Rainier, Inc. v. United States (147 F. Supp. 709, 1957)

JONES, Chief Judge.

The plaintiff sues for $338,371.88, which it claims is the balance due it on 90,050 overcoats which it manufactured for the Army under a contract originally entered into on or about September 16, 1946, and dated June 28, 1946. Plaintiff’s contract was one of 18 awarded about that time for the manufacture of 1,262,000 field overcoats for the Army for a consideration of approximately $22,-647,650.

The facts, which are extensive and somewhat complicated, are set forth in detail in the court’s findings of fact.

On June 14, 1946, invitations to bid were sent out to 150 clothing manufacturers by the Quartermaster Purchasing Office at New York, hereinafter called the New York Office, but there was such a strong civilian demand in the clothing market at that time that only 18 bids were received. The request for bids recited that the informal bids would be used as a basis for negotiating contracts.

After considerable discussion as to the inclusion of a price revision clause, the plaintiff submitted a unit price bid of $19.09 per garment.

Telegraphic notices of conditional awards were sent to the 18 bidders, including plaintiff, on June 29, 1946, just prior to the end of the fiscal year. By telegram, dated August 9, 1946, plaintiff was advised by the contracting officer that the award of the contract for the manufacture of 90,000 overcoats had been confirmed by the War Department.

After the overcoat contracts had been executed, the Quartermaster General criticized the New York Office for its failure to make a cost analysis of the bids before the awards were made, called attention to the high administrative expense and high rate of profit in plaintiff’s contract, and returned the file relating to all of the overcoat contracts, except three, to the New York Office with the suggestion that a renegotiation with some of the contractors as to the unit prices specified in their contract would probably be necessary.

Negotiations for a reduction in the unit bid prices were conducted during the period November 1 to November 15, 1946, under the supervision of Major Voiers who was then Director of Procurement of the New York Office and who became successor contracting officer on or about December 1, 1946. Plaintiff’s representatives were called upon to attend two meetings held in the New York Office. At the first meeting plaintiff’s officers refused to agree to any adjustment in the bid price, but a few days later they signed Modification “C” of the contract, whereby plaintiff’s unit price was reduced from $19.09 to $18.99. Major Voiers reported the reduction in plaintiff’s unit price to the Quartermaster General with the statement that all elements of cost included in plaintiff’s bid had been refigured and substantiated.

On May 19, 1947, Major Voiers notified plaintiff that almost 30 percent of the overcoats had been delivered, and called attention to a provision in the price revision article which required the contractor to submit cost data within five days after such delivery. Cost data were submitted by plaintiff and a field audit was recommended by defendant’s Cost and Price Analysis Section. But in the meantime effort was made to get the profit items reduced.

A price Adjustment Review Board, composed of various officials of defendant’s New York Office, met to consider the matter of negotiating a revision of the profit items of the contract. No decision on that question was made, but the Board voted that the field audit be made.

On July 28, 1947, the Price Adjustment Advisory Group met to consider what amount should be withheld from payments on/plaintiff’s delivery, pending the completion of the field audit. After discussion the members voted to withhold $3.06 per unit from plaintiff and to proceed with the field audit.

On July 29, 1947, the contracting officer notified plaintiff that $3.06 per unit would be withheld as a temporary expedient, pending the result of the field audit. Plaintiff protested this action and after it agreed to furnish a bond all but $50,-000 of the funds withheld were released to it.

On October 16, 1947, after the Army Audit Agency had submitted its report, Major Voiers, the contracting officer, telephoned the plaintiff’s president and demanded that he appear at once at the former’s office to negotiate a revised price. Plaintiff’s president, Oberman, stated that he was unable to appear immediately because one of plaintiff’s officers was in the hospital and he himself was needed at the factory. He suggested a meeting be set for Monday, October 20, 1947. This was refused. Major Voiers insisted that he come at once and when Oberman declined, the contracting officer declared that he would then and there negotiate by telephone, and he proceeded to read off proposed unit prices in the various cost classifications.

Mr. Oberman objected to this procedure, whereupon Major Voiers stated that he would issue a unilateral determination of a unit price of about $15 per unit and that the fiscal officer would be instructed to adjust payments accordingly.

Plaintiff filed a telephone protest in Washington, and, as a result, the contracting officer agreed to a meeting with plaintiff on October 20, 1947. However, at that meeting at which plaintiff’s officers appeared with their accountants, Major Voiers refused to go into the cost items and insisted that he was interested only in reducing the profits. He refused to furnish plaintiff’s representatives a copy of the Army Audit Agency’s report or any other cost data on which he relied. He did mention the revised cost figures that had been submitted to him by the Cost and Price Analysis Section. The conference lasted about 20 minutes. The two sets of cost data which plaintiff had previously submitted were not used as a basis for negotiation. Plaintiff’s representatives had no opportunity to determine which of plaintiff’s claims had been deleted, and they were given no information as to how the unit cost figure supplied by the Cost and Price Analysis Section was computed.

The conference of October 20th was the first and only one afforded plaintiff by the contracting officer for negotiating a revision of price. As to this conference, our trial commissioner who heard the testimony recommended the following finding:

“The evidence establishes that the contracting officer had made a determination of the unit price he intended to allow before the conference began, that he did not negotiate with plaintiff in accordance with the terms and provisions of the price revision article, and that he acted arbitrarily in making his determination.”

We approve the finding, since we have seldom had our attention called to a more arbitrary attitude on the part of a constituted official. Certainly, when the testimony is read, there appears to have been a complete failure on the part of the contracting officer to negotiate in good faith as required by section 14(d) of the contract, which is set out in the court’s finding 3.

In fact, defendant’s counsel does not strongly contend that there was negotiation in good faith by the contracting officer and his associates. But he earnestly contends that regardless of the circumstances plaintiff is entitled only to its costs plus a profit of $1.65 per unit.

The plaintiff, on the other hand, contends that it .should recover on the basis of a unit price of $18.99 as provided in the first modification agreement.

We cannot accept either of these figures. Since the good faith negotiations required by the contract never occurred, the court must determine from all of the evidence the unit price to which the plaintiff is entitled.

The record contains 1132 pages of testimony and numerous exhibits. The experienced trial commissioner, who personally heard the witnesses, has found that in all the circumstances the plaintiff •is entitled to a unit price of $17.2915. Included in this figure is a profit allowance of $3.06 per unit which the commissioner has found to be fair and reasonable in the light of all the evidence. The detailed reasons for the commissioner’s conclusions as to the unit price are set out in the court’s findings 38 to 52, inclusive.

After a thorough review of the record we conclude that the findings of fact made by the commissioner are fully supported by the evidence, and the court, in its ultimate findings, has adopted the facts and conclusions of the commissioner. Plaintiff is entitled to recover the sum of $185,421.95, and judgment will be entered for that amount.

It is so ordered.

LARAMORE, MADDEN, WHITAKER, and LITTLETON, Judges, concur.

Findings of Fact

The court, having considered the evidence, the report of Commissioner Wilson Cowen, and the briefs and argument of counsel, makes findings of fact as follows :

1. Plaintiff is a New York corporation which, at all times' material to this action, was engaged in the manufacture of wearing apparel. Prior to the execution of the contract involved here, plaintiff was designing and manufacturing sportswear and ski-wear.' It had its principal office and show room at 1410 Broadway, New York City, and it had leased a loft at 777 Flushing" Avenue, Brooklyn, New York, where. machinery and equipment, had been .installed for manufacturing purposes.

Plaintiff was incorporated in March of 1946 with a paid-in capital of $80,000. Its capital stock was owned in equal shares by the following individuals who actively participated in the business and served as its officers:

Hyman M. Oberman, President.

Herman O. Karp, Vice President.

Joseph Bell, Treasurer.

Abraham Smith, Secretary.

2. In April of 1946, the four individuals who owned the stock of plaintiff organized a second New York corporation under the name of A. & L. Smith Garment Co., Inc., hereinafter referred to as the Smith Co. Its paid-in capital was $10,000 and its stock was owned equally by the four individuals who owned the stock of plaintiff. They actively participated in the business of the Smith Co. and held offices in that company as follows:

Abraham Smith, President.

Herman Karp, Vice President.

Hyman Oberman, Treasurer.

Joseph Bell, Secretary.

Soon after it was organized, the Smith Go. engaged in business as a sewing contractor for clothing manufacturers. The Smith Co. leased plaintiff’s Brooklyn plant and its machinery for operations, •and used the plant while plaintiff was still in process of developing its sample lines. All four stockholders and officials •of the Smith Co. had had considerable •experience in the manufacture of clothing and devoted their full time to its activities and to that of the plaintiff.

3. On or about September 16, 1946, plaintiff and the defendant, acting through the Quartermaster Corps, War Department, entered into a written contract dated June 28, 1946, whereby plaintiff agreed to manufacture and deliver 90,000 field overcoats with removable liner at a unit price of $19.09, or for a total ■consideration of $1,718,100. Under the terms of the contract, the Government ■furnished the cloth and liner materials, but the contractor was required to furnish the trimmings, buttons, thread, labels, etc., which are generally referred to as trimmings and findings.

The contract contained the following provisions:

* * * Article 10. Payments. — Upon the submission of properly certified invoices or vouchers, the contractor shall be paid the prices stipulated herein for supplies delivered and accepted or services rendered, less deductions, if any, as herein provided. Unless otherwise specified, payment will be made on partial deliveries accepted by the Government when the amount due on such deliveries so warrants; or when requested by the contractor, payments for accepted partial deliveries shall be made whenever such payments would equal or exceed either $1,000 or 50% of the total amount of the contract.

******

“Article 16. Disputes. — Except as otherwise specifically provided in this contract, all disputes concerning questions of fact which may arise under this contract, and which are not disposed of by mutual agreement, shall be decided by the Contracting Officer, who shall mail to the Contractor a written notification of his determination. Within 30 days from said mailing the Contractor may appeal to the Secretary of War, whose decision shall be final and conclusive upon the parties. Pending decision of a dispute hereunder the Contractor shall diligently proceed with the performance of this contract. * * * ”

The contract stated that certain supplementary contract provisions entitled “Revision of Price” were incorporated in and made a part of the contract, except that the percentage mentioned therein was changed from 40 percent to 30 percent. The “Revision of Price” article, so incorporated in the contract, read as follows:

“14. Revision of Price:

“(a) The prices fixed herein may be increased or decreased in accordance with this Article.

“(b) Times for negotiation. — (1) Upon completion of delivery of forty percent (40%) of the items to be furnished under this contract, the parties shall negotiate to revise the prices of all items theretofore and thereafter to be delivered. Within 5 days after the completion of delivery of said forty percent (40%) the Contractor shall furnish to the Contracting Officer the statements and data referred to in paragraph (c) of this Article. At any time and from time to time after the completion of delivery of said forty percent (40%), subject to the limitations specified in this Article, either the Government or the Contractor may deliver to the other a written demand that the parties negotiate to adjust the prices under this contract. No demand shall be made prior to 90 days after the completion of delivery of said forty percent (40%) and thereafter neither party shall make a demand having an effective date within 90 days of the effective date of any prior demand, provided, however, that this limitation shall not be applicable in the event that during any 90-day period the War Labor Board or any similar Government agency shall authorize or order a change in wages, salaries or conditions of employment in the plants of the Contractor used in the performance of this contract. Each demand shall specify a date (identical with or subsequent to the date of the delivery of the demand) as of which the revised prices shall be effective as to the deliveries made thereon and thereafter. This date is hereinafter referred to as ‘the effective date of the price revision’. For the purposes of the first negotiation contemplated by this paragraph, the date of execution of this contract shall be deemed to be the effective date of the price revision. Any demand under this Article, if made by the Contractor, shall state briefly the ground or grounds therefor and shall be accompanied by the statements and data referred to in paragraph (c) of this Article. If the demand is made by the Government, such statements and data will be furnished by the Contractor within 30 days of the delivery of the demand.

“(2) In the event all remaining work under this contract, as it may from time-to time be amended, shall be terminated*, under Article entitled ‘Termination at. the Option of the Government’ no demand shall then or thereafter be made: and any demand the effective date of which is less than 30 days before the effective date of such termination shall be void and of no effect.

“(c) Submission of data. — At the time or each of the times specified or provided for in paragraph (b) of this Article the Contractor shall submit (i) a new estimate and breakdown of the unit cost and the proposed prices of the items remaining under this contract after the effective date of the price revision, itemized so far as is practicable in the manner prescribed by War Department Standard Procurement Form No. 3; (ii) an explanation of the differences between the original (or last preceding) estimate and the new estimate; (iii) such relevant shop and engineering data, cost records, overhead absorption reports and accounting statements as may be of assistance in determining the accuracy and reliability of the new estimate; (iv) a statement of experienced costs of production hereunder to the extent that they are available at the time or times of the negotiation of the revision of prices hereunder; and (v) any other relevant data usually furnished in the case of negotiation of prices under a new contract. The Government may make such examination of the Contractor’s accounts, records and books as the Contracting Officer may require and may make such audit thereof as the Contracting Officer may deem necessary.

“(d) Negotiations. — (1) Upon the filing of the statements and data required by paragraph (c) of this Article, the Contractor and the Contracting Officer will negotiate promptly in good faith to agree upon prices for items to be delivered on and after the effective date of the price revision. Negotiations for price revisions under this Article shall be conducted on the same basis, employing the same types of data (including, without limitation, comparative prices, comparative costs, and trends thereof) as in the negotiation of prices under a new War Department contract.

“(2) After each negotiation the agreement reached will be evidenced by a supplemental agreement stating the revised prices to be effective with respect to deliveries on and after the effective date of the price revision (or such other later date as the parties may fix in such supplemental agreement).

“(e) Disagreements. — If within 30 days after the date on which the statements and data are required pursuant to paragraph (b) of this Article to be filed (or such further period as may be fixed by written agreement) the Contracting Officer and the Contractor fail to agree to revised prices, the failure to agree Shall be deemed to be a disagreement as to a question of fact which shall be disposed of in accordance with Article entitled ‘Disputes’, and the prices so fixed shall remain in effect for the balance of the contract notwithstanding any other provision of this Article.

“(f)' Payments. — Until new prices shall become effective in accordance with this Article, the prices in force at the effective date of the price revision shall be paid upon all deliveries, subject to appropriate later revision made pursuant to paragraph (d) or (e) or (h) (2) (B) of this Article.

■ “(g) Termination provisions. — For any of the purposes of Article entitled ‘Termination at the Option of the Government’ of this contract (including, without limitation, the computation of ‘the total contract price’ and ‘the contract price of work not terminated’), the contract price of delivered articles shall be deemed to be,

“(1) for all items delivered prior to the effective' date of the price revision, the contract price (giving effect to any prior revisions under this Article) applicable to each such item;

“ (2) for all items delivered on or after the effective date of the price revision, “(A) the contract price as revised in accordance with this Article if such revision shall have been agreed upon; and

“(B) if such revision shall not have been agreed upon, then such estimated prices as the Contractor and the Contracting Officer may agree upon as reasonable under all the circumstances and in the absence of such agreement such reasonable prices as may be determined in accordance with Article entitled ‘Disputes’.

“(h) Termination during the initial period. — In the event that this contract is terminated under Article entitled ‘Termination at the Option of the Government’ or the Contractor’s right to deliver is terminated under Article entitled ‘Delays-Damages’, so that the last delivery under the contract as terminated is made prior to the completion of the initial period as specified in paragraph (b) of this Article, the Contractor within 15 days after such last delivery shall furnish the data required by paragraph (c) of this Article and thereupon the parties shall negotiate in good faith to agree upon revised prices under this contract. The agreement reached shall be evidenced by a supplemental agreement to this contract stating the revised prices under the contract. Any disagreement as to the revised prices will be disposed of as a question of fact in accordance with Article entitled ‘Disputes’.”

4. Plaintiff’s contract was one of 18 awarded for the manufacture of 1,262,-000 field overcoats for the Army at a total cost of approximately $22,647,650.

On June 14, 1946, the Quartermaster Purchasing Office at New York, hereinafter called the New York Office, issued invitations for bids to 150 clothing manufacturers. The invitation was designated “Request for Informal Bid” and stated that the informal bids received in response to the invitation would be used as a basis for negotiating contracts.

Only 18 bids were received, because the clothing market was then dominated by a strong civilian demand which continued throughout 1947, and most manufacturers were unwilling to devote their facilities to production of clothing for the Army. The bid prices ranged from $14.25 to $22.75 per unit on quantities offered for delivery. Under the circumstances then existing in the clothing market, the contracting officer considered that the prices were reasonable and awards were made at the unit price quoted in each instance.

5. The New York Office was in charge of a Commanding Officer and included a Director of Procurement, a Buying and Production Branch, a Clothing and Equipage Branch, a Cost and Price Analysis Section, and a Legal Section. The services of the Army Audit Agency for that area were also available to the New York Office.

Lt. Boyden Bearce was the contracting officer for the procurement of the field overcoats until about December 1946. In January 1947, Major Lewis Voiers became the contracting officer for the field overcoats. He was first assigned to the New York Office in May 1946, where he was placed in charge of the Buying and Production Branch covering six or seven sections of procurement, including the Clothing Section, and was the immediate superior of Lieutenant Bearce. In September 1946, Major Voiers became Director of Procurement for the entire office.

During the time that Lieutenant Bearce acted as contracting officer, Major Voiers received daily reports from and had frequent discussions with him and with other subordinates regarding prices, production progress, and other matters relating to the overcoat contracts. The proposed awards of the overcoat contracts were discussed with Major Voiers and he approved them.

6. The invitation to bid had attached thereto a form of-the proposed contract containing the Revision of Price article. Beginning with the day after the invitations were issued, most of the bidders called at the New York Office for an interpretation of that article of the contract, because they had not previously encountered it in Government contracts.' They were referred to the Legal Section, since neither the contracting officer nor the civilian Chief of Procurement of the Clothing Seetion had had any previous experience with that provision of the contract and did not understand its meaning.

After receiving the request for bids, plaintiff’s officers decided to submit a bid at a unit price of $19.09 for the manufacture of the overcoats. However, the meaning and applicability of the Revision of Price article was not clear to them, and they decided to secure an interpretation of its language before submitting the bid. Accordingly, Mr. Oberman and Mr. Bell went to see the contracting officer a few days before the bids were required to be submitted and were referred to Mr. Allen, Chief of the Legal Section. They informed Mr. Allen that their experience with the renegotiation of Government contracts during the war had been unsatisfactory and that if price revision was analogous to renegotiation as applied to war contracts, they did not intend to submit a bid on the overcoats. They referred specifically to officers’ salaries and profit. While there is a conflict in the evidence as to the exact details of the interpretation given by Mr. Allen, it is undisputed that he advised plaintiff’s officers that the Renegotiation Act had expired in 1945, and therefore, that the overcoat contracts would not be subject to renegotiation as provided in that Act. Messrs. Oberman and Bell then returned to the office of ■.the contracting officer and imparted to Rim the advice they had received from Mr. Allen. The contracting officer stated that he agreed with and would abide by the interpretation given by Mr. Allen.

Based on the conversations referred to above, plaintiff has contended, both in the hearings before the War Department Board of Contract Appeals and in this action, that plaintiff’s officers were informed and understood that the amounts specified in plaintiff’s bid for officers’ salaries and profit would not be subject to reduction under the price revision article, and that the article applied only to items of cost, such as labor, which would vary In amount during the period of performance.

7. After considerable discussion in the New York Office, it was decided to delete the price revision article from the overcoat contracts, and plaintiff was advised of this decision. Acting on this Information, plaintiff submitted its first bid about June 20, 1946, at a unit price of $24.95. The unit cost breakdown, required on the bid form, showed that the price bid by plaintiff included $1.70 for trimmings and findings, $1.40 for general and administrative expenses, $1.85 for operating profit, and $20 for subcontracted operations and assemblies to be performed by the Smith Co. at 777 Flushing Avenue, Brooklyn, New York.

8. After plaintiff’s proposal had been submitted, defendant advised the bidders that a provision for revision of prices would be included in the contracts. Thereupon, plaintiff submitted an amended bid by letter of June 24, 1946, which read as follows:

“This will confirm our telegram dated June 22, 1946 advising you of our intention to submit an amended bid, as we were under the impression that the Price Revision clause was eliminated.

The following is our amended bid price:

A.& L, Smith

Banier, Garment

Cost Breakdown Inc. Co., Inc.

Trimmings and Findings.......... $ 1.30

Subcontracted operations & Assemblies ......................... 15.30 $15.36

Direct labor — Cutting.............. .85

Direct labor — Sewing.............. 8.35

Indirect factory expense — Ind. Labor ............................ 1.00

Indirect factory expense — All other ................................ 1.10

G & A Expense.....................70 1.00

Operating Profit (Before income and excess profits taxes). 1.73 3.06

Total proposed unit price......... $19.09

In view of the fact that Mr. Allen of the QM Legal Branch advised us that Supplementary Contract Provision No. 14 remains part of the bid, we have amended our bid price as stated above, based on prevailing wage rates.”

9. Telegraphic notices of conditional awards were sent to the 18 bidders on Saturday, June 29,1946, or Sunday, June 30, 1946. By telegram of June 29, 1946, plaintiff was notified by the contracting officer that its bid had been accepted for a quantity of 90,000 overcoats at a unit price of $19.09 and that the contract would include the price revision article. The notice also stated that the award was subject to an inspection of plaintiff’s manufacturing facilities and was also subject to the approval of the Chief, Current Procurement Branch, Office of the Director of Service Supply and Procurement, War Department, General Staff.

10. Following the award and prior to July 15, 1946, Charles Brandt, a civilian assistant to the contracting officer, inspected the Smith Co.’s plant at 77 Flushing Avenue, which was then in full production in civilian work. Messrs. Oberman and Bell were present at the time and informed the inspector that Mr. Bell, plaintiff’s production manager, was the former owner of the B. & D. Coat Co., which had manufactured a substantial quantity of similar overcoats under war contracts; that most of the employees were former employees of the B. & D. Coat Co., and that they were experienced in making the type of overcoat described in the specifications. The space then occupied covered approximately 15,000 square feet, but the inspector was advised that 8,000 square feet of additional space had been arranged for and would be available about January 1, 1947. The information conveyed to the plant inspector was confirmed by letter from plaintiff to the contracting officer under date of July 15, 1946.

By telegram of August 9, 1946, plaintiff was advised by the contracting officer that the award of the contract for the manufacture of 90,000 overcoats had been confirmed by the War Department. Upon receipt of the telegram, plaintiff and the Smith Co. discontinued the solicitation of civilian business and began the liquidation of the civilian business previously obtained so that their entire facilities could be devoted to the performance of the contract.

11. If standard procedure in the New York Office had been followed, each of the bids for the manufacture of the overcoats would have been referred to the Cost and Price Analysis Section for an analysis by the.section and a report to the contracting officer. However, no such analysis was made because of the great haste with which the New York Office acted in accepting the bids and awarding the contracts. About the end of June 1946, the contracting officer was advised that approximately $40,000,000 had been allocated for the procurement of overcoats and other clothing, exclusive of the value of materials which had been purchased and were then in storage. However, this appropriation from which the funds were allocated expired at the end of the fiscal year, and the funds had to be committed on or before June 30, 1946. Accordingly, the telegraphic awards were sent to the 18 bidders on June 29 and June 30, 1946.

12. After the execution of the contracts by plaintiff and the 17 other bidders, the New York Office requested the Quartermaster General to approve the awards, stating that no cost analysis had been made, because the overcoat was a new article for which no cost experience was available and because the contracts were subject to price revision on the basis of actual experience. In a reply memorandum of October 16,1946, the Quartermaster General criticised the New York Office for its failure to make an analysis of the bids before awarding the contracts. The memorandum read in part as follows:

“ * * * The fact that each contract contains a price revision article does not obviate the necessity for analyzing the original elements of cost submitted and establishing a close pricing pattern at the outset of contractual negotiations. In the administration of the price redetermination article a contractor is required, after completing 40 per cent of the contract, to submit a cost breakdown, based upon actual experience, following the structure of his original estimated cost breakdown. In theory the contracting officer reviews this new breakdown and compares it with the original estimate and with similar submissions by other bidders. Should such review and comparison satisfy the contracting officer he could approve the new cost breakdown and establish it as the basis for remuneration under the terms of the contract. In actual practice it is usually found necessary to dispatch an accountant to the contractor’s plant to perform an audit. The official report of this audit becomes the basis for the contracting officer’s final determination. In the course of negotiations arriving at this determination all of the contractor’s cost elements are discussed. In those cases where the contractor’s allocations of burden, general and administrative expense or profit appear unreasonably high the contracting officer will endeavor to reduce the appropriate cost to one that is reasonable. In this connection the ratios originally submitted by the contractor and allowed by the contracting officer become a basis for contention. For example, if the contractor has contemplated a profit of 30 per cent of total costs in his original bid and the contracting officer has not contested this rate, the contractor might well assume during the price redetermination negotiations that his profit should be 30 per cent of his revised total costs.”

The memorandum called specific attention to plaintiff’s bid, among others, and noted the “pyramided G. & A. Expense” and the high rate of profit anticipated by both the prime contractor and the subcontractor. The memorandum directed the New York Office to make a proper analysis of the bids that had been accepted and to resubmit a request for the approval thereof.

13. Pursuant to the directive of the Washington office, Major Voiers sent that office an analysis of each of the‘bids and forwarded a second request for the approval of the awards. In connection with the analyses, Major Voiers also submitted a memorandum of comments dated October 25, 1946. With respect to plaintiff’s bid, the comments were:

“Bid No. 8. — Rainier Inc. bid for 100,000 coats at the highest price submitted, $24.95. This would amount to $2,495,000. The sub-contract price of $20.00 to A. and L. Smith Garments contrasts with the average of $17.31. ' In addition, Rainier shows $1.40 for general and administrative expenses, which is above the average. At this rate, $140,000 G. & A. would be accumulated over the entire contract. Only a comparison to an overall profit and loss statement would reveal the propriety of this item. To the extent that G. & A. is over applied, additional profit will accrue. Profit at $1.40 is 8% of costs. In determining the propriety of this item it is well to consider the manufacturing effort expended. There is no indication of the financial arrangement between the prime and subcontractor. • Subsequently, the contractor filed an amended bid at $19.09, in which trimmings were reduced from $1.70 to $1.30, G. & A. from $1.40 to $.70, operating profit from $1.85 to $1.73.

“The subcontractor’s price was reduced from $20.00 to $15.36. Profit for the subcontractor is shown as $3.06 or 25% on costs. Together the profits of the prime and sub are also 25%. G. & A. at $.70 for the prime and $1.00 for the sub are $.50 above the average. This is equivalent to $50,000 on the entire contract.

“The prime contractor’s reduction in price may be attributed to the forward pricing program of the Government and at a reduction $5.86 per garment would amount to $586,-000 on the proposed contract. The contractor stated that the price was revised upon the learning of the inclusion of a price revision clause in the contract so that a provision for possible wage increases could be eliminated.

“Conclusion:

“Inasmuch as there are no yardstick costs available on this item, comparisons were limited to data furnished by the various contractors. It must be pointed out that without overall profit and loss statements it is difficult to evaluate the effect of volume upon the various overhead allocations. In instances of overabsorbtion [sic] of indirect expenses additional profits accrue.

“In instances where subcontractors perform the entire manufacturing operation it is not known if this arrangement is done because of economic necessity or for greater profit to the prime-contractor.”

14. By memorandum of November 1, 1946, the Office of the Quartermaster General returned to the New York Office the complete file pertaining to the overcoat contracts, with the exception of material relating to three of the bids. The memorandum requested that additional information be submitted with respect to the remaining 15 bids, including plaintiff’s bid, and stated in part as follows:

“3. In order to satisfactorily prepare the information required attention is directed to paragraphs 2 and 3 of 3d Indorsement from this office dated 16 October 1946 and to comments in further detail contained in the Cost & Price Analysis Branch report prepared by your installation. All questionable cost comments must be satisfactorily determined before further action can be contemplated by this office. Cost information presently lacking or incomplete must be secured and appropriately considered. The nature of many of these comments is sufficiently serious to require further investigation by contracting personnel. In some cases it may be necessary to reopen negotiations with bidders in order to establish a proper pricing pattern.”

15. During the period November 1 to November 15, 1946, after the memorandum described in the preceding finding had been received, negotiations were reopened with 15 of the overcoat contractors, including plaintiff. These negotiations were supervised by Major Voiers, then Director of Procurement in the New York Office, and were carried on verbally either in his office or in that of the contracting officer, who left the New York Office about November 11, 1946, on another assignment.

Col. Christie, who was in charge of the Manufacturing Division of the Philadelphia Quartermaster Depot, had conferred with the overcoat contractors in October 1946, and was thoroughly familiar with the specifications involved in the production of the overcoats. He advised the procurement officials in New York that, in his opinion, $19 per coat was a fair price for the type of overcoat required. The contracting officer and Major Voiers then agreed that the negotiations with the contractors should be so conducted that $19 per unit would be the maximum price for any contractor. As a result of the negotiations, agreements were made to reduce the awarded unit prices to amounts not exceeding $19 per unit with 15 contractors. One of the contractors agreed to reduce his unit price from $22.-75 to $21 per coat.

During the period of these negotiations, the demand for civilian wear continued strong, and clothing manufacturers were operating at full capacity.- The contracting officer and Major Voiers both considered that the prices obtained as a result of the negotiations were fair and reasonable at that time.

16. . Early in November 1946, plaintiff received a telephone request to report to the contracting officer for a discussion of its contract, and Messrs: Oberman and Bell responded to the reques t. They were told that the contract price was too high, that the profits were excessive, and that they should agree to a reduction of the prices as awarded.. During the discussion, the contracting officer and other procurement officials who participated had before them the price analysis which had been prepared by the Cost and Price Analysis Section. At the first meeting, plaintiff refused to make any reduction either in the contract price or the amount of profit included therein, but a few days later, plaintiff’s officers were again called in by the contracting officer and agreed to reduce the operating profit of Rainier, Inc. from $1.73 to $1.63 per unit. Mr. Bell proposed that the reduction be applied to the estimate of labor costs, but the contracting officer insisted that it should apply to the profit specified in plaintiff’s bid. The agreement was set forth in Modification “C” of the contract. It was dated November 27, 1946, and provided that the unit price was reduced from $19.09 to $18.99 and that the Revision of Price article of the contract was to remain in full force, unaffected by the modification.

17. On November 15, 1946, Major Voiers submitted to the Quartermaster General a report on the progress of the negotiations with the contractors, and with respect to plaintiff’s contract, stated as follows:

“Refigured all elements of cost and substantiated computation. Reduced prime contractor’s profit in the amount of .10.”

By the time plaintiff’s contract was modified as described above, a thorough study had been made by the New York Office of each item of estimated cost in the bid, including officers’ salaries and profit.

18. The bid form did not contain any provision for indicating the relationship between plaintiff and its subcontractor, and plaintiff submitted no information to the contracting officer to the effect that both concerns were under the same management and ownership.

Plaintiff’s bid had stated that the coats were to be manufactured at the plant of the Smith Co. in Brooklyn, and when this plant was inspected by a representative of the contracting officer in June 1946, the Smith Co. was engaged in the manufacture of civilian clothes. As has been shown, Messrs. Oberman and Bell were present at the time of the inspection, and the inspector was informed that Mr. Bell would be the production manager for the contract involved here. On July 15, 1946, plaintiff wrote the contracting officer regarding the inspection that had been made ■ of the plant in Brooklyn and referred to it as “our factory.” Again on July 25, 1946, plaintiff wrote the contracting officer, stating that arrangements had been made to use the facilities of the Newell Clothing Co. in Vineland, New Jersey, and that the equipment there was “in addition to our own facilities on file.”

Standard procedure in effect in the Supply Division of the Quartermaster Corps at the time the contract was entered into provided for an investigation by the contracting officer to determine the relationship or affiliation between the prime contractor and all subcontractors named in bids.

In December 1946, Major Voiers, the successor contracting officer, obtained reports from Dun & Bradstreet, Inc., which disclosed the relationship between plaintiff and the Smith Co., but there is no explanation in the record as to why the original contracting officer had not called for and obtained these reports prior to the early part of November, when the contract was renegotiated, especially since the Quartermaster General had criticized the New York Office for its failure to submit a proper analysis of the bids and had on October 16, 1946, pointed out that in passing on the amount of profit to be allowed, consideration should be given by the contracting officer to the character and extent of subcontracting. However, the reports were not obtained, until December 1946, and at the time he carried on negotiations with plaintiff in November 1946, Lt. Bearce did not know of the relationship between plaintiff and the Smith Co.

In his analysis of the several bids submitted to the Quartermaster General on October 5, 1946, Major Voiers stated, among other things, that there was no indication of the financial arrangement between plaintiff and its subcontractor. At that time, however, he knew of the probability of an affiliation between plaintiff and the Smith Co., but he did not obtain definite information that both companies were under the same ownership and management until he saw the Dun & Bradstreet reports. After receiving the reports, he notified Messrs. Oberman and Bell of the information he had obtained. They made no attempt at concealment but discussed the affiliation openly, stating that the facts with respect to the management and ownership of the two companies were matters of public record.

The facts outlined above were sufficient to put the contracting officer and Major Voiers on notice by October 29, 1946, that there was a strong probability of an affiliation between plaintiff and its subcontractor. If the contracting officer had inquired of plaintiff regarding the affiliation or had followed the established procedure, he would have been fully informed about the common ownership and management of the two companies prior to the early part of November 1946, when he called in plaintiff’s representatives for the purpose of negotiating a reduction in the contract price.

19. By letter of May 19, 1947, Major Voiers notified plaintiff that almost 30 percent of the overcoats had been delivered and called attention to a provision in the price revision article which required the contractor to submit cost data within five days after delivery of 30 percent of the contract quantity.

Plaintiff completed delivery of 30 percent of the total contract quantity on May 21, 1947, and on June 10, 1947, it submitted audit reports for the period of performance to May 23, 1947, covering deliveries of about 35 percent of the overcoats. The reports showed that plaintiff’s unit costs, exclusive of profit, amounted to $16.23 and that profit was applied to the unit costs in the same percentages as included in the renegotiated contract price of $18.99 per unit, thereby making a total cost of $21.33 per unit. In its letter of transmittal, plaintiff stated that the increased costs shown in the report were due to starting load expenses and certain changes in specifications but that conditions generally were the same as at the time the contract was awarded. Plaintiff therefore proposed that the unit price remain at $18.99 for the balance of the contract.

Because it failed to apply certain reductions allocable to work in process and also omitted an accrued payroll for the sewing department, plaintiff’s audit report did not reflect a correct statement of its unit cost. Had the report been adjusted for the errors referred to, such unit cost, exclusive of profit, would have amounted to approximately $15.85 per unit.

20. By memorandum of June 5, 1947, the contracting officer requested advice from the Chief of the Legal Branch as to the following:

“What legal grounds exist for the Contracting Officer to insist (when negotiations fail) on a reduced dollar profit where the percentage remains approximately the same in reference to actual operating costs ?”

On June 16, 1947, the Chief of the Legal Branch replied in part as follows:

“The amount of profit may be a subject of negotiation since there is nothing in the contract article which provides that the original estimated profit is binding either upon the Government or the contractor. In negotiating a revised price, all factors should be considered including contractor’s efficiency record in keeping costs down, a comparison of his costs with those of other contractors, a comparison of profit with that of other contractors and any other factors which are believed to have a bearing on the price to be negotiated. For example, the contractor’s failure to maintain a proper accounting system may very well influence the contracting officer’s decision as to the reliability and reasonableness of the costs and profit claimed by the contractor. However, the profit as set forth in the original cost breakdown is definitely evidence that the parties agreed, at least for the purpose of an original estimate, that such profit was not unreasonable. It would be difficult to defend the arbitrary disallowance of a profit set forth in the original cost estimate, and upon which the award was originally approved, without adequate justification for such action.”

21. On June 12, 1947, plaintiff’s cost data were submitted to the Cost and Price Analysis Section, which recommended that a field audit be made of both the prime and subcontractor’s records.

The audit was not ordered at that time. Instead, the Price Adjustment Review Board, composed of various officials in the New York Office, met to consider the matter of negotiating a revision of the profit items in the contract price. No decision on that question was made, but the Board voted that the field audit be made and that the Cost and Price Afialysis Section send a special letter of instructions to the Army Audit Agency, outlining the information desired.

On July 28, 1947, the Price Adjustment Advisory Group met in the New York Office to considér what amount should be withheld from payments on plaintiff’s delivery, pending the completion of the field audit. This group was organized in the New York Office to advise contracting officers, and Major Voiers was a member. One member stated that $5 should be withheld from the .award price of $18.99, and on being consulted as to his wishes in the matter, the contracting officer stated:

“Would like to see something in the vicinity of $16.00. This fellow has delivered about 40,000 units. If we withheld $5.00 per unit it would mean the delivery of $200,000 worth of Coats with no payment whatever. I want to force their hand, but don’t want to force it so much that it will cut their production.”

Then it was suggested that the Government withhold the subcontractor’s profit, amounting to $3.06 per coat, since this would provide a tangible basis for a finding of fact by the contracting officer. When this suggestion was made, the contracting officer stated that whatever action was taken, he was prepared to make a finding of fact if called upon to do so. A motion was then made and adopted to withhold the sum of $3.06 per unit from plaintiff and proceed with the field audit.

The request for the field audit was made on July 29, 1947, and the audit was commenced by the Army Audit Agency about August 5, 1947.

22. On June 27, 1947, the contracting officer wrote plaintiff, stating that sufficient data would not be available within 30 days after plaintiff’s cost data were submitted to permit the parties to agree on a revised price, pursuant to the price revision article. He requested an extension of 30 days and plaintiff consented. Thereafter, by letters of July 15, 1947, August 18, 1947, and September 18, 1947, the contracting officer made similar requests for extensions of the 30-day negotiation period. Plaintiff assented to each request, thereby extending the' negotiation period to October 18, 1947.

23. On July 29, 1947, the contracting officer wrote, plaintiff, stating that, effective immediately, the sum of $3.06 per unit would be withheld from funds due plaintiff as a temporary expedient to protect the Government, pending the results of the Government’s field audit.

Plaintiff protested this action by letter of August 6, 1947, stating that the contract was not in dispute and that plaintiff was unable to understand the contracting officer’s attitude in his dealings with plaintiff. Major Voiers replied on August 8, 1947, to the effect that the withholding of funds was not a reflection on plaintiff’s performance of the contract, that negotiations for revision of price would be conducted upon completion of the field audit, and that promptly thereafter an adjustment of all funds withheld would be made.

About August 12, 1947, plaintiff’s officers carried their protest to the Office of the Quartermaster General, and on the following day Major Voiers conferred with Army officials in Washington, D. C., who advised him that the withholding of funds was untimely and improper. It was suggested that in order to protect the Government’s interests, plaintiff should submit a bond to remain in force until the price revision negotiations were completed.

Plaintiff’s officers agreed to furnish a bond of $50,000, and Major Voiers then released approximately $100,000 of the funds that had been withheld. He retained $50,000 pending the receipt of a bond form approved by the War Department. The approved form of bond was never received, and the $50,000 was never released.

Up to the time the above-described actions were taken, no negotiations had been conducted with plaintiff pursuant to the terms of the price revision article. However, the contracting officer had on several occasions verbally requested plaintiff to reduce the amount of profit included in the award price. At one time plaintiff offered a reduction of 25 cents in its profit, but the contracting officer stated that was not sufficient, and the parties reached no agreement on the matter.

24. On August 12, 1947, the contracting officer wrote plaintiff requesting that it submit a new cost breakdown pursuant to paragraphs (b) and (c) of the price revision article. The effective date of the new breakdown was to be August 21, 1947, but at plaintiff’s request the date was extended to August 29, 1947, to correspond with plaintiff’s monthly closing date.

On September 29, 1947, plaintiff sent the required cost data covering the production of 60,520 overcoats. The unit cost amounted to $15.7192, exclusive of profit. To this, was added $3.2889 as operating profit for the Smith Co. and $1,-7848 for Rainier, Inc., or a total proposed unit price of $20.7929. However, in its letter accompanying the cost data plaintiff proposed that the unit price remain at $18.99 for the balance of the contract.

25. The Army Audit Agency submitted its report on September 19, 1947, stating that its audit covered an examination of plaintiff’s books during the period from July 1, 1946 to May 23, 1947, and of the Smith Co.’s books from December 1, 1946 to May 23, 1947. As a result of a number of adjustments and some deletions from plaintiff’s costs, the auditor found that the unit cost for the period audited amounted to $15.0492, exclusive of any profit. The report also stated that an examination had been made of the “latest costs prevailing in the period under review”, and that the unit cost on that basis amounted to $13.-6893. No explanation was contained in the report as to how or on what basis the “latest costs” were computed, but at a hearing held by the Board of Contract Appeals on November 7, 1947, a witness for the Government stated that the Army auditor had determined the cost of producing the garments for the period from May 23, 1947 to July 1, 1947. To the. extent that the report attempted to show costs after May 23, 1947, such costs must have been estimated because no inventory of work in process was available for the period from May 23, 1947 to July 31, 1947. The contractor’s inventories of such work in process were made only for May 23, 1947, and August 29, 1947.

The Cost and Price Analysis Section reviewed the audit and decided that the difference between the unit cost reported by the Army Audit Agency for the period of performance to May 23, 1947 and the “latest costs” were starting load costs. These starting load costs were prorated to the total number of units to be delivered under the contract and a unit cost of $13.1612 was derived. This figure did not include officers’ salaries or profits since these items were referred to the contracting officer for further consideration when the report was sent to him on October 14, 1947.

26. On October 16, 1947, the contracting officer telephoned plaintiff’s president and demanded that he appear at once at the office of the contracting officer to negotiate a revised price. Plaintiff’s president stated that he was unable to appear immediately, because one of plaintiff’s officers was in the hospital and that he, Oberman, was needed at the factory. He suggested a meeting on Monday, October 20, 1947. Major Voiers insisted that Mr. Oberman appear immediately, and when Oberman refused, the contracting officer stated that he would then and there negotiate by telephone and proceeded to read off proposed unit prices in the various cost classifications for Oberman’s approval.

When Mr. Oberman objected to this procedure, ’ the contracting officer stated that he would issue a unilateral determination of a unit price in the amount of about $15 per unit and that the Government fiscal officer would be instructed to adjust payments accordingly.

Plaintiff then filed a telephone protest with the contracting officer’s superiors in Washington and, as a result, the contracting officer consented to a meeting with plaintiff on October 20, 1947.

27. On October 20, 1947, Messrs. Oberman and Bell arrived with their accountant at the contracting officer’s office for the purpose of negotiating a revised price. At the outset, Major Voiers inquired as to what reduction in profit plaintiff would consent to. Plaintiff’s officers replied that they had come with their accountant to discuss all items of cost, and since they had previously submitted cost data on two occasions to the contracting officer, they requested that they be shown the Government’s cost data, including the audit made by the Army Audit Agency. Major Voiers replied that the only thing he was interested in was a reduction in profit. Upon plaintiff’s refusal to discuss a reduction in profit without regard to other costs involved, the contracting officer terminated the meeting after briefly referring to several classifications of costs.

The contracting officer declined to furnish plaintiff’s representatives a copy of the Army Audit Agency report or any other cost data on which he relied, but he did mention the revised cost figures that had been submitted to him by the Cost and Price Analysis Section and stated that he would allow five percent additional for officers’ salaries and a profit of approximately eight percent so that his determination would amount to approximately $15 per unit.

Aside from the several verbal requests that the contracting officer had previously made for a reduction of the profit in the award price, the conference of October 20th was the first and only one which was afforded by the contracting officer for negotiating a revision of price. The conference lasted about 20 minutes. The two sets of cost data which had previously been furnished by plaintiff were not used as a basis for. negotiation. Plaintiff’s representatives had no opportunity to determine what items claimed by them had been deleted, and they were given no information as to how the unit cost figure supplied by the Cost and Price Analysis Section was computed.

The evidence establishes that the contracting officer had made a determination of the unit price he intended to allow before the conference began, that he did not negotiate with plaintiff in accordance with the terms and provisions of the price revision article, and that he acted arbitrarily in making his determination.

28. On October 20, 1947, the contracting officer mailed plaintiff his written determination, stating that he had found the sum of $14.95 to be the fair and reasonable price for the 90,000 overcoats to be delivered by plaintiff under the terms of the contract.

29. By letter dated October 24, 1947, plaintiff appealed from the contracting officer’s decision to the Secretary of War and charged that the contracting officer had not acted in good faith and had repeatedly breached the contract. These allegations were repeated in plaintiff’s formal appeal of November 3, 1947, when plaintiff further alleged that the contracting officer had failed to follow the procedure required by the contract in negotiating or in determining a revised price.

On November 7, 1947, a hearing was held before the Army Board of Contract Appeals, which by decision of November 14, 1947, affirmed the contracting officer’s determination. On the same day, the Secretary of War adopted the findings of fact and recommendations of the Board.

30. After plaintiff’s appeal had been made, the matter of the profit allowances to the contractors manufacturing the Army overcoats under the same form of contract as that entered into with plaintiff became the subject of conferences between the New York Office and the Office of the Quartermaster General in Washington, D. C., on October 22, 1947. Five of the other overcoat contractors protested to Gen. Herman Feldman, Chief of the Supply Division in the office of the Quartermaster General, that Major Yoiers, the contracting officer, had not negotiated with them in good faith, that he declined to budge from a maximum price of $15 per unit, that at a conference with the contractors held in May of 1947, he had made the categorical statement that he did not propose to alter the original dollar profit stated in the contractor’s cost breakdown but that he had subsequently proposed drastic reductions in the profit figure.

As a result of the protest, the commanding officer and two other officials of the New York Office conferred with General Feldman in his office on November 10, 1947, at which time he attempted to clarify the problem of profit allowances under the contracts containin