Opinion ID: 1039944
Heading Depth: 2
Heading Rank: 1

Heading: kbr’s appeal

Text: KBR appeals the Court of Federal Claims’s determination of reasonable fees and the calculation of KBR’s base fee. We address each argument in turn. 1. The Court of Federal Claims Properly Evaluated Cost Reasonableness of the Subcontract Between KBR and Tamimi for July 2004 through December 2004. Both parties agree that KBR is entitled to be reim- bursed only for its “reasonable” costs under LOGCAP III. They also agree that LOGCAP III incorporated, by reference, the cost principles in the FAR and that FAR § 31.201-3 (codified at Title 48 of the Code of Federal Regulations) governs the assessment of the reasonableness of KBR’s costs. That provision states that a cost is reasonable “if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business.” FAR § 31.201- 3(a). The regulation further provides that: (b) What is reasonable depends upon a variety of considerations and circumstances, including— (1) Whether it is the type of cost generally recognized as ordinary and necessary for the con- duct of the contractor’s business or the contract performance; (2) Generally accepted sound business practices, arm’s length bargaining, and Federal and State laws and regulations; (3) The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and (4) Any significant deviations from the contractor’s established practices. FAR § 31.201-3(b). 16 KELLOGG BROWN & ROOT SERVICES v. US KBR admits that the language above “emphasizes its nonexclusivity, saying reasonableness ‘depends upon a variety of considerations and circumstances, including’ but not limited to those listed in the regulation.” KBR Reply Br. 14 (emphasis in the original). Notwithstanding, KBR’s core argument is that the Court of Federal Claims committed legal error by “appl[ying] an improper standard for reviewing the reasonableness of costs under the Contract Disputes Act . . . .” KBR Br. 29. According to KBR, “cost-reimbursement contracts require only that the contractor gives its ‘best efforts’ when performing, and its costs are payable absent gross misconduct” or “absent arbitrary action or a clear abuse of discretion.” Id. at 32. KBR’s suggested standard of review finds no support in the text of section 31.201-3 or our precedent. Section 31.201-3 of the FAR affords the reviewing officer or court considerable flexibility in assessing the reasonableness of costs. The words “arbitrary,” “gross negligence,” and “willful misconduct” do not appear in the text. Our prior authority on cost reasonableness is contrary to KBR’s position. In Boeing North American, Inc. v. Roche, this court reasoned that a cost could be “unreasonable” under section 31.201-3 when “the contractor overcharge[d] the government for the materials.” 298 F.3d 1274, 1281 (Fed. Cir. 2002). Absent from the court’s example was any suggestion that the “overcharge” must be based on gross negligence or arbitrary behavior. Although evidence of willful misconduct, gross negligence, or arbitrary conduct could well provide a basis for a contracting officer or court to disallow costs under the regulation, such evidence is not required. KBR offers many pages of non-binding law to illustrate the amount of discretion courts have afforded to contractors. 12 However, KBR offers no binding prece- 12 KBR states: “The court’s conclusion conflicts with the bedrock principle that the government bears all risk in cost-reimbursement contracting and a half-century of KELLOGG BROWN & ROOT SERVICES, v. US 17 dent in defense of their position that all risk in costreimbursement contracting falls on the Government and does not dispute that KBR is entitled to be reimbursed only for its “reasonable” costs under LOGCAP III. Rather, the Court of Federal Claims applied the correct standard articulated by FAR § 31.201-3, and its analysis was consistent with the regulation’s admonition that the reasonableness of specific costs “must be examined with particular care” when the costs incurred “may not be subject to effective competitive restraints.” FAR § 31.201-3(a). In addition to arguing that the Court of Federal Claims employed the wrong standard, KBR argues at length that the court improperly assessed specific evidence with regard to cost reasonableness by crediting the wrong information at trial and ignoring other pertinent information. Cost reasonableness “is a question of fact.” Gen. Dynamics Corp. v. United States, 410 F.2d 404, 409 (Ct. Cl. 1969). The court will overturn factual determinations only when they are clearly erroneous. See Ind. Mich. Power Co., 422 F.3d at 1373. The standard for assessing reasonableness is flexible, allowing the Court of Federal Claims to consider many fact-intensive and contextspecific factors. See FAR § 31.201-3. The Court of Federal Claims’s two opinions total roughly 150 pages, and comprehensively articulate the court’s assessment of the cost reasonableness of the Tamimi subcontract from July 2004 case law acknowledging contractors’ considerable discretion and holding costs to be reasonable absent gross misconduct.” KBR Reply Br. 8–9 (emphasis added). 18 KELLOGG BROWN & ROOT SERVICES v. US to December 2004. We address each of KBR’s specific arguments in turn. 13
Effort at Self-Performance Did Not Impermissibly Focus on Outcome Rather than “Best Efforts.” The Court of Federal Claims found that KBR’s sum- mer 2004 effort to end Tamimi’s involvement by selfperforming dining services was “disastrous.” See KBR II, 103 Fed. Cl. at 752, 758. KBR argues that this was reversible error since the Court of Federal Claims supposedly focused on the outcome of KBR’s decision to selfperform, not its reasonableness ex ante. KBR Br. 40. KBR argues that this “error unquestionably infected the court’s assessment of the reasonableness of all KBR’s JuneDecember 2004 prices.” Id. at 43 (emphasis in original). Contrary to KBR’s characterization, the Court of Federal Claims did not conclude that KBR’s costs were unreasonable based solely on KBR’s failed self-performance. Rather, it adopted KBR’s urging at trial that reasonableness must be determined in context, not based on standards for “conference room” contracting. KBR II, 103 Fed. Cl. at 751. The Court of Federal Claims agreed with KBR that “costs need to be reasonable, not in a vacuum, but in 13 KBR bore the initial burden to establish that its costs were reasonable. FAR § 31.201-3(a). As noted by the Court of Federal Claims, “[p]reviously, a contractor’s incurred costs were entitled to a presumption of reasonableness, and the Government bore the burden of proving that the costs were unreasonable”; however, this presumption was superseded in 1987 when FAR § 31.201-3 was amended. KBR II, 103 Fed. Cl. at 749–50 (citing 52 Fed. Reg. 19,800, 19,804 (May 27, 1987)); Ace Constructors, Inc. v. United States, 70 Fed. Cl. 253, 275 (2006); George Sollitt Constr. Co. v. United States, 64 Fed. Cl. 229, 245 (2005)). KELLOGG BROWN & ROOT SERVICES, v. US 19 the context of the events in which they arose.” Id. But, it cautioned KBR that consideration of all of the circumstances cut both ways: “KBR cannot now point to a deficit in bargaining power and contend that its weakened state entitles it to greater latitude” because a “contractor may not itself manufacture—or in this case exacerbate—a situation that leads to higher costs for the Government . . . .” Id. at 752. Here, the Court of Federal Claims found that KBR was in a weak position with Tamimi, which stemmed from KBR’s own conduct, including “fail[ure] to negotiate prices prospectively” and its “attempt to self-perform the work at Anaconda.” Id. at 758. These observations did not end the Court of Federal Claims’s analysis. Even in its weakened position, KBR failed to act prudently to improve its leverage: “the court finds that the prudent business person would have seized any available advantage,” which for KBR was $40 million in withheld funds that Ms. Hayes, KBR’s negotiator, did not know about or use to KBR’s advantage. Id. The subsidiary finding, that KBR’s disastrous self- performance harmed its bargaining position with Tamimi, is not clearly erroneous, nor was it legal error to consider this fact in assessing cost reasonableness. Additionally, even if there had been an infirmity in the Court of Federal Claims’s discussion of self- performance, self-performance was only one of numerous findings supporting the Court of Federal Claims’s reasonableness determination. See FAR § 31.201-3(b) (providing that reasonableness is determined based “upon a variety of considerations and circumstances”). Finally, KBR’s self-performance argument attacks the Court of Federal Claims’s weighing of the evidence, which this court will rarely disturb. See Pacific Gas & Elec. Co. v. United States, 668 F.3d 1346, 1353 (Fed. Cir. 2012) (weighing of evidence is “within the special province of the trial judge”) (internal quotation marks and citation omitted). 20 KELLOGG BROWN & ROOT SERVICES v. US B. The Court of Federal Claims Did Not Impermissibly Second-Guess KBR’s Arm’s-Length Negotiations with Tamimi or Fail to Consider KBR’s Collective Knowledge in Assessing Reasonableness. Similar to its argument above, KBR also contends that the Court of Federal Claims impermissibly “secondguessed” KBR’s negotiations with Tamimi. KBR Br. 43– 48. KBR argues that the court failed to give the proper weight to this “arm’s length bargaining” and how such bargaining supports a determination of reasonableness. Id. at 43 (citing FAR § 31.201-3(b)(2)). KBR argues that the Court of Federal Claims’s assessment of these negotiations runs afoul of both the “business judgment rule” and the requirement that the court look to management collectively, not to the actions of individual employees. Id. at 44, 46–47. KBR analogizes its requested standard, the “business judgment rule,” to “its corporate-law analogue,” which restricts courts from imposing liability “‘in the absence of a showing of abuse of discretion, fraud, bad faith, or illegality.’” Id. at 36 (quoting In re Bal Harbour Club, Inc., 316 F.3d 1192, 1195 (11th Cir. 2003)). Similarly, Amici Curiae the Professional Services Council and the National Defense Industrial Association argue that the Court of Federal Claims applied the wrong standard but do not urge the extreme standard argued by KBR. Amici Curiae offer instead that “what a contractor must prove, and what the [Court of Federal Claims] or [Board of Contract Appeals] must determine de novo, is whether any prudent businessperson in the contractor’s position would have incurred the disputed cost.” Amici Curiae Br. 8, 10 (emphases in original). As stated above, the Court of Federal Claims employed the correct standard to determine costreasonableness. FAR § 31.201-3(a) requires the court to examine the reasonableness of a contractor’s actions to ensure that KELLOGG BROWN & ROOT SERVICES, v. US 21 those actions result in costs that do not exceed “that which would be incurred by a prudent person in the conduct of competitive business.” A trial court’s review is not restricted to only “management” actions. If a contractor acts primarily through one employee, manager or not, that employee’s actions may well be a focus of the reasonableness inquiry. 14 KBR again appears to contest the trial court’s weighing of the evidence and its assessment of KBR’s witnesses. “[I]n reviewing factual findings under the clear error standard, this court ‘gives great deference to the [trial] court’s decisions regarding credibility of witnesses.’” Medichem, S.A. v. Rolabo, S.L., 437 F.3d 1157, 1171 (Fed. Cir. 2006) (citing Ecolochem, Inc. v. S. Cal. Edison Co., 227 F.3d 1361, 1378–79 (Fed. Cir. 2000)). The Court of Federal Claims found the agreement arising from Change Order 9 was unreasonable, based in part on its determination that KBR’s negotiator, Ms. Hayes, failed to leverage withheld funds, did not set goals for the negotiation, and could not justify the prices. Ms. Hayes’s testimony did not convince the court otherwise. Rather, it found that “the enthusiastic endorsement of Ms. Hayes by Mr. Jonas and plaintiff’s counsel was borne out by neither her testimony nor the record of her negotiations that she included in her Negotiation Memorandum dated March 29, 2005. Her testimony was in the nature of summations on the topics, flavored with anecdotes.” KBR II, 103 Fed. Cl. at 736 (internal citation omitted). KBR argues the court improperly “gave no weight” to the fact that Change Order 9 arose from an arm’s-length negotiation. See KBR Br. 43. The court’s credibility determinations and extensive assessment of the Change Order 9 negotiations are not clearly erroneous. 14 Ms. Hayes testified that she was a procurement manager. KBR II, 103 Fed. Cl. at 735. 22 KELLOGG BROWN & ROOT SERVICES v. US C. The Court of Federal Claims Did Not Clearly Err in Evaluating the Army’s Directives. KBR contends that the Court of Federal Claims failed to consider the Army’s directives in evaluating reasonableness. KBR Br. 48–51. According to KBR, although the Court of Federal Claims “recognized that the Army had told KBR that it was imperative for troop morale that soldiers in the field have hot, freshly prepared meals,” the Court of Federal Claims “refused to weigh the urgency of the action—and the risk of non-performance . . . —in evaluating the reasonableness of the prices negotiated . . . .” Id. at 48 (emphasis in original). KBR correctly notes that the FAR instructs “‘contractor’s responsibilities to the Government’” to be considered in evaluating reasonableness. Id. at 48–49 (quoting FAR § 31.201-3(b)(3)). The Court of Federal Claims repeatedly considered all the circumstances, including the Army’s directives and the fact that the costs were incurred in a demanding war-time environment. See KBR II, 103 Fed. Cl. at 752 (noting “the Army placed great demands on KBR at the outset of the war” and “the urgent need to provide many services in many locations for the Army”); id. (noting that the Army “favored” Tamimi); id. at 751 (concurring that KBR “need[ed] to fulfill the demands of the Government in performing under LOGCAP III”); id. at 752–53 (noting costs were incurred from a war “initially conducted as a contingency operation . . . that became a sustained effort”); id. at 753 (recognizing that costs “were impacted by fluctuating projections for the number of troops on the ground”); id. (stating that costs “were driven by the singular goal of putting DFAC facilities in place to offer warm meals to the troops by July 4, 2003”); id. at 726–27 (acknowledging that the “constantly changing demands required by the Army’s effort were foreseeable to neither the Army nor to KBR”). KELLOGG BROWN & ROOT SERVICES, v. US 23 The Court of Federal Claims’s consideration of that evidence and assessment of the Army’s directives was not clearly erroneous. D. The Court of Federal Claims Did Not Clearly Err in Not Awarding Any Sum for the Amortization of Facilities Cost nor Did It Impermissibly Equate Reasonable Costs with Lowest Costs. KBR argues that the Court of Federal Claims incor- rectly adopted the December 2004 pricing as the amount reasonably supportable, arguing that the Court of Federal Claims conflated reasonable cost with “lowest cost.” KBR Br. 53–56. According to KBR, “there is no evidence whatsoever that Tamimi, or any other contractor, would have accepted that as a stand-alone figure—the lowest price ever obtained for Anaconda, cherry-picked out of a 22month package deal, divorced from other terms favoring Tamimi.” KBR Reply Br. 21 (emphasis removed). 15 The Court of Federal Claims was within its discretion in finding that KBR failed to prove that its costs were reasonable. KBR declined to present independent evidence of the reasonableness of the facilities costs (or any other component of the challenged costs). KBR II, 103 Fed. Cl. at 752. The Court of Federal Claims was “confident” of the evidence that KBR had paid “most” of the expense of the facilities to Tamimi by July 2004 (i.e., before the period of costs at issue in this lawsuit). Id. at 770. It seems that KBR seeks a presumption that it is entitled to reimbursement simply because it incurred 15 As stated by KBR: “the court took [the December 2004] price—at 55% below Change Order 6 pricing, the lowest price KBR ever achieved for that facility, and a far greater reduction than KBR had achieved in any other renegotiation or competition—and applied it to the entire period services were provided[.]” KBR Br. 55–56 (emphases in original) (citations omitted). 24 KELLOGG BROWN & ROOT SERVICES v. US facilities costs. It is not. See FAR § 31.201-3(a) (providing that it is the contractor’s burden to prove the reasonableness of costs and that “[n]o presumption of reasonableness” exists). Similarly, the Court of Federal Claims’s decision to base its calculation on the negotiated December 2004 pricing is not clear error. FAR § 31.201-3, which provides the standard for determining reasonableness, affords the Court of Federal Claims considerable discretion in determining whether a cost is reasonable and therefore allowable. The Court of Federal Claims used Tamimi’s July 2004 competitive bid proposal as a guide for its reasonableness analysis, even though it “was not the lowest of the bids to be received in response to the July 2004 solicitation.” KBR II, 103 Fed. Cl. at 770. 16 The Court of Federal Claims stated that “subsequent events would suggest that [Tamimi’s July 2004 bid] was itself inflated.” Id. As discussed above, although it was KBR’s burden to prove reasonableness, KBR chose not to provide independent analysis to show the reasonableness of its costs. Having chosen to proceed by what the Court of Federal Claims characterized as “circumstantial” evidence (e.g., the Hayes negotiations, the Global DFAC Settlement, and the DCAA audits), see id. at 752, and attempting to show reasonableness by focusing on Change Order 9’s “discounts” from earlier prices, KBR has not now shown the Court of Federal Claims’s weighing of the evidence or calculation of price was clearly erroneous. E. The Court of Federal Claims Did Not Err in Its Evaluation of the Price Negotiation Memorandum. KBR argues that a one-paragraph “admission” in the Price Negotiation Memorandum should constitute compel16 As discussed above, KBR ultimately elected to self-perform the DFAC services instead of making an award based on the July 2004 solicitation. KELLOGG BROWN & ROOT SERVICES, v. US 25 ling evidence of the reasonableness of the prices at Camp Anaconda. 17 The Court of Federal Claims rejected this argument, stating that KBR “attempt[ed] to place more weight on the one paragraph in Ms. DeRoche’s [memo] than it can fairly bear.” KBR II, 103 Fed. Cl. at 761. The Court of Federal Claims went on to note that “[w]hile Ms. DeRoche was a highly credentialed government employee, the sheer scope [of the report at issue] colors any argument that price reasonableness at any one particular [dining facility] was considered.” Id. The court’s decision to find the one paragraph concerning Camp Anaconda to be less persuasive than the information gleaned at the trial was not clearly erroneous. 2. The Court of Federal Claims’s Calculation of KBR’s Base Fee Was Incorrect. According to KBR, “[t]he court’s erroneous fee calculation is a second independent basis for reversal.” KBR Br. 59. The Court of Federal Claims awarded KBR a base fee calculated as 1% of the total amount of direct costs it awarded as reasonable ($11,460,940.31), or $114,609.40. KBR II, 103 Fed. Cl. at 780. According to KBR, however, because the LOGCAP III contract called for a fixed-base 17 As noted in the Background section, on July 8, 2005, Ms. DeRoche authored the Price Negotiation Memorandum, which stated in part: The reduced costs reflected for the credit memo period are the result of KBR’s protracted negotiation with Tamimi, and are considered reasonable. When the associated credits are applied to the original invoices, the resulting costs are equivalent to KBR’s new subcontract rate structure. The new Tamimi subcontract costs were viewed as reasonable . . . . J.A. 5592. 26 KELLOGG BROWN & ROOT SERVICES v. US fee by which KBR would receive “1% of all fee-bearing costs,” J.A. 5105 (emphasis added), that fixed base fee remains the same regardless of the costs KBR actually incurred, whether reasonable or not. KBR Br. 59. It seems the Government agrees: “The base fee, as KBR correctly argues, is owed to it for negotiated estimated costs.” Gov’t. Br. 77 (citing KBR Br. 60). However, the Government argues, somewhat confusingly, that because there was “no evidence presented that KBR will not be paid the balance of the base fee that had been calculated based upon its estimated costs on contract close-out,” this court has no basis “to make such an award at this appeal.” Gov’t. Br. 77–78. KBR responds that “the government provides no reason KBR must wait until LOGCAP’s conclusion to receive the fee it admits is rightly due for services performed nearly a decade ago, or why this Court must leave a flawed judgment intact.” KBR Reply Br. 23. The record shows that the base fee is to be calculated as follows: The fee for this contract is composed of a base fee of 1% of all fee-bearing costs. Fee bearing costs shall be established based on negotiated estimated costs to execute the effort. J.A. 5105. The Court of Federal Claims incorrectly calculated the base fee to be awarded, and that determination is reversed and remanded with instructions to calculate the fee consistently with this opinion.