Aydin Corp. v. Widnall, 94-1441

• Decision Date: 10 August 1995
• Docket Number: No. 94-1441,94-1441
• Parties: 40 Cont.Cas.Fed. (CCH) P 76,821 AYDIN CORPORATION (WEST), Appellant, v. Sheila E. WIDNALL, Secretary of the Air Force, Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1571

61 F.3d 1571

40 Cont.Cas.Fed. (CCH) P 76,821

AYDIN CORPORATION (WEST), Appellant, v. Sheila E. WIDNALL, Secretary of the Air Force, Appellee.

No. 94-1441.

United States Court of Appeals Federal Circuit.

Aug. 10, 1995.

Rehearing Denied Nov. 13, 1995.

Peter B. Jones, Jones & Donovan, Irvine, CA, argued for appellant.

Geoffrey C. Cook, Atty., Commercial Litigation Branch, Dept. of Justice, Washington, DC, argued for appellee. With him on the brief were Frank W. Hunger, Asst. Atty. Gen. and David M. Cohen, Director.

Before ARCHER, Chief Judge, MAYER, and RADER, Circuit Judges.

Opinion of the court filed by Circuit Judge RADER. Concurring in part and dissenting in part opinion filed by Circuit Judge MAYER.

RADER, Circuit Judge.

Aydin Corporation appeals from a decision of the Armed Services Board of Contract Appeals. Aydin Corp. (West), 94-2 B.C.A. (CCH) p 26,899, 1994 WL 159377 (1994). Aydin appeals the Board's denial of its equitable adjustment claim seeking reimbursement for the cost of complying with an order from the contracting officer who administered Aydin's contract to change its method of cost allocation and billing. Id. at 133,924-25. Aydin also appeals the Board's denial of its request for reimbursements related to (i) a large sales commission on a foreign contract, (ii) costs of building a demonstration radar, and (iii) certain unabsorbed overhead costs. Id. at 133,936-37, 133,941, 133,944. This court affirms-in-part, reverses-in-part, and remands.

BACKGROUND

The Board--making very feeble attempts to separate relevant facts from the vast minutiae associated with any large Government contract--provided an exhaustive recitation of facts. Id. at 133,919-23, 133,925-33, 133,937-40, 133,941-43. This court reproduces only those facts relevant to this appeal.

I.

In 1987, the United States Air Force awarded Aydin a multi-year, firm-fixed-price requirements contract (Contract No. F04606-87-D-0002) for Multiple Threat Emitter Systems (MUTES). MUTES are ground-based radar simulators which evaluate airborne radar warning systems, test electronic warfare countermeasure systems, and train pilots. The contract called for the production of a "best estimated quantity" of nine MUTES, and up to five additional MUTES, over five years. To order MUTES, the contracting officer handling procurement issued delivery orders. To date, the contracting officer has issued thirteen delivery orders, nine involving manufacture of MUTES or MUTES subparts.

The MUTES contract directed the Government to pay Aydin in the form of progress payments according to Aydin's incurred costs: "Each progress payment shall be computed as ... eighty percent (80%) of the Contractor's cumulative total costs under this contract...." 48 C.F.R. Sec. 252.232-7007 (Jan. 1986) (deviation), reprinted in 51 Fed.Reg. 6,284, 6,286-88 (Feb. 21, 1986). Aydin accumulated its contract costs as costs of a single contract and then allocated that total equally among the delivery orders based on contracted MUTES units. Aydin therefore requested progress payments as a percentage of its cumulative total costs on the overall MUTES contract.

The contracting officer objected to Aydin's cost allocation and billing practice. The contracting officer viewed each delivery order as a separate contract. Accordingly, the contracting officer ordered Aydin to segregate its costs by delivery order and to submit separate progress payment requests for each delivery order. In 1990, after several rounds of correspondence between the contracting officer and Aydin, the contracting officer stopped progress payments to Aydin. The contracting officer refused to resume them until Aydin segregated its costs and issued progress payment requests by delivery order. After Aydin changed its accounting system, the contracting officer resumed progress payments. Aydin incurred significant administrative and production costs in implementing the cost segregation requirements imposed by the contracting officer. Aydin submitted an equitable adjustment claim for those increased costs. The contracting officer denied the claim; Aydin appealed to the Board.

The Board denied Aydin's claim. Aydin, 94-2 B.C.A. (CCH) at 133,924-25. The Board found that the contracting officer properly considered each delivery order a separate contract. Id. The Board determined that segregation by delivery order was consistent with the contract and the applicable federal regulations. Id.; see also 48 C.F.R. Sec. 32.503-5 (1987). Thus, according to the Board, the cost segregation requirement made no constructive change to the MUTES contract for which Aydin could obtain an equitable adjustment. Aydin, 94-2 B.C.A. (CCH) at 133,925.

II.

The Government also disallowed certain indirect costs from Aydin's progress payment requests. The Government excluded (i) a large sales commission on a foreign contract, (ii) costs to build a demonstration radar, and (iii) certain unabsorbed overhead costs.

A.

Aydin, like most contractors, maintains sales agents around the world and pays them sales commissions on both Government and commercial, and both foreign and domestic, contracts. Aydin includes the stipends and sales commissions paid to its agents in its general and administrative (G & A) expense pool.

In 1988, Aydin sold an electronic system called "SOLAR II" to the Argentine Government for over $25 million. Of $4.3 million in total sales commissions in 1989, Aydin incurred liabilities of about $3.7 million to its foreign sales agents in commissions from the SOLAR II sale. Aydin included the cost of the SOLAR II sales commissions in its G & A expense pool, thus allocating a portion of those costs to the MUTES contract. The Defense Contract Audit Agency (DCAA) found a disparity between the large size of the 1989 sales commissions for the SOLAR II contract and the minimal impact upon the MUTES contract overhead rate.

DCAA concluded that Aydin's inclusion of the SOLAR II sales commission in its 1989 G & A expense pool violated Cost Accounting Standards (CAS) 410 and 418. Therefore, DCAA removed about $3.6 million from the pool. DCAA removed another $3.6 million from Aydin's 1990 G & A expense pool to adjust for the 1990 sales commissions on the SOLAR II contract. Aydin sought reimbursement of the amount it would have received if the DCAA had not adjusted the G & A expense pools. The contracting officer denied the claim; Aydin appealed to the Board.

Because the SOLAR II sales commissions were not "incurred for the management and administration of Aydin as a whole," the Board first determined that Aydin's sales commissions were not G & A expenses as defined in CAS 410, 4 C.F.R. Sec. 410.30(a)(6) (1987). Aydin, 94-2 B.C.A. (CCH) at 133,935. Next the Board noted that, under CAS 410.50(c), " '[e]xpenses which are not G & A expenses and are insignificant in amount may be included in the G & A expense pool for allocation to final cost objectives.' " Id. (quoting 4 C.F.R. Sec. 410.50(c) (1987)). The Board found that Aydin's 1989 sales commissions were not insignificant. Id. Finally, the Board determined that Aydin's inclusion of the SOLAR II sales commissions in its G & A expense pool would result in inequitable distribution of those commissions to Government contracts. Id. The Board found that Aydin could continue to charge its sales commissions, including its foreign sales commissions to its G & A expense pool. Id. at 133,936. However, the SOLAR II sales commission required different treatment:

With the Solar II commission representing over 91 percent of the total 1989 sales commissions, and the Solar II contract representing only 19 percent of Aydin's 1989 G & A base, the MUTES contract was receiving significantly less benefit from the Solar II commission in relation to other final cost objectives. For the MUTES contract G & A rate to be commensurate with the benefits received, Aydin may account for the MUTES G & A rate by means of special allocation as provided under [4 C.F.R. Sec. 410.50(j) (1987) ].... [T]he special allocation requires, among other adjustments, an adjustment to Aydin's total cost input base.

Id. The Board found this approach consistent with CAS 410.40(d) which allows non-G & A expenses classified as G & A expenses to remain in the G & A expense pool, unless "they can be allocated to business unit cost objectives on a beneficial or causal relationship." Id. (quoting 4 C.F.R. Sec. 410.40(d) (1987)).

Because the SOLAR II commission could be handled by special allocation, the Board concluded that, under CAS 410.40(d), that sales commission could not remain in Aydin's G & A expense pool. Id. at 133,936. The Board further held that Aydin would not violate CAS 402 by directly assigning the sales commission to the SOLAR II contract. Id. at 133,935. The Board ultimately instructed Aydin to reassign the sales commission on the SOLAR II contract as a direct expense and approved DCAA's deduction of that amount from Aydin's G & A expense pool to account for the reassignment.

B.

In 1983, Aydin contracted with Prutech Research and Development Partnership to develop a three-dimensional radar system. The money budgeted for research and development (R & D) ran out while Aydin was still in the "breadboarding" phase of development. Therefore, Aydin built a demonstration radar with between $3.0 and $4.5 million of its own funds during 1986 and 1987. Aydin treated the demonstration radar as a capital asset and depreciated its costs over a five-year period. Aydin included the depreciation costs in its G & A expense pool, a portion of which Aydin allocated to the MUTES contract.

In 1989, a DCAA audit questioned Aydin's treatment of the demonstration radar costs. DCAA concluded that the demonstration radar costs were independent research & development (IR & D) expenses and should have been expensed in 1986 and 1987. Because FAR 31-205.18(d)(1), 48 C.F.R. Sec. 31.205-18(d)(1) (1987), classifies IR & D costs incurred in...