Petition for Writ of Certiorari — Tom Shaw, Inc. v. West

Ss oreme

DR} 995

SUPREME COURF*OF PHE UNITED STATES

October Term, 1995

TOM SHAW, INC.

Petitioner,

Ws

TOGO WEST,

SECRETARY OF THE ARMY,

Respondent.

On Petition For Writ Of Certiorari

To The United States Court of Appeals

for the Federal Circuit

PETITION FOR WRIT OF CERTIORARI

THOMAS R. HUNGERFORD (P40000 )

Attorney for Petitioner

3857 S. Straits Hwy.

P.O. Box 849

Indian River, MI 49749

(616)238-4333

QUESTIONS FOR REVIEW

I. A TERMINATION FOR THE GOVERNIYENT'S

CONVENIENCE CONVERTS A FIXED ¥**CE

CONTRACT TO A COST REIMBURSABLE CONTRACT.

II. CONTRACT CLAUSE SP.33 IS APPLICABLE

TO A TERMINATION FOR CONVENIENCE

PEF CCING ACTION.

Page ii

SIGNIFICANCE OF CASE

Tom Shaw, Inc. is a small business

that had a bonding capacity of $9,000,000

at the time of its contract with the U.S.

Corps of Engineers. Presently, Tom Shaw,

Inc. is in chapter 7, has no_ bonding

capacity, its credit rating is non-existent

and in the process of being forced to

liquidate. Tom Shaw, Inc. has not been

fully reimbursed for the work performed in

this contract, due to misinterpretation of

the contract and termination for

convenience clause.

This case has great significance since

the Engineering Board of Contract Appeals

and the U.S. Court of Appeal for the

Federal Circuit has misinterpretated and

committed a major error of law in their

interpretation and appreciation of a

termination of convenience by a

Governmental Unit. It is the petitioner's

position that the interpretation issued on

this contract by Engineering Board of

Appeals and the U.S. Court of Appeals for

the Federal Circuit is a bizarre twist of

the existing case law and is conflict with

other decisions of the court and federal

regulations including both Federal

Acquisition Regulations, ("FAR"), and

Defense Acquisitions Regulations, ("DAR").

Additionally, the court is being asked

to review a section of the specification

contract ; SP-33, that relates to

completion of equipment rates for the

purpose calculating

$44

equipment costs in termination settlement

proposal. This issue has never been

addressed by this court and if heard will

give the lower court's guidance in

termination for convenience clauses in most

governed Government contracts. A n ad

finally, this petition, if left in its

present states, not only affects Tom Shaw,

Inc. but all other small businesses, who

have entered into work for the Government.

Termination for convenience is not an open

season for the Government to dishonor its

contractual obligations.

As part of termination for convenience

clause, the Government has the right to

stop any contract in progress for whatever

reason. But as a result of this right, the

Government must make the aggrieved

contractor financially whole again in a

timely manner. Case law has tested this

legal proposition and until this case has

always supported the aggrieved partly due

to the Government's unfettered power and

ability to terminate contracts.

iv

TABLE OF CONTENTS

Page

Questions for Review i

Significance of Case pe HY

Table of contents Vv

Table of Authorities vi

Statement of Jurisdiction vii

Statement of Case 1

Legal Arguments is

I. A termination for the Government's

convenience converts a fixed price

contract to a cost reimbursable

contract. 13

ee Contract Clause SP.33 is

applicable

to a termination for convenience

pricing action.

19

Conclusion 26

Appendix

Red Appendix:

Assignment by Chapter 7 trustee

termination contract Claim to

Tom Shaw.

Orange Appendix:

Judge Charles Steridan's Opinion

and Termination for Convenience

Clause on page 80.

Yellow Appendix:

Judgement of U.S. Court of

Appeals

for Federal Circuit.

Green Appendix:

Tom Shaw, Inc. 90-1 BCA 22,580.

Blue Appendix:

Construction contract and SP.33.

TABLE OF CASES AND AUTHORITIES

Blount Bro's Corp. v. U.S.. 872 F2a 1003 (Fed. Cir.

1989)

Caskel Forge, Inc., 1962 BCA ~3318

Codex Corp. v. U.S.. 226 Ct. Cl. 693 (1981)

Corliss Steam Engine Co. v. U.S.. 916 S. ct.

(1871)

Kalvar Corp. v. U.S., 543 F.2d 1298 (Ct. Cl. 1976)

Lisbon Contractors, Inc., y. U.S.. 543 F.2d 1298 (ct.

Cl. 1976)

M.E. Brown, 91-1 BCA "23,293

Maxima Corp. v. U.S.. 847 F.2d 1549 (Fed. Cir.

1988)

Melvin Wilner v. U.S., Slip Opinion No. 92-5161

(Fed. Cir. 5/24/93)

New York Shipbuilding Co.. 73-1 BCA ~9852

Paul E. McCallum, Sr, 81-2 BCA ~15,311

R.G. Robbins & Co., Inc., 83-1 BCA ~16,420

R.HJ. Corp., 69-1 BCA ~7587

Scope Electronics, Inc.. 77-1 BCA ~12,404;

denied 77-2 BCA “12,586

Tom Shaw, Inc., 90-1 BCA ~22,580

Torncello v. U.S., 681 F.2d 756 (Fed. Cir.

Wolfe Constr. Co., 88-3 BCA ~22,122

recon

1982)

STATEMENT OF JURISDICTION

Tom Shaw, Inc. appealed the January

26, 1993 Engineering Board of Contract

Appeals ("Eng BCA" or "Board") decision by

Administrative Law Judge Charles J.

Sheridan which denied in part Tom Shaw's

$10.3 million appeal from the final

decision of the contracting officer that

denied Tom Shaw additional termination for

convenience costs. The United States Court

Of Appeals for the Federal Circuit in a

judgment dated November 14, 1994, affirmed

the opinion of the Eng BCA. Tom Shaw, Inc.

is requesting that this court grant a

petition for a writ of certiorari to review

the judgment entered by U.S. Court of

Appeals for the Federal Circuit. 28 U.S.C.

2101

vii

STATEMENT OF THE CASE

Tom Shaw, Inc., ("Shaw" or

"Petitioner"), is a small business located

in northern Michigan, which employed

approximatly 100 people. Currently, Shaw

has filed for bankruptcy. See Red Appendix

for statement from the trustee. On August

31, 1983, Shaw was awarded a contract for

$2,306,24.90 by the u.8. Corps of

Engineers, ("Government" or "Respondent" ),

to quarry and barge 60,000 tons of rip-rap

for the main breakwater at Pt. Judith, R.I.

See Blue Appendix for a copy of the

contract. The contract was later modified

to $2,274,749.40. Shaw has been paid

$2,742, 763.07 for direct costs and

$282,550.00 as settlement expenses under

termination settlement proposal. Prior to

the contract being awarded a pre-award

hearing was held. and the Government

informed Shaw that about 90% of the work

was on the harbor side and Only 10% was

seaside. Shaw relied upon the Government's

representations. Shaw visited the pt.

Judith site prior to its Submitting a bid

for the contract.

As part of the contract, the

Government was to engineer/survey or lay-

Out the job; however, the centerline had to

be reset, which resulted in a major change

in the project. Shaw bid the job and

anticipated working the project at Point

Judith from the calm waters of the harbor

Side, not the stormy seas of the Atlantic

Ocean. The plan and specifications

indicated the major work was the repair of

the change to the harborside Slope of the

breakwater. It became apparent after the

contract was signed that the harborside was

largely intact. This further complicated

Shaw's job. The centerline on the project

had to be moved 2 1/2"-10' towards the

harborside. (A baseline or centerline may

be congruent. The first is simply a line

from which measurements are taken and the

other is the center of the breakwater).

The major part of the work was to the

seawardside. This is directly contrary to

a reasonable interpretation of the plan and

specifications submitted by the Government

to be bid. The additional cost of daily

work on the seawardside came from having to

deal with the oceanic water and wave

action, not the peace and tranquility of

the ocean water in the harbor. The work

shifted from 10% seaside/90% harborside, ;

as shown on the contract drawings, to 90%

seaside/10% harborside. The cost effect of

this change was to increase the contract

from $2.3 million to $7.6 million. Job

Change #2 was finally issued in September

3

of 1984 to cover the necessary changes. No

plans or specifications were attached to

the job change order. Based upon the

production rates, Shaw estimated that the

project would require several million more

dollars to complete. The original

drawings and specifications of the

Government detailed approximately 30 pieces

of displaced stone that had to be removed

so that the Shaw's barges could enter the

breakwater. But the real conditions

revealed thousand of tons of additional

stone. After several meetings with the

Government, job order #1 was issued so that

the stone could be reused and Shaw could

have access to the breakwall.

In addition to the above, the

specifications and drawings submitted by

the Government were not detailed with

regards to the placement of the stone. The

Original drawings and specifications were

ee

defective and/or ambiguous. Shaw continued

work on the project until forced to close

the project down due to the weather on

Christmas Eve, December 24, 1984.

After several meetings with the

Government in late 1984 and early 1985, the

Government advised Shaw that the contract

was to be terminated for convenience. Work

was stopped. However, the Government asked

Shaw, as part of the termination for

convenience, to load, Clean-up and set off

the remaining 30,000 tons of stone at the

dock on the breakwater.

Shortly thereafter, the termination

for convenience directions, mentioned

above, were again amended, directing Shaw

to remove approximately 10,000 tons of

Stone. Clean-up work at the quarry was to

be stopped. As directed by the Government,

Shaw was forced to remobilize during the

winter months. During this period, car

, J

float #12, while transporting large

boulders between Davisville and Point

Judith, RI, capsized. Shortly thereupon,

the Government proceeded to issue a

termination for default.

Shortly after the termination for

default, the Government began an exhausting

and expensive investigation of Shaw.

After several months of investigation, the

Government turned the termination for

default into another termination for

convenience. This is unprecendented

unusual to have two terminations for

convenience on the same contract. This

decision was made only after Shaw was

exonerated of any wrongdoing in two

investigations by the Criminal

Investigation Division (CID) and by the

U.S. Department of Labor (DOL).

As before mentioned, this Petition

presents an extraordinary circumstance of

_

two convenience terminations on the same

contract Two Final Decisions by the

Respondent's Contracting Officer, ("CO"),

resulted in payment of a sum in excess of

the adjusted Contract value. Respondent's

position - that payment of actual costs

reflected in Petitioner's cost records

provides sufficient compensation - has been

adopted by the Eng BCA without due regard

for DAR S8-301, i.e., strict accounting

principles shall not apply; rather, the CO

should exercise sound business judgment in

deciding what is fair compensation because

fairness is the controlling principle to be

applied. Shaw's economic circumstances at

the time of the contract award and the

effect of two terminations determination

based on the principle of fairness as the

primary criterion required by DAR 8-301.

The Eng BCA's validation of the

Respondent's cost award to Petitioner

ee

provides exclusive endorsement to the

strict accounting principles contained in

DAR 215 without so much as even a summary

discussion of the fairness guidelines given

in DAR 8-301.

The Board has made the following

findings inconsistent with its position:

(1) The Contract Specifications were

exacting yet not precise.

(2) The intended scope of Job Change #2

was vague.

(3) The Government did not disavow its

Determination and

Finding ("D & F") issued incident to

the initial convenience

termination which stated in part:

(a) A case for termination for

default could be made but would be

contested by Shaw or Shaw's Surety "on the

basis of ambiguous specifications and

changes being the cause of the problem."

(b) "Although not in agreement

that the low production is due solely to

changes or ambiguities, the Government's

position is prejudiced by the fact that

they do exist."

(4) The same D&F also stated that the

Government's position rejecting

Petitioner's work for improper placement of

stone, was doubtful.

(5) The perpendicularity requirements of

the specifications do not use the clearest

imaginable language.

The events Surrounding the

Government's 2/6/85 decision to terminate

for convenience, and not default, represent

the most compelling evidence bearing on the

Board's finding that Petitioner performed

little Satisfactory work. Those events

consist of a 1/9/85 meeting between the

parties' representatives who discussed the

intent of the specifications. At this

BEST AVAILABLE COPY

meeting, Shaw's bonding company, Maryland

Casualty, had retained Louis Caccese,

retired Chief Construction Division, Corps

Philadelphia ‘District, and Frank Vinci,

retired Chief Technical Engineering Branch,

Corps Philadelphia District. The same Mr.

Caccese testified at the trial before the

Board as well. Mr. Caccese confirmed his

opinions expressed on 1/9/85, to the effect

that a changed condition had occurred

“based on the fact that 90% of the repair

work would have to be performed on the

seawardside of the breakwater and 10% of

the harborside, compared to 90% on the

harborside and 10% on the seawardside as

indicated on the Contract drawings." Mr.

Caccese estimated this change plus the

placement of armor stone would turn a

$2,300,000.00 project into a $7,600,000.00

project. Mr. Caccese testified that he

would regard this change as having

10

dramatically different effect on the cost

of having to perform work on the seaward

side as opposed to the harborside of the

breakwater. He also testified that if he

were administering the Contract, he would

consider that ae cardinal change _ had

occurred. The Government's Minutes of this

Meeting reveal that the CO directed his

staff to prepare pricing under three modes:

(1) termination for default; (2)

termination for convenience; (3)

negotiated agreement for termination.

Subsequent to the 1/9/85 meeting, ina

Determination and Finding recommending a

termination for convenience, the Government

recognized that the Petitioner's

interpretation of the phrase "perpendicular

to the length" as allowing stone to be

placed with their long axis horizontal

would probably stand up as being

reasonable. The Government concluded that:

11

(1) Its interests would be served by a

termination rather than "to be exposed to

the risk of paying an excessive amount to

complete the work."

(2) The Government's plans and

specifications should be revised to reflect

job changes, eliminate ambiguities, and be

reissued under a future contract.

It is undisputed that the Government

recognized its position regarding rejection

of Petitioner's work for improper placement

of stone was doubtful.

The Board elected to disregard the

Government's own admissions and substitute

its judgment that Shaw's work, except for

160 feet, was not in conformance with the

/ specifications, admittedly ambiguous, from

the Government's perspective, and were

admittedly "very exacting yet not precise"

from the Board's perspective. The

existence of a change was Supported by Col.

12

Sciple's admissions in a letter dated

6/20/85 (1) that Petitioner's claim for

additional payment of $1,191,190.90 for

moving of the center line, had merit and

requested a formal cost proposal; (2) that

Petitioner was performing work beyond the

scope of the contract under a second claim

filed in 11/84 involving requirements

governing the method of placing and inter

locking stones on the breakwater.

These admissions were glossed over by

the Board's findings that he would change

in the centerline "reduced" the amount of

work Petitioner would perform. Such

findings are contrary to the

contemporaneous documentation issued not by

Shaw, but by the Respondent itself. Such

findings ignore the countervailing facts

that it was Respondent which erred in

performing the survey indicating the

centerline. Respondent's responsibility to

13

reflect the work to be performed has been

overlooked, even though the Board does seem

to acknowledge some semblance of

imperfection in the specifications as being

"very exacting, yet not precise" and the

“perpendicularity requirements as not using

the clearest imaginable language". The

Board stops short of taking the next step

and discounts Respondent's imperfections by

finding Petitioner's work improper. Such

findings are not Supported by the record

made primarily by Repsondent's own

contemporaneous sources wherein

Petitioner's interpretation of the

specifications was found reasonable and its

failure to make Production was, at least in

part, attributable to the difference of

interpretation between Petitioner and

Respondent as to Specification

requirements.

14

® 1

4

Some background regarding the period

of performance may be helpful to the Court.

The contract called for a performance

period of 365 days. Notice to Proceed was

issued 9/21/83 - thus establishing the

required completion date on 9/23/84. It is

undisputed that Petitioner did not complete

by the required completion date; however,

Respondent permitted Shaw to continue work

beyond the stated date. No doubt

Respondent was mindful that its failure to

obtain the necessary Dredging Permit,

required by the contract in Paragraph 2A-6,

precluded Petitioner from commencing its

work prior to the Permit's availability,

which was obtained 2/84. Petitioner's

equipment began work on 6/26/84, although

the preparatory work at the site occurred

much earlier, and preparatory work at the

stone quarry had also occurred earlier as

well.

15

In 6/84, discussions began between

Shaw and Respondent regarding the

conditions at the breakwater and the effect

upon the work to be performed. These

discussions focused upon three major

conditions: (1) existence of displaced

stone which blocked access to the

breakwater (resolved by a VECP' under

Modification POOOO1 and the contract price

was reduced by $31,500.00); (2) a

conflict existed between what he drawings

indicated as a centerline and the survey

baseline, which resulted in more work on

the seaward side than on the harborside

(this was to have been resolved by Job

Change #2, but the Government terminated

before this Job Change #2 was resolved);

(3) a conflict developed over the parties’

interpretation of the specifications

requiring placement of the armor stone to

be perpendicular to the slope.

16

Discussions continued throughout the

summer, fall and winter of 1984, as Shaw

continued its work in an attempt to satisfy

the Government Inspector. Finally, in

early 1/85, the meeting of representatives

from both parties and Petitioner's bonding

company consultants occurred.

On 4/25/86, Petitioner presented its

Termination for Convenience Cost Proposal.

In that proposal, Petitioner detailed its

time and materials proposal for removal of

the stone and demobilization. A letter

dated 2/19/85, describes a meeting which

had occurred on 2/13/85. That letter

recites Shaw's understanding that the post-

termination work would be done on a time

and materials basis.

Petitioner's equipment pricing

rationale is also contained in the April

Convenience Termination Proposal.

Petitioner explained in detail why standby

17

time should be calculated as it was, why

_ severity factors should be applied, and why

| the Region I Manual prescribed in Contract

Clause SP-33 should be utilized for

arriving at equipment rates for ownership

/ and operating expenses. Briefly put, Shaw

pointed out that actual costs for each

piece of equipment for ownership and

+, operating costs were not ascertainable from

its cost records kept as a small business

which was not required to comply with Cost

Accounting Standards.

The Region I Manual provides that its

purpose was for use as guidance in those

Situations where a contractor's actual

Ownership and operating costs could not be

ascertained for each piece of equipment.

In the Preface to the Region I Manual, its

use is prescribed for forward pricing and

for negotiated procurements. The Board

found that it was unclear whether SP-33

18

=

should be applied to convenience

| termination pricing actions. Yet, the

| Preface itself speaks to its application in

Bits.:.

"all construction contracts except dredging

and all negotiated procurements" which

Respondent's CO Rhen considered to be

"termination for convenience".

The two-part issue before this Court

is whether contract clause SP-33 should be

disregarded and whether’ actual costs

represent fair compensation to Petitioner

for tying up its equipment from 2/6/85, the

date of the first termination through 3/88,

the date Respondent's CO made aé final

decision. Awarding actual ownership and

Operator costs for non-operating equipment

begs the question of fairness by failing to

consider Petitioner's inability to put its

equipment to work was impeded both by the

Petitioner's non-existent bonding capacity

and the deteriorated condition of the

19

J eh ie

equipment resulting from its use in severe

terrain. The Board's findings ignore that

the idleness of Petitioner's equipment was

caused by the suspended state of events

originated by Respondent's failure to

adequately draft its specifications and to

properly describe the location and nature

of the work and continued by Respondent's

failure to promptly and reasonably

compensate Petitioner by payment of such

costs necessary to make the contractor

whole under the principle of fairness. The

protracted process to which Petitioner was

subjected, of charging wrong-doing, which

charges were dismissed; conducting four

time-consuming and expensive audits, whose

recommendations were not followed according

to the Board; and last, engaging in 20

negotiation sessions, is itself

inconsistent with fair treatment under

convenience termination guidelines.

20

Te

é

Pere! ey i

The Board was critical of Petitioner's

performance of acceptable work effort on

ten constructive changes for which

, Petitioner submitted cost proposals. The

' Board's examination of these changes served

as the basis for its finding that there is

no basis to justify an increase to the

‘contract price. The Board heard no

pte gy

testimony from Respondent's CO addressing

the issue of why an amount in excess of the

adjusted contract price was paid to

' Petitioner. The Board heard limited

testimony from one of the staff for the CO

who indicated that the Respondent did so

‘because there was at least on undefinitized

change and Respondent was trying to be fair

“to Petitioner. The Board heard no

testimony from Respondent's CO that he

‘considered the Contract to be a loss

contract or that he considered application

of a loss factor. Finally, the Board heard

21

no testimony from Respondent's CO that he

considered denying profit. Rather the

final decision itself and G-70, a cost

memorandum prepared to summarize the costs

paid to Petitioner, contain a reference to

a profit factor of 10%. The Board's de

novO power of review must have some

reasonable basis in the record before it.

The Board professed that it did not intend

to second-guess the-CO's cost allowances.

Yet, its findings do exactly that. The

Board's de novo decision appears to be

saying three inconsistent things: (1) The

Board finds no justification to raise the

contract price; (2) Yet, the CO's action

of payment in excess of the contract price

is acceptable to the Board; and (3) The

fact that the CO so acted does not convince

the Board that the CO intended to increase

the contract price. Such a conclusion

defies logic and existing case law as will

22

be more thoroughly discussed in the Legal

Arguments Section.

The instant Petition involves a

complex set of circumstances beyond the

usual complexity of addressing a

termination for the Government's

convenience which concedes liability but

seeks examination of costs. The Board

below overlooked its task of examining the

business judgment of the CO to ascertain

whether Petitioner had been fairly made

whole by the cost adjustments paid and

made. The Board found that the CO had been

generous or overly generous. The 17-month

time lag between 2/6/85, the date of the

first termination, and 9/22/86, the date of

the first payment made pursuant to partial

agreements per negotiation, was not

examined. Nor was the Petitioner's

financial condition at time of Award

evaluated. Petitioner's bonding capacity

23

and it's business have been destroyed by

circumstances surrounding the two

convenience terminations. Yet, because

such bonding costs were not an actual cost

reflected on Petitioner's books, so goes

the argument, no compensation could and

should have been paid.

Having outlined the relevant facts for

the Court's consideration, Petitioner now

turns to its Legal Arguments.

LEGAL ARGUMENTS

ARGUMENT 1;

A termination for the Government's

convenience converts a fixed price contract

to a cost reimbursable

contract.

It is axiomatic that, upon termination

of a contract for convenience, the

terminated portion of a § fixed price

contract is converted to a cost

reimbursable contract. (RG. Robbins & Co.,

24

Inc., 83-1 BCA ~16,420 and Paul E. McCallum,

Sr, 81-2 BCA ~15,311).

The Board below concedes as much at page 59

of its Opinion. However, the Board finds

that such a statement of cost principle is

an oversimplification because of three

countervailing cost principles which the

Board finds to be inconsistent with

treating the fixed price contract as

unqualifiably being converted to a cost

reimbursable contract.

Since the Board's Opinion attempts to

qualify the existing body of case law

regarding the conversionary effect of a

termination upon a fixed price contract,

some background of this previously

unchallenged cost principle is in order.

As this Court is well aware from opinions

in Maxima Corp. v. U.S., 847 F.2d 1549 (Fed.

Cir. 1988) and Torncello v. U.S. 681 F.2d 756

25

(Fed. Circ. 1982) the Government may not

use the Termination for Convenience Clause

to dishonor, with impunity, its contractual

obligations. The Government's power to

terminate a contract when its completion is

no longer in the Government's best interest

developed after the Civil War. In Corliss

Steam Engine Co. v. U.S., 916 S. 321, 322,

(1871) the U.S. Supreme Court established

the legal theory Supporting the modern

termination clause included in both

Civilian and military contracts. The

progeny of cases following after the Corliss

decision has established that a termination

for convenience, actual or constructive, is

not an "open license to dishonor

contractual obligations", Torncello, 681 F2a

at 770, 772. The only real limitation upon

the Government's power to terminate for its

convenience, places an almost impossible

26

burden upon the contesting contractor to

prove bad faith or clear abuse of

discretion. Kalvar Corp. v. U.S., 543 F.2d 1298,

1304-1305 (Ct. Cl. 1976) cert denied 434

U.S. 830 (1977). Thus, care must be taken

to reconcile the Government's power with

the benefits conferred upon both parties,

lest the Government be permitted to avoid

the cost effects of a bad bargain while the

contractor is permitted to recoup only his

actual costs plus a reasonable profit.

The Board maintains at p.- 58 of its

Opinion, that the overall theory of the

termination for convenience Clause is

"relatively straight forward." The Board

speaks in glowing terms of the benefits to

the contractor of a termination for

convenience, £-@., the contractor is

“relieved of some of the work and its cost"

and the contractor may have been "rescued

from potential loss". The Board never

27

addresses the parallel benefits conferred

on the Government, i.e., the Government has

avoided liability for payment on a contract

intended to be binding. In order to

equalize the position of the parties in the

somewhat awkward situation generated by a

termination for convenience, DAR S8-301 was

passed to enable the CO to recognize the

unique circumstances created by such a

termination by awarding the contractor

costs under the controlling principle of

fairness. Besides application of DAR S8-

301, the courts have fashioned theories

which ameliorate the harsh effects of a

termination and increase the contractor's

ability to recover costs for attempts to

perform under defective or impossible

specifications and for constructive changes

to the work under the contract.

The Board's finding of "relative

straight forwardness" ignores the

28

complexities involved in the strict

application of the cost principles

inconsistent with the cost conversion of a

fixed price contract into a cost

reimbursable contract. The Board's dispute

with the practical effect of a termination

is not well taken because this approach

discounts the validity of other factors

found by courts and boards to justify such

a characterization of contract conversion.

Significantly, a termination for

convenience settlement should compensate

Shaw fairly for the work done and the

preparation made for the terminated

portions of the contract, including costs

resulting from a Suspension of the work.

M.E. Brown, 91-1 BCA "23,293. Further, the

qualifying factors of whether the

Government contributed to the increased

costs and whether it is possible or not to

separate the Government's portion of the

29

loss from the possible losses caused by the

contractor requires that there be no

disallowance of profit on a loss contract.

Scope Electronics, Inc. , 77-1 BCA “12,404, Motion

for reconsideration denied 77-2 BCA

“12,586. R.HJ. Corp., 69-1 BCA ~7587. In

effect, the question of whether the

completed contract would have resulted ina

profit or loss is immaterial. Finally,

there is an inherent trade-off employed in

a termination setting that disregards any

evaluation of work produced as an

appropriate standard for determining costs

under a termination settlement. Reasonable

costs of producing items which failed to

meet requirements are recoverable under the

Termination for Convenience Clause. Caskel

Forge, Inc., 1962 BCA “3318, New York Shipbuilding

Co., a Division of Merritt Champman & Scott

Corp., 73-1 BCA ~9852. This principle

30

recognizes that the parties do not need to

engage in a fault-finding as to why the

continued performance of the contract work

is no longer in the Government's best

interests.

Thus, juxtaposed against the Board's

three qualifying cost Principles found to

be inconsistent with the conversion of a

fixed price contract into a cost

reimbursable contract are three competing

considerations:

(1) Government Suspension of work, actual

Or constructive, establishes @ basis for

cost recovery and makes the profit or loss

position of the contract immaterial.

(2) Government contribution to increased

costs of work, which is not possible to

separate from any possible losses caused by

&@ contractor, requires no disallowance of

profit on a loss contract.

(3) Evaluation of the contractor's work

31

Product is an inappropriate Standard for

determining costs under a termination

settlement.

Petitioner maintains that the Board

below erred, as a matter of law, in

ignoring these countervailing cost

principles which should have been

considered and applied in examination of

the convenience termination cost

settlement.

Though Petitioner did not couch its

Termination Settlement Proposal in terms of

& suspension of work theory, the facts in

the record Clearly establish that there was

@ constructive suspension of work due to

Job Change #2, which was never definitized

by Respondent. The Respondent never

prepared its independent estimate of the

cost effect of Job Change #2 upon the

contract cost. In a fixed price contract

case where work never even commenced, the

32

rr

ASBCA found the contractor entitled to

recovery of costs for the eight-month delay

between the discovery of asbestos and the

convenience termination because the delay

was so lengthy it was unreasonable to

require the contractor to assume the risk

of associated costs. Although the

contractor never incurred costs during

performance, the question of whether the

contract would have resulted in a profit or

loss was immaterial. ME. Brown, supra.

The Respondent has conceded that

Petitioner's interpretation of the

specifications would probably be

reasonable; however, Respondent insisted

that its interpretation be enforced by the

Inspector. The Board found that the

specifications were "very exacting, yet not

precise" and that the perpendicularity

requirement did not use the "clearest

language imaginable. Under those

33

Eee eee ea...

circumstances, the Board ignored the

Respondent's contribution to Petitioner's

cost of the work and improperly found

Petitioner to be in a loss position.

Finally, the Board has found

Petitioner's pre-termination performance to

be unsatisfactory by finding that

approximately only 160 ft. was completed

per Specification requirements.

Notwithstanding the fact that the

specification requirements were unclear or

Open for more than one interpretation, the

Board's evaluation of Petitioner's work

Product was improper because that standard

has been rejected as inapplicable. The

Board finds this unsatisfactory performance

to be a yardstick for its finding that no

constructive changes occurred. Yet, any

conclusion regarding the value of the work

product are immaterial, given the

circumstances ofa convenience termination.

34

CC SSESS'~' See

Petitioner was attempting to meet a

performance specification impossible to

perforn, given the language in the

specifications. Such work effort, even in

@ loss position, has been found to be a

reasonable basis for recovery of costs.

Scope Electronics, supra.

ARGUMENT II:

Contract Clause SP.33 is applicable

to a termination for convenience

pricing action.

The Eng BCA finds that there is a

preference for actual costs over estimated

costs in a termination settlement. This

preference runs parallel to the favored

form for a termination Proposal being on

the inventory versus the total cost

approach. Usually, a termination

contracting office, ("TCO"), will direct a

contractor to prepare his Settlement

Proposal on an Inventory Basis. Only in

35

those cases where the contractor's books

and records do not contain a sufficient

actual level of cost detail to arrive at an

Inventory Proposal Should the TCO direct

that the settlement Proposal be submitted

on a total cost basis. There are two

points to be gleaned: (1) The TCO, not

the contractor, determines the basis for

the proposal; (2) sufficient actual cost

detail must exist in order for an Inventory

Proposal to be feasible. Directing

submission of a total cost settlement

proposal is inherently contradictory to a

finding that actual costs can be identified

with a sufficient level of specificity for

computing ownership and operating costs for

@ contractor's equipment.

Because a TCO is charged with the

guiding principle of fair compensation, he

must consider whether fair compensation

demands deviation from the general rule of

36

NN

favoring actual costs if they are

ascertainable. The TCO should be aware

that the Contract itself at SP-33 required

use of the Region I Manual unless the

actual costs of each piece of equipment

could be ascertained form the records.

This was the contract Clause upon which

Petitioner's risk assessment was based at

time of award. The Board finds that Shaw

did not rely upon the word "each" in SP-33

at time of bid: however, no contractor at

time of bid contemplates a termination for

convenience either. See Appendix Blue for a

overview of Sp-33. The Board attributes an

unsavory motive to a contractor to avoid

application of SP-33 by asserting at p. 64

of its Decision that a contractor could

"unilaterally defeat the Co's right to use

actual, ascertainable costs" simply by

choosing not to separate some equipment

costs in its accounts." A contractor could

37

0 SSSSSS’'"'T’' —_—_Zgrcoocsss——

hardly predict a termination in sufficient

time to jockey its books so as not to

separate equipment costs in its accounts.

The more likely reason, relates to the lack

of usefulness to a contractor to do so.

Respondent's Tco directed Shaw to

prepare its proposal on a total cost basis.

Why? The Board Suggests that the TCO did

SO because there was at least one

outstanding undefinitized change, Job

Change #2, and the TCo wanted to be fair,

which was commendable. The TCO had another

option of course, if he truly believed Job

Change #2 reduced the amount of work

Petitioner would be required to perform, he

could and should have issued a deductive

change. The TCO elected to pass on

performing an estimate to complete a

reduced scope of work. The TCO did not pay

attention to either the applicable total

contract price or what would have been a

38

reasonable estimate to complete the

contract as compared to aie reasonable

estimate for a deductive change order? If

undefinitized changes are not expected to

have an extreme impact on contract costs,

it is appropriate to definitize the

changes, adjust the contract price and

apply the loss formula if necessary. By

failing to act on Shaw's change proposals,

prior to directing. the submission of a

termination cost proposal, the TCO skewed

the basis for determining both the contract

price ceiling as well as the potential of

any loss. Just as the Respondent's survey

for the baseline on the breakwater was

inaccurate, the Respondent's delay in

evaluation of Petitioner's pricing for

constructive changes also created lack of a

proper reflection of a cost baseline.

Besides this, there is a more fundamental

flaw in the Board's ruling.

39

The Board disputes that SP-33 applies

to a termination. The TCO thought that it

did since a termination is a negotiated

procurement. The Board gives no rationale

for its contrary impression and ignores

that the Preface to the Region I Manual

provides for its use in all construction

contracts and all negotiated procurements.

The Board understands the Petitioner's

semantic argument but is not persuaded that

actual costs were not to be used.

Petitioner's argument centers on compliance

with the terms of the contract which called

for application of the Region I Manual

rates unless actual ownership or operating

costs for each piece of equipment were

ascertainable from the contractor's books.

The Board believes that such actual costs

were available in the Petitioner's records.

In holding that actual costs on a

collectiv~» basis represent adequate

40

compensation in a termination setting, the

Board has ignored that equipment costs

present an extremely unique cost are of a

contractor's operations. A contretor's

investment in its equipment represents an

asset capable of generating revenue.

The Board has failed to recognize and

apply the holding in Tom Shaw, Inc., 90-1 BCA

“22,580, wherein te DOT Board found that a

contractor was entitled to compensation for

its fully depreciated idle equipment,

despite the Defense Contract Audit Agency's

policy disallowing any reimbursement for

fully depreciated inactive equipment.

In this Decision, the Board has

adopted a theoretical approach which

ignores the realities under which

contractors operate. The DOT BCA points

out that depreciation is an accounting

device that spreads acquisition costs over

the estimated life of an item for

41

recognizing the cost of equipment as a cost

Of doing business. The amount of

depreciation that may be claimed each year

is unrelated to the amount of use or annual

revenue generated by the equipment. Under

the DCAA approach, a contractor would not

be entitled to consider the amortization of

the purchase price of equipment if its

useful life for accounting purposes had

expires, even if the equipment had never

been used. The Board found that, although

fully depreciated and inactive, the

contractor's equipment was capable of

performing and generating revenue and thus

was still valuable. Ownership of the

equipment entailed costs such as

maintenance, insurance, and taxes, in

addition to the cost of money initially

invested. The Board fund that what

especially cost money during the period of

enforced idleness was the contractors’

42

inability to perform other work with the

equipment.

The DOT BCA refused to follow a strict

accounting analysis which the Board below

has chosen to follow. The DOT BCA stated

that adopting the DCAA approach would mean

that a contractor would not be entitled to

consideration of the amortization of the

purchase price if its useful life for

accounting purposes has expired, even if

that equipment had never been used and

therefore provided no recoupment of its

purchase price. This is exactly what the

Eng BCA has imposed upon Petitioner by

virtue of its decision. The inequity

placed upon Petitioner is obvious.

As is well stated by the DOT BCA, a

contractor does not (normally) purchase

equipment merely to generate an annual tax

deduction or an accounting write-off. A

contractor purchases equipment in the

43

expectation that within a reasonable time,

he will be able to recoup the acquisition

cost and realize a profit, a return for the

investment. ' Here, the decision below

states that Shaw has been compensated for

the equipment costs in that the acquisition

costs were reimbursed. This fails to give

consideration to Petitioner's purpose

underlying the acquisition of equipment.

The Board's decision fails to

recognize that it was the Government which

chose to terminate the contract for

convenience thereby depriving the

Petitioner of the Opportunity to earn

income from its equipment. As is noted

above, the contractor can not only

reasonably anticipate recouping the value,

but also anticipate generating revenue by

the use of the equipment. The Eng BCA has

deprived the Petitioner of this by adopting

the position that the contractor is only

44

entitled to recoupment of the actual cost

of the equipment while failing to address

the problem that it was the Government

which placed the Petitioner in the position

as a result of this protracted termination

for convenience. The Eng BCA does not find

that Petitioner presented its loss of

equipment use on a claim in the nature of

additional profit, Wolfe Construction Co., 88-3

BCA “22,122; therefore, there should be no

need to address this issue on Petition.

The Board dismisses a method for

calculating the operating costs for marine

equipment, which was developed by the

author of the Region I Manual, Mr. Glen

Moosman, because the method had no support

in the contract and because the Board

believes that payment of acquisition cost

in the amount of $162,104.00 plus a mark-

up for Cost of Facilities Capital (CFC) and

45

Pits aes SE ME AOC LS Ele TEC LE Aa Na a. amore ae

ea er rT eee

Operating costs was sufficient

compensation.

The Board contrasts this to its own

calculation of depreciation and CFC factors

from the Region I Manual. The Board

concedes that the Region I Manu~l does not

provide rates for marine equipment but does

provide a method to determine ownership

costs but not operating costs for marine

equipment. Moosman provided a Suggested

method using comparable operating costs for

pieces of heavy land construction equipment

Similar in size and weight to the marine

equipment. Moosman also confirmed that he

had been present during some of the

negotiation sessions when Petitioner was

told to use the Region I Manual. The Board

found such use of the Region I Manual was

for interim rates only, pending the Audit

results of whether actual costs could be

determined. That may have been so, but

46

there is evidence to Support the use of the

Region I Manual. SP-33 had been accepted

by both parties for estimating equipment

costs throughout contract performance. Job

Change #2 was priced under the Region I

Manual. Cost proposals for Changed work

were submitted under SP-33 using the Region

I Manual. The termination Proposal was

priced according to SP-33 requirements.

The Region I Manual represents average

rates based on historical data gathered

from a cross-section of the Corps'

experience with many contractors. It

represents a fair basis upon which to

estimate equipment costs - both ownership

and operating costs. The underlying reason

for development of the Region I Manual was

to address the insufficient state of the

majority of the contractor's records as

being insufficient to identify actual costs

for each piece of equipment so that

47

Government Auditors could obtain complete

data on equipment costs.

Because Petitioner's equipment costs

are based on average rates as provided for

in the Region I Manual, the Board's

comments about the unreliable nature of the

estimates are not well taken. The only

possible factor to evaluate would be the

amount of time for which equipment costs

are projected. As Shaw has already noted,

its inability to put its equipment back to

work after the two terminations related to

its lack of bonding Capacity and its lack

of capital resources, both of which arose

from the lengthy period of time Respondent

took to address the effects of the two

terminations. Petitioner did not assume

the risk of such delayed relief which came

in dribbles over time. Awarding actual

costs only for equipment rendered idle by

acts of the Government does not bespeak

48

fairness. Codex Corporation v. United States, 226

Ct.Cl. 693 (1981).

CONCLUSION

etition, this Court is faced

with three e+ interpretations issued by

9f Contract Appeals

~OF ird”). Petitioner

tnree interpretations

re Dizarre twist from the

existing case law concerning terminations

for convenience that this Court should

reverse and remand for proceedings

consistent with the principles enunciated

by this Court in Maxima Corp. v. United

States , 847 F.2d1549 (Fed. Cir. 1988 )

[holding that changed circumstances must

exist as a basis for the Government to

avoid liability for breaching its contract

by declaring a convenience termination],

49

Lisbon Contractors, Inc. v. United States, 828 F.2d

759 (Fed. Cir. 1987) [holding that the

Government bears the burden Of proof to

establish the amount of a set off for

corrective work in a convenience

termination setting], and Blount Brothers Corp.

v. United States, 872 F.2d 1003 (Fed. Cir. 1989)

Jholding that the “Substantial Evidence"

rule does not require that automatic

deference by given to the determination of

an administrative Board where there is

specific evidence in the record supporting

@ contrary conclusion].

By its construction of the termination

for convenience Clause, the Eng BCA has

Challenged the long-standing holding and

well-accepted principle that a termination

for convenience converts a fixed price

contract into a cost reimbursable contract.

90

nm a a

The Eng BCA finds that such a statement

constitutes an "over Simplification",

because there are three countervailing

limitations inherent in the termination for

convenience clause which Support the

Board's holding that it would be

inconsistent to treat a fixed price

contract as being unqualifiably converted

to a cost reimbursable contract.

The Eng BCA identified these three

limiting factors as follows:

(1) The contract price serves as a ceiling

On cost recovery;

(2) A profit allowance is partially or

totally eliminated on a loss contract;

(3) Actual costs may be reduced by a loss

factor.

These factors have always existed as

the courts and boards have examined

termination for convenience actions. There

has been no emphasis placed on these

S51

ee

a

limiting factors prior to the instant

decision. From the standpoint of the facts

actually involved, the Eng BCA may have a

point. From the standpoint of the facts

actually involved, the Board's notions do

not square with the pertinent

circumstances. First, the Board's ana lysis

ignores that it was the Contracting

Officer's (hereinafter "CO') decision to

pay the Petitioner funds in excess of the

Contract ceiling price. second, the

Board's holding failed to give any weight

to the CO's decision to apply a 10% profit

factor on direct costs due Petitioner.

Third, the existence of a loss contract was

beyond Petitioner's control = thereby

making application of any loss’ factor

improper and immaterial. The CO found no

reason to apply a loss factor, despite the

conduct of approximately 20 negotiation

sessions and extensive audits of

Petitioner's termination proposal.

What the Eng BCA's' Decision has

accomplished is tantamount to a judicial

reversal of the CO's decision to terminate

for convenience instead of default. The de

novo review power of a Board does not

enable it to disregard a CO's decisions

favorable to a contractor. Melvin Wilner vy.

United States, Slip Opinion No. 92-5161,

decided May 24, 1993, Fed. Circuit.

Petitioner contends that the Eng BCA

committed a material error of law by

failing to consider at least four competing

factors consistent with the principle that

a convenience termination converts a fixed

price contract into a cost reimbursable

contract:

(1) The convenience termination makes it

impossible for a contractor to correct any

allegedly defective work:

5 3

Le!

J

(2) Evaluation of a contractor's work is

not an appropriate standard for determining

costs under a termination settlement,

including actuals, costs, profit, and

whether a loss factor Should be applied;

(3) Government contribution to increased

costs of work, which are incapable of

Separation from any possible losses, caused

by the contractor, require no disallowance

Of profit on a loss contract;

(4) Defective specifications and

Government suspensions of work, actual or

constructive, make the profit or loss

position of the contract immaterial.

Petitioner has demonstrated that the

Respondent should not benefit from chaotic

circumstances under which the Petitioner

was directed to submit its termination

pricing. The Eng BCA applied abstract

principles in total disregard of the

94

factual actions taken by the Respondent's

CO.

The Eng BCA did not give due weight to

the evidence justifying why the initial

termination was for convenience and not

default. Instead, the Eng BCA has

circumvented the effect of a convenience

termination by finding a loss contract

without giving consideration to the

Government's contemporaneous documents

Substantiating that the specifications was

reasonable, and that the Government's

position for rejecting the contractor's

work was doubtful.

Finally, the Eng BCA has misapplied

the burden of proof. It is well-accepted

that the Government bears the burden of

proof on the issue of the correctness of

its actions in terminating a contractor for

default. Likewise, in a convenience

termination situation, .k is the

2a

Government's burden of proof to establish a

loss contract and the amount of the loss.

The Board Clearly concedes that the

Government did not meet its burden to prove

the amount of loss but the Board totally

disregarded that the Government never

prepared an estimate to complete the

contract. In the case of Lisbon Contractors y.

United States, supra, the Government,

in a default termination action, did not

perform an estimate of time to complete,

which invalidated the default termination.

It is undisputed that the Government, in

this case, never Prepared an estimate to

complete the work. Therefore, the Board's

sole basis on which to find a loss contract

emanates from either Petitioner's

completion estimate or the fact that only

20% of the work had been completed prior to

termination. The Respondent Submitted no

evidence regarding cost estimates for

56

completion and yet the CO paid costs in

excess of the ceiling price. Petitioner is

being asked to both prove its costs and to

prove why it was reasonable for the CO to

pay funds in excess of the Contract's

ceiling price. This is inconsistent with

the burden of proof, where the Petitioner's

proof is used to penalize it by the finding

of a loss contract.

Shaw believes this Petition for a Writ

of Certiorari serves as an Opportunity for

this Court to reconcile the content of the

termination clause with the intent of the

governing regulations so that a contractor

terminated for convenience may not be put

through the costly and time-consuming task

of justifying the validity of both its own

costs and the propriety of the Government's

actions. This constitutes an unfair and

onerous burden to bear under the

practically unfettered right of the

97

Government to

contract for

P.O. Box 849

Indian River,

616 )238-4333

declare a terminati

its

—

nA

ed |

i

convenience.

we

Thomas R. HyYingerf¢rd

3857 S. Straits

Hivy .

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