Question

HUB AEROSPACE Review this case carefully and answer the questions at the end of the case in detail. Hub Aerospace, Inc. was awarded a fixed-price-incentive contract for jet aircraft engines. The engines were assembled by Hub from components furnished by subcontractors. Hub had received competitive bids on all their components, which they had compiled, to come up with the bid price. Included in a number of these components was one termed a "chamber." Hub's make or-buy study in the pre-contract phase had concluded with the decision to buy 70 chambers from one of its subcontractors.

Mr. Brosky, the contracting officer, had reduced the target price by $58,751 pursuant to the clause on price reductions for defective cost or pricing data. His decision to take this action was based on information furnished him by the GAO, who found in their post-award audit under PL 87-653 that Hub had failed to disclose price quotations submitted by a subcontractor, Steele Tube and Pipe Company, in competition for the chambers. This subcontractor's quotation of I February 19XO to Hub had been a unit price of $16,211. Hub's proposal to the government was based on the unit price of $17,000 submitted by the Weller Steel Tube Company. The difference between these two vendor prices of $789, adjusted by contract pricing arrangement of 75/25, G&A and profit was the basis of Mr. Brosky's price adjustment.

Also at issue is a substantial increase in the amount of price reduction based on another undisclosed quotation of $15,451, 3 June 19XO. This quotation was submitted by Steele after the prime contract negotiations were completed and after Hub had executed its certificate of current pricing but before signing the prime contract. Hub then awarded the subcontract to Steele at the reduced price.

The circumstances preceding award of the government's contract to Hub Aerospace, Inc. were substantially as follows:

The number of chambers to be purchased or to be made in-house under the make-or buy program was uncertain. Changes were made in the program and in the quantities to be quoted on by the subcontractors. In January 19XO, the range of prices per unit for chambers was as follows:

Quantity	Steele	Weller
76	$18,463.51	$18,486.00
102	$18,278.90	$18,835.00
128	$18,186.59	$18,486.00
154	$18,094.29	$18,228.00
180	$17,909.68	$17,990.00

On 6 February 19XO, Weller's oral quotation for 144 units was given: $16,866 for delivery beginning in November. On 7 February 19XO, Steele's written quotation for delivery in July 19XO was submitted as follows:

Quantity Price	Each Lot Of
144	$16,142.58
120	$16,179.85
96	$16,211.12

"The above prices are based on uninterrupted production at rates shown above commencing July 19XO."

The delivery conditions imposed by Steele made their quotations nonresponsive, since Hub's RFQ called for delivery in November, not July. Hub's subcontracting Negotiation Memorandum showed an attempt to have Steele eliminate that condition, and their statement they would give some consideration to the effect on pricing if they complied with the delivery schedule. The Memorandum contained no evidence to show that when Hub submitted its proposal to the Government in March 19XO, or before conclusions of the negotiations in May, that Steele had eliminated its delivery condition. On the basis of delivery, Hub accepted Weller's quotation of$16,866 adjusted to $17,000 because of program changes from 144 to 136.

The government's Negotiation Memorandum reflected a close and cooperative relationship between Hub and the government personnel. The cost analyst could have learned of the quotation differences by asking for access to the chambers' procurement records. The government representatives were familiar with both Steele and Weller and when a make-or-buy decision arose they would be logical subcontracting sources. In relying on the cost and pricing data, the government was satisfied with the Weller $17,000 price. However, it had been pricing practice when loser prices were known to attempt to secure a lower overall price. This had happened with other contractors.

The Negotiation Memorandum also showed concessions by both parties. Each had altered its position several times on target cost, profit, share-ratio, and ceiling price. As finally negotiated, Hub's target cost had been reduced from $12,859 to $9,735, and there had been adjustments of profit percentages from the original position of each party. As they finally were incorporated in the contract, target costs had been arrived at on a total cost approach.

When Mr. Peterson, Hub's President, met with the contracting officer to discuss the price reduction, he was aware of Clause 51 of his contract, providing for a price reduction when a contract has: " ... furnished incomplete or inaccurate cost or pricing data or data not current as certified in the contractor's Certificate of Current Cost or Pricing Data ... " On the other hand, he was convinced that his firm had not violated either the letter, or the spirit ofPL 87-653. After an exchange of greetings, Mr. Peterson introduced Mr. Blackstone, his attorney, to Mr. Brosky. The counselor was quick to "get down to the case at hand" presenting to the contracting officer the company's position that:

Hub does not object to the minor adjustments or the method of adjusting the contract amount, i.e., reducing the contract price by the target cost and target profit attributable to a nondisclosure. Hub objects to any adjustment being made and on the theory, that in the total cost negotiations in this case, the target cost would have been reduced by the entire amount of the difference between the Steele and Weller quotations.

Hub contends that no price adjustment is due because of its failure to disclose Steele's $15,451 price, quoted in June 19XO. Because that quotation was neither solicited nor received until after the 7 May 19XO date of certificate of current pricing and until after the prime contract price had been negotiated.

Hub further objects on various grounds to the government's entitlement to adjustments, as included in Mr. Brosky's decision, contending:

(1) Steele's quotation of 1 February 19XO was not cost or pricing data as of 7 May 19XO because it was conditioned on an unacceptable delivery schedule, had a 30-day acceptance limitation, and was at that time neither responsive nor current.

(2) The quotation was in fact disclosed to the government prior to or in connection with the contract price negotiations.

(3) If there was a nondisclosure, the government has failed to prove that it caused an overstatement in the contract price. That is, the government did not rely on Weller's $17,000 quotation or on the alleged absence of the Steele quotation. In addition to other evidence, the government's conduct in asserting no such claim when chargeable with knowledge of the facts shows its lack of reliance, its construction of the contract and, perhaps, a waiver of the right to a price adjustment.

QUESTIONS:

1. Evaluate each of Hub's contentions. Do you agree or disagree? Why?

2. What should Mr. Brosky do now?

Answer 1

The Hub Aerospace gave a contract to the subcontractor to assemble components for the aircraft. In the above case Hub Aerospace also received the competitive bids on all their components. The Hub Aerospace facing tough decisions whether to make or buy the components before the phase of pre-contract. They are about to take the decision of buying 70 chambers from one of its subcontractors.

Mr. Brosky who is the contracting officer reduced the target price by $58,751 by the following clause on the price reduction for defective cost or pricing data. He takes this decision based on information provided to him by the General Audit Officer, who originated in their post-award audit that Hub had unsuccessful to release price quotations that mainly yield to buy a subcontractor that is Steele Tube already in competition for the chambers.

Steele Tube has been made a quote to the Hub of a unit price of $16.211 on 01, February 19X0. Hub's application for the tender to the government was based on the unit price of $17,000 submitted by the Weller Steel Tube Company. The price of $789is the difference between these two dealers which adjusted by contract pricing arrangement.

The extension in the reduction of price based on another undisclosed quotation of $15.451, 3 June 19X0 Also at the time of issue. This quotation was presented by Steele that was after Prime contract negotiations were completed and after Hub had performed its certificate of a current set price, but before signing the Prime contract.

Hub also gives the subcontract to the Steele at a very low price.

The actual situations before the government's contract to Hub Aerospace, Inc. were significantly according to this. The requirement of the number of chambers to be purchased or to be made in-house was undecided and the make-or­-buy program indeterminate. Changes were made in the program and in the quantities to be quoted on by the sub-contractors. In January I9X0. Collection of the prices per unit for the chambers was as follows:

On 6 February 19X0, Weller's verbal quotation for 144 units had given $16,866, for delivery to start in November. Steele'squotationin black and white for the transport of the delivery in July19X0 was submitted as follows:

The Hub also attempted to the make Steele eliminate that condition and statement was that they would give some consideration to the effect on pricing if it complied with the delivery schedule which was shown in  Negotiate Memorandum, the delivery condition is that Steele will make the delivery in November, not from July. Steele made this quotation with respect to the low pricing model of delivery.

The Memorandum was not discussed in Hub’s proposal to the Government in March 19X0 that is before the conclusions of negotiations in March that the Steele had eliminated in its delivery condition.

In the above case, Hub has accepted the Weller’s quotation of $16,866 because as the program changes from 144 to 136 chambers to be taken in the account.

Government representative awarded both Steele and Weller, and when a make-or-buy decision came up, they would be relevant subcontracting sources. Depending on the cost and previous data, the government was satisfied with the Weller $17,000 price. Nevertheless, it had been preceding practice when lower prices were known to effort to secure a lower price.

The Memorandum of Negotiation also showed concessions by both parties. Each had permitted its position several times on target cost, profit, share-ratio, and maximum price. As it was negotiated, Hub's overall target cost has been reduced from a very low price of $12,859 to $9,735, and there had been adjustments in profit percentages from the original position of each party. As they finally merged in the contact, target costs were attained at a total cost method.

Brosky needs to analyze on the decreasing the contract price by the target cost and target production which is the nondisclosure. Hub objects to any consideration to change due to theory that in the entire cost negotiations, in this case, the target cost would have been reduced by the full amount and overall the difference between the Steele and Weller quotations.