Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_12-cv-00526/USCOURTS-casd-3_12-cv-00526-0/pdf.json

Nature of Suit Code: 120
Nature of Suit: Marine Contract Actions
Cause of Action: 28:1333 Admiralty

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

SOUTHWEST MARINE

INCORPORATED, a dissolved

California corporation;

Plaintiff,

v.

RAYMOND MABUS, Secretary of the

Navy,

Defendant.

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Civil No. 3:12-cv-0526-GPC-WMC

ORDER:

(1) GRANTING IN PART AND

DENYING IN PART THE

NAVY’S MOTION FOR

SUMMARY JUDGMENT, (ECF

NO. 22);

(2) GRANTING IN PART AND

DENYING IN PART

SOUTHWEST MARINE

INCORPORATED’S CROSSMOTION FOR SUMMARY

JUDGMENT, (ECF NO. 27)

INTRODUCTION

Before the Court in this appeal of a decision by the Armed Services Board of

Contract Appeals (“ASBCA”) is defendant Raymond Mabus’s (“Navy”) Motion for

Summary Judgment, (ECF No. 22), and plaintiff Southwest Marine Incorporated’s

(“SMI”) Cross-Motion for Summary Judgment, (ECF No. 27). Both parties have filed

replies in support of their respective motions. (ECF Nos. 30, 31.) The Court finds the

motions suitable for disposition without oral argument. See CivLR 7.1.d.1. After a

review of the parties’ briefs, administrative record, and applicable law, the Court will

GRANT IN PART AND DENY IN PART the Navy’s Motion and GRANT IN

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PART AND DENY IN PART SMI’s Cross-Motion for Summary Judgment.

BACKGROUND

This case centers on a 1985 contract between the Navy and SMI’s predecessorin-interest, Northwest Marine Iron Works (“NW Marine”), for the overhaul of the

U.S.S. Duluth, a naval ship. After NW Marine completed performance on the contract

and was paid for its work, the Navy determined it had overpaid NW Marine because

some of the costs NW Marine incurred while performing the contract were later

forgiven by NW Marine’s creditors following bankruptcy proceedings. 

After a lengthy procedural history, the Ninth Circuit determined the Navy was

entitled to some reimbursement in light of the debt concessions NW Marine obtained

from its creditors. The Ninth Circuit thus remanded the matter to the ASBCA to

determine the quantum owed to the Navy in light of the debt concessions.

The ASBCA determined the amount ofthe debt concessions attributable to work

on the Duluth (and therefore creditable to the Navy) to be $1,728,522. After

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considering payments made from the Navy to NW Marine and applying certain

adjustments, the ASBCA determined the amount owed the Navy $1,104,479, plus

interest from August 14, 1989, through the date of payment. (A34.) Disagreeing with

this outcome, SMI filed the instant action for review of the ASBCA’s determination.

I. Factual Background

The underlying facts of this case are fully set forth in the decision by the

Honorable Irma E. Gonzalez, U.S. DistrictJudge, and the NinthCircuit’s review ofthat

decision, and do not bear repeating here. See Dalton v. Sw. Marine, Inc., 1998 WL

919360, at *2-4 (S.D. Cal. Aug. 27, 1998); Sw. Marine, Inc. v. Danzig, 217 F.3d 1128,

1132-35 (9th Cir. 2000). The relevant facts for purposes of these proceedings pertain

to specific contract provisions and specific dollar amounts used in calculating the

reimbursement owed to the Navy as follows.

This amount includes a portion of the debt concession by Oregon’s State Accident Insurance

1

Fund (“SAIF”). SMI asserts this debt concession should not have been included as a credit to the

Navy. Indeed, this assertion forms the basis of Count III of SMI’s Complaint. (Compl. ¶¶ 71-77.)

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A. Contract & Relevant Clauses

The contract at issue is a fixed-price incentive contract, which the Federal

Acquisition Regulation (“FAR”) describes as:

a fixed-price contract that provides for adjusting profit and establishing

the final contract price by application of a formula based on the

relationship of total final negotiated cost to total target cost. The final

price is subject to a price ceiling, negotiated at the outset.

48 C.F.R. § 16.403(a). More specifically, the contract at issue is a firm-target, fixedprice incentive contract, which the FAR explains as follows:

A fixed-price incentive (firm target) contract specifies a target cost, a

target profit, a price ceiling (but not a profit ceiling or floor), and a profit

adjustment formula. These elements are all negotiated at the outset. The

price ceiling isthe maximumthat may be paid to the contractor, except for

any adjustment under other contract clauses. When the contractor

completes performance, the parties negotiate the final cost, and the final

price is established by applying the formula. When the final cost is less

than the target cost, application of the formula results in a final profit

greater than the target profit; conversely, when final cost is more than

target cost, application of the formula results in a final profit less than the

target profit, or even a net loss. If the final negotiated cost exceeds the

price ceiling, the contractor absorbs the difference as a loss. Because the

profit varies inversely with the cost, this contract types provides a

positive, calculable profit incentive for the contractor to control costs.

48 C.F.R. § 16.403-1 (emphasis added). Thus, the key figuresfor determining the final

price on firm-target, fixed-price incentive contract include the target cost, the total

target profit, and the total final negotiated cost. The ASBCA determined these figures

to be:

• Total Target Cost: $17,582,184

• Total Target Profit: $550,724

• Total Final Negotiated Cost: $22,738,540

These figures are largely undisputed. The only dispute as to these figures, which is 2

These figures were the result of modifications to the contract. The initial figures were as 2

follows:

• Target Cost: $12,282,010

• Target Profit: $-0-

• Target Price: $12,282,010

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discussed in connection with Count III of SMI’s Complaint, pertains to the inclusion

of a portion of the debt concession by Oregon’s State Accident Insurance Fund

(“SAIF”) in determining the total final negotiated cost. In determining whether this,

and other debt concessions, were creditable to the Navy, the ASBCA relied on the FAR

Credits provision, FAR § 31.201-5 (“Credits Clause”), which wasincorporated into the

contract, and which provides:

The applicable portion of any income, rebate, allowance, or other credit

relating to any allowable cost and received by or accruing to the

contractor shall be credited to the Government either as a cost reduction

or by cash refund.

(Emphasis added.) After the ASBCA determined the amount of the debt concessions

creditable to the Navy, it was able to determine the total final negotiated cost set forth

above.

Once the total negotiated final cost, total target cost, and total target profit were

determined, the ASBCA plugged them into a “profit adjustment formula” to determine

the total final price of the contract, which, in no event, wasto exceed the ceiling price.3

In this case, the adjustment formula comes from another standard FAR provision that

was also incorporated into the contract, namely, the Incentive Price Revision–Firm

Target provision, FAR § 52.216-16 (“IPR Clause”). 

The IPR Clause provides that, after receiving a contractor’s final statement of

costs, the contracting officer shall promptly establish the total final price as follows:

(a) General. The supplies or services identified in the Schedule as Items

0001, 0005, 0009 [are] subject to price revision in accordance with this

clause; provided that in no event shall the total final price of these items

exceed the ceiling price of one hundred thirty (130%) percent of the target

NW Marine initially offered to perform the contract for zero profit because it never expected

to perform the contract at the initial target cost. (A47.) Rather, NW Marine expected it would be able

to perform the Contract at the ceiling price (i.e., 130% of the initial target cost). (Id.) Given this

bidding strategy, “both parties expected an eventual increase in the billing price from target cost.” 

(A48.)

The original ceiling price was set at $15,996,613. Through the modifications referenced in 3

footnote 2, the ceiling price was ultimately raised to $23,295,755. NW Marine was paid for its costs

up to this ceiling price. Though, for purposes of applying the IPR Clause’s adjustment formula, the

ceiling price was determined to be $22,856,839. These amounts are not in dispute.

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cost for these Items . . . .

* * *

(d) Price Revision. Upon the Contracting Officer’s receipt of the data

required by paragraph (c) above, the Contracting Officer and the

Contractor shall promptly establish the total final price of the items

specified in (a) above by applying to final negotiated cost an adjustment

for profit or loss, as follows:

(1) On the basis of the information required by paragraph (c)

above, together with any other pertinent information, the parties

shall negotiate the total final cost incurred or to be incurred for

supplies delivered (or services performed) and accepted by the

Government and which are subject to price revision under this

clause.

(2) The total final price shall be established by applying the total

final negotiated cost an adjustment for profit or loss, as follows:

* * *

(ii) If the total final negotiated cost is greater than the total

target cost, the adjustment isthe total target profit, lessthirty

(30) percent of the amount by which the total final

negotiated cost exceeds the total target cost.

(A4-5); 48 C.F.R. § 52.216-16 (emphasis added).

Because the total final negotiated cost ($22,738,540) was greater than the total

target cost ($17,582,184), the ASBCA took the total target profit ($550,724) into

consideration and applied the adjustment formula set forth in subsection (d)(1)(2)(ii)

of the IPR Clause as follows:

Total Final Price = Total Final Negotiated Price + (Total Target Profit –

(.3(Total Final Negotiated Price – Total Target Cost))

Total Final Price = $22,738,540 + ($550,724 – (.3($22,738,540 –

$17,582,184))

Total Final Price = $22,738,540 + ($550,724 – (.3($5,156,356))

Total Final Price = $22,738,540 + ($550,724 – $1,546,906)

Total Final Price = $22,738,540 – $996,183

Total Final Price = $21,742,357

The ASBCA then subtracted the total final price ($21,742,357) from the ceiling price

($22,856,839), accounted for amounts retained by the Navy ($10,003), and finally

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reached a total of $1,104,479 asthe amount due to the Navy as a result of NW Marine’s

debt concessions. While a portion of the Total Final Negotiated Price is disputed as

to the SAIF debt concession, these calculations are not in dispute.

The ASBCA then relied on subsection (g) of the IPR Clause to award the Navy

interest from August 14, 1989. This subsection provides:

(g) Quarterly limitation on payments statement. This paragraph (g) shall

apply until final price revision under this contract has been completed.

(1) Within 45 days after the end of each quarter of the Contractor’s

fiscal year in which a delivery is first made (or services first

performed) and accepted by the Government under this contract,

and for each quarter thereafter, the Contractor shall submit to the

contract administration office . . . a statement, cumulative from the

beginning of the contract, showing–

(i) The total contract price of all supplies . . . for which final

prices have been established;

(ii) The total costs (estimated to the extent necessary)

reasonably incurred for, and properly allocable solely to, the

supplies delivered (or services performed) . . . for which

final prices have not been established;

(iii) The portion of the total target profit . . . that is in direct

proportion to the supplies delivered (or services performed)

. . . for which final prices have not been

established–increased or decreased in accordance with

subparagraph (d)(2) above, when the amount stated under

subdivision (ii), immediately above, differs from the

aggregate target costs of the supplies or services; and

(iv) The total amount of all invoices or vouchers or supplies

delivered (or services performed) . . . .

(2) Notwithstanding any provision of this contract authorizing

greater payments, if on any quarterly statement the amount under

subdivision (1)(iv) above exceeds the sum due the Contractor, . . . 

the Contractor shall immediately refund or credit to the

Government the amount of this excess. . . .

(3) If the Contractor fails to submit the quarterly statement within

45 days after the end of each quarter and it is later determined that

the Government has overpaid the Contractor, the Contractor shall

repay the excess to the Government immediately. Unless repaid

within 30 days after the end of the statement submittal period, the

amount of the excess shall bear interest, computed fromthe date the

quarterly statement was due to the date of repayment, at the rate

established in accordance with the Interest clause.

(Emphasis added.) The ASBCA applied subsection (g) to award the Navy interest

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upon the reimbursement amount because no quarterly statement wassubmitted in 1989

when NW Marine obtained the debt concessions and because it has been “later

determined” that the Navy overpaid NW Marine.

4

JURISDICTION

Jurisdiction over this case arises under 41 U.S.C. §§ 7101-7109 of the Contract

Disputes Act, which provide that the Suits in Admiralty Act, 46 U.S.C. §§ 30901-

30918, and the Public Vessels Act, 46 U.S.C. §§ 31101-31113, govern claims arising

out of maritime contracts against the government and “preserve the traditional

exclusive jurisdiction of the federal district courts over admiralty or maritime cases.” 

L-3 Servs., Inc. v. United States, 104 Fed. Cl. 30, 33 (Fed. Cl. 2012); 28 U.S.C. § 1333

(providing exclusive federal district court jurisdiction for “any civil case of admiralty

or maritime jurisdiction”).

STANDARD OF REVIEW

Because Congress clearly provided for judicial review under the Contract

Disputes Act, the provisions of the Contract Disputes Act trump the default provisions

for judicial review under the Administrative Procedure Act. Bowen v. Massachusetts,

487 U.S. 879, 903 (1988) (“When Congress enacted the [Administrative Procedure

Act] to provide a general authorization for review of agency action in the district

courts, it did not intend that general grant of jurisdiction to duplicate the previously

established specialstatutory proceduresrelating to specific agencies”);Reflectone,Inc.

v. Dalton, 60 F.3d 1572, 1574-75 (Fed. Cir. 1995) (“The [Contract Disputes Act]

dictates the standards this court applies in reviewing decisions of agency contract

appeal boards”).

The Contract Disputes Act provides that, on appeal, “the decision of the agency

board on a question of law is not final or conclusive,” but “the decision of the agency

board on a question of fact is final and conclusive and may not be set aside unless the

It is undisputed that, even though subsection (g) applies until final price revision under the 4

contract was completed, NW Marine ceased submitted quarterly statements in 1987 after completing

work on the Duluth.

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[finding] is . . . [1] fraudulent, arbitrary, or capricious; . . . [2] so grossly erroneous as

to necessarily imply bad faith; or . . . [3] not supported by substantial evidence.” 41

U.S.C. § 7107(b).

Although courts review ASBCA conclusions of law without deference, the

ASBCA’s legal interpretations are generally “given careful consideration because of

its expertise in interpreting government contracts.” White v. Edsall Const. Co., Inc.,

296 F.3d 1081, 1084 (Fed. Cir. 2002). Only minimal deference, however, is due with

regard to the ASBCA’s interpretations of the FAR. See Perry v. Martin Marietta Corp.,

47 F.3d 1134, 1137 (Fed. Cir. 1995) (“[W]hile an agency’s interpretation of its own

regulations is normally entitled to considerable deference, such deference is not

required here because the FAR and the underlying CAS are not regulations of the

Department of Defense.” (citations omitted)).

Summary judgment is the appropriate vehicle in the Ninth Circuit for reviewing

an administrative agency’s final determination. See Nw. Motorcycle Ass’n v. U.S.

Dept. of Agriculture, 18 F.3d 1468, 1472 (9th Cir. 1994).

ISSUES ON APPEAL

In its Complaint and Cross-Motion, SMI claims the ASBCA decision awarded

the Navy “an unexpected and inequitable windfall and is based on an overly literal and

incorrect interpretation” of the Contract. SMI contends this Court should reverse the

ASBCA’s decision because the ASBCA: 

1. erred in interpreting and applying the IPR Clause’s final price adjustment

formula;

2. erred in awarding interest under the IPR Clause’s quarterly statement

provision; and

3. erred in including a debt concession by Oregon’s State Accident

Insurance Fund (“SAIF”) in calculating the cost reimbursement due to the

Navy.

/ / /

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DISCUSSION

I. IPR Clause

The ASBCA applied the adjustment formula set forth in the IPR Clause

according to its plain language, resulting in a total reimbursement amount of

$1,104,479. (A26.) This adjusted reimbursement amount means that, even after taking

into account the debt concessions, NW Marine will have performed the contract at a

net loss.

SMI challenges the ASBCA’s interpretation and application of the IPR Clause

in Count I of its Complaint. (Compl. ¶¶ 43-56.) SMI contends the terms “profit” and

“loss” in the IPR Clause are ambiguous and that the ASBCA erred by refusing to

consider “the contract as a whole, the parties’ reasonable expectations and course of

performance, and the policy considerations [underlying firm-target, fixed-price

incentive contracts].” Then, relying on its assertion that the terms “profit” and “loss”

are ambiguous, SMI contendsthe IPR Clause should be interpreted in a way that would

not result in a “negative profit” or “penalty” to NW Marine (so long as its costs

remained below the ceiling price), but instead in a way that would ensure NW Marine

would be paid for its costs up to the ceiling price. SMI contends that a mechanical

reading and application of the IPR Clause leads to an absurd and inequitable result.

The Navy, on the other hand, assertsthe ASBCA applied the IPR Clause without

error. The Navy asserts the IPR Clause is unambiguous and should be applied as the

ASBCA applied it, notwithstanding the result being that NWMarine would suffer a net

loss on the contract. The Navy asserts SMI’s proffered extrinsic evidence isimmaterial

to interpreting and applying the IPR Clause, given that it is derived from a federal

regulation. The navy assert regulations incorporated into a contract should be

interpreted according to the intent of the regulation’s drafters—not the parties to the

contract.

The Court first addresses SMI’s contention that the ASBCA should have

considered extrinsic evidence asto the parties’ expectations and course of performance.

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Having considered this argument, the Court agrees with the Navy that, when

interpreting a provision from the FAR that is incorporated into a contract (such as the

IPR Clause), courts look to the rules of statutory, rather than contract, interpretation. 

See e.g., Raytheon Co. v. United States, 105 Fed. Cl. 236, 255 (Fed. Cl. 2012)

(“Because the . . . agreement is taken directly from [the] FAR . . ., the court agrees . .

. that it must construe the provision to effectuate the intent of the promulgators and not

the parties . . . . The fact that the regulatory language is contained in a contract does

not change its interpretation.”).

SMI provides no authority, and the Court has found none, to support SMI’s

assertion that the parties’ intentions, understandings, prior negotiations, or course of

performance are relevant in interpreting and applying regulatory language incorporated

into a contract. The Court therefore rejects SMI’s argument that the ASBCA erred by

refusing to consider “the contract as a whole, the parties’ reasonable expectations and

course of performance” in interpreting and applying the IPR Clause. It may be,

however, that—if the IPR Clause is deemed ambiguous—the ASBCA erred by failing

to consider (under the rules of statutory interpretation) the policy considerations

underlying firm-target, fixed-price incentive contracts. The Court thus proceeds to

addressing SMI’s argument that the IPR Clause is ambiguous.

When interpreting a statute, courts “look first to the plain language ofthe statute,

construing the provisions of the entire law, including its object and policy, to ascertain

the intent of Congress.” Nw. Forest Res. Council v. Glickman, 82 F.3d 825, 830 (9th

Cir. 1996). “When statutory language is clear and unambiguous, . . . a judicial inquiry

into the meaning of the statute ends.” United States v. Molinaro, 876 F.2d 1432, 1433

(9th Cir. 1989) (per curiam). When statutory language is ambiguous, courts “may

consider extrinsic evidence of the legislature’s intent.” In re First T.D. & Inv., Inc.,

253 F.3d 520, 527 (9th Cir. 2001). 

Statutory terms should be “construed consistently with their everyday meaning,

including by reference to the dictionary absent statutory definition or definitive clue.” 

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Natural Res. Def. Council, Inc. v. Winter, 518 F.3d 658, 681 (9th Cir. 2008), rev’d on

other grounds, 555 U.S. 7 (2008), (citing Watson v. United States, 552 U.S. 74, 79

(2007)). Courts should avoid interpretations that “would produce absurd results.” Ma

v. Ashcroft, 361 F.3d 553, 558 (9th Cir. 2004) (citing United States v. Wilson, 503

U.S. 329, 334 (1992)).

SMI’s argument that the IPR Clause is ambiguous stems largely from its reading

of the statutory description of firm-target, fixed-price incentive contracts as set forth

in FAR § 16.403-1. Relying on this description, SMI argues such contracts operate to,

on one hand, provide the contractor with a profit incentive for keeping costs at or

below the initially agreed-upon target cost, while, on the other hand, capping the

government’s potential liability on the contract through the initially agreed-upon

ceiling price. SMI argues that, given this scheme, a contractor can never suffer a loss

unless it exceeds the ceiling price, and, even then, the contractor’s loss would be

limited to the amount by which it exceeded the ceiling price. Then, on the basis of

these arguments, SMI argues the words “loss” and profit (as used in the IPR clause)

and the words “loss” and “net loss” (as used in the contract description) must be

ambiguous because a mechanical application of the IPR Clause results in NW Marine

incurring a net loss on the contract even though it never exceeded the ceiling price.

In the first instance, the Court notes that the contract description is merely that:

a description. The Court nonetheless considersthe contract description given its place

in the same regulatory scheme from which the IPR Clause is derived. 

Having reviewed and considered the contract description, the Court rejects

SMI’s premise that a contractor can never suffer a loss under a firm-target, fixed price

incentive contract unless it exceeds the ceiling price. Nothing in the contract

description can be reasonably interpreted to arrive at this result. 

As to the ceiling price, the contract description merely states that it “is the

maximum that may be paid to the contractor” and is “not a profit ceiling or floor.” 

FAR § 16.403-1(a) (emphasis added). In that regard, the ceiling price is intended to

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protect the government, not benefit the contractor. See Northrop Grumman Corp. v.

United States, 47 Fed. Cl. 20, 81 (2000) (“The Government . . . was well positioned to

have a ceiling on its potential liability.”). SMI acknowledge as much in its Crossmotion. (ECF No. 27-1 at 17 (“The contractor has a ‘positive’ incentive to make a

profit, while the government is protected from cost overruns by the ceiling price.”

(emphasis added)).) On this basis, it cannot be said that the ceiling price represents a

contractor’s guaranteed allowance. It is merely a cap on the government’s liability.

The remainder of the contract description further supports the Court’s rejection

of SMI’s argument that a contractor can only suffer a lossif it exceeds the ceiling price.

FAR § 16.403-1 explains:

When the contractor completes performance, the parties negotiate the

final cost, and the final price is established by applying the formula. 

When the final cost is less than the target cost, application of the formula

results in a final profit greater than the target profit; conversely, when

final cost is more than target cost, application of the formula results in a

final profit less than the target profit, or even a net loss. If the final

negotiated cost exceeds the price ceiling, the contractor absorbs the

difference as a loss.

(Emphasis added.) The use of the words “lessthan the target profit, or even a net loss”

in the contract description makes clear that its draftersintended to provide for instances

where a contractor may suffer a “net loss” beyond a complete diminution of the target

profit.

The IPR Clause itself is similarly clear with regard to the possibility of a

contractor suffering a loss. Subsection (d) of the IPR Clause provides that, after

receiving the required information, the contracting officer “shall promptly establish the

total final price . . . by applying to final negotiated cost an adjustment for profit or

loss.” Subsection (d)(2) similarly provides: “The total final price shall be established

by applying the total final negotiated cost an adjustment for profit or loss . . . .” As the

ASBCA observed, nothing in the IPR Clause limits a contractor’s loss to costs that

exceed the ceiling price.

Reading the IPR Clause in a way that permits a contractor to suffer a loss even

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if the contractor keeps its costs at or below the ceiling price is consistent with the

remainder of the contract description. The contract description provides that,

“[b]ecause the profit varies inversely with the cost, this contract type provides a

positive, calculable profit incentive for the contractor to control cost.” Providing a

contractor with a “positive, calculable profit incentive” is not mutually exclusive with

the contractor suffering a net loss if the final negotiated cost exceeds the target cost by

so much that, not only is the contractor’s target profit completely depleted, but, in fact,

the contractor begins to absorb its excess costs as a net loss. This inverse relationship

between a contractor’s costs and any potential profit or loss is irrelevant to the ceiling

price.

Moreover, NW Marine assumed the risk of incurring a net loss when it opted to

perform the contract at what was a “considerably understated” initial target cost,

realizing all along that it would only ever be able to perform the contract at or above

the initial ceiling price. (A47.) In this regard, the Court finds it is not absurd for NW

Marine to have suffered a net loss per its failure to control costs. Conversely, had NW

Marine controlled its costs and performed below its target cost, the Navy would have

been on the hook for paying NW Marine a final profit greater than the target profit. As

the Northrop court concluded, this is a reasonable apportionment of the risks. See 47

Fed. Cl. at 48.

Because the Court rejects SMI’s premise that a contractor can never suffer a loss

unless it exceeds the ceiling price, the Court does not reach SMI’s ultimate contention

that the terms “profit” and “loss” are ambiguous as used in the IPR Clause. Rather, the

Court concludes the ASBCA’s interpretation and application of the IPR Clause was

without error.

II. Interest

The ASBCA awarded the Navy interest on the reimbursement amount, accruing

from August 14, 1989, through the date of payment, pursuant to subsection (g) of the

IPR Clause. (A32-34.)

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SMI challenges the ASBCA’s interest award in Count II of its Complaint.

(Compl. ¶¶ 57-70.) SMI argues the ASBCA erred in determining “the debt concessions

made by [NW Marine] in April 1989 were a ‘major event’ that triggered a requirement

for [NW Marine] to file a quarterly statement for the period ending June 30, 1989

restating Contract costs to provide the credits [finally] determined by the ASBCA in

June 2011.” (Id. ¶¶ 62-63.) Said another way, SMI argues “[t]he IPR Clause cannot

be read to require cost statements be made three years after contract completion to

reflect credits not determined to exist, or quantified, until many years after June 30,

1989.”

SMI further asserts that, in accordance with FAR’s Cost Accounting Standard

401, NW Marine never recorded the debentures awarded to its creditors during

bankruptcy proceedings as contract costs; thus, the subsequent debt concessions could

not have changed NW Marine’s recorded costs. In other words, SMI argues it should

be insulated from the ASBCA’s award of interest because Cost Accounting Standard

401 prevents SMI from allocating costs differently than the manner in which NW

Marine originally (and, as later determined, incorrectly) recorded them.

5

The Navy asserts subsection (g) of the IPR Clause required NW Marine to

submit quarterly statements after performance began until final price revision under

contract has been completed. The Navy contends that, because NW Marine stopped

submitting quarterly statements in April 1987, the Navy is entitled to recover interest

on whatever amount is finally deemed reimbursable to the Navy.

FAR § 52.216-16 provides that subsection (g) “shall apply until final price

revision under this contract has been completed.” Subsection (g)(1) further explains

that, “[w]ithin 45 days after the end of each quarter . . . in which . . . services are first

performed . . . , and for each quarter thereafter, the Contractor shall submit . . . a

SMI also contends the ASBCA erred in awarding interest because no refund is due to the

5

Navy until after the final price is established. (Id. ¶¶ 68-70.) The provision of the IPR Clause SMI

relies on for this proposition, however, refers to an inapplicable section of the IPR Clause pertaining

to contract modifications. See FAR § 52.216(f)(3).

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statement.” (Emphasis added.) The Court therefore agrees with the Navy that

subsection (g) applies until final price revision has been completed, and that final price

revision here has yet to occur.

On one hand, the Court agrees with SMI that the words “major event” do not

appear in subsection (g), and, therefore, a “major event” (however defined) could not

have triggered the obligation to file a quarterly statement. This, however, misses the

point that the requirements of subsection (g) requires no trigger at all, so long as final

price revision is incomplete. The plain language of subsection (g) requires quarterly

statements to be filed until final price revision is complete. Thus—given the

controversy surrounding the debt concessions and the potential accrual of interest

under subsection (g)—it is unclear why NW Marine and then SMI would not comply

with the plain language of this provision.

Subsection (g)(3) provides: “If the Contractor fails to submit a quarterly

statement within 45 days after the end of each quarter and it islater determined that the

Government has overpaid the Contractor, the Contractor shall repay the excess

immediately.” FAR § 52.216-16(g)(3). Subsection (g)(3) goes on: “Unless repaid

within 30 days after the end of the statement submittal period, the amount of the excess

shall bear interest.”

Here, it is undisputed that NW Marine and then SMI “fail[ed] to submit a

quarterly statement within 45 days after the end of each quarter.” It is also undisputed

that it has been “later determined” that the Navy overpaid NW Marine in light of the

debt concessions. It is further undisputed that the amount of this overpayment has not

been finally determined and may not, given the possibility of appeals following this

Order, be finally determined for quite some time.

Applying subsection (g)(3) to these, the Court findsit is unclear whether interest

begins to accrue 30 days following the end of the statement submittal period in which

NW Marine originally obtained the debt concessions (i.e., the second quarter of fiscal

year 1989), or 30 days following the end of the submittal period in which the amount

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of the overpayment is finally determined (i.e., at some point in the future). In this

regard, SMI persuasively argues that, even if it had submitted a quarterly statement

following the second quarter of fiscal year 1989, it is unclear what would have been

included on that statement.

Subsection (g) requires quarterly statements to show: (1) the total price of all

services performed for which final prices have been established;(2) total costs incurred

for, and properly allocable solely to, the services performed and for which final prices

have not been established; (3) the total profit due as increased or decreased according

to the IPR adjustment formula in subsection (d)(2); and (4) the running total amount

of all invoices. FAR § 52.216-16(g)(1). 

Thus, had a quarterly statement been submitted following the second quarter of

fiscal year 1989, it is unclear which of the foregoing categories the debt concessions

would have fallen under. Perhaps they could have been included under category (2)

as a decrease in costs for which final prices have not been established. Even if the debt

concessions fell under category (2), however, the portion of the debt concessions that

is “properly allocable solely to” performance on the Duluth was only recently

determined by the ASBCA upon remand from the Ninth Circuit. This determination,

however, is not final. Indeed, as discussed below, SMI challenges the ASBCA’s

inclusion of the SAIF debt concession in Count III of its Complaint.

Based on the foregoing, the Court findsit would be absurd to read subsection (g)

as requiring the accrual of interest on an amount that has yet to be finally determined. 

See Ma, 361 F.3d at 558 (stating that courts should avoid statutory interpretations that

“would produce absurd results”). The Court instead reads subsection (g)(3) has

requiring the accrual of interest on overpayments not repaid within 30 days following

the statement submittal period for the quarter in which the amount of any overpayment

is finally determined. Accordingly, the Court finds the ASBCA erred in determining

that the Navy is entitled to interest on the reimbursement amount from August 14,

1989, through the date of repayment.

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III. SAIF Debt Concession

Among other debt concessions obtained by NW Marine, was a debt concession

from SAIF, Oregon’s workers compensation insurance fund. The ASBCA determined

the debt concession was properly booked (per accounting standards) in fiscal year

1986, even though SAIF conceded the debt in fiscal year 1989. The ASBCA further

determined, under the Credits Clause, (see p.4, supra), that a portion of the SAIF debt

concession related to NW Marine’s work on the Duluth in 1986 and was therefore

creditable to the Navy. (A21.)

SMI challenges the ASBCA’s decision to include the SAIF debt concession in

the amount creditable to the Navy in Count III of its Complaint. (Compl. ¶¶ 71-77.) 

SMI contends the ASBCA erred by including the SAIF debt concession because Cost

Accounting Standard 416 required NW Marine to book the debt concession as a

“refund” of premiums in 1989, when the “adjustment to premium costs” occurred.

The Navy contends that, whether the SAIF debt concession was booked in 1986

or 1989 is irrelevant, as the only question in determining whether the debt concession

is creditable to the Navy is whether the debt concession “relates to” allowable costs

under the contract. The Navy argues that, because the contract is still open and subject

to final price revision, it should make no difference when the debt concession was

booked. The Court agrees with the Navy.

The Credits Clause provides: “The applicable portion of any income, rebate,

allowance, or other credit relating to any allowable cost and received by or accruing

to the contractor shall be credited to the Government either as a cost reduction or by

cash refund.” 48 C.F.R. § 31.201-5 (emphasis added). Cost Accounting Standard 416

provides: “The premium cost applicable to a given policy term shall be assigned pro

rata among the cost accounting periods covered by the policy term,” and “[a] refund

. . . shall become an adjustment to the pro rata premium costs for the earliest cost

accounting period in which the refund . . . is actually or constructively received.” 48

C.F.R. § 9904.416-50(a)(1)(ii) (emphasis added). 

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It is thus clear that the Credits Clause and Standard 416 do not conflict with one

another. That is, regardless of whether the SAIF debt concession was booked in

accordance with Standard 416, it still “relat[es] to an[] allowable cost” for which NW

Marine was paid by the Navy, namely, the insurance costs NW Marine incurred while

performing the contract.

Even if Standard 416 somehow prevented the SAIF debt concession from being

included in the amount determined to be creditable to the Navy, the Court agrees with

the ASBCA’s finding that the debt concession was not a “refund” for purposes of

Standard 416. Instead, SAIF merely forgave a previously agreed to premium that NW

Marine never paid to SAIF in the first place. As such, the Court finds the ASBCA did

not err by including the SAIF debt concession in the amount determined to be

creditable to the Navy. Accordingly, the total final negotiated cost used by the ASBCA

in applying the IPR Clause, which took the SAIF debt concession into consideration,

(see pp. 3-4, supra), was determined without error.

CONCLUSION & ORDER

Based on the foregoing, IT IS HEREBY ORDERED that:

1. The Navy’s Motion for Summary Judgment, (ECFNo. 22), is GRANTED

as to Counts I and III of SMI’s Complaint and DENIED as to Count II of

SMI’s Complaint;

2. SMI’s Cross-motion for Summary Judgment, (ECF No. 27), is DENIED

as to Counts I and III of SMI’s Complaint and GRANTED as to Count II

of SMI’s Complaint;

3. TheClerk ofCourt shall therefore enterFINALJUDGMENTasfollows:

The ASBCA’s determination that the quantum due to the Navy is

$1,104,479 is AFFIRMED. The ASBCA’s determination that the Navy

is owed interest on this amount from August 14, 1989, through the date

of repayment is REVERSED. Interest on the quantum due to the Navy

will begin to accrue if the quantum due to the Navy is not repaid to the

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Navy within 30 days following the statement submittal period for the

quarter in which the quantum is finally determined.

DATED: February 19, 2014

HON. GONZALO P. CURIEL

United States District Judge

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