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Total costs claimed. (Case Commentary).

Between July 1988 and March 1990, Propeilex Corporation (PX) received awards (contract # 817 and #445) from the U.S. Army Munitions and Chemical Command (Army). These awards were to deliver approximately 160,000 MK 45 Electric Primers--used as the propelling charge of the 5-inch 54-caliber gun--and 5,202 MK 153 primers. The aggregate price was approximately $2.35 million. Standard clauses, such as changes, government delay of work, supply inspection, and pricing adjustments, were in both contracts.

The primers were described and detailed in a variety of specifications and drawings. These included the environment, equipment, and methods of performing tests--one of which was to establish the moisture content of the black powder. PX manufacturing and test procedures, performed in several different locations and many steps, were approved by Army toward the end of 1988. PX manufactured and tested primers with the approval and in the presence of Army quality assurance representatives (QAR). After successful testing of a "lot" at a PX plant, samples were selected for final testing at the Naval Surface Warfare Center (NSWC) in Indian Head, Maryland.

In September 1990, NSWC rejected lot 6 under contract #817 for excessive moisture content. The army contracting officer (CO) required PX to ascertain the source of the excess moisture and resolve the problem. Later, the CO waived the test result and accepted the lot for a consideration of $700, without obtaining from PX a release of claims. NSWC found excessive moisture in samples from lots 1-3 on contract #455. The CO waived the defect for consideration of $750, without a release from PX. By June 1993, all deliveries were completed and accepted.

In October 1990, PX began to investigate the causes of excess moisture in the black powder. Believing it was at fault, PX did nothing to segregate the time or materials spent in the investigation. Powder mixers, inspectors, and test personnel were diverted, and the investigation continued until 1993, when the results were sent to the CO.

Review of its procedures showed that NSWC did not control or record environmental humidity when testing the samples for moisture content. In test procedures and in the analysis of results, NSWC applied a variety of different methods and equipment, prompting questions about their validity and accuracy. These were questioned also by the NSWC PhysChem Laboratory Quality Control Manual.

In December 1993, PX submitted a claim for approximately $1.4 million for the NWSC defective testing and erroneous rejection of lots, which caused PX to do the moisture content investigation at additional cost under the two contracts. The CO acknowledged that the NSWC testing was not as it should have been, admitted some Army culpability, and issued a final decision to PX, offering $77,000 for the investigation.

PX based its initial proposals for settlement on average hours per labor operation on prior MK 45 lots, material quotations, and manufacturing costs from historical data and rates calculated by its parent company. These were found to be fair and reasonable by the CO, when these contracts were awarded in competition. Incurred actual costs on these contracts were fully accepted without question by the Defense Contract Audit Agency (DCAA). The difference (or "total cost") was claimed by PX as caused by the faulty moisture content inspection. Consultant fees of $6,000, attorney's fees of $25,000, and administrative costs of $17,000 to prepare the claims were added.

The consultant, a former DCAA auditor, modified the total cost claim by eliminating actual costs incurred for which PX was responsible. These included abnormal grinding, abnormal inspection, and weighing primers for missing black powder charges. The claim was reduced by approximately $200,000. PX did not estimate, inductively, the cost incurred in the moisture content investigation, but relied entirely on the total cost presentation.

PX appealed the CO's rejection of its claim--the decision of the Armed Services Board of Contract Appeals (ASBCA) is published as Propellex Corporation, ASBCA 50203, 02-1 BCA 31,721 (December 2001).

The board set forth the elements of a total cost recovery that the contractor had to prove: (1) the impracticality of proving "actual losses" directly; (2) the reasonableness of the bid and of the actual costs; and (3) the absence of contractor responsibility for the added costs.

The board noted that though PX argued that it did not segregate and could not estimate its actual costs because of commingling, yet its expert was able to segregate a variety of costs ("other overruns") unrelated to moisture content. The board pointed out that the consultant omitted (1) backing out the unrelated cost to produce MK 153 primers included in contract #817 or the costs of torque testing; (2) strapping and demilitarizing the primers; or (3) resolving vendor problems with the materials. The board noted that it could not make an approximation of these "irreconcilable" actual costs, in the absence of data free of the moisture content investigation.

The board held that PX established that its bid was reasonable and that the costs of performance were actually incurred. It also held that PX had failed to prove the elements of the impracticality of cost analysis or the absence of contractor responsibility. Since PX was able to identify costs of some of the activities unrelated to the claim (and omitted others), it could have provided inductive estimates. "The board attempted to reconstruct from the record a reasonable approximation of those costs, but found that the...presence of certain costs...are irreconcilable..." with the claimed amount and with DCAA audit work papers." It held that "PX failed to establish...required elements of proof of the modified total cost recovery."

The board awarded PX the consultant and attorney fees incurred to prepare the claim, but disallowed the administrative costs, on the ground that there was no proof that those were not included in overhead. It is unclear whether PX received the $77,000 approved by the CO which led to the appeal.

"Total cost" is the often rejected method of proving the amount of an equitable price adjustment. It is also the most risky because--as in this PX case--it is "all or nothing." It is perhaps more difficult to induce the cost of manufacturing operations for comparisons and contrasts, to estimate or record the time and cost of normal and abnormal operation, or to analyze each additional operation. Once done, however, the issue is a battle of the experts, which should result in a reasonable recovery.

If the CO obtained releases as part of the waivers, this case might have been avoided.

About the Author

ROBERT D. WITTE is a senior partner in the firm of Witte & Lestz, P.C., White Plains, New York. One of the original members of NCMA, he is an Honorary Life Member, Fellow, Charles J. Delaney Memorial Award winner for his articles, and a member of NCMA's South East Florida Chapter. NCMA's Blanche Witte Memorial Award was founded in memory of his mother. Send comments on this article to
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Title Annotation:Propeilex Corporation
Author:Witte, Robert D.
Publication:Contract Management
Geographic Code:1USA
Date:May 1, 2003
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