B-177792, AUG 24, 1973

B-177792: Aug 24, 1973

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

BELIEVES THAT B-J'S ENTITLEMENT TO OVERHEAD COSTS IS OF DOUBTFULL LEGAL VALIDITY AND THAT THE PROFIT FIGURE DETERMINED BY THE DEPARTMENT OF THE NAVY CONSTITUTES A REASONABLE SETTLEMENT OFFER. B-J IS AUTHORIZED TO MANUFACTURE A MARINE PROPELLER IDENTIFIED BY THE TRADE NAME OF KAMEWA PROPELLER. PARAGRAPH (B)(2) SETS FORTH THE RESTRICTIVE LEGEND TO BE APPLIED TO DRAWINGS WHICH ARE FURNISHED WITH LIMITED RIGHTS. YOU STATE THAT B-J WAS CAPABLE OF MANUFACTURING THESE HUBS DURING THE FIRST FOUR MONTHS OF 1971. THAT A CONTRACT WOULD HAVE ALLOWED IT TO CHARGE A PORTION OF ITS OVERHEAD EXPENSE. YOU FURTHER CONTEND THAT THE ALLOCABLE OVERHEAD RATE SHOULD BE 58.1 PERCENT SINCE THIS IS THE ACTUAL OVERHEAD RATE THAT WAS IN EFFECT DURING THE PERIOD THAT B-J WOULD HAVE PRODUCED THE ITEM IF IT HAD RECEIVED THE CONTRACT.

B-177792, AUG 24, 1973

DECISION THAT A SETTLEMENT OFFER SHOULD BE MADE TO THE BIRD-JOHNSON COMPANY (B-J) IN THE AMOUNT OF $15,926 AS FULL SETTLEMENT OF THE CLAIM BY B-J FOR $18,308, FOR BREACH OF CONTRACT DAMAGES. THE COMP. GEN. BELIEVES THAT B-J'S ENTITLEMENT TO OVERHEAD COSTS IS OF DOUBTFULL LEGAL VALIDITY AND THAT THE PROFIT FIGURE DETERMINED BY THE DEPARTMENT OF THE NAVY CONSTITUTES A REASONABLE SETTLEMENT OFFER.

TO BIRD-JOHNSON COMPANY:

ON NOVEMBER 3, 1972, THE NAVY REGIONAL FINANCE CENTER, WASHINGTON, D.C., FORWARDED A CLAIM IN THE AMOUNT OF $81,308, FOR DIRECT SETTLEMENT BY THIS OFFICE FROM THE BIRD-JOHNSON COMPANY (B-J) AGAINST THE NAVY FOR BREACH OF CONTRACT DAMAGES. BY LETTER OF JANUARY 22, 1973, YOU SUBMITTED YOUR COMMENTS ON THE MATTER.

BRIEFLY, THROUGH VARIOUS LICENSES AND SUBLICENSES, B-J IS AUTHORIZED TO MANUFACTURE A MARINE PROPELLER IDENTIFIED BY THE TRADE NAME OF KAMEWA PROPELLER. UNDER CONTRACT NO. N00151-24352AX) WITH THE PHILADELPHIA NAVAL SHIPYARD (PNSY), B-J FURNISHED THREE SHIP SETS OF THE KAMEWA PROPELLER AND MANUFACTURING DRAWINGS. THE CONTRACT CONTAINED THE STANDARD "RIGHTS IN TECHNICAL DATA CLAUSE" AS SET FORTH IN THE ARMED SERVICES PROCUREMENT REGULATION (ASPR). PARAGRAPH (A)(2) DEFINES THE LIMITED RIGHTS THE GOVERNMENT HAS TO DATA APPROPRIATELY MARKED WITH A RESTRICTIVE LEGEND. DATA SO MARKED MAY NOT BE USED FOR MANUFACTURING PURPOSES EXCEPT IN LIMITED CIRCUMSTANCES. PARAGRAPH (B)(2) SETS FORTH THE RESTRICTIVE LEGEND TO BE APPLIED TO DRAWINGS WHICH ARE FURNISHED WITH LIMITED RIGHTS.

ON NOVEMBER 30, 1970, NAVAL SHIP SYSTEMS COMMAND (NAVSHIP) ISSUED A PROJECT ORDER TO PNSY TO MANUFACTURE CERTAIN SHORE BASED PARTS FOR THE KAMEWA PROPELLER. THE PROJECT ORDER REQUIRED THE USE OF MANUFACTURING DRAWINGS FURNISHED PNSY UNDER THE ABOVE-REFERENCED CONTRACT. ONE OF THESE DRAWINGS COVERED HUB ASSEMBLIES AND BORE A RESTRICTIVE LEGEND. THE GOVERNMENT'S USE OF THE HUB ASSEMBLY DRAWING EXCEEDED THE LIMITED RIGHT TO USE THIS DRAWING FURNISHED UNDER THE PRIOR CONTRACT.

YOU URGE THAT THE MEASURE OF RECOVERY FOR THE GOVERNMENT'S UNAUTHORIZED USE OF THE DRAWING SHOULD BE THE DIFFERENCE BETWEEN THE HYPOTHETICAL CONTRACT PRICE FOR 4 HUBS AND THE HYPOTHETICAL COST OF PERFORMANCE, BASED ON ACTUAL COSTS INCURRED BY B-J UNDER A CONTRACT AWARDED IN 1971 FOR 10 HUB ASSEMBLIES. YOU STATE THAT B-J WAS CAPABLE OF MANUFACTURING THESE HUBS DURING THE FIRST FOUR MONTHS OF 1971, AND THAT A CONTRACT WOULD HAVE ALLOWED IT TO CHARGE A PORTION OF ITS OVERHEAD EXPENSE, RESULTING IN HIGHER PROFITS ON OTHER BUSINESS. YOU FURTHER CONTEND THAT THE ALLOCABLE OVERHEAD RATE SHOULD BE 58.1 PERCENT SINCE THIS IS THE ACTUAL OVERHEAD RATE THAT WAS IN EFFECT DURING THE PERIOD THAT B-J WOULD HAVE PRODUCED THE ITEM IF IT HAD RECEIVED THE CONTRACT. A NUMBER OF COURT AND ARMED SERVICES BOARD OF CONTRACT APPEALS (ASBCA) CASES HAVE BEEN CITED IN SUPPORT OF THESE CONTENTIONS. YOU COMPUTE YOUR TOTAL CLAIM FOR LOST PROFIT AND OVERHEAD, IN THE AMOUNT OF $81,308, AS FOLLOWS:

MANUFACTURING COST $107,480

OVERHEAD AT 58.1 PERCENT 62,446

PROFIT AT 11.1 PERCENT 18,862

TOTAL CONTRACT PRICE $188,788

THE NAVY DOES NOT AGREE WITH YOUR COMPUTATION OF DAMAGES. IT OBJECTS TO THE INCLUSION OF OVERHEAD SINCE B-J'S FACILITIES OR RESOURCES WERE NOT ALLOCATED TO THE MANUFACTURE OF THE HUB ASSEMBLIES AND THE GOVERNMENT DID NOTHING TO PREVENT B-J FROM FULLY UTILIZING ITS RESOURCES AND FACILITIES FOR THE PERFORMANCE OF OTHER WORK. THE NAVY ALSO ADVISES THAT IN ANY EVENT THE OVERHEAD RATE WHICH WOULD BE APPLICABLE TO THE COMPUTATION IS 33.5 PERCENT BASED ON THE DEFENSE CONTRACT AUDIT AGENCY'S (DCAA'S) EVALUATION OF B-J'S CLAIM. THE DCAA AUDITOR REDUCED THE INDIRECT EXPENSE RATE TO 33.5 PERCENT, WHICH THE AUDITOR FOUND REPRESENTED THE EXPERIENCE RATE FOR 1971 AND ALSO MADE CERTAIN OTHER ADJUSTMENTS TO CONFORM WITH ASPR. THERE IS AGREEMENT, HOWEVER, THAT THE PROFIT RATE IS 11.1 PERCENT AND THAT THE MANUFACTURING COST IS $107,480. THE NAVY HAS COMPUTED B-J'S DAMAGES AS $15,926, ARRIVED AT AS FOLLOWS:

MANUFACTURING COST $107,480

BURDEN AT 33.5 PERCENT 36,005

TOTAL COST INCURRED $143,485

PROFIT AT 11.1 PERCENT $ 15,926

TOTAL CONTRACT PRICE $159,411

WE HAVE EXAMINED THE LEGAL AUTHORITIES CITED AND ARE UNABLE TO CONCLUDE THAT THEY CONCLUSIVELY ESTABLISH B-J'S ENTITLEMENT TO OVERHEAD COSTS. SECTION 2-708(2) OF THE UNIFORM COMMERICAL CODE (UCC) WHICH YOU CITE PROVIDES FOR THE RECOVERY OF OVERHEAD COSTS IN THE EVENT OF A REPUDIATION OF A CONTRACT FOR THE SALE OF GOODS BY THE BUYER. ALTHOUGH THE NAVY IMPROPERLY USED B-J'S DRAWING FOR THE IN-HOUSE MANUFACTURE OF HUBS, IT DID NOT REPUDIATE ANY CONTRACT OF SALE WITH B-J. WE DO NOT THINK SECTION 2- 708(2) OF THE UCC IS APPLICABLE TO THE INSTANT SITUATION.

THE COURTS HAVE ALLOWED OVERHEAD EXPENSES AS AN ELEMENT OF DAMAGES FOR CONTRACT BREACH IN VARIOUS CIRCUMSTANCES. GENERALLY, OVERHEAD HAS BEEN ALLOWED FOR CONTRACT BREACH WHERE THE INJURED PARTY WAS PREVENTED FROM PERFORMING OTHER CONTRACTS AS A RESULT OF THE BREACH OR WHERE THE BREACH CAUSED THE INJURED PARTY TO INCUR ADDITIONAL OVERHEAD EXPENSES. IN THE ABSENCE OF SUCH EVIDENCE, HOWEVER, THE COURTS ARE DIVIDED AS TO WHETHER OVERHEAD SHOULD BE ALLOWED IN CONNECTION WITH A CLAIM FOR LOSS OF PROFITS. SEE 3 ALR 3D 689, 697 AND 22 AM. JUR. 2D, DAMAGES, SECTION 178.

AS THE NAVY POINTS OUT, ITS UNAUTHORIZED USE OF THE B-J DRAWING DID NOT PREVENT THE CONTRACTOR FROM UTILIZING ITS RESOURCES AND FACILITIES FOR THE PERFORMANCE OF OTHER WORK, NOR DO YOU ALLEGE THAT B-J'S OVERHEAD EXPENSES INCREASED AS A RESULT OF THE NAVY'S ACTION. IN THIS CONNECTION, THE RECORD SHOWS THAT B-J'S OVERHEAD RATE DECREASED FROM 58.1 PERCENT FOR THE INITIAL FOUR MONTHS OF 1971 TO 33.5 PERCENT FOR THE ENTIRE YEAR OF 1971.

THEREFORE, WE BELIEVE THAT B-J'S ENTITLEMENT TO OVERHEAD COSTS IS OF DOUBTFUL LEGAL VALIDITY. UNDER THE CIRCUMSTANCES, WE MAY NOT AUTHORIZE PAYMENT OF THE CLAIM IN THE AMOUNT OF $81,308. LONGWILL V. UNITED STATES, 17 CT. CL. 288, 291 (1881); CHARLES V. UNITED STATES, 19 CT. CL. 316, 319 (1884). HOWEVER, WE BELIEVE THAT THE AMOUNT OF $15,926, AS COMPUTED BY THE NAVY, REPRESENTS A REASONABLE SETTLEMENT OF THE CLAIM. A CHECK IN THIS AMOUNT WILL BE SENT TO YOU UPON RECEIPT OF ADVICE THAT YOU ACCEPT THIS AMOUNT IN FULL AND FINAL SETTLEMENT OF YOUR CLAIM.