[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.
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\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.
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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.
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\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.
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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.
____________________