B-155472, DEC. 17, 1965

B-155472: Dec 17, 1965

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INC.: REFERENCE IS MADE TO YOUR LETTER A-LEGAL-195-491 OF OCTOBER 11. 000 IN PROFIT SHOULD HAVE BEEN PAID TO DOUGLAS BY THE AIR FORCE AS PART OF THE TERMINATION-FOR-CONVENIENCE SETTLEMENT OF A CALL UNDER CONTRACT AF 04/607/ -1926. AFTER THE CALL WAS TERMINATED. THE CONTRACTING OFFICER AND THE COMPANY REACHED AN AGREEMENT ON THE COSTS BUT WERE UNABLE TO ARRIVE AT AN AGREEMENT ON THE PROFIT. 412.50 AND IT CONTENDED THAT AS THE CALL WAS ABOUT 47 PERCENT COMPLETE WHEN IT WAS TERMINATED. THE COMPANY WAS ENTITLED TO ABOUT 47 PERCENT OF THE $93. BELIEVED THAT PROFIT SHOULD NOT BE PROVIDED FOR THE SUBCONTRACTORS' WORK WHICH WAS TERMINATED. 000 FOR PROFIT AND HIS FINAL OFFER WAS $7. THE CONTRACTING OFFICER MADE A UNILATERAL DETERMINATION EMPLOYING THE FORMULA IN THE TERMINATION-FOR CONVENIENCE CLAUSE WHICH WAS IN THE CONTRACT.

B-155472, DEC. 17, 1965

TO MR. GENE A. POWELL, COUNSEL, DOUGLAS MISSILE AND SPACE SYSTEMS DIVISION, DOUGLAS AIRCRAFT COMPANY, INC.:

REFERENCE IS MADE TO YOUR LETTER A-LEGAL-195-491 OF OCTOBER 11, 1965, AND PREVIOUS CORRESPONDENCE FROM YOUR COMPANY CLAIMING THAT $44,000 IN PROFIT SHOULD HAVE BEEN PAID TO DOUGLAS BY THE AIR FORCE AS PART OF THE TERMINATION-FOR-CONVENIENCE SETTLEMENT OF A CALL UNDER CONTRACT AF 04/607/ -1926.

AFTER THE CALL WAS TERMINATED, DOUGLAS FILED A CLAIM WITH THE CONTRACTING OFFICER FOR COSTS AND PROFIT. THE CONTRACTING OFFICER AND THE COMPANY REACHED AN AGREEMENT ON THE COSTS BUT WERE UNABLE TO ARRIVE AT AN AGREEMENT ON THE PROFIT. IN PRICING THE CALL, DOUGLAS HAD FIGURED A PROFIT OF $93,412.50 AND IT CONTENDED THAT AS THE CALL WAS ABOUT 47 PERCENT COMPLETE WHEN IT WAS TERMINATED, THE COMPANY WAS ENTITLED TO ABOUT 47 PERCENT OF THE $93,000 FIGURE OR $44,000. THE CONTRACTING OFFICER, HOWEVER, BELIEVED THAT PROFIT SHOULD NOT BE PROVIDED FOR THE SUBCONTRACTORS' WORK WHICH WAS TERMINATED. THEREFORE, IN HIS NEGOTIATIONS, HE OFFERED NO MORE THAN $12,000 FOR PROFIT AND HIS FINAL OFFER WAS $7,000. WHEN HE COULD NOT ARRIVE AT AN AGREEMENT ON THE PROFIT WITH DOUGLAS, THE CONTRACTING OFFICER MADE A UNILATERAL DETERMINATION EMPLOYING THE FORMULA IN THE TERMINATION-FOR CONVENIENCE CLAUSE WHICH WAS IN THE CONTRACT. UNDER THE FORMULA, DOUGLAS WAS ALLOWED $3,946.12 AS PROFIT.

DOUGLAS APPEALED THE CONTRACTING OFFICER'S DECISION TO THE ARMED SERVICES BOARD OF CONTRACT APPEALS (ASBCA NO. 5921). AT THE HEARING, THE CONTRACTING OFFICER STATED THAT HE DID NOT FEEL THAT THE FORMULA PROFIT ADEQUATELY COMPENSATED DOUGLAS. HOWEVER, BY DECISION OF AUGUST 21, 1962, THE BOARD DENIED THE APPEAL ON THE BASIS THAT THE TERMINATION-FOR- CONVENIENCE CLAUSE PROVIDED THE FORMULA-DETERMINATION METHOD AS THE MEANS OF SETTLING THE PROFIT MATTER IN THE EVENT THE CONTRACTING OFFICER AND THE CONTRACTOR WERE UNABLE TO ARRIVE AT AN AGREEMENT ON THAT POINT. DOUGLAS CONTENDS THAT THE BOARD ACTED INCORRECTLY IN THAT RESPECT AND THAT IT SHOULD HAVE GONE INTO THE REASONABLENESS OF THE PROFIT PRODUCED BY THE CONTRACT FORMULA.

WHILE IT IS TRUE THAT THE TERMINATION-FOR-CONVENIENCE CLAUSE PROVIDES THAT IN THE EVENT OF TERMINATION THE CONTRACTOR AND THE CONTRACTING OFFICER MAY AGREE UPON AN AMOUNT INCLUDING "A REASONABLE ALLOWANCE FOR PROFIT" TO BE PAID TO THE CONTRACTOR FOR THE WORK DONE, THE CLAUSE PROVIDES FURTHER THAT IF THERE IS A FAILURE TO AGREE, THE CONTRACTING OFFICER SHALL DETERMINE THE TERMINATION COSTS AND PROFITS IN ACCORDANCE WITH A PRESCRIBED FORMULA SPECIFYING A FIXED RATE OF PROFIT AND THE TYPE OF COSTS UPON WHICH IT IS TO BE BASED. IT IS EQUALLY TRUE THAT THE CLAUSE PROVIDES THAT THE CONTRACTOR SHALL HAVE A RIGHT OF APPEAL UNDER THE "DISPUTES" CLAUSE OF THE CONTRACT FROM THE FORMULA DETERMINATION MADE BY THE CONTRACTING OFFICER. HOWEVER, IN CONNECTION WITH THE UNILATERAL DETERMINATION OF PROFIT, SINCE THE TERMINATION CLAUSE PROVIDES A SPECIFIC RATE OF PROFIT AND THE MANNER IN WHICH IT IS TO BE FIGURED, WE AGREE WITH THE CONCLUSION OF THE BOARD THAT NO LEGAL BASIS EXISTS FOR THE PAYMENT OF ANY ADDITIONAL PROFIT. WHILE THERE COULD BE A DISPUTE AS TO WHETHER THE RATE WAS PROPERLY APPLIED, THAT COULD BE ASCERTAINED BY EXAMINING WHETHER THE DETERMINATION FOLLOWED THE FORMULA. WE DO NOT, HOWEVER, FIND IN THE FORMULA PROVISION ANYTHING WHICH REQUIRES A TEST OF WHETHER THE FORMULA PRODUCES A REASONABLE ALLOWANCE FOR PROFIT. AS THE BOARD INDICATED IN ITS DECISION, IF THE FORMULA DOES NOT PRODUCE AN ADEQUATE RESULT, THE FAULT LIES WITH THE CLAUSE WHICH PRODUCES THE RESULT.

MOREOVER, ALTHOUGH YOUR COMPANY HAS SUGGESTED THAT SUBPARAGRAPH (9) OF CLAUSE 11 OF THE CONTRACT PROVIDING THAT THE TERMINATION-FOR CONVENIENCE CLAUSE IN THE CONTRACT IS SUBJECT TO A PROVISION THAT IN THE EVENT OF A FAILURE OF THE CONTRACTOR AND THE CONTRACTING OFFICER TO AGREE UPON REVISIONS IN THE PROVISIONS OF THE FIXED-PRICE INCENTIVE CLAUSE,"INCLUDING TARGET PRICE," AS MAY BE EQUITABLE WHERE THERE IS A TERMINATION, THERE SHALL BE CONSIDERED TO BE A DISPUTE WITHIN THE MEANING OF THE "DISPUTES" CLAUSE, WE BELIEVE THAT TARGET PRICE IS A MATTER APART FROM THE PRESENT MATTER.