Ace Electronics Defense Systems ( 2022 )

ARMED SERVICES BOARD OF CONTRACT APPEALS
Appeal of - )
)
Ace Electronics Defense Systems ) ASBCA No. 63224)
Under Contract No. N63394-20-D-0002 )
APPEARANCE FOR THE APPELLANT: Adam D. Bruski, Esq.
Warner Norcross + Judd LLP
Midland, MI
APPEARANCES FOR THE GOVERNMENT: Craig D. Jensen, Esq.
Navy Chief Trial Attorney
Andrea S. Maglasang-Miller, Esq.
Matthew B. Hawkins, Esq.
Trial Attorneys
OPINION BY ADMINISTRATIVE JUDGE MELNICK DISMISSING THE APPEAL
FOR FAILURE TO STATE A CLAIM
Ace Electronics Defense Systems, LLC (Ace), seeks compensation due to
increased costs it experienced performing a firm-fixed price contract with the Naval
Surface Warfare Center (government). Ace’s complaint fails to allege facts that support
any recovery under the contract and therefore we dismiss the appeal for failure to state a
claim upon which relief can be granted.
STATEMENT OF FACTS FOR PURPOSES OF THE MOTION
The government issued a delivery order to Ace under the indefinite-delivery,
indefinite-quantity contract identified above for various assemblies and parts associated
with cruise missiles (compl. ¶ 2; R4, tab 1 at 221, tab 3). The delivery order contained
numerous firm-fixed price line items for a total price of $11,700,479 (R4, tab 3).
Ace obtains some elements for the ordered components from another vendor
(compl. ¶ 3). Since 2020, the other vendor’s prices for the materials associated with two
line items have risen substantially. The vendor has given little insight into the cause
other than to assert they are related to the COVID-19 pandemic. (Compl. ¶ 4) Ace is
unable to obtain the items from another vendor. It has submitted several requests for cost
adjustment to the government reflecting the vendor’s quoted prices, which have been
denied. The cost increases have substantially altered the economics of the contract and
put financial stress on Ace. (Compl. ¶¶ 5-6, 13) The increase is unlike anything Ace has
ever experienced (compl. ¶ 11).
On July 2, 2020, the Office of the Undersecretary of Defense for Acquisition and
Sustainment issued a memo entitled “Guidance for Assessment of Other COVID-19
Related Impacts and Costs.” In part the memo states the following:
The COVID-19 pandemic has presented historic and
unprecedented challenges for the Department, its mission, and
its people. These challenges require us to use all of our
experience and skill to find innovative solutions to both
protect Government interests and ensure the continued health
of the Defense Industrial Base to support our mission.
Unlike contractors performing under cost-type contracts,
contractors under fixed-price contracts generally must bear
the risk of cost increases, including those due to COVID-19
(e.g., costs associated with PPE, social distancing, and
supplier delays and inefficiencies). However, Contracting
Officers are granted discretion, subject to the availability of
funds, to modify contracts (e.g., under FAR 52.243-1,
Changes Fixed Price, and its applicable alternatives) to reflect
changes to the Government’s needs as a result of COVID-19.
(Compl. ¶ 12)
Ace has incurred $113,993.46 in additional costs related to the two line items due
to the vendor’s increased pricing (compl. ¶ 16). Ace alleges breach of contract by the
government for failure to adjust the contract price (compl. at 2). “Ace believes that under
the circumstances, it is appropriate to apply the Fixed Cost with Economic Price
Adjustment provisions of the Federal Acquisition Regulation to this Contract. FAR
16.203 and/or changes provisions of FAR 43.205 and 53.243-1.” (Compl. ¶ 15)
Ace submitted a certified claim to the contracting officer dated February 9, 2022
(R4, tab 4). 1 The claim’s allegations are substantially identical to the complaint. The
claim was denied on February 24, 2022 (compl. ¶ 8). Ace has appealed and seeks
$113,993.46 (compl. at 4).
The government moves to dismiss the complaint on the ground that it fails to state
a claim upon which relief may be granted.
1
Ace alleges it submitted the claim on February 2, 2022 (compl. ¶ 7). The discrepancy is
irrelevant to this decision.
2
DECISION
A complaint is subject to dismissal for failure to state a claim when it fails to
“allege facts ‘plausibly suggesting (not merely consistent with)’ a showing of entitlement
to relief.” Cary v. United States, 552 F.3d 1373, 1376 (Fed. Cir. 2009) (quoting Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 557 (2007)). The allegations must “raise a
right to relief above the speculative level” and state a claim “that is plausible on its face.”
Id. We “must accept all well-pleaded facts as true and view them in the light most
favorable to the non-moving party.” Rack Room Shoes v. United States, 718 F.3d 1370,
1376 (Fed. Cir. 2013) (quoting United States v. Ford Motor Co., 497 F.3d 1331, 1336
(Fed. Cir. 2007)); see also Parwan Grp., ASBCA No. 60657, 18-1 BCA ¶ 37,082at 180,498 (quoting Kellogg Brown & Root Servs., Inc. v. United States, 728 F.3d 1348,
1365 (Fed. Cir. 2013)). However, “[t]hreadbare recitals of the elements of a cause of
action, supported by mere conclusory statements, do not suffice.” Rack Room Shoes, 718
F.3d at 1376 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). We are not bound to
Ace’s legal conclusions. Id. The motion will be granted when the facts asserted do not
entitle the claimant to a legal remedy. Lindsay v. United States, 295 F.3d 1252, 1257
(Fed. Cir. 2002); Arab Shah Constr. Co., ASBCA No. 61565, 19-1 BCA ¶ 37,266at 181,348. In addition to the complaint, we may consider “matters incorporated by
reference or integral to the claim, items subject to judicial notice, [and] matters of public
record.” A&D Auto Sales, Inc. v. United States, 748 F.3d 1142, 1147 (Fed. Cir. 2014)
(quoting 5B CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND
PROCEDURE § 1357 (3d ed. 2004)). Because interpretation of the parties’ contract rights
is integral to the claim, and that is a question of law, NOAA Md., LLC v. Adm’r of the
Gen. Servs. Admin., 997 F.3d 1159, 1165 (Fed. Cir. 2021), we consider the contract’s
terms in determining whether the complaint asserts a claim upon which relief may be
granted. See Parwan Grp., 18-1 BCA ¶ 37,082 at 180,498.
The complaint concedes that the contract is fixed price (compl. ¶ 10). “Under a
firm-fixed price arrangement, [Ace] assumed ‘maximum risk and full responsibility for
all costs and resulting profit or loss.’” Parsons Gov’t Servs., Inc., ASBCA No. 61630,
20-1 BCA ¶ 37,655 at 182,815 (quoting FAR 16.202-1). Thus, “[t]he price was ‘not
subject to any adjustment on the basis of [Ace’s] cost experience in performing the
contract.’” Id.; see also Zafer Taahhut Insaat ve Ticaret A.S. v. United States, 833 F.3d
1356, 1361 (Fed. Cir. 2016)). The essence of Ace’s complaint is that it encountered
higher prices from its vendor for certain components than it expected due to the COVID
pandemic. However, it has not identified any clause of the contract that would shift the
risk of such costs to the government. See Pernix Serka Joint Venture v. Dept. of State,
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CBCA No. 5683, 20-1 BCA ¶ 37,589 at 182,522-23 (rejecting a claim under a fixed price
contract for increased performance costs caused by an unforeseen epidemic). 2
Ace quotes the July 2, 2020, memo from the Office of the Undersecretary of
Defense for Acquisition and Sustainment but does not allege how it dictates entitlement
to recover. We agree with the government that the memorandum is not a part of the
contract or delivery order and nothing in it governs the parties’ rights under those
instruments. Moreover, after noting the challenges that the pandemic posed to the
government’s interests and the health of the defense industry, the memo observes that
contractors performing fixed price contracts generally must bear the risk of cost increases
due to the pandemic. It grants discretion to contracting officers to modify contracts to
reflect changes to the government’s needs resulting from the pandemic. (Compl. ¶ 12)
Ace has not alleged that this contract was modified by the contracting officer to reflect
any changes to the government’s needs. 3 Ace’s suggestion that the memo imposes a
contractual obligation upon the government to grant a price adjustment because Ace
experienced higher costs due to the pandemic is not correct.
Ace’s reliance in the complaint upon Federal Acquisition Regulation (FAR)
16.203, 43.205 and 53.243-1 is also misplaced.
2
Ace does not allege that the increased costs have made performance commercially
impracticable, which might entitle it to an equitable adjustment if proven.
Raytheon Co. v. White, 305 F.3d 1354, 1367 (Fed. Cir. 2002). That would require
it to allege extraordinarily excessive or unreasonable costs or burdens that make
performance commercially senseless. Id. at 1367-68 (citing examples of
commercial impracticability, such as contract performance that would have
required 17 years at a cost of $400 million rather than 720 days and $16.92
million, or a seven-month performance period that turned into an unsuccessful
four-year period with a 148 percent cost overrun); see also Parwan, 18-1 BCA ¶
37,082 at 180,496 (explaining that simply showing economic hardship is
insufficient). It would also require Ace to not have assumed the risk of the event
causing the impracticability. Raytheon, 305 F.3d at 1367. Here, Ace does not
even allege that its $113,993.46 in higher costs have caused it to suffer a loss on
this $11,700,479 delivery order.
3
Additionally, a subsequent memo from the same source, dated May 25, 2022, clarifies
that “[s]ince cost impacts due to unanticipated inflation are not a result of a
contracting officer-directed change, [contracting officers] should not agree to
contractor [equitable adjustments] submitted in response to changed economic
conditions” (gov’t reply ex. 1, at 2, available at
https://www.acq.osd.mil/dpap/policy/policyvault/USA000999-22-DPC.pdf).
4
FAR 16.203 describes the circumstances for awarding a fixed price contract with
economic price adjustment, which would provide for upward or downward revision of
the price upon the occurrence of specified contingencies. Contracting officers are
permitted to use this type of contract when there is serious doubt concerning the stability
of market or labor conditions that will exist during an extended period of performance
and contingencies that would otherwise be included in the contract price can be identified
and covered separately in the contract. FAR 16.203-2; see also FAR 16.203-4. Such a
contract shall not be used unless the contracting officer determines that it is necessary
either to protect the contractor and the government against significant fluctuations in
labor or material costs or to provide for contract price adjustment in the event of changes
in the contractor’s established prices. FAR 16.203-3.
This contract and delivery order did not contain a price adjustment clause. Ace
does not allege it was somehow misled at the time of award to believe that the contract
would receive such an adjustment should the prices of its materials increase.
Nevertheless, Ace’s opposition to the motion to dismiss demands that the Board rewrite
the contract now to include such a clause because of the “unprecedented circumstances
experienced during the execution phase of this project,” which we presume means the
COVID pandemic. Ace contends that the government’s refusal to incorporate the clause
now and its insistence upon performance at the agreed upon price is arbitrary and
capricious. Ace cites no authority for the proposition that a fixed price contract must be
revised after the fact to include a price adjustment clause when the contractor experiences
unexpected price increases due to a pandemic. Such a ruling would turn on its head
Ace’s assumption of the maximum risk and full responsibility for all costs and resulting
profit or loss.
FAR 43.205 provides instructions for the inclusion of a Changes Clause in
contracts. This contract incorporated FAR 52.243-1, CHANGES-FIXED PRICE (AUG
1987) (R4, tab 1 at 243). That clause permits the contracting officer to make certain
written changes within the general scope of the contract and provides for an equitable
adjustment for increases or decreases in the cost of, or time required for, performance
caused by the change. The complaint lacks any allegation that written changes by the
contracting officer caused Ace’s alleged cost increases. Instead, Ace alleges it incurred
increased costs from price increases imposed upon it by its vendor (compl. ¶¶ 4, 11).
Ace’s further contention in its opposition, that the government’s insistence that it
perform constitutes a constructive change given its vendor’s price increases, is also
unsupported by the complaint’s allegations. To prevail upon a constructive change a
contractor must “show (1) that it performed work beyond the contract requirements, and
(2) that the additional work was ordered, expressly or impliedly, by the government.”
Bell/Heery v. United States, 739 F.3d 1324, 1335 (Fed. Cir. 2014); Kellogg Brown &
Root Servs., ASBCA Nos. 59385, 59744, 20-1 BCA ¶ 37,656 at 182,829. The complaint
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fails to plausibly suggest any facts that could establish either of those elements. That the
government continued to expect the contract’s prescribed performance from Ace at the
agreed upon price is not an order to perform additional work. Ace’s additional
suggestion that its allegations support a cardinal change, which requires a demonstration
that the government effected an alteration in work requiring performance materially
different from what was bargained for, fails for the same reasons. See U.S. Aeroteam,
Inc. v. United States, No. 2021-2272, 2022 WL 2431626, at *3 (Fed. Cir. July 5, 2022).
Ace’s final argument in its effort to salvage its complaint is to suggest that by
failing to recognize the changed environment in which the contract was to be performed,
and compensating Ace for its higher costs, the government’s action constitutes a breach
of the contract’s duty of good faith and fair dealing. 4 The duty of good faith and fair
dealing prohibits “interference with or failure to cooperate in the other party’s
performance.” LaBatte v. United States, 899 F.3d 1373, 1379 (Fed. Cir. 2018) (quoting
RESTATEMENT (SECOND) OF CONTRACTS § 205 cmt. d (1981)). Ace emphasizes the
observation in Centex Corp. v. United States, 395 F.3d 1283, 1304 (Fed. Cir. 2005), that
parties are obligated “not to act so as to destroy the reasonable expectations of the other
party regarding the fruits of the contract.” However, “a specific promise must be
undermined for the implied duty to be violated.” Dobyns v. United States, 915 F.3d 733,
739 (Fed. Cir. 2019). It “must be ‘keyed to the obligations and opportunities established
in the contract,’ so as to not fundamentally alter the parties’ intended allocation of
burdens and benefits associated with the contract.” Id. (quoting Lakeshore Eng’g. Servs.,
Inc. v. United States, 748 F.3d 1341, 1349 (Fed. Cir. 2014)). The complaint does not
contain any allegations that plausibly suggest that the government’s refusal to relieve Ace
from the firm-fixed price to which Ace committed itself undermines any specific promise
or destroys Ace’s reasonable expectations regarding the fruits of the contract. See
Lakeshore Eng’g. Servs., 748 F.3d at 1349 (holding that given the payment terms agreed
upon by the parties, the government’s refusal to pay more to account for cost increases
did not destroy the contractor’s reasonable expectations under the contract).
4
We disagree with the government’s contention in its reply that this argument flows from
a separate set of operative facts than those set out in Ace’s certified claim.
Accordingly, we deny its request that the argument be dismissed for lack of
jurisdiction. See Wilwood Eng. Inc., ASBCA Nos. 62773, 62774, 22-1 BCA ¶
38,116 at 185,144-45.
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CONCLUSION
Ace has failed to state a claim upon which relief can be granted. The appeal is
dismissed with prejudice.
Dated: October 5, 2022
MARK A. MELNICK
Administrative Judge
Armed Services Board
of Contract Appeals
I concur I concur
RICHARD SHACKLEFORD J REID PROUTY
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. 63224, Appeal of Ace
Electronics Defense Systems, rendered in conformance with the Board’s Charter.
Dated: October 5, 2022
PAULLA K. GATES-LEWIS
Recorder, Armed Services
Board of Contract Appeals
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