Raytheon Co. v. White

• Decision Date: 24 September 2002
• Docket Number: No. 01-1350.,01-1350.
• Citation: 305 F.3d 1354
• Parties: RAYTHEON COMPANY (doing business as Raytheon Systems Company), Appellant, v. Thomas E. WHITE, Secretary of the Army, Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1354

305 F.3d 1354

RAYTHEON COMPANY (doing business as Raytheon Systems Company), Appellant, v. Thomas E. WHITE, Secretary of the Army, Appellee.

No. 01-1350.

United States Court of Appeals, Federal Circuit.

September 24, 2002.

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Mitchell Y. Mirviss, Venable, Baetjer and Howard, LLP, of Baltimore, MD, argued for appellant. Of counsel on the brief were Thomas J. Madden and Rebecca E. Pearson, Venable, Baetjer, Howard & Civiletti, LLP, of Washington, DC.

Steve J. Gillingham, Senior Trial Attorney, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, DC, argued for appellee. With him on the brief were Robert D. McCallum, Jr., Assistant Attorney General; and David M. Cohen, Director. Of counsel on the brief was Craig Clarke, Deputy Chief Trial Attorney, Contract Appeals Division, Litigation Center, Department of the Army, of Arlington, VA.

Before BRYSON, GAJARSA, and LINN, Circuit Judges.

BRYSON, Circuit Judge.

Following the termination of a military supply contract, appellant Raytheon Company sought an increase in the total price of the contract to provide a basis for a later claim of termination damages. Dissatisfied with the decision of the contracting officer, Raytheon appealed to the Armed Services Board of Contract Appeals. Before the Board, Raytheon argued that the total price of the contract should have been increased substantially. The Board granted Raytheon's claim in part and denied it in part. Raytheon has appealed from the adverse portion of the Board's decision.

I

In 1982, Ford Aerospace & Communications Corporation was awarded a contract to develop the AN/DAW-2 Rosette Scan Seeker guidance section for use in the Army's Chaparral ground-to-air missile. As part of its contract, Ford Aerospace developed a Technical Data Package ("TDP"), a package of design and manufacturing information that defines the required design configuration and procedures to ensure that an item will perform as intended when it is produced.

In 1988, the Army requested proposals for production of the AN/DAW-2 guidance section by a second source. At that time, Ford Aerospace had not been awarded a contract for sustained production, and it had not demonstrated that the TDP was technically sufficient to allow mass production of the guidance sections. Nonetheless, the request for proposals specified that the guidance sections were to be constructed based on the TDP that Ford Aerospace had developed. In addition, the request for proposals stated that the AN/DAW-2 guidance section "is a build-to-print item." Both the Army and employees of Hughes Missile Systems Company (Raytheon's predecessor in interest) understood the term "build-to-print" to mean that if an item were built properly and in compliance with the TDP, it would work as intended without the need for additional development work.

Hughes submitted an initial proposal for the second source production contract in the amount of $76,177,436, which represented an estimated cost of $69,252,215 plus 10 percent for profit. While the initial proposals were being evaluated, the Army was attempting to have the TDP validated as suitable for production by a source other than the developer. That attempt ended in failure when the validation contractor reported that it could not validate the TDP. The validation contractor noted that, along with other problems, engineering changes developed for the validation effort would require that portions of the guidance section be redesigned to meet specifications.

Ford Aerospace alerted the Army to problems with the AN/DAW-2 development effort. It explained that the TDP was still in an "immature status," in part because 200 requests for engineering changes had not yet been incorporated into the TDP, some of which represented "significant" design changes. Although the request for proposals characterized the guidance section as a build-to-print item, the Army acknowledged a week before the request for proposals was issued that the TDP was "not fully mature."

Unaware of the problems with the TDP, Hughes prepared its best and final offer for the second source production contract, estimating the total contract price for producing 1,171 units to be $59,438,379, including $5,329,667 profit. The price Hughes actually submitted as its best and final offer was lower, however, because senior management at Hughes directed that the offer be reduced by $7.6 million. As a result, Hughes bid the contract at $51,758,509. The Board found that the bid reduction was not based on a revision of the cost estimate, but simply reflected a decision by Hughes's senior management to reduce the offered price.

Despite the failed validation effort, and in contravention of a directive from the Under Secretary of the Army that second source production contracts not be awarded until after validation of a TDP through sustained production by the product developer, the Army awarded the second source production contract to Hughes on September 22, 1988. The production contract for Ford Aerospace, which had been intended to prove that the guidance section could be manufactured from the TDP before the competitive procurement of the second source, was not awarded until six months later.

The delivery schedule required Hughes to deliver 13 first article test units by May 31, 1990, and all 1,171 production units by April 30, 1992. Between award and termination of the contract, however, 379 engineering change proposals were incorporated into the contract to correct deficiencies in the TDP. Although 345 of those changes had no impact on contract price or schedule, the other 34 resulted in a total contract price increase of $6,765,674 and a total schedule extension that delayed final delivery until October 29, 1993. The Board found that the contract modifications incorporating those changes addressed only the cost and schedule effects of implementing the changes, not the cost and schedule effects of the underlying deficiencies in the TDP that made the changes necessary.

The Board also found that in addition to the large number of changes that were necessary to correct specific deficiencies in the TDP, Hughes had very low production yields that were caused in part by those deficiencies. The expected yield on a build-to-print missile guidance section is approximately 95 percent. In April 1993, however, Hughes and Loral (the successor-in-interest to Ford Aerospace) reported yields on their AN/DAW-2 production contracts of 28 and 25 percent, respectively. The Board found that the low yields and increased costs experienced by Hughes were caused in part by the TDP deficiencies, but that problems with quality control and manufacturing processes for which Hughes and its subcontractors were responsible also contributed to the low yield and increased costs.

The Army terminated the AN/DAW-2 second source production contract for the convenience of the government on January 17, 1995, after accepting 576 guidance sections from Hughes. The remaining 595 units were in various stages of assembly at the time the contract was terminated. Hughes's total cost of performance at termination was $82,983,697. The contract price at that time was $60,374,361.

Hughes had previously entered into a separate contract with the government to produce 27 additional AN/DAW-2 guidance sections. The government referred to those sections as "spares," and they were to be built in accordance with the TDP and all the changes to the TDP that had been approved at that time. The Board found that the solicitation for the spares contract made no representation that it was for a "build-to-print" item. To the contrary, the Board found that when the final price negotiation for the spares contract was conducted in late April of 1991, Hughes was already 11 months behind schedule in delivery of the first article test units under the main contract, and 314 changes had been incorporated into the TDP for that contract. The Board found that when Hughes entered into the spares contract on May 22, 1991, Hughes was fully aware that the AN/DAW-2 was not a build-to-print item and knew that production under the spares contract would encounter problems similar to those that affected production under the second source contract.

B

Hughes submitted a certified claim requesting price adjustments on both of the guidance section contracts. The claim sought adjustment of the total contract price for the cost growth that Hughes had already incurred and for costs that Hughes would have incurred if the contract had not been terminated, which are known as estimate-to-complete ("ETC") costs.

Hughes advanced several theories in support of its claim, including a "discrete events" approach and a "modified total cost" approach. By a final decision on August 27, 1997, the contracting officer allowed $13,577,360 on the discrete events claim. The amount allowed was solely for incurred costs; it did not include any ETC costs. The contracting officer did not allow Hughes a price adjustment on any of its other theories.

Hughes appealed the contracting officer's decision to the Board. In proceedings before the Board, the government disputed Hughes's entitlement to any additional contract price adjustments. Hughes filed a restated claim, which was audited by the Defense Contract Audit Agency ("DCAA"). Following a hearing, the Board held that, based on incorrect statements and nondisclosures by the government, Hughes was entitled to an additional contract price adjustment of $7,421,271. The Board, however, rejected the remaining elements of Hughes's claim.

II

A

As part of its discrete events claim, Raytheon argues that the Board erred by refusing to allow $3,283,349 in direct material costs for 200 new and 411 reworked Refrigerated Detection Units ("RDUs"), parts used in the guidance sections. According to Raytheon, the Board improperly rejected its claim because the Board...