838 F.2d 1179 (Fed. Cir. 1988), 87-1108, Beta Systems, Inc. v. United States

Docket Nº:87-1108, 87-1274.
Citation:838 F.2d 1179
Party Name:BETA SYSTEMS, INC., Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.
Case Date:January 29, 1988
Court:United States Courts of Appeals, Court of Appeals for the Federal Circuit

Page 1179

838 F.2d 1179 (Fed. Cir. 1988)

BETA SYSTEMS, INC., Plaintiff-Appellant,


The UNITED STATES, Defendant-Appellee.

Nos. 87-1108, 87-1274.

United States Court of Appeals, Federal Circuit

January 29, 1988

Page 1180

William H. Gammon, Smith, Pachter, McWhorter & D'Ambrosio, Vienna, Va., argued for plaintiff-appellant. With him on the brief was J. Kevin Moore.

Carol N. Park-Conroy, Commercial Litigation Branch, Dept. of Justice, Washington, D.C., argued for defendant-appellee. With her on the brief were Richard K. Willard, Asst. Atty. Gen., David M. Cohen, Director and Thomas W. Petersen, Asst. Director.

Before MARKEY, Chief Judge, BALDWIN, Senior Circuit Judge, and NEWMAN, Circuit Judge.

PAULINE NEWMAN, Circuit Judge.

Beta Systems, Inc. appeals the decision of the United States Claims Court granting the government's motions for summary judgment as to Counts I and III of Beta's complaint. 1 We reverse, and remand for appropriate proceedings.

At issue are certain aspects of a contractual arrangement between Beta and the Army Troop Support and Aviation Materiel Readiness Command, and specifically section H-8 of the contract, the Economic Price Adjustment ("EPA") clause. The contract provides for the procurement of several thousand tank/pump units over a period of four Program Years. Section H-8 provides for upward or downward adjustment of the contract price depending, inter alia, on changes in material and labor costs as measured by the Bureau of Labor Statistics ("BLS") index for "Machinery & Equipment, Code 11".

Based on this index the contracting officer reduced the contract price. Beta states that its costs did not decrease, but instead dramatically increased due to unusual increases in the price of aluminum, and that this particular BLS index was a grossly inaccurate measure of the economic factors pertinent to the contract. Beta also asserts that because certain material and labor costs had been authorized before First Article Approval, inclusion of these costs in the section H-8 calculation was incorrect.

Count I

The Claims Court's decision on Count I, relating to the EPA calculation for the First Program Year of the contract, was certified on the issue of liability; this appeal is pursuant to 28 U.S.C. Sec. 1292(d)(2).

Count I, turning on interpretation and application of section H-8, was decided in the government's favor on cross motions for summary judgment. The following sub-clauses of section H-8 are asserted by Beta to have been misinterpreted or misapplied:

a. Seventy percent (70%) of the price set forth in this contract is subject to adjustment for unanticipated economic fluctuation. That portion of the price (70%) will be deemed by the Government to include an amount for anticipated economic fluctuation based on the factors

Page 1181

set forth in Table I. The remaining thirty percent (30%) of the price is not subject to the provisions of this clause.

* * *

* * *

p. In the event the Contracting Officer authorizes labor effort or acquisition of specific materials or components prior to First Article Approval, in accordance with paragraph (g) of the First Article Approval--Contractor Testing Clause, the contractor agrees that the percentage of the unit price of Items 0001AA [the tank/pump units for the First Program Year], 0003 [the units for the First Program Year Option], 0004AA [the units for the Second Program Year,] 0005 [the Second Program Year Option], 0006AA [the Third Program Year], 0007 [the Third Program Year Option], 0008AA [the Fourth Program Year] and 0009 [the Fourth Program Year Option] attributable to labor and materials, and subject to adjustment will be reduced to reflect only the percentage of the unit prices of remaining labor materials or components not authorized for pre-First Article acquisition. [Bracketed words are added]

Count I raises primarily legal questions of contract interpretation, and is amenable to summary resolution. See Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1390 (Fed.Cir.1987) ("Summary judgment is properly granted only where there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law").


With respect to the method of calculation of the 70% of the price that is subject to adjustment, the Claims Court held as follows:

The adjustment called for under section H-8 is to utilize the contract award price for the First Program Year; that portion of the contract award price representing material costs is to be reduced, up to 70 percent, by the costs of materials, excluding the cost of aluminum alloy 5086-0, set forth on the list appended to plaintiff's November 3, 198, letter to the Army; labor costs are not to be eliminated from the contract award price for adjustment purposes. Finally, the November 26, 1982, pre FAA [First Article Approval] authorization only applied to the First Program Year.

Beta assigns error to this holding, which it interprets as meaning that subclause (a) requires that 70% of the material cost component only, not 70% of the total contract price, is subject to adjustment. Indeed, the Claims Court so clarified its holding: "Stated simply, under section H-8(p), up to 70 percent of the material and labor cost percentage of the contract award price that was pre-FAA authorized can be deducted from the contract award price for EPA clause adjustment purposes." Therefore, according to the Claims Court, when material and labor costs are authorized pre-FAA, as contemplated by subclause (p), only 70% of these pre-FAA authorized costs can be deducted from the 70% of the contract price that is available for adjustment pursuant to the EPA clause.

Beta argues that this is a misreading of Section H-8. Beta states that the 70% in sub-clause (a) plainly means that 70% of the total contract price is subject to adjustment, not 70% of that portion of the contract price that represents material and labor costs. Beta states that the Claims Court's holding is contrary to the plain reading of sub-clause (a); and we must agree. See, for example, sub-clause H-8(q), which, in an example of how to calculate the EPA adjustment, utilizes 70% of the total contract price. See also DAR 3-404.3(c)(3)c.10 (1981). Although the government asks that we affirm the court's analysis, it offers no defense or explanation thereof, and points to no support in the contract or elsewhere for its reading.


Sub-clause (p) provides that when labor effort and materials acquisition are authorized by the contracting officer prior to First Article Approval, these authorized costs are not included in the adjustment. In accordance with sub-clause (p) only those labor, materials, and component costs

Page 1182

that are not authorized prior to First Article Approval are subject to the adjustment, to the maximum of 70% of the contract price as set in sub-clause (a).

Beta states that it was authorized, before First Article Approval, to incur labor and material costs that exceeded 70% of the contract price for the First Program Year (the only year included in Count I); and that once these authorized costs exceeded 70% of the contract price, that ended the inquiry, and no adjustment was available for that Program Year. Beta ignores the final phrase of sub-clause (p), which provides that when costs are authorized prior to First Article Approval, the "reduced" percentage subject to adjustment will "reflect only the percentage of the unit price of remaining labor materials or components" (emphasis added). Thus, any post-First Article Approval costs remain adjustable under the EPA clause, up to 70% of the contract price.


The Claims Court also held that sub-clause (p) eliminated from section H-8 adjustment all labor and materials costs authorized after "conditional" First Article Approval. Thus, the court held that conditional First Article Approval had, for the purposes of Section H-8(p), the same effect as actual First Article Approval, which occurred six months later. Beta correctly states that this is legal error.

The several contractual events that depend on First Article Approval did not and do not occur at the time of conditional First Article Approval. These separate stages of approval, and their consequences, are not interchangeable.

The government argues that the conditional approval was conditional only because, due to defective government specifications, a "minor component" (in the government's words) could not be completed; thus, the government asserts, the conditional approval was correctly treated by the Claims Court as final First Article Approval under the contract. No authority for this position is offered by the government, nor any explanation of why a matter that took six months to correct must be deemed "minor" in terms of substantive legal consequences.

The contract requires that following receipt of the First Article Approval test report, the contracting officer "shall ... approve, conditionally approve, or disapprove such first article.... A notice of conditional approval shall state any further action required of...

To continue reading