Free Answer - District Court of Federal Claims - federal

Case 1:07-cv-00134-SGB

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FINAL DECISIONOF TIIE CONTRACTING OFFICER Contract DACA87-9 No. 1-C-001 9 Shared EnergySavings Program AliamanuFamilyHousingArea,Oahu,Hawaii

TERMINATION SETTLEMENTDETERMINATION

INTRODUCTION 1) By Modification Number P00212 dated 12 August 2004 the Contractorwas notified that, effective 30 September2004, the contractwas being terminatedfor the convenienceof the Government and the Contractorwas requestedto provide its termination settlementproposal within one year from the effective date of the termination. The Contractor subsequently submitted a proposaland negotiationswere conducted;however, the partieswere unable to negotiate a bilateral termination.settlement amotrnt. During the settlementnegotiations,the Contractor orally requested that the undersigned,as the Termination Contracting officer (TCO), issue a Contracting Officer's Final Decision (COFD) regardingthe termination settlement amount. This COFD contains my determination of the appropriate termination settlement amount, and sets forth the basis for my unilateral determination. 2) Among other things, the Contractorcontendsthat it is entitled to all of the paymentsthat it alreadyreceivedunder the contract,plus its termination expenses and settlementcosts,as well as all of the remaining fixed payments that the Contractor would have received had the contract not been terminated for the convenience of the Government. The Government contends that the Contractor is not entitled to the fixed monthly paymentsthe Contractorwould have receivedhad the contract not been terminated; and that the final contract price resulting from the termination should be basedupon the Contractor's actual cost incurred prior to the effective date of the termination, as well as the Contractor's allowable, allocable,and reasonable termination and settlement cost incurred after the contract was terminated. 3) In order to arrive atmy final decision, I reviewed pertinent provisions and clausesof the contract; severalitems of correspondence betweenthe Contractorand the Honolulu Engineer District (HED), including the Contractor's proposal; the DefenseContract Audit Agency (DCAA) audit report concerningthe Contractor's purportedtermination settlementproposal, various documentsobtainedfrom the Contractorduring my personalreview of the Contractor's records in Nevada; and various other Govemment-generated intemal documents. Basedupon my review, I have determinedthat as a result of the termination for the convenienceof the Government,the final contract price should be definitized at541,237,389;and since the Contractor has alreadyreceivedpaymentsunder the contracttotaling $47,452,392,the Contractor needsto repay the Governmentthe excesspaymentamount of $6,215,003,plus interest. FederalAcquistion Regulation (FAR) Part 49.112-I(g) addresses effect of the overpaymentand how the interest shall be computed.

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FINDINGS OF FACT TheContract: 4) Basedupon full and opencompetition,on 11 February1991,ContractNo. DACA87-91-C-0019,
SharedEnergy SavingsProgram,Aliamanu FamilyHousing Area, Oahu,Hawaii was awarded to Co-Energy Group (CEG) (see Standard Form 26 executedby the Procurement Contracting Officer (PCO), Mr. JamesW. Reynolds at TAB C-1). At the time of award, CEG certified that it was a Califomia Corporation,w¿rs a Small Business,that its Tax PayerIdentification not Number GIlrD was 95-3930946,that its Presidentwas Mr. Robert Freeman,its Executive Vice Presidentwas Mr. Thomas Mitchell, and its Vice Presidentwas Mr. GeorgeJones. After the contract was awarded, the contract was transferred to the United StatesArmy Corps of Engineers, Honolulu Engineer District (HED) for administration, and payments tmder the contract were to be made by the United StatesArmy Corps of Engineers,Pacific OceanDivision (PoD).

s) The Contract required the Contractor to provide and install energy savings equipment, and to
provide operatingand maintenanceservices¡at the Aliamanu MilitaryReservation (AMR) family housing complex in Honolulu, Hawaii, that would result in a reduction in AMR's monthly energy and maintenance expenditures. The energy savings equipment and sen¿ices were to be provided by the Contractor,at the Contractor'sexpense,and the only paymentsthat the Contractorwould receive under the contractwere to be basedupon a pre-established percentageof the avoided energyand maintenanceexpenditures over a maximum term of fifteen (15) yearsl, with a limitation that the amount paid to the Contractorfor the maintenancesavings could not exceedthe amount paid for the energysavings2.

6) At the time the contract was awarded,the AMR familyhousing complex consistedof 1,510
town houseunits, 1,090 apartmentunits, and supportfacilities including a RecreationalCenter with a swimming pool, a Shopette/Gas Station, a Burger Krg, a ChapelAnnex, and Athletic Fields. The energyexpenditureat AMR was to be reducedthrough the implementation of Contractor developedand proposedEnergy ConversationProjects(ECP's), subject to the acceptance the Contracting Officer. Since air conditioning was the largest energy of consumption system at Atr¡IR, the Contractor was required to develop an ECP to modiff or replacethe existing air conditioning system,and the Contractorwas required to investigate potential ECP's involving the replacementof the interior and exterior incandescent bulbs with fluorescentbulbs and improving attic ventilation. The Contractorincluded ECP's for these required items, as well as for other items, ffi pd of its proposalfor the contract, and the PCO acceptedthe Contractor's proposedECP's through the award of the contract. Under the terms of the contract, after award of the contract the Contractorcould proposeadditional ECP's to the Administrative Contracting Officer (ACO) for acceptance the ACO. by
Section C, Paragraph 1.3 of the contact clearly stated a "maximum" duration of fifteen years, irrplying that the contact duration could be less than the stated maximurn Section C, Parugraph I .4 of the contract stated that the montbly payments to the Contactor would consist of an energy savings conponent and a maintenancs s¿vings cornponent (which could not exceed the amount paid for the energy 5¿yingscorrponent). 2 I

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including: that of Contract Clauses arerelevant this issue, several contained 7) The contract (TAB C-2); for Termination Convenience a) H.29,52.249-4010, (TAB C-3); (APR 1984) General by of Examination Records Comptroller b) I.14,52.215-0001, (TAB C-a); Audit - - Negotiation c) 115,52.215-0002, @EC 1989) (TAB Cfor Costor PricingData(APR 1988) Reduction Defective d) I.16,52.215-0022,Price 5); (TAB C-6); (FEB 1988) and Payrolls BasicRecords e) I.28,52.222-0008, (TAB C-7); (SEP1987) Standards Cost Ð I.48,52.230-0003, Accounting (TAB C-8); (SEP1987) Standards of g) I.49,52.230-0004, Adminishation CostAccounting (SEP1987) Practices of and Disclosure Consistency CostAccounting h) I.50,52.230-0005, TAB C-9); (TAB C-10); (SEP1987) Practices of Consistency CostAccounting Ð 1.50,52.230-0006, j) (TAB C-l1); (APR 1.54,52.232-0017,Interest 1984)

(APR 1984) (TAB C-12); Disputes k) 1.56,52.233-0001, (JAN 1965) (TAB C-13); of Composition Contractor l) I.69,52.236-7000, (FDGD-PRICE) of for Termination the Convenience the Government m) I.75,52.249-0002, (APR 1984) (TAB C-14);and (FDGD-PRICE) of for Termination the Convenience the Government n) I.76,52.249-0002-I, -Altemate I (APR 1984) (TAB C-15). (APR 1984) to relevant wereissued areparticularly that modifications contract several 8) During thecontract, of and the termination the establishment the final priceof theterminated of the resolution in are modifications identifiedandbriefly discussed the contract relevant contract.These following paragraphs: uponCEG'swritten based (18) eighteen monthsafterawardof thecontract, a) Approximately l992the (SeeTAB C-17)on 3 September (TAB C-16),by ModificationNo. P00009 request CEG (CegalÐ.At thetime of thenovation, from CEGto Cegalí,Inc. wasnovated contract that it wasa that represented Cegaliwaswholly ownedby CEG;andCegalire,presented was and CaliforniaCorporation that its President Mr. RobertFreeman (TAB C-18),by later,based uponCegali'swrittenrequest three(3) years b) Approximately was (See the TAB C-l9) on23Ma¡ch1995 contract again No. Modification P00035 L.P. Partners (ACP). At this novated, time from Cegali,Inc. to theAliamanuConversation

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the time of this novation, ACP was represented being a Limited Partnershipestablishedin as Hawaii, with Cegali, Inc. (California) being its GeneralParbrer. c) As a result of modifications P00009 and P00035;when the contractwas terminatedfor the convenienceof the Govemment, the Contractorwas the Hawaii-basedAliamanu ConversationPartnersL.P. (ACl), not the California-basedCegali, lnc. nor the CaliforniabasedCo-EnergyGroup (CEG)'. d) Approximately six (6) months later, on 13 September1995, in an undateddocumententitled "Aliamanu ConservationPartners,LP, DiscussionDocument Concerningthe Failure of Metered Energy Savings to Match Actual Energy Savings" (TAB C-20) the Contractor contendedthat the contract was in dangerof failing financially. The Contractorallegedthat the implemented energy conservation measuresshould have resulted in a greater energy savingsa- and since the energy saving was being determined by the differénce between the actual energy used by AMR and the energy consumption baseline contained within the contract, the Contractor contended that there must have been a problem with the energy consumptionbaselineset forth in the original solicitation for the contract. After lengthy negotiations,the Contracting Partiesultimately agreedto changethe Govemment-developed pre-awardAMR energyconsumptionbaseline- essentiallyincreasingthe projected energy consumptionlevels at AMR. By moving the energyconsumptionbaselineupward, there would then be a gteater difference between the new energy consumption baseline and the actual energy readings, which in turn would reflect an increasedmonthly energy savings, and would result in increasing the monthly paymentsto the Contractor. The agreementto changethe contract's original energyconsumptionbaselinewas memorialized in a nine-page document entitled "Amended Agreement in Principle" that was signedbythe Contracting Parties (and others)on 31 May 1996 (SeeTAB C-21). e) On27 February 1998 Modification No. P00050(TAB C-22) was issuedto incorporatethe 31 May 1996 "Amended Agreement in Principle" into the Contract- and by doing so, replacedthe original pre-awardenergyconsumptionbaseline(that was the Table at Section C, Paragraph12.0) with a "new" post-awardenergyconsumptionbaseline(on pagesthree and four of the "Amended Agreementin Principle") - which beginning on I January1996 reflected an increaseto the baselinethat would be used to determinethe energysavingsand thus the energysavingscomponentof the paymentsto the Contractor. Modification No. P00050 did not changethe contract specifiedmethod of determiningthe performance-based payments to the Contractor, and payment amounts were basedupon comparing actual monthly AMR energyreadingsto the revised energyconsumptionbaseline. Ð Even after paymentsto the Contractorwere basedupon the revisedenergyconsumption baselineand while the number of housing units at AMR were being reduced,the Contractor asserted that the monthly paymentsit was receiving were less than it expectedto receive and that the Contractorwas still losing money. Lengthy negotiationswere again conducted,
the Conüactor changed twice druing the contract, unless specifically identified otherwise, the term "the Contractor" is used throughout this Decision to mean the Contactor at the particular point in time being discussed. The Contactor contended that it had anticipated receiving larger payments becauseof the energy savings equipment that had been installed. a 'Although

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monthly during which the ContractingParties agreedto convert the performance-based paymentsinto fixed-priced paymentssubject to adjustmentsassociated with the Consumer Price Index (CPÐ. g) Based upon this bilateral agreement, Modification No. P00100 was issuedon 4 February (TAB C-23), which in effect convertedthe natureof the sharedenergysavingscontract 1999 contract into a fixed price contract with an economicadjustment from a performance-based factor. Before Modification No. P00100 was executed,monthlypayments to the Contractor the were basedupon me¿rsuring actual energy consumed at AMR and comparing the measuredenerry consumptionto the energyconsumptionbaselinecontainedwithin the contract. However, after Modification No. P00100was issued,the monthly paymentsto the Contractor were to be basedupon fixed amountsadjustedby application of a CPI factor. The term of the contractwas not modified; remaining a maximum duration of l5 years. h) By modification number P00212 dated 12 August 2004 (TAB C-24), the Contracting Officer notified ACP that the contractwas being terminatedfor the convenienceof the Govemment effective as of 30 September2004, and requestedthat ACP provide its termination settlementproposalwithin one year from the effective date of the termination. 9) A total of two hundredand eleven(211) contract modifications were issuedprior to the Notice of Termination, and two (2) contractmodifications were issuedafter the Notice of Termination; resulting in a total of 214 contractmodifications (SeeModification Summaryat TAB C-25). kr forty (40) modifications were addition to the modifications referredto in the aboveparagraphs, adminishative in nature and did not affect the substantive rights of either contracting party; however a total of one hundredand sixty seven(167) modifications involved the establishment of unit priced line items for additional work). As reflected in the Modification Summary (TAB by C-25), the contractwas increased atotal of $1,275,2266for the additional work incorporated into the contractby the contractmodifications. As a result of the contractmodifications, paymentsto the Contractorconsistedof three (3) parts; an energysavingscomponent,a maintenancesavingscomponent,and an additional work component. were 10)Prior to the Notice of Termination a total of one hundred and sixty seven(167) payments and another payment was made in November 2004 for the Contractor's made to the Contractor, work under the contract for the month of September 2004 (See Conhact P-ayment Summary at was paid a total of $46,379,724.15'for its preTAß C-26); as a result, the Contractor termination work. After the Notice of Termination, two (2) partíal terminationpayments ($536,333.92 each)were made to the Contractor; resulting in post-terminationpartial payments of $1,072,667.84. To date, one hundred and seventy(170) paymentshave beenmade to the Contractorfor a total of $47,452,391.998.

The two contract modif,rcations issued after the Notice of Termination definitized the estimated quantities associated with the nnit priced line items, and thus definitized the amount that the Contactor was corpensated for the additional work. It is presumed that the cost that the Confractor incured performing the additional unit priced line item work required by the modifications was included in the Conüactor's total cost incurred under the contact. Sor consistency,all dollar amountscontainedwithin this COFD have been rounded-off to the nearestdollar. tv/ithit'r this COFD, this amount has been rounded-offto 546,379,724. 8 g¿lthin this COFD, the total payment amount has been rounded-offto 841,452,392.

t

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TheDispute wasawarded 1991, U.S.Army began 11)After the subject contract in the examining otherwaysto cost,besides reducing manage military housing its energy maintenance The U.S.Army and cost. privatization possible investigated initiatives, wherecostsavings couldbe realized turningby facilitiesto privatecontractors, overexistingmilitary housing which in turn wouldbe responsible operating maintaining existinghousing for and the facilitiesandfor designing and constructing housingfacilities. UndertheArmy's pnvatization new initiative,theArmy into a long-termcontractual subsequently entered arrangement with a private firm, Actus Lend Lease LLC, to build, maintain, operate and Army housing theislandof Oahu(whichincluded on with Noticeto Proceed be issued or aboutI October2004. PeretheAMR housing area), to on mail message, dated28 July 2004(TAB D-l), from Ms. Joyce VanSlyke, RCI Program Manager, Secretary theArmy for Installation Environment, of and Officeof the Assistant Ms. the the VanSlyke recommended termination existingenergy savings contract.Ms. VanSlyke that stated hermessage "Due to the implementation theRCI Projectin Hawaii andthe in of plan/schedule, wouldbe in thebestinterest the housing renovation development and it of government to continuethis contract. The Army's pnvatizationpartnerin Hawaii, Actus not LendLease takeoverthe assets operations drawrent for thequarters I Oct 04." will and and on 12)Based upontheneeds the Government, 12August2004theContracting of on Officernotified ACP that the contractwasbeingterminated the convenience the Government for of effectiveas proposal 2004,andrequested ACP provideits termination that of 30 September settlement ye¿rfrom the effectivedateof the termination(SeeTAB C-24). within one coordination meeting washeldwith ACP (Mr. RobertFreeman Mr. George and t3) A termination at HED wasMr. DavidKam, Termination Jones) HED on 18August2004. Representing Officer (TCO),Mr. RichardTotten,Office of Counsel, BruceStevenson, Mr. Contracting Civil Administrator,andMr. RandallMita, Civil Engineer/Contracting Engineer/Contract Officer's Representative. Representing DPW HawaiiRCI OfficewasKeith Nishioka. Contract modificationno.P00212,dated August2004andthe incorporated 12 Noticeof Termination at letterdated12August2004,wasdiscussed themeeting.It wasbroughtto the ACP's (c) with paragraph of thenoticeof termination attention in accordance that letter,the TCO instructedACP to transfertitle anddeliveryto the Government terminationinventoryof the all partsthatit identifiedin thatletter,to includea listingof spare following typesor classes FurthermoÍe, listing of theon-siteactivities intended turn overto the Govemment. to a that ACP mustcoordinate with Mr. Mita, to includedemobilization from AMR waslistedin paragraph of the noticeof termination (f) letter. Therequisite termination settlement formswas (2) which wasaddressed paragraph (i) of thenoticeof broughtto ACP's attention, in letter. Apparently, wasACP's intentto negotiate settlement it a termination amount this at proposal meeting.TheTCO explained ACP thatits termination to settlement mustbe submitted proposal (2) formsandaspreviously on oneof therequired settlement advised paragraph (ii) in letter- if its proposal exceeds it mustincludeCostor of thenoticeof termination $100,000 will be audited theDefense by PricingDataandtheproposal Audit Agency(DCAA). Contract The TCO advised ACP thatuponreceiptof theDCAA auditreport,theGovernment will

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develop a PrenegotiationObjective Memorandum and will then conduct negotiationswith ACP to arrive at a termination settlementamount. 14) Subsequent the termination coordinationmeeting, the Contractorreferring to the required to settlementproposalforms identified in FederalAcquisition Regulation (FAR) Part 49.602,as well as the provision containedat FAR 49.206-I; indicated that the forms did not appearto be appropriatefor this particular contract,and requestedthat the TCO waive the requirementfor these forms. As a result of this request,the TCO informed the Contractorthat it was more important for the Contractorto provide complete,current and accurateinformation, so that a than using any particular termination termination settlementamount could be established, settlementform. 15)By letter dated20 June 2005, Cegali, Inc. (with a Nevadanot California address)submittedwhat it called its "Costing Methodology For The Termination Of The Aliamanu Contract" and provided its "ProposedTermination SettlementCosts" in the amountof $9,764,061(TAB D-2). Within the transmittal letter Cegali, Inc. referred to itself as the GeneralPartnerof ACP, represented that the proposalwas being submitted for ACP, and the letter was signedby Mr. Robert Freeman. The elementsand amountscontainedin the 20 June2005 termination settlementproposalare summarized.inthe following table: Item 1 2 3 4 5 6 7 Description Amortization Initial of Costs Amortization Operating of Costs Termination Expenses Termination Settlement Costs Subtotal Fee(Profit "*" ltems1 - 3) on TotalTermination Settlement Amount Amount $l ,575,767 $6,929,721 " $212,117 $174.696 $8,892,301 10.00% $871.760 $9,764,061 * '

16) A review ofthe 20 June 2005 proposalrevealedthat, as anticipated,the proposal had not been preparedusing one of the termination settlementproposal forms; but the proposal did not appear to be a termination settlementproposal(as defined in FederalAcquisition Regulation (FAR) 49.001) sinceit did not appearto be a proposal for a final contractprice, and instead,the proposal appeared consistprimarily (items I e,Ð of estimatedamountsnot received,because to the contract had beenterminated- insteadof identiffing the Contractor's actual costsincurred during the performanceof the contract;and the proposal did not include the Contractor's Cost or as Pricing Data (all relevant facts). It appeared though the Contractor'sproposedamountshad been estimatedor calculatedas describedbelow: a) Item 1 - Amortization of Úritial Costs. It appearedthat the Contractor may have started with its total incurred cost þresumably all of its labor, equipment,materials,overhead, financing, etc.) to someunspecifiedpoint in lgg3e,the total of which the subcontractors, Contractor then addedcost of money and dishibuted that total amountover 156 months.to
The Conhactor referred to the period of time from confract award to this point in time as the "Construction Phase" of the contract, during which most of the energy s¿vings equipment was installed at AMR. The Contractor then referred to the period of time after the ConstructionPhase,to the effective date of the termination, as the'Maintenance" (or Operation) Phase of the contract, during which very little additional energy saving equipment was installed and the Contactor's primary work involved performing the operations or maintenance services. For consistency, these terms are used tbroughout this final decision. e

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with the 16.3 months occurring after the contract a¡rive at the claimed amount associated was terminatedand during which there had beenno performanceby the Contractorbecause as of the termination. Essentially,it appeared though the Contractorwas contendingthat it in a loss position when the contractwas terminatedbecauseit had not yet recoveredits was with installing the energysavingsequipmentat the beginning of the contract. cost associated to b) Item2 - Amortization of Operating Costs. The Conhactor's amount appeared be based upon a similar calculation; where the Contractorhad totaled its monthly Operatingand Maintenancecost from contract award until the contractwas terminated;and then projected an amount acrossthe 16.3months after the effective date of the contracttermination. This that the Contractorwas in effect estimating item was extremelyconfusing, since it appeared and Maintenance cost that the Contractor would have incurred if the contract the Operating had not beenterminated,which the Contractordid not incur becausethe contractwas tenninated. c) Item 3 - Termination Expenses. The Contractorcontendedthat it incurred a total of with demobilizing from the AMR Housing Area after the effective S2l2,ll7 associated termination date of the contract. Although someof the cost elementsincluded under this to questionable, generalthis item appeared appropriatelyrepresenta in item appeared portion of the Contractor's post termination cost. d) Item 4 - Termination SettlementCosts. To preparethe proposal and to conduct future negotiations,the Contractorcontendedthat it incurred or would incur a total of $174,696 for a Consultant,for Legal Fees,and for Mr. Freeman'sinvolvement in preparing and processingof the termination settlement. Although someof the estimatedamountsincluded to questionable,in generalthis item appeared appropriately under this item appeared the remainderof the Conhactor's post termination cost. represent e) Item 6 - Fee (or Profit). The Contractor's proposalincluded profit calculatedat arate of ten (10) percentapplied to the first three elementsin the proposal; however, the Conhactor did not provide any calculation demonstratingthat it was in a profit position - as requiredby Federal Acquisition Regulation (FAR) 49.203. Instead,as highlighted above,by including that the Contractorwas Item 1 "Arnofüzation of Initial Costs" in its proposal,it appeared position when the contractwas terminated,and in accordance contending that it was in a loss with FAR 49-203,no profit could be allowed if the Contractorwould have incurred a loss had the entire contractbeen completed.

that the 17)After receiptof the 20 June2005proposal, TCO informallynotifiedMr. Freeman the with prepared accordance FAR Tablel5-2, and in proposal not been had settlement termination ACP's Costor PricingData. By letterdated5 July 2005(TAB did theproposal not contain that (on whathe calledACP's "Certificate"andACP's D-3), Mr. Freeman behalfof ACP) provided a"Certiftcateof Current signed or PricingData." Mr. Freeman "Cefüftcateof CurrentCost facts). In the Costor PricingDatt'but, did not provideACP's Costor PricingData(all relevant prepared "from thebooksof had stated theproposal been that "Certificate,"Mr. Freeman with recognzedcommercialaccounting accountandrecordsof the Contractorin accordance practices..."

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with Mr. to 25 13)By letterdated July 2005(TAB D-4), theTCO referred thepreviousdiscussion to needed submita termination and Fieeman formallynotifiedACP that the Contractor the with therequirements FAR Table l5-2 thatincluded of proposal complying settlement to by Costor PricingDataasdefined FAR 2.101. In response the TCO's 25 Jluly Contractorts (GCA) dated1 Associates Contract a 2005letter,theTCO received letterfrom Govemment by August2005,signed Mr. William Lennett(seeTAB D-5). h that letter,Mr. Lennett, and to identifiedhimselfasa formerDCAA auditoranda consultant Mr. Freeman; inexplicably Act of contended the submission Costor PricingDataandtheTruth in Negotiations (TINA) that proposal. settlement to, applyto, andwereirrelevant a termination did not settlement to with theTCO's request providea propertermination 19)krstead complying of and initiatedseveral differentdiscussions (consultants) Mr. Freeman of proposal, represørtatives was of representatives theTCO arguingthatthe Contractor with various emailcorrespondence repeatedly the to not required submitits Costor PricingData. In general, TCO's representatives by to insisted thatCostor Pricingneeded be submitted the requirements, referred theFAR to upon the costthat the Contractor amountshouldbe based the settlement Contractor;andthat insisted thattheyhadprovided representatives while Mr. Freeman's incurredunderthe contract; be uponthevalueof the amount should based Data,andthatthe settlement CostandPricing the shouldreceive fixed and underthe contract, thattheContractor work performed Contractor's (essentially had the payments hadnot madebecause contract beenterminated that monthly the had arguirjqthal the.Government breached contractandthat the Contractorwasentitledto contractamount). remainingunpaid and to 20)By letterdated19August2005(TAB D-6), the TCO referred previouscoresponde¡ce proposal settlement needed submita termination to ACP thatthe Contractor reminded the Costor of complyingwith the requirements FAR TableI5-2that included Contractor's in role andauthority ACP to explainMr. Lennett's In that létter,the TCO asked PricingDáta. for ACP that therequirement ACP to submitits Cost and settlement, reminded the termination (seeTAE C-24). or PricingDatahadbeenclearlysetforth in theNoticeof Termination that contended FAR Part 15did not 2005(TAB D-7), Mr. Freemen 21)By letterdated6 September was supporled accounting by proposal thattheproposal and settlement applyto his termination lnstruction in contained the General the addressed questions letter,Mr. Freeman ¿äta. Wittr that but coverpageinformation), did not providea the 15-2(essentially proposal of FAR Table ACP's Costor PricingData. or proposal identified, referenced, incorporated that revised 2005(TAB D-8)i Cegali,Inc. submitted 22)Nearlytwo monthslater,by letterdated31 October in Proposal" the Settlement Proposal" providedits "Termination and its "Revised what it called for by Theletterwassigned Mr. Freeman Cegali,Inc. asthe General amountof $7,64L,772. proposal consisted the following elements: of Parfirer ACP, andthe revised of
Item I 2
J

4 5 6 7

Description MonthlyPayments AssetValue Unamortized TerminationExpenses Costs TerminationSettlement Subtotal: Fee(Profiton "*" Items2 &3) Amount Totzl TerminationSeftlement

Amount $5,519,180 * $1,329,807 * $135,077 $ 186.331 s7,370,395 16.30% s271.376 s7,641,772

usedin the that the revealed although methodology 2005proposal 23) Areview of the 31 October proposal appeared still to the proposal wåsdifferentthanthe initial proposal, revised revised had paidbecause contract been the amounts hadnot been that consistprimarilyof estimated

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terminated, instead of identiffing the actual costs the Contractor had incurred before the contract was terminated,and the revisedproposalstill did not include the Contractor's Cost or Pricing as Data. It appeared though the Contractor'srevised amountshad been estimatedor calculated as describedbelow: to a) Item 1 - Monthly Payments: The proposedamount appeared representthe fixed monthly payments(consisting of both the energysavingsand the maintenancesavingscomponents) that the Contractorwould have receivedhad the contractnot beenterminated(essentially, the fixed contract amount remaining when the contract was terminated - without any that the Contractorwas contendingthat the adjustmentfor the CPÐ. It appeared Government had breached the conhact (like the contract was a commercial contract instead of a FederalGovernmentcontract),and as a result the Contractorwas claiming that it was entitled to the remaining unpaid contractbalance. This elementwas problematic at best sincepaymentof any "enetgy savingscomponent" after the effective date of the termination would essentiallyrepresentanticipatoryprofit; and it was difficult to understandhow the componentafter Contractorcould, in any way, be entitled to payment for the maintenance the contract was terminated during which the Contractor did not perform any maintenance. to b) Item 2 - UnamortizedAsset Value: The proposedamount appeared be basedupon the cost to provide and install the energysavingsequipmentunder the contract,distributed acrossthe maximum number of months in the contract, and then that monthly amount had been multiplied by the maximum number of months remaining after the effective date of the that the Conhactor was termination. This item was also problematic since it appeared either 1) that even if it were to receive all of the remaining fixed monthly contending paymentsunder the contract (under Item I of the revisedproposal),it wouldn't be sufficient to ensurerecovery of its initial cost to install the energysavingsequipment(this ltem); or 2) that it had included this item in its proposalas an alternateamount (in caseit could not that the Contractor's proposedamountswere recover Item 1). In either case,it seemed excessive,since under the first contention,the Contractorwould be indicating that it was in a loss position, and the proposedamountwould be overstatedby at least the amount of the profit; and turderthe secondcontention,the proposedamount would be overstatedby at least the amount included under Item I of the proposal. c) Item 3 - Termination Expenses: The proposedamount was approximately $120,000higher to than the correspondingitem in the Contractor'sinitial proposal,but still appeared consist with demobilizing from the AMR Housing Area after the of atlegedcostsassociated effective date of the termination. d) Item 4 - Termination SettlementCosts: The proposedamount\¡/asapproximately$12,000 to higher than the correspondingitem in the Contractor'sinitial proposal and still appeared amountsfor Mr. Freeman,a Consultant(Mr. Lennett), and consistof incurred and estimated with preparingthe two different termination settlement I-egal Fees(Mr. Power) associated proposalsand to negotiate a termination settlement. e) Item 6 - Fee (or Profit): The proposalincluded 16.3 percentprofit on the secondand third elementsof the proposal; however, the Contractorstill did not provide any calculation demonstratingthat the Contractorwas in a profit position when the contractwas terminated,

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or would have been in a profit position had the contract not been terminated- as requiredby FederalAcquisition Regulation (FAR) 49.203. 24)The TCO promptly notified Mr. Freemanthat the revisedproposal still had not beenpreparedin with the requirementsset forth in FAR Table l5-2, andthat the revisedproposal still accordance did not contain ACP's Cost or Pricing Data. Insteadof complying with the TCO's requestto provide a proper termination settlementproposal,Mr. Freeman'sconsultantsinitiated another round of informal discussionscontendingthat Cost or Pricing Data was not required and that the settlementamountshould be basedupon the value of the Contractor's work provided turderthe contract insteadof being basedupon the Contractor'scost incurred prior to the effective date of the termination. 25) The TCO's attemptsto have the Contractor specifically identiff its actual cost incurred during the performanceof the contract,and to submit its Cost or Pricing Data continued until20 December2005 when the TCO received a letter from the Law Offices of Timothy H. Power (TAB D-9), which referred to Mr. Freeman'sOctoberTermination SettlementProposal,and indicated that attachedto the letter were "documentsthat supportthe cost and pricing data submittedwith the proposal." Review of the submissionrevealedthat the documentsattached to that letter did, to a certain extent, lend somesupportto the cost information and the pricing information previously provided by Mr. Freeman;however, the documentsattachedto that letter ACP's Cost or Pricing Data (all relevant facts). still did not represent to 26)han email message the TCO dated2 February2006 (TAB D-10), Mr. Freemancharacterized regardingthe requirementfor the Contractor to the various discussionsand correspondence submit its Cost or Pricing Data as being "negotiationson the settlementproposal," statedthat that the TCO issuea Contracting Officer's the "negotiations" were at an impasse,and requested Final Decision. Becausethe TCO had made severalunsuccessfulattemptsto have the that no amount of explanationor Contractor submit its Cost or Pricing Data, and it appeared direction from the TCO would result in the Contractoractually providing the relevant facts (including the Contractor's actual cost incurred prior to the effective.dateof the termination), the to TCO informally suggested Mr. Freemanthat as a compromisethe TCO could review the Contractor's recordsto determinewhat facts the Contractormight have that could be submitted; Mr. Freemanagreedand indicated that the Contractor's recordswould be available at Co-Energy Group's office in Las Vegas,Nevada. to 27) Ãfter the TCO beganmaking travel arrangements review the Contractor's recordsin Nevada; to in an email message the TCO dated 15 February2006 (TAB D-l1), Mr. Freemanquestioned with the contract and the TCO's authority to review the Contractor's recordsassociated specifically questionedthe TCO's authority to review and examinerecordsthat may have not been usedby the Contractor in preparing its termination settlementproposal (i.e., factual items that did not necessarilysupport the cost information or the pricing information containedin the Contractor's proposal). 28) In a letter dated 16 February2006 (TAB D-I2) the TCO respondedto Mr. Freeman'squestions regarding the TCO's authority to review and examinethe Contractor's recordsand provided several referencesto various contract clausesgranting the Contracting Officer such authority. kI of that letter the TCO also referred to Mr. Freeman's charactenzation the TCO's numerousand

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repeatedrequestsfor the Contractorto submit its Cost or Pricing Data as being some sort of negotiations;and advisedMr. Freemanthat the TCO's requestsfor the submissionof Cost or Pricing Data were not any type of negotiations,but ratherhad been requestsfor the Contractor to comply with the terms of the contract. 29)Ina separate letter dated23 February2006 (TAB D-13), the TCO formally respondedto Mr. Freeman's 2 February2006 email requestfor a ContractingOfficer's Final Decision. In that letter, the TCO reiteratedthat the TCO's previousrequestsfor the Contractor to submit its Cost or Pricing Data had not beennegotiations,and the TCO explainedthat negotiationsregarding the termination settlementhad never been initiated, and that the only apparent"impasse" involved whether or not the Contractorwas requiredto submit its Cost or Pricing Data; and as a personallyreviewing the Contractor's records. The TCO compromise the TCO had suggested informed Mr. Freemanthat the TCO did not believe that the situation had yet ripened into an actual Contract DisputesAct (CDA) claim and that althoughthe Contractorhad a right to submit a properlyprepared and certified claim, Mr. Freeman's2 February2006 email requestfor a Conhacting Officer's Final Decision did not contain accurateand complete supporting data and was not properly certified. 30) From 6 March 2006 through 10 March 2006 the TCO personallyreviewed the recordsmade available at Co-EnergyGroup's office in Las Vegas,Nevada(seeTAB D-14). During that visit, and as a result of the review of thoserecords,the TCO orally requestedthat specific to information, that appeared be readily availablefrom the records,be submittedto the TCO. The requested"Information Other than Cost or Pricing Datt'requested by the TCO consistedof the following: that the Contractor submit: a) Regardingthe "UnamofüzedAsset Value" - the TCO requested Ð A listing of the specific "energy savings" equipmentthat was purchasedand installed under the contract; ii) The specific date eachpiece of listed equipmentwas purchased; iii) The specific amount paid for eachlisted piece of equipment;and iv) The amount of depreciationalreadyrecoveredfor each listed piece of equipment. b) Regardingthe ;'Termination Expenses"- the TCO requested that the Contractor submit:

Ð An explanationas to why the list of materialsturned-overto the Govemment (directly to Actus Lend Lease- the privatizatíoncontractor) containedin the proposalwas different than the signed list of materialsthat had actually beenturned-over;and iÐ A narative explaining how the corporateidentity of the Contractorhad changedfrom the entity that was awarded the contract to the entity that was currently representing itself to be the Contractor. c) Although, during the meeting in Nevada,Mr. Freemanorally agreedto provide the specific and was later remindedbythe TCO severaltimes to provide information the TCO requested,

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the requested"Information Other than Cost or Pricing Data;" as of the date of this Contracting Officer's Final Decision, none of the information specifically identified and requestedby the TCO has been submitted by the Contractor. 31) In accordance with FAR 15.404-1(e),a Technical Analysis Report (TAR) of the Contractor's proposal for the terminationwas completed on 9 May 2006 (TAB D-l5). The TAR addressed the 20 June 2005 proposal,the 3l October 2005 revisedproposal,as well as the 20 December 2005 submission,and various documentsthat were obtaineddwing the review of the records made available at Co-EnergyGroup's office in Las Vegas,Nevada. The TAR commentedon the absenceof the Contractor'sCost or Pricing Data, addressed method set forth in the FAR the to establishthe final contractamount resulting from the termination, and using some of the information provided by the Contractor in its initial proposal,attemptedto estimatewhetheror not the Contractor had beenin a profit position when the contracthad been terminated. proposalexceeded 32) Sincethe Contractor's with FAR 49.107,on 17 $100,000,in accordance March 2006 the TCO requested that the DefenseContractAudit Agency (DCAA) perform an audit of the Contractor's termination settlementproposal;and on 23 August 2006, the DCAA issued Audit Report No. 04141-2006G17I0002(TAB D-16). Similar to the TAR, the audit report concludedthat the Cost or Pricing Data submittedby the Contractorwas not adequate; that the proposal did not complywith the requirementof FAR; and that the Contractor's proposal did not provide an acceptable basis for negotiatinga fair and reasonable contract termination settlement amount. In the audit report the DCAA stated that in order to make the proposal adequatefor negotiations,the Contractorwould needto submit a termination settlementproposalbasedupon the cost it had incurred, supportedby Cost or Pricing Data that included references the Contractor's accountingbooks and cost recordssupporting the to proposed amount, insteadof submitting a proposalbasedupon the paymentsnot madebecause the contract had beenterminated. 33) As a result, both the TAR and the DCAA had reportedthat the Contractor's proposalsdid not provide an acceptable basisfor negotiating a fair and reasonable contract termination settlement amount; but in order to comply with FAR 49.103(d), the TCO could only issue a unilateral termination settlementdeterminationwhen the settlementamountcould not be resolvedthrough negotiations and FAR 15.406-l required the TCO to establishprenegotiationobjectivesbefore entering into negotiationswith the Contractor. As a result, and in order to begin negotiations,a PrenegotiationObjective Memorandum @OM) was completedon 18 September2006 (TAB D17) setting forth the prenegotiationobjective. The POM containeda review of the related the events, addressed Contractor's different proposals,including the detrimental effect that the absenceof Cost or Pricing Data could have on the negotiations,referred to the TAR and the DCAA's audit report, and provided various calculationsthat estimatedthe Government's with the terminatedcontract. Basedupon the analysesrecordedin maximum liability associated the POM, two prenegotiationobjectiveswere established; to limit the Govemment to any i) further liability, by issuing a termination settlementeither bilateral or unilateral if necessary; and ii) to establisha final contractprice resulting from the termination at or below the Govemment's maximum liability amountof $46,769,252. 34) The TCO reviewed the POM, dated 18 September2006,that was preparedby Mr. Bruce 2006 (TAB DStevenson. Per the TCO's cover memorandumfor record, datedZSSeptember

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that objectiveshould with the POM's recommendation themostimmediate 18)the TCO agreed either settlement, to be to limit the Government anyfurtherliability by issuinga termination TheTCO stated it wouldnot be in the Government's that if bilateralor unilateral necessary. the Costor PricingData,sincethe Contractor to bestinterest continue request Contractor's to writtenrequests from theTCO. TheTCO agreed hasfailedto providethat dataafternumerous priceat a pre-negotiation which wasto establish final contract objective, with thePOM's second liabilityamount $46,769,252. of maximum or belowtheGovemment's (PNM) dated October 24 2006(TAB DMemorandum in 35)As documented the PriceNegotiation 2006. During telephonically 3 October on and 19)negotiations scheduled conducted was proposed settlement that amount ($6,22I,395) wasoverpaid of a the negotiations, Government wasbased the on settlement amount This proposed to ACP andwasduethe Govemment. proposals the received, TAR, theDCAA auditreport,anda costanalysis.The settlement settlement to a offer. In an attempt reach negotiated this did Contractor not accept settlement proposed altemate amount ($683,140) of settlement an andto avoidlitigation,the Government did the The to thatwasoverpaid ACP andduethe Government. Contractor not accept altemate sinceit expected receive to wereat animpasse, that offer andindicated negotiations settlement settlement. During payments approximately million for termination additional of $6 (Mr. RobertFreeman) that orallyrequested theTCO issuea negotiations, Contractor the to couldmakehis presentation the so Officer's Final Decision thatthe Contractor Contracting court. DISCUSSION contract a Fixed-Price nor was contract neithera Firm Fixed-Price the 36)As awarded, subject upon payments Contractor to receive depended the couldexpect sincethe only contract contract, expenditures the Contractor'sability to reduceAMR's monthly energyandmaintenance P00100 effectively converted ModificationNo. (Contract C,Paragraphll.2).However, Section contractinto a fixed price contract,with an the natureof the contractfrom a performance-based was factor. As a result,on 12August2004,whenthe Contractor notified adjustment economic the of for that the contractwas beingterminated the convenience the Govemment, contractwas set to contract subject FAR Part49 andtherequirements forth in FAR 49.2. a fixed-priced settlement a of Proposal" being"a proposal effecting as for a 37)FAR 49.001defines "settlement in by or terminated wholeor in part,submitted a contractor subcontractor the form, in contract contract,the TCO by the data,requiredby this part." Underthis terminated and supported reflectinga total proposed i) submissions: the20 June2005proposal, threeseparate received (TAB D-2); ii) the31 October 2005proposal, reflecting total proposed a of amotrnt $9,764,061 (T er amountof $7,641,772 AB D-8); andiii) the20 Decemb 2005letterprovidingsomelimited (TAß D-9). However, amount $7,641,772 of informationrelatedto the previouslyproposed with the TCO's nevercomplied from the TCO,the Contractor despite specificinstructions proposal" defined FAR 49.001.A as by and instructions neverprovideda viable"settlement of failedto disclose indication whatthe any reading eachof the threesubmissions of close priceshouldbe asa resultof thetermination.Clearly,the the believed final contract Contractor cannotreflectwhatthe Contractor or proposed of amounts either59,764,061 $7,641,772 that price. Onecouldassume the Conhactor believed that believes shouldbe the final contract

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the final conhact price should be the summationof the paymentsalreadymadeplus the proposed amount; although that is not statedby the Contractorin either proposal,and even then, one would then needto make another assumptionregardingwhether the'þayments already made" were to include or exclude the partial termination paymentsmadeafter the effective date of the termination. 38) h this case,the TCO ensuredthat the Conhactor was informed of the Contractor'sobligation to submit Cost or Pricing Data (as defined byFAR 2.10D before the termination notice was issued; ensuredthat the Notice of Termination alertedthe Contractorof the requirementto include the Contractor's Cost or Pricing Data in its settlementproposal(seeTAB C-24, Notice of Termination, paragraph(Ð (2) (ii)); and ensuredthat Modification P00212reinforced the importanceof the Contractorproviding complete,current, and accurateCost or Pricing Data (see TAB C-24, Modification P00212,paragraph(ta) (d)); all in compliancewith FAR 49.105, paragraph(c) (15) which required the TCO to inform the Contractorof the and complete, curent costor to of Obligation the contractor furnishaccurate, whenthe with 15.4034(a)(1) pricingdata,andto certiff to that effectin accor$ance or agreement, a partial terminationsettlement of a terminationsettlement amount portionof thecontract the to plus agreement the estimate cgmplete continued in the exceeds threshold 15.4034. 39) Despite all of theseunambiguousnotifications, the Contractordid not submit Cost or Pricing attemptsto Data with its initial20 June 2005 proposal (TAB D-2); and the TCO's subsequent furnish Cost or Pricing Data (all relevant facts, including but not limited to, have the Contractor the Contractor's actual cost incurred before the effective date of the termination) were unexpectedlymet with stiff refusal and unexpectedargumentsinvolving the Contractor's apparentbelief that Cost or Pricing Data and the Truth in NegotiationsAct (TINA) did not apply, and were irrelevant, to the processingof a termination settlementproposal(seeTAB D5). to efforts by the TCO (and the TCO's representatives) explain to the Contractorthat 40) Subsequent the FAR 49.201 requiredthe final settlementamountto fairly compensate Contractorfor the FAR 49.206-2paragraph(b) work performedup to the effective date of the termination, and that (2) required the Contractor to itemize its actual costs incurred under the contract up to the effective date of termination, were met with even shongerresistanceand arguments. the 4l) During those discussions, Contractor was informed that, as set forth in FAR Part 49 and in Contract ClauseI.75 entitled "Termination for the Convenienceof the Government" (TAB C14), the final contractprice resulting from the termination neededto be basedupon the Contractor's actual cost incurred before the effective date of termination, plus an allowancefor that it was in a profit position), plus the profit þrovided the Contractor could demonstrate cost incurred, after the effective date of Contractor's allowable, allocable, and reasonable with closing-out the contractand preparing the termination settlement termination, associated proposal with the required Cost or Pricing Data. The Contractorwas also informed that afrera that final contractamount would be comparedto the final contract amounthad been established, payments that had already been made under the contract, to determine what additional payment might be owed to the Contractor, or what amountneededto be repaid by the Contractor.

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4z)Inthe initial20 June 2005 proposal(TAB D-2), the Contractorreferred to cost information that to appeared indicate that the Contractorhad incurredgl5,529,422 (14,318,422 -without interest) during the constructionphaseof the contract,and another$22,714,888during the maintenance phaseof the contract; and Mr. Freemancertified that information on 5 July 2005 (seeTAB D-3) as being from the Contractor's records. However, after being repeatedlyreminded that Cost or Pricing Data was required to be submittedcoupledwith an explanationof how the factual information (Cost or Pricing Data) would be usedto establishthe final contractprice; the Contractorbegan arguing that the final contractprice should be basedupon the value of the with performing that work, and work the Contractorhad provided, not the cost associated abruptly distanceditself from thosepreviously disclosedincurred cost numbers(seeTAB D-8 and TAB D-9). Further attemptsto have the Contractorprovide its Cost or Pricing Data were that the TCO review the Contractor's fruitless, ultimately leading to the TCO's suggestion recordsto determinewhat information was availableto be submitted. 43) From 6 March 2006 through 10 March 2006 the TCO personallyreviewed the recordsmade available at Co-Energy Group's office in Las Vegas,Nevada. Although the TCO prepareda documEntingthat visit, there are a number of issuesthat memorandumcontemporaneously demandfurther discussion. The first issueinvolves the volume of documentsthat were made available for the TCO's review at that location; and the secondinvolves the number of different to corporateentities that appeared be managedfrom that single office location. 44)The contractwas awardedon 1l February 1991 and was terminatedon 30 September2004, over thirteen (13) yearslater. For at leastthe first two (2) years,the Contractorresearched, materials and developed,and submittedvarious different ECP's to the ACO for acceptance; energysavingsequipmentwas ordered,shipped,and installed; and daily constructionprogress reports, daily quality control reports,monthly certified payrolls, and various requestsfor payment were preparedand submittedto the ACO. For the remaining eleven(11) years,the Contractor maintained an onsite field office with a substantialstaff to perform maintenance work throughout the AMR housing area, to respond to numerous service calls from either the Government or the individual AMR tenants, and to perform monthly administration functions including documentingactivities performed,ordering suppliesand materials,processing billings, processingpayrolls, and submitting monthly contractpaymentrequests. 45) However, the recordsthat were made availablefor the TCO's review in the one-room office or the small U-Haul storagelocker in Nevadacontainedvery little of the abovedescribed"normal" contract documents;instead,the recordsmade available.tothe TCO consistedprimarily of and paymentrecords,reflecting amountsthat had beenpaid to various financing agreements partners,suppliers,individuals, and others;but there was various contractors,subcontractors, relatively little cost (or source)documentationdemonstratingwhy paymentswere being made or what was being purchasedby the payment. In addition, the recordsmade availableto the TCO were associated with several with other contractsand./or included documentationassociated other corporateentitieslO;as a result, one could not readily discernwhether certain payments with other with the subjectcontract,or were paymentsassociated were even associated
For exanple, within the building where Cegali's office was located, Cegali's incoming mailbox was identified as being a mailbox for several,at least seven(7) different Corrpanies- all either owned or confrolled by either CEG or Cegali, or some combination of the owners of CEG. to

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with the subjectContractor (ACP) or were contracts,or even if the paymentswere associated insteadassociated with one of the other companiesbeing managedfrom that location, or were for items that were purchasedfor use by more than one company. 46) Despite the relatively sparsenature of the records,coupledwith the intermingling of recordsfor different companies,the TCO's review of the recordsresultedin identiffing some documents that appeared be relatedto the processingof the subjectcontractterminationll, as describedin to the following paragraphs. a) Mr. Freemanidentified a pamphlet entitled "Enron FederalSolutions Inc, & Co-Energy Group" (TAB D-20) that was on display in the Mr. Jones' office, and Mr. Freeman explained to the TCO the associationof CEG with En¡on. Page4 of that that pamphlet listed severaldifferent conhacts that had apparentlybeenawardedto CEG, including the subject contract, and the pamphlet contained a statementthat the AMR work had been at "implemented a costof $14,000,000..." b) The documentsmade available to the TCO included various income tax returns, audits, and balancesheets. One of thosedocumentswas identified as being for financial statements, the subject Contractor(ACP), had been preparedby the accountingfirm, Arthur Anderson as LLP, and was entitled "Financial Statements of December31,1996 togetherwith Auditor's Report" (TAB D-21). Among the various items reportedin that document, page3 included an entry indicating that the recordedcost for the energysavingsequipmentinstalled depreciation. Page 10 of that at AMR was $14,239,854,with a note regarding accumulated documentincluded a statementthat for the year ending December3I,1996 Cegali Inc. chargedthe Contractor (ACP) a total of $930,880for providing the on-going maintenance servicesfor the energysavingsequipmentinstalled at AMR. c) Another document,also identified as being for ACP, and also preparedby Arthur Anderson as LLP, was entitled "Financial Statements of December31, 1995 togetherwith Accountant's Compilation Report" (TAB D-22); which included an entry on page 3 indicating that the recorded cost for the energy savings equipment installed at AMR was 915,792,939,with a different note regarding accumulateddepreciation. Page 10 of that documentincluded a statementthat for the year ending December31,1995 Cegali Inc. chargedthe Contractor (ACP) a total of $910,897for providing the on-going maintenance services for the energy savings equipment installed at AMR. d) Another documentpreparedby Gumbiner, Savett,Finkel, Fingleson& Rose, Inc., Certified Public Accotrnts entitled "Co-Energy Group and SubsidiariesFinancial Report - For the Six Months ended[sic] December31, 1994" (TAB D-23) documentedhow CEG (and its subsidiaries,including Cegali) accountedfor equipmentdepreciation,on page 8 discussed the differencebetweenthe costof the creationof ACP, and on page9 discussed $1,516,314 the energysavingsequipment (assets)being recordedfor CEG (and Cegali) and the cost of being recordedby the Contractor(ACP). the energysavingsequipment (assets)

The documentsreferred to in this section, as well as other documentsnot necessarilyreferred to in this COFD, were copied from the Confractor's records dwing the TCO's review of the Contractor's records in Nevada. A duplicate copy of all of the documentsobtained by the TCO was also produced and given to Mr. Jones.

It

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the of documentation concerning creation ACP includinga "Bill alsocontained e) Therecords CegaliInc, a CaliforniaCorporation of Sale" dated2August1993(TAB D-24)between (Seller)andME HawaiiInc, a Delaware Attached that Bill of to Corporation @urchaser). spare energy includinginstalled energy savingequipment, listing of assets Salewas a2-page partsneeded maintenance theenergy savings for of and savingequipment, variousspare "ClimateMaster" reflected the underthe heading For equipment. example, listing included and BTU units(of which225 hadbeeninstalled 3 were two differentsizeunits: 18,000 and BTU units(of which 865hadbeeninstalled spares for a totalof 228units);and 13,000 - for a total of 877units),for a combined units total of 1,105 ClimateMaster 12werespares transferred from Cegali(CA) to ME Hawaii(DE). being priceof these unitscouldbe identifiedfrom the records if Ð Attemptsto discern thepurchase dated15May 1992(seeTAB D-25) resulted locatingan invoicefrom ClimateMaster in and825 "HS-012G" for275"HS-019GT"units, reflectingapurchasepriceof $725,000 - for a total purchase 1,100ClimateMaster of units. units the g) Furthersearch throughthe records,in an attemptto identiff the differencebetween total of unitspurchased Cegaliandthe total number units by numberof ClimateMaster (ACP),or at leastto explainthe transferred ME Hawaii,andthusto theContractor to resulted in and the difference between typeof unitspurchased thetypesof unitsinstalled; (TAB D-26) from Mr. George Memorandum identiffing a l7 August1993Inter-Office of and to Jones Mr. Freeman Mr. Mitchell (thethreeowners CEG). In thatrnemo,George but to mostof his onsiteresponsibilities Mr. Aldecoa, would retain described transferring materials.Attached to equipment, trailers,andsurplus for responsibility the saleof scrap partof a separate August1993memo,andan "Inventoryto be turnedl8 thatmemowas savings equipment listedvariousitemsof energy overto CegaliInc. AMR." Thatinventory (3) 18,000 BTU units,aswell BTU unitsandtwelve(12) 13,000 andparts,includingthree and asvariousotherequipment parts. Inc." letterto Mr. Freeman Mr. Mitchell (TAB D-27) and "Big Distributors h) In an undated of and to referred a "Scrap,Surplus, TrailerAccount"andinformedtheotherowners George so CEG that he would "resurrect"the account that the ownerscould "share"the fundsin that that alsoindicated he hadusedsomeof the fundsin that account.In thatletter,George how he couldget $30,000 "out of' and the for account variousre¿rsons asked otherpartners he suggested perhaps could"increase that account, George and CEG andbackinto the scrap month." the monthlybudgetof Hawaii" andthenhe could"feedit backeach Account"dated October1995 26 & entitled"AliamanuMilitary Scrap Surplus Ð A document ",{W Scrap (TAB D-28)contained Notereading Pile Misc. þ¡! Listedon MasterAcc't a parts,trailers,andenergy spare savings account listedvariousitemsof File." This scrap price and the (including32 ClimateMaster units,still in stock),reflected sales equipment directlyto the amounts beingpaid out of this account buyersfor variousitems,andreflected of owners CEG. records, theconclusion my at of in this 47)Basedupondiscovering information the "Contractor's" proposal, the claimedamountfor termination and to Mr. Freeman's review,I referred asked Freeman provideto me, in writing, a Mr. to "lJnamortized AssetValue;"andI specifically

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detailed listing of the energysavings equipmentthat was installed at AMR, preciselywhen each piece of equipmentwas purchasedand its purchaseprice, when it was installed, and the amount that had alreadybeenrecoveredfor that piece of equipment;and he agreedto provide that information. I further askedMr. Freemanto explain to me, in writing, how the corporate identity of the Contractor had changed from the entity that was awarded the contract to the "enti$' that was currently representingitself to be the Contractor; and he agreedto provide that information too. However, to date,Mr. Freemanhas not provided any of that information. 48) I do not agreewith Mr. Freeman's(and his consultant's)position that factual information (Cost or Pricing Data) and the Truth in Negotiations Act (TINA) do not apply to the negotiationof the final price of a FederalGovemment contract that is terminatedfor the convenienceof the Government. Nor do I agreewith the Contractor's position that the final contractprice should be determined as if it were a commercial contract under which the Government breachedthe terms of the contract by ending the contract earlier than the Contractor anticipated. The fact remains that the subjectcontract is a FederalGovernmentcontract;that the provisions of TINA apply to the termination sefflementproposal, the termination negotiations,and the establishment of the final contractprice; and that the FederalAcquisition Regulationsare quite clear in the method to be usedto establishthe final contractprice. 49) Mr. Freeman'sdemandfor the remaining unpaid fixed monthly paymentsis severelymisplaced. for It would be totally unreasonable a FederalGovernmentContractorto receive the maintenance component of a monthly shared energy and maintenancepayment when no component(when no maintenance was performed. Paymentof the maintenance maintenance cost was incurred by the Contractor) as well as paymentof the energysaving component,after the contractwas terminatedwould representpaymentof "anticipated" profit, which is specifically unallowable. 50) Based on my direct involvement with contractmodifications P00050 (TAB C-22) and P00100 (TAB C-23), initially, I was concemed that perhaps the Contractor had still not recovered the with providing and installing the energysavingsequipment. However, two cost associated things have sinceconvincedme otherwise: my personalreview of the "Contractor's" records; and the fact that the Contractor is claiming profit in the proposal,when profit would only be allowable if the Conhactor was in a profit position. I repeatedlyaskedMr. Freemanto submit his Cost or Pricing Data (all relevant facts) and after my review I specifically askedMr. Freeman to submit his "Information Other than Cost or Pricing Data," in part, so that I could be assured for that all of the Contractor'spre-termination cost had beenproperly accoturted and iden