[Congressional Record Volume 142, Number 39 (Wednesday, March 20, 1996)]
[House]
[Pages H2549-H2557]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 CONTRACTUAL ACTIONS, CALENDAR YEAR 1994 TO FACILITATE NATIONAL DEFENSE

  The Clerk of the House of Representatives submits the following 
report for printing in the Congressional Record pursuant to section 
4(b) of Public Law 85-804:

                           Office of the Secretary of Defense,

                                    Washington, DC, Mar. 14, 1996.
     Hon. Newt Gingrich,
     Speaker of the House of Representatives, Washington, DC.
       Dear Mr. Speaker: In compliance with Section 4(a) of Public 
     Law 85-804, enclosed is the calendar year 1995 report 
     entitled Extraordinary Contractual Actions to Facilitate the 
     National Defense.
       Section A, Department of Defense Summary, indicates that 35 
     contractual actions were approved and that two were 
     disapproved. Those approved include actions for which the 
     Government's liability is contingent and can not be 
     estimated.
       Section B, Department Summary, presents those actions which 
     were submitted by affected Military Departments/Agencies with 
     an estimated or potential cost of $50,000 or more. A list of 
     contingent liability claims is also included where 
     applicable. The Defense Logistics Agency, Ballistic Missile 
     Defense Organization, Defense Information Systems Agency, 
     Defense Mapping Agency, and the Defense Nuclear Agency 
     reported no actions, while the Departments of the Army, Navy,

[[Page H2550]]

     and Air Force provided data regarding actions that were 
     either approved or denied.
           Sincerely,
                                                      L.W. Freeman
                                       (For D.O. Cooke, Director).
       Enclosure: As stated.


                         department of defense

 EXTRAORDINARY CONTRACTUAL ACTIONS TO FACILITATE THE NATIONAL DEFENSE 
                 (PUBLIC LAW 85-804) CALENDAR YEAR 1995


                                foreward

       On October 7, 1992, the Deputy Secretary of Defense 
     (DepSecDef) determined that the national defense will be 
     facilitated by the elimination of the requirement in existing 
     Department of Defense (DoD) contracts for the reporting and 
     recoupment of nonrecurring costs in connection with the sales 
     of military equipment. In accordance with that decision and 
     pursuant to the authority of Public Law 85-804, the DepSecDef 
     directed that DoD contracts heretofore entered into be 
     amended or modified to remove these requirements with respect 
     to sales on or after October 7, 1992, except as expressly 
     required by statute.
       In accordance with the DepSecDef's decision, on October 9, 
     1992, the Under Secretary of Defense for Acquisition and 
     Technology directed the Assistant Secretaries of the Army, 
     Navy, and Air Force, and the Directors of the Defense 
     Agencies, to modify or amend contracts that contain a clause 
     that requires the reporting or recoupment of nonrecurring 
     costs in connection with sales of defense articles or 
     technology, through the addition of the following clause:
       The requirement of a clause in this contract for the 
     contractor to report and to pay a nonrecurring cost 
     recoupment charge in connection with a sale of defense 
     articles or technology is deleted with respect to sales or 
     binding agreements to sell that are executed on or after 
     October 7, 1992, except for those sales for which an Act of 
     Congress (see section 21(e) of the Arms Export Control Act) 
     requires the recoupment of nonrecurring costs.
       This report reflects no cost with respect to the reporting 
     or recoupment of nonrecurring costs in connection with sales 
     of defense articles or technology, as none have been 
     identified for calendar year 1995.

 EXTRAORDINARY CONTRACTUAL ACTIONS TAKEN PURSUANT TO PUBLIC LAW 85-804 
         TO FACILITATE THE NATIONAL DEFENSE, CALENDAR YEAR 1995

                Section A--Department of Defense Summary

 SUMMARY REPORT OF CONTRACTUAL ACTIONS TAKEN PURSUANT TO PUBLIC LAW 85-804 TO FACILITATE THE NATIONAL DEFENSE-- 
                                              JANUARY-DECEMBER 1995                                             
----------------------------------------------------------------------------------------------------------------
                                                  Actions approved                         Actions denied       
  Department and type of action  -------------------------------------------------------------------------------
                                   Number    Amount requested     Amount approved    Number         Amount      
----------------------------------------------------------------------------------------------------------------
    Department of Defense, total        35             \1\0.00                0.00         2      111,753,769.00
                                 -------------------------------------------------------------------------------
Amendments without consideration         0                0.00                0.00         2      111,753,769.00
                                 -------------------------------------------------------------------------------
Contingent liabilities..........        35                0.00                0.00         0                0.00
                                 ===============================================================================
    Army total..................         0                0.00                0.00         1      110,700,000.00
                                 -------------------------------------------------------------------------------
Amendments without consideration         0                0.00                0.00         1      110,700,000.00
                                 ===============================================================================
    Navy, total.................        33             \1\0.00                0.00         1        1,053,769.00
                                 -------------------------------------------------------------------------------
Amendments without consideration         0                0.00                0.00         1        1,053,769.00
Contingent liabilities..........        33                0.00                0.00         0                0.00
                                 ===============================================================================
    Air Force, total............         2             \1\0.00                0.00         0                0.00
                                 -------------------------------------------------------------------------------
Contingent liabilities..........      \2\2                0.00                0.00         0                0.00
                                 ===============================================================================
Defense Logistics Agency, total.         0                0.00                0.00         0                0.00
Ballistic Missile Defense                                                                                       
 Organization, total............         0                0.00                0.00         0                0.00
Defense Information Systems                                                                                     
 Agency, total..................         0                0.00                0.00         0                0.00
Defense Mapping Agency, total...         0                0.00                0.00         0                0.00
Defense Nuclear Agency, total...         0                0.00                0.00         0                0.00
----------------------------------------------------------------------------------------------------------------
\1\ The actual or estimated potential cost of the contingent liabilities can not be predicted, but could entail 
  millions of dollars.                                                                                          
\2\ One of the indemnifications is for FY 1996 annual airlift contracts and is included in this report. The Air 
  Force has deemed the second indemnification to be ``classified,'' not subject to this report's purview.       

                     Section B--Department Summary


                         DEPARTMENT OF THE ARMY

       Contractor: Martin Marietta Corporation.
       Type of action: Amendment Without Consideration.
       Actual or estimated potential cost: $110,700,000.
       Service and activity: U.S. Army Missile Command.
       Description of product or service: The request was made for 
     payment of certain nonrecurring investment costs incurred 
     that were not fully recovered upon the 1992 cancellation of 
     the Forward Area Air Defense Line-of-Site Forward Heavy 
     System (LOS-F-H).
       Background: The Martin Marietta Team, consisting of Martin 
     Marietta Technologies Inc., Electronics & Missiles; and two 
     of its subcontractors, Oerlikon Aerospace, Inc., and Williams 
     International, submitted a request for extraordinary contract 
     relief under Public Law 85-804, requesting an amendment 
     without consideration pursuant to Federal Acquisition 
     Regulation (FAR) 50.302-1(b), ``Government action.''
       The Team requested a total of $110.7 million for losses 
     sustained when the Army canceled the Forward Area Air Defense 
     Line-of-Site Forward Heavy System (LOS-F-H) in 1992. The 
     request was for payment of certain nonrecurring investment 
     costs incurred by the Team which could not be fully recovered 
     when the program was canceled. The $110.7 million request for 
     relief was further broken down as follows: Martin Marietta 
     Technologies Inc.--$54.9 million; Oerlikon Aerospace, Inc.--
     $41.1 million; and Williams International--$14.7 million.
       Martin Marietta Corporation (MMC) was the prime contractor 
     on the LOS-F-H System,\1\ with Oerlikon performing as the 
     principal subcontractor for the fire units and missiles, and 
     Williams serving as the subcontractor integrating two 
     environmental control units into the systems primary power 
     unit.
---------------------------------------------------------------------------
     \1\ The Program/Contract was also commonly known as the Air 
     Defense Anti-Tank System (ADATS).
---------------------------------------------------------------------------

                           Statement of facts

       In 1986 the Army had a need to provide air defense 
     protection for heavy maneuvering forces deployed forward on 
     the battlefield. Consequently, on January 24, 1986, the U.S. 
     Army Missile Command (MICOM) issued a Request for Information 
     (RFI) for a proposed LOS-F-H Program. Following analysis of 
     several responses to the RFI, MICOM issued a Draft Request 
     for Proposals (RFP) on January 3, 1986. The Draft RFP 
     contained deployment requirements and target quantities and 
     deliveries.
       On January 12, 1987, Martin Marietta Corporation (MMC) 
     responded to the draft RFP, advising that significant up-
     front MMC nonrecurring investment and capital outlay would be 
     required to comply with the RFP requirements. MMC requested 
     that the definitive RFP address indemnification for the 
     expenses identified. MMC was the only contractor that raised 
     indemnification as an issue. On March 16, 1987, MICOM issued 
     a definitive RFP. The RFP contained a six year funding 
     profile for the proposed program along with a statement that 
     if the funding profile was insufficient, offerors should 
     offer an alternative profile which matched their proposed 
     delivery schedule. The funding profile provided was as 
     follows:
Fiscal year:                                                   Millions
  1988..............................................................$43
  1989..............................................................243
  1990..............................................................410
  1991..............................................................404
  1992..............................................................407
  1993..............................................................416
       On April 3, 1987, the LOS-F-H Project Office completed 
     Acquisition Plan number 2 for the LOS-F-H Program. This plan 
     called for the acquisition of a Non Developmental Item (NDI) 
     as a component of the Forward Area Air Defense System (FAADS) 
     to operate with and provide protection for forward heavy 
     maneuvering Army units. The plan stated that the responses to 
     the RFI had demonstrated that several systems met the 
     criteria for an NDI, but that none of them met the full 
     system requirements defined in the Required Operational 
     Capability (ROC) for the FAADS. The plan called for the 
     immediate procurement of the NDI system that came nearest to 
     meeting the full system requirements, with the capability to 
     grow to meet the requirements of the ROC. This approach was 
     adopted in part based on a determination that several firms 
     had responded to the RFI, offering systems that could 
     ultimately satisfy the Army's full system requirements. The 
     plan also called for fielding of the system to begin in FY 
     1990 and full deployment to four forward divisions in Europe 
     by the end of the calendar year 1992. It called for award of 
     up to four $2.0 million firm fixed-price contracts for 
     candidate evaluation.
       On May 29, 1987, MMC responded to the definitive RFP. In 
     its response, MMC proposed

[[Page H2551]]

     clauses (identified as H-12a and H-12b) which called for 
     indemnification of the funds it had previously identified as 
     necessary for nonrecurring up-front investment and capital 
     outlay. These two clauses were rejected by MICOM. No other 
     competing offeror requested similar indemnification.
       On June 12, 1987, MMC was awarded Contract DAAH0187-C-A049, 
     one of four candidate evaluation contracts. This contract 
     contained follow-on production options which were unpriced.
       On August 14, 1987, the Army changed the funding profile 
     for fiscal years (FYs) 1988, 1989, and 1990, as follows:
       FY 1988--$95 million.
       FY 1989--$255 million.
       FY 1990--$397 million.
       At that time, MMC was advised by the Contracting Officer 
     (CO) that its proposal had to be both affordable and 
     executable in FY 1988-FY 1990.
       On November 12, 1987, following extensive negotiations, MMC 
     submitted its Best and Final Offer for the unpriced options. 
     This offer stated that MMC was delaying recovery of its major 
     investments until the production phases of the program (FY 
     1990 through FY 1993). On November 30, 1987, MMC was 
     announced as the winner of the competition.
       On February 10, 1988, modification P00004 to the MMC 
     candidate evaluation contract was executed. This modification 
     priced the unpriced production and interim contractor support 
     options. Option 1 was exercised. This modification did not 
     provide for indemnification for the up-front and capital 
     outlay expenses requested earlier by MMC.
       At the time modification P00004 was executed, certain Army 
     officials, including but not limited to the LOS-F-H Project 
     Manager, were aware that, as a result of the budgeting 
     process, the funding profile contained in the definitive RFP 
     had been sharply reduced for FY 1989 and forward, The MICOM 
     contracting organization and others did not know of any 
     finite reductions at that time the modfification was 
     executed. Modification P00004 contained a provision that 
     production Special Tooling/Special Test Equipment (ST/STE) 
     costs would be deferred to succeeding production efforts and 
     that if the contract was terminated for any reason other than 
     default, any unamortized cost would be subject to termination 
     settlement in accordance with the Terminiation provision of 
     the contract. It also stated that in the event of nonexercise 
     of an option or program cancellation for any reason other 
     than default, the contract would be subject to an equitable 
     adjustment to provide for recoupment by the contractor of any 
     unamortized production ST/STE acquisition cost, or adjustment 
     of the amortization schedule, as appropriate.
       On February 11, 1988, bilateral modification P00006 to the 
     contract was executed by the CO. This modification exercised 
     Option 2 on an incremental funding basis.
       Then on February 25, 1988, just 15 days after contract 
     award, the CO notified MMC by letter that a reduction in the 
     FY 1989 funds allocated to the LOS-F-H Project in the 
     President's FY 1988 Budget necessitated a not-to-exceed (NTE) 
     proposal from MMC for substantially less hardware quantities 
     than set forth in Option 3 of the contract. It was requested 
     that such a proposal be received before March 4, 1988. Prior 
     to the CO's letter of February 25, 1988, there was no 
     indication that any Government official notified MMC of the 
     reduction. MMC contended that while it was aware of budget 
     cut speculation from reading several periodicals in the 
     November and December 1987 time frame, it was not aware of 
     any specific reduction decisions prior to the CO's letter of 
     February 25, 1988.
       On March 16, 1988, MMC provided the NTE proposal requested. 
     The proposal contained the long lead time items necessary to 
     support 5 fire units and 60 missiles as opposed to the 
     quantities necessary to support the 15 fire units and 178 
     missiles called for in the contract at that time for Option 
     3. While MMC did not mention its up-front and capital 
     investment in its March 16, 1988, proposal, it did make 
     reference to its investment and its intent to recover it as 
     originally planned. This letter accompanied the signed copy 
     of contract modification P00022 MMC sent to the CO. 
     Modification P00022 incorporated the reduced quantity for 
     Option 3 into the contract. It also exercised Option 3 for 
     the reduced quantities at NTE prices to be definitized within 
     180 days.
       On December 9, 1988, MMC provided its proposal for final 
     pricing of the new quantities for Option 3. This proposal was 
     conditioned on MICOM acceptance of a contractor proposed 
     provision (H-28) wherein MICOM would recognize: 1) that MMC 
     had and would continue to make a significant investment in 
     the LOS-F-H program; 2) that recovery of that investment was 
     planned commencing with the FY 1990 program requirement; and 
     3) the allowability of an reimbursement for the investment in 
     subsequent year production options. However, the parties 
     failed to reach any agreement on provision H-28, and it was 
     not incorporated into the contract. MMC Provision H-28 is 
     attached.
       On March 10, 1989, the CO concurred in an MMC suggestion 
     that its December 1988 proposal was outdated and that the new 
     pricing be combined with a planned repricing exercise for 
     Option 4. On April 14, 1989, the CO provided MMC with RFP 
     package D9-109-89, which called for a restructure of the 
     contract. With regard to Option 4, the package called for 
     prices for 5 fire units and 60 missiles, and 4 fire units and 
     48 missiles. No funding profile was provided. Funding 
     constraints, additional and extensive testing requirements, 
     and other programmatic and administrative delays were 
     identified as contributing factors to the need for the 
     restructure.
       On June 27, 1989, MMC provided its response. With regard to 
     Option 4, MMC proposed the following:

------------------------------------------------------------------------
           Option                      Quantities             NTE price 
------------------------------------------------------------------------
Option IV...................  5 Fire Units and 60 missiles  $151,292,880
Option IV(a)................  4 Fire Units and 48 missiles   131,289,560
Option IV(b)................  4 Fire Units and 10 missiles    88,772,880
------------------------------------------------------------------------

     MMC's proposal stated that its unsolicited Option IV(b) was 
     an alternate that contained suggested hardware and support 
     services which MMC believed would fulfill the Army's near 
     term requirements and meet the Army's perceived budget 
     restraints. The proposal further stated that the proposed 
     prices included additional MMC supplemental funds in the 
     amount of $29 million. At this time MMC again requested 
     indemnification of allocable and allowable advance 
     expenditures. On July 17, 1989, the CO rejected this 
     proposal because it did not contain firm NTE prices. A new 
     proposal was requested.
       Several meetings between various representatives of MMC and 
     MICOM followed. One such meeting was held on July 21, 1989, 
     in the office of the Director of the Acquisition Center at 
     MICOM. Following these meetings, amendment 4 to the 
     restructure solicitation was issued. At this time two clauses 
     proposed by MMC (identified as H-36 and H-37) were 
     incorporated into the solicitation. These clauses, which deal 
     with indemnification of and recovery of MMC up-front 
     nonrecurring and capital outlay costs, are also found in 
     contract modification P00063. Clauses H-36 and H-37 are 
     attached.
       On October 24, 1989, MMC submitted its combined proposal 
     for definitization of the new Option III and IV quantities. 
     At that time, citing H-36, MMC submitted a proposal for the 
     recovery of capital and nonrecurring investment costs. The 
     proposal was further revised by MMC in November 1989, and 
     completed on March 29, 1990.
       On May 7, 1990, MMC wrote the CO, raising the possibility 
     of early transition of the missile production line from 
     Switzerland to the United States. A change in the contract 
     provision dealing with ST/STE was requested. On May 31, 1990, 
     the CO responded that since the program was experiencing 
     perturbations and system technical performance uncertainties, 
     the Government was not willing, at that time, to increase its 
     exposure relative to such requirements.
       On June 15, 1990, an independent reliability, availability, 
     and maintainability (RAM) review of the MMC LOS-F-H System 
     was completed by a team appointed by the Deputy Under 
     Secretary of the Army (Operations Research), and the 
     Commanding General of the Operational Test Evaluation Agency. 
     This review established that while the system met or exceeded 
     technical requirements, its long term RAM performance left 
     much to be desired. On July 8, 1990, the CO advised the MMC 
     Contract Manager that no further action would be taken at 
     that time on the earlier indemnification request pursuant to 
     an agreement between the Army's Air Defense Program Executive 
     Office and MMC officials.
       On September 13, 1990, the CO wrote to MMC advising that an 
     updated proposal was needed for audit by The Defense Contract 
     Audit Agency (DCAA). On November 16, 1990, MMC forwarded the 
     updated request for information to the CO. On January 24, 
     1991, a DCAA Audit Report for the request for indemnification 
     was completed.
       In the interim, on November 5, 1990, the U.S. Congress 
     enacted Public Law 101-510, which stated that the Secretary 
     of the Army may not obligate any funds after November 5, 
     1990, for a payment under the ADATS (the MMC LOS-F-H 
     candidate) air defense program for contractor corrections of 
     system reliability deficiencies to meet original program 
     specifications.
       On February 15, 1991, the parties finalized contract 
     modification P00116, wherein a Test Program Extension Phase 
     was added to the contract. Negotiation of this agreement 
     began before any action was taken by the U.S. Congress. The 
     parties agreed that MMC would fund a reliability growth 
     program and MICOM would fund a test program extension to 
     verify actual system reliability.
       On June 18, 1991, a MICOM Price Analysis Report concerning 
     indemnification was completed. On August 16, 1991, the MICOM 
     Commanding General forwarded the MMC request to the Army 
     Contract Adjustment Board (ACAB) through the Army materiel 
     Command (AMC). The referral stated that MMC's Public Law 
     indemnification request was being forwarded pursuant to a 
     contract requirement that MICOM would make a ``best effort'' 
     to ensure that the special provision was proceeded in a 
     timely fashion. No recommendation was made. The letter 
     requested action by the ACAB on the request and asked that if 
     indemnification was granted, MICOM be provided appropriate 
     guidelines for and an opportunity to negotiate the 
     implementing provision. On December 6, 1991, AMC forwarded 
     the MMC indemnification request to the ACAB. AMC recommended 
     denial of the request as premature.
       On January 22, 1992, the Secretary of Defense announced 
     that the Army's LOS-F-H program was canceled. On February 27, 
     1992, the ACAB notified MMC that since the program had been 
     canceled, indemnification was no longer a suitable form of 
     relief for MMC. MMC was advised to submit a revision of its

[[Page H2552]]

     request if it desired to maintain its request under Public 
     Law 85-804.
       MMC has been paid a total of $363,513,948.04. This 
     represents amounts paid under the basic contract, its 
     options, and under the termination for convenience clause to 
     include $25.8 million under Clause H-37. The team's present 
     request for $110.7 million is in addition to amounts already 
     received.

                         Applicants contentions

       For the following reasons the Team believed that it should 
     be granted relief for losses it sustained as a result of the 
     supplemental funding it provided to the Government and for 
     which it has not been reimbursed:
       First, the Government identified the LOS-F-H program as a 
     high-priority program, answering a critical need for air 
     defense for the Army's heavy maneuvering forces, and the Team 
     made a firm commitment to the Program.
       Second, the Government defined a program plan that, by any 
     objective assessment, could not be accomplished without 
     contractor concurrent supplemental funding which the Team 
     provided.
       Third, throughout the contract, statements, 
     representations, and other actions by the Government 
     encouraged the Team to continue supplemental funding of the 
     program, even as Government funding decreased and technical 
     requirements increased. The Team lists the following ten 
     Government actions in support of this assertion:
       1. The Government accepted MMC's original proposal, which 
     clearly identified its plan to provide supplemental funding 
     for the early program phases and then recover that funding 
     during priced production options;
       2. By indemnifying ST/STE, the Government clearly 
     demonstrated an intent to carry the program through to 
     production;
       3. The Government continued to acknowledge and accept MMC's 
     supplemental funding;
       4. The Army, in December 1987, after selecting the Martin 
     Marietta Team, and prior to contract award, reduced FY 1989 
     funding for the LOS-F-H program. On February 10, 1988, the 
     Army awarded the contract that it knew could not be executed 
     as contracted for by the parties. As a result, MMC became 
     contractually obligated to spend the initial increment of 
     supplemental funding required to perform the contract ($65 
     million). MMC was notified by the CO 15 days after contract 
     award that significant hardware reductions would be made due 
     to FY 1989 funding reductions. At this time, MMC's 
     contractual method of recovery (priced production options) 
     was effectively eliminated because of the Army's intent to 
     reduce production quantities and funding;
       5. The Government accepted additional nonrecurring funding 
     ($29 million) by MMC when Government funding was insufficient 
     to execute contract Option IV (FY 1990);
       6. Special Provision H-36 was incorporated in to the 
     contract, committing to a ``best effort'' to secure 
     indemnification of MMC's nonrecurring expenditures;
       7. Special Provision H-37 was incorporated into the 
     contract, providing for recovery of nonrecurring expenses 
     within the obligated contract funds in the event of 
     termination through no fault of MMC;
       8. The Government insisted that MMC fund and perform a 
     reliability growth program (an additional $17.3 million) to 
     achieve performance over and above current contract 
     reliability requirements;
       9. MICOM program officials encouraged MMC to expend funds 
     to relocate the ADATS missile production line from 
     Switzerland to the United States in anticipation of 
     Government production requirements; and
       10. The Government failed to process MMC's original request 
     for indemnification under Public Law 85-804 in a timely 
     manner.

                                Decision

       The Team requested an amendment without consideration for 
     $110.7 million, asserting that it lost this amount providing 
     contractor supplemental funding to the LOS-F-H program. 
     Suffering a loss is not enough to justify an amendment 
     without consideration under Public Law 85-804 and FAR 50.302-
     1. To justify relief under this provision, a contractor must 
     established that the loss: (a) will impair the future 
     productive ability of a contractor whose continued operation 
     is essential to the national defense (FAR 50.302-1(a)); or 
     (b) is the result of Government action, which in the 
     interests of fairness deserves to be compensated (FAR 50.302-
     1(b)).
       In this case, the Team did not assert that the provisions 
     of FAR 50.302-1(a) apply, but instead framed their request 
     for relief in terms of Government action (FAR 50.302-1(b)). 
     It is generally recognized that the Government action theory 
     of recovery is composed of three elements:
       1. The contractor has suffered an actual loss;
       2. The loss resulted from some Government action (either a 
     contractual or sovereign act); and
       3. The Government action action has resulted in unfairness 
     to the contractor.
       As discussed below, while the ACAB agreed that the Team 
     suffered a loss of at least $110.7 million, the weight of the 
     evidence did not support the claim that the loss was the 
     result of Government action(s), or that it would be unfair to 
     maintain the status quo with regard to the parties' position 
     involving the canceled LOS-F-H Program. The ACAB found that 
     the losses suffered by the Team were the result of calculated 
     business decisions made under the pressure of competition, 
     and not the result of Government action. It was decided that 
     the risk of loss in this situation must therefore be born by 
     the Team.
       First, there was no question that the Army identified to 
     MMC and the other competitors that the LOS-F-H was a high-
     priority program answering a critical need for air defense of 
     the Army's heavy maneuvering forces. However, this statement 
     of need hardly qualified as the type of Government action 
     that warrants granting relief under FAR 50.302-(b) when a 
     program is subsequently canceled. When this statement of need 
     was made it was truthful and supported with adequate funding. 
     These kinds of statements are frequently made by the 
     Government. In fact, if the Government can not make these 
     definitive statements, it is prohibited from acquiring the 
     goods or services requested. Using the Teams' analysis, 
     anytime the Government cancels a program a contractor would 
     be entitled to relief under Public Law 85-804. Adoption of 
     this analysis would make unnecessary and meaningless other 
     protection found in Government contracts which provide for 
     the effect of a canceled contract (e.g. termination for 
     convenience clause), and would eliminate from contractor's 
     consideration any risk of loss on the contract.
       Second, the Team asserted that any objective assessment of 
     the Army's requirements reveals a program that could not be 
     accomplished without contractor concurrent supplemental 
     funding. The ACAB was unable to verify the Team's implied 
     position that all four competitors considered supplemental 
     funding to be essential to this acquisition because the 
     proposals of those offerors not selected for award had been 
     destroyed. However, the consensus of the Government personnel 
     involved in this action indicated that of the four offerors, 
     only MMC affirmatively notified the Army that its proposal 
     involved the use of contractor funds to accomplish early 
     Government objectives. Furthermore, the ACAB had been advised 
     that whether an offeror proposed the use of their funds to 
     support the initial efforts under the contract with recovery 
     in follow on production options was not a factor in the 
     Army's cost/price deliberations. What was unique about the 
     LOS-L-H contract was that the RPF informed offerors of the 
     Army's six year funding profile for the program (total 
     funding line of $1.984 billion). Offerors were told that 
     award would be made to the contractor that closest achieved 
     the Army's desired objectives.
       MMC's response to this situation was informative. Even 
     though MMC identified the Army's funding profile to be 
     insufficient in the early years to pay for all of its costs, 
     and even though it proposed indemnification clauses to cover 
     its nonrecurring up-front investment and capital outlay 
     (clauses specifically rejected by the Army, i.e., H-12a and 
     H-12b), MMC elected to remain in the competition. Apparently, 
     MMC viewed the Army's overall funding profile to be 
     sufficient, and made a business decision to shift a 
     substantial proportion of its cost to the follow on 
     production options. MMC could have chosen not to submit an 
     offer, but it did not elect that course of action. These 
     facts suggested that MMC considered the risks involved and 
     made a business decision that it could present an acceptable 
     offer that met the Army's funding line. By analogy, it is 
     noted that the Government may accept a contractor's ``buy-
     in'' to a contract, and if this is permissible, certainly the 
     Government may accept advanced funding by the contractor on 
     the contract. Consequently, the ACAB was not persuaded that 
     the acceptance of a contractor's proposal \2\ especially one 
     from a major experienced DoD contractor like MMC, constituted 
     the kind of Government action which justified providing 
     relief under Public Law 85-804.
---------------------------------------------------------------------------
     \2\ Acceptance of MMC's original proposal was listed as the 
     first of ten Government actions that encouraged it to provide 
     supplemental funding to the LOS-F-H program. Government 
     actions 3 and 5 are similar in their charge.
---------------------------------------------------------------------------
       MMC had identified some ten Government actions which 
     occurred throughout the contract which encouraged it to 
     continue supplemental funding. The first (acceptance of MMC's 
     original proposal) is discussed above. Others of significance 
     are discussed below.
       MMC contended that by indemnifying production ST/STE, the 
     Army clearly demonstrated an intent to carry the program 
     through to production. While the contract contained such a 
     provision, it was unreasonable to conclude that it 
     constituted some form of a guarantee that the LOS-F-H program 
     would enter production. The Army clearly had an expectation 
     that this program would enter full scale production; however, 
     there were no guarantees. Indeed, it can be argued that the 
     presence of this limited indemnification provision in the 
     contract was a warning that production was not a foregone 
     conclusion, i.e., there were risks involved and contractors 
     must plan accordingly.
       MMC complained that the exercise of Option 2 on February 
     10, 1988, was unfair because the Army knew that would cause 
     MMC to expend its supplemental funds and at the time the Army 
     knew the program would have to be restructured because of 
     funding shortfalls in FY 1989. There was some appeal to this 
     argument, however, shortly thereafter on February 25, 1988, 
     immediately after becoming aware of the reduced funding, the 
     CO notified MMC of the problem. During the 15 days between 
     February 10-25, 1988, MMC

[[Page H2553]]

     did not obligate all of its supplemental funding ($65 
     million). In fact, MMC did not definitize its $1.00 \3\ 
     contracts with its subcontractors, Oerlikon and Williams, 
     until March and April of 1988, respectively. On February 25, 
     1988, MMC could have objected to the changed circumstances, 
     but it did not. It was not unreasonable to conclude that MMC 
     failed to object because it believed that an objection would 
     cancel the program and lead to the termination of the 
     contract. At that point, still believing the program could be 
     saved, MMC concluded it was worth the risk and continued 
     performance.
---------------------------------------------------------------------------
     \3\ In a letter to Williams dated July 17, 1987, MMC stated: 
     ``To win this program we must develop a strong team that is 
     not only willing to share the rewards, but also to shoulder 
     their share of the risk.'' Similar letters were sent to all 
     major MMC subcontractors. In accordance with this business 
     decision, Williams and Oerlikon embarked on their Option 2 
     efforts for $1.00.
---------------------------------------------------------------------------
       The same analysis applied to the execution of Option IV, 
     which MMC asserted amounted to $29 million in supplemental 
     funding by the Team. The restructuring of the option began in 
     August 1988. MMC had the opportunity of repricing any 
     remaining options in the contract so it could recover all of 
     its supplemental funding. However, MMC, which was in a sole 
     source position at that time, elected not to seek such a 
     repricing, probably out of a concern that the program may 
     have been canceled. Consequently, MMC made the decision to 
     continue to accept the risks it had undertaken from the 
     beginning of the competition.
       MMC asserted that the insertion of Special Provision H-36 
     in its contract, committed the Army to a ``best effort'' to 
     secure indemnification of MMC's nonrecurring investment 
     costs. The parties had different opinions on the meaning of 
     H-36. MMC believed that the clause represented a Government 
     commitment to use its best effort to secure indemnification 
     for MMC for what the Government considered to be legal and of 
     value to the Government. On the other hand, MICOM officials 
     stated that the clause merely required MICOM to make its best 
     effort to insure that special provisions, deemed to be of 
     value to the Government, and in accord with applicable 
     statutes and regulations, would be processed in a timely 
     manner for consideration at a higher level and, if approved, 
     incorporated into the contract. A review of H-36 supported 
     MICOM's reading of the clause. In any event, the ACAB did not 
     believe that agreeing to the incorporation of such clause in 
     a contract constituted the type of Government action which 
     triggers the applicability of Public Law 85-804.
       MMC also cited the inclusion of Special Provision H-37 as a 
     Government action which encouraged its expenditure of 
     nonrecurring investment costs. This clause was negotiated in 
     July 1989 after MMC made its decision to accept the risk of 
     loss associated with the contract. The ACAB found it 
     difficult to ascertain how the interpretation of this clause 
     harmed MMC, since the TCO paid MMC $25.8 million under its 
     terms and conditions.
       MMC's argument that the Army insisted that it spend $17.3 
     million on a reliability growth program was not supported by 
     the record.\4\ During the period April 1, 1990, to May 18, 
     1990, the Government conducted an independent Reliability, 
     Availability, and Maintainability (RAM) review of the LOS-F-H 
     system. This report, dated June 15, 1990, found that while 
     the LOS-F-H met or exceeded program requirements in the area 
     of technical performance, it had not demonstrated the 
     capability of meeting RAM criteria essential for deployment. 
     A reliability growth program was recommended before the 
     system entered production. MMC and the Government reached an 
     agreement whereby MMC would fund a RAM growth program and the 
     Government would fund an extended test program. This occurred 
     before Congress directed in November 1990 that the Army not 
     fund improvement of system reliability deficiencies. All 
     things considered, the ACAB believed that this arrangement 
     was not properly characterized as a situation where the Army 
     insisted that MMC do anything. Rather, the ACAB believed the 
     proper characterization was that the parties reached an 
     agreement on a solution for correcting a mutually recognized 
     problem with the system.
---------------------------------------------------------------------------
     \4\ While MMC cited this as one of the Government actions 
     which encouraged it to expend investment costs, MMC was not 
     asking for reimbursement of any of the expenditures 
     associated with the effort. The $17.3 million figure was not 
     included in the $110.7 million request for relief.
---------------------------------------------------------------------------
       MMC asserted that LOS-F-H program officials encouraged it 
     to relocate Oerlikon's missile production line from 
     Switzerland to the United States. The circumstances 
     surrounding this issue were in dispute.
       Colonel Gamino, the Project Manager, stated that the idea 
     of moving the missile production line to the United States 
     came from MMC. He pointed out that moving the line had the 
     obvious advantages of lower cost, reduced risk and increased 
     political support. He advised that MMC approached him on 
     several occasions indicating it was considering the move. He 
     stated that while he neither objected to the proposal, nor 
     encouraged further consideration of the move, he made it 
     clear to MMC that the decision to move the line was a 
     business decision that would have to be made by MMC.
       General Drolet, the Program Executive Officer at the time, 
     indicated that his first knowledge that such a move was under 
     consideration came in a discussion with Colonel Gamino, 
     during which he was advised that Colonel Gamino had learned 
     that MMC had been involved in undisclosed discussions with 
     the Swiss on moving the line. The General confirms that the 
     Army had earlier expressed serious concern to MMC over the 
     cost of the missile, and that when he discussed the matter 
     with MMC officials after his discussion with Colonel Gamino 
     he encouraged MMC to explore the concept because he felt that 
     such a move would reduce the cost of the missile.
       Dr. Arnold Maynard, as employee in the LOS-F-H Project 
     Office at the time, advised that he remembered the concept 
     coming up during discussions between Project Office 
     officials; all of whom felt it was a good idea primarily 
     because of the political consequences of production in the 
     United States. However, Dr. Maynard did not recall any 
     discussions with MMC officials on the subject.
       MMC, on the other hand, maintained that the idea to move 
     the line came from unidentified senior Army officials and 
     that those officials provided strong encouragement for the 
     move. MMC cited first quarter of calendar year 1989 program 
     cost reviews as the point in time when the move was conceived 
     and encouragement begun.
       The ACAB had carefully reviewed this evidence and concluded 
     that the decision to move Oerlikon's missile production line 
     was a business decision of MMC's and was not the product of 
     any Government action. It appeared from the record that the 
     funds associated with the move had been invested by the time 
     the issue of moving the line came to the attention of Army 
     officials.
       The final Government action MMC complained of was the 
     Army's failure to timely process its original request for 
     indemnification. MMC asserted that it should not have taken 
     31 months to process its request from the CO to the senior 
     procurement official at the Department of the Army (October 
     1989-February 1992). MMC acknowledged that some delays were 
     caused by a misunderstanding of the documents requested to 
     support the proposal and the fact that the action was put 
     ``on hold'' (for less than two months) in mid-1990 while 
     reliability growth was being worked. MICOM described the 
     situation as follows: MMC and the CO were unable to agree 
     that the request was complete and ready to be sent forward 
     until MMC provided further input on March 29, 1990. The RAM 
     issue became prominent shortly thereafter. This caused the 
     parties to agree that the request should not be sent forward 
     and the Army should put the indemnification request ``on the 
     back burner'' until further notice. Following receipt of 
     briefings from both MICOM and MMC in the third quarter of 
     1990, Department of the Army officials requested that MICOM 
     take action to send the request forward for action. This 
     called for an update of MMC's request, which was received in 
     November 1990, and an audit was completed by the Defense 
     Contract Audit Agency in the latter part of January 1991. A 
     MICOM price analysis was completed in June 1991. In August 
     1991, the request was forwarded by MICOM through AMC to 
     Headquarters Department of the Army for action. AMC sent the 
     request forward on December 6, 1991. The ACAB took action at 
     the end of February 1992.
       It was the ACAB's judgment that while there was delay in 
     processing the request, the record did not support MMC 
     assertion that the Army was responsible for the majority of 
     the delay. Furthermore, since MMC's original request for 
     indemnification was based on essentially the same facts that 
     were now before the ACAB, MMC had suffered no prejudice since 
     there was no reason to believe that an earlier decision by 
     the Army on this request would be different than the one 
     reached by ACAB today.

                               Conclusion

       The ACAB considered all materials submitted by the Martin 
     Marietta Team, all information submitted by the MICOM 
     Contract Adjustment Board, and all testimony presented to the 
     ACAB on October 6, 1994. Based on that review, it was the 
     unanimous decision of the ACAB that relief under the 
     authority of Public Law 85-804 was not appropriate in this 
     case and the request was denied.

             Attachment--Prime Contract Special Provisions

       Special provision submitted to MICOM, but not incorporated 
     into the LOS-F-H contract.
     H-28 contractor recovery of nonrecurring investment
       ``The Government recognizes that the contractor has and 
     will continue to make a significant financial investment in 
     the LOS-F-H program substantially as was proposed in the FAAD 
     LOS-F-H BAFO Cost Volume IV, OR19,200P, pages 2-53 to 2-60, 
     dated November 12, 1987. The Government also recognizes that 
     the recovery of this investment by the contractor is planned, 
     commencing with the FY 1990 program and for each program 
     year, in accordance with the schedule as provided in the same 
     BAFO Cost Volume IV, OR19,200, page 0-18. To this end, it is 
     the intention of the Government, as stated herein, to 
     recognize the allowability of and reimbursement for this 
     nonrecurring contractor investment in subsequent program year 
     production options and to assure the recovery of that 
     contractor investment as specified above should these options 
     be exercised by the Government.''
       Special Provisions incorporated into Option IV

[[Page H2554]]

     H-36 indemnification procedures
       ``The contractor has provided, for consideration by the 
     Government with his NTE submittal, the following contract 
     special provisions that he has requested the Government 
     include in the resultant definitized contract: (1) Capital 
     Indemnification; and (2) Indemnification of Non-recurring 
     Investment. Approval for inclusion of these provisions is at 
     a higher headquarters. It is the intent of MICOM to review in 
     detail the content of these provisions. After review, MICOM 
     will make a ``best effort'' to ensure that the special 
     provisions deemed to be of value to the Government and IAW 
     applicable statutes and regulations, are processed in a 
     timely manner and, upon receipt of approval, to incorporate 
     the special provisions into the contract by contract 
     modification.
       Approval or disapproval of the above provisions shall not 
     result in a change to the NTE or the definitized price of 
     Option IV.''
     H-37 contractor recovery of nonrecurring investment
       ``The Government recognizes that the contractor has and 
     will continue to make a significant financial investment in 
     the LOS-F-H program. The Government also recognizes that the 
     recovery of this investment by the contractor is planned, 
     commencing with the FY 1990 program and for each program 
     year. To this end, it is the intention of the Government to 
     recognize all reasonable, allowable and allocable 
     nonrecurring contractor investment in subsequent program year 
     production options should these options be exercised by the 
     Government. Nothing contained herein in any way shall be 
     construed to diminish the Government's right to review and 
     audit these costs at any time IAW provisions in the contract. 
     In the event no options are exercised, there will be no 
     liability on the part of the Government not covered elsewhere 
     in the contract. The amount claimed to be invested through 
     Option IV by the contractor is not-to-exceed amount of 
     $98,000,000, which is subject to downward negotiation only.
       In the event the Government terminates this contract for 
     convenience, the contractor may include in its termination 
     claim and the Government will recognize any previously 
     incurred reasonable, allocable, and allowable unrecovered 
     investment costs to the extent such costs do not cause the 
     termination settlement to exceed the funding obligated to the 
     contract.''
       Contingent Liabilities: None.
       Contractor: None.


                         department of the navy

       Contractor: EMS Development Corporation (EMS).
       Type of action: Amendment Without Consideration.
       Actual or estimated potential cost: $1,053,769.
       Service and activity: Department of the Navy, Naval Sea 
     Systems Command.
       Description of product or service: Supply of degaussing 
     systems on LHD 5 and LHD 6.
       Background: EMS Development Corporation (EMS) submitted a 
     Request for Extraordinary Contractual Relief under Public Law 
     85-804 (hereinafter referred to as the ``Act'') on May 15, 
     1995, in the amount of $1,053,769, not including profit. The 
     request arose out of contract N00024-92-C-2204, between 
     NAVSEA and Ingalls Shipbuilding, Inc. (ISI), for construction 
     of LHD 5 and 6. EMS was a subcontractor chosen by ISI to 
     supply degaussing systems on LHD 5 and LHD 6.
       The Secretary of the Navy has authority under the Act to 
     approve or deny requests for extraordinary contractual 
     relief. Section 5250.201-70(a) of the Navy Acquisition 
     Procedures Supplement (January 1992) delegates authority to 
     deny requests for extraordinary contractual relief to the 
     Head of the Contracting Activity, which authority may be and 
     has been further delegated to the Naval Sea Systems Command 
     (NAVSEA) Deputy Commander for Contracts. Based on this 
     delegation of authority, it was determined that there was no 
     basis to grant EMS's request for extraordinary contractual 
     relief. Therefore, EMS's request for relief pursuant to 
     Public Law 85-804 was denied in its entirety.
       Through a full and open competition, NAVSEA awarded 
     contract N00024-92-C-4045 to EMS in July 1992 for 11 
     degaussing systems. The contract called for a first article 
     testing of the system, Level III drawings, provisional 
     documentation and technical manuals, plus ten production 
     degaussing units. The degaussing systems consisted of four 
     power supplies (sizes 5KW, 8KW, 12KW and 26KW), one 
     switchboard, and one remote control unit. The period of 
     performance for the contract was July 1992 to November 1994.
       Subsequent to this contract award, ISI solicited EMS to 
     participate in a competitive procurement for degaussing 
     systems to be installed on LHD 5 and LHD 6. The degaussing 
     systems under the ISI procurement were identical to the 
     systems being procured under the NAVSEA contract, with the 
     exception of two 40KW power supplies. EMS acknowledged in the 
     request for relief that it submitted a proposal to ISI with a 
     price predicated on the assumption that the costs of 
     engineering design, Level III drawings, first article 
     testing, provisional documentation and technical manual 
     preparation on all but the two 40KW power supplies would be 
     absorbed under the NAVSEA contract. In addition, because of 
     the simultaneous production of degaussing systems, EMS was 
     able to offer ISI significant material cost savings. The 
     period of performance stipulated in the ISI Request for 
     Proposal (RFP) coincided with the NAVSEA period of 
     performance. Because of the larger number of systems being 
     produced within the same period of performance, EMS was able 
     to propose aggressive burden rates. These facts and 
     assumptions resulted in a highly competitive unit price for 
     the degaussing systems to be supplied for LHD 5 and LHD 6.
       In December 1992, NAVSEA exercised one of the existing 
     contract options which increased the number of production 
     units from 10 to 16. In January 1993, ISI awarded EMS a 
     contract in the amount of $906,380 to provide degaussing 
     systems for LHD 5 and LHD 6. On June 23, 1993, EMS was 
     notified that the NAVSEA contract was to be terminated in its 
     entirety for the convenience of the Government. The 
     termination for convenience resulted from the identification 
     of surplus degaussing systems from ships scheduled for 
     decommissioning. At that time, the NAVSEA contract was 11 
     months into completion, but still eight months from the 
     completion of first article testing. The termination of the 
     NAVSEA contract caused serious impacts on EMS's cash flow and 
     financial posture. In addition, the termination jeopardized 
     EMS's ability to provide the degaussing systems to ISI at the 
     contract cost and schedule.
       EMS continued performance under the ISI contract while 
     negotiating the terms of the NAVSEA termination beginning in 
     February 1995. During negotiations, the Termination 
     Contracting Officer (TCO) informed EMS that production costs 
     would not be allowed because EMS had not completed first 
     article testing prior to the termination. Further, the TCO 
     warned that inclusion of unabsorbed overhead in EMS's 
     termination settlement proposal could be cause for rejection.
       Because of their tenuous cash flow situation, EMS did not 
     have the financial resources to prolong termination 
     settlement negotiations and settled for $100,000 less than 
     initially requested. EMS then filed a request for relief 
     under Public Law 85-804 with ISI. On May 3, 1995, ISI 
     terminated its subcontract with EMS for default, citing EMS's 
     failure to make progress as the basis for the termination. 
     Additionally, ISI refused to consider EMS's request for a 
     subcontract price adjustment. The actions taken by ISI, 
     coupled with the NAVSEA terminated contract, left EMS in 
     financial extremis. On May 15, 1995, EMS requested 
     extraordinary contractual relief under Public Law 85-804 
     directly with the Navy, asserting ``essentiality'' to the 
     national defense and ``Government Action'' as the basis for 
     granting relief. EMS requested relief in the amount of 
     $1,053,769, plus profit, on increased costs caused by 
     Government action, which represented the alleged loss 
     sustained due to the termination of the NAVSEA prime contract 
     and the ISI subcontract, as well as attendant increases 
     incurred on all other contracts.
     A. EMS did not establish a basis for contract adjustment
       The Federal Acquisition Regulation (FAR), Part 50.302, 
     lists the following three types of contract adjustment under 
     the Act: (1) amendments without consideration (FAR 50.302-1); 
     (2) correcting mistakes (FAR 50.302-2); and (3) formalizing 
     informal commitments (FAR 50.302-3). EMS requested a contract 
     adjustment pursuant to FAR 50.302-1.
       FAR 50.302-1(a) stipulates an adjustment may be granted 
     without consideration if the ``actual or threatened loss 
     under a defense contract would impair the productive ability 
     of a contractor whose continued performance on any defense 
     contract or whose continued operation as a source of supply 
     is found to be essential to the national defense.'' In 
     addition, FAR 50.302-1(b) provides that if ``. . . a 
     contractor suffers a loss (not merely a decrease in 
     anticipated profits) under a defense contract because of 
     Government action . . . when the Government action, while not 
     creating any liability on the Government's part, increases 
     performance cost and results in a loss to the contractor,'' 
     an adjustment without consideration may be made to the 
     contract. EMS alleged it was entitled to an adjustment 
     pursuant to both 50.302-1(a) and 50.302-1(b).
       1. Amendments Without Consideration--Essentiality:
       In its submission, EMS stated it was the sole supplier for 
     the EMS-10, MCD-1, SSM-2, SSM-4 and SSM-5 degaussing units. 
     The FFG, AOE, TAO, LSD, and CVN class ships are equipped with 
     these systems. In addition, EMS was awarded a sole source 
     contract for a computer controlled power supply for SSN-21. 
     Accordingly, EMS argued it comprised the U.S. industrial base 
     for this technology.
       At the time of this request, EMS was a subcontractor to 
     Avondale Industries, Inc. (AII), and National Steel and 
     Shipbuilding Company (NASSCO) to supply the degaussing 
     systems for the LSD 52 and AOE 10, respectively. Avondale's 
     subcontract with EMS was found to be approximately 13 percent 
     complete as of June 18, 1995. The subcontract value is 
     $367,000, of which $60,000 had been paid to EMS through 
     progress payments. NASSCO's subcontract with EMS was 37 
     percent complete as of June 18, 1995, and $155,486 of a total 
     contract value of $375,028 had been paid to EMS through 
     progress payments. Discussions were conducted with the 
     cognizant program offices to validate EMS's assertion that it 
     was the only source available for the needed equipment and, 
     if not, to ascertain whether any other company would supply 
     the needed systems in a timely fashion. Similar discussions 
     were entered into with representatives from both Avondale and 
     NASSCO.

[[Page H2555]]

       Several facts were disclosed during the aforementioned 
     discussions. First, both the program offices and the 
     shipyards confirmed that other sources existed which could 
     produce the required systems with slight modification to 
     their production lines. Secondly, the Program Managers stated 
     the degaussing systems are not essential to acceptance of the 
     ship(s) on which they are to be installed and should their 
     delivery be delayed, they could be installed during a post 
     delivery availability period.
       FAR 50.302-1(a) requires the contractor's continued 
     performance or operation to be essential to the national 
     defense to merit a contract amendment without consideration. 
     EMS's continued performance or operation was not required to 
     support delivery of the AOE or LSD ships. In addition, EMS 
     was not considered to be essential to the national defense 
     because other sources existed which could satisfy the needs 
     of the Government.
       EMS did not, therefore, demonstrate a sufficient basis for 
     an amendment without consideration based on ``essentiality'' 
     to the national defense.
       2. Amendments Without Consideration--Government Action:
       EMS asserted the termination for convenience of the NAVSEA 
     contract was the cause for the deterioration of its financial 
     condition. Specifically, EMS stated the termination action 
     taken and the denial by the Navy to allow completion of the 
     first article testing and level III drawings reduced its 
     overhead base, which resulted in increased burden rates. The 
     increased rates caused cost overruns on other existing 
     contracts. NAVSEA was of the opinion that EMS's assertions 
     were without merit for two reasons: (1) EMS suffered 
     significant financial loses on contracts to supply degaussing 
     systems prior to NAVSEA's termination of its contract with 
     EMS; and (2) EMS knowingly and voluntarily chose to sign a 
     full and final release waiving its rights to further 
     termination costs because the company had a tenuous cash flow 
     situation as a result of the losses on its other contracts.
       In the backup data submitted as attachments to its Public 
     Law 85-804 submission, EMS acknowledged a substantial loss, 
     equating to approximately $1M on a contract with Electric 
     Boat Division of General Dynamics (EB). A review of EMS's 
     cash flow statements showed this loss had a significant 
     negative impact on EMS's financial status. In fact, the 
     supporting data showed an overall projected loss of $1.2M 
     from EMS's existing contracts, including the $970,108 
     projected loss on the Electric Boat contract. This loss is 
     unrelated to EMS's claimed losses associated with the 
     increased overhead rates. Therefore, the Navy's decision to 
     terminate the NAVSEA contract could not be considered the 
     sole cause for the deterioration of EMS's financial 
     condition.
       As stated above, EMS was informed by the TCO that no 
     production costs or costs associated with unabsorbed overhead 
     would be included in the termination settlement. The TCO 
     further stated that EMS could dispute both issues, but that 
     such an action would increase the time required to reach a 
     settlement. EMS chose to not delay the termination 
     negotiation and, instead, to pursue extraordinary contractual 
     relief because, as cited in its request for relief, ``they 
     needed a quick cash settlement.'' The company further stated 
     that it realized the negotiated settlement represented a loss 
     to EMS.
       Pursuant to FAR 49.201, when a fixed price contract is 
     terminated for convenience, a settlement should compensate 
     the contractor for the work done and the preparations made 
     for the terminated portion of the contract, including a 
     reasonable allowance for profit. Fair compensation is a 
     matter of judgment and is subject to negotiations and, 
     preferably, a bilateral agreement. Such an agreement was 
     executed by administrative modification A00001 on February 1, 
     1995. The termination settlement, as agreed to by EMS, 
     expressly stated ``(t)he contractor has received -0- for 
     work and services performed, or items delivered, under the 
     complete portion of the contract.'' In addition, the 
     termination modification contained a release specifying 
     the net settlement constituted payment in full and 
     ``complete settlement of the amount due the Contractor for 
     the complete termination of the contract and all other 
     demands and liability of the Contractor and the Government 
     under the contract. . . .'' EMS elected not to continue 
     settlement negotiations and endorsed the agreement on 
     January 31, 1995, with the full knowledge it has 
     relinquished its right for future recourse. Further, the 
     termination settlement contained several reserved items 
     protecting the rights and liabilities of the parties. EMS 
     elected not to reserve its right for recovery of costs 
     associated with the first article production units and 
     increased overhead costs on other contract(s) resulting 
     from the termination. EMS was responsible for protecting 
     its rights and liabilities, and identifying areas to be 
     reserved for possible future action. EMS did not include 
     costs in the termination settlement associated with the 
     issues which it claimed to be the catalyst for its extreme 
     financial position. EMS had the right to protect its 
     interest in recovery of the subject costs and knowingly 
     forfeited that right with the signing of the settlement 
     modification. The forfeiture of the reservation for 
     recovery of the subject costs was not and could not be 
     considered to be the result of Government action.
       FAR 50.302-1(b) requires an applicant for relief to show 
     that it has suffered a loss, not merely diminished profits, 
     under a defense contract because of government action. With 
     full knowledge of a loss resultant from the termination of 
     the NAVSEA contracts, EMS endorsed the modification releasing 
     its right to assert any claim arising out of events regarding 
     the termination. Accordingly, it could not be concluded that 
     EMS's loss was solely the result of Government action. It 
     was, therefore, considered inappropriate to grant relief 
     under Public Law 85-804 for those same events.


                               conclusion

       After considering all relevant information, it was 
     determined that EMS's Public Law 85-804 request should be 
     denied.

                         Contingent liabilities

       Provisions to indemnify contractors against liabilities 
     because of claims for death, injury, or property damage 
     arising from nuclear radiation, use of high energy 
     propellants, or other risks not covered by the Contractor's 
     insurance program were included in these contracts. The 
     potential cost of the liabilities could not be estimated 
     since the liability to the United States Government, if any, 
     would depend upon the occurrence of an incident as described 
     in the indemnification clause. Items procured were generally 
     those associated with nuclear-powered vessels, nuclear armed 
     missiles, experimental work with nuclear energy, handling of 
     explosives, or performance in hazardous areas.

Contractors:                                                     Number
    Westinghouse Election Corporation.................................9
    General Dynamics Corporation, Electric Boat Division..............6
    Lockheed Missiles & Space, Co., Inc...............................3
    Martin Marietta Defense Systems...................................4
    Newport News Shipbuilding.........................................3
    Hughes Aircraft Company...........................................1
    Hughes Missile Systems Company....................................1
    Charles Stark Draper Laboratory...................................1
    Alliant Techsystem, Inc./Thiokol Corporation......................1
    Loral Defense Systems--East.......................................1
    Kearfott Guidance & Navigation Corporation........................1
    Raytheon Company, Electric Systems Division.......................1
    Rockwell International Corporation, Autonetics Strategic Systems 
      Division........................................................1
                                                               ________

      Total..........................................................33

                  CONTINGENT LIABILITIES SUMMARY TABLE                  
------------------------------------------------------------------------
                                   Service and         Description of   
          Contractor                 activity         product service   
------------------------------------------------------------------------
Westinghouse Electric           Department of the  Replacement nuclear  
 Corporation.                    Navy, Naval Sea    reactor plant       
                                 Systems Command.   components.         
                                Department of the  New Attack Submarine 
                                 Navy, Naval Sea    nuclear reactor     
                                 Systems Command.   plant components.   
                                Department of the  Replacement nuclear  
                                 Navy, Naval Sea    reactor plant       
                                 Systems Command.   components.         
                                Department of the  New Attack Submarine 
                                 Navy, Naval Sea    nuclear reactor     
                                 Systems Command.   plant components.   
                                Department of the  FY 1996 Launcher     
                                 Navy, Strategic    Training Services.  
                                 Systems Program.                       
                                Department of the  Launcher Expendables 
                                 Navy, Strategic    for U.S. and U.K.   
                                 Systems Program.   Trident II Weapon   
                                                    Systems.            
                                Department of the  D5 Backfit Program.  
                                 Navy, Strategic                        
                                 Systems Program.                       
                                Department of the  Strategic Systems    
                                 Navy, Strategic    Programs Alterations
                                 Systems Program.   (SPALTS) and Navy   
                                                    Change Requests.    
                                Department of the  U.S. Operation and   
                                 Navy, Strategic    Maintenance.        
                                 Systems Program.                       
General Dynamics Corporation..  Department of the  Engineering technical
                                 Navy, Naval Sea    services and program
                                 Systems Command.   support for design, 
                                                    manufacture, test   
                                                    and delivery of New 
                                                    Attack Submarine    
                                                    prototype Main      
                                                    Propulsion Unit and 
                                                    prototype Ship      
                                                    Service Turbine     
                                                    Generator.          
                                Department of the  Engineering and      
                                 Navy, Naval        Analysis Services   
                                 Undersea Warfare   for SSN-688 & SSN-21
                                 Center Division.   Hull Programs.      
                                Department of the  Engineering,         
                                 Navy, Naval Sea    technical and       
                                 Systems Command.   logistic services in
                                                    support of R&D      
                                                    Submarine (SSN 691) 
                                                    Baseline            
                                                    Modifications.      
                                Department of the  Basic Ordering       
                                 Navy, Naval Sea    Agreement for       
                                 Systems Command.   supplies and        
                                                    services in support 
                                                    of operational and  
                                                    unique SSN and SSBN 
                                                    Submarines.         
                                Department of the  Engineering effort   
                                 Navy, Naval Sea    and design studies  
                                 Systems Command.   in support of the   
                                                    New Attack Submarine
                                                    Program.            
                                Department of the  Engineering effort   
                                 Navy, Naval Sea    and design studies  
                                 Systems Command.   in support of the   
                                                    Seawolf Submarine   
                                                    and Advance         
                                                    Submarine RDT&E     
                                                    Programs.           
Lockheed Missiles & Space Co.,  Department of the  FY 1996 Trident II   
 Inc.                            Navy, Strategic    (D5) Missile        
                                 Systems Program.   Production, related 
                                                    hardware, and       
                                                    services.           
                                Department of the  Trident Reentry Body 
                                 Navy, Strategic    Long Term           
                                 Systems Program.   Supportability.     
                                Department of the  Propellant Hazard    
                                 Navy, Strategic    Test and Analysis   
                                 Systems Program.   Program.            
Martin Marietta Defense         Department of the  Basic Ordering       
 Systems.                        Navy, Strategic    Agreement for       
                                 Systems Program.   Support of Trident  
                                                    and Trident II Fire 
                                                    Control Systems,    
                                                    Guidance Support    
                                                    Equipment and       
                                                    Related Support     
                                                    Equipment.          
                                Department of the  Trident I and II Fire
                                 Navy, Strategic    Control System.     
                                 Systems Program.                       
                                Department of the  U.S. effort, SPALTs, 
                                 Navy, Strategic    Logistics Support,  
                                 Systems Program.   and Fault           
                                                    Insertions.         
                                Department of the  Verification of      
                                 Navy, Strategic    failures on MK-5    
                                 Systems Program.   Inertial Measurement
                                                    Units.              
Newport News Shipbuilding.....  Department of the  Basic Ordering       
                                 Navy, Naval Sea    Agreement for       
                                 Systems Command.   supplies and        
                                                    services in support 
                                                    of operational SSN  
                                                    594, 637, and 688   
                                                    Class submarines.   

[[Page H2556]]

                                                                        
                                Department of the  Engineering effort   
                                 Navy, Naval Sea    and design studies  
                                 Systems Command.   in support of the   
                                                    Seawolf Submarine   
                                                    Program.            
                                Department of the  Engineering,         
                                 Navy, Naval Sea    technical, and      
                                 Systems Command.   logistic services in
                                                    support of Aircraft 
                                                    Carrier programs.   
Hughes Aircraft Company.......  Department of the  Electronic Assembly, 
                                 Navy, Strategic    Inertial Measurement
                                 Systems Program.   Unit Electronics,   
                                                    and other Electronic
                                                    Components.         
Hughes Missile Systems Company  Department of the  Procurement of       
                                 Navy, Naval Air    Tomahawk All-Up-    
                                 Systems Command.   Round Production,   
                                                    Depot Maintenance,  
                                                    and Operational Test
                                                    Launch.             
Charles Stark Draper            Department of the  U.S. Systems Support 
 Laboratory.                     Navy, Strategic    and PIGA Screening. 
                                 Systems Program.                       
Alliant Techsystem, Inc./       Department of the  C3 Second Stage Motor
 Thiokol Corp.                   Navy, Strategic    Disposal and        
                                 Systems Program.   Support.            
Loral Defense Systems-East....  Department of the  U.S. Technical       
                                 Navy, Strategic    Services and Support
                                 Systems Program.   Program.            
Kearfott Guidance & Navigation  Department of the  Procurement of       
 Corp.                           Navy, Strategic    Inertial Measurement
                                 Systems Program.   Units (IMU), IMU    
                                                    Repair and          
                                                    Recertification, IMU
                                                    Recalibration and   
                                                    Long Lead Material. 
Raytheon Company..............  Department of the  Captive Line Parts   
                                 Navy, Strategic    Program.            
                                 Systems Program.                       
Rockwell International Corp...  Department of the  SINS, ESGM, and ESGN 
                                 Navy, Strategic    House System        
                                 Systems Program.   Evaluation and      
                                                    Engineering Support 
                                                    Program.            
------------------------------------------------------------------------




                      DEPARTMENT OF THE AIR FORCE

       Contractor: Various.
       Type of action: Contingent Liability.
       Actual or estimated potential cost: The amount the 
     Contractors will be indemnified by the Government cannot be 
     predicted, but could entail millions of dollars.
       Service and activity: Civil Reserve Air Fleet (CRAF).
       Description of product or service: FY 1996 Annual Airlift 
     Contracts.
       Reference: ``Definitions of Unusually Hazardous Risks 
     Applicable to CRAF FY 1996.''
       Background: Twenty-nine contractors requested 
     indemnification under Public Law 85-804, as implemented by 
     Executive Order 10789, for the unusually hazardous risks (as 
     defined) involved in providing airlift service for CRAF 
     missions (as defined). In addition, Headquarters, Air 
     Mobility Command (AMC), requested indemnification for 
     subsequently identified contractors and subcontractors who 
     conducted or supported the conduct of CRAF missions. The 
     contractors for which indemnification was requested were 
     those to be awarded as a result of Solicitation Fl 1626-95-
     R0002, and future contracts to support CRAF missions which 
     are awarded prior to September 30, 1996. The 29 contractors 
     who requested indemnification are listed below:


       contractors to be indemnified and Proposed Contract Number

       Air Transport International (ATN), F11626-95-D0015.
       Airborne Express (ABX), F11626-95-D0024.
       American Airlines (AAL), F11626-95-D0022.
       American Int'l Airways (CKS), F11626-95-D0038.
       American Trans Air (ATA), F11626-95-D0019.
       Atlas Air (GTI), F11626-95-D0023.
       Burlington Air Express (BAX), F11626-95-D0020.
       Carnival Airlines (CAA), F11626-95-D0020.
       Continental Airlines (COA), F11626-95-D0018.
       Delta Air Lines (DAL), F11626-95-D0026.
       DHL Airways (DHL), F11626-95-D0027.
       Emery Worldwide (EWW), F11626-95-D0018.
       Evergreen International (EIA), F11626-95-D0018.
       Federal Express (FDX), F11626-95-D0019.
       Miami Air (MYW), F11626-95-D0018.
       North American Airlines (NAO), F11626-95-D0029.
       Northwest Airlines (NWA), F11626-95-D0018.
       OMNI Air (OAE), F11626-95-D0037.
       Rich International (RIA), F11626-95-D0018.
       Southern Air Transport (SAT), F11626-95-D0019.
       Sun Country Airlines (SCX), F11626-95-D0030.
       Tower Air (TWR), F11626-95-D0020.
       Trans World Airlines (TWA), F11626-95-D0031.
       United Airlines (UAL), F11626-95-D0032.
       United Parcel Service (UPS), F11626-95-D0033.
       US Air (USA), F11626-95-D0035.
       US Air Shuttle (USS), F11626-95-D0034.
       World Airways (WOA), F11626-95-D0018.
       Zantop International (ZIA), F11626-95-D0036.
       Note: The same contract number may appear for more than one 
     company because in some cases the companies provided services 
     under a joint venture arrangement.
       Desert Shield/Storm and Restore Hope showed that air 
     carriers providing airlift services during contingencies and 
     war require indemnification. Insurance policy war risk 
     exclusions, or exclusions due to activation of CRAF, left 
     many carriers uninsured--exposing them to unacceptable levels 
     of risk. Waiting until a contingency occurs to process an 
     indemnification request could result in delaying critical 
     airlift missions. Contractors need to understand up front 
     that risks will be covered by indemnification and how the 
     coverage will be put in place once a contingency is declared.
       Justification: The specific risks to be indemnified are 
     identified in the applicable definitions. No actual cost to 
     the Government was anticipated as a result of the actions 
     that were to be accomplished under this approval. However, if 
     the air carriers were to suffer losses or incur damages as a 
     result of the occurrence of a defined risk, and if those 
     losses or damages, exclusive of losses or damages that were 
     within the air carriers' insurance deductible limits, were 
     not compensated by the contractors' insurance, the 
     contractors would be indemnified by the Government. The 
     amount of indemnification could not be predicted, but could 
     entail millions of dollars.
       All of the 29 contractors were approved DoD carriers and, 
     therefore, considered to have adequate, existing, and ongoing 
     safety programs. Moreover, HQ AMC has specific procedures for 
     determining that a contractor is complying with government 
     safety requirements. Also, the contracting officer had 
     determined that the contractors maintain liability 
     insurance in amounts considered to be prudent in the 
     ordinary course of business within the industry. 
     Specifically, each contractor had certified that its 
     coverage satisfied the minimum level of liability 
     insurance required by the Government. Finally, all 
     contractors were required to obtain war hazard insurance 
     available under 49 U.S.C. Chapter 443 for hull and 
     liability war risk. All but one of the contractors 
     maintained said insurance. The remaining contractor had 
     applied for the insurance with the Federal Aviation 
     Administration, as required by the contract. Additional 
     contractors and subcontractors that conduct or support the 
     conduct of CRAF missions may be indemnified only if they 
     request indemnification, accept the same definition of 
     unusually hazardous risks as identified, and meet the same 
     safety and insurance requirements as the 29 contractors 
     who sought indemnification in this action.
       Without indemnification, airlift operations to support 
     contingencies or wars might be jeopardized to the detriment 
     of the national defense, due to the non-availability to the 
     air carriers of adequate commercial insurance covering risks 
     of an unusually hazardous nature arising out of airlift 
     services for CRAF missions. Aviation insurance is available 
     under 49 U.S.C. Chapter 443 for air carriers, but this 
     aviation insurance, together with available commercial 
     insurance, does not cover all risks which might arise during 
     CRAF missions. Accordingly, it was found that incorporating 
     the indemnification clause in current and future contracts 
     for airlift services for CRAF missions would facilitate the 
     national defense.
       Decision: Under authority of Public Law 85-804 and 
     Executive Order 10789, as amended, the request was approved 
     on October 11, 1995, to indemnify the 29 air carriers listed 
     above and other yet to be identified air carriers providing 
     airlift services in support of CRAF missions for the 
     unusually hazardous risks as defined. Indemnification under 
     this authorization shall be effected by including the clause 
     in FAR 52.250-1, entitled ``Indemnification Under Public Law 
     85-804 (APR 1984),'' in the contracts for these services. 
     This approval is contingent upon the air carriers complying 
     with all applicable government safety requirements and 
     maintaining insurance coverage as detailed above. The HQ AMC 
     Commander will inform the Secretary of the Air Force 
     immediately upon each implementation of the indemnification 
     clause.
       Approval was also granted to contracting officers to 
     indemnify subcontractors that request indemnification, with 
     respect to those risks as defined.


definition of usually hazardous risks applicable to CRAF FY 1995 annual 
                           airlift contracts

       1. Definitions:
       a. ``Civil Reserve Air Fleet (CRAF) Mission'' means the 
     provision of airlift services under this contract (1) ordered 
     pursuant to authority available because of the activation of 
     CRAF, or (2) directed by Commander, Air Mobility Command 
     (AMC/CC), or his successor for mission substantially similar 
     to, or in lieu of, those ordered pursuant to formal CRAF 
     activation.
       b. ``Airlift Services'' means all services (passenger, 
     cargo, or medical evacuation), and anything the contractor is 
     required to do in order to conduct or position the aircraft, 
     personnel, supplies, and equipment for a flight and return. 
     Airlift Services include Senior Lodger and other ground 
     related services supporting CRAF missions. Airlift Services 
     do not include any services involving any persons or things 
     which, at the time of the event, act, or omission giving rise 
     to a claim, are directly supporting commercial business 
     operations unrelated to a CRAF mission objective.
       c. ``War risks''means risks of:
       (1) War (including war between the Great Powers), invasion, 
     acts of foreign enemies, hostilities (whether declared or 
     not), civil war, rebellion, revolution, insurrection, martial 
     law, military or usurped power, or attempt at usurpation of 
     power.
       (2) Any hostile detonation of any weapon of war employing 
     atomic or nuclear fission and/or fusion, or other like 
     reaction or radioactive force or matter,
       (3) Strikes, riots, civil commotions, or labor disturbances 
     related to occurrences under subparagraph (1) above;
       (4) Any act of one or more persons, whether or not agents 
     of a sovereign power, for political or terrorist purposes, 
     and whether the

[[Page H2557]]

     loss or damage resulting therefrom is accidental or 
     intentional, except for ransom or extortion demands;
       (5) Any malicious act or act of sabotage, vandalism, or 
     other act intended to cause loss or damage;
       (6) Confiscation, nationalization, seizure, restraint, 
     detention, appropriation, requisition for title or use by, or 
     under the order of, any government (whether civil or military 
     or de facto), or local authority;
       (7) Hijacking or any unlawful seizure or wrongful exercise 
     of control of the aircraft or crew (including any attempt at 
     such seizure or control) made by any person or persons on 
     board the aircraft or otherwise, acting without the consent 
     of the insured; or
       (8) The discharge or detonation of a weapon or hazardous 
     material while on the aircraft as cargo or in the personal 
     baggage of any passenger.
       2. For the purpose of the contact clause entitled 
     ``Indemnification Under Public Law 85-804 (APR 1984),'' it is 
     agreed that all war risks resulting from the provision of 
     airlift services for a CRAF mission, in accordance with the 
     contract, are unusually hazardous risks, and shall be 
     indemnified to the extent that such risks are not covered by 
     insurance procured under Chapter 443 of Title 49. United 
     States Code, as amended or other insurance, because such 
     insurance has been canceled, has applicable exclusions, or 
     has been determined by the government to be prohibitive in 
     cost. The government's liability to indemnify the contractor 
     shall not exceed that amount for which the contractor 
     commercially insures under its established policies of 
     insurance.
       3. Indemnification is provided for personal injury and 
     death claims resulting from the transportation of medical 
     evacuation patients, whether or not the claim is related to 
     war risks.
       4. Indemnification of risks involving the operation of 
     aircraft, as discussed above, is limited to claims or losses 
     arising out of events, acts, or omissions involving the 
     operation of an aircraft for airlift services for a CRAF 
     mission, from the time that aircraft is withdrawn from the 
     contractors regular operations (commercial, DoD, or other 
     activity unrelated to airlift services for a CRAF mission), 
     until it is returned for regular operations. Indemnification 
     with regard to other contractor personnel or property 
     utilized or services rendered in support of CRAF missions is 
     limited to claims or losses arising out of events, acts, or 
     omissions occurring during the time the first propositioning 
     of personnel, supplies, and equipment to support the first 
     aircraft of the contractor used for airlift services for a 
     CRAF mission is commenced, until the timely removal of such 
     personnel, supplies, and equipment after the last such 
     aircraft is returned for regular operations.
       5. Indemnification is contingent upon the contractor 
     maintaining, if available, non-premium insurance under 
     Chapter 443 of Title 49, United States Code, as amended, and 
     normal commercial insurance, as required, by this contract or 
     other competent authority. Indemnification for losses covered 
     by a contractor self-insurance program shall only be on such 
     terms as incorporated in this contract by the contracting 
     officer in advance of such a loss.

                         Contingent Liabilities

       Provisions to indemnify contractors against liabilities 
     because of claims for death, injury, or property damage 
     arising from nuclear radiation, use of high energy 
     propellants, or other risks not covered by the Contractor's 
     insurance program were included; the potential cost of the 
     liabilities cannot be estimated since the liability to the 
     United States Government, if any, would depend upon the 
     occurrence of an incident as described in the indemnification 
     clause.
Contractor                                                       Number
    Civil Reserve Air Fleet (CRAF) FY 1996 Annual Airlift Contracts...1
                                                               ________

      Total.......................................................\1\ 1
                                                                     []
\1\ One additional indemnification was approved; however, the Air Force 
has deemed it to be ``CLASSIFIED,'' not subject to this report's 
purview.

                          ____________________