Universal Restoration, Inc. v. U.S.

• Decision Date: 22 August 1986
• Docket Number: No. 85-2662,85-2662
• Parties: , 33 Cont.Cas.Fed. (CCH) 74,555 UNIVERSAL RESTORATION, INC., Appellant, v. The UNITED STATES, Appellee. Appeal
• Court: U.S. Court of Appeals — Federal Circuit

Page 1400

798 F.2d 1400

55 USLW 2203, 33 Cont.Cas.Fed. (CCH) 74,555

UNIVERSAL RESTORATION, INC., Appellant, v. The UNITED STATES, Appellee.

Appeal No. 85-2662.

United States Court of Appeals, Federal Circuit.

Aug. 22, 1986.

Douglas L. Patin, Braude, Margulies, Sacks & Rephan, Chartered, of Washington, D.C., argued, for appellant. With him on the brief were Paula J. Glaser and Herman M. Braude.

Hillary Stern, Commercial Litigation Branch, Dept. of Justice, of Washington, D.C., argued, for appellee. With her on the brief were Richard K. Willard, Asst. Atty. Gen., David M. Cohen, Director and Sandra P. Spooner.

Before MARKEY, Chief Judge, BENNETT, Senior Circuit Judge, and NIES, Circuit Judge.

NIES, Circuit Judge.

Universal Restoration Inc. appeals the decision of the United States Claims Court ¹ holding that Universal had violated the Truth in Negotiations Act and that Universal's recovery under the contract was precluded by the contract's defective pricing clause. The dispute centers on the amount charged by the contractor for overhead which was found to be excessive. We reverse.

I.

The subject contract required the repair and restoration of the ceiling and the clerestory vaults of the National War College, a National Historic Landmark located at Fort McNair, Washington, D.C. The structure's inner dome and clerestory vaults are constructed of "Gustavino" terra-cotta tiles specially layered in depth so as to constitute primary support for the central dome of the structure. In May, 1974, some of the tiles which formed the ceiling area, some sixty-five feet above the floor of the rotunda, loosened and fell to the floor causing a safety hazard and raising doubts as to the structural integrity of the dome itself.

The government requested Universal, a small firm with highly regarded expertise in the field of restoration and renovation of historic buildings, including experience with terra-cotta tiles, to submit a price proposal on a time-and-material basis for emergency repair work to the dome. Universal, on May 28, 1974, submitted a price proposal of $65,000, which specified an overhead rate of 115% and a profit rate of ten percent of direct labor costs. These rates were Universal's standard add-ons and, as a matter of company policy, Universal would accept nothing less than its established mark-ups on any contract.

The government determined that Universal was the only source available to perform the emergency work and that Universal's price proposal was fair and reasonable when compared with similar type contracts for time and materials and the government's own cost estimate. The contracting officer made no attempt to negotiate with Universal for a reduction in any part of its proposal. The government awarded the contract to Universal on May 31, 1974.

In August, 1974, the government began to enlarge the scope of work to be performed as a result of engineering studies (not made by Universal) with respect to what was required and as additional funds became available. The contract price rose incrementally over a nine month period to $1,349,800. ² With respect to each modification, the rates proposed in Universal's original May, 1974, proposal remained in effect. Each time, the government accepted Universal's price proposal without attempting to negotiate for a reduction in any part of its proposal. The contracting officer and the Board of Awards did, however, determine that Universal's proposal in each instance was both fair and reasonable based on government estimates and the previous work performed on the project. Universal satisfactorily completed the contract on September 23, 1975.

During the contract period, Universal billed the government for work performed in the amount of $1,220,644.87, the billings being calculated on the basis of the 115% markup for overhead. Universal made no calculations of its actual overhead rate in connection with these billings. The government paid Universal $1,021,204 and withheld the balance, pending audit clearance of Universal's complete billings. This withholding was the subject of several audits and a long running dispute between the parties.

The contract became the subject of intense auditing once it became an after-the-fact cause celebre because of its growth in price from a modest $65,000 to in excess of $1,000,000. Between August, 1975, and March, 1981, the government audited Universal's performance six times. Two of these audits were routine voucher audits. Four audits were performed with respect to Universal's cost and pricing data and overhead expense with the 115% overhead rate being the focus of the audits. Two of these audits were made the subject of Universal's board appeal. The first audit indicated that Universal's overhead rate remained at about 115% throughout the contract period. However, the second audit report, based on a one month period, concluded that Universal's overhead rate had declined and that, if Universal had furnished current overhead data at the time of each contract modification, the contracting officer would have negotiated a lower overhead rate. The second audit recommended a reduction of $130,561 in the contract price. After the parties failed to resolve the dispute through negotiations, the contracting officer issued a final decision in favor of the government. Universal timely appealed to the Armed Services Board of Contract Appeals.

II.

A. The Statute

The Truth in Negotiations Act, Pub.L. 87-653, Sec. 1(e), 76 Stat. 528-29 (1962), codified as amended at 10 U.S.C. Sec. 2306(f), requires that (1) certain government contractors and would-be contractors must certify, to the best of their knowledge and belief, that the "cost or pricing data [they] submitted [to the government] was accurate, complete and current," and (2) any contract under which such a certificate is required shall contain a provision that "the price to the Government, including profit or fee, shall be adjusted to exclude any significant sums by which it may be determined by the head of the agency that such price was increased because the contractor ... furnished cost or pricing data which was inaccurate, incomplete or noncurrent." ³ To implement the Truth in Negotiations Act, the government mandated the inclusion in every contract subject to the Act of a uniform clause entitled "Price Reduction for Defective Cost or Pricing Data." ⁴ 32 C.F.R. Secs. 3-807-5, 7-104.29(b) (1970). At the time of the instant contract, the statutory obligation applied to contracts or contract modifications in excess of $100,000 only. ⁵ Although the original contract in this case did not meet the statutory threshold, the subsequent contract modifications invoked the "defective pricing clause."

B. The Decisions Below

In its original decision of April 9, 1982, Universal Restoration, Inc., 82-1 BCA p 15,762 at 77,998 (ASBCA 1982), the ASBCA found that Universal had "failed to discharge [its] disclosure duty since its stated overhead was not always its actual overhead which fluctuated monthly." However, the ASBCA recognized that mere nondisclosure does not invoke the defective pricing clause. Rather, a presumption that the contract price would have been lower arises when the government carries its burden of proving nondisclosure. Id. at 77,999. Once the government proves nondisclosure, the burden of going forward shifts to the contractor to prove nonreliance by the government on the nondisclosure. Id.; Sylvania Electric Products, Inc. v. United States, 202 Ct.Cl. 16, 479 F.2d 1342, 1349 (1973). In this case ASBCA originally found no reliance by the government on the nondisclosure of Universal's actual overhead rate. The majority noted that Universal was the only source available to perform the original emergency repair work; that it would have been impracticable to allow another contractor to perform any of the contract work; that Universal's prices were found by the government to be fair and reasonable; that Universal would accept nothing less than its established overhead markup; and that the government made no attempt to negotiate with Universal for a reduction in any part of its proposals. 82-1 BCA at 77,995-997. From these findings, the majority (Norman, Williams, and Andrews, JJ.) concluded "that the contracting officers involved did not rely on [Universal's] pricing data and, thus, were not misled by [Universal's] failure to disclose its actual overhead rate." Id. at 77,998.

From these findings, the board majority concluded:

The ultimate burden of showing the causal connection between the inaccurate data and an overstated contract price, however, remains with the Government.

In our opinion the Government has not satisfied this burden.

We are unable to conclude from the record before us that even if the fact of the appellant's declining overhead had been brought to the contracting officer's attention it would have had any practical effect on the price of any one of the contract modifications. The record establishes that the appellant would accept nothing less than its stated overhead rate leaving the Government to take it or leave it. There is no question in our mind but that the Government would have taken it in view of its obvious and proven reluctance to question any of the appellant's several price proposals.

In our opinion, these circumstances are sufficient to rebut the presumption of the natural and probable consequence of the nondisclosure. Inasmuch as no evidence was presented to overcome this rebuttal, we are unable to find that the Government satisfied its ultimate burden of establishing that the contract price was overstated because of the appellant's failure to reveal its actual as opposed to its policy overhead. Hence, there is no basis for reducing the contract price because of the variance between the appellant's actual as opposed to its established policy overhead.

Id. at 77,999-78,000.

Two judges, Freeman and Ruberry, dissented on the ground that the...