Error: Bad annotation destination United States Court of Appeals for the Federal Circuit
04-1461
LOCKHEED MARTIN CORPORATION,
Appellant,
v.
Gordon R. England, SECRETARY OF THE NAVY,
Appellee.
E. Sanderson Hoe, McKenna Long & Aldridge LLP, of Washington, DC, argued for appellant. With him on the brief were Daniel G. Jarcho and Jason N. Workmaster.
William K. Olivier, Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for appellee. With him on the brief were Peter D. Keisler, Assistant Attorney General, David M. Cohen, Director, and Bryant G. Snee, Assistant Director. Of counsel on the brief was Charles W. Goeke, Attorney, Defense Contract Management Agency, of Philadelphia, Pennsylvania.
Appealed from: United States Armed Services Board of Contract Appeals United States Court of Appeals for the Federal Circuit
__________________________
DECIDED: September 21, 2005 __________________________
Before RADER, DYK, and PROST, Circuit Judges.
PROST, Circuit Judge.
Lockheed Martin Corp. (“Lockheed”) appeals from a decision of the Armed
Services Board of Contract Appeals (“Board”) in which the Board held that Lockheed
was not entitled to recover for subcontract effort in a termination settlement. Lockheed
Martin Corp., Naval Elecs. & Surveillance Sys.—Surface Sys., ASBCA Nos. 53032,
54064, 2003 ASBCA LEXIS 104 (Oct. 16, 2003). We affirm the Board’s decision.
I. BACKGROUND
Plaintiff Lockheed contracted with the Navy to supply antennas and transmitters for the Navy’s AEGIS program.1 This effort was known as the AEGIS Second Source
Radar Qualification Program and was divided into two phases: Phase I and Phase II.
Phase I consisted mainly of planning. Phase II required Lockheed to provide a
demonstration antenna and transmitter.
Lockheed enlisted several subcontractors to assist in the Second Source Radar
Qualification Program. For the antenna work, Lockheed itself was to be the leader,
Unisys Corp. (“Unisys”) would be the first-tier subcontractor, and Westinghouse Corp.
(“Westinghouse”) would be the second-tier subcontractor. For transmitters, first-tier
subcontractor Raytheon Co. (“Raytheon”) would lead the project, and Unisys would be
the second-tier subcontractor. We adopt the parties’ convention of using “Unisys-
Antenna” and “Unisys-Transmitter” to distinguish between the two roles Unisys played
in this contractual arrangement.
The prime contract between the Navy and Lockheed was initially undefinitized
but contemplated definitization into a cost-plus-fixed-fee (“CPFF”) contract. In a CPFF
contract, the contractor recovers its allowable incurred costs and also receives a pre-
negotiated fee. Before a contract is “definitized” through establishment of its final terms,
a contractor may begin performance pursuant to a preliminary contractual instrument
that is sometimes called a “letter contract.” The prime contract in this case contained
the standard Federal Acquisition Regulation (“FAR”) termination for convenience clause
for cost-type contracts. See 48 C.F.R. § 52.249-6 (2005).
1 The AEGIS Weapon System is a guided missile system that includes a radar system known as AN/SPY-1. The primary function of the SPY-1 Radar is to search, detect, and track air and surface targets in heavy clutter and electronic countermeasure environments. The SPY-1 Radar consists of a Transmitter Group, a Signal Processor, and an Antenna.
04-1461 2 The first-tier transmitter subcontract with Raytheon was also a CPFF contract. It
contained the standard FAR termination for convenience clause for cost-type contracts.
See id. However, the second-tier subcontract with Unisys-Transmitter was a firm-fixed-
price (“FFP”) contract. In an FFP contract, the price is not subject to any adjustment
solely on the basis of the contractor’s costs incurred in performing the contract. Both
antenna subcontracts were also FFP contracts. They contained the standard FAR
termination for convenience clause for fixed-price-type contracts. See 48 C.F.R.
§ 52.249-2 (2005). The structure of the overall contractual arrangement is shown in
Figure 1 below.
Navy
CPFF
Lockheed (Radar System & Antenna Leader)
CPFF FFP
Raytheon Unisys-Antenna (Transmitter Leader) (Antenna Follower)
FFP FFP
Unisys-Transmitter Westinghouse (Transmitter Follower) (Antenna Follower)
Figure 1: Contract Structure
The second-tier subcontracts required the subcontractors to deliver data items
known as Subcontract Data Requirements List items (“SDRLs”) to their next higher-tier
subcontractors. During both Phase I and Phase II, the subcontractors delivered many
04-1461 3 SDRLs. SDRLs included a wide variety of items, including status reports, meeting
agendas and minutes, presentation materials, quality assurance inspection reports, test
procedures, a production/delivery plan, a quality assurance program plan, and a list of
special tools and equipment.
On March 30, 1990, the Navy stopped work on the program. At this point, many
Phase II SDRLs had been delivered, but assembly of the demonstration hardware had
barely begun. The Navy proceeded to terminate the prime contract for the
government’s convenience on June 21, 1990. In consequence, Lockheed terminated
the Unisys-Antenna and Raytheon subcontracts for convenience, and those parties
terminated their second-tier subcontracts with Westinghouse and Unisys-Transmitter for
convenience. Each lower-tier subcontractor submitted a termination settlement
proposal to its next-higher-tier contractor for negotiation. Lockheed collected these
proposals and included them in its termination settlement proposal to the government.
None of the subcontractors’ settlements would become final until approved or ratified by
the Termination Contracting Officer. See 48 C.F.R. § 49.108-3(b)(2) (2005).
The Termination Contracting Officer did not ratify the subcontract settlements.
Specifically, she objected to the fee and profit amounts calculated based on Phase II
work by Unisys-Transmitter and Westinghouse.2 At that point, the Termination Contract
Officer was apparently unaware of the SDRLs that had been delivered by Unisys and
Westinghouse on the antenna and by Unisys on the transmitter. She determined that
none of the Phase II second-tier subcontract work had been completed and delivered
2 “Fee” and “profit” are similar concepts, but the term “fee” is used for cost- type contracts, and “profit” for fixed-price contracts. See FAR 49.202, 49.305-1.
04-1461 4 and consequently held that no profit or fee should be paid to Lockheed or its
subcontractors for Phase II. The Termination Contract Officer relied on FAR 49.202(a),
which states that “profit shall not be allowed the contractor for material or services that,
as of the effective date of termination [for convenience], have not been delivered by a
subcontractor, regardless of the percentage of completion.” 48 C.F.R. § 49.202(a).
In response, Lockheed’s final termination settlement proposal sought fee or profit
(as appropriate to the contract type) for all costs incurred by the subcontractors. The
Termination Contract Officer denied the requested fee and profit at all levels, insofar as
the fee and profit was based upon Phase II work performed by the fixed-price
subcontractors. She did not consider the SDRLs to be “delivered” Phase II material or
services, because only “Phase I call[ed] for detailed analyses of requirements and the
development of plans and procedures; Phase II [required] the production, qualification,
and delivery of hardware.” Lockheed had still not informed her of what specific SDRLs
were delivered and what value Lockheed placed on them; it finally did so in June 2002,
two years after she issued her final decision.
In the meantime, Lockheed appealed to the Board in September 2000. While the
case was pending, the Board directed Lockheed to submit its listing and valuation of
Phase II SDRLs to the Termination Contract Officer. The TCO reviewed this material
and found that Lockheed had “failed to adequately substantiate” the delivery of the
SDRLs. Lockheed appealed this decision, as well.
The Board found that Lockheed had demonstrated, albeit tardily, that “a massive
amount of antenna SDRLs” had been delivered by Westinghouse and Unisys. Based
on FAR 49.202(a), the Board allowed Unisys-Antenna to recover profit of $926,550 on
04-1461 5 the SDRLs produced by Westinghouse because Unisys-Antenna had an FFP contract
with its next-higher-tier contractor, Lockheed.3 Although the Board awarded Lockheed
profit under the FFP antenna contract, it rejected Lockheed’s proposed method for
calculating the amount of that profit. The Board held that the contract accounting
requirement of Department of Defense Instruction (“DODI”) 7000.2 governed the
valuation of the delivered SDRLs. Lockheed Martin, 2003 ASBCA LEXIS 104, at
*102-03.
The Board denied fee to Raytheon for Unisys-Transmitter’s effort because
Raytheon had a CPFF contract with Lockheed and the subcontractor effort was
“included in” the proposed settlement between Unisys-Transmitter and Raytheon. The
Board also denied fee for Raytheon and Unisys-Antenna’s effort because Lockheed had
a CPFF contract with the Navy. According to the Board,
FAR 49.202(a) and FAR 49.305-1(a) do not provide the same recovery in terms of profit and fee based on subcontractor work. In the case of FAR 49.202(a), which applies to fixed-price contracts terminated for convenience, profit is not allowed for “material of services that, as of the effective date of the termination, have not been delivered by a subcontractor” . . . . In contrast, FAR 49.305-1(a), which applies to cost- reimbursement contracts terminated for convenience, flatly provides that the contractor’s adjusted fee “shall not include an allowance for fee for subcontractors’ effort included in subcontractors’ settlement proposals” . . . .
Lockheed Martin, 2003 ASBCA LEXIS 104, at *89 (internal cross-references omitted).
As mentioned, the Board determined that the Phase II transmitter SDRLs were
“included in” the subcontractor settlement proposals. See 48 C.F.R. § 49.305-1 (2005).
3 Lockheed Martin, 2003 ASBCA LEXIS 104, at *85-85, 99-100. Because Lockheed presented a gross settlement proposal on behalf of itself and all its subcontractors, this profit was awarded to Lockheed, but the dollar value of Lockheed’s first-tier settlement with Unisys-Antenna increased by the same amount. See id. at *102-03.
04-1461 6 The parties had disputed the meaning of the term “included in.” Lockheed had argued
that “the mere listing of the cost of particular subcontract effort somewhere on a
termination form . . . cannot mean that that effort is ‘included’ in the subcontractor's
settlement proposal for the purpose of FAR 49.305-1(a)[.]” The Board declined
Lockheed’s invitation to “get around FAR 49.305-1(a) by simply including the unpriced
but delivered Phase II subcontractor work as a part of ‘Finished Product’ on line 10 of
Unisys’ Standard Form (SF) 1436.” It found “no support” for Lockheed’s suggestion that
“Unisys erroneously placed the delivered Phase II transmitter SDRL costs on its
Termination Settlement Proposal (TSP) (SF Form 1436).” Accordingly, the Board
concluded that “the Phase II transmitter SDRL costs (subcontractor effort) were a part
of, and included in, Unisys’ settlement proposal, subject to the no-fee limitation of FAR
49.305-1(a).”
Lockheed moved for reconsideration. The Board denied the motion, re-
emphasizing that “fee is not allowed on any subcontractor effort regardless of delivery”
in cost-type contracts under FAR 49.305-1(a). Lockheed Martin Corp., Naval Elecs. &
Surveillance Sys.—Surface Sys., ASBCA Nos. 53032, 54064, 2004 ASBCA LEXIS 16,
at *5 (Mar. 10, 2004). With respect to the methodology for evaluating the antenna
SDRLs, the Board again stood by its original ruling, holding that Department of Defense
Instruction (“DODI”) 7000.2 and MIL-STD-881[A] provided a cost estimation system that
was “imposed on all contractors” and that precedent allowed an estimate to serve as a
basis for an adjustment upon termination of a contract. Id. at *15. The Board also
relied upon DD Form 1423’s instruction to contractors to price data items “only from
those costs which will be incurred as a direct result of the requirement to supply the
04-1461 7 data, over and above those costs which would otherwise be incurred in performance of
the contract if no data were required[.]” Id. at *19.
II. DISCUSSION
Lockheed appeals the denial of fee for itself and Raytheon, contending that
CPFF contractors like themselves should be treated the same as FFP contractors. The
Court of Appeals for the Federal Circuit reviews final decisions of the Board pursuant to
28 U.S.C. § 1295(a)(10) and 41 U.S.C. § 607(g) (2000).
A. Standard of review
This court’s review of agency boards of contract appeals is “very limited.”
Erickson Air Crane Co. v. United States, 731 F.2d 810, 814 (Fed. Cir. 1984). The
Board’s factual conclusions may not be set aside unless “fraudulent, or arbitrary or
capricious, or so grossly erroneous as to necessarily imply bad faith, or if such decision
is not supported by substantial evidence.” Id.; 41 U.S.C. § 609(b) (2000). Legal
decisions are reviewed de novo. Wickham Contracting Co. v. Fischer, 12 F.3d 1574,
1577 (Fed. Cir. 1994). On mixed questions of fact and law, this court gives careful
consideration and great respect to Board decisions. Vancouver Plywood Co. v. United
States, 860 F.2d 409, 414 (Fed. Cir. 1988).
B. Arguments
Lockheed accepts that FAR 49.305 governs the controversy in this case. This
regulation provides that “[t]he contractor’s adjusted fee shall not include an allowance
for fee for subcontract effort included in subcontractors’ settlement proposals.” 48
C.F.R. § 49.305-1(a). Lockheed frames this appeal as a dispute over what it means for
an item to be “included in” a subcontractor settlement proposal. In Lockheed’s view, an
04-1461 8 item is “included in” the proposal if it either has been or could have been invoiced.
Because the SDRLs in question could have been invoiced, Lockheed contends, they
should not be considered part of the settlement proposals, and Lockheed should be
able to recover fee on behalf of itself and its subcontractors.
To support its claim to fee for the SDRLs, Lockheed argues that FAR Parts 15
and 16 evidence an overall intention to treat cost-type and fixed-price contracts the
same for recovery of fee or profit. Lockheed emphasizes that nothing in the FAR
guidelines advises the government or contractors to consider the impact of a
termination for convenience on the contractor’s performance or contractual risk. By
contrast, the guidelines do encourage the use of cost-type contracts when performance
is quite risky (e.g., when costs are unpredictable) for the contractor, and fixed-price
contracts when the risk level is low. Lockheed calls it “incongruous” for a cost-type
contractor, which has a cost-type contract precisely in order to shift risk to the
government, to face more risk than a fixed-price contractor in a termination for
convenience.
Lockheed also challenges the Board’s use of the accounting methodology of DD
Form 1423, DODI 7000.2, and MIL-STD-881A to determine the values of the Phase II
antenna SDRLs. Lockheed claims that the accounting methodology based on these
documents does not reflect the true value of the SDRLs, because much of the value of
SDRLs is actually built into the overall contract price. When the government terminates
a contract for convenience, as it did here, there is no opportunity to complete the
contract and recoup the overall value, so the value of the SDRLs is underestimated,
according to Lockheed.
04-1461 9 The government disputes Lockheed’s contention that the overall risk allocation
scheme of Parts 15 and 16 requires cost-type and fixed-price contracts to be treated the
same in a termination for convenience. The government presents a plain meaning
argument to justify treating the two types of contracts differently. According to the
government, there is a sound policy reason not to grant fee on effort that is built into a
subcontract settlement, because the contrary approach would encourage contractors to
seek inflated settlements with their subcontractors in order to increase the fee received
from the government. As such, says the government, the test for whether fee is
available on an item is not whether it could have been invoiced, but whether it was
included in the net proposed settlement amount on a proposal. Under this standard, the
SDRLs in this case were included in the settlement proposals. Not only was nothing
deducted from the total settlement amounts to account for the SDRLs, says the
government, but it makes sense that the SDRLs would have been the included as a
subject of overall settlement negotiations because assigning values to the wide variety
of SDRLs (which include status reports, meeting minutes, etc.) would have been
impractical and subjective.
With respect to the calculation of the value of the SDRLs on which Lockheed was
awarded profit, the government asserts that the Board properly relied upon the
accounting system that Lockheed and its subcontractors used during contract
performance. The government disputes Lockheed’s contention that the instructions for
pricing SDRLs in DD Form 1423, DODI 7000.2, and MIL-STD-881A are inapplicable in a
termination for convenience. The government points out that DD Form 1423 calls the
price “an amount equal to that portion of the total price which is estimated to be
04-1461 10 attributable to the production or development for the Government of that item of data.”
The forms, moreover, permit the listing of the full cost of preparing an SDRL when
prepared directly for and according to the specifications of the government (e.g., a
“technical manual prepared for military use only”), while it restricts the pricing of
contractors’ internal documents (e.g., a drawing “used in the manufacturer’s normal
plant activities”). According to the government, the forms provide a reasonable method
for capturing the complete and actual costs of data items.
C. Analysis
Initially, we must interpret the profit provision of FAR 49.202 and determine how,
if at all, FAR 49.305 and other parts of the FAR affect that interpretation. As detailed
below, we agree with the government and the Board that FAR 49.202 does not allow a
higher-tier contractor to recover fee for the effort of its subcontractors when the higher-
tier contractor has a CPFF contract with its next-higher-tier contractor or with the
government. We also affirm the Board’s decision to value the delivered antenna SDRLs
as the cost “over and above” that which would have been incurred had the relevant
contract not required delivery of those data items.
1. Entitlement to Fee Based on CPFF Contracts
Lockheed argues that the law should treat subcontractor effort in cost-type and
fixed-price contracts the same. However, Lockheed fails to establish that the law does
treat them the same. Whereas Lockheed must rely on nebulous assertions about the
overall tone and alleged policy objectives of a whole group of regulations, the
government straightforwardly relies on the plain language of a single regulation that
covers the situation presented in this case. The regulation explicitly says that “[t]he
04-1461 11 contractor’s adjusted fee shall not include an allowance for fee for subcontract effort
included in subcontractors’ settlement proposals.” FAR 49.305-1(a) (48 C.F.R.
§ 49.305-1).
Lockheed does not contend that the meaning of this provision is unclear. The
most it can do is argue that the Board applied “an overly literal reading” of FAR
49.305-1. Lockheed, for its part, is arguing against the literal meaning of the regulation.
This is a difficult row to hoe, and we are not persuaded that the provision should be
interpreted in a way that contradicts its plain meaning.
The literal interpretation of “included in” requires that the contractor exclude the
item from the settlement proposal. The contracting parties in this case made a
deliberate choice not to invoice the SDRLs in question. The required settlement
proposal form (SF 1436) submitted by each subcontractor allowed for excluding finished
product already invoiced or “to be invoiced”; such items would not be included in the
termination settlement. However, as counsel for Lockheed acknowledged at oral
argument, the subcontractors chose not to exclude the SDRLs in question as items “to
be invoiced” in the settlement proposal, and thus by their own choice included them in
the settlement proposal. Lockheed is not entitled to get around these choices through
creative interpretation of the regulations. Under these circumstances, we need not
decide whether the SDRLs could properly have been invoiced (or reserved for later
invoicing) and excluded from the settlement, as the contractors here elected to include
them in the settlement proposal.
04-1461 12 2. Valuation of SDRLs Delivered Pursuant to FFP Contracts
Lockheed’s attempt to obtain greater valuations for the delivered antenna SDRLs
than the Board awarded is similarly unavailing. The Board relied on the instructions in
DODI 7000.2 and MIL-STD-881A (the latter of which was incorporated by reference into
Lockheed’s contract by reference and “flowed down” to all the subcontracts). Lockheed
Martin, 2004 ASBCA LEXIS 16, at *15 n.3. Lockheed’s only rebuttal evidence is the
subjective valuation of the SDRLs by officials from Lockheed and Raytheon. We agree
with the government that the form and the instructions provide a reasonable method for
valuing the SDRLs. It was not error for the Board to rely on the methodology in these
documents in preference to the testimony of employees of the plaintiff and its
subcontractor.
III. CONCLUSION
For the reasons stated above, we affirm the decision of the Board of Contract
Appeals.
AFFIRMED
04-1461 13