Cutler-Hammer, Inc. v. United States

• Decision Date: 17 October 1969
• Docket Number: No. 364-67.,364-67.
• Citation: 416 F.2d 1306
• Parties: CUTLER-HAMMER, INC. v. The UNITED STATES.
• Court: U.S. Claims Court

416 F.2d 1306 (1969)

CUTLER-HAMMER, INC. v. The UNITED STATES.

No. 364-67.

United States Court of Claims.

October 17, 1969.

David V. Anthony, Washington, D. C., for plaintiff, Gilbert A. Cuneo, Washington, D. C., attorney of record, John M. Allen and Sellers, Conner & Cuneo, Washington, D. C., of counsel.

James A. Pemberton, Jr., Washington, D. C., with whom was Asst. Atty. Gen. William D. Ruckelshaus, for defendant.

Before COWEN, Chief Judge, LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON and NICHOLS, Judges.

ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

DURFEE, Judge.

Plaintiff contracted with the United States Air Force to design, develop and manufacture an electronic reconnaissance system to be carried in aircraft. The contract was a Fixed-Price-Incentive-Fee (FPIF) type, with a negotiated target cost of $22,389,523.00. A 10% target fee was added, making the target price $24,628,475.00. Cost savings below the target cost or expenditures above it were to be shared by the Air Force and plaintiff on an 80%-20% basis.

General provision 52 of the contract is entitled "Price Reduction For Defective Cost or Pricing Data," and reads as follows:

(a) If the Contracting Officer determines that any price, including profit or fee, negotiated in connection with this contract was increased by any significant sums because the Contractor, or any subcontractor in connection with a subcontract covered by (c) below, furnished incomplete or inaccurate cost or pricing data or data not current as certified in the Contractor\'s Certificate of Current Cost or Pricing Data, then such price shall be reduced accordingly and the contract shall be modified in writing to reflect such adjustment.

Because the time allowed for submitting price proposals was short, and because a large number of personnel familiar with the system contracted for could not be spared without impairing progress on the whole program, plaintiff assembled a group of qualified people from various sections of its facility to formulate the proposal.

There are a number of different methods of formulating proposals. One is the "family tree" method, which is a block diagram depicting the approximately 140-line replaceable units (LRUs) which make up a single system. Each block indicates the type of LRU involved and the number per system. Below each block the various kinds of subassemblies are set out, as well as the number of each subassembly in the entire system. The final bill of materials is arrived at by multiplying the type and quantity of each subassembly per system by the number of systems.

The "family tree" method is standard in the industry, but it has several variations. In one variation, the quantities of subassemblies indicate the number per LRU instead of the number per system. Thus, when this method is employed, the number in the subassembly block must first be multiplied by the number of LRUs in the system, and then by the number of systems.

Since some of the members of the group were accustomed to the latter method, they incorrectly multiplied the subassembly number, which represented the number per system, by the number of LRUs, before again multiplying by the number of systems. The number of subassemblies was thereby overstated by about 50%. These duplications led to an overstatement in price, for which the Government is seeking a reduction.

Plaintiff alleges, however, that even if it overstated this particular cost, it is entitled to offset this amount with understatements of the cost of purchased parts and components which resulted from other calculating errors. Thus, one legal issue which faces this court is whether the provision governing defective pricing allows such a set-off.

In addition to the Government's first claim, it is seeking to further reduce the target price by invoking the current cost and pricing data portion of the Defective Pricing Clause as to the antenna equipment. Each of the nine systems contracted for utilized two each of six different types of antenna. Plaintiff chose to use the Luneberg lens, whose availability was restricted in terms of sources of supply. Prior to the contract at issue, the only company that had produced the lens for the applicable purpose was Aero-Geo-Astro (AGA). On December 10, 1963, plaintiff issued a Request for Quotations from five different companies. Only AGA submitted a proposal, in the amount of $406,445.00, and this sum was included in plaintiff's price proposal submitted on January 13, 1964.

During January 1964, Transco Products Co. learned about plaintiff's Request for Quotations, and asked for one. On February 10, 1964, plaintiff received a price proposal from Transco in the amount of $91,260.00, and on February 24 it received Transco's technical proposal.

From January 13 to February 13, 1964, the Government was conducting its audit and price analysis of plaintiff's proposal. From February 13 to February 19, 1964, the parties negotiated a reduction in plaintiff's original proposal in the amount of $1,858,805.00. The respective prices of all major vendors were discussed, including those of AGA, but no mention was made by plaintiff of Transco's lower proposal. Plaintiff contends that Transco's proposal was so low that it could not have been considered a valid proposal, and mention of it would just have confused negotiations. The Government, however, asserts that had Transco's proposal been mentioned, execution of the contract would have been delayed until Transco's competency could be ascertained, or in the alternative, the Luneberg lens costs would have been excluded from the contract negotiations and discussed separately.

Plaintiff is presently seeking Wunderlich Act review (41 U.S.C. §§ 321, 322) of the decision of the Armed Services Board of Contract Appeals (hereinafter referred to as the Board or the ASBCA) in Cutler-Hammer, Inc., ASBCA No. 10900, 67-2 BCA, ¶ 6432, p. 29,822 (decided June 28, 1967). The Board held that the Government was entitled to reduce the price of the contract under the "Price Reduction For Defective Cost or Pricing Data" clause. This case was remanded to the contracting officer so that the parties could negotiate the reduction in price. Instead of entering into the negotiations, plaintiff commenced the instant suit. Both sides are moving for summary judgment.

I — Duplication Issue

The basic question presented in this aspect of the case is whether the Defective Pricing Clause requires consideration only of errors which over-state the price, or whether it allows consideration of errors which understate the price. In other words, even if there are duplications which raise the price, can the omissions which lowered the price be set off against the overstatements? The Board held that only overstated costs could be considered, stating:

* * * Although reasonable men may certainly differ on this interpretation, it is our conclusion that the Defective Pricing Statute (PL 87-653, 10 Sept. 1962; 76 Stat. 528) was intended solely as a vehicle for recoupment by the Government of overpricing resulting from any of the causes enumerated therein. * * * Id. at p. 29,826.

The statute providing for reduction in contract price where there has been defective pricing is found at 10 U.S.C. § 2306(f) (Supp. IV, 1965-1968). It states in pertinent part:

* * * * * *

Any prime contract or change or modification thereto under which such 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 or any subcontractor required to furnish such a certificate, furnished cost or pricing data which, as of a date agreed upon between the parties (which date shall be as close to the date of agreement on the negotiated price as is practicable), was inaccurate, incomplete, or non-current: * * *.

The bill which was enacted into P. L. 87-653, 10 U.S.C. § 2306(f) was H.R. 5532, and it aimed at "truth in negotiating."¹ In an incentive type contract, costs of production are estimated and a normal profit (a percentage of costs) is added on to arrive at the target price. When "actual" costs prove to be less than "estimated" costs, the contractor receives not only the "estimated normal profit," but an "incentive profit" as well, which is determined by the cost-sharing formula contracted for (usually 20% of "estimated" costs minus "actual" costs).² It was found that in almost all cases, actual costs proved to be less than estimated costs, and it was assumed by Congress that this resulted from inflated cost estimates. The statute was therefore aimed at reducing the contract price when it was found that cost items had been overstated, so that a contractor would share in savings only when these savings resulted from actual efficiencies.

It is clear that when only overstatements are included in estimates, the Government has the right to reduce the contract price. In such a situation, a downward revision of the price is mandated.³ Whether offsets in favor of the contractor are to be allowed presents a more difficult question, the answer to which is not so readily apparent. The legislative history of the act does indicate that efforts were made to have the language of P.L. 87-653 cover situations where errors in favor of the Government would cancel out errors in favor of contractors, but these efforts were to no avail. For example, William H. Moore, Vice President of the Electronic Industries Association, Military Products Division, objected to the language of H.R. 5532, and the following colloquy ensued:

Mr. Moore. * * *

* * * the language as it stands provides only a one-way street. It is unfair, I believe, to contractors, because it says nothing about the situation in which hindsight may reveal that there have been mistakes that accrued to the

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