Urban Data Systems, Inc. v. U.S.

• Decision Date: 04 February 1983
• Docket Number: No. 79-81,79-81
• Citation: 699 F.2d 1147
• Parties: 30 Cont.Cas.Fed. (CCH) 70,790 URBAN DATA SYSTEMS, INC., Petitioner, v. The UNITED STATES, Respondent. Appeal
• Court: U.S. Court of Appeals — Federal Circuit

Page 1147

699 F.2d 1147

30 Cont.Cas.Fed. (CCH) 70,790

URBAN DATA SYSTEMS, INC., Petitioner, v. The UNITED STATES, Respondent.

Appeal No. 79-81.

United States Court of Appeals Federal Circuit.

Feb. 4, 1983.

John R. MacKay II, Roseland, N.J., argued for petitioner. With him on the briefs were Daniel A. Schwartz and Lowenstein, Sandler, Brochin, Kohl, Fisher & Boylan, Roseland, N.J.

Robert M. Hollis, Washington, D.C., argued for respondent. With him on the brief were Asst. Atty. Gen. J. Paul McGrath, and Mark Ramsey, Washington, D.C.

Before FRIEDMAN, RICH, and DAVIS, Circuit Judges.

OSCAR H. DAVIS, Circuit Judge.

Urban Data Systems, Inc. (Urban) seeks review of a decision of the General Services Administration (GSA) Board of Contract Appeals (Board) rejecting Urban's appeal from a GSA contracting officer's decision of June 1979. The contracting officer had denied Urban's claim for $144,429 under two Small Business Administration (SBA) contracts with GSA, involving two subcontracts between petitioner Urban and the SBA. We affirm the Board's decision that the subcontracts had invalid price terms, and remand for determination of the amount of recovery to which Urban is properly entitled.

I

Urban is a small business located in Newark, New Jersey, eligible for consideration under the Sec. 2(a) program of the Small Business Act, 15 U.S.C. Secs. 631 et seq. (1970). ¹ Section 637 of the Act empowers the SBA to enter into contracts with federal agencies and departments and then to subcontract the work to small businesses coming within the bounds of the Act. On August 12, 1975 and February 9, 1976, SBA and GSA entered into contracts GS-OOS-01562 (01562) and GS-OOS-01904 (01904), which called for the supply of specific quantities and types of paper computer forms. Both contracts required SBA "[t]o furnish the supplies ... set forth in this contract according to the specifications and terms and conditions hereof by subcontracting with an eligible concern pursuant to the provisions of section 8(a) [2(a) ] of the Small Business Act, as amended (15 U.S.C. Sec. 637(a))." Each contract also contained a price adjustment clause:

The price agreed to on this contract has been arrived at on the basis of information presented by the SBA as their cost of performance. By mutual agreement between SBA and GSA this price may be decreased by any amount or increased by not more than 30% based on verified decreases or increases in SBA's cost of performance.

SBA then subcontracted the performance of these paper supply contracts to Urban. On the same day that GSA awarded contract 01562 to SBA, the latter entered into subcontract SB2-10-8(a) 76C-016 (016) with Urban under which Urban agreed to "fulfill and perform all of the requirements of" contract 01562, which was incorporated therein; similarly, on the same day that GSA awarded contract 01904 to SBA, that agency entered into subcontract SB2-10-8(a)76C-103 (103) with Urban under which that subcontractor agreed to "fulfill and perform all of the requirements of" contract 01904, also incorporated. Under the terms of the GSA/SBA contracts, the SBA/Urban subcontracts were to be administered by GSA except with respect to price adjustments, and any cognizable dispute was to be resolved by the GSA contracting officer with right of appeal to the GSA Board of Contract Appeals.

The current controversy arises out of the price adjustment clauses in each of the SBA/Urban subcontracts. With respect to the August agreements (contract 01562 and subcontract 016), Urban had proposed a price of $1,352,728, which apparently included a profit equal to approximately 5 percent of the total cost per unit. The proposed price was later raised to $1,699,064, corresponding to a modification increasing the quantity of paper to be provided. In subcontract 016 as written and executed, however, that price was not fixed as final. Rather, the parties included the following specially typed-in price adjustment clause:

(5) It is understood by and between the parties hereto that the individual prices for the items as stated herein will be subject to a post-award audit.

It is further agreed that in the event the findings as contained in the audit report indicates [sic] that a reduction in all or any of the unit prices is in order such prices shall be reduced accordingly (utilizing the proposed 5% profit factor) and the total contract value adjusted.

In the negotiations for the February agreements (contract 01904 and subcontract 103), GSA first rejected Urban's original price proposal of $1,544,943, which apparently included approximately 10 percent in profit per unit cost. Negotiations resulted in agreement on a "base price" of $1,193,672, which could be adjusted upward but not above Urban's originally proposed price, according to the following price adjustment provision:

It is further agreed that in the event the findings as contained in the audit report indicates [sic] that an increase in the unit price is in order such price shall be increased accordingly (utilizing the proposed 10% profit factor) and the total contract value adjusted. The price will not be increased in any amount above the price offered in the proposal.

In short, Urban agreed in subcontract 103 to increase its price, following an audit, with a 10 percent profit above actual costs, while in subcontract 016 it agreed to decrease its price in accordance with an audit, utilizing a 5 percent profit relative to actual costs.

Post-performance audits revealed a cost overrun of $81,254 on subcontract 103 and a cost underrun of $64,318 on subcontract 016. Based on these reports, Urban claimed it was due a net amount of $144,429, calculated as the cost overrun of subcontract 103 plus profit at 10 percent of the total costs minus the cost underrun on subcontract 016. ²

This claim was forwarded to the GSA contracting officer, who under the subcontracts' price adjustment provisions. This figure was based on findings that Urban was entitled not to 10 percent profit on the total costs of performance but only on the cost overrun of subcontract 103, and that a 5 percent reduction was to be applied to the cost underrun on subcontract 016. ³

Urban appealed that decision to the GSA Board of Contract Appeals. In its ruling of July 31, 1981, ^* the Board agreed with Urban's method of calculating the amounts due on the subcontracts, but determined that both subcontracts were void ab initio because the price adjustment clauses are "cost-plus-a-percentage-of-cost" provisions in violation of 41 U.S.C. Sec. 254(b) (1976). The Board further held that because performance had been completed on both contracts and the supplies had been accepted, Urban would be entitled to a recovery on a quantum valebant basis upon the submission of a claim to the contracting officer.

Urban requests reversal of the Board's decision, claiming that (1) neither subcontract is a cost-plus-a-percentage-of-cost contract within the meaning of 41 U.S.C. Sec. 254(b); (2) section 254(b) is not applicable to contracts entered into under section 2(a) of the Small Business Act; (3) the Government is estopped to deny the validity of the subcontracts; and (4) Urban is in any event entitled to a quantum valebant recovery for the reasonable value of the services, including a 10 percent profit above costs. We consider these contentions in turn.

II

We must disagree with Urban that the Board erred in concluding that both subcontracts constitute cost-plus-a-percentage-of-cost contracts proscribed by 41 U.S.C. Sec. 254(b) (1976). Section 254(b) provides (in pertinent part) that "[t]he cost-plus-a-percentage-of-cost system of contracting shall not be used," and is incorporated into the Federal Procurement Regulations at 41 C.F.R. Sec. 1-3.401(b) (1976).

We accept, at the outset, the general criteria (adopted by the Board) which were developed by the Comptroller General for determining whether a contract is a cost-plus-a-percentage-of-cost contract: (1) payment is on a predetermined percentage rate; (2) the predetermined percentage rate is applied to actual performance costs; (3) the contractor's entitlement is uncertain at the time of contracting and (4) the contractor's entitlement increases commensurately with increased performance costs. 55 Comp.Gen. 554, 562 (1975). These standards incorporate the common understanding of the "cost-plus-a-percentage-of-cost system of contracting," an understanding which was undoubtedly in Congress's mind when it enacted the prohibition.

These gauges squarely apply to the subcontracts before us. Subcontract 103 provides for payment at a predetermined 10 percent rate to be applied to actual performance costs, and Urban's entitlement which was uncertain at the time of contracting, would increase commensurately with increased performance costs. See Laburnum Construction Corp. v. United States, 325 F.2d 451, 459 (Ct.Cl.1963) (profit on costs incurred during delay disallowed as violative of proscription against cost-plus-a-percentage-of-cost procurement). No showing of unfair or inefficient increase in price or costs is necessary in order to render such a contract illegal. "The theoretical contravention of the prohibition is adequate to make the arrangement illegal." Air Repair, G.M.B.H., ASBCA No. 10288, 67-1 B.C.A. (CCH) p 6115 (1967).

A comparable defect exists in subcontract 016. In the Board's words: "Contract 016 constitutes a unique but nonetheless prohibited cost-plus-a-percentage-of-cost contract. The contract is unique in that its provisions provide for reductions rather than increases in the contract price. * * * * * In light of the circumstances surrounding the negotiation of the contract; i.e., the apparent total reliance upon the appellant's cost data; after the fact auditing; and the tacit but consistent agreement of the parties that the contract price was to be reduced by the amount of the costs included in the price but not in fact incurred plus the...