and during the discussion and negotiation sessions with NASA. APCI proposed to furnish the bulk, if not all, of NASA's east cost liquid hydrogen requirements, based in part on a proposed plant expansion, while Union Carbide proposed to furnish only a small percentage of the requirement and declined, for several reasons, to expand its existing facilities or build new ones. It is clear, however, that Union Carbide's paramount reason for not wishing to build a new plant was the high cost of financing. Although it is apparent from the record that NASA regarded APCI's approval as more responsive to its needs, we cannot say that Union Carbide, had it been informed of the possibility of interest reimbursement (and also of a longer basic contract term), would not have submitted a proposal for at least a portion of the total liquid hydrogen requirement which would have been acceptable to NASA. It is therefore our conclusion that NASA's negotiation of interest pass-thru provisions with APCI without informing Union Carbide that it would consider proposals which involved a departure from the NASA PR with respect to financing effectively denied Union Carbide and equal opportunity to compete. For that reason, we are recommending that negotiations be reopened with Union Carbide. Should that firm then submit a proposal, the acceptance of which would be in the best interests of the Government, then we would further recommend that NASA consider the feasibility of partially or completely (as appropriate) terminating the APCI contract for the convenience of the Government. Since NASA and APCI are now 7 months into the contract, we recognize that any undue delay may adversely impact upon NASA's mission requirements. We therefore would expect that both NASA and Union Carbide will act as expeditiously as possible in response to these recommendations so as to minimize any possible disruption to NASA's space shuttle program. As this decision contains recommendations for corrective action to be taken, it has been transmitted by letters of today to the congressional committees named in section 232 of the Legislative Reorganization Act of 1970, Public Law 91-510, 84 Stat. 1170, 31 U.S.C. 1172 (1970). [B-184830] Appropriations-Defense Department-Contracts-Absence of Statutory Restrictions Allocation of Navy appropriation for DLGN nuclear powered guided missile frigate program between DLGN 41 and DLGN 42, which was based on Navy's budget request and contained in committee reports to 1975 Defense Department Appropriation Act, is not legally binding on Navy since it was not specified in Appropriation Act itself. Procurement-Defense Programs-Full Funding "Full funding" of military procurement programs is not a statutory requirement, and deviation from full funding does not necessarily or automatically indicate violation of 31 U.S.C. 665 or 41 U.S.C. 11. Contracts-Options-Requirements v. Contract Clause-Appropriation Obligation Where exercise of contract option required Navy to furnish various items of Government-furnished property (GFP), but contract clause authorized Navy to unilaterally delete items of GFP and make necessary equitable adjustment, full value of unobligated and undelivered GFP should not be considered an "obligation" as of time of option exercise for purposes of assessing violation of 31 U.S.C. 665 or 41 U.S.C. 11. Exercise of DLGN 41 contract option did not violate these statutes since recorded obligations and other binding commitments did not exceed available appropriations. Appropriations-Restrictions-"Follow Ship" Proviso in Appropriation Act requires DLGN 41 to be "follow ship" of DLGN 38 class. Proviso is not violated since DLGN 41 has same basic characteristics as prior ships of that class, notwithstanding nonincorporation of series of modifications and absent showing that unincorporated modifications would significantly alter those characteristics. In the matter of the Newport News Shipbuilding and Dry Dock Company, February 27, 1976: INTRODUCTION This decision concerns the validity of the exercise of a contract option. For clarity of presentation, we have divided the text into four sections. The first section summarizes pertinent facts and sets forth the relevant chronology. Second is a brief summary of the issues presented. Since the interpretation of the 1975 Defense Department Appropriation Act is of major importance to our decision, the statutory provisions and pertinent legislative history have been synthesized in the third section. The fourth section is the body of our decision, containing our analysis of the facts, discussion of authorities, and our conclusions. I. BACKGROUND AND CHRONOLOGY On June 25, 1970, the Navy awarded contract number N0002470-C-0252 to Newport News Shipbuilding and Dry Dock Company of Newport News, Virginia (hereinafter referred to as "Contractor"). 232-098 - 77-54 The contract provided for preconstruction work on the DLGN 38 nuclear powered guided missile frigate. (*) On December 21, 1971, the contract was modified by Modification P0007 to provide for construction of the first three ships of the class, DLGN 38, 39 and 40. Modification P0007 also contained option provisions for two additional ships, DLGN 41 and 42. Subsequent modification, P00018, revised the option clause (Article 28) and provided for exercise of the DLGN 41 option by written notice given on or before February 1, 1975. The revised Article 28 provides in part: The Contracting Officer may increase the quantity of vessels under this contract by the timely exercise of Option 1 for DLGN 41 and, if Option 1 is exercised, by the timely exercise of Option 2 for DLGN 42 at cost and profit not to exceed a profit-cost envelope defined by the target cost, target profit, target price, share line and ceiling price set forth below. The Parties agree to negotiate in good faith to reach an agreement as rapidly as possible on the provisions of this contract which require modification in order to express the agreement of the parties as to new option provisions for DLGN 41 and DLGN 42. *** The contract is a fixed-price incentive contract (see Armed Services Procurement Regulation [ASPR] § 3-404.4 [1975]), with provisions for adjustment based on the excess of actual cost over target cost and on contract escalation (labor and material). Article 28, as revised by Modification P00018, established the profit-cost envelope for the DLGN 41 as follows: The contract also provides for delivery by the Government of property described in the contract as "Government-Furnished Property" (GFP), to be supported by certain Government-furnished information and engineering services. Extracts from pertinent GFP provisions are set forth in Attachment 1. On February 22, 1974 (Modification P00022), Navy authorized Contractor to expend $35 million for long lead time items relating to the DLGN 41 ("material procurement, shop fabrication and other preliminary work"). The bulk of this authorization was required by Article 28 as a prerequisite to exercising the option. In August 1974, Contractor advised Navy that it considered the DLGN 41 option invalid. Considerable correspondence between Contractor and Navy ensued, with Contractor asserting as many as 11 reasons for the invalidity of the option and Navy consistently maintaining its (*) As of July 1, 1975, the DLGN was redesignated as Guided Missile Cruiser (CGN). validity. On January 31, 1975, Navy notified Contractor that it was exercising the DLGN 41 option (Modification P00024). The parties, on February 3, 1975, entered into a Memorandum of Understanding whereby they agreed to negotiate in good faith to resolve their differences, not to institute any action in any administrative or judicial tribunal, and Contractor agreed to continue performance. The Memorandum specified that it could be terminated by either party after 30 days upon 48 hours written notice. Discussions and the flow of correspondence continued, with both parties maintaining their respective positions. On August 25, 1975, Contractor notified Navy of its intent to terminate the Memorandum and to suspend performance. On August 27, 1975, Contractor requested an opinion from the Comptroller General on the validity of the option exercise. Two days later, Navy brought suit in the United States District Court for the Eastern District of Virginia, to restrain Contractor from ceasing performance. After oral argument on Plaintiff's motion for temporary restraining order, the parties stipulated to resume performance and payment, and to join in requesting the Comptroller General's opinion, the stipulation to remain in effect for 1 year unless sooner canceled or modified by mutual agreement or by order of the Court. The stipulation was entered as the Order of the Court and the case left open on the docket pending further advice. United States v. Newport News Shipbuilding and Dry Dock Company, and Tenneco, Inc., Civil No. 75-88-NN (E.D. Va., August 29, 1975). Navy then submitted its report to us, dated October 1, 1975, on the allegations contained in Contractor's August 27 submission. Contractor was given the opportunity to comment on Navy's report, and did so by letter dated November 7, 1975. By letter of November 24, 1975, Navy submitted its rebuttal of Contractor's comments. Contractor advised us that it did not wish to submit any further material and the record was then closed. II. SUMMARY OF ISSUES The issues presented for consideration may be grouped under the following headings: (1) Violation of the Antideficiency Act. (2) Violation of the Appropriation Act. (3) Violation of ASPR provisions. The pertinent portion of the Antideficiency Act, 31 U.S. Code §665 (1970), provides: (a) No officer or employee of the United States shall make or authorize an expenditure from or create or authorize an obligation under any appropriation or fund in excess of the amount available therein; nor shall any such officer or employee involve the Government in any contract or other obligation, for the payment of money for any purpose, in advance of appropriations made for such purpose, unless such contract or obligation is authorized by law. Also relevant is 41 U.S.C. § 11(a) (1970), which provides that: No contract or purchase on behalf of the United States shall be made, unless the same is authorized by law or is under an appropriation adequate to its fulfillment, except in the Departments of the Army, Navy, and Air Force, for clothing, subsistence, forage, fuel, quarters, transportation, or medical and hospital supplies, which, however, shall not exceed the necessities of the current year. Contractor argues, citing authorities, that is has a duty to inquire into the status of the DLGN appropriation. It then points out that, in October 1973, for purposes of the fiscal year 1975 budget estimate, Navy estimated the cost of the DLGN 41 at $268,000,000. In October 1974, for purposes of the fiscal year 1976 budget estimate, Navy estimated the cost of the DLGN 41 at $337,400,000. The difference, $69,400,000, consists of the following: $15,000,000-target price to ceiling price deficit $69,400,000 Appropriations for the DLGN 41 prior to FY 1975 totalled $115.7 million. In its FY 1975 budget submission, Navy requested $152.3 million for construction of the DLGN 41 and $92 million for advance procurement funding of the DLGN 42, for a total of $244.3 million. Congress approved the total of the request but without specifying the breakdown in the law itself. Instead the Navy's breakdown was included in committee reports. (See Section III, infra.) Contractor thus argues that the total appropriation available for the DLGN 41 was $115.7 million plus $152.3 million, or $268 million, which is less than the Navy's FY 1975 cost estimate by $69.4 million. Contractor further points out that Navy has authorized the expenditure of $30.4 million for long lead time activity on the DLGN 42 (Modification P00023), and thus argues in the alternative that, even if the total appropriation available is deemed to be $360 million ($115.7 million plus $244.3 million), the amount available for the DLGN 41 would be at most $329.6 million, which is still less than the Navy's FY 1975 estimate. Navy, citing its own authorities, asserts that Contractor is under no "duty" to question the adequacy of the appropriation. In any |