General Engineering & Mach. Works v. O'Keefe

• Decision Date: 16 April 1993
• Docket Number: No. 92-1440,92-1440
• Citation: 991 F.2d 775
• Parties: 38 Cont.Cas.Fed. (CCH) P 76,504 GENERAL ENGINEERING & MACHINE WORKS, Appellant, v. Sean C. O'KEEFE, Acting Secretary of the Navy, Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 775

991 F.2d 775

38 Cont.Cas.Fed. (CCH) P 76,504

GENERAL ENGINEERING & MACHINE WORKS, Appellant, v. Sean C. O'KEEFE, Acting Secretary of the Navy, Appellee.

No. 92-1440.

United States Court of Appeals Federal Circuit.

April 16, 1993.

Patrick J. Martell, Pettit & Martin, San Francisco, CA, argued for appellant. With him on the brief was Walter F. Pettit.

Arnold M. Auerhan, Atty., Commercial Litigation Branch, Dept. of Justice, of Washington, DC, argued for appellee. With him on the brief were Stuart M. Gerson, Asst. Atty. Gen., David M. Cohen, Director and Allen D. Bruns, Asst. Director.

Before RICH, Circuit Judge, BENNETT, Senior Circuit Judge, and NEWMAN, Circuit Judge.

BENNETT, Senior Circuit Judge.

Appellant, General Engineering and Machine Works (General Engineering) appeals from a decision of the Armed Services Board of Contract Appeals ¹ (board) confirming the Navy's entitlement to reimbursement of $86,775 in material handling fees. We affirm the decision of the board.

BACKGROUND

The essential facts of this controversy are not in dispute. On July 1, 1982, appellant was awarded a time and materials indefinite quantity contract, No. N00228-82-D-6028, under which supplies and services were ordered for the West Coast Shock Test Facility, San Francisco, California. The contract, which was for a term of one year, contained two options for one-year extensions of performance. The Navy exercised those options and, by modification, extended the contract for a fourth year. The last Navy order under the contract was placed on July 29, 1986.

Before the contract was awarded, the Request for Proposals issued to prospective contractors included the following language, under line item 0003, which required the contractor to insert a percentage figure to calculate the appropriate compensation for material handling costs:

Incidental material required to perform at cost plus ____% handling. Charge to be reimbursed in accordance with Section C8.

NOTE: Offeror to insert percentage figure, if any, for material handling charge. Material handling charge shall include cost of delivery of material to the work site. If none, so state. For evaluation purposes, Government estimated cost of incidental material required is: $50,000.00

In addition, the contract provides:

C8 COST OF MATERIALS

The cost of materials furnished pursuant to specific authorization, the written Service Orders, shall be reimbursed at the Contractor's invoice cost less any discounts taken or to be taken, plus material handling costs. Expendable material costs for items such as office supplies, report paper, repair parts, etc., shall be absorbed by the contractor in his given hourly wage rates. The contractor will be required to support all material cost claims by submitting said invoices or store room requisitions therefore [sic].

Material handling costs shall include the cost of labor and transportation to the work site or West Coast Shock Facility.

(Emphasis added.)

Section I of this time and materials contract incorporated by reference several contract clauses required for all firm fixed-price service contracts. One such clause was the Defense Acquisition Regulation (DAR) 7-103.7 "Payments (1958 JAN)" clause (the 7-103.7 clause). ² However, the contract also made reference to a second payments clause under subheading G2:

G2 INVOICING AND PAYING INSTRUCTIONS (TIME AND MATERIAL/LABOR-HOUR)

a. The contractor shall prepare his invoices (in quadruplicate unless otherwise specified) and submit them to the Ordering Officer for approval prior to payment.

* * * * * *

b. Invoices shall be in accordance with the Payments clause of the contract (DAR/ASPR 7-901.6)....

(Emphasis added.)

The DAR 7-901.6 "Payments (1972 MAY)" clause (the 7-901.6 clause) is more restrictive than the 7-103.7 clause. Specifically, the 7-901.6 clause allows for reimbursement of material handling charges only if those charges are clearly excluded from labor hour rates. ³ In addition, the 7- 901.6 clause is required in all time and material contracts. 32 C.F.R. § 7-901 (1982).

Appellant included a 15% material handling charge in its contract proposal as well as in each of the two contract extensions. ⁴ However, the material handling costs were not kept in a separate cost pool. Rather, it was appellant's accounting practice to include the material handling costs in its overhead pool. Appellant received 131 orders under the contract for services and material, but was never questioned about material handling charges throughout the term of the contract. In addition, three prior time and material contracts between the parties each made parenthetical reference to the 7-901.6 clause in sections similar to the G2 clause of the present contract. ⁵ In each of those contracts, appellant did not use a separate cost pool. Those contracts were audited by the government, but no questions regarding the material handling charges were ever raised.

After completion of the last order under this contract, the Navy sent a letter to appellant stating that material handling costs would be audited. The letter also requested the production of time and material cost proposals summarizing labor hours and rates as well as material costs by fiscal year. Appellant responded with the requested information which indicated that the material handling fee for the years in question totaled $86,775. The Navy conducted its audit and announced, in a June 29, 1988 report of the Defense Contract Audit Agency (DCAA), that the material handling charges were unallowable since appellant had failed to maintain those costs in a separate cost pool pursuant to the 7-901.6 payments clause. The DCAA's report concluded that appellant was double billing the material handling costs by including them in both its hourly rate and its material handling rate.

The contracting officer (CO) confirmed the DCAA report and issued a demand for payment in the amount of $86,775. Appellant began making installment payments on that amount but submitted a certified claim, received by the CO on June 28, 1989, seeking reimbursement of those payments. That claim was denied by the CO, and appellant sought review before the board. Initially, the board incorporated the 7-901.6 clause into the contract by operation of law. The board then held that, although it could not ascertain whether appellant had been paid twice for material handling costs, such double payments would be assumed since, under the 7-901.6 payments clause, appellant was required to maintain material handling costs in separate cost pools. General Engineering now appeals.

OPINION

The parties do not dispute the board's findings of fact. The decision of the board on any question of law is not final or conclusive and is subject to de novo review by this court. 41 U.S.C. § 609(b) (1988).

In G.L. Christian & Associates v. United States, 312 F.2d 418, 160 Ct.Cl. 1, reh'g denied, 320 F.2d 345, 160 Ct.Cl. 58, cert. denied, 375 U.S. 954, 84 S.Ct. 444, 11 L.Ed.2d 314 (1963), the Court of Claims established what has become known as the Christian Doctrine. In Christian, a construction contract was terminated for the convenience of the government even though the contract lacked a termination clause. 312 F.2d at 424. The contractor sued the government alleging breach of contract. The court denied the contractor's claim noting that the termination clause was required under federal procurement regulations. Id. at 427. As the court explained:

[T]he Armed Services Procurement Regulations were issued under statutory authority, those regulations, including Section 8.703, had the force and effect of law.... If they applied here, there was a legal requirement that the plaintiff's contract contain the standard termination clause and the contract must be read as if it did.

Id. at 424 (footnote omitted). Accordingly, the court incorporated the missing termination clause into the contract.

[W]e believe that it is both fitting and legally sound to read the termination article required by the Procurement Regulations as necessarily applicable to the present contract and therefore as incorporated into it by operation of law.

Id. at 427.

Thus, under the Christian Doctrine a court may insert a clause into a government contract by operation of law if that clause is required under applicable federal administrative regulations. However, the Christian Doctrine does not permit the automatic incorporation of every required contract clause. As the Christian court stated:

The termination clause limits profit to work actually done, and prohibits the recovery of anticipated but unearned profits. That limitation is a deeply ingrained strand of public procurement policy. Regularly since World War I, it has been a major government principle, in times of stress or increased military procurement, to provide for the cancellation of defense contracts when they are no longer needed, as well as for the reimbursement of costs actually incurred before cancellation, plus a reasonable profit on that work--but not to allow anticipated profits.

Id. at 426 (emphasis added). In denying the contractor's motion for rehearing and reargument, the Court of Claims added:

To accept plaintiff's plea that a regulation is powerless to incorporate a provision into a new contract would be to hobble the very policies which the appointed rule makers consider significant enough to call for mandatory regulation. Obligatory Congressional enactments are held to govern federal contracts because there is a need to guard the dominant legislative policy against ad hoc encroachment or dispensation by the executive. There is a comparable need to protect the significant policies of superior administrators from sapping by subordinates.

Christian, 320 F.2d at 350-51 (emphasis added).

Accordingly, the Christian Doctrine applies to mandatory contract clauses which express a significant or deeply ingrained strand of public procurement policy. Clem Perrin...