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American Electronic Laboratories Inc. v. United States

October 7, 1985


Appealed from: Armed Services Board of Contract Appeals


Before NEWMAN, Circuit Judge, COWEN, Senior Circuit Judge, and BISSELL, Circuit Judge.

BISSELL, Circuit Judge.

American Electronic Laboratories (AEL) appeals from the decision of the Armed Services Board of Contract Appeals (Board), which affirmed the contracting officer's denial of AEL's claim. For the reasons set forth below, we reverse the Board's decision and remand the case for proceedings consistent with this opinion.


Since a full and complete statement of facts relevant to this case is contained in the Board's decision reported at 84-2 BCA P17,468 (ASBCA1984), only a summary of the facts is presented here. Reference to the Board's findings of fact will be cited by their paragraph number as "FF ."

On October 13, 1978, AEL was awarded Contract No. DAAD07-79-C-0017 by the U.S. Army White Sands Missile Range (WSMR) to produce several electronic countermeasure test simulators. The simulators were to be used to determine the vulnerability of the Patriot missile to jamming equipment, before that missile went into production. WSMR worked through the Office of Missile Electronic Warfare (OMEW) in procuring the simulators.

Because the nature of the work involved advanced research and development of technical uncertainties, WMSR justified resort to a cost-plus-fixed-fee contract. The contract included the Limitation of Funds (LOF) clause which provided that (1) AEL was required to notify the contracting officer (CO) in writing when AEL had reason to believe that the costs that it would incur in the next sixty days, when added to all previously incurred costs, would exceed seventy-five percent of the funds then allotted to the contract; (2) absent written notice from the CO increasing the allotted amount, the government was not liable for costs incurred by AEL in excess of the total amount allotted to the contract; and (3) absent the CO's written notice, AEL was not obligated to continue performance under the contract or otherwise to incur costs in excess of the amount allotted to the contract.

The contract further required that a monthly status report be sent to the CO and it also set forth the authority for the CO's technical representative who acted in a liaison capacity between AEL and the CO.

Eight months into the contract (early June 1979) AEL started experiencing a cost growth which was due in large part to a subcontractor's performance problems. The technical representatives conferred with AEL on the problem, and it was mutually decided that a work around program coupled with engineering changes could compensate for the subcontractor's poor performance. However, these steps did not resolve the problem and the subcontractor was terminated. As a result of these events, AEL anticipated a cost overrun and informed the technical representatives by June 27 that an estimate would be forthcoming. On August 21 AEL notified the CO of its anticipated cost growth and requested $1,124,200.

Thereafter the technical representatives met with AEL on several occasions to discuss the cost overrun and the additional funding which was needed to complete the contract. At a meeting on September 25 and 26, 1979, AEL indicated its cost growth was then $1,396,524. The technical representatives advised AEL that the government had only an additional $900,000 available for the contract. Prior to this two day meeting the contract limit was $3,418,487. As a result of the meeting, the Board found, AEL knew the contract limit was $4,318,487 if no additional funding was available to WSMR. On October 12, AEL notified the contract specialist that it had exceeded its presented funding, requested preliminary funding of $500,000, and indicated it was continuing performance of the contract. On October 17, AEL informed WSMR that it would be at WSMR on October 23 to negotiate and finalize the funding issue. On October 19, the CO responded to a memorandum which detailed the strategy which the government was to use in negotiating with AEL on October 23. The memorandum advised that it was not in the best interests of the government for work to stop, stated that "every effort must be made to fund this contract and thus continue performance," and recommended a contract modification of $900,000. The CO determined that the proposed modification would be in the best interests of the government and signed a document authorizing the modification. At the October 23 meeting, AEL and WSMR reached an agreement on changes totaling $125,638. AEL was unable to negotiate for any greater sum because its negotiating team lacked engineers who could quantify the reduction in contract scope which has proposed by the government. On November 21, 1979, the CO signed a modification of the contract which added the $125,638 to the contract. On December 11, AEL informed the government that it would cease work on December 15 unless an additional $500,000 was added to the contract by December 14. The CO responded by requesting that AEL extend its deadline until December 21, to allow more time to secure funding. On December 20, the CO informed AEL that the funds still were not available and might not be prior to January 2, 1980. AEL ceased work on December 21, 1979. On January 8, 1980, the CO informed AEL that no additional funding had been received, whereupon, AEL asked the CO to release the residue of the $900,000. After the CO informed AEL that no funds were available, AEL submitted a claim for $1,361,644 which the CO denied. AEL then appealed to the Board.

In its decision on AEL's appeal, the Board denied AEL's claim for costs incurred in excess of the funds allotted to the contract. The Board determined that AEL had failed to provide timely notice of the cost overrun and that the government was not estopped from invoking the LOF clause. AEL brings this appeal before us pursuant to the Contract Disputes Act of 1978, 41 U.S.C. §§ 601-613. Under our scope of review the Board's conclusions of law are not final and are thus freely reviewable, while the Board's findings of fact are final and our review is limited to a determination whether those findings are arbitrary, capricious, based on less than substantial evidence, or rendered in bad faith. 41 U.S.C. § 609(b) (1982).


(1) Whether the Board correctly determined that AEL failed to ...

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