Source: http://openjurist.org/437/f2d/1371
Timestamp: 2015-04-01 04:54:41
Document Index: 29870418

Matched Legal Cases: ['art 4', '§ 15', '§ 15', '§ 15', '§ 15', '§ 15', '§ 15', '§ 15', '§ 15']

437 F2d 1371 Nolan Brothers Inc v. United States | OpenJurist
437 F. 2d 1371 - Nolan Brothers Inc v. United States	Home437 f2d 1371 nolan brothers inc v. united states
437 F2d 1371 Nolan Brothers Inc v. United States 437 F.2d 1371
NOLAN BROTHERS, INC.v.The UNITED STATES.
Charles E. Carlsen, Minneapolis, Minn., attorney of record, for plaintiff. Carlsen, Greiner & Law, Minneapolis, Minn., Jack D. Eades and Clark, West, Keller, Clark & Ginsberg, Dallas, Tex., of counsel.
M. Morton Weinstein, Washington, D. C., with whom was Asst. Atty. Gen. William D. Ruckelshaus, for defendant. Robert E. Tressel, Baltimore, Md., of counsel.
John A. McWhorter, Washington, D. C., amicus curiae, for The Associated General Contractors of America, Inc. King & King, Washington, D. C., Harold I. Rosen, Harrisburg, Pa., and Joseph M. Zorc, Washington, D. C., of counsel.
"The claimant, Nolan Brothers, Incorporated, undertook in August 1962 to construct for the Corps of Engineers two rock jetties out into the Gulf of Mexico from Matagorda Peninsula in Texas. The contract price ultimately amounted to some nine million dollars. In March 1964, when about one-third of the work was done, the defendant exercised its contract right to terminate performance for the Government's convenience. The contractor did not contest this action but submitted, under the convenience-termination article, its termination claims on the total-cost basis, and efforts were made to settle the demands by negotiation. These were unsuccessful and, as the termination clause contemplated, the contracting officer then issued a unilateral determination in which he allowed the plaintiff $5,386,183 out of the $8,153,902 sought. Nolan Brothers appealed to the Corps of Engineers Board of Contract Appeals which granted only $101,315 more. This action followed." Nolan Brothers, Inc. v. United States, 405 F.2d 1250, 1252, 186 Ct.Cl. 602, 604 (1969). In that first opinion we held that the convenience-termination was lawful, and that an award pursuant to that provision of the contract was the contractor's sole remedy. Under that ruling, we dismissed, without passing on its truth, the first count of the petition in which the plaintiff alleged that the Government breached the contract by furnishing an inadequate design and defective specifications for the jetties, and also by negligently failing to apprise the contractor of certain facts. We then returned the case to the trial commissioner to consider, "on the basis of the administrative record under the standards of the Wunderlich Act", the remaining claim that the Board of Contract Appeals had been wrong in failing to enlarge the termination award.1 The commissioner was also to consider the counterclaims filed by the Government attacking aspects of the case in which the Board upheld the contractor. Plaintiff asks for $1,272,555 additional, and the defendant demands $1,155,190 back.
Trial Commissioner Mastin G. White has written a careful and comprehensive opinion covering the termination-award issues still in dispute, and each of the parties has sought review of certain adverse parts of his recommendation.2 We depart from him on the major question relating to pre-termination equipment ownership expense for interest, taxes, storage, and insurance. This is discussed in Part I of this opinion (along with related subsidiary matters). In Part II, we adopt, for the most part, Commissioner White's opinion on the remaining issues in the case.
* Pre-termination Equipment Ownership Expense
The convenience-termination article (clause 23) provided (in paragraph (e)) that, in such a termination, the contractor should be reimbursed for: the total cost of all contract work performed prior to termination; the cost of settling and paying claims arising out of the termination under subcontracts or orders; the reasonable cost of the preservation and protection of property; any other reasonable costs incidental to the termination; and a specified percentage as profit. Under these standards, the parties have agreed that the plaintiff is entitled to be reimbursed for the expense arising from the ownership of its equipment on the job prior to the termination of the contract. The parties do not agree, however, concerning the amount that should be allowed with respect to this item. The Board awarded $875,000 for equipment ownership expense during the pre-termination period. Plaintiff contends that the Board should have allowed it $1,502,956. On the other hand, the defendant alleges in one of its counterclaims that the plaintiff should have been given only $404,118, instead of $875,000.
1. Nolan's controversy with the Board centers on the use of the Contractors' Equipment Ownership Expense Schedule, published by the Associated General Contractors of America, Inc. ("AGC"). This manual, first put out in 1920, is a widely-used guide to construction contractors' equipment ownership expense, reflecting both the experience of equipment owners throughout the country and also the average of operating conditions. In tabular form, the schedule lists numerous forms of construction equipment, and for each one gives the percentages of capital investment in the item to be charged off annually for the three following expense-categories: depreciation; major overhauling and repair; interest, taxes, storage, insurance. It also states the average number of months that the particular item is likely to be used per year, and the contractor's expense for that item per working month.3
The theory of the Schedule, to use its own words, is that "the annual equipment expense * * * must be recovered by a contractor from the work that he performs. To do this, it is necessary to establish for each item a monthly charge of such amount that when multiplied by the average of working months it will yield a revenue equal to the annual expense * * *." For instance, the expense of storing equipment between jobs must be recovered from the jobs worked, even though no storage may have occurred during the performance of those particular jobs. All proper expenses during the life of the item are allocable and allocated to the periods the equipment is actually working.
In determining the amount of plaintiff's pre-termination equipment ownership expense, the Board based the allowances for depreciation, and for major repairs and overhaul, on this AGC Schedule, but it did not do the same for interest, taxes, storage, and insurance. For those classes of cost, it declined to follow the Schedule. Nothing was allowed for interest, and the sum for taxes, storage, and insurance was based on figures said to be the plaintiff's actual expenditures, with respect to the equipment, for those cost-elements during the pre-termination period. Plaintiff's claim is that the AGC Schedule should have been used for the latter group of cost-items, as well as for depreciation and major overhaul. The defendant supports the Board.
The settlement of this dispute turns, not so much on general principles of contract law or on judicial precedent, as on the provisions of a particular Defense Department regulation. The convenience-termination clause in this contract expressly said that "any determination of costs" for a unilateral (i. e. nonnegotiated) termination award, such as we have here, "shall be governed by the principles for consideration of costs set forth in Section 15, Part 4 of the Armed Services Procurement Regulation, as in effect on the date of this contract." One of those cost principles is contained in ASPR 15-402.1, which deals with the very subject before us.4 The meaning and reach of that regulation controls the answer to the controversy. None of the earlier decisions bearing on the AGC Schedule directly involved such a regulation; all were decided as a matter of the common-law of determining contract damages or awards.5
The contractor's position on the ASPR regulation is that this directive mandates use of the AGC Schedule, not only for depreciation and major overhaul, but also for interest, taxes, storage, and insurance. The Board and the trial commissioner, however, consider the Schedule not to be obligatory for the latter group, and defendant supports those rulings. Each side plucks different portions of the ASPR section for sustenance.
Looking solely at the wording of § 15.402.1, supra, note 4, one might be hard put to decide which position is correct. Paragraph (c) appears to favor the plaintiff. It starts out with the flat declaration that "evaluation of costs for the use of construction plant and equipment * * * which are owned or controlled by a contractor or subcontractor and are furnished for the proper and economical performance of a fixed-price type contract [as in this case] shall be based upon" the AGC Schedule (emphasis added). This seems to be an unqualified command to use the whole Schedule, not simply a part of it. The same paragraph also says, later on: "The allowance for equipment ownership expense, computed as provided herein, shall be considered to include all costs of depreciation, major repairs and overhaul, and overhead applicable to the equipment" (emphasis added). "Overhead applicable to the equipment" is one compendious way of covering "interest, taxes, storage, and insurance", and the sentence is most easily read as saying that an allowance based on the AGC Schedule will include those items, as well as depreciation and major overhaul. Defendant argues that the next two sentences of the paragraph show that these items (taxes, insurance, etc.) are not to be included except to the extent actually and properly incurred, but we think that those sentences do no more than caution that, when the AGC Schedule is used, all other allowances for depreciation, major overhaul, and overhead (including the items of taxes, storage, etc.) should be eliminated from the calculation of direct and indirect costs, so as to avoid duplication. Nothing else in paragraph (c) detracts from the indications, mentioned above, that the full Schedule is to be used, not only the entries for depreciation and major overhaul.
On the other hand, paragraph (a) does look the other way, in large part. It talks only of depreciation and major overhaul and explains why the AGC Schedule should be used for those items. Nothing at all is said about overhead, and there is no reference to interest, taxes, storage, or insurance. However, as plaintiff stresses, the paragraph does end with the direct and unqualified statement that "Accordingly, unless the contract specifically provides to the contrary, usage costs for construction plant and equipment under cost-reimbursement type contracts and fixed-price type contracts shall be determined as provided in paragraphs (b) and (c), respectively."
We think that the catalyst which brings these disparate elements of § 15-402.1 into a homogenized solution is the history of the drafting of the provision — a useful aid which we can rightly employ (cf. General Builders Supply Co. v. United States, 409 F.2d 246, 248-249, 187 Ct.Cl. 477, 480-481 (1969)).6 In 1960, the ASPR Committee of the Defense Department appointed a Special Subcommittee to consider cost principles for construction contracts. Among the Subcommittee's initial proposals was, in substance, what is now paragraph (c) of § 15-402.1. At the discussion before the full Committee, the Chairman of the Subcommittee defended use of the AGC Schedule and indicated, unmistakably, that the Schedule was to apply to "depreciation, overhaul, repair, interest, taxes, insurance, storage." The interest item of the Schedule was discussed in particular,7 and there was no doubt that the "interest, taxes, insurance, and storage" entry was to be used, along with depreciation and major overhaul. The Committee minutes show that the "consensus of the members was to permit the policy of using AGC schedules to stand. However, the Special Subcommittee was requested as a separate effort to develop a detailed rationale for the use of the AGC Schedule in lieu of a DOD [Department of Defense] developed document, pointing out the ease of administration and the equity involved."
The Subcommittee rationale, supplied later, first gave reasons why, for fixed-price agreements, use of the AGC Schedule was preferable to a new detailed Defense Department directive specifying government rates or amounts or percentages (such as was available for cost-reimbursement type contracts). Then, in describing the proposed regulation adopting the Schedule (the part which is now paragraph (c) of § 15.402.1), the report employs these significant sentences:
The AGC Schedule develops the ownership expense of construction plant and equipment per working month expressed as a percent of acquisition cost. The monthly allowance completely reimburses the contractor for depreciation (based on assigned service life and average working months per year), overhauling and major repairs, and also includes 11% for interest, taxes, storage and insurance. As interest is not an allowable expense and as costs representing taxes, storage and insurance would appear in the overhead expense account of the contractor, your Subcommittee has recommended that such 11% be considered as complete reimbursement for all overhead expenses applicable to such equipment. Therefore, 15-402.1(b) [now 15.402.1(c)] specifically states that the allowance for equipment ownership expense computed by using the AGC Schedule shall be considered as completely including all costs of depreciation, major repairs and overhaul, and overhead. Accordingly, in considering total costs under any construction contract no separate allowance for overhead is to be applied to the allowance for equipment ownership expense.
The minutes of the ASPR Committee show no dissent from this declaration. The paragraph which is now § 15.402.1(c) was slightly (and immaterially) revised into the form in which it was promulgated in 1961 and in which it governs this case. It seems, however, that paragraph (a) of the Section was added after the Subcommittee's report on the rationale for using the AGC Schedule. We have no information on the reasoning which prompted that addition, and the ASPR Committee's minutes do not discuss it. In particular, there was no hint that this new paragraph (a) was designed to counteract or contradict the general reach and scope of paragraph (c).
This history amply confirms that paragraph (c), taken by itself, means what it says in words, i. e., under that paragraph the AGC Schedule is to be used, not only for the items of depreciation and overhaul (or repair), but also for the comprehensive item entitled "interest, taxes, storage, insurance." The ASPR Committee made it clear that the term "overhead applicable to the equipment", in this paragraph, covers that over-all item in the Schedule. The text and the drafters' purpose, as revealed in the history, coincide admirably.
What, then, is the function of paragraph (a), with its strong emphasis on depreciation and overhaul-repair? We repeat that there is no intimation in the history or wording of paragraph (a) that the full ASPR Committee was dissatisfied with the impact of paragraph (c), as that provision had been drafted and explained by the Subcommittee and its Chairman. On the contrary, the minutes show nothing but approval. Nor would it be reasonable for the full Committee to promulgate paragraph (c) in the form prepared by the Subcommittee if the purpose of the addition of paragraph (a) was to deprive (c) of most of its content. If the aim were to limit general use of the AGC Schedule to depreciation and overhaul, paragraph (c) should and could have been eliminated or changed drastically in its wording. We cannot, therefore, follow defendant in its argument to the effect that, under paragraph (a) of § 15-402.1, the use of the AGC Schedule for taxes, storage, interest, and insurance is precisely the same as if paragraph (c) were not there and the common law rules (see note 5, supra) were the only ones operating. The addition of paragraph (a) must have had some other purpose.
There is a clue to the true function of paragraph (a) in the foreword to the AGC Schedule which points out that the listed rates "are subject to adjustment to fit the experience of the individual contractor", that the Schedule should "be used as a guide, and it is recognized that individual experience may vary within a fairly broad range from the averages shown here", and that "the rates are not determinable by any precise method of accounting and should always be applied in the light of individual experience." The Manual itself thus allows for deviation and adjustment in individual cases. We think that the special role of paragraph (a) of § 15-402.1 is to provide that this kind of individual adjustment should rarely, if ever, be used for the items of depreciation and major overhaul. Instead, "uniform rates covering depreciation, and where appropriate overhaul and repair costs, shall be used * * *" (emphasis added). The exceptions with respect to those two categories are to be kept to the barest minimum because uniformity is the dominant goal.8
On the other hand, since paragraph (a), with its stress on uniformity, does not mention the Schedule's comprehensive item for interest, insurance, taxes, and storage, we judge that use of that comprehensive entry, under the provisions of paragraph (c), is permitted by the regulation to be subject to the Schedule's general prescription that individual adjustments are permissible if there is demonstrated need for such special treatment. The leeway is greater than for depreciation or overhaul. But the presumption is nevertheless still in favor of the Schedule — on which the regulation declares that the "evaluation of costs" "shall be based" — and the burden of proof is on the party (contractor or Government, as the case may be) desiring a deviation from the Schedule to show that an individual or particularized departure is warranted and ought to be made. Unless there is a persuasive, specific showing that the Schedule rate should not be used, that is the rate which is to control.
The Board did not, in our view, operate under this standard with respect to the comprehensive item now in question. It gave no presumptive weight at all to the Schedule rates but held them entirely inapplicable — as if the common law of quantum applied to its full extent — and ruled that "under applicable cost principles appellant [plaintiff] should receive only its actual outlay for taxes, storage, and insurance, and none for interest." The award was only for what the Board deemed the contractor's actual expenditures for taxes, storage, and insurance. By-passing for the moment the question of whether the Board correctly determined those actual costs, we hold that the mere ability to compute actual costs during the pre-termination period is not in itself a sufficient ground for avoiding use of this item of the AGC manual. There must, in addition, be proof by the party desiring use of actual costs that these costs are either (a) adequately representative of the particular contractor's normal or average costs (in other words, a proper substitute for the AGC rate, which takes account of the full life of the equipment and its lifetime cost),9 or (b) attributable to some special factor or feature which makes it inappropriate or unfair to use average or normal costs (either the AGC average or the contractor's own average) in the particular instance. No such inquiry was made by the Board here, nor did the Government undertake to bear the burden of showing that the AGC rate should be discarded. That rate was simply eliminated from consideration as irrelevant because (in the Board's view) "actual costs" were available.
Moreover, we have considerable doubt whether the Board accurately determined the actual costs it allowed. The difficulty is that, at the contracting officer's level, both sides (the contractor and the contracting officer) assumed that the AGC Schedule was applicable across-the-board (including the item for interest, taxes, storage, and insurance), and both sides made their calculations on that basis. In fact, the contracting officer followed the Schedule on this comprehensive item and allowed the Schedule rate. It was not until the Board level that the Government's position changed. But by that time the plaintiff and the contracting officer, both acting on the assumption that the AGC rate was to be used, should, and may very well have, eliminated from all direct and indirect charges (under the mandate of § 15-402.1(c)) expenses attributable to interest, taxes, storage, and insurance — since those classes of costs would be covered by the AGC percentage. At least this is what plaintiff strenuously charges before us when it urges that the trivial amount the Board gave for taxes, insurance, etc. ($1,633) is totally inaccurate because it represents only the few direct and indirect costs which were not eliminated on the original assumption that the allowance of the AGC rate would cover the major costs for those categories. If this is so, plaintiff has not been treated fairly, in the determination of these costs. We do not resolve this issue — defendant just as strenuously rejects plaintiff's point, and there is complicated discussion of the issue by both parties — but leave it to the Board to canvass when the case returns there, if actual costs remain important to the case. The record as it comes to us is not in satisfactory shape to settle the matter.
For these reasons, we set aside the administrative determination of the allowances for interest, taxes, storage, and insurance, and suspend proceedings here so that the partie