Rex Systems Inc. ( 2016 )

ARMED SERVICES BOARD OF CONTRACT APPEALS
Appeal of -- )
)
Rex Systems Inc. ) ASBCA No. 59624)
Under Contract No. SPRMM1-12-P-YH36 )
APPEARANCE FOR THE APPELLANT: Ms. Nicole L. Kornesczuk
President
APPEARANCES FOR THE GOVERNMENT: E. Michael Chiaparas, Esq.
DCMA Chief Trial Attorney
Kara M. Klaas, Esq.
Trial Attorney
Defense Contract Management Agency
Chantilly, VA
OPINION BY ADMINISTRATIVE JUDGE PROUTY
In this appeal, we consider what compensation appellant, Rex Systems, Inc.
(Rex), is entitled to for the government's termination of its contract for convenience.
Although the contracting officer made an offer to settle Rex's termination costs, Rex
alleges that the government imposed significant costs upon it through delay during the
performance period and seeks payment of an amount greater than it would have been
entitled to had the contract been completed in a timely manner. The parties also
dispute Rex's entitlement to other components of its termination claim. For the most
part, the government prevails, although Rex is entitled to some relief, as will be
detailed below.
The parties waived a hearing and submitted the case upon the record pursuant
to Board Rule 11. We granted Rex's request to have the declaration of its corporate
officer Nicole Komesczuk (which had been previously submitted in tab 9 of its
supplement to the Rule 4 file) stand in for its opening brief, rather than requiring it to
submit a more formal brief. Ms. Komesczuk also filed a reply brief. The government
filed an opening brief, but did not file a reply, stating that it believed that its opening
brief addressed all the issues raised in the Kornesczuk affidavit.
FINDINGS OFF ACT
1. On 2 August 2012, the Defense Logistics Agency (DLA) awarded to Rex
Contract No. SPRMM1-12-P-YH36 (the contract) in the amount of$42,096 for the
production of certain semiconductor devices (R4, tab 1). These devices were
electronic assemblies utilized to support the MK-49, a Department of Defense legacy
system and provided electro-magnetic pulse protection (app. supp. R4, tab 9, ~ 5, tab 6
(provision of electro-magnetic pulse protection)). Rex had delivered the same
assemblies for DLA in a previous contract (app. supp. R4, tab 9, ~ 10).
2. The contract required first article testing prior to the delivery of the eight
devices (R4, tab 1 at G-2). It thus included the following schedule:
Submission of test procedures for first article and
production lot items: 60 days after contract award.
Approval oftest procedures: 120 days after contract
award.
Submittal of first article test sample and first article test
report: 180 days after contract award.
Approval of first article: 270 days after contract award.
Shipment of production quantity and production lot test
report: 360 days after contract award.
(Id.)
3. The contract also contained a number of standard Federal Acquisition
Regulation (FAR) clauses, including FAR 52.213-4, TERMS AND CONDITIONS-
SIMPLIFIED ACQUISITIONS (OTHER THAN COMMERCIAL ITEMS (OCT 2010), paragraph
(f) Terminations clause (R4, tab lat G-18); and FAR 52.209-3, FIRST ARTICLE
APPROVAL-CONTRACTOR TESTING (SEP 1989) (id. at G-20-21 ).
4. Relevant here, the termination clause in FAR 52.213-4(f) provides, in part,
that, upon notification of termination for the convenience of the government:
[T]he Contractor shall immediately stop all
work ... and ... cause ... all of its suppliers and subcontractors
to cease work. Subject to the terms of this contract, the
Contractor shall be paid a percentage of the contract price
reflecting the percentage of the work performed prior to
the notice of termination, plus reasonable charges that the
Contractor can demonstrate ... have resulted from the
termination.
(See R4, tab 1 at G-18)
2
5. Also relevant to this matter, are two portions of the First Article Testing
clause, FAR 52.209-3, the first of which provides in part:
(b) The Contractor shall submit the first article test
report within 180 calendar days from the date of this
contract.... Within 90 calendar days after the Government
receives the test report, the Contracting Officer shall notify
the Contractor... ofthe conditional approval, approval, or
disapproval of the first article ....
( f) If the Government does not act within the time
specified in paragraph (b ) ... the Contracting Officer shall,
upon timely written request from the Contractor, equitably
adjust under the Changes clause of this contract the
delivery or performance dates and/or the contract price,
and any other contractual term affected by the delay.
(R4, tab 1 at G-20)
6. The second material portion of the First Article Testing clause, FAR 52.209-3(g),
relates to recoverable costs and warns that:
Before first article approval, the acquisition of materials or
components for, or the commencement of production of,
the balance of the contract quantity is at the sole risk of the
Contractor. Before first article approval, the costs thereof
shall not be allocable to this contract for ... termination
settlements if the contract is terminated for the
convenience of the Government.
(R4, tab 1 at G-20-21)
7. The contract also contained a standard Navy supplemental provision
regarding pre-manufacturing test procedures (NAVSUPWSSIA05) further limiting the
government's liability in a termination settlement for the contractor's acquisition of
materials, which provided that:
Prior to approval of [first article test procedures], the
acquisition of materials or components for ... the contract
items (including first article samples) shall be at the sole
risk of the contractor, and costs incurred on account
thereof shall not be allocable to this contract...for the
3
purpose of termination settlement if this contract is
terminated for convenience of the Government prior to
approval of the [first article test procedure].
(R4, tab 1 at G-16)
8. In light of its having furnished the same items to the government in an
earlier contract, on 14 August 2012, Rex requested that the government waive the
contract's first article testing requirement (app. supp. R4, tab 1, tab 9, if 15). On
19 September 2012, the government denied this request (app. supp. R4, tab 1).
9. Before receiving the government's response to the first article test waiver
request, on 30 August 2012, Rex contacted a parts supplier (USI Electronics) and ordered
the production materials (the diodes) necessary to construct the first article and the other
seven semiconductor devices required by the contract (supp. R4, tab 24 at G-195-96).
Rex's pre-bid estimate noted that the diodes required a 24-week lead time (R4, tab 23 at
G-170-71 ). Nevertheless, the materials were requested for delivery on 15 October 2012,
and were received by Rex on 24 September 2012 (id. at G-195-97). The cost of these
items was $8,979 (id.).
10. On 27 September 2012, Rex timely submitted its first article and
production test procedures to the government for its approval (app. supp. R4, tab 2).
11. Without waiting for government approval of its test procedures, on
28 October 2012, Rex built the first article semiconductor device and conducted tests
upon it (app. supp. R4, tab 5, see also tab 6 (photograph of completed semiconductor
device)).
12. The government did not approve the proposed testing procedures within
120 days of contract award (or by 30 November 2012), as required by the contract.
Rex contacted the government on 6 December 2012 and inquired about the status of
the approval (app. supp. R4, tab 3 at 4). The contracting officer (CO) forwarded Rex's
correspondence to the appropriate technical personnel for review and noted, in an
email on 13 December 2012, that "we [the government] are in breach of the delivery
schedule in the contract" (id. at 2).
13. On 14 January 2013, a government technical representative contacted Rex and
requested that Rex provide him with a technical data package for the contract items as
well as a list of the drawings that had been provided in Rex's 27 September 2012
submittal (app. supp. R4, tab 1 at 2, tab 9, if 17). He explained that his concern was that
4
Raytheon had changed some of the specifications in the six years since Rex last provided
the semiconductor devices 1 (id.). This information was duly provided by Rex (id.).
14. The government made a follow-up request to Rex for additional
information regarding the drawings and specifications on 18 January 2013 (app. supp.
R4, tab 4 at 4-5). When this request was forwarded by Rex's contract administrator to
Rex's engineering personnel, Rex's founder and senior director, Mr. G. Rex Rathbun,
became aware of it and decided that it was an inappropriate request (app. supp. R4,
tab 9, ~ 18). Accordingly, on 23 January 2013 Mr. Rathbun sent a letter to the CO,
complaining that the documents sought by the government on 14 January 2013 and
provided by Rex that same date were proprietary, not required by the contract, and
never should have been provided (app. supp. R4, tab 4 at 3-4). Mr. Rathbun further
conveyed his view that, if the government felt that the specifications that it provided in
the contract (and which Rex was following) were deficient and that it wished Rex to
provide documents that would remedy that problem, it should do so by change order
(id.). On the same date, Mr. Rathbun also sent a letter to the government technical
personnel who had been involved in the technical conversation and informed them of
his view that it was improper and beyond the scope of the contract (id. at 10-11).
15. There was no written government response to these letters until 4 March
2013 when the CO sent Rex a contract modification terminating the contract for
convenience (app. supp. R4, tab 9, ~ 19). 2 This modification specified that the contract
was being terminated, in full, pursuant to FAR 13.302-4 and FAR Part 49 (id.).
16. The parties attempted to settle the termination costs, but were unsuccessful.
In its termination settlement proposal dated 16 July 2014, Rex sought in total
$57,381.50 (R4, tab 13 at G-79). On 1August2015, the government's termination
contracting officer (TCO) offered $25,231.94 to Rex (supp. R4, tab 24 ). This
$25,231.94 represents $24,614.08 for costs deemed allowable that were incurred in
performing the contract prior to termination minus a $64.41 projected loss on those
costs plus settlement expenses of $1,218.00 and minus disposal credits of$535.73 for
the materials purchased to perform the contract (supp. R4, tab 24 at G-189-93).
1
The record is not particularly clear, but we believe the Raytheon specifications
referenced involved the MK-49 legacy system for which the semiconductor
devices were being built.
2 The modification terminating the contract for convenience is dated 25 February 2013
(R4, tab 3 at G-46). Whether this modification was provided to Rex on
25 February or 4 March as alleged in the declaration provided by Rex (see app.
supp. R4, tab 9, ~ 19) is of no material difference to the outcome of this appeal.
Rex's internal records indicate that it was informed by telephone of the intended
termination for convenience on 22 February 2013 (app. supp. R4, tab 1at2).
5
17. Although Rex did not agree to this lower government figure, it did invoice
and collect that amount from the government (supp. R4, tab 25), thus, $32,149.56
remains in contention here. We thus conclude, that on 1August2015, the parties were
at an impasse with respect to Rex's termination settlement proposal and it ripened into
a claim. Matters of dispute that remain to be resolved here were Rex's request for
payment (minus a small credit for re-use) for the materials that were obtained for the
entirety of the production of the contract, which the TCO disallowed as being
precluded by the First Article Test clause; Rex's "'DELAY" damages, which the TCO
found non-applicable; Rex's request for profit, which the TCO determined
inapplicable because he believed that Rex would have lost money on the contract; and
the extent of Rex's settlement costs (R4, tab 13 at G-76).
18. With respect to Rex's demand for profit, the TCO created a table projecting
the costs to complete the contract that will prove important below. In this table, he
determined that:
a. The costs of materials to complete the contract were incurred prior to
termination and were $10,714.68 (supp. R4, tab 24 at G-190). With the addition of the
material burden of 15.99%, the material costs increased to $12,427.96 (id.).
b. Labor to complete the contract was determined to be $1,194.62 in direct labor
costs already incurred (for creating the first article), plus the anticipated cost of
producing the remaining seven articles, which was calculated at $546.21 in direct costs
for a total of $1,740.83 (supp. R4, tab 24 at G-190). This number came from taking
Rex's estimate of $68.27 in projected labor costs for producing each unit3 and
multiplying by 8, the number of units to be produced (id.). 4 The manufacturing burden
in this table was 394.85% of labor costs, which, when multiplied by the already-incurred
and projected direct labor costs ($1,740.83 x 394.85%), produces a total of $6,873.67 in
indirect costs attributable to labor (id.). Adding the direct labor costs of $1,740.83 to its
indirect costs of $6,873.67 to the fully burdened material costs of $12,427.96 sums to
$21,042.46 (id.).
c. General and administrative (G&A) costs of90.10% of the above total added
$18,959.26 to the costs in the TCO's table (supp. R4, tab 24 at G-190). The TCO also
included the miscellaneous costs ofUID marking ($50.00), labels ($16.00), the cost of
money ($197.20), and delivery ($1,941.52) (id.).
d. In sum total, then, the TCO found that the estimated cost to Rex for
completing the contract would have been $42,206.44, which was $110.44 more than
the contract price of $42,096.00 (supp. R4, tab 24 at G-190).
3
(See SOF ii 19, below).
4
There is a 5 cent discrepancy due to rounding errors.
6
19. The most significant costs in the TCO's profit calculation table came
directly from information provided by Rex. The direct material costs in the TCO's
table of $10,714.68 are consistent with Rex's allegations in this case (see app. supp.
R4, tab 9, ~ 20). The already-incurred direct labor costs in the TCO's table come from
Rex's claim (see app. supp. R4, tab 7, ex. 1). The per unit cost of manufacturing the
production items come from Rex's bid estimate that the production units would each
require 3.08 hours to assemble and 1.28 hours to test (supp. R4, tab 23 at G-172). At
the labor rates in Rex's estimate ($15.14 for assembly, $16.91 for testing (id.)), each
assembly would then cost $68.27 in direct labor ($46.63 in assembly labor plus $21.64
for testing labor). The material and manufacturing burden rates in the TCO's table
came from Rex's settlement proposal (see supp. R4, tab 24 at G-190), and were higher
than those in its bid estimate (compare burden rates in bid estimate, supp. R4, tab 23 at
G-172 to those in Rex's settlement proposal, app. supp. R4, tab 7, ex. 3 and R4, tab 16
at G-109). Finally, the G&A rate also came from Rex's settlement proposal (app.
supp. R4, tab 7, ex. 4).
20. Turning to the settlement expenses, Rex submitted to the TCO termination
settlement expenses of $2,717.55 for the labor of individuals who assembled the
termination settlement proposals (multiplied by the proper G&A factor) plus the costs
of its outside attorneys, who performed work on the proposal prior to this litigation
(app. supp. R4, tab 9, ~ 21e.). The TCO disallowed all of the costs of Rex's salaried
employees ($1,137.05) under the beliefthat their salaries were already being paid by
G&A for the contract and thus were precluded by FAR 31.205-42(c)(5), but allowed
almost all of the legal fees except for a small amount ($362.50) that involved litigation
before the Board, which the TCO considered not to be recoverable (supp. R4, tab 24 at
G-192-93). Rex has since submitted unrefuted evidence that the salaries of the
employees for the time that they worked on settlement of this dispute were not part of
the G&A pool applied to this contract, nor were they paid by any other contract (app.
supp. R4, tab 9, ~ 2le.).
21. On 27 October 2014, Rex filed a notice of appeal from the deemed denial
of its claim which was docketed as ASBCA No. 59624.
DECISION
Typically, entitlement to compensation for costs in a termination for convenience
is determined by those applicable clauses of the FAR that are incorporated into the
contract at issue. With respect to the FAR clauses governing termination costs, the
parties appear to have, sub silentio, treated this case for the most part as ifthe termination
were covered by the termination clause for firm-fixed-price contracts in FAR Part 49 5
(see, e.g., gov't br. at 17). In fact, however, the termination clause contained in the
5
This is not surprising, given that the contract modification terminating it referenced
FAR Part 49 (SOF , 15).
7
contract is that for simplified acquisitions other than commercial items, FAR 52.213-4(f)
(see SOF ~ 4). Under FAR Part 49, contracts are "essentially converted into cost-
reimbursement contracts, when terminated for convenience." See Dellew Corp., ASBCA
No. 58538, 15-1 BCA ~ 35,975 at 175,783-84. Here, the standard for recovery of
termination costs is somewhat different: subject to other terms of the contract, the
contractor is entitled to "be paid a percentage of the contract price reflecting the
percentage of the work performed prior to the notice of termination, plus reasonable
charges that.. .have resulted from the termination" (see SOF ~ 4 ).
In prior decisions, we have considered the scope of the materially-identical
termination clause for commercial items, FAR 52.212-4(t), see, e.g., SWR, Inc., ASBCA
No. 56708, 15-1 BCA ~ 35,832, and we will apply the same reasoning to the termination
clause presented by FAR 52.213-4(t) for simplified non-commercial acquisitions. In
these earlier decisions, we analyzed the clause as providing for reimbursement under two
prongs: the first prong being for the percentage of work performed prior to the notice of
termination; the second prong being for costs (including settlement costs) "resulting from
the termination." See Dellew, 15-1BCAii35,975 at 175,784 (citing SWR, 15-1 BCA
ii 35,832 at 175,223). In the case before us, because there were never any semi-conductor
devices tested and deemed acceptable and delivered to the government, there is no way to
pay Rex a percentage of its performance and the parties have made no attempt to set forth
a percentage of performance. 6 Nevertheless, when (as here) the contractor incurs costs
prior to termination without completing any percentage of the contract, we have read an
equivalent FAR clause to permit the contractor to recover reasonable expenses incurred
prior to termination under the theory that they constitute "costs resulting from the
termination." SWR, 15-1BCA~35,832 at 175,277-28; Dellew, 15-1 BCA ~ 35,975 at
175,784. These costs (but not the settlement costs) are subject to profit. See SWR, 15-1
BCA ~ 35,832 at 175,233. We examine each category of costs below.
I. Rex is not Entitled to Costs of Production Materials Ordered Prior to First
Article Acceptance
A contractor's entitlement to termination costs as set forth in FAR 52.213-4(f)
is "subject to the terms of this contract." Under FAR 52.209-3, First Article Approval
- Contractor Testing, which is included in the contract (SOF ~ 3), Rex was explicitly
warned that, "[b]efore first article approval, the acquisition of materials or components
for ... production of, the balance of the contract quantity is at the sole risk of the
Contractor" and not allocable to the contract for purposes of a termination settlement
(SOF ~ 6). The NA VSUPWSSIA05 clause, also included in the contract (SOF ii 7),
included similar provisions that prohibited compensation in a termination settlement
6
But see TriRAD Technologies Inc., ASBCA No. 58855, 15-1 BCA ii 35,898. Under
the proper circumstances (not presented here) the government could be liable
for a percentage completion of partially assembled items, even if they were not
delivered to the government. Id. at 175,497.
8
for materials obtained for the assembly of production and even first article test devices
ifthe materials were obtained prior to approval of first article test procedures (id.).
Thus, by the terms of the contract, Rex was not entitled to compensation in a
termination settlement for production materials purchased prior to approval of the first
article testing. Indeed, under NAVSUPWSSIA05, Rex was not entitled to
compensation of any materials purchased for production of the test article prior to
approval of the test procedure.
The TCO, nevertheless, agreed to compensate Rex for materials purchased for
the fabrication of the first article for testing (see supp. R4, tab 24 at G-176), and,
because the government does not seek to revisit that determination here, we will not
disturb it.
Rex argues that it should be compensated for the early purchase of the diodes
because it had no choice in the matter if it wished to deliver the semiconductor devices on
time (app. supp. R4, tab 9, ~ 2la.). Rex argues the diodes had a 24-week lead time for
delivery, which meant that production would not have met the contractual deadline if it had
waited until first article approval prior to ordering them (id.; see also app. reply br. at 2-3 ).
Although this long lead time concern could explain why Rex initially expected
to make an early diode order (see SOF ~ 9 (24-week lead time initially anticipated)), it
does not provide us a basis for ignoring the plain terms of the contract when
determining what compensation is owed to Rex for the termination. Indeed, in
multiple prior cases, we held that, absent waiver from the CO, a contractor was not
entitled to payment for such costs incurred prior to first article acceptance. See, e.g.,
Basic Tool Co., ASBCA No. 29683, 88-2 BCA ~ 20,638 at 104,321 (citing Century
Electronics, ASBCA No. 29123, 85-3 BCA ~ 18,232 at 91,550); Aerospace Swaging
& Mfg., Inc., ASBCA No. 38534, 90-2 BCA ~ 22,834 at 114,656. Neither party
alleged a waiver by the CO here, and when Rex entered the contract, it was well aware
of the risks it would undertake if it chose to order its diodes prior to first article
acceptance. It took those risks and must live with the consequences. Rex's argument
that "[t]he Government Should Not Be Allowed to Hide Behind the [First Article Test]
Clauses" (see app. reply hr. at 3), is not persuasive. The terms of the contract are
binding upon the parties unless waived, and the unsupported allegation that the
government withheld approval of the test procedures "in pursuit of this improper
purpose" (see id.), even if true (but which we find unproven) would not change the
simple fact that the contract forbids payment for production items obtained prior to
such approval.
Moreover, although the contract terms are sufficient to preclude recovery to Rex
on this issue, we further note that the evidence demonstrates that Rex was not, in fact,
saddled with a 24-week lead time for the subject diodes. When Rex contacted the diode
supplier in August 2012, it was offered a delivery with a six-week lead time (see SOF
~ 9), although the diodes were actually delivered in less than four weeks (id.). Thus, at
9
the time that it placed its order for the diodes, Rex was on notice that it need not worry
about a 24-week lead time, and that the diodes could be delivered in plenty of time to
meet its production time-lines if ordered subsequent to first article testing approval.
II. Rex is Not Entitled to the Delay Damages that it Seeks
While Rex submitted a claim for delay damages as part of its termination
settlement proposal, we do not have evidence that such costs resulted from the
termination. We do however consider whether Rex is otherwise entitled to such costs
under some other contract provision. Undoubtedly, the government was delinquent in
responding to Rex's first article and production test procedures submitted on
27 September 2012 (finding 10)-indeed, there was no response at all from the
government except that the contract was terminated some three months after the response
was due. This lack of response might justify a change to the contract delivery dates (see
SOF ii 5) and potential damages, if they could be proved. But the delay damages sought
by Rex are limited to unabsorbed overhead (see app. supp. R4, tab 9, ii 21b.) and there is
simply no basis to award such damages based upon the record before us.
The government's responsibility for unabsorbed home office overhead in a
delay case was principally articulated in Eichleay, 7 and in numerous cases that later
followed in the United States Court of Appeals for the Federal Circuit. See, e.g.,
Interstate Gen. Gov 't Contractors, Inc. v. West, 12 F.3d 1053, 1058 (Fed. Cir. 1993);
Melka Marine, Inc. v. United States, 187 F.3d 1370 (Fed. Cir. 1999); P.J Dick Inc. v.
Principi, 324 F.3d 1364 (Fed. Cir. 2003); Nicon, Inc. v. United States, 331 F.3d 878(Fed. Cir. 2003). The general notion is that the government is liable to the contractor
for a proportionate share of the general costs of operating the contractor's business
(things like accounting and payroll services, salaries for upper-level managers, general
insurance, utilities, taxes and depreciation, see Interstate, 12 F.3d at 1058), during the
time that the contractor was forced to do little but twiddle its thumbs due to the delay.
See Melka Marine, 187 F.3d at 1374-75. A prerequisite to this entitlement, however,
is that the contractor truly was forced to remain on standby during the delay period and
was precluded from obtaining new business. Melka Marine, 187 F.3d at 1375 (citing
Interstate, 12 F.3d at 1056); P.J. Dick, 324 F.3d at 1370; Nicon, 331 F.3d at 883. Rex
was not so affected by the government.
Rex argues in the Kornesczuk declaration that it could not obtain new work
during the delay period because it was "required to standby" at that time and maintain
its resources at the ready to perform and that, in any event, its business model was to
sit by and let its customers place orders - a matter over which it argues that it had no
control (app. supp. R4, tab 9, ii 2lb.). Perhaps its passive business model did not lend
itself to Rex's seeking new work during the delay period, but that was not the fault of
the government. Moreover, nothing about the government delay here imposed upon
7 Eichleay Corp., ASBCA No. 5183, 60-2 BCA ii 2688.
10
Rex a standby that required it to incur additional costs. In P.J. Dick, the Federal
Circuit discussed, at length, the meaning of "standby" for purposes of Eichleay
damages. See 324 F.3d at 1371-72. This discussion makes clear that a contractor is
considered to be on standby if, "during that delay it was required to be ready to resume
work on the contract, at full speed as well as immediately." Id. at 1371. Thus, there
would be no standby ifthe government permitted the contractor "a reasonable amount
of time" to remobilize once the suspension was lifted. Id. Factually, Rex had ample
time to complete the little work necessary to fulfill the requirements of the contract
and need not have been on standby.
Our basis for this conclusion is two-fold. First, the First Article Testing clause,
FAR 52.209-3(t), requires the CO to provide for an extension of time ifthe
government was late in approving the first article test procedure (SOF ~ 5) ("If the
Government does not act within the time specified [for approval of first article test
procedure] the Contracting Officer shall...equitably adjust...the delivery or
performance dates."). This provision thus gave Rex every reason to believe that the
government would have given it "reasonable time," see P.J. Dick, 324 F .3d at 13 71, to
complete the work.
Our second factual reason to conclude that Rex had ample time to complete the
contract without needing to keep its work force "ready to resume work on the contract,
at full speed as well as immediately," P.J. Dick, 324 F.3d at 1371, is based upon a
straightforward review of the calendar and the minimal work remaining to be
performed upon the contract. At the time that the contract was terminated, it was
approximately seven months into performance, with the first article having been
already (and prematurely) fabricated and tested by Rex (SOF ~ 11). After delivery and
approval of the first article and its tests, all that remained for the next five months of
performance was the fabrication, testing, and delivery of the seven remaining
semiconductor devices. In the Kornesczuk declaration that serves as its opening brief,
Rex characterizes the work remaining to be done on these devices as "insubstantial"
(app. supp. R4, tab 9, ~ 2lb.). We agree. Rex estimated that the production units
would each require 3.08 hours to assemble and 1.28 hours to test (SOF ~ 19), which
would yield slightly more than 30 hours of work to fabricate and test the remaining
7 devices (7 x (3.08 + 1.28) = 30.52). We cannot conclude that Rex kept its workforce
on tenterhooks to immediately ramp up "at full speed" in order to perform 30 hours of
work in the coming 5 months (even if the CO had refused to grant the extension
required by FAR 52.209-3(t)). 8 Thus, by no meaning of the word applicable to the
8 In its reply brief, Rex argues that it needed to keep its workforce on standby because
time was of the essence and it needed to avoid a negative performance rating
that would follow if it were late (see app. reply br. at 2). Given the ample time
remaining on the contract and the minimal work remaining upon the contract,
we find this argument farfetched.
11
Eichleay analysis, was Rex on "standby." Accordingly, Rex has not proved itself
entitled to delay damages for unabsorbed overhead.
III. Rex was Entitled to Very Little Profit in the Termination Settlement
Even though Rex is entitled to profit for its "costs resulting from termination,"
see SWR, 15-1BCA,-[35,832 at 175,233, there is no basis for compensating Rex at a
higher profit margin than it would have earned had the contract not been terminated.
The facts here demonstrate that that margin would have been far smaller than claimed
by Rex. The documents that Rex submitted to support its claim for expenses incurred
prior to the termination of the contract reflected higher labor and material costs than
anticipated in its bid. In particular, the burdens for both were substantially higher than
expected9 and, when the remaining labor required to complete the contract is factored
in to our calculations, we find that Rex would have barely eked out a profit on the
contract, had it been completed.
The accounting supporting this conclusion comes from a straightforward review
of the costs already incurred upon the contract added to the remaining costs for the
contract. The TCO included a depiction of this calculation in a table contained in his
1August2015 determination (SOF ,-[ 18). We have reviewed the numbers in this table
and find them to be (mostly) supported and accurate (see SOF ,-[ 19), but depart from
them in one instance that changes the negative profit to a very small profit: the TCO
calculated the wrong number of production items remaining on the contract.
Because Rex had already completed its first article at the time of contract
termination (see SOF ,-[ 11), it only needed to make seven more of the semiconductor
devices required by the contract, but the TCO' s table assumed that eight more devices
needed to be made (see SOF ,-[ 18). Accordingly, the labor costs (fully burdened and
subjected to G&A markups) for one device should be subtracted from the TCO's
projected bottom line. The direct labor costs for one item were $68.27 (id.), to which
should be added the 394.85% labor burden and the 90.10% G&A cost (id.).
Mathematically, we may represent that as $68.27 x 4.9485 x 1.901. The result is
$642.22 in extra costs for the one over-counted production item. We thus change the
TCO's projected $110.44 loss (see id.) into a $531.78 profit.
Since the contract price was $42,096 (see SOF ,-[ 1), by application of simple
division, we can see that the proper expected profit rate would have been 1.26% instead
of the TCO's negative profit rate. We multiply this profit rate against the TCO's
9
Rex argues that its past experience and its estimate demonstrate that it would have
made substantial profit on this contract (see app. reply br. at 3-4). The problem
with this contention is that it utterly ignores the reality of its contract
performance, which encountered vastly increased burden rates than those used
to formulate Rex's bid (SOF ,-[ 18).
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calculated allowable costs incurred prior to termination, $24,614.08 (SOF ii 16), and
determine that the TCO should have paid $3 10 .14 in profit to Rex, rather than
withholding $64.41 in loss, which is a net difference of $374.55.
IV. Rex was Entitled to Additional Reimbursement for Settlement Expenses
Rex submitted termination settlement expenses of $2,717.55 for the labor of
individuals who assembled the termination settlement proposals (multiplied by the
proper G&A factor) plus the costs of its outside attorneys, who performed work on the
proposal prior to this litigation (SOF ii 20). The TCO disallowed all of the costs of
Rex's salaried employees ($1,137.05) under the beliefthat their salaries were already
being paid by G&A for the contract, but allowed almost all of the legal fees except for a
small amount ($362.50) that involved litigation before the Board and would be
precluded by FAR (id.). Rex does not appear to challenge the determination regarding
legal fees, but does take issue with the notion that it should not be able to charge for the
time of its employees whose salaries were part of the G&A pool (app. supp. R4, tab 9,
~ 21e.). Because the work on the settlement proposal took place in a different year than
performance of the contract and the evidence of record is that it was not charged to any
other government contract (SOF ~ 20), Rex is entitled to the money.
Without getting too far into the weeds of cost accounting, the general premise
of FAR 31.205-42(c)(3), which was relied upon by the TCO to deny this portion of
Rex's claim (SOF ~ 20) 10 is that, if particular labor costs were incurred for work on a
particular contract and paid as a direct cost on that contract for its termination, those
labor costs cannot also be placed into the pool of costs used to generate G&A
expenses. See FAR 31.205-42(c )(3 ). To put a finer point on it, a contractor cannot be
paid twice for the same labor expense. In a somewhat obscure manner, the TCO found
and the government argues that the personnel who performed work on the termination
settlement were all persons whose positions would have placed their salaries into the
G&A expense pool (SOF ~ 20). The TCO then alleges that, because these expenses
were incurred prior to 2015 and not, apparently, charged to the contract, they were part
of the G&A pool and presumably recovered in the years in which they were incurred
(id., see also gov't br. at 19-20). The flaw in this reasoning is that the government has
not demonstrated that G&A costs were ever recovered by Rex from the government
(or any other customer, for that matter) during the years that Rex incurred its
settlement expenses. Rex has provided unrefuted evidence that it did not otherwise
recover these settlement expenses (SOF ~ 20). Accordingly we find that Rex did not
recover its internal settlement expenses of $1,137.05 (SOF ~ 20), and that this expense,
10
Under the applicable termination clause, FAR 52.213-4(f), cost accounting
standards are not necessarily applicable to this termination settlement. Neither
party raises the issue and because we rule in favor of Rex here, we need not
decide whether it was appropriate for the CO to consider FAR 31.205-42(c)(3)
in the first instance.
13
which we find to be reasonable under the circumstances, should have been paid.
Accordingly, Rex is entitled to an additional $1,137.05 in settlement expenses.
CONCLUSION
We find that Rex is entitled to an additional $374.55 for lost profit and
$1,137.05 in settlement expenses for a total of$1,511.60, plus CDA interest from
1 August 2015, the date the termination settlement proposal matured into a claim.
Dated: 15 April 2016
J.~ OUTY
Administrative Judge
Armed Services Board
of Contract Appeals
I concur I concur
RICHARD SHACKLEFORD
Administrative Judge Administrative Judge
Acting Chairman Vice Chairman
Armed Services Board Armed Services Board
of Contract Appeals of Contract Appeals
I certify that the foregoing is a true copy of the Opinion and Decision of the
Armed Services Board of Contract Appeals in ASBCA No. 59624, Appeal of Rex
Systems Inc., rendered in conformance with the Board's Charter.
Dated:
JEFFREY D. GARDIN
Recorder, Armed Services
Board of Contract Appeals
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