appellant that the Committee members

lacked sufficient information to arrive

at a considered decision, and the speed

with which the action was taken. How-

ever, we are not aware of any provision

of law that prohibits ASPR Committee

action on matters brought to its atten-

tion ex parte by a procuring agency.

The adequacy of the information presented

to the Committee, and the speed with

which it reached its decision are matters

within the discretion of the Committee.

Appellant has endeavored to demon-

strate to the Board that the weighted

guidelines are in fact feasible to apply

to the "instant contracts." In a proper

case we might so determine. Norair

Ri FED THROUGH

——

~ calereen LS sede § 55

«34

Engineering Corporation, ASBCA No. 10856,

67-2 BCA par. 6619. However, the Court

of Claims has left such a determination

to "the Pentagon" as distinguished from

the Board. We are obliged to observe

this distinction in the absence of evi-

dence that the ASPR Committee has acted

arbitrarily in making its determinations.

In this regard, appellant apparently

contends that the ASPR Committee ignored

a definition of "feasible" as including

what is "possible" or "practicable" or

"capable of being done." However, the

same dictionary also defines the word

"feasible" as including what is "suit-

able" or "reasonable." (Webster's New

International Dictionary, Second Ed.,

p. 926.) It is clear that the ASPR

Committee had the latter meaning in mind

when it determined that the weighted

guidelines were not feasible "since

they . . . were intended for the develop-

ment of a profit objective for negotia-

tion of future contracts." Even if it

were indeed "possible" or "practicable"

to apply the weighted guidelines, we do

not regard the Court as having used

"feasible" in the narrow sense proposed

by appellant. And we do not regard the

grounds cited by the ASPR Committee for

its actions as unreasonable.

Appellant has further contended

that the action of the ASPR Committee is

an attempt to overrule the decision of

the Court. In making this contention,

appellant assumes that the Court has

determined that the Board is obligated

to apply the weighted guidelines as

distinguished from any other guidelines

for the purpose of determining the

profit to which appellant is entitled.

=-35-

As indicated above, we do not read the

Court's opinion in that manner. The

Court was essentially determining how,

in its opinion, the Board erred in arriv-

ing at its initial result. In effect the

Court was telling the Board that it must

apply the weighted guidelines unless

"the Pentagon" were to determine that

the weighted guidelines are not feasible

and appropriately amends or supplements

its regulations without depriving appel-

lant of "vested rights." If "the Penta-

gon" were to acomplish such actions, the

Board would be "bound" to apply the

amended or supplemented regulations. It

might be contended that the ASPR Commit-

tee went beyond an "amendment" or "sup-

plement" when it determined that the

non-weighted guidelines should be made

applicable to determining profit under

contracts of the kind involved here.

However, from a reading of the last

sentence of the penultimate paragraph of

the Court's opinion, it is apparent that

the Court was not particularly concerned

with how one might characterize the

action taken by "the Pentagon," but was

insistent upon the applicability of

"published guidelines" to the resolu-

tion of this controversy. From its

consideration of the Newport News case,

the Court was well aware of the non-

weighted guidelines. And in its motion

for summary judgment, the plaintiff

(Bethlehem) further called the Court's

attention to the non-weighted guidelines

as well as to the weighted guidelines.

In this connection it is noteworthy that

in none of the papers which it filed

with the Court did Bethlehem specifi-

cally ask the Court to order application

of the weighted guidelines, as distin-

1 om

tinguished from any other guidelines which

Department of Defense officials might

regard as more suitable.

Appellant's final principal conten-

tion is that if we give effect to the

action of the ASPR Committee we would be

depriving appellant of a vested right, a

consequence not permitted by the Court.

Appellant is saying in effect that it has

a vested right to application of the

weighted guidelines. Both parties have

cited a variety of cases which bear on

the question of what might be character-

ized as a "vested" right in circun-

stances not analogous to the present con-

troversy, e.g., Greene v. United States,

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

Authority of Durham, U.S. 268 (1969) .

The contracts involved in these appeals

do not provide for the calculation of

fair and reasonable profit in accordance

with the weighted guidelines or any

other ASPR profit guidelines. Appel-

lant's entitlement to the application of

"guidelines" springs from the direction

of the Court of Claims in remanding this

matter to the Board. In Lockheed Air-

craft Corporation v. The United States,

Ct. Cl. No. 46-65 (Decided May 15, 1970),

the Court characterized the ASPR profit

guidelines discussed by it in Newport

: News and Bethlehem as ". . . changes in

3 procedural requirements and standards

during the determination of a claimant's

substantive rights." (Slip Op. p. 9;

emphasis by the Court)

Appellant correctly points out that

in Lockheed, the Court characterized its

Newport News and Bethlehem decisions as

‘ favorable to, or for the benefit of the

A eta oneal?

-37-

claimant. (See p. 9, text and footnotes

7 and 9) Appellant contends that unless

the weighted guidelines are applied it

would be deprived of the profit to which

it believes itself entitled. However,

there is no indication that in Lockheed,

the Court was referring to the applica-

tion of one set of ASPR profit guide-

lines as distinguished from another.

In Bethlehem, the Court expressed its

awareness that the profit to which appel-

lant might be found entitled on applica-

tion of even the weighted guidelines

could be less than the profit originally

determined by the Board. What was

"favorable" to appellant in the Bethlehem

decision was the Court's determination

that "guidelines" must be applied to

determining profit, as distinguished

from no guidelines at all.

In considering the "feasibility" of

the weighted guidelines the ASPR Commit-

tee stated that they "effected a sub

stantive change in the standards exist-

ing at the time the contracts were

entered into... ." (Emphasis supplied)

However, we have no basis to conclude

that the ASPR Committee was attempting

to dictate the ultimate result which the

Board might reach in further proceedings

on the merits. As stated previously,

the Court left the determination of

feasible standards to the authorized

Department of Defense policy makers.

Appellant points to indications that the

actions of the ASPR Committee were spe~

cifically intended for application to

the Board's resolution of these appeals,

even though contracts not involved here

were also considered. But such specific

applicability was foreseen by the Court

Bi FED THROUGH

7 ‘ mea sno tS ees

Rea IIS RY ENN AS A LEASE RL DR, NIE INN EGA EO »

-38-

when it referred to the possible infeas-

ibility of applying the weighted guide-

lines to the “instant contracts." The

non-weighted guidelines are published

guidelines of general applicability prior

to 1964. They were regarded by the Court

as acceptable for resolution of the

Newport News controversy. The Court did

not determine that appellant was entitled

to any particular profit, and we accord-

ingly do not regard the application of

the non-weighted guidelines to resolu-

tion of the instant controversy as impair-

ing appellant's vested rights in the

sense meant by the Court.

We conclude that we are bound pursu-

ant to the Court's directive, as imple-

mented by the ASPR Committee, to apply

the non-weighted guidelines, and not the

weighted guidelines, in determining the

profit to which appellant may be entitled.

Appellant has contended that such a

course of action would be improper for

a number of reasons. We have consid-

ered appellant's objections in the con-

text of determining the manner in which

the Court has directed us to proceed.

In opposing the Government's Motion

appellant has in large part taken issue

with the propriety of the course of

action suggested in the penultimate

paragraph of the Court's opinion. Our

decision herein would, of course, be

subject to change upon order or clari-

fication rendered by the Court.

For the foregoing reasons the Govern-

ment's Motion is granted. Appellant is

ordered to inform the Board within 30

days as to whether it intends to make

application to the Court for review of

=39=-

this interlocutory ruling. If appellant

does not intend promptly to make such

application, the Board will issue instruc-

tions to the parties regarding further

proceedings on the merits of these

remanded appeals.

Dated 23 December 1970.

I Concur

B. Lee Bird

5 OR RPA Sib Tah MINTS

Daniel M. Arons

DANIEL M. ARONS

Member of Division No. 5

Armed Services Board of

Contract Appeals

I Concur

William J. Ruberry

B. LEE BIRD

Member of Division No.

Armed Services Board of

Contract Appeals

I Concur

Richard C. Solidakke

WILLIAM J. RUBERRY

Member of Division No. 5

Armed Services Board of

Contract Appeals

I Concur

Harris J. Andrews, Jr.

RICHARD C. SOLIDAKKE,

Chairman

Armed Services Board of

Contract Appeals and

Member of Division No.

HARRIS J. ANDREWS, Jr.,

Vice Chairman

Armed Services Board of

Contract Appeals and

Member of Division No. 5

> EEROOO OT LEA IA Ie SIP PRE RE GOOLT PIGLET IOP AGA PEGE

eee od

-40-

I certify that the foregoing is a

true copy of the opinion and decision

by the Armed Services Board of Contract

Appeals in ASBCA Nos. 10316 and 10317

(Reinstated), appeals of Bethlehem Steel

Corporation, rendered in conformance

with the Board's Charter.

Dated: 13 January 1971.

George L. Hawkes

GEORGE L. HAWKES, Recorder

Armed Services Board of

Contract Appeals

-41-

IN THE UNITED STATES COURT OF APPEALS

No. 44-68

BETHLEHEM STEEL CORPORATION

Vv.

THE UNITED STATES

Before LARAMORE, Acting Chief Judge,

DURFEE, DAVIS, COLLINS, SKELTON and

NICHOLS, Judges.

ORDER

This case comes before the court on

plaintiff's motion, filed May 10, 1971, for

an order terminating stay and for other

relief. Upon consideration thereof,

together with the opposition thereto,

without oral argument,

IT IS ORDERED that plaintiff's said

motion for an order terminating stay and

for other relief be and the same is denied.

BY THE COURT

JUDGE LARAMORE

Acting Chief Judge

JUL -1 1971

We UE RENT PERLE. EU

=é2=

ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeals of --

and 10317

Under Contract Nos. NObs-3556) (Reinstated)

and NObs-3648)

)

Bethlehem Steel Corporation ) ASBCA Nos. 10316

)

APPEARANCES FOR THE APPELLANT:

E. J. O'Brien, Esq.,

Assistant General Counsel

Bethlehem Steel Corporation

Of Counsel:

George Vradenburg, III, Esq.

New York, New York

APPEARANCES FOR THE GOVERNMENT:

Samuel Pinn, Jr., Esq.

Counsel for the Naval Ship

Systems Command

Morris Amchan, Esq.

Assistant Counsel

OPINION BY MR. ARONS

History of the Dispute.

These appeals have been reinstated

following the decision of the United States

Court of Claims in Bethlehem Steel Corpora-

tion v. United States, 191 Ct. Cl. 141

(1970), in which the Court held that the

Board, when it initially decided these

appeals, erred in failing to consider the

provisions of the Armed Services Procure-

SON. —————

-43-

ment Regulation (ASPR) which the Court regarded

as applicable to resolving the matters in dis-

pute. In these appeals appellant seeks to

recover the amount of labor and material cost

escalation said to be due pursuant to Article

6 of the Special Provisions of the above

contracts, under which appellant built five

destroyers for the Navy at its shipyard

located in Quincy, Massachusetts. (Appellant

is sometimes referred to herein as "Quincy.")

Under Article 6(f) of the Special Provisions

appellant warranted that its price proposals

and other data submitted in connection with

negotiation of the contract,

" . . exclude any allowance for con-

tingencies to cover the possibility of

increased costs of performance for which

provision for price adjustment is made

in this Article."

In exchange for this warranty, other para-

graphs of Article 6 provided for adjustment

in the contract price to take account of

inflation in labor and material costs during

performance. However paragraph (e) of that

Article further provided,

"(e) The Contracting Officer may

deny, in whole or in part, any upward

adjustment in the contract price

required under this Article if the Con-

tracting Officer finds that such adjust-

ment is not required, in whole or in

part, to enable the Contractor to earn

a fair and reasonable profit under this

contract."

Delivery of the last of the five ships

was accomplished in February 1958. On

5 January 1960 appellant submitted its formal

claims for accrued labor and material escala-

tion, computed in accordance with the formula

Se.

OT RSs —,, .

= _ . Se FATA ORE STE AIS LSP) LENNY ETE SITY TT TET ST

as al ¢

SEER II LEED eT

Teed 22

=44-

specified in Article 6. Under NObs-3556 appel-

lant claimed a total of $3,347,500. Under

NObs-3648 appellant claimed a total of

$2,404,900. Without escalation appellant had

earned profits of 3.0% under NObs-3556, which

covered three vessels, and 2.35% under NObs-

3648, which covered two vessels, computed as

percentages of cost. With full escalation

appellant would recover profits of 9.3% under

NObs-3556 and 9.6% under NObs-3648, computed

as percentages of cost.

In final decisions, both dated 18

August 1964, the contracting officer denied

appellant's escalation claims, after deter-

mining, pursuant to Article 6(e), that no

upward adjustment in the contract prices on

account of labor and material escalation was

required to enable appellant to earn a fair

and reasonable profit under either contract.

In making his determinations the contracting

officer excluded from the cost based used in

computing the profit percentages certain

costs which he did not consider allowable

under the contracts. By virtue of these

exclusions the contracting officer determined

that appellant had earned, without escalation,

a profit of 4.6% of contract costs under

NObs-3556, and a profit of 5.0% of contract

costs under NObs-3648.

Appellant then appealed to this Board

pursuant to the Disputes clause in both con-

tracts. In a decision dated 16 June 1966

(66-1 BCA par. 5639) the Board sustained

the appeals in part. It determined that the

contracting officer's cost disallowances were

improper, and that appellant was entitled to

escalation sufficient to enable it to earn a

profit of 5.0% of costs under both contracts,

with the cost amounts previously disallowed

included in the cost base. Under the Board's

-45-

decision, appellant was allowed to retain a

$1,000,000 partial escalation payment

($500,000 under each contract) which the

contracting officer had approved in December

1959. Appellant was allowed a further

$564,151 under NObs-3556 and $376,028 under

NObs-3648. Appellant was thus allowed total

escalation of $1,064,151 under NObs-3556 and

$876,028 under NObs-3648.

Appellant then brought an action in

the Court of Claims seeking to recover the

balance of the escalation claimed. In its

decision, dated 20 March 1970, the Court did

not allow any further escalation. However,

it followed the precedent which it set in

Newport News Shipbutioing & aa Dock Co. v.

United States, Ct. Ci. , a case

Involving the same Article 6(e), and held

that in determining a fair and reasonable

profit under appellant's contract, the Board

erred as a matter of law in not resorting to

profit determination techniques or guidelines

prescribed by applicable published regula-

tions. In the original proceeding before

this Board, neither party relied on profit

guidelines prescribed in ASPR or elsewhere,

and the Board did not specifically consider

any regulatory guidelines in determining the

profit to which appellant was entitled. No

such guidelines were in effect in 1954, when

NObs-3556 and -3648 were awarded. However,

the Court decided, as it did in Newport News,

that a proper determination of fair and

reasonable profit required consideration of

the applicable profit guidelines and sus-

pended proceedings to enable the parties to

obtain further fact findings in accordance

with its opinion. The appeals were thereupon

reinstated by this Board.

After the appeals were reinstated the

parties engaged in a preliminary controversy

crm *&="LIE on ice

STI OD BEE ODA TIIGE CREO EDP ILL RL LE ELLIS CTE MISE IAIN LEI IED Rt 2 08 Fe oe

-46-

1 RL LB mt

over which set of ASPR profit guidelines

should be applied in deciding the appeais

on their merits. On the basis of certain

language in the Court of Claims' decision,

appellant contended that the Court of Claims

required application of the so-called

"Weighted Guidelines" set forth in ASPR

Section 3-808 effective 15 August 1963. The

Government maintained that the Court did not

require use of the Weighted Guidelines,

but instead, allowed Department of Defense

policy makers to establish the applicability

of other guidelines if the Weighted Guide-

lines were not considered feasible for reso-

lution of this dispute, provided that no

impairment of vested rights was attempted.

In June 1970, the authoriZed Department of

Defense policy making body, the ASPR Com-

mittee, determined that the so-called "non-

weighted guidelines," set forth in ASPR

Section 3-808 effective January 1960 should

be considered applicable. The application

of the non-weighted guidelines had been

required by the Court for resolution of

the Newport News litigation. The Government

accordingly urged that the non-weighted

guidelines should similarly be applied for

disposition of the present appeals. For

the reasons stated in our decision on the

guidelines controversy, dated 23 December

1970 (71-1 BCA par. 8640), we agreed with

the Government.

Appellant then filed a motion in the

Court of Claims seeking termination of the

suspension of proceedings and other relief.

Appellant contended that the Board's decision

on the guidelines controversy was erroneous.

In an unpublished order dated 1 July 1971,

the Court denied appellant's motion without

stating any view as to which set of guide-

lines should be applied in deciding these

appeals on their merits. Our disposition

een

Dae 7 oan ee ats

GAAS PMN DST AEST ETE IAN DORE LOONIE * + ELE NSO WIRE ADI OS ALi NOS ROLE IA TRN Aes apy Se EIRENE ELIE B

-47-

of these appeals herein is accordingly gov-

erned by application of the non-weighted

guidelines to the relevant facts. By agree-

ment of the parties the specific text of the

guidelines under consideration is that which

appeared in ASPR Section 3-808 as of November

1962.

With the permission of the Board,

appellant submitted for the record an offer

of proof as to profit it considers itself

entitled under application of the weighted

guidelines. Appellant's offer of proof is

not in evidence. With respect to appellant's

insistence upon application of the weighted

guidelines we note the memorandum dated 13 ;

June 1963 by the Assistant Secretary of 4

Defense for Installations and Logistics

which indicated that the substitution of

the weighted for the non-weighted guidelines

was intended to quantify existing policy but :

not to introduce any drastic changes. That

memorandum was quoted from extensively in our

decision in Newport News Shipbuilding & Dr

Dock Company, ASBCA No. 6565 (Reinstated) ,

7i-1 BCA par. 8705, the decision on the

Newport News appeal which followed the

decision of the Court of Claims in Newport

News Shipbuilding and Dry Dock Company v.-

United States, supra.

NPE IES PALISADE SANT TT IES

To a considerable extent the facts

relevant to deciding these appeals have

already been recited in the Board's original

decision and in the opinion of the Court of

Claims. In the original proceeding before

this Board no evidentiary hearing was held;

but the parties executed a lengthy stipula-

tion of facts which was reproduced in toto é

in the Board's decision. Several exhibits ;

were attached to the stipulation. After the

appeals were reinstated, and following reso-

lution of the guidelines controversy, 4

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-48-

seven-day evidentiary hearing was held and

numerous additional documents, obtained through

mutual discovery, were submitted for the record.

The record now consists of the materials orig-

inally before the Board, which were also before

the Court, supplemented by the hearing tran-

script and additional documents submitted fol-

lowing reinstatement of the appeals.

At the hearing in the reinstated appeals

the Government stated that in its view the

amount of escalation allowed by the Board in

its original decision resulted in a profit to

appellant which was within a fair and reason-

able range upon application of the non-weighted

guidelines. Accordingly the Government does

not now contend that the amount of escalation ;

previously allowed by the Board should be

reduced. (Tr. 1-111, 2-7; Govt. Brief, p. 8)

The amount now in dispute is thus determined

as follows:

a PPS.

NObs- 3556 NObs-3648

(ASBCA No. (ASBCA No.

10316) 10317)

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

Escalation allowed

per Board's

original decision 1,064,151 876,028

Difference now

claimed $2,282,849 $1,528,972

Total claimed ..... £654 6645 060880 $3,811,821

The Guidelines.

ASPR Section 3-808, entitled "Profit

or Fee," in effect as of November 1962,

included nine individual guidelines. They

-49-

were prefaced by the following introductory

paragraphs:

"3-808.1 General. A fair and rea-

sonable provision for profit or fee

cannot be made by simply applying a

certain predetermined percentage to

the cost estimate or selling price of

a product. Rather, the profit or fee

should be first established as a dollar

amount, after considering the factors

set forth in this 3-808. Therefore,

where a fee is involved and it is neces-

sary to determine the percentage rela-

tionship between the fee and the esti-

mated cost of the contract in order to

comply with administrative and statutory

limitations on fees for cost--reimburse-

ment type contracts, the percentage shall

be determined only after the dollar

amount of the fee has been established

for negotiation purposes.

"3-808.2 Factors for Determining

Fee or Profit. The factors set forth

In subparagraphs (a) through (i) below

should be considered in determining

profit or fee in all contracts, whether

for supplies or services; for construc~

tion work; or for experimental, develop-

mental, or research work, and whether of

the fixed-price type or of the cost-

reimbursement type unless otherwise

specified in the particular factor.

All of the following factors, as set

forth in (a) through (i) below should

be evaluated in the light of the basic

policy set forth in 3-801.1 which pro-

vides that supplies and services shall

be procured from responsible sources

at fair and reasonable prices calcu-

latea to result in the lowest overall

cost to the Government:

* * *

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We now turn to consideration of the individ-

ual guidelines, as applied to the relevant

facts. The order of the following discussion

reflects the order in which the guidelines

are set forth in ASPR Sectiun 3-808.

Factor (a) - Effect of Competition.

This factor is stated as follows:

"When competition is effective and

proposals are on a firm fixed-price

basis, the contracting officer normally

need not consider in detail the amount

of estimated profit included in a price.

When effective competition is lacking,

and in all cases where cost analysis is

performed in accordance with 3-807.2(c)

the estimate for profit, target profit

or fee, or the proposed fixed fee

should be analyzed in the same manner

as all other elements of price, eval-

uating the factors set forth in this

paragraph 3-808." 1/

The DD 931 Procram.

The destroyers built by appellant

under NObs-3556 and NObs-3648 were five

of eighteen destroyers in the DD 931 class.

Table I which follows indicates the pattern

in which contracts were awarded for ships

within that class:

1/ ASPR 3-807.2(c) prescribes techniques

for performing a cost analysis. Neither

party has relied on this subparagraph and

we do not consider it material to the dis-

position of these appeals.

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Preparation of Proposal.

As indicated by Table I, NObs-3556

required appellant to build the DD 936, DD

937 and DD 938 which constituted the second

group of three ships in the DD 931 class.

The requests for proposals ultimately

leading to award of NObs-3556 were issued

by the Navy Bureau of Ships on 21 October

1953 and 15 January 1954. Eight shipyards

were invited to submit proposals. Of those

eight, the following yards submitted pro-

posals in the amounts indicated (rounded

off to the nearest $1000):

TABLE It

Bath Iron Works $15,492,000 ea

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