Hercules Inc. v. United States, 442-77.

• Decision Date: 02 July 1980
• Docket Number: No. 442-77.,442-77.
• Parties: HERCULES INC. v. The UNITED STATES.
• Court: U.S. Claims Court

626 F.2d 832

HERCULES INC. v. The UNITED STATES.

No. 442-77.

United States Court of Claims.

Decided July 2, 1980.

Clarence T. Kipps, Jr., Washington, D. C., atty. of record, for plaintiff. S. Maynard Turk, Edward H. Kurth, John Lloyd Rice and Miller & Chevalier, Washington, D. C., of counsel.

Sandra P. Spooner, Washington, D. C., with whom was Asst. Atty. Gen. Alice Daniel, Washington, D. C., for defendant.

Before DAVIS, KASHIWA and SMITH, Judges.

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

PER CURIAM:

This case comes before the court on plaintiff's request for review by the court of the recommended decision of Trial Judge C. Murray Bernhardt, filed July 23, 1979, pursuant to Rule 166(c), on plaintiff's motion and defendant's cross-motion for summary judgment. The court has heard oral argument and has considered the briefs of the parties. Agreeing with the trial judge's recommended decision, as hereinafter set forth, the court hereby affirms and adopts that decision, together with the following paragraphs of this per curiam opinion, as the basis for its judgment in this case.

A major part of plaintiff's case is comprised of the twin propositions that (i) the contracting officer for the fixed-price contracts necessarily decided, in accepting plaintiff's prices for those contracts, that the method used to determine the depreciation allowance for the Hercopel Plant which was included in those fixed prices was proper and fully in accord with the pertinent provisions of Section XV of the Armed Services Procurement Regulations (ASPR), and (ii) such an approving decision by that contracting officer, taken together with the need for consistency of treatment, controls the determination of the reimbursable General and Administrative (G&A) expense for plaintiff's cost-reimbursable contracts now before us.¹ The factual predicate for consideration of those propositions—as found by the Armed Services Board of Contract Appeals and confirmed by the trial judge— is (to use the trial judge's words) that plaintiff decided "to adjust its costing practices for its fixed price contracts by understating its depreciation on the Hercopel Plant in order to make its prices lower and thus more competitive."²

We are satisfied that, on these facts, nothing in Section XV of ASPR, including the specific provisions plaintiff cites (i.e., ASPR §§ 15-201.3, 15-203, 15-205.9), precluded the contracting officer on the fixed price contracts from accepting a fixed price which included an understated or too-low depreciation cost on the Hercopel Plant if the bidder or potential contractor wanted to proffer such a deliberately lower cost for its own competitive purposes. Conversely, the regulations did not forbid plaintiff from offering a fixed price lower than that computed according to ASPR.³ The texts of the regulations do not forbid a contracting officer from accepting such a too-low price on a fixed-price contract, nor do they require him to reject it if offered, nor do they preclude a bidder or contractor from putting forward such a too-low price. What the regulations do is to declare the criteria for deciding what types of depreciation allowances should not be accepted because they are too high for the particular contract. Unless perhaps the proffered fixed price is so low that it might well endanger performance, there is no legal or practical requirement that the contracting officer go through each item making up the proffered price to determine whether that specific item is too low, considered by itself. In our system for bid and negotiated fixed price contracts, that process and that determination are left to the judgment of the bidder or potential contractor. It is his choice if he wishes to cut his price for competitive ends, and there is nothing illegal or improper in his doing so.

None of the decisions on which plaintiff relies states or implies a contrary holding. In particular, they do not say or suggest that acceptance by a contracting officer of a fixed price necessarily implies that he also accepted each of the underlying components of that fixed price as proper under the ASPR standards. Rather, the deciding tribunal (this court or a board of contract appeals) has ruled for itself, in cost-reimbursement cases, that a contractor's cost accounting practices accorded, or did not accord, with the pertinent ASPR and controlling standards, where the Government contended that the claimed reimbursement was excessive and a review of the contractor's practices was necessary in order to resolve that question. We do the same here, holding that in the circumstances usage depreciation did not comply with ASPR and resulted in excessive reimbursement on plaintiff's cost-reimbursable contracts.

Accordingly, on the basis of the foregoing paragraphs and the trial judge's opinion, we hold that plaintiff's motion for summary judgment is denied, defendant's motion for summary judgment is allowed, and the petition is dismissed.

OPINION OF TRIAL JUDGE

BERNHARDT, Trial Judge:

This review under the Wunderlich Act (41 U.S.C. § 321-22 (1976)) of a decision of the Armed Services Board of Contract Appeals (77-1 BCA ¶ 12,394) on claims under two Navy cost reimbursement research and development (R&D) contracts turns entirely on elusive accounting principles. In the abstract, what is accepted practice in the accounting profession is a factual inquiry. But the application of accounting rules to a finite problem raises an issue of contract interpretation, which is an issue of law. "Thus, the ultimate question is one of law, though facts are essential to its solution." Lockheed Aircraft Corp. v. United States, 179 Ct.Cl. 545, 553, 375 F.2d 786, 790 (1967). See also Tri-Cor, Inc. v. United States, 198 Ct.Cl. 187, 204, 458 F.2d 112, 122 (1972). 3 A. Corbin, Corbin on Contracts § 554 (2d ed. 1960).

Synoptically, plaintiff wishes to employ the same usage basis of depreciation in its cost reimbursable contracts under review that it was permitted to employ in its fixed price contracts being performed contemporaneously in another of its plants. A usage basis of depreciation, if allowed, would increase the reimbursable General and Administrative (G&A) expense that plaintiff could recapture in the subject cost reimbursable contracts, while at the same time decrease the prices it could offer in bidding on fixed price contracts in order to make plaintiff's bids on government work more competitive. The contracting officer, affirmed by the Board, disallowed employment of the usage formula for the cost reimbursable contracts under review, and required that depreciation for such contracts be computed on a straight-line basis for inclusion in the determination of G&A rates. From this refusal the plaintiff appeals, without avail.

The two contracts in dispute were awarded on August 25, 1967 and October 23, 1969, and required the rendition of R&D services from, respectively, July 1, 1967 through June 30, 1968, and November 1, 1969 through October 31, 1970. Each contract contains the standard Disputes Clause (ASPR 7-103.12(a), January 1958) and the clause entitled "Allowable Cost, Fixed Fee, and Payment" (ASPR 7-203.4(a)). The contracts were performed at plaintiff's Allegany Ballistics Laboratory (Plant # 1) at Cumberland, Maryland, which was primarily an R&D laboratory facility that was owned by the Navy and operated by plaintiff.

On land adjacent to Plant # 1 plaintiff constructed the Hercopel Plant (Plant # 2) which became operational by February 1968. Plant # 2 was an automated special purpose facility designed to manufacture tactical rocket motors fueled by proprietary composite propellants known as "Hercopel." The manufacture of Hercopel propellants is hazardous; hence the emphasis on automation in Plant # 2. The plant was the first new tactical rocket facility built in the United States in many years; none has been built since its completion, at least to time of trial before the Board. It consists of thirteen special purpose buildings arranged to provide for receipt of rocket parts and materials, continuous flow through the various operations required to manufacture, cure, inspect, store and ship rocket motors, and use of remote control during the most hazardous manufacturing phases. The facility was developed for two reasons: first, plaintiff needed a production facility capable of manufacturing motors in order to qualify to bid as a subcontractor to Raytheon on the Sparrow missile program; second, plaintiff anticipated growth in the solid propulsion business and hoped to capture a 20 percent share of government procurement in the composite rocket field. Plaintiff believed that an automated facility would reduce labor costs and thereby enable it to compete with manufacturers then dominating the market.

In plaintiff's corporate organization the Allegany Ballistics Laboratory (ABL) complex, including Plants # 1 and # 2, was a part of the Systems Group in plaintiff's Industrial Systems Department (ISD). The Systems Group performed virtually all of the government contracts within the company. Approximately 15 percent of Plant # 1 R&D effort went into Plant # 2 production contracts. Although Plants # 1 and # 2 were regarded as one complex, from a cost accounting standpoint each plant had a separate factory overhead rate, and Plant # 1 used a straight-line method of depreciation while Plant # 2, a production facility, used the usage method of depreciation for costing government contracts beginning in early 1969.

The only work in process at Plant # 2 in 1968 was a firm fixed price, negotiated subcontract from Raytheon for rocket motors for the improved Sparrow missile. From 1969 through 1974 the work force at Plant # 2 totalled 12 to 30 employees, plus maintenance support personnel, always on a one shift basis. At design capacity Plant # 2 required 100 employees.

For approximately one year of the 1969-74 period Plant # 2 was...