Government Constructively Changed Contract By Contravening Parties’ Course of Dealing; Appeals of Raytheon Company ASBCA Nos. 60448, 60785

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Appeal of a contractor claim asserting a constructive change is sustained. The contractor provided missiles to the government. The contractor was also required to provide engineering support for the missiles. The contract was ambiguous as to whether the contractor was supposed to provide the engineering support over a one year period of performance or a three year period performance. The contracting officer determined that the three-year period applied. The board found that the decision constituted a constructive change. Although the applicable period of performance was ambiguous, the parties’ course of dealing established they understood that the one-year period applied to engineering support. Because the contracting officer’s decision altered this understanding, the contractor was allowed to recover the additional costs it would incur in providing engineering support for three years.

For several years Raytheon had been producing Advanced Medium Range Air-to-Air Missiles for the Air Force. Raytheon provided these missiles under successive contracts, called Lots. Each Lot had a Statement of Content (SOC), which is similar to a statement work. The SOC’s contained two paragraphs relevant to this dispute: (1) SOC 2.a, which required Raytheon to produce a certain number of missiles over a three year period, and (2) SOC 2.b, which required Raytheon to provide Systems Engineering/Program Management (SEPM)—basically engineering support for the missiles—over a one year period.

These two paragraphs, however, did not necessarily set forth distinct tasks. The missiles produced in accordance with SOC 2.a required engineering support, or production SEPM. Indeed, about 2/3 of the SEPM provided under SOC 2.b was production SPEM to support the missiles produced under SOC 2.a. But the period of performance for missile production under SOC2.a was three years while the period of performance for SEPM was one year. To avoid a gap in engineering support for newly produced missiles, Raytheon would produce three different lots of missiles under SOC 2.a for each year of engineering support required under SOC 2.b. Thus, for example, SEPM provided under Lot 20 would include the production SEPM for missiles produced under the third year of Lot 18, the second year of Lot 19, and the first year of lot 20. This meant that the engineering support that Raytheon was charging under lot 20 was really production support for earlier contracts.

But in 2013, as the Air Force was preparing to negotiate a new missile contract, Lot 28, the contracting officer questioned whether production SEPM fell under SOC 2.b. Indeed, SOC 2.a’s requirement included all the activities required to produce missiles. Given that production SEPM was required for the production of missiles, the contracting officer decided that for Lot 28, production SEPM would be provided under SOC 2.a not SOC 2.b. This meant that production SEPM now had a three year period of performance, not the one year period under SOC 2.b.

As noted, however, Raytheon had been using the SEPM provided under each new Lot to cover the production SEPM for three previous Lots. Because the production SEPM for Lot 28 would apply to the missile produced under SOC 2.a for Lot 28, this meant that Raytheon could not use Lot 28 to cover the production SEPM still required for missiles that were being produced under Lots 25, 26, and 27.

Raytheon submitted a request for an equitable adjustment to cover the production SEPM for Lots 25, 26, and 27. The contracting officer denied the request. Raytheon then submitted a certified claim for over $48 million for its costs providing production SEPM for Lots 25, 26, and 27. The contractor officer denied the claim. Raytheon appealed to the ASBCA.

On appeal, Raytheon argued that the Air Force had constructively changed Lots 25, 26, and 27 when it decided that production SEPM was included in SOC 2.a, not SOC 2.b. This required Raytheon to provide production SEPM for Lots 25, 26, and 27 during the three year period of performance on those contracts SOC 2.a instead of the one year period of performance under SOC 2.b.

The board noted that constructive change has four elements: (1) a change in performance not required by the contract, (2) the person directing the change have authority to alter the contractor’s duties, (3) the contractor’s performance requirements were enlarged, and (4) an order from a government official directing the contract to perform more work. The board reasoned that elements 1 and 4, change and order, were dispositive. Raytheon had established both elements.

To prove a change in performance, the board had to first determine what kind of performance the contract initially required. This was difficult because the SOC’s were ambiguous as to whether SOC 2.a or SOC 2.b covered production SEPM. On the one had it was reasonable to interpret SOC2.s as covering production SEPM because that paragraph covered all activities necessary to produce missiles. On the other hand, it was reasonable to interpret production SEPM as covered by SOC 2.b because that provision did not define SEPM and did not explicitly exclude production SEPM.

When confronted with ambiguous terms, the board reasoned that it was appropriate to look to the parties course of dealings—that is, the previous conduct between the parties, which is to be fairly regarded as establishing a common basis of understanding. Here, the board found that parties course of dealing established that Raytheon was only required to provide production SEPM under SOC 2.b’s one year period of performance. The board noted that other agency officials and even previous contracting officers had always interpreted the SOC 2.b as including production SEPM. Indeed, the parties, during negotiations for a previous contract, Lot 22, had actually attempted to move production SEPM from SOC 2.b to SOC 2.a, which indicated that they understood production SEPM was not included in SOC 2.a.

If the parties understood that production SEPM was not included in SOC 2.a, then the contracting officer’s decision to include production SEPM in SOC 2.a was a change in performance.

As to the fourth, order-from-a-governmentofficial, element,  the board noted that it is not enough for a contractor to show that the official offered advice, comments or suggestions. Rather, the contractor must show some coercion or compulsion. Here, the board found that by interpreting SOC 2.a in Lots 25, 26, and 27 as covering production SEPM, the contracting compelled Raytheon to provide production SEPM during the Lots’ SOC 2.a period of performance.

The board concluded by finding that Raytheon had demonstrated with reasonable certainty that its actual costs to provide production SEPM for Lots 25, 26, and 27 was $42 million. Allowing for a 12.6% profit, the board found that Raytheon was entitled to $48 million.

Raytheon is represented by Donald G. Featherstun, Daniel P. Wierzba, and Giovanna A. Ferrari of Seyfarth Shaw LLP. The government is represented by Jeffrey P. Hildebrant, Lawrence M. Anderson, Jason R. Smith, Caryl A. Potter, Colby L. Sullins, and Danielle A. Runyan of the Air Force.

ASBCA - Raytheon Company (2)