DocketNumber： No. 39-72
Citation Numbers： 202 Ct. Cl. 500, 480 F.2d 1331
Judges： Bennett, Cowen, Davis, Kashiwa, Ktjnzig, Nichols, Ohief, Skelton
Filed Date： 7/13/1973
Status： Precedential
Modified Date： 1/13/2023
delivered the opinion of the court:
This case is before the court on plaintiff’s motion for summary judgment and defendant’s cross motion for summary judgment.
Plaintiff entered into a fixed price contract (No. DACW01-68-C-0088) with the Department of the Army on April IT, 1968, for the construction of the Jones Bluff Lock and Dam on the Alabama Elver in Alabama. Article 50 of the general provisions of the contract entitled “Value Engineering Incentive” provided that the contractor and the Government would share in savings in the cost of performance of the contract which resulted from changes proposed by the contractor. On May 22, 1968, plaintiff submitted a proposal for a change in the design and construction of the cofferdam required by the contract along with a suggested adjustment in the contract price, not including any decrease in profit on the work originally included in the contract, which would now be
The parties are in agreement as to the facts of the case and the figures used in arriving at the cost reduction. They disagree only as to whether Article 50 calls for the calculation of profit as part of the cost savings. Thus, the controversy in this case centers around the varying interpretations of Article 50 of the contract, and therefore the court is faced with a pure question of law. We hold that the plaintiff is right, and the Board in error.
Plaintiff tells us that the language of Article 50 indicates that the amount of cost reduction must be calculated from the point of view of cost savings to the contractor. Therefore, profit should not be included in arriving at the amount saved. The court’s attention is invited to the pertinent regulations involved, and to the administrative history of those regulations, all of which the plaintiff says supports its position.
Defendant tells us, to the contrary, that the only reasonable meaning that can be given Article 50 is to read its provisions from the point of view of savings to the Government. Defendant argues that the pertinent regulations and their administrative history as they relate to fixed price .contracts support its position. Finally, the defendant avers that the court should not depart from the usual method of calculating equitable adjustment under the circumstances of this case, and we
The objective in interpreting a contract is to determine the intention of the parties. The language of the contract must be given the meaning that would be understood by a reasonably intelligent person acquainted with the contemporary circumstances. Firestone Tire & Rubber Co. v. United, States, 195 Ct. Cl. 21, 444 F. 2d 547 (1971). All provisions of the contract should be read together and so as to make none inoperative, and specific provisions should be given precedence over general ones. Morrison-Knudsen Co. v. United States, 184 Ct. Cl. 661, 397 F. 2d 826 (1968). If the contract is unambiguous its language should be implemented. Keco Industries v. United States, 176 Ct. Cl. 983, 364 F. 2d 838 (1966), cert. denied, 386 U.S. 958 (1967). As an aid to interpretation of the contract the pertinent ASPE, should be inspected and the policy behind the promulgation of these regulations should be looked into. Firestone Tire ds Rubber, sufra. Such regulations are law, binding on the contract parties, where applicable. Newfort News Shipbuilding & Dry Dock Co. v. United States, 179 Ct. Cl. 97, 374 F. 2d 516 (1967); Chris Berg, Inc. v. United States, 192 Ct. Cl. 176, 426 F. 2d 314 (1970).
That portion of the contract which is at the center of controversy in this case is Article 50 of the General Provisions of the contract. That Article reads in pertinent part:
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50. VALUE ENGINEERING INCENTIVE (JUNE 1967) (Applicable to dll contracts in excess of $100,000)
(a)(1) This clause applies to those cost reduction proposals initiated and developed by the Contractor for changing the drawings, designs, specifications, or other requirements of this contract. This clause does not, however, apply to any such proposal unless it is identified by the Contractor, at the time of its submission to the Contracting Officer, as a proposal submitted pursuant to this clause. * * *
(2) The cost reduction proposals contemplated are those that:
(i) would require, in order to be applied to this contract, a change to this contract; and
*505 (ii)would result in savings to the Government by providing a decrease in the cost of performance of this contract, without impairing any of the items’ essential functions and characteristics such as service life, reliability, economy of operation, ease of maintenance, and necessary standardized features.
(b) As a minimum, the following information shall be submitted by the Contractor with each proposal:
(i) a description of the difference between the existing contract requirement and the proposed change, and the comparative advantages and disadvantages of each;
(ii) an itemization of the requirements of the contract which must be changed if the proposal is adopted, and a recommendation as to how to make each such change (e.g., a suggested revision);
(iii) an estimate of the reduction in performance costs, if any, that will result from adoption of the proposal, taking into account the costs of development and implementation by the Contractor (including any amount attributable to subcontracts in accordance with paragraph (e) below) and the basis for the estimate;
(iv) a prediction of any effects the proposed change would have on collateral costs to the Government such as Government-furnished property costs, costs of related items, and costs of maintenance and operation;
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(c) (1) Cost reduction proposals shall be submitted to the Procuring 'Contracting Officer (PCO). * * *
(2) The Contracting Officer may accept, in whole or in part, either before or within a reasonable time after performance has been completed under this contract, any cost reduction proposal submitted pursuant to this clause by giving the Contractor written notice thereof reciting acceptance under this clause. Where performance under this contract has not yet been completed, this written notice may be given by issuance of a change order to this contract. Unless and until a change order applies a value engineering change proposal to this contract, the Contractor shall remain obligated to perform in accordance with the terms of the existing contract. If a proposal is accepted after performance wider this contract has teen completed, the adjustment required*506 shall be effected by contract modification in accordance with this clause.
(3) If a cost reduction proposal submitted pursuant to this clause is accepted by the Government, the Contractor is entitled to share in instant contract savings, collateral savings, and future acquisition savings not as alternatives, but rather to the full extent provided for in this clause.
(4) Contract modifications made as a result of this clause will state that they are made pursuant to it.
(d). If a cost reduction proposal submitted pursuant to this clause is accepted and applied to this contract, an equitable adjustment in the contract price and in any other affected provisions of this contract shall be made in accordance with this clause and the “Termination for Convenience,” “Changes,” or other applicable clause of this contract. The equitable adjustment shall be established by determining the effect of the proposal on the Contractor’s cost of performance, taking into account the Contractor’s cost of developing the proposal, insofar as such is properly a direct charge not otherwise reimbursed under this contract, and the Contractor’s cost of implementing the change (including any amount attributable to subcontracts in accordance with paragraph (e) below). When the cost of performance of this contract is decreased as a result of the change, the contract price shall be reduced by the following amount: the total estimated decrease in the Contractor’s cost of performance less fifty percent (50%) of the difference between the amount of such total estimated decrease and any net increase in ascertainable collateral costs to the Government which must reasonably be incurred as a result of application of the cost reduction proposal to this contract. When the cost of performance of this contract is increased as a result of the change, the equitable adjustment increasing the contract price shall be in accordance with the “Changes” clause rather than under this clause, but the resulting contract modification shall state that it is made pursuant to this clause. (JUNE 1961) * * * (Emphasis supplied.)
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Paragraphs (c) (2), (3), and (d) indicate that the Article is to be a mechanism by which the adjustment in price is to be implemented. Paragraph (d) clearly states that “an
As stated above, when possible all language of the contract should be given an operative meaning and specific language should take precedence over general language. To apply only the “Changes” or “Termination for Convenience” procedures for adjustment would be to read out contract language of specific application to the question at issue, in favor of language of general application. Such an order of preference would be contrary to the rules of construction fol
The conclusion that the language of the Article in question spells out a method for adjustment which may differ from the usual equitable adjustment under the “Changes” or “Termination for Convenience” clauses of the contract and that this adjustment is to be based upon the contractor’s cost of performance and therefore will not include profit, is supported by the relevant regulations. These regulations read in pertinent part:
Armed Services Procurement Regulations Involved (32 C.F.R. (1968))
Subpart Q — Value Engineering
§ 1.1701 Policy.
(a) Value engineering is concerned with the elimination or modification of anything that contributes to the cost of a contract item or task but is not necessary for needed performance, quality, maintainability, reliability, or interchangeability. Specifically, value engineering as contemplated by this part constitutes a systematic and creative effort, not required by any other provision of the contract, directed toward analyzing each contract item or task to ensure that its essential function is provided at the lowest over-all cost. Over-all cost may include, but need not be limited to, the costs of acquiring, operating, and logistically supporting an item or system.
(b) In order to realize fully the cost reduction potential of value engineering, provisions which encourage or require value engineering shall be incorporated in all contracts, including letter contracts, of sufficient size and duration to offer reasonable likelihood for cost reduction. All such provisions shall ofer the contractor a share in cost reductions ensuing from cha/nge proposals he submits under such contracts. While most proposals will*509 result from the contractor’s value engineering efforts, any proposal submitted by the contractor which meets the documentation and other requirements of the value engineering clauses may be rewardable. In addition, the value engineering provisions are intended to induce major prime contractors to encourage subcontractors to ■utilize value engineering techniques. Finally, to realize the cost reduction potential of value engineering, it is imperative that value engineering change proposals be processed by all parties as expeditiously as possible.
(e) In addition to the value engineering potential noted above (cost reductions resulting from contract change proposals), it is recognized that a contractor may develop a value engineering-type proposal with regard to a weapon system or end item for which he does not have a current contract, e.g., Where the contractor originally developed and produced a weapon system, it is now operational, and the contractor no longer has a production or other contract therefor. In such a case, the value engineering proposal would not come within the provisions of this subpart. Nevertheless, it is desirable that the potential cost reductions resulting from unsolicited proposals not within the scope of value engineering clauses under current contracts be realized by the Government. Accordingly, nothing in this subpart shall be construed to preclude the purchase of unsolicited proposals on a case-by-case basis or other special contractual arrangements, pursuant to Subpart B, Part 9 of this chapter, or 10 U.S.C. 2386, which are necessary to induce contractors to develop such proposals and make them available to the Government.
§ 1.1102 Types of value engmeerimg provisions.
§ 1.1702-1 Incentives.
'(a) A Value Engineering Incentive clause permits the contractor to share in cost reductions that ensue from change proposals he submits. Many types of contracts, when properly used, provide the contractor with an incentive to control and reduce costs while performing within the specifications and other contract requirements. However, the practice of reducing the contract price (or fee. m the case of cost-reimbursement type contracts) wader the Changes clause tends to discourage contractors from submitting cost reduction proposals requiring a change to the specifications or other contract requirements even though such proposals could be beneficial to the Government. The objective of a value engi*510 neering incentive provision is to encourage the contractor to submit such cost reduction proposals. To be acceptable, a value engineering change proposal must involve some change in ithe contract specifications, purchase description, or statement of work; this may include the elimination or modification of any requirements found to be in excess of actual needs in the areas of, for example, design, components, materials, material processes, tolerances, packaging requirements, technical data requirements, or testing procedures and requirements, and consequent reduction in the contract cost. Furthermore, even when the contract cost may be increased, the incentive provisions encourage contractors to submit value engineering change proposals that are likely to lead to overall savings resulting from significant net reductions in collateral costs of Government-furnished property, operational requirements or logistic support requirements.
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§ 1.1703 Types of sa/oings to be shared with the contractor.
§ 1.1708-1 General.
(a) One of the hey problems in exploiting the very large cost reduction potential of varne engineering is that of mahing contractual arrangements that give the contractor am, effective incentive to perform value engineering successfully. An effective incentive arrangement must include three principal elements: first, the contractor must be assured of a fair proportion of any savings realized 'by the Government as a result of his change proposal; second, he must be assured that this proportion will be applied to a substantial base; and third, he must be assured of an objective evaluation and expeditious processing of his change proposal. Sections 1.1703-2 through 1.1703-4 explain the various types of savings to be shared with the contractor and the different incentive arrangements to accomplish such sharing. Normally, the value engineering clause in a particular contract will provide for the contractor to share in savings realized on the instant contract on future acquisitions within a specified period of time, and in the area of reduced collateral costs.
(b) In choosing an appropriate incentive arrangement, it is Department of Defense policy to provide the contractor with substantial financial incentives to under-tahe value engineering. This policy reflects the premises*511 that the Government will benefit from any value engineering savings, that definitely assured savings from successful value engineering are likely to be only a part of the overall savings, and that a strong incentive tied to definitely assured savings will induce maximum contractor efforts to realise the full sowings 'potential of value engineering. (Emphasis supplied.)
The above regulations demonstrate an intent on the part of the authors that the contractors be encouraged to come forward with proposals which would lead to cost savings. The adjustment in the contract price under Article 50 was to be an inducement to the contractor. By § 1.1702-1 (a) the Changes clause is rejected as a criterion to measure the price adjustment, and by § 1.1703 (b) maximum incentives are the paramount consideration. It is consistent with this intent and policy that the contractor not be forced to accept a reduction in his expected profit partly offsetting his gain from sharing the cost saving.
Of particular interest in respect to these regulations is that the authors of them were made aware of the fact that they could be construed to allow a contractor to retain all his expected profit. Prior to the enactment of the regulations they were submitted in draft form to various agencies for comment. The office of the Comptroller General in its comment stated that it appeared that under the regulations a contractor would be able to retain his expected profit on work that no longer would be done. It was recommended that further consideration be given to this point. The subcommittee which drafted the final language of the regulation considered this comment and explicitly stated in its memorandum to the ASPE Committee of February 13, 1967:
Subcommittee Conclusion: In light of the basic intent of DOD’s program to stimulate more aggressive value engineering-type efforts on defense contracts, this proposal of the C.G. — which, in effect, takes away part of one contractor payment (i.e., profit or fee) while at the same time making another (i.e., share in savings) — appears to be self-defeating. In addition, the C.G.’s characterization of the increased rate of fee or profit as “retention of profits unearned” in considered to be erroneous. The original profit agreed upon is a dollar figure*512 designed to stimulate efficient contract performance; the contractor should not be penalized when he, in fact, demonstrates such efficiency by developing successful YE proposals. Eecommendation rejected.
The subcommittee’s conclusion was thereafter adopted by the full ASPE Committee.
Defendant is quick to point out, and correctly, that the Comptroller General’s comment was directed to the Value Engineering Incentive Clause associated with Fixed-Price Incentive (Firm Target) Contracts and not the clause to be used in a Firm Fixed-Price Contract of the sort here at issue. However, it must be noted that the Comptroller General’s comment as to the retention of profits was pertinent to both forms of contracts. It is therefore clear, that at the least the subcommittee was made aware by the Comptroller General’s comment that the language criticized, which with variations was in the provisions proposed for several types of contracts, could be construed to allow retention of profit on work not done, and that it decided that it would be most consistent with the policy of the clause to reject the Comptroller General’s recommendation.
It is, of course, obvious when one thinks about it, that it is inimical to the achievement of contractor economy and efficiency to allow the idea to dominate, that his profit must be in some fixed ratio to his cost, whether the latter be great or small. We are dealing with a contract clause which on its face indicates that profit should not be reduced because the contractor discovers how to make the job less costly. The policy which underlies the regulations promulgated in connection with the clause demonstrates an intent to induce the cooperation of the contractor by making such cooperation economically attractive. And we are shown that the authors of these regulations were aware that contractors might retain expected profit under the regulations and specifically accepted such practice. By all approaches to contract interpretation it would appear that the plaintiff is in a strong position on the question of retention of expected profits.
Defendant, in support of the opposite conclusion, asserts that the clause calls for an equitable adjustment made in
* * * “equitable adjustment” has become a term of art (in federal contracts) with a commonly understood meaning in the aspect involved in this case (compare Ambrose-Augusterfer Corp. v. United States, 184 Ct. Cl. 18, 33, 394 F. 2d 536, 545 (1968) X, and that accepted content should be followed unless there are very strong counterbalancing reasons. Such a counterweight might be a marked alteration in contest, but if the change is not significant and drastic it should not be sufficient to alter the established meaning of this specialized term. * * *
It is significant that in rejecting the contractor’s claim in General Builders the court allowed for the possibility that under certain circumstances equitable adjustment might be given a different meaning. In the case at bar we have one of those circumstances, an alteration in context with a specific procedure telling how to determine the price adjustment based on the contractor’s cost.
Defendant says that an equitable adjustment must be a fair adjustment and it is not fair for a contractor to retain a profit on work he does not do. As a matter of contract interpretation, we have shown that the general principles of calculating an equitable adjustment are preempted here by the special provision stating how the computation is to be made. If defendant wants us to distort the plain meaning to effectuate our sense of fairness, or revise the contract because we deem it unconscionable, the answer is we cannot do these
Accordingly, the plaintiff’s motion for summary judgment is allowed, and judgment is entered for the plaintiff in the stipulated amount of $5,696.00. Defendant’s cross motion for summary judgment is denied.