Full opinion text
OPINION BENNETT, Judge. This renegotiation case comes before the court on plaintiff’s and defendant’s exceptions to findings of fact and the opinion issued on July 25, 1975, by Trial Judge George Willi, in accordance with Rule 134(h), in which he held that plaintiff realized excessive profits of $711,231. Plaintiff, Major Coat Company, Inc., brought this action seeking a redetermination of a unilateral order of the Renegotiation Board (the board) that it realized $740,-760 in excessive profits, before federal income taxes, out of total net profits of $1,079,962 for its fiscal year ended January 31,1968 (FY 1968). Plaintiff now prays for a judgment that it earned no excessive profits within the meaning of section 103(e) of the Renegotiation Act of 1951 (the Act), 50 U.S.C. App. § 1213(e) (1970), while defendant presses for a ruling that the extent of the excess was even greater than that found by the board, or about $900,000. Upon careful review of the record we are unable to agree with either the board or the trial judge, and find that plaintiff received excessive profits of $560,000. The facts and reasons léading to this conclusion are fully set out hereafter. The suit is brought under section 108 of the Act, as amended, 50 U.S.C.A. App. § 1218 (Supp. V, 1975), which provides that judicial review of the board order shall occur in a de novo proceeding. This provision is understood to require not only a full, due process trial to develop the facts in the case entirely independent of what the board may have done, but also that defendant, in seeking the return of monies paid out by it, bear the burden of persuading the court by a preponderance of the evidence that the renegotiated contractor realized excessive profits and that the extent of that excess was as defendant claims. Lykes Bros. S.S. Co. v. United States, 459 F.2d 1393, 1401-403, 198 Ct.Cl. 312, 327, 330 (1972) (hereafter Lykes Bros.). Congress set forth in the Renegotiation Act the means of determining the existence and extent of excessive profits in a series of guidelines known as the “statutory factors.” Section 103(e). These describe the essentially comparative process by which a reasonable level of profit is determined. The factors requiring consideration of the character of the renegotiated contractor’s business, the net worth and capital employed, and the reasonableness of his costs and profits outline the information that must be assembled in order to construct a reasonably accurate comparison of the contractor’s performance in the fiscal year under renegotiation (the review year) with the performance of similar firms. This group of factors provides the means of identifying the firms (including plaintiff itself in the past years) sufficiently similar to plaintiff that they may be considered part of plaintiff’s “industry,” and of determining the pricing policy and profit picture of that industry (or industries). Three other statutory factors focus attention on the contractor’s efficiency, the business risks he assumed, and his contribution to the defense effort, to ascertain how well the renegotiated contractor fared against other firms in his industry on points affecting profitability in a competitive market. This analysis answers “[a] most important question in renegotiation,” which is “ * * where the contractor in a defense industry belongs in the hierarchy of profit returns of industry as a whole and the reason for his being placed in that particular position.’ ” Aero Spacelines, Inc. v. United States, 530 F.2d 324, 340, 208 Ct.Cl. 704, 730 (1976). (1) Character of Business. Section 103(e)(5) of the Act provides that a determination of excessive profits must take into consideration the “[cjharacter of [the renegotiated contractor’s] business, including source and nature of materials, complexity of manufacturing technique, character and extent of subcontracting, and rate of turnover.” This factor requires the assembly of basic information about the renegotiated contractor’s total operation during the review year, laying the foundation for a later, meaningful comparison of the contractor’s review year business and performance with that of firms functioning in a competitive market. The factor focuses attention, inter alia, on the kind of renegotiable product made, the nature of the manufacturing operation and the difficulties inherent in the product’s manufacture, the sources of the materials from which it was produced, the kind of product that the renegotiated contractor marketed commercially (if any) during the review year or in preceding years, the difficulty of making that product relative to the renegotiable item, and the state of the commercial market in which the contractor had operated or was operating. Most of our commentary under this factor relies heavily on the opinion of the trial judge. Plaintiff is a small, family-owned enterprise that began operation in 1945 as a custom manufacturer of men’s clothing, primarily coats, jackets, and trousers, which it produced from fabrics supplied by commercial customers in what was known as a “cut, make, and trim” operation. Nourished by the personal energy and initiative of its owners, three brothers, the venture grew and generally prospered until, by 1960, the business was conducted in newly constructed and enlarged facilities located just outside Bridgeton, New Jersey. By then the brothers had established profitable working relationships with McGregor-Doniger Co. (McGregor) and Londontown, Inc., marketer of London Fog raincoats. While the requirements of these two customers were seasonal in nature, they dovetailed to provide plaintiff with full utilization of its productive facilities on nearly a year-round basis. With this substantial and sustained patronage, plaintiff’s business continued to grow. Earnings were modest, in keeping with the very limited capital available to the brothers, yet progress was sufficient to qualify plaintiff for a $100,000 loan from the Small Business Administration and to enable it punctually to curtail and ultimately to liquidate that obligation in 1966. Beginning in 1964, the clothing industry experienced a general upturn in sales and earnings that continued substantially unabated until the last quarter of 1969. Plaintiff’s revenues from McGregor and London-town increased accordingly, and in its fiscal year ended January 31, 1966, it showed a combined net profit of $26,000, a 2.9-per-cent return on receipts of approximately $900,000. Prospects for plaintiff’s future with McGregor and Londontown were predictably good. This was generally the climate in which plaintiff found itself on the eve of its first major involvement with the Government as a contract supplier of military clothing. In May 1966 the Army was in urgent need of 400,000 cotton sateen trench coats known as the OG-107. Because the clothing industry generally was operating at peak production at the time, military buyers found that they were unable to attract qualified suppliers as interested bidders for this item. It was therefore decided that this essential procurement should be effected by the issuance of a so-called “rated order.” That emergency device, authorized by a provision of the Defense Production Act of 1950, 50 U.S.C. App. § 2071 (1970), and regulations issued thereunder, legally obligated an operator in plaintiff’s circumstances to accept a contract to produce an article such as the OG-107 and to do so without regard to the prejudicial effect on its existing relations with commercial customers. Such an order was issued to plaintiff on May 16, 1966, for 52,200 OG-107 coats. Plaintiff resisted the order because filling it meant the complete sacrifice of sales to its valued customer, McGregor, but when it was given to understand by the procurement authorities that it could be legally compelled to fill the order if it did not agree to negotiate contract terms voluntarily, it reluctantly entered into such negotiations. It incurred the serious disapproval of McGregor when it advised that it could not service the account until it had filled the Government’s order. This occurred at a time when McGregor had substantial outstanding sales commitments that it had assumed in reliance on the future production that it anticipated from plaintiff. McGregor ultimately had no choice but to accept this development and adjust to it as best it could. In doing so, however, it informed plaintiff that the incident would be remembered when commercial conditions changed from a seller’s to a buyer’s market. McGregor ultimately made good on that pledge — to plaintiff’s considerable detriment. Plaintiff satisfactorily and punctually completed its rated order work on the OG-107 in the fall of 1966. Although its overall capacity was such that it did not have to turn away the Londontown account while it was performing the OG-107 work its commercial business (i. e., nondefense or nonrenegotiable business) in its fiscal year ended January 31, 1967 (FY 1967), resulted in a loss of $60,961.14. The trial judge found that this loss was attributable to the disruption and dislocation caused by the enforced intervention of production of the OG-107. On October 7, 1966, just as plaintiff had finished its OG-107 work, it was issued another rated order by the Army, this time for a first procurement of a dress overcoat. This new item, a top-quality, wool-gabardine coat, extremely complex and demanding in construction, was designated the AG — 44, and it was plaintiff’s work on it that was the source of the renegotiable revenues that are the subject of this proceeding. Because of the novelty and complexity presented by the AG — 44, the activities and negotiations that occurred between issuance of the rated order and consummation of a formal contract included a plant survey by a representative of the Defense Personnel Support Center. The representative concluded that plaintiff could meet the Government’s needs provided that: (1) it promptly terminate the remainder of its civilian business, i. e., the Londontown account, (2) it take on an additional quantity of personnel skilled in various particular garment-making functions, and (3) it purchase a specified assortment of special-purpose sewing equipment. Meanwhile, plaintiff decided to accept an order for the AG-44. Though it realized that such acceptance would require the interruption, if not the permanent loss, of its valued relationship with Londontown, it concluded that since it could not then reinstate the McGregor business and could presumably be compelled in any event to accept some AG-44 business, and because its experience in manufacturing the OG-107 had been profitable and otherwise satisfactory, it might as well appropriate its entire resources and efforts to the performance of Government work. Plaintiff took the steps specified by the defense agency representative, engendering essentially the same hostile reaction in Londontown that it earlier had in McGregor, incurring substantial personnel recruitment and training costs, and expending some $28,000 for specialized equipment, almost all of which was useful only for making the AG-44. On November 3, 1966, plaintiff was awarded a fixed-price contract for 45,-000 AG — 44 coats, subject to a Government option to purchase an additional 50 percent at a somewhat reduced figure. While production on the AG — 44 was fully under way, in September of 1967, New Jersey state authorities threatened to curtail plaintiff’s operations unless it agreed to take prompt action to provide substantial additional sanitary facilities to accommodate its expanded work force, which rose from 230 workers on the OG-107 contract to 350 workers on the AG — 44. In order not to interfere with AG-44 production, plaintiff complied and undertook the construction of a new building on its premises. The building, completed in early 1968, cost $107,000, and has at all times since been largely extraneous to plaintiff’s needs. During FY 1968, plaintiff commenced and completed all of its AG-44 work, delivering 68,109 coats under its prime contracts- — the approximate volume of the original contract plus the 50-percent option quantity— and 10,010 coats under a subcontract that it obtained later in the year from L. W. Foster Sportswear Co., Inc. Plaintiff, however; subcontracted none of its AG-44 work. Dr. William F. E. Long, called by defendant as its expert witness on economic matters, testified that plaintiff should be accorded no consideration for the “complexity of [its] manufacturing technique,” in the statutory factor’s words, because in his opinion plaintiff’s manufacturing operation was not complex. It was Dr. Long’s view that a manufacturing process is complex to the degree that the end-product yield from a given quantity of raw material cannot accurately be forecast. He expressly rejected the notion that the statutory phrase “complexity of manufacturing technique” relates in any way to the intrinsic complexity of the end item involved. The evidence shows, as the trial judge found, that the AG-44 coat was very complex in construction and design and that its production consequently required a commensurate degree of skill and painstaking care. The coat was acknowledged by qualified and experienced Government procurement officials, appearing as witnesses, to' be among the most complicated garments ever procured by the military. The trial judge correctly decided to accord plaintiff consideration for the complexities involved in the coat’s manufacture, even though the coat’s production showed no erraticism in yield. Defendant’s expert witness, as the trial judge noted, simply misapprehended the meaning of the statutory phrase, which is far less restrictive that he thought. The board’s regulation commenting on the character-of-business factor notes in pertinent part: “The manufacturing contribution will vary with the nature of the product and the degree of skill and precision required in the work performed by the contractor.” 32 C.F.R. § 1460.14(b)(1) (1968). Intrinsic complexity of the end item and the degree of skill and care needed to produce it are the subjects to be considered under the subfactor of manufacturing complexity. Having resolved to reject Dr. Long’s reading of the subfactor and to credit plaintiff with “favorable consideration on complexity grounds,” the trial judge went on to decline assigning a dollar value to that “favorable consideration,” noting that the record offered no guidance as to what that value should be. He concluded that recognition of the complexity of manufacturing technique in plaintiff’s operation could only serve to reinforce other determinations favorable to plaintiff made in his opinion. Plaintiff has objected to this approach, arguing that the purpose of the statute in according favorable consideration where this is merited was frustrated by what the trial judge did. We think that the trial judge is more nearly correct here than is plaintiff, for consideration of production complexity is in reality the assessment and comparison of “[t]he relative complexity of the manufacturing technique,” as the board states in the regulation just cited. The term “relative” is the key: a comparison of degrees of manufacturing complexity is anticipated, between plaintiff and those firms against whose profit levels plaintiff’s will be measured, to ascertain that plaintiff’s performance will not be compared with that of a firm not encumbered by similar complications, or at least that plaintiff will not be so compared without making appropriate adjustments. The assessment of the degree of production complexity is not of itself a vehicle for granting rewards or withholding them, but simply lays the foundation for a later comparison. There can be no meaning to a finding that one firm is possessed of production line complexities, or that another has none, for there are no absolutes here; the only meaning is that which surfaces in the final comparison of the assessed degrees of complexity among the firms in plaintiff’s “industry.” Accordingly, the trial judge properly resisted the invitation to translate any finding on the complexity of plaintiff’s manufacturing technique into a monetary credit for plaintiff. His findings that the process of manufacturing the AG-44 coat was complicated and required a high degree of skill and care to accomplish with success, and that the coat itself was one of the most complex garments ever procured for military use, must be considered in comparing plaintiff’s work and profits with the work and profits of other firms, in the discussion on the “reasonableness of costs and profits,” infra. Plaintiff’s renegotiable contracts obligated it to construct the AG-44 coats out of fabrics furnished by the Government (so-called Government-furnished property, or GFP) under a standard Government contract clause, entitled GFP Bailment System. A board regulation advises: (2) A contractor who uses customer-furnished materials generally is not entitled to as large a dollar profit as the dollar profit to which such contractor would have been entitled had it furnished the materials itself. In the latter case, the contractor would have expended effort in finding or acquiring the materials, would have invested capital in the materials and would have assumed the risks of obsolescence, spoilage, or other loss inherent in owning such materials. * * *. [32 C.F.R. § 1460.14(b)(2) (1968).] Defendant contends that the value of the GFP, an administratively determined figure, used in the manufacture of the AG-44 coats must be excluded in stating the dollar amount of plaintiff’s renegotiable sales and in calculating its renegotiable profit as a percentage of sales, in order to give effect to the quoted regulation. The trial judge took the view, mostly contrary to defendant, that the value of GFP should be included in figuring the profit percentage, making an adjustment for the fact that plaintiff incurred no inventory financing cost for the fabrics it acquired under the bailment system. Apparently, the trial judge agreed with the notion that a firm may make a profit on the materials it purchases as well as on the manufacturing services it performs, and that the board’s regulation simply advised discounting the firm’s profit to the extent that it did not bear the risks and responsibilities of an outright purchaser of materials. This is plaintiff’s view, though plaintiff does not agree with the trial judge’s exclusion of one-fourth of the GFP value. It argues instead that the total value must be included in the sales figure and the percentage profit calculations, pointing out that neither party submitted evidence directed toward, or contended for, the partial exclusion of GFP value to approximate the inventory financing expense said to have been saved. To resolve the foregoing controversy, we must determine whether a GFP “bailee” bore virtually the same burdens and derived the same benefits in the handling of the GFP as would a purchaser of raw materials. A negligible difference between the two requires that the GFP be accounted for in the same manner as materials purchased. This is the thrust of the board’s regulation and of the Tax Court’s opinion in Winfield Mfg. Co. v. Renegotiation Bd., 57 T.C. 439, 450-52 (1971). The GFP bailment system under which plaintiff operated supplied the contractor with needed materials without requiring a cash outlay. Thus, the contractor was relieved of both the necessity and the opportunity of locating a component supply source and arranging for the payment of the supplier. These characteristics were common to both the bailment system and the so-called “free-issue” system, the latter used until 1957. Under the free-issue system, discussed in Ellis Coat Co. v. Secretary of War, 9 T.C. 1004, 1016 (1947), the Government specified the amount of GFP that could be used in each end-item contract that involved GFP. So long as the contractor held his total GFP consumption within the specified tolerance, the quantity of GFP that he used had no impact on the profits he realized from performance of the contract. Even as the contractor had little incentive to economize on GFP usage, the Government bore the expense of voluminous record-keeping on the GFP as well as of the maintenance of a large force of field personnel to supervise the return of unused GFP upon the completion of contracts. The free-issue system, generally regarded as inefficient and unsatisfactory, was eventually abandoned in favor of the form of bailment of GFP under which plaintiff worked in the review year. The central feature of the bailment system was that of placing squarely on the contractor the entire risk of end-item yield from GFP. Thus, the contractor assumed all the economic benefit or burden resulting from the efficiency with which he utilized GFP in his manufacturing process. The contract no longer referred to an amount of GFP that could be consumed, but rather, the invitation for bids (made a part of the contract) described the physical character of the GFP, a price per unit (such as per yard) of GFP, and a single dollar figure that would be deducted, for payment purposes, from the contract price of each delivered end item. The contractor was responsible for determining prior to contract award the quantity of GFP projected for consumption during performance, and for including this in his contract price calculation; though he would take the Government’s GFP dollar figure per end item into account in making this final price calculation, he could not rely on its accuracy, as he was warned in the invitation. As the GFP was issued to the contractor after award of the contract, the Government debited a material account established for him at the price per unit times the number of units issued, and he in turn transported the GFP to his worksite, at his own expense and under his own arrangements. While the GFP remained in his custody, the contractor bore the entire risk of loss on it, the Government maintaining only a security title in the goods. Upon delivery and acceptance of contract items, the Government credited the contractor’s material account at the agreed dollar figure per end item. At the conclusion of performance on a contract, the contractor was charged with any debit balance in the material account, or alternatively was paid for any credit balance. Again, the end-item dollar figure was administratively set and did not necessarily reflect the actual GFP consumption per item, and so the usage of more GFP than projected by the contractor in calculating his total contract price could likely reduce or destroy his estimated profit margin. For purposes of establishing the final material account balance, the contractor returned the GFP issued but not used; the bailment system terms required this return, and placed the arrangement and expense of it upon the contractor. However, the contract permitted neither return of nor credit for the GFP incorporated into unacceptable end items, so-called “irreparable rejects,” or incorporated in work-in-process upon a valid default termination. The foregoing shows an allocation of benefits and burdens tantamount to those assumed by one who commercially purchases the materials he uses in manufacturing goods. The allocation contrasts sharply with the free-issue system’s distribution of risks and benefits, meaning that we cannot rely on the holding in the free-issue Ellis Coat Co. case, supra, excluding the value of GFP from the sales base, for guidance in determining the proper mode of accounting for GFP under the bailment system. In addition to the burdens normally assumed by a materials purchaser, the bailment system placed upon the contractor the obligation of accepting up to 10 percent of the GFP in “short pieces” without compensation for any extra costs entailed in working with them, along with the duties of storing and accounting for the GFP separately from the rest of his inventory and of allowing the Government access to it at certain times. Defendant would have us weigh against the above facts several points which it says favored the contractor, supposedly subjecting him to less risk and expense than would be the case with a purchaser of materials. Under the bailment system’s terms, according to defendant, plaintiff “was insulated from the vagaries of the marketplace in the acquisition of basic fabric,” presumably meaning that plaintiff could depend upon the Government as a ready and sufficient source of supply, and that the material price was effectively guaranteed not to rise between the date that price negotiations were concluded and the time that commercial supply commitments (were they to be used) could be secured. The protection provided against a component price rise would undoubtedly be advantageous to the contractor, particularly in a tight materials market, and in the same kind of market a reliable source of supply would likewise favor the contractor considerably. However, it is not apparent from the record that plaintiff would have experienced problems in obtaining a steady supply of needed fabrics, particularly if the Government had remained out of the material supply market, or would have incurred more than negotiable costs in locating that supply. Moreover, that dependence upon a sole source supplier, whether the Government or a commercial firm, is not necessarily an advantageous circumstance to be in, especially when disputes arise over the timeliness or quality of supply, for the contractor does not then have the opportunity to seek out an alternative supplier. Defendant must adduce proof, which it has not done, rather than make conjectures, in order to establish an advantage here. We should not rush to find a significant advantage in the dependability of the Government as a supply source. The bailment system also favored the contractor, according to defendant, because the contractor took possession of the materials without having to pay cash for them. The trial judge agreed with defendant that the contractor received an advantage in being relieved of inventory financing costs on the fabrics supplied under the system. However, this reasoning, while attractive on the surface, finds no support in the facts of this case. On numerous occasions during the trial, plaintiff’s officers and various of its suppliers testified that it was common practice in plaintiff’s industry for suppliers who sold component materials to plaintiff and like operators to await payment for those materials until after the contractor was itself paid for the end items it delivered. This was as true for Government contracts as for commercial orders, even though the former at times required longer waiting periods between component shipment and receipt of payment therefor. When a bank or factor entered the picture, as assignee of the Government contract proceeds, the material suppliers still waited for payment until finished goods were delivered to and paid for by the Government. The trial judge did not find to the contrary, and again it must be remembered, it is defendant’s burden to bring forward sufficient proof to persuade the court, by a preponderance of the evidence, that plaintiff did derive some advantage from the bailment system in the nature of an interest-free loan. Defendant did not do this, but left plaintiff’s showing on extension of credit for the materials it bought virtually unrebutted, relying solely on the theory of advantage constructed from the operation of the bailment system and its assumptions about credit for materials in plaintiff’s industry. Defendant also did not suggest any dollar figure approximating the alleged financing cost forgiveness; the deduction used by the trial judge was his own invention. The trial judge’s finding of fact that plaintiff derived interest-free credit for its inventory financing under the bailment system beyond what it otherwise could have obtained as a purchaser of materials, and that exclusion of one-quarter of the total GFP value for the review year from the net renegotiable sales figure was appropriate to compensate for this advantage, must be disallowed as indulging in assumptions not supported in the record and against the weight of the evidence. Plaintiff has overcome the presumption of correctness that normally attaches to the finding of a trial judge under our Rule 147(b) by making the showing required in Bonnar v. United States, 438 F.2d 540, 563, 194 Ct.Cl. 103, 146-47 (1971), quoting Davis v. United States, 164 Ct.Cl. 612, 616-17 (1964). On the facts in this case, it cannot be said that any advantage accrued to plaintiff by virtue of the fact that the bailment system did not charge plaintiff a fee for financing part of its inventory. On balance, we conclude that, on the facts of this case, the value of the GFP should be taken into the net renegotiable sales figure and included in calculations of renegotiable profit as a percentage of sales, to place plaintiff in parity with a manufacturer that purchases all the materials it uses. This aligns with the board’s regulation, cited at the outset of this discussion. Under the bailment system, the contractor who works with GFP bears at least as many risks and burdens as the manufacturer who uses only materials he has purchased. Defendant cites Winfield Mfg. Co. v. Renegotiation Bd., supra, in support of a contrary conclusion, and indeed, the Tax Court did reach a result in that case different from ours as regards the costs of locating and financing the acquisition of materials. The court concluded that the GFP recipient did not assume burdens of finding and financing inventory as great as those borne by a materials purchaser. However, the plaintiff in Winfield had the same burden of proof, under the Tax Court’s rules, as does defendant in this case, see Lykes Bros., supra, and so it is not surprising that a failure of proof on exactly the same point leads to an opposite result. We view Win-field as the product of the plaintiff’s failure there to elicit sufficient proof to persuade the court that its material acquisition costs would not have been greater in the commercial marketplace than under the bailment system, just as we reach our conclusion in part because defendant has not established that the acquisition costs would have been greater. To the extent this does not account for the differing results in the two cases, we simply state that we believe our analysis of the allocation of benefits and burdens under the bailment system to be the correct one, on the facts presented to us in this record. It should not be understood, from the above discussion, that inclusion of the GFP value is now the invariable rule for the renegotiated contractor’s net renegotiable sales and percentage profit figures no matter how the figures with which they are later to be compared are constituted. Rather, the rule is that, in making comparisons between plaintiff and other firms, materials purchased or considered as if purchased by plaintiff (including the GFP) must be accounted for in the same manner as materials purchased or properly treated as purchased by the compared firms. This does no more than admit that a contractor may realize a profit on materials he has purchased for use in making his products. If, for example, plaintiff is compared with a firm, in the analysis under the statutory factor “reasonableness of costs and profits,” that deals solely with commercial customers and that purchases all of the components that it includes in its products, then the value of the GFP used by plaintiff must be included in its sales figure. And where the comparison is with a fellow AG-44 coat manufacturer, whose GFP value is excluded in stating the renegotiable sales figure, plaintiff cannot properly include the GFP value in its figure. If, however, plaintiff is compared with a firm that excludes the value of its materials since it cannot be considered a purchaser of the materials, such as an operator who relies on the customer to supply the materials and likewise to assume all responsibility therefor, plaintiff’s net renegotiable sales must nonetheless include the GFP value. This is true because plaintiff is considered a materials purchaser, and only when a compared firm that is also viewed as a purchaser excludes the value of its materials can plaintiff properly do so. Having set forth the environment in which plaintiff operated in the year under review, we move on to consider the remaining statutory factors. (2) Net Worth and Capital Employed. Section 103(e)(2) of the Act directs that a determination of excessive profits take into account “[t]he net worth [of the renegotiated contractor], with particular regard to the amount and source of public and private capital employed.” Neither the parties nor the trial judge considered in much depth the data involved under this factor, aside from the role of the GFP bailment system in plaintiff’s manufacturing operation, already discussed above in detail. Apart from that system, plaintiff provided, by equity funding and some borrowing, all the capital used in running its business. Certainly, if the GFP be viewed as a contribution by the Government to plaintiff’s working capital — a dubious assumption in light of the discussion above on inventory financing — the risks and burdens that the bailment system’s terms placed on plaintiff hardly justify saying that the Government made the contribution without receiving anything in return. Though a contractor’s heavy reliance on public capital provided for his use without charge argues against his receipt of as great a profit as a contractor making a similar product in a similar volume using private capital, as it is one of the purposes of the net worth factor to point out, see 32 C.F.R. § 1460.11(b)(4) (1968), this is not a case of such reliance. Since net worth and capital employed were not further considered by either party or by the trial judge, in measuring normal earnings or otherwise, we will not treat of the matter hereafter. (3) Reasonableness of Costs and Profits. Determination of the excessiveness of profits must also take into consideration the “[reasonableness of costs and profits, with particular regard to volume of production, normal earnings, and comparison of war and peacetime products.” Section 103(e)(1). The Act requires that the reasonableness of profits be considered because, unless it is decided that the renegotiable profits were not competitively set, and that they rose substantially above the competitively fixed profits of comparable firms, there can be no finding that excessive profits were realized. That the touchstone of this statutory factor is price competition, and that its term “reasonable” should be read to mean “competitive,” is understood from the primarily economic nature of the Act. Statutory renegotiation stems from the premise that “accurate pricing and the control of contractors’ profits cannot be achieved during a build-up of production for defense of war.” Mason & Hanger-Silas Mason Co. v. United States, 518 F.2d 1341, 1346-347, 207 Ct.Cl. 106, 115 (1975). The careful cost analysis and forecasting that usually accompanies negotiated procurement sometimes falters in time of war, as demand for various goods and services suddenly rises to a level that outstrips industry capacity and overwhelms procuring agents. If the inordinately high demand is not sufficient to create a seller’s market in the extreme, then the knowledge that the demand is short-term and will just as suddenly fall off surely accomplishes the task. Of course, pressed by the exigencies of war, the Government is unlikely to refrain from purchasing needed supplies and work even though the price is suspiciously and distastefully high. The result, not surprisingly, is the evaporation of price competition, and the consummation of sales to the defense agencies much higher in price than a competitive market would have allowed. The Government thus relies upon the expedient of renegotiation to recoup the price differential, Mason & Hanger-Silas Mason Co. v. United States, supra. The defense demand will neither wait, nor will it provide the incentive, for enough new productive capacity to be opened up (because of the attraction of the profits) “to drive prices down and eliminate ‘abnormal’ profits,” thus serving to “preclude continuing and excessive profits” as typically done in the competitive marketplace. W. Baumol, Models of Economic Competition, in Price Theory 288, 299 (H. Townsend ed. 1971). Renegotiation merely seeks to reconstruct the competitive price to the Government, and the competitive profit for the contractor, that negotiation would have produced absent the suddenness of the wartime demand on the marketplace. By directing inquiry into the reasonableness of profits, the Act says in effect that a profit figure cannot stand if it was not competitively determined. Thus, the renegotiation process must disregard the renegotiated contractor’s profits where these have not been competitively fixed, and as well may not consider, in making comparisons of profit levels within the contractor’s industry, the earnings rates of firms not operating in competitive markets. When the statutory factor prescribes that profit reasonableness is to be weighed by paying regard to the size and change in production volume, the typical or “normal” earnings in the contractor’s history and industry, and the likeness of renegotiable and commercially marketed products, it not only confirms the economic, competitive thrust of the factor, but also admits that deciding whether competition exists is not always without difficulties. See A. C. Ball Co. v. United States, 531 F.2d 993, 1014-015, 209 Ct.Cl. 223, 260-62 (1976). By assembling data on production volume, normal earnings, and product similarity, the renegotiator can determine if the prices and profits of the renegotiated contractor, and of other firms with which he is compared, were set by adequate competition. For example, the maintenance or rise of the customary rate of return over a vastly expanded volume of production may well show, absent the introduction of risks not previously compensated, that the producer is not subject to the restraints of price competition, see Mason & Hanger-Silas Mason Co. v. United States, supra, 518 F.2d at 1361-363, 207 Ct.Cl. at 139-43, whereas considerable difference in manufacturing complexity between a renegotiable product and a commercial product cautions against drawing inferences about competition from a close comparison of their respective earnings levels. By thus analyzing the performance records of the renegotiated contractor and of compared firms, one can learn whether their profits may be sustained or used in a comparison because they are competitive or “reasonable,” or whether they should be rejected because noncompetitive. Beyond the task of focusing attention on the competitive nature of the profit figures, the profit reasonableness factor performs a second key function in renegotiation. In this role, the factor directs that the gathering of data identify (a) the firms whose size, products, and overall business operations were, in the time frame of the review period, sufficiently similar to plaintiff’s that they may be considered “comparable,” (b) the extent of that similarity, and (c) the comparable firms’ profits in that time frame. The gathered data should disclose the full range or hierarchy of profits in the renegotiated contractor’s industry, with which plaintiff’s profits may be compared to ascertain whether they are excessive, and if so, by how much. The statutory factor directs that such a comparison be made as part of the renegotiation process when it says that “normal” profits should be taken into account, meaning in part that the renegotiated contractor’s profits should be matched with the profits of similar firms known to be functioning in a competitive market, to measure the existence and extent, if any, of the contractor’s aberration. “A reasonable profit can be established only on a comparative basis because it is impossible to say what a particular product or service is intrinsically worth.” Aero Spacelines, Inc. v. United States, supra, 530 F.2d at 353-54, 208 Ct.Cl. at 753. It is not sufficient, however, that the comparison be made only between the contractor’s profits and industry averages or medians — a range of industry profits, reflecting the varying efficiencies and risks of member firms, must be identified for comparative purposes. In A. C. Ball Co. v. United States, supra, 531 F.2d at 1013, 1016-017, 209 Ct.Cl. at 259, 263-66, we focused upon a profit range, not a mid-range figure, to measure the excessiveness of the plaintiff’s earnings. The importance of disclosure of the full range, including the highest and lowest profits in the industry, is apparent from that case, in which we found that the plaintiff, though functioning in a market where price competition was not wholly adequate, could earn a reasonable profit at the very top industry rate, partly because the Government failed to show that a lower profit was in order, and partly because the plaintiff demonstrated that it performed with great efficiency while assuming many risks. The seemingly diverse functions of the statutory factor, ascertaining the state of competition and constructing a comparative profit structure, are reconciled at this point — another firm’s profit level cannot be considered reasonable, and therefore be useful in a comparison to determine excessiveness, where it was not itself competitively set. A practice of measuring the reasonableness of a contractor’s profits against the noncompetitive profits of others is too futile to warrant condemnation. This is not to say, of course, that every noncompetitive profit contains an excessive portion, for a contractor need not exploit his market power to the fullest even though the impact of defense demand on his industry gives him that power. Only after all the statutory factors have been considered, A. C. Ball Co. v. United States, supra, 531 F.2d at 998, 209 Ct.Cl. at 232-33, the contractor has been “located” on the industry profit hierarchy, and the profit reasonable for him at that point on the hierarchy is measured against his actual earnings, can it be known whether any part of his profit was excessive. The record shows that there was little or no price competition among the producers of OG-107 and AG-44 coats in FY 1967 and FY 1968. The trial judge found that a strong commercial market existed in the clothing industry during this period, which meant that most of the productive capacity in the industry was already committed when defense procurement officials first sought to place their orders for the coats. In turn, this meant that these officials, to place the orders at all let alone obtain priority production, were forced to resort to the issuance of rated orders. The great bulk of the AG-44 coats delivered in FY 1968 were produced under rated orders. Though a negotiation would follow the placement of the order, to fix the contract terms and price, procurement officials would have to agree at least to meet the contractor’s regularly established price or terms of sale or payment in order to maintain the legally compelling nature of the order under the Defense Production Act. This situation was far removed, indeed, from procurement by competitive bidding. Rather, it is reminiscent of the state of competition we found in A. C. Ball Co. v. United States, supra, 531 F.2d at 1014, 209 Ct.Cl. at 260, though without even the indicia of competition present there: The contention that procurement for the Vietnam war caused a decline in competition in 1967, is not, however, so readily to be dismissed. The year under review was a period of greatly increased military procurement for the war in Southeast Asia, * * *. With the increase in Government procurement for war it was inevitable that there would be fewer bids or bids at higher prices by contractors already busy to capacity and beset by wartime scarcities of labor, materials and shop capacity. As procurement expanded, competition waned and prices and margins of profit necessarily rose. Profits from this source are the objective of the Renegotiation Act, * * *. In these circumstances, it is not to be assumed that plaintiff’s earnings in FY 1967 and FY 1968, or those of other military coat manufacturers who themselves received or whose market was influenced by rated orders, were competitively determined. The potential for excessive profit-taking existed in the marketplace for OG-107 and AG-44 coats in the review year and the year preceding it. Both parties brought forth data on the firms and their profits with which plaintiff and its review year renegotiable profits could properly be compared. Unfortunately, the data of neither side is entirely satisfactory for the construction of a comparative profit hierarchy. Though not mentioned in the trial judge’s opinion, plaintiff’s evidence showed that it earned a 15-percent profit on all its sales in FY 1967, covering both commercial and renegotiable work and including GFP, and that the six other firms which both manufactured AG-44 coats during the review year and were subjected to review by the board earned an average return on renegotiable sales (excluding the value of GFP, according to board practice) of 19.63 percent before renegotiation. Its evidence further showed that three of these firms, the ones which the board required to make refunds, were permitted to retain profits of 12.8 percent, 13.2 percent, and 25.1 percent of sales. In its reply brief, plaintiff forewent reliance on the FY 1967 profit figure, claiming instead that its past earnings were not truly comparable to those of the review year due to the differences in the products manufactured. It is of more than passing interest that this change in position occurred after defendant’s brief pointed out that the 15-percent figure was composed of a commercial loss coupled with a 46-percent profit on renegotiable work that was not adjusted by the board because a statutory floor forbade lowering plaintiff’s renegotiable sales receipts below $1 million. See § 105(f)(1), 50 U.S.C. App. § 1215(f)(1) (1970). The demise of the argument based on the FY 1967 figure is just as well, for the derivation of the renegotiable profit from sales not competitively priced, but based on a rated order, make the figure of little or no use for purposes of constructing comparisons to determine profit excessiveness. Plaintiff has not, however, retreated from its position that the profits of the other AG-44 producers reviewed by the board, and their profits alone (see discussion in this section, below), should be compared with plaintiff’s to assess the reasonableness of the latter. It is not clear on the record how plaintiff arrived at the 19.63-pereent calculation. But it is certain that most of the firms whose profits underlie that calculation earned those profits producing AG-44 coats under rated orders, and that the others did so in the same tight market. Just as in the case of the FY 1967 profit figure in plaintiff’s own business, the 19 + percent average profit is of practically no help in constructing a picture of reasonable returns with which to compare plaintiff’s review year earnings, for it cannot be said that it derived from competitively priced sales. Further, the calculation yields only an average figure, which is of limited utility for the reasons stated below in the discussion of the defendant’s comparative profit figures. The trial judge did not err in disregarding this average profit calculation. Defendant, speaking through its expert witness, Dr. Long, presented evidence and an analysis showing, in Dr. Long’s opinion, that $900,000 of plaintiff’s review year profit was excessive. The witness focused, not on plaintiff’s prior earnings history, which he apparently considered abnormal, but on profits of other firms that he thought comparable to plaintiff, earned in or near the review period. Dr. Long chose Standard Industrial Classification (SIC) Nos. 2310 and 2311 as the prime indicators of the profit figures that could properly be compared with plaintiff’s earnings. The trial judge correctly found that these two categories, which are practically identical save in respects not relevant here and which encompass some 2,700 manufacturers of men’s and boy’s suits, coats, and overcoats, included the firms most similar to plaintiff in products and manufacturing operations for present comparative purposes. Defendant’s expert then reviewed various profit statistics available in defendant’s documentary evidence. According to the trial judge’s findings, the figures which the expert singled out were: 1.55-percent median after-tax profit expressed as a percentage of net sales, reported in a Dun & Bradstreet survey of the 1967 earnings of 125 firms that accounted for more than 50 percent of the total domestic sales volume of the manufacturers included in SIC 2311; 4.5-percent to 4.8-percent average before-tax profit on net sales, based on a sample of about 300 firms’ corporation income tax returns filed with the Internal Revenue Service, as reported under SIC 2310 in the IRS Corporation Source Book of Statistics of Income for the fiscal period July 1967 through June 1968; and a 1967 median net before-tax income of 2.9 percent of net sales, drawn from an Ernst & Ernst survey of nine unidentified manufacturers of men’s suits, coats, outerwear, jackets, and sweaters having sales of less than $6 million, prepared for the American Apparel Manufacturers Association. Dr. Long also noted in his testimony, not mentioned by the trial judge, the earnings of four firms reporting their 1968 renegotiable receipts and profits, before taxes, to the board and classified under “Coats (SIC 2311)” by the board, apparently none of which manufactured the AG-44 under a rated order: Bonham Manufacturing, Inc., which realized a 4.5-percent return on $3.2 million sales; Rolane Sportswear, Inc., 6.5-percent return on $3.0 million sales; Marcie Dale, Inc., 3.2-percent profit on $3.7 million sales; and Rapid American, 4.3-percent rate of earnings on $2.9 million sales (sales figures excluding GFP). He said he thought these firms useful for comparative purposes because their sales volumes more closely resembled plaintiff’s than did those of other firms reporting 1968 earnings, and because volume is significant in that it “determines how much and how well you can spread fixed cost.” Based on the foregoing, and particularly the IRS data, defendant’s expert said that a return of $180,000 to plaintiff on its FY 1968 renegotiable business would be reasonable, in keeping with the compared profit figures, and giving due allowance for plaintiff’s efficiency; no “favorable consideration” was thought due under any other statutory factor. He characterized this as leaving plaintiff with a 5.4-percent return on net renegotiable sales, excluding the value of GFP. The trial judge accepted Dr. Long’s analysis as basically correct, and applied the 5.4-percent profit rate to plaintiff’s net renegotiable sales to reach a reasonable earnings figure. As noted before, he deviated from Dr. Long’s approach by including part of the GFP value in the sales base; he also made several other adjustments, discussed hereafter. Plaintiff has objected that defendant’s expert and the trial judge relied on irrelevant data in drawing their conclusions about profit excessiveness, pointing to the alleged remoteness of many of the firms in SIC Nos. 2310 and 2311 from plaintiff’s sales volume, asset size, and type of product and manufacturing operation. Rather than focus on this data, plaintiff now insists, the inquiry into excessiveness should have looked, and looked only, to profit statistics drawn from firms more similar to plaintiff in all respects considered under the character-of-business factor, especially the product type. In other words, plaintiff would limit the comparison to the other AG-44 coat manufacturers. However, the groupings of firms singled out by defendant’s expert are not irrelevant per se, but only would become so if adjustments were not or could not be made for the differences between them and plaintiff. In renegotiation, the comparability of firms and industries depends upon their similarity to the renegotiated contractor in such areas as the type and extent of risks undertaken and the entrepreneurial skills employed, and not solely and dogmatically upon the likeness of the product type. Cross-elasticities of product demand do not assume the importance in renegotiation that they do in antitrust law; though the AG-44 coat was no doubt different from and more difficult to make than most other garments, it does not follow that the variant risks and skills involved cannot be taken into account in arriving at a reasonable profit figure. Aero Spacelines, Inc. v. United States, supra, 530 F.2d at 356, 208 Ct.Cl. at 756-57. The finding of factual similarity of the compared groupings is not erroneous, as stated before, but comports with the basic similarity required by the data noted under the character-of-business factor for comparability, and so profit statistics drawn from the firms in these groupings may be used in this proceeding. It is a different matter, however, to approve the reliance of defendant’s expert and the trial judge on the statistics taken from the compared firms. Dr. Long focused, for the most part, on median and average profit figures. High and low quartiles, and top and bottom extremes of the industry profit ranges were not considered, nor apparently were the differences between the risks assumed by, and skills required of, plaintiff and the compared firms taken into account. All were lumped together in one great mass. But, as we said in A. C. Ball Co. v. United States, supra, 531 F.2d at 1015, 209 Ct.Cl. at 263, “[n]o rule or principle says that the profit made on the highly efficient production for war of good quality materiel in volume is excessive when it exceeds the contemporaneous statistical average profit of comparable industry, composed of good, bad and indifferent producers.” Defendant cannot establish that excessive profits were realized simply by pointing to industry profit averages and medians and noting that the renegotiated contractor’s profits came in above them. A reasonable profit rate will vary among contractors producing the same product, with the same risk and efficiency, depending upon the volume of sales, though no consideration was accorded this fact by defendant’s expert save in the case of four compared firms, discussed below. See Mason & Hanger-Silas Mason Co. v. United States, supra, 518 F.2d at 1362-363, 207 Ct.Cl. at 142-43. The reasonable profit will also differ from one firm to the next as the risks assumed differ, and from one product to the next as the manufacturing complexities differ. It will not be the same for all producers because they vary in efficiency; the projection of the renegotiated contractor’s reasonable profit must take his efficiency into account, and should not do so by guess or unarticulated opinion, one of which was the case with defendant’s expert, but rather by reference to the profit of a similarly efficient compared manufacturer. This, of course, cannot be done when only average and median profit figures dominate the record. The careful comparisons called for by the statutory factors between the character, risks, and efficiencies of plaintiff’s and other firms’ businesses in order to ascertain a reasonable level of profit for plaintiff, have all been swept aside in defendant’s expert’s analysis. They are now precluded by a lack of data on industry profit ranges and by a lack of inquiry into the business character, risks, and efficiencies of the firms located on those industry ranges. In substitution for those careful comparisons, defendant has elevated a statistical profit norm to a place of primacy, adjusting it for efficiency in a manner that remains mysterious on the record and in the trial judge’s opinion. Obviously, the trial judge’s conclusion on profit excessiveness, being so heavily reliant upon the expert’s erroneous methodology, cannot stand. Neither excessiveness of profits, nor the extent of that excess, can be shown without resort to location of the renegotiated contractor on his industry’s profit hierarchy. When only profit averages and medians appear in the evidence and expert analysis, the renegotiated contractor cannot be located on his industry’s hierarchy and the reasonableness of his profits thereby measured, unless of course it is otherwise established that the contractor belonged at the average or median point on the scale. This has not been proved regarding plaintiff in the present case, and the court will not assume that the contractor before it is merely average. A. C. Ball Co. v. United States, supra, 531 F.2d at 1016-017, 209 Ct.Cl. at 264-66. There were other problems in the expert’s and trial judge’s reliance on the profit rates they chose. For example, defendant itself suggests in its brief that the profit percentages available in the Dun & Bradstreet and Ernst & Ernst surveys and the IRS data excluded the value of customer-furnished materials from the sales base over which the percentages were calculated. While the absence of risks and responsibilities growing out of their possession of the materials would justify this accounting practice by industry firms that used such materials — and defendant further suggests that most firms included in the profit percentages did use customer-furnished materials — the inclusion of materials value by plaintiff and the exclusion of that value (at least in part) by firms plaintiff is sought to be compared with, would distort such a comparison. A different overall rate may well apply to firms that include the value of materials in their sales base. It would not be appropriate to adjust for the profit rate difference growing out of the exclusion of materials value by simply removing the GFP value from plaintiff’s sales figure, however, for this would still leave unaccounted for the difference in risks between plaintiff and the firms using customer-furnished materials. Another problem with the profit rates utilized by defendant’s expert and the trial judge lies in the fact that the expert characterized his “reasonable” profit of $180,000 for plaintiff as a 5.4-per-cent return on sales. The trial judge proceeded to apply this percentage over the sales base he thought appropriate, yet this percentage was erroneously calculated by the expert on a sales base that included the alleged $900,000 excessive profits. The rate would have been 7.44 percent were the alleged excess removed (still excluding the GFP value, according to the expert’s method). In concluding this discussion, two other points are noted about the data brought in by defendant. First, the IRS-based profit percentages were, it is true, stated as a range, at first glance complying with the statutory factor’s prescription of the kind of data needed and most useful. However, this range derives from different average figures calculated from two sets of tax return data, one that included only firms showing taxable income, and the other that covered firms with and without taxable income. Secondly, defendant’s expert did cite the profits of four firms classified by the board as coat manufacturers within SIC 2311, and stated for each a volume of sales quite similar to plaintiff’s. He was correct in thinking sales volume an important factor in his profit comparison— the absence of sales volume data is yet another defect in the average and median statistics that he used — for profit rates stated as perce