Jacobs Engineering Group, Inc. v. United States
2006 WL 133464, 2006 U.S. App. LEXIS 1145, 434 F.3d 1378 (2006)
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Rule of Law:
In a government cost-sharing contract, a standard termination for convenience clause requiring payment of 'all costs reimbursable' entitles the contractor to recover 100 percent of its allowable costs, not the reduced percentage specified in the cost-sharing provision, as the phrase refers to the type of costs, not the amount of reimbursement.
Facts:
- The U.S. government entered into a contract with Jacobs Engineering Group, Inc.'s predecessor to develop and construct a gasification improvement facility.
- The contract was a cost-sharing agreement stipulating that the government would reimburse 80 percent of the costs and the contractor would absorb the remaining 20 percent.
- The contractor agreed to this cost-sharing arrangement with the expectation of obtaining valuable patent rights upon successful completion of the project.
- The contract included a standard termination for convenience clause, requiring the government upon termination to pay '[a]ll costs reimbursable under this contract.'
- During performance, the government terminated the contract for its own convenience because it lacked the funds to complete the project.
- Following the termination, Jacobs sought reimbursement for 100 percent of the costs it had incurred.
- The government refused to pay 100 percent, asserting its liability was limited to the 80 percent share specified in the cost-sharing provision of the contract.
Procedural Posture:
- Jacobs submitted a termination settlement proposal to the government's contracting officer seeking 100 percent reimbursement.
- The contracting officer rejected the claim and issued a final decision limiting Jacobs' recovery to 80 percent of its costs.
- Jacobs challenged the contracting officer's decision by filing suit against the United States in the U.S. Court of Federal Claims (the trial court).
- Both parties filed cross-motions for summary judgment.
- The Court of Federal Claims granted the government's motion for summary judgment, ruling that Jacobs was only entitled to 80 percent reimbursement.
- Jacobs, as the appellant, appealed the judgment of the Court of Federal Claims to the U.S. Court of Appeals for the Federal Circuit.
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Issue:
Does a standard termination for convenience clause in a government cost-sharing contract, which requires the government to pay '[a]ll costs reimbursable,' limit the government's liability to the percentage of costs it agreed to share during performance (80 percent), or does it require reimbursement of 100 percent of the contractor's allowable costs?
Opinions:
Majority - Friedman, Senior Circuit Judge
No. The clause requires the government to reimburse 100 percent of the contractor's allowable costs. The court reasoned that the phrase 'all costs reimbursable' defines the type or kind of costs for which the contract provides reimbursement (e.g., allowable costs like labor and materials vs. unallowable costs like entertainment), not the percentage of those costs. The court noted that in other parts of the contract where the 80/20 split was intended to apply, such as for cost overruns, it was stated explicitly. The absence of such an explicit limitation in the termination clause indicated it was not meant to apply. Furthermore, the court considered the underlying purpose of the contract: Jacobs agreed to absorb 20% of the costs in anticipation of obtaining valuable patent rights. The government's convenience termination thwarted this opportunity, and it would be inequitable to deny Jacobs full reimbursement for costs incurred when the compensating benefit was made impossible to achieve by the government's own action. A contractor should not be made to suffer financially as a result of the government's decision to terminate for convenience.
Analysis:
This decision provides a crucial clarification on the interaction between cost-sharing provisions and standard termination for convenience clauses in government contracts. It establishes a protective precedent for contractors, ensuring they can recover their full allowable costs when a project is terminated by the government for its convenience. The ruling emphasizes that the government, as the drafter of the contract, must be explicit if it intends to limit its termination liability to a cost-sharing percentage. This holding reinforces the underlying policy of termination for convenience clauses, which is to make the contractor whole for its performance costs, particularly when the termination prevents the contractor from realizing the ancillary benefits that induced it to accept a cost-sharing arrangement in the first place.
